author: Korner, Chairman:

text:
    Appeal of George R. Dyer, H. Kierstede Hudson and T. Hendry Walter, Executors of Estate of Charles I. Hudson.
    Docket No. 3351.
    Promulgated November 30, 1926.
    Decedent and wife were tenants by the entirety of lands conveyed to them in 1909. Decedent died November 15, 1921, a resident of the. State of New York wherein the lands were situate. Under the laws of the State of New York there was not a transfer of an estate to the surviving spouse on the death of the decedent in such lands, and the inclusion of their value as a part of the gross estate of the decedent, under the provisions of the Revenue Act of 1918, was without authority in law. Appeal of Susie M. Boot, 5 B. T. A. 696. '

      John Godfrey Same, Esq., for the petitioners.

      J. F. Greaney, Esq., for the Commissioner.
    Appeal by the executors of the estate of Charles I. Hudson, deceased, from the determination of a deficiency in estate tax proposed to be assessed by the Commissioner in the amount of $43,121.72 under the provisions of the Revenue Act of 1918. The question to be decided is whether, under that statute, decedent’s contribution of $480,000 to the purchase price of certain real estate,- conveyed to decedent and his wife as tenants by the entirety, should be included as a part of the gross estate of the decedent for purposes of such tax.
    FINDINGS OF FACT.
    Charles I. Hudson died testate on November 15, 1921, a resident of the City, County and State of New York. His will was thereafter duly admitted to probate by the Surrogate’s Court of the County of New York; letters testamentary thereon were duly issued to the petitioners as executors, who duly qualified as such and since that time have been, and are still, acting as such executors.
    Long prior to the dates hereinafter mentioned, on some date prior to May 6, 1878, Charles I. Hudson and Sara E. K. Hudson intermarried, and at all times hereinafter mentioned down to the date of the decedent’s death were man and wife.
    On February 26, 1906, Jane W. Underhill and another conveyed a certain parcel of land to “ Charles I. Hudson and Sara E. K. Hudson, his wife * * * To have and to hold the above granted premises unto the said parties of the second part, their heirs and assigns forever, as tenants by the entirety.” The land thus conveyed was situate at East Norwich, Nassau County, Long Island, and comprised 48.877 acres.
    On February 26, 1906, John C. Martling and others conveyed a certain parcel of land to “ Charles I. Hudson and Sara E. K. Hudson, his wife * * * To have and to hold the above granted premises unto the said parties of the second part their heirs and assigns forever as tenants by the entirety.” The land thus conveyed was situate at East Norwich, Nassau County, Long Island, and comprised 165.127 acres.
    On February 28, 1906, Vincent M. Lewis and another conveyed a certain parcel of land to “ Charles I. Hudson and Sara E. K. Hudson his wife * * * To have and to hold the above granted premises unto the said parties of the second part their heirs and assigns forever as tenants by the entirety.” The land thus conveyed was situate at East Norwich, Nassau County, Long Island, and comprised 57.805 acres.
    The three foregoing deeds were duly recorded in the office of the Clerk of the County of Nassau, New York, on March 5, 1906.
    On March 30, 1909, Sarah E. Vernon conveyed a certain parcel of land to “ Charles I. Hudson and Sara E. K. Hudson, his wife * * * To have and to hold, the above granted premises unto the said parties of the second part as tenants by the entirety, their heirs and assigns forever.” The land thus conveyed was situate at East Norwich, Nassau County, Long Island, and comprised 53.74 acres. This deed of conveyance was duly recorded in the office of the Clerk of the County of Nassau, New York, on April 2, 1909.
    Charles I. Hudson contributed $480,000 to the purchase price of the lands hereinabove referred to. It is agreed by the parties to this proceeding that the value of the decedent’s contribution toward the purchase of this property was, at the date of the death of the decedent, $480,000. The lands in question were held by decedent and his wife under the above conveyances until the death of the decedent on November 15, 1921.
    At the time of his death, Charles I. Hudson left surviving him his widow, Sara E. K. Hudson, who, on April 14, 1922, conveyed the lands above referred to, by deed of conveyance executed by Sara E. K. Hudson as sole grantor, to Gustavia A. Senff; said deed being duly recorded in the office of the Clerk of the County of Nassau, New York, on April 18, 1922. As security for a balance of the purchase price of the said lands, the grantee, Gustavia A. Senff, executed on April 14, 1922, a purchase money mortgage to Sara E. K. Hudson in the amount of $335,000, which said mortgage was duly recorded in the office of the Clerk of Nassau County, New York, on April 18, 1922.
    The executors duly reported the lands in question to the New York State Tax Board as owned by the decedent and Sara E. K. Hudson as tenants by the entirety. By orders dated January 15 and 18, 1924, the Surrogate’s Court in and for the County of New York appointed a referee to examine into the necessary jurisdictional facts, to examine the accounts of the executors, to hear and determine all questions arising upon the settlement of such accounts and to make report to the court. The referee held hearings, took testimony, and filed with the court his report on August 22, 1924. The matter came on for hearing before the Surrogate’s Court and on February 6, 1925, the court entered a written decision confirming and approving the referee’s reports in all particulars material to this issue, and on April 8, 1925, the court entered its decree making adjudication of the matters before it. The portion of the decree pertinent to this issue is as follows:
    And it appearing that the said Executors have fully accounted for all of the moneys and property of the said Estate which have come into their hands as such Executors, and their account having been adjusted by the said Surrogate, and a summary statement of the same having been made as above and herewith recorded; and it further appearing that the estate at the time of the death of the testator had and still has no interest in the real estate theretofore owned by the decedent and his wife as tenants by the entirety, and the account as summarized above which includes therein no real property, having been hereby approved and settled as the only property properly accountable for in this estate by the said Executors; it is
    FURTHER- ORDERED, ADJUDGED AND DECREED:
    IV. That the said account be, and the same is, in all respects, judicially settled and allowed as filed and adjusted * * *.
    On audit of the estate-tax return filed by the executors, the Commissioner determined that there should be included in the value of the gross estate of the decedent the value at the time of his death of the interest of the decedent in the lands held by decedent and his wife as tenants by the entirety. He determined the value of the decedent’s interest in such lands at the date of his death to be $480,000. The action of the Commissioner in this respect was predicated on the provisions of sections 401 and 402 of the Revenue Act of 1918. Accordingly, he notified the petitioners of his determination of a deficiency in estate tax of $43,121.72. From that notice the petitioners appealed to this Board.
   OPINION.

Korner, Chairman:

The issue presented for determination in this proceeding is substantially the same as that presented in Appeal of Susie M. Root, 5 B. T. A. 696, decided this day. The salient point of difference, aside from the matter of the jurisdiction of the parties and the subject matter, is that, in that case, the estate by the entirety was created in the grantees subsequent to the date of the enactment of the statute controlling at the date of the death of the decedent, whereas, in the instant case, such estate was created prior to the enactment of the statute controlling the subject matter of this controversy. It will be noted that the Root case arose under the provisions of the Revenue Act of 1921, while the instant proceeding arises under the provisions of the Revenue Act of 1918. But, since the provisions of the two acts are the same in so far as concerns the matters involved in the two cases, this difference is not of importance.

The petition alleges and the answer admits that Charles I. Hudson and his wife were seized of the premises in question as tenants by the entirety down to the date of the former’s death. This is admitted as a fact, but, in our opinion, it is a legal conclusion which is fully borne out by the authorities. Hunt v. Blackburn, 128 U. S. 464, 469; Bertles v. Nunan, 92 N. Y, 152, 156; Matter of Klatzl, 216 N. Y. 83; 110 N. E. 181; Matter of Lyon, 233 N. Y. 208; 135 N. E. 247; Matter of Dunn, 236 N. Y. 461; 141 N. E. 915. In view of the decisions of the courts of New York, it is not open to question that the doctrine of estates by the entirety obtains in that jurisdiction with all the legal consequences incident thereto.

In Matter of Klatzl, supra, the Court of Appeals held (p. 85, 87):

At common law a conveyance by a third person to husband and wife creates a tenancy by entirety. Such an estate is founded upon the ancient principle of the common law which regarded the husband and wife as one person. (Blackstone’s Oomm. book I, p. 442; Bl. Comm, book II, p. 182; 2 Kent’s Comm, p. 132.) Neither the provision of the Revised Statutes that “ every estate granted or devised to two or more persons, in their own right, shall be a tenancy in common, unless expressly declared to be in joint tenancy” (3 R. S. [7th ed.] 2179), nor the legislation that has been enacted in reference to the rights and property of married women and permitting husband and wife to contract directly with one another, preclude the creation of a tenancy by entirety. After some fluctuation of opinion (Meeker v. Wright, 76 N. Y. 262) it is now settled that this tenancy is still recognized in the jurisprudence of this state.

In 1916, in an attempt to overrule the decision in the Klatzl case (decided October, 1915), the New York Legislature amended the Tax Law in respect to taxable transfers and attempted to include in the gross taxable estate property held “ in the joint names of two or more persons, or as tenants by the entirety.” The act was retroactive, and attempted to tax such an estate, whenever created, provided death should occur after 1916. Laws of 1916, chap. 323, sec. 83, p. 866, amending the Tax Law, sec. 220, subdiv. 7.

In Matter of Lyon, supra, the Court of Appeals construed this Act of 1918 and held that this attempt to tax estates by the entirety created before 1916 was fruitless, and that such estates could not be taxed. Thus, the Court of Appeals unanimously held (233 N. Y. 211, 212):

When, on July 31st, 1908, a house and lot was conveyed to Edmund Lyon and to Carolyn, his wife, as tenants by the entirety they became seized of an estate having well-recognized attributes. Whatever the original reasoning upon which this estate was based, the rules with regard to it had long become a part of the law of real property consistently enforced in New York. (Matter of Klatzl, 216 N. Y. 83.) Husband and wife were not joint tenants. One did not acquire the rights and property of the other by survivorship. The fee was indivisible. As an entirety it was vested in both. Eor this purpose they were considered one and not two. On the death of either the fee vested in the other, not because there was a transfer of any part of the estate, but because the survivor was the representative of the single ownership. * * *
Since 1916 the statute has been altered. (Cons. Laws, ch. 60, section 220, subd. 7.) Where there is a joint tenancy or a tenancy by the entirety, the right of the survivor to the immediate ownership and enjoyment of the property shall be deemed a taxable transfer “ in the same manner as though the whole property * * * belonged absolutely to the deceased tenant by the entirety (or) joint tenant * * * and had been bequeathed to the” survivor by the deceased. This means that the tax is to be imposed upon the entire estate held by the joint tenants or by the tenants by the entirety as if the whole had passed by will. (Matter of Dolbeer, 226 N. Y. 623.) The act is also retroactive and is an endeavor to tax such estate whenever created provided the death occurs after 1916. (Matter of McKelway, 221 N. Y. 15.)
Whatever power the legislature may have with regard to such estates later created does not extend to those already vested before the adoption of the amendment. (Matter of Pell, 171 N. Y. 48.) This estate by the entirety with all its incidents was vested in Mr. and Mrs. Lyon in 1910. What was then acquired may not subsequently be diminished by a tax upon that acquisition. As there was no transfer after 1916 there can be no tax. Mrs. Lyon now has what she had in 1910, no more and no less. (Matter of McKelway, supra.)

The distinction is brought out in Matter of Dunn, supra. There husband and wife, as tenants by the entirety, acquired certain real estate in 1915 and certain other real estate in 1919 and 1920. The New York Act was passed in 1916 and the husband died in 1921. The Court of Appeals held the property acquired in 1915 was not affected by the Act of 1916, and was not liable to tax, saying (236 N. Y. 464):

Patrick J. Dunn and his wife in 1915, prior to the amendment of the Tax Law, acquired real estate as tenants by the entirety. Such property was not affected by the amendment of 1916, nor has it been considered in the appraisal made for the reason that under the statute as it then read, the surviving tenant was entitled to the immediate ownership, possession and enjoyment of the property upon the death of the co-tenant.

In the last cited case the court held that the property to which title was taken in 1919 and 1920 was burdened with a transfer tax. We are not here concerned, however, with a situation to which such a ruling would be applicable. In the instant case title to the property in question was taken by the grantees in 1909 and the death of the husband occurred in 1921.

Pursuant to the laws of New York, the Surrogate’s Court of that State rendered a decree specifically adjudicating that the estate at the time of decedent’s death had and still has no interest in the real estate-theretofore owned by the decedent and his wife as tenants by the entirety.

In view of what has been said, we conclude that on the death of Charles I. Hudson there was no transfer of any interest or estate from him or his estate either to his wife or to his executors, but that his interest in the lands in question ceased and terminated— became annihilated.

With the foregoing as a premise, we conclude, as we did in Appeal of Susie M. Root, supra, and by the same process of reasoning, that no estate tax is imposed by the Revenue Act of 1918 in respect of the value of the lands here in question, and that the deficiency proposed here is not a correct or proper deficiency.

It was alleged by the petitioners in their brief that, if the issue in this proceeding be resolved in their favor, there would be a resultant overpayment of estate taxes in the amount of $7,243.74. No proof was offered on this point nor is the matter referred to in the record other than the statement in brief just referred to. The statutory deficiency notice from which this appeal is taken is not before the Board, nor is there any showing as to the method of computation by which the Commissioner arrived at his determination. We therefore make no finding and offer, no comment on that phase of the matter.

Judgment will be entered for the petitioners.

Love dissents.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Appeal of James H. Persons.
    Docket No. 3250.
    Promulgated November 30, 1926.
    1. An alleged partnership was merely a scheme of the taxpayer to defeat and evade the tax upon the income of a business owned entirely by him and the Commissioner correctly determined that the profits of the business constituted income to him and that the 50 per cent penalty imposed by section 250 (b) of the Revenue Act of 1918 should be added to the deficiency.
    2. Additional compensation authorized and credited to the taxpayer upon the books of the corporation in 1920 and received by him in 1921 was not income for the year 1920, since the taxpayer kept his books and rendered his return upon the cash receipts and disbursements basis.
    3. The Commissioner’s disallowance oí a loss of $9,260 from the operation of a farm during 1920 approved.

      Lawrence A. Baker, Esq., and Leroy Sawnders, Esq., for the petitioner.

      A. Colder Maohay, Esq., and Wm. H. Lawder, Esq., for the Commissioner.
    At the hearing taxpayer withdrew certain assignments of error as to the Commissioner’s determination of deficiencies for 1918 and 1919. For the calendar year 1920 the Commissioner determined a deficiency in tax of $54,673.65, and in addition he determined that the taxpayer willfully filed a false and fraudulent return for the calendar year 1920 with intent to evade the tax, and accordingly added to the deficiency the 50 per cent penalty as provided in section 250 (b) of the Revenue Act of 1918.
    The issues are (1) whether all or only one-fourth of a profit of $104,939.97 for 1920 from the operation of a coal mine under the name of the Liberty Coal Co. was income to the taxpayer, and whether taxpayer’s income-tax return for 1920 was willfully false and fraudulent with intent to evade the tax; (2) whether additional compensation of $25,000 credited to the taxpayer in 1920 but not received by him until 1921 was income in the taxable year 1920; and (3) whether taxpayer sustained a loss of $9,260 in the operation of a farm.
    FINDINGS OF FACT.
    The taxpayer is a resident of Terre Haute, Ind. During 1920 and for several years prior thereto he and one Randolph owned in equal portions the capital stock of the Queen City Coal Co., a corporation engaged in mining and selling coal near Jasonville.
    The taxpayer also owned a farm near Terre Haute which he operated for profit. In the latter part of 1918 taxpayer purchased a coal mine and equipment near Jasonville which he thereafter operated as an individual under the name of the Liberty Coal Co. He derived no profit from the operation of this mine in 1918 and a profit of only $333.34 was made during 1919. For the calendar year 1920 the profits from the operation of the Liberty Coal Co. amounted to $104,939.97. Separate books of account were kept for the Liberty Coal Co., and for the calendar year 1920 they reflected a profit of $102,762.30, which was increased by the Commissioner to the amount above stated through a reduction of depletion claimed in the amount of $2,177.67.

      On March 15, 1921, the taxpayer filed a partnership income-tax return for the Liberty Coal Co. showing the net income as belonging one-fourth each to himself, his wife Florence E. Persons, his brother-in-law E. W. Ferguson, and his bookkeeper H. O. Bedwell. These individuals in their income-tax returns for 1921, which were prepared by H. O. Bedwell, each reported one-fourth of the profits of the Liberty Coal Co. and paid the tax shown to be due on said returns. The taxpayer reported as his proportion of the profits from the Liberty Coal Co. $25,690.56. The other individuals mentioned each reported $25,690.58. Bedwell kept the books of the Queen City Coal Co. and the Liberty Coal Co. and performed other services for the Liberty Coal Co. for which he was paid salaries by the corporation and the taxpayer respectively. During the year 1920 Ferguson was not in the employ of either the corporation or the taxpayer. Some time during that year he purchased an interest in a retail coal yard at Terre Haute, through which business a small portion of the coal produced by the Liberty Coal Co. during 1920 was sold, on which no commission as such was charged. Mrs. Persons rendered no service to the Liberty Coal Co. During the year 1920 the taxpayer withdrew from the profits of the Liberty Coal Co. various amounts aggregating more than $80,000. No portion of the profits of the Liberty Coal Co. was paid to any one other than the taxpayer during the taxable year. No entry was made upon the books during 1920 to show that any one other than the taxpayer had any interest in the profits of the business. At some time subsequent to March 1. 1921, certain erasures were made on page 67 of the journal containing the closing entries for the year 1920, and the profit of $102,762.30, as shown by the books, was credited one-fourth each to the four individuals mentioned. On some date subsequent to March 1, 1921, four loose-leaf sheets were placed in the loose-leaf ledger of the Liberty Coal Co., bearing the respective names of the four individuals mentioned, on which they were credited with one-fourth of the profits of the Liberty Coal Co.
    About March 15, 1921, taxpayer gave his wife, Ferguson, and Bedwell his personal check for an undisclosed amount and during several months following gave his wife and Ferguson additional personal checks, all of which aggregated $15,000 to each of them. The Liberty Coal Co. was not operated from January 1, 1921, until about July, 1921, due to the fact that No. 5 seam from which coal had theretofore been removed was exhausted and it was necessary to sink an additional shaft to reach No. 4 seam. The taxpayer incorporated the business about July, 1921, and gave Bedwell his personal check for $25,000, with the understanding and agreement that Bedwell would immediately endorse it to the corporation for stock, which he did.

      In December, 1920, the directors of the Queen City Coal Co. voted the taxpayer an additional salary of $25,000, which was credited to him upon its books. The corporation had sufficient cash at the time the salary was voted to pay the same. The salary was paid to and received by the taxpayer in January, 1921.
    During the taxable year the taxpayer’s expenditures in the opertion of his farm exceeded his receipts in the amount of $9,260.
   OPINION.

Littleton:

The testimony of the taxpayer and his witnesses relating to the alleged partnership in the operation of the Liberty Coal Co. during the year 1920 is so contradictory, vague and indefinite that it is impossible for the Board to make any finding that any attempt was made to organize a valid partnership prior to or during the year 1920. The testimony submitted on behalf of the taxpayer can not be reconciled so as to be in any way consistent with the belief that there was any agreement to divide the profits from the operation of the Liberty Coal Mine for the year 1920. The other evidence in the case, which will be hereafter referred to, justifies the conclusion that the division of the profits of the Liberty Coal Co. was first thought of in the year 1921 and that the entries in the ledger showing a division of the profits were made some time in or about the year 1923.

The taxpayer, his wife, and Bedwell, the bookkeeper, who were the only witnesses produced by the taxpayer at the first hearing of this case (the hearing having been continued for a month in order to secure the testimony of the other witnesses), testified that in December, 1919, a conversation was held at the home of the taxpayer in Terre Haute, at which the taxpayer, his wife, Bedwell, and Ferguson were all present; that at that time the taxpayer informed the persons mentioned that it was his intention to divide the profits of the Liberty Coal Co. for the year 1920 equally between himself, Bed-well and Ferguson. The taxpayer testified that his reason for this was that he desired to give his attention to other matters and desired that Bedwell should operate the mine and that Ferguson should sell the coal; that at the time of this conversation Mrs. Persons insisted that the profits be divided four ways and that she receive one-fourth, and that this was agreed to. The taxpayer testified further that an aocountant who had been employed to audit the books of the Queen City Coal Co. had suggested to him that if he would divide his profits four ways he would save considerable income tax. Bedwell first testified that the entries in the books of the Liberty Coal Co. showing an equal distribution of profits between the taxpayer, his wife, Ferguson, and himself were made on or about January 1, 1921, immediately after the close of the calendar year 1920, and after expert testimony, hereinafter referred to, had been given he testified that these entries were made on or about March 15, 1921. The outstanding feature of the testimony of these witnesses is that they could remember very little about anything except that in December, 1919, they organized a partnership. They could not remember anything that was said at that time except that the profits of the Liberty Coal Co. for 1920 were to be divided four ways. The Liberty Coal Co. had made practically no profits since the beginning of operations and no further reason was given why it was decided in 1919 to divide the profits between the four individuals mentioned. No witness for the taxpayer testified that any of the individuals other than the taxpayer were to have any interest in the property or business of the Liberty Coal Co.

After the testimony of these witnesses had been given, the Board called an expert of more than thirty years’ experience to examine the book entries, the age of the ink, etc., and to testify as to when the entries crediting one-fourth of the profits to the four individuals named were made. After having made investigation this witness testified on September 21,1925, that the entries showing the distribution of profits of $102,762.30, one-fourth each to the taxpayer, Florence E. Persons, H. O. Bedwell, and Earl W. Ferguson, claimed to have been made in January, 1921, were made less than three years ago and that certain other entries appearing on the books of the company concerning its ordinary transactions reported to have been made at the close of the year 1920 were made at that time.

At a further hearing held October 29, 1925, E. W. Ferguson testified that the first he heard of the division of the profits of the Liberty Coal Co. was in the spring of 1920, when he was informed by the taxpayer that the profits were to be divided equally between the persons hereinbefore named. This and the fact that some time after the end of the year 1921 the taxpayer gave him personal checks aggregating $15,000 was about all that he could remember about the matter. The accountant who had advised the division of profits of the Liberty Coal Co. was called as a witness and testified first that he first suggested this to the taxpayer in the spring of 1920. The testimony of this witness is typical of the testimony of most of the taxpayer’s witnesses concerning this alleged partnership. A portion of his testimony concerning his part in connection with the alleged partnership was as follows:

Q. When did you have that conversation with Mr. Persons? [About the formation of the partnership],
A. I could not say.
Q. You could not say?
A. My recollection is that it was either the first part of 1920 or during the year 1920. As to the dates, I can not say. * * *
Mr. James. When yon suggested the advisability oí forming a partnership, did you go into detail as to the methods to be pursued, or anything of that sort; beyond the general suggestion that a partnership should be formed?
The Witness. I do not see there were any details to go into. Do you mean as to the division of the profits?
Q. The division of profits or the persons among whom they were to be divided?
A. Yes, sir.
Q. What was the substance of that conversation?
A. What was said * * * the names, you mean?
Q. Yes, tell the conversation about the division of profits.
A. I do not recall that; all X know is that I suggested they form a partnership with four partners.
Q. Why did you suggest four partners?
A. Why did I?
Q. Yes, why did you suggest that; you were suggesting that he divide up his money, weren’t you? And how did it come that you suggested that he divide it among four partners?
A. What is wrong with that?
Q. It is not merely a question of being right or wrong, but I am trying to get at how this suggestion came about. You suggested that he form a partnership.
A. Yes, sir.
Q. And then dividing $100,000 among four people?
A. Not at that time.
Q. Well, it involved dividing whatever sum he made during that year among four people?
A. Yes, sir.
Q. You were suggesting to him that he give up three-fourths of the profits that he would make, weren’t you?
A. Give up actual cash?
Q. Yes.
A. No, sir.
Q. You were not?
A. No, sir.
Q. What was the purpose of the partnership?
A. My suggestion to him was this, that this partnership should be formed on the basis of the division of one-fourth of the profits, no profits to be distributed until he had received a return on his original capital investment.
Q. Well, interpreting that understanding, do you regard it as a proper book interpretation to make the entry on page 67 of that journal?
A. Absolutely, that is the only way that you could do it.
Q. They were to get the book credits and he was to get the money, is that the idea?
A. That is it.
Q. Now, was that a new suggestion to Mr. Persons at the time you made it, as far as you know?
A. A new suggestion from myself?
Q. Yes.
A. Yes, sir.
Q. That was not before February or March, 1920?
A. That is my recollection. It would not be before that, so far as I know.
By Mr. Mackay :
Q. It might have been later?
A. Xes, sir, it may Rave been later.
Q. It might have been towards the fall of the year?
A. Yes, sir, it might have been.
Q. It might have been the first of January, 1921, as far as you know?
A. I hardly think so.
By Mr. James :
Q. It might have been?
A. Yes.
Q. At that time, in 1920, when you made that suggestion, did Mr. Persons or Mr. Bedwell tell you that a partnership had been formed?
A. They did not.

The Board is of the opinion from the entire record that no valid partnership was formed or attempted to be formed, that the purported division of profits of the Liberty Coal Co. was merely a scheme to evade the tax, and that the return of this taxpayer for the year 1920 was willfully false and fraudulent with intent to evade the tax. The Commissioner therefore correctly held that the profits from the operations of the Liberty Coal Co. constituted income to this taxpayer and that he was also liable for the 50 per cent penalty. It should be stated in connection with this proceeding that counsel appearing on behalf of the taxpayer presented to the Board every obtainable fact, whether favorable or unfavorable, which might have any bearing upon either the correctness or incorrectness of the tax or the penalty.

The Commissioner held that the additional compensation allowed the taxpayer by the Queen City Coal Co. was constructively received by him in 1920. We are of opinion that this determination was in error. He made his return on the cash receipts and disbursements basis and he did not receive the amount until the year 1921.

The taxpayer employed one Maride to manage his farm. Begular books of account were not kept but all receipts, purchases and disbursements during the year were entered upon separate slips and these were used by the accountant who prepared the taxpayer’s return in determining the profit or loss in the operation of the farm for 1920. Some time after the return had been made these slips were destroyed. Maride lost his life in a railroad wreck shortly after 1920. The Board is unable from the evidence to find that the taxpayer sustained a deductible loss from farm operations: We have no knowledge as to the source of the income or as to the nature of the expenditures during the year, that is, whether the expenditures were in fact ordinary and necessary expenses or disbursements for improvements and betterments. In these circumstances the Commissioner’s determination in this regard is approved.

Judgment wild be entered on 15 days’ notice, under Rule 50.


author: Trussell:

text:
    Appeal of Selwyn Operating Corporation.
    Docket No. 4851.
    Promulgated December 8, 1926.
    1. Personal service corporation. — The taxpayer corporation, although organized without paid-in capital, immediately thereafter acquired a 10-year lease of a building valued at $800,000 or more, which it operated as a combination office and theatre building. Bold,, that under such conditions it can not be found that capital, either invested or borrowed, is not a material income-producing factor and personal service classification must be denied.
    2. Section 303, Revenue Act op 1918. — The taxpayer corporation, carrying on the business of operating a building, a part of which is rented for offices and a part of which is used for the conduct of a theatre, is not engaged in two such separate trades or businesses as to bring it within the provisions of section 303 of the Revenue Act of 1918.
    3. Special assessment. — The taxpayer corporation during the years in question had no paid-in or other form of invested capital and it paid no compensation to its three principal officers yet produced net income of $64,342.40 in 1919 and $90,034.31 in 1920. These facts establish such “ abnormal conditions affecting the capital and income of the corporation ” as to justify and require the application of section 328 of the Revenue Act of 1918 in the event that the total profits tax, determined under said section, shall be found to be less than the amount determined to be due under section 302.

      Ben Jenkins, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes in the amounts of $25,257.50 for the calendar year 1919 and $37,075.78 for the calendar year 1920. The total amount of $62,333.28 is in controversy.
    The petitioner asserts that the Commissioner erred in computing its tax liability for the years involved: (a) in denying it a personal service classification under section 200 of the Eevenue Act of 1918, (b) in not considering any portion of its income as directly attributable to the personal services rendered by its officers, and in not determining its tax liability in accordance with the provisions of section 303 of the Eevenue Act of 1918, and (c) in not determining its tax liability in accordance with the provisions of section 328 of the Eevenue Act of 1918. Errors (b) and (c) are alleged in the alternative if it is found that the petitioner is not a personal service corporation.
    FINDINGS OF FACT.
    The petitioner is a New York corporation with its principal office at 229 West 42nd Street, New York City. It was organized in June, 1918, with a capital stock of $10,000 held by Arch Selwyn, Crosby Gaige, Edgar Selwyn, and Lee Shubert, who hold 30 shares, 24⅜ shares, 20⅝ shares, and 25 shares, respectively. The stock was issued for the good will and services of the said stockholders. About $500 cash was contributed for incidental expenses.
    At or about the time of its organization it acquired a lease of the Selwyn Theatre and office building connected therewith. The cost of this property to the lessor was more than $800,000. This theatre and office building was owned by the Selwyn Realty Corporation, the stockholders of which were Arch Selwyn, Crosby Gaige, and Edgar Selwyn. No stock was issued for the lease nor was any deposit or guarantee made to the Selwyn Realty Corporation. The rental was to be paid out of the box-office receipts and rentals. The lease was for a 10-year period, and the rent to be paid by the petitioner covered interest on the investment of the owners of the building, taxes, insurance, and ground rent plus an arbitrary sum of $10,000 per year. The office building comprised six floors, two of which were occupied by the Selwyn organization. The petitioner’s income-tax returns for the years involved show under gross income, for the year 1919, rentals $118,549.09, and for the year 1920, $27,747.34. The office building and theatre expenses were not segregated on the books.
    The petitioner produced no plays. Its business was the management and operation of the Selwyn Theatre. The successful operation of the" theatre depended upon the knowledge and skill of the stockholders in selecting'proper and attractive plays to be produced in the theatre. The petitioner entered into contracts with the owners and producers of plays whereby the plays were produced in the petitioner’s theatre, and the gross box-office receipts were divided upon a certain percentage basis, usually about 50 per cent to the producer. The petitioner paid no actors and furnished no equipment for the production of plays. Its only employees were office help, box-office clerks, ticket-takers, stage hands, electrical men, and cleaners. The petitioner furnished four musicians, and if more were needed for any particular play the producer of the play furnished them. The stockholders took no part in the production of the plays with the exception of making suggestions to the producers for improvements in the plays. These services were for the benefit of the petitioner and without cost to the producers. Each of the stockholders is an acknowledged expert in the theatrical business, each having had more than a score of years of experience. Arch Selwyn, Edgar Selwyn, and Crosby Gaige write plays as individuals but not for the petitioner. Lee Shubert attended to the booking of plays for the petitioner. Edgar Selwyn is an author, playwright, producer, and actor. He is author of the play “ The Crowded Hour,” and the play “ Buddies ” was written under his supervision. These two plays were produced in the Selwyn Treatre during a part of the years 1919 and 1920 but were produced under the same contracts, providing for certain percentages of the gross box-office receipts to the producer and the petitioner, as were entered into by the petitioner with other producers of plays.
    The petitioner had no source of income other than the box-office receipts and the rentals from the office building. The petitioner’s net income, and the division of the same among the stockholders for the years involved, was as follows:

    All of the stockholders, who were also officers of the taxpayer corporation, were actively engaged in the business but received no salaries or other compensation for their services. All the stockholders were also engaged in other theatrical businesses.
    The petitioner’s balance sheets as of December 31, 1919, and December 81, 1920, were as follows:

    The petitioner filed its income-tax returns for the years 1919 and 1920 as a personal service corporation. The Commissioner disallowed the petitioner a classification as a personal service corporation and computed the taxes under section 302 of the Bevenue Act of 1918, and upon net income of $64,342.40 for the year 1919 and $90,-034.31 for the year 1920. From this determination the petitioner brought this proceeding before the Board.
   OPINION.

Trussell:

The main question presented in the appeal at bar is whether or not the petitioner was during the years 1919 and 1920 a personal service corporation within the meaning of section 200 of the Revenue Act of 1918. The facts in the proceeding at bar are wholly similar to those in the Appeal of Newam Theatre Corporation, 1 B. T. A. 887, and under authority of the decision in that appeal personal service classification of this petitioner must be denied. Compare also Cotton Hotel Co. v. Bass, 7 Fed. (2d) 900.

The second question presented in the alternative is whether, if the petitioner is not a personal service corporation, it is entitled to a determination of its tax liability for 1919 and 1920 in accordance with the provisions of section 303 of the Revenue Act of 1918.

The petitioner’s contention that its activity in respect to the renting and management of a part of a building for offices and the operation of another part of the same building as a theatre constitutes two separate trades or businesses, one of which might be said tro require capital while the other is claimed to be the rendering of personal service, does not appear to be supported by the record. Capital may be just as much essential to the operation of a theatre as it may be to the conduct of an office building. We are, therefore, convinced that the record of this proceeding does not disclose such a state of facts as to warrant or require the application of the provisions of section 303 of the Revenue Act of 1918.

The third question presented in the alternative is whether, if questions (1) and (2) are answered in the negative, the petitioner is entitled to have its tax liability for the years 1919 and 1920 determined in accordance with the provisions of section 328 of the Revenue Act of 1918.

During the years here under consideration the petitioner had no paid-in or other invested capital as defined by section 326 of the Revenue Act of 1918. It paid no salary or other compensation to its three managing officers. It reported net income for the year 1919 in the amount of $64,342.40, and for the year 1920 in the amount of $90,034.31.

We are of the opinion that this record is sufficient to establish such abnormalities affecting capital and income as to require the determination of the petitioner’s profits taxes for said years under the provisions of section 328 of the Revenue Act of 1918, provided that the Commissioner shall find that the amount of tax under said section shall be less than the amount computed under section 302, and that the Commissioner should now examine the proper comparatives and if he shall find that the total profits taxes for the years here under consideration, computed under that section, are less than the amounts computed under section 302, the deficiencies should be recomputed accordingly.

Judgment- will be entered after 15 days’ notice, under Rule 50.


author: Marquette:

text:
    Appeal of Ricks-McCreight Lumber Co.
    Docket No. 3656.
    Promulgated December 8, 1926.
    Evidence held insufficient to establish that the loss involved herein was a loss of the petitioner.

      George D. WieJc, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1918 and 1920, in the amount of $25,268.57.
    FINDINGS OF FACT.
    The petitioner is a Pennsylvania corporation with its principal office and place of business at Pittsburgh. During the years 1917 to 1920, inclusive, it was engaged in the wholesale lumber brokerage business. The capital stock of the corporation during the years 1917, 1918, 1919 and until about July 1, 1920, was owned by C. V. Mc-Creight and W. R. Ricks in equal amounts. Ricks disposed of his shares of stock about July 1, 1920. McCreight and Ricks were, respectively, president and secretary of the corporation. Each of them also acted as a salesman.
    For the year 1918, the salaries of Ricks and McCreight were $4,000 and $4,800, respectively, and, in addition, each received a commission of 4 per cent on the total sales made by him. For each of the years 1919 and 1920, the board of directors of the corporation fixed the salaries of Ricks and McCreight at $4,000 and $4,800, respectively, and provided that “ in addition to such salary, they shall each receive a commission or bonus of 50% of the net earnings, to be settled and paid at the close of the year.” The “ 50% of the net earnings ” was intended by the board of directors to mean that each of the persons named should receive, in addition to his salary, 50 per cent of the net profits on sales made by him.
    During the year 1917 it became difficult for the petitioner to obtain sufficient lumber to supply its trade, and McCreight and Ricks, president and secretary, respectively, and also the only stockholders of the petitioner, began to look around with a view to finding an adequate supply of lumber. They finally met with one J, B, Justice, who held, under a contract with one George W. Hopkins and the Eastern Land & Timber Co., dated October 2, 1916, the timber rights in large tracts of timber located near Florence, S. Car. The contract of October 2, 1916, between Justice and Hopkins and the Eastern Land & Timber Co., provided, among other things, that the contract should not be assigned by Justice without the consent of Hopkins, that Justice would cut not less than 5 million feet of lumber the first year that the contract was in force, and would endeavor to cut not less than 12 million feet each year thereafter, and that upon any breach of the contract by Justice the contract should be null and void at the option of Hopkins and the Eastern Land & Timber Co. and that they should have the right to enter and take possession of the land. Justice did not have sufficient money to cut and market this timber, and it was agreed on or about November 8,1917, by and between Ricks, McCreight and Justice, that Ricks and McCreight would furnish the money which would be required to build a mill and a railroad to the timber, estimated at about $25,000, and that a corporation would be formed to carry on the business of cutting the timber controlled by Justice and converting it into lumber. Accordingly, a corporation called the Giles Bay Lumber Co. was formed, under the laws of South Carolina, and Justice assigned to the new corporation his contract for timber rights heretofore referred to. So far as the records show, this assignment was never approved or ratified by Hopkins and the Eastern Land & Timber Co. Also, at the time the contract was assigned by Justice to the Giles Bay Lumber Co., he was in default in that he had failed to cut 5 million feet of lumber during the first year of the life of the contract as provided therein.
    On November 24, 1917, a written contract was entered into by and between the Giles Bay Lumber Co., Justice, McCreight, and Ricks, which provided that Justice should be entitled to one-half, or $12,500, of the authorized capital stock of the Giles Bay Lumber Co. and that Ricks and McCreight should each be entitled to one-fo'urth, or $6,250, of the authorized capital stock, but that no part of the said capital stock should be issued to them, except two shares to Justice and one share each to Ricks and McCreight, to enable them to qualify as directors until “ all the present outstanding indebtedness of said company is fully paid,” and that none of the stockholders could dispose of his stock, either before or after the issue thereof, except with the unanimous consent of all of the stockholders. The contract of November 24,1917, also provided:
    (g) That W. R. Ricks shall be Vice-President of Giles Bay Lumber Company, Inc., for the entire period it is engaged in carrying out the fulfillment of the conditions and covenants of the aforesaid contract of October 2nd, 1916, and this contract, and as such officer he shall exercise and enjoy such rights, privileges and authorities as legally belong to the office of Vice President of said company.
    That said Vice President shall be paid no salary for his services as such, it being expressly understood and agreed that his compensation for said services are and shall be covered by the commissions of ten per cent (10%) allowed Ricks, McCreight Lumber Company under its contract as Sales Agent on all sales of lumber made by it f. o. b. cars, Florence, South Carolina, or f. o. b. cars at any other place in said State where said Giles Bay Lumber Company, Inc., may hereafter establish a plant.
    (h) That C. V. McCreight shall be Secretary-Treasurer of Giles Bay Lumber Company, Inc., during the period it is engaged in the carrying out and fulfillment of the covenants and conditions of the contract of October 2nd, 1916 and this contract, and as such he shall exercise and enjoy such privileges and conditions as legally belong to the office of Secretary-Treasurer of the corporation.
    * * * * * * *
    The said Secretary-Treasurer shall be paid no salary for his services as such, it -being expressly understood and agreed that his compensation for such services is covered by the ten per cent (10%) commissions paid Ricks, McCreight Lumber Company as Sales Agent on all sales of lumber made by it f. o. b. cars Florence, South Carolina, or at any other place in said State where said company may hereafter establish and maintain a lumber plant.
    On or about the-day of November, 1917, the Giles Bay Lumber Co. and the petitioner entered into a written contract, which provided that the petitioner should be sales agent for the Giles Bay Lumber Co. and receive a commission of 10 per cent of the gross amount collected from the sale of lumber.
    During the years 1917 and 1918 money was borrowed by or was advanced for the Giles Bay Lumber Co. by the petitioner or by Nicks and McCreight individually, in the amount of $65,000. The money so borrowed by, advanced to, or expended for the Giles Bay Lumber Co., was secured on notes, of which two for $5,000 each were signed by the Giles Bay Lumber Co., three for $5,000, $7,500 and $27,-500, respectively, by McCreight and Nicks, and three for $5,000 each by the petitioner. During the year 1918 the petitioner paid, as interest or principal on these notes or renewals thereof, the amount of $19,-234.80, all of which was charged to the personal accounts of Mc-Creight and Nicks in equal amounts. In January, 1919, there was set up on the petitioner’s books an account, denominated “Trust Fund In re Giles Bay Indebtedness,” to meet the notes in question. This fund was started by transferring to the “ Trust Fund ” account credit balances in the personal accounts of McCreight and Nicks in the amount of $11,627.78. Thereafter, during the year 1919, the amount of $35,000 was transferred to the “ Trust Fund ” account from the “ Commission Account ” of the petitioner. The “ Commission Account ” represented money earned by the petitioner as commissions on sales and was, in substance, the same as the profit and loss account. On June 30, 1920, the “ Trust Fund ” was credited with $1,551.10. The record does not disclose from what source that credit came. During the years 1919 and 1920 payments were made on the notes in question out of the “ Trust Fund,” and the final payment of principal and interest was made on August 18, 1920. The total amount paid by the petitioner, as herein set forth, was $65,000 principal and $4,346.39 interest. After the notes and interest had been paid in full, there remained in the “ Trust Fund ” a balance of $1,-067.29, which balance was transferred to the personal accounts of McCreight and Ricks.
    The capital stock of the Giles Bay Lumber Co. was never issued, except the two shares to Justice and one share each to Ricks and McCreight to qualify them as directors; the mill and railroad were never completed and the corporation never manufactured or sold any lumber. In the year 1920, Justice demanded additional nioney and McCreight went to Florence, S. Car., to investigate conditions and found that the Giles Bay Lumber Co. had not only spent all of the money that had been advanced for the purpose of building the mill and the railroad, but had also incurred indebtedness. He was advised by Justice and Hopkins that $100,000 additional would be required. He said to Justice and Hopkins, “ We will not put it up, we are through.” He then returned to Pittsburgh and informed Ricks what he had done and Ricks approved of the action taken by him. Thereafter, Ricks, McCreight and the petitioner did not have anything further to do with the Giles Bay Lumbér Co., except, as hereinabove set forth, to pay the indebtedness that had been incurred to finance that company.
    The petitioner, in its original income and profits-tax returns for the years 1918, 1919, and 1920, did not claim any deduction on account of any loss sustained in the Giles Bay Lumber Co. transaction. McCreight and Ricks, however, in their individual returns for those years, claimed that the losses incurred in the transaction were their individual losses and they were allowed deductions therefor in the total amount of $73,124.85. Subsequently, the petitioner claimed that the loss in the Giles Bay Lumber Co. transaction was a loss to it and not to McCreight and Ricks as individuals, and they claimed deductions therefor for the years 1918, 1919, and 1920, in the total amount of $69,346.39. The Commissioner refused to allow the deductions claimed.
   OPINION.

Marquette:

It is alleged, in the petition filed herein, that Ricks and McCreight entered into the Giles Bay Lumber Co. transaction, not as individuals, but as agents for the petitioner; that the loss incurred in that transaction was the petitioner’s loss and that it is entitled to deduct the amount thereof in computing its net income for the years 1918,1919, and 1920. However, at the hearing, it abandoned its contention that it is entitled to spread the loss over the years named, and contended that the loss actually occurred in the year 1920 and that the entire amount thereof is a proper deduction in that year.

The testimony and other evidence presented herein are conflicting, contradictory, and confusing. Indeed, from the record, it is almost impossible to ascertain what the true facts of the transaction in question were. While there is some testimony to the effect that Nicks and McCreight entered into the transaction on behalf of the petitioner, there is other evidence, at least equally convincing, that they intended to act and considered that they were acting as individuals. Upon consideration of the entire record, we are of the opinion that we would not be justified in disturbing the determination of the Commissioner that the loss from the transaction was a loss of Ricks and McCreight as individuals. In view of this conclusion, it is unnecessary for us to determine in what year the loss occurred.

Judgment will he entered for the Commissioner.


author: Trammell:

text:
    John F. McDonald Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5153.
    Promulgated December 8, 1926.
    Where petitioner keeps its books on the accrual basis, it may not deduct for the year 1919 officers’ salaries voted in 1918 for that year but credited to the accounts of the officers in 1919.

      Simon Michelet, Esq., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
    This' is a proceeding for the redetermination of a deficiency in income and profits taxes of $5,783.53 for the year 1919. The deficiency results from the Commissioner’s making an “ inventory adjustment ” disallowing deductions of $547.50 taken for donations, $1,244.50 for life insurance premiums, $1,500 for ordinary and necessary. expenses, and $4,546 as officers’ salaries for 1918.
    At the hearing no testimony was introduced by either side, but a stipulation was submitted in which petitioner withdrew all the contentions raised in the petition except that relating to the dis-allowance of officers’ salaries.
    FINDINGS OF FACT.
    Petitioner is a Minnesota corporation with its principal office at Minneapolis. From the stipulation we find that on January 28, 1918, the corporation voted the salaries to be paid the officers for the calendar year 1918. On January 31, 1919, the sum of $4,546 was credited to the accounts of the officers on the books of the corporation, which amount represented the unpaid salary which had been authorized for 1918. This item was disallowed as a deduction for the year 1919 by the Commissioner. The books of account of the corporation were kept on the accrual basis.
   OPINION.

Trammell:

The officers’ salaries were authorized in 1918 for the year 1918. Since the petitioner kept its books on the accrual basis, it may not deduct in its 1919 return the salaries incurred in 1918 for that year. Appeal of Green Oil Soap Co., 3 B. T. A. 467.

Judgment will be entered for the Commissioner.


text:
    E. B. Crabtree Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5889.
    Promulgated December 8, 1926.
    1. Adjustment of invested capital made by the Commissioner on account of income and profits taxes for prior years held to be correct under section 1207 of the Revenue Act of 1926.
    2. Invested capital may not be reduced in determining the extent to which a dividend is paid from current earnings of the year by a “ tentative tax ” theoretically set aside out of such earnings pro rata over such year.

      F. 0. Graves, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes of $4,665.44 for the year 1920. Thé deficiency results from the respondent’s reducing invested capital by $7,238, representing the prorated amount of income and profits taxes for the preceding year; by reducing invested capital by $2,842.17, representing unpaid income and profits taxes for 1918 and by reducing invested capital as a result of deducting a “ tentative tax ” from current earnings to determine the amount of such earnings available for distribution as dividends.
    No testimony was introduced by either side. The case was submitted on the pleadings from which we make the following
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation with its principal office at Minneapolis.

      The respondent reduced petitioner’s invested capital at the beginning of 1920 by $7,238, representing prorated income and profits taxes for the year 1919. The respondent also reduced petitioner’s invested capital for 1920 by $2,842.17 on account of unpaid income and profits taxes for 1918. The correct amount of unpaid taxes for 1918 as admitted by the respondent in his answer is $2,577.31.
    On July 1, 1920, a dividend of $35,000 was paid by petitioner. The earnings of 1920 up to that date were $35,308.43. On that amount the respondent computed a tentative tax of $7,452.67, which he deducted from the $35,308.43, leaving $27,855.76, which he considered as earnings available for distribution. The difference between the the amount of the dividend, $35,000, and $27,855.76, or $7,144.24, was prorated for 184 days, giving an amount of $3,591.64. The respondent reduced petitioner’s invested capital by that amount.
    Petitioner’s income for 1920 was $70,984.88.
   OPINION.

Trammell:

The petitioner contends that the respondent erred:

(1) In reducing invested capital by the prorated income and profits taxes for 1919.

(2) In reducing invested capital by the amount of unpaid income and profits taxes for 1918.

(3) In reducing earnings available for distribution as dividends by computing a tentative tax thereon.

The first two contentions must be denied upon the authority of Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168; Appeal of B. F. Boyer Co., 4 B. T. A. 180; Appeal of Randall Brothers, Inc., 4 B. T. A. 291; Appeal of Chicago Railway Equipment Co., 4 B. T. A. 452; Appeal of Manville Jenckes Co., 4 B. T. A. 765; Appeal of Herald-Despatch Co., 4 B. T. A. 1096; Appeal of Henderson Cotton Mills, 4 B. T. A. 1212.

The petitioner’s third contention, in our opinion, is correct. The earnings available for distribution as dividends should not be reduced by the amount of a “tentative tax” theoretically set aside out of such earnings pro rata over the year. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135; Appeal of Georgia Car & Locomotive Co., 2 B. T. A. 986; Appeal of Rhode Island Tool Co., 3 B. T. A. 180; Appeal of Washington Hotel Co., 4 B. T. A. 441; Appeal of Amalgamated Sugar Co., 4 B. T. A. 568; Appeal of Gardner Governor Co., 5 B. T. A. 70.

Judgment will he entered on 15 days’ notice, under Rule 50.


text:
    Appeal of Harriet Cotton Mills.
    Docket No. 6228.
    Promulgated December 8, 1926.
    1. Tentative tax computation. — The Commissioner is without authority to reduce invested capital for any year by' reducing current earnings applicable to dividends by a tentative tax computation. Appeal of L. B. Ayers & Go., 1 B. T. A. 1135, followed.
    2. Reduction oe invested capital by prorated amount oe previous year’s income and profits taxes. — Reduction of invested capital by prorated amount of previous year’s income and profits taxes made in accordance with existing regulations approved under section 1207, Revenue Act of 1926, and Appeal of Russel Wheel & Foundry Go., 3 B. T. A. 1168.
    3. Reduction oe invested capital for the year 1920 by amount OF ADDITIONAL INCOME AND PROFITS TAXES FOR THE YEAR 1918 ASSERTED and assessed in the year 1921. — Income and profits taxes for the year 1918 were by law payable during the year 1919 and additional taxes for the year 1918 asserted and assessed in the year 1921, after the application of section 328 of the Revenue Act of 1918, became a liability as of the installment payment dates during 1919, and although the amounts of such additional taxes were not then known must be treated as an accrued liability on December 31, 1919, and must be deducted from invested capital for the year 1920,

      W. W. Spalding, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    The petitioner complains of a deficiency in income and profits tax for the year 1920 in the amount of $8,279.73.
    FINDINGS OF FACT.
    1. The petitioner is a North Carolina corporation with its principal office at Henderson.
    2. In computing the petitioner’s invested capital for the year 1920, the Commissioner set up a tentative tax liability of $61,336.90 for that year and reduced the net income available for dividends on September 1,1920, by that amount and thereby reduced invested capital by $11,849.95, representing the alleged excess of dividends of $35,-54-9.84 prorated from September 1 to December 31, 1920.
    3. In computing the petitioner’s invested capital for the year 1920, the Commissioner deducted $19,437.39 on account of income and profits taxes for the preceding year 1919 prorated in accordance with the installment payment dates.
    4. Accompanying its income and profits tax-return for the calendar year 1918 the petitioner made application to have its profits taxes determined and adjusted mider the provisions of section 328 of the Revenue Act of 1918. This application was granted by the Commissioner and, after applying the provisions of said section 828, the Commissioner found an amount of tax liability for the year 1918 in excess of the amount originally paid in the sum of $48,925.07, and so advised the petitioner in a letter dated January 28, 1921. This amount of additional tax was assessed and paid subsequent to January 28, 1921.
    5. The petitioner kept its books of account on the accrual basis, but did not set up any reserve to take care of income or profits taxes for any year, such taxes being reflected on the books only from date of payment.
   OPINION.

Trussell:

Whether the Commissioner may reduce the petitioner’s invested capital for 1920 on account of a tentative tax liability set up for that year must be answered in the negative under the authority of the decision in the Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

The Commissioner’s treatment of income and profits taxes for the year 1919, as affecting invested capital for the year 1920, appears to have been made in accordance with the regulations then in force, and under the provisions of section 1207 of the Revenue Act of 1926, and the Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168, the Commissioner’s action must be approved.

The Revenue Act of 1918 provided that income and profits taxes under said Act should be paid in four installments during the year following the year for which the taxes were determined and assessed.

In those cases in which the profits tax is to be computed under the so-called relief sections, 328(b), paragraph 2, provides:

In cases in which the tax is to be computed under this section, if the tax as computed without the benefit of this section is less than 50 per centum of the net income of the taxpayer, the installments shall in the first instance be computed upon the basis of such tax; but if the tax so computed is 50 per centum or more of the net income, the installments shall in the first instance be computed upon the basis of a tax equal to 50 per centum of the net income. In any case, the actual ratio when ascertained shall be used in determining the correct amount of the tax. If the correct amount of the tax when determined exceeds 50 per centum of the net income, any excess of the correct installments over the amounts actually paid shall on notice and demand be paid together with interest at the rate of ½ of 1 per centum per month on such excess from the time the installment was due.

The latter part of the above paragraph requiring the payment of interest from the, time the several installments were due seems clearly to establish that Congress intended that such additional income and profits taxes should be regarded as a debt due to the Government from and after the dates when the original installments were due and payable. This petitioner kept its accounts upon the accrual basis. We are of the opinion that it was this petitioner’s duty at the close of the year 1919 to accrue upon its books a tax liability equal to 50 per cent of the net' income of the year 1918 whether that amount had been paid or not. Later, when the tax liability for the year 1918 was finally determined it was the duty of the petitioner to readjust its accrued tax liability in accordance with such final determination.

So far as the instant case is concerned, the question of accrued tax liability for the year 1919 is a closed incident, but the Board, having now before it the redetermination of the tax liability for the year 1920, will compute that liability on the basis that the total tax liability for 1918 had been accrued on the petitioner’s books in the year 1919.

We are, therefore, of the opinion that the additional tax liability of $48,925.07 for the year 1918 was properly eliminated from the invested capital for the year 1920.

Redetermination of the deficiency will he made upon 15 days’ notice under Rule 50, and, judgment will he entered thereon in due course.


text:
    Joseph P. Authier, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2778.
    Promulgated December 8, 1926.

      George E. Wallace, Esq., and W. W. Gibson, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
   Trussell:

The petitioner complains of a deficiency for the calendar year 1919. During that year he sold a farm which he had acquired prior to March 1,1913, and in computing the gain from such sale estimated the March 1, 1913, value of the property sold to be $31,600. The Commissioner, in auditing the petitioner’s return for 1919, reduced this value to $25,280.

At the hearing several resident farmers and dealers in farm lands in Pipestone County gave opinion testimony to the effect that the petitioner’s property had a value on March 1, 1913, in amounts between $100 and $110 per acre.

FINDINGS OF FACT.

In 1910 the petitioner purchased a farm of 316 acres in Pipestone County, Minnesota, at $70 per acre. He -went into possession of this property early ⅛ the year 1911, at which time the farm was overrun with wild mustard, quack grass, and Canadian thistle.

During the years 1911 and 1912, the petitioner and his three sons cultivated the farm and succeeded in practically eradicating all of the above-named noxious weeds. The work of eradicating these weeds increased the value of the property approximately $25 per acre. Prior to March 1, 1913, the petitioner made improvements to the farm buildings and constructed two miles of woven wire fence and some barb wire fence, all at a cost of between $2,000 and $2,500.

The petitioner in 1910 paid $22,120 for his 316-acre farm and sold it in 1919 for $110 per acre. The March 1, 1913, value of this property was $100 per acre. The gain derived from the sale was $3,160.

Judgment for the 'petitioner will he entered in due course.


text:
    Appeal of Crowell Corporation.
    Docket No. 5411.
    Promulgated December 8, 1926.
    1. Valuation of an invention fob invested capital. — The petitioner’s exclusive license to use a patentable process held to have had a cash value of $25,000 at the time paid in for stock.
    2. Deduction fob exhaustion. — A taxpayer having a license for the exclusive use of a patentable process can not claim a deduction for exhaustion of the value of such license during a taxable period ended prior to the issuance of the patent.

      J. L. Andrews, G. P. A., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    The petitioner complains of a deficiency letter dated May 18, 1925, asserting a deficiency in income and profits tax in the amount of $1,566.33 for the calendar year 1919.
    The petitioner asserts errors on the part of the Commissioner as follows:
    (1) Failure to allow the cash value of certain patents and inventions held under exclusive license and acquired for stock.
    (2) Failure of the Commissioner to allow deduction for exhaustion on account of one of such inventions.

      (3) As an alternative for the allowance of the value of such patents and inventions as part of invested capital the petitioner claims a right to have its tax liability determined under section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is a New York corporation with its principal office at Brooklyn.
    The Lang & Gross Manufacturing Co., a corporation, was organized in 1906 and was engaged in the manufacture and sale of gummed cloth tape. Charles H. Crowell became associated with the said Lang & Gross Manufacturing Co. in 1911 when he acquired one-third of the outstanding capital stock. In 1917, Crowell was the owner of three patents and six applications for patents pertaining to the gummed paper and tape industry. On March 23, 1917, the said Crowell granted the Lang & Gross Manufacturing Co. a license for the exclusive use of the inventions and processes covered by said patents and applications for patents, for which license the said corporation issued to him $80,000 par value of its capital stock. Crowell retained the ownership of the patents and processes. Soon thereafter the Lang & Gross Manufacturing Co. changed its name to Crowell Corporation.
    It was conceded that all the patents and the applications for patents, with the exception of one, as hereinafter described, had not been developed or put to practical tests. Included in the licenses granted to the petitioner was the exclusive right to use one certain new process for producing stronger gummed cloth tape and eliminating a shrinkage in the cloth used. This invention, or process, at the time it was paid in for stock, was protected by an application for a patent. This patent was later issued on March 1, 1921, as patent No. 1370413.
    By the use of this new process the petitioner was enabled to reduce the time required in producing gummed tape from cloth from a period of six to eight weeks to a period of two to four days. The new process also eliminated a shrinkage of the cloth and saved four or five inches in a wide yard of 38 inches, or of approximately 10 per cent of the material used. The saving in the process of manufacture effected by the use of this process was not less than one cent per yard of material, and the petitioner used approximately 150,000 yards of cloth per month.
    This patentable process at the time it was paid in for the stock of the taxpayer corporation had a cash value of $25,000.
    The Commissioner, after eliminating the capital value of this process, found that the petitioner, for the calendar year 1919, had an average invested capital of $80,397.46, a net taxable income of $27,296, upon which he computed excess-profits tax of $5,816.14, total tax liability $7,764.13.
   OPINION.

Trussell:

The record of this case clearly establishes the fact that the use of the patentable process here under consideration in the petitioner’s business resulted in a reduction in the cost of manufacturing of a large part of the goods produced and sold in the course of the petitioner’s business. This reduction in the cost of manufacturing must necessarily be, and was, reflected in the net profits of the business, and we are of the opinion that the record supports the finding that this process had at the time paid in for stock a cash value of $25,000.

Up to the close of the taxable year here under consideration the patent under this process had not been issued, and therefore the period of patent monopoly had not yet begun to run. The record shows no basis upon which a deduction for exhaustion of the capital value of this process can be computed and therefore no such deduction can be allowed.

We are further of the opinion that the record fails to establish any such abnormality either of invested capital or net income as to require the application of section 328 of the Revenue Act of 1918.

The deficiency will be redetermined in accordance with the foregoing findings of fact and opinion upon 15 days' notice pursuant to Rule 50, and judgment will be entered in due course.

Geeen and Trammell dissent.


author: Smith:

text:
    Appeal of Peninsula Shipbuilding Co.
    Docket No. 5741.
    Promulgated December 8, 1926.
    During tbe years 1918, 1919, and 1920, tbe petitioner was engaged in, building wooden ships for tbe United States Shipping Board Emergency Fleet Corporation on a cost plus fixed fee basis, tbe contracts under which the work was being done providing that depreciation of plant and equipment was to be considered an element of cost. Held, that the petitioner was not entitled to deduct from gross income, in its tax returns for the years 1918, 1919, and 1920, amounts for amortization of property which were reimbursed to the petitioner in 1923.

      Charles E. McCulloch, Esq., and Stiles W. Burr, Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.

      This is an appeal from the determination of deficiencies for the years 1918, 1919, and 1920, in the respective amounts of $26,576.12, $68,055.93, and $23,074.65. The petitioner admits an aggregate deficiency of about $12,000. The one issue presented is whether the petitioner is entitled to deduct from gross income, in income-tax returns for the years 1918, 1919, and 1920, an aggregate amount of $235,126.27 for obsolescence or amortization of plant, or whether that amount should be reduced by $149,763.01, which was reimbursed to it by the United States Shipping Board Emergency Fleet Corporation to cover such obsolescence or amortization. It is the contention of the petitioner that it is entitled to deduct the full amount of $235,126.27 and that the receipt of $149,763.01 in 1923 constituted the receipt of taxable income for that year.
    FINDINGS OP PACT.
    Petitioner is a corporation organized under the laws of Oregon with its office at Portland. It was organized in 1916 for the purpose of building small wooden vessels as a private enterprise and was so operated until May 15, 1917. On that date it entered into the first of three contracts with the United States Shipping Board Emergency Fleet Corporation for the construction of wooden ships for the Government. The shipbuilding facilities of the plant at that time consisted of two “ways”; that is, facilities for the construction of two ships at a time, and represented a capital expenditure of $110,116.04.
    The first contract, above referred to, known as Contract 5-W. C., provided for the construction of four wooden vessels, to be completed under specifications approved by the Emergency Fleet Corporation, the first by February 15, 1918, and the remaining three — one every thirty days thereafter. Pertinent portions of this contract read as follows:
    [Art.] II.
    [Par. 2] For the purpose of this contract, the actual cost shall he generally as defined in the United States Revenue Bill of September 6th, 1916, Section 302, insofar as the requirements of said Revenue Bill are applicable to and not inconsistent herewith.
    [Par. 3] The actual cost shall include the following and items similar thereto in principle, provided, that all items of overhead or indirect cost included in paragraphs (b) to (e) of this article and all items under paragraphs (†) and (g) shall, as far as possible, be submitted to the Owner in advance for its approval, and no item so submitted in advance and disapproved by the Owner shall be payable to the Contractor. (Italics ours.)
    * * * * * * *
    (f) A reasonable allowance, according to the conditions, for depreciation of values of plant and property (account being taken 0⅜ exceptional deprecia-txon of extensions, increases, and additions to plant and property specially acquired for or devoted to the manufacture or erection of the work or the construction of the vessel under this contract provided the same have not been paid for by the Owner under (g)).
    (g) The cost of labor materials machinery equipment and supplies (other than real estate) for the establishment of and extensions increases and additions to plant and property of the Contractor authorized by the Owner specially acquired for or devoted to the building or construction of the vessels under this contract and rentals actually paid for such establishments extensions increases and additions authorized by the Owner.
    * * * * * * *
    [Par. 5] Physical property represented by items of cost included in paragraph (g) supra paid for by the Owners shall continue to be Owner’s property after termination of this contract, but may be purchased by the Contractor at such termination at a value to be agreed upon.
    * * * * * * *
    Determination of cost.
    The determination of the actual cost as above defined shall be made by and under the direction of George W. Goethals as General Manager of the Owner or his successors in such office (herein called the General Manager) and his decision shall (except as hereinafter stated) be binding on both parties. Wherever possible, he will lay down in advance the methods to be followed in ascertaining and determining the actual cost, and where this cannot be done, will act on claims submitted by the Contractor. He will determine methods to be followed by the Contractor in preparing bills and by engineers and auditors in certifying to them, and will determine the items which must be referred for his decision. He will so far as possible determine in advance the ratio of amortization referred to in paragraph (f) supra, and allowances to be made for indirect charges.
    * * * * * * *
    [Art.] III.
    * * * * * * *
    Orders.
    The Owner shall have full control of all orders for materials, machinery equipment supplies and other purchases and commitments made under this agreement (including establishment of extensions increases and additions to plant and property) and all contracts and orders placed by the Contractor may be in the name of the Owner by the Contractor as agent, and it is understood that the Contractor shall assume no pecuniary liability under or by reason of such obligations where made with the written approval of the Owner.
    The number and class of men engaged on the work (including establishment of extensions increases and additions to plant and property), the hours of labor, methods of work and terms of employment shall be subject to the approval and direction of the General Manager of the Owner.
    * * * * * * *
    [Art.] VIII.
    Disputes.
    If any doubt or dispute arises as to the meaning or effect of this contract, or the drawings or specifications which are a part hereof, or if any discrepancy occurs, the matter shall be promptly referred to the General Manager and his decision in the premises shall be conclusive and binding upon both parties.

      In case after delivery of a completed vessel to the Owner under this contract (but only in that event) the Contractor shall deem that it is aggrieved by any decision of the General Manager either as to actual cost or as to any disputed matter hereunder of any kind and shall give notice to the Owner to that effect within thirty days after delivery or after final payment by the Owner,. such matter shall be determined by a Board which shall consist of three naval architects or engineers or experts to be appointed, one by the Owner, one by the Contractor, and one by the American Bureau of Shipping. Such Board shall within thirty days after submission of such matter to- it determine what if any further sum shall be due by the Owner to the Contractor hereunder on account of such delivered vessel and its finding (made by a majority of the Board) shall be conclusive on both parties.
    The second contract, known as Contract 172-W. C., dated December 15, 1917, carried substantially the same provisions as Contract 5-W. C., and called for the delivery of four ships, the first by November 1, 1918, and the remaining three — one every thirty days thereafter. The pertinent provisions of this contract are as follows:
    [Art.] I.
    * * * Said vessels are to be constructed under the terms of said contract dated May 15, 1917, and payment therefor is to be made under the terms of said contract, which contract is to govern in all respects in the construction of said vessels and is to be binding upon the parties hereto as if fully set out herein, except in the following particulars:
    1. The Contractor agrees to deliver said completed vessels to the Owner afloat at the works of the Contractor at Portland, Oregon, on or before the following dates:
    One vessel to be delivered on or before November 1, 1918; and the remaining three vessels to be delivered — one every thirty (30) days thereafter. All four (4) vessels, however, to be delivered prior to February 1, 1919.
    2. The 5th paragraph of Article II, relating to the purchase of physical property represented by items of cost included under subdivision (g) of the 3d paragraph of Article II, is eliminated, and in lieu thereof the following is substituted:
    The Contractor agrees to purchase and pay for, from its own funds, any real estate or other improvements to the plant authorized by the Owner, providing any are necessary for the construction and completion of the vessels herein contracted for. The Owner agrees to allow the Contractor for the use of said improvements and plant, as a part of the cost of constructing the vessels, at the rate of thirty per cent. (30%) per annum depreciation (exclusive of the cost of grading) ; if any further additions to plant or equipment are necessary for the construction of the vessels under the contract of May 15, 1917, the Contractor is to pay for the same from its own funds, and the Owner is to allow as part of the cost of constructing the vessels at the rate of thirty per cent. (30%) per annum depreciation upon the plant and equipment so purchased by the Contractor.
    3. The 11th paragraph of Article II, relating to payment, is amended to read as follows:
    No payment shall be made except upon such certificates as the Owner may from time to time require. Final approval of such certificates by the Owner shall be necessary for the payments.

      4. The second paragraph of Article III entitled “ Orders ” is. amended to read as follows:
    The Owner shall have full control over all orders for material, machinery, equipment, supplies, and all other purchases and commitments made under this contract (including the establishment of extensions, increases and additions to plant and property) ; and all contracts and orders placed by the Contractor shall be first submitted to the Owner for its approval. Any contracts or orders placed by the Contractor, which have not been first approved by the Owner, shall, in no way, be binding upon the Owner, and the Contractor shall be solely liable therefor.
    * * * * * * *
    [Art.] IV.
    * * * and provided further, That the Owner may, without prejudice to the rights of the Contractor, reserve his decision upon any or all claims for extension until the completion of the vessel, the work in the meantime not to be discontinued or delayed on account thereof. In the event that parties shall not agree as to such extension, such extension shall be determined in accordance with Article VIII of the contract of May 15, 1917.
    * * * * * * *
    [Art.] VII.
    The Contractor agrees immediately to make a complete Inventory of its yard and plant and to submit a complete list of all purchases made to date. And the Contractor further agrees that no new purchases shall be made without proper authorization of the Owner; that when said inventory is submitted that the Contractor will submit therewith, in writing, a complete list of all improvements for which the Contractor claims depreciation as a part of the cost, together with full details of each and every item upon said list.
    The third contract, known as Contract 437-W. C., was similar to the preceding contract and called for the completion and delivery of four more vessels — the first by April 1, 1919, and the remaining three — one every thirty days thereafter.
    Under, each contract the builders were guaranteed a profit of $40,000 per vessel. Work under the first contract was begun immediately after its execution. It was necessary in the beginning to make extensive additions to the plant. In order to carry on the construction of four vessels simultaneously the plant had to be enlarged to a four “ way ” plant. The periods over which these additions were made and the costs thereof were billed as follows:
    Period. Amount.
    April 6, 1917, to December 31, 1917-$87,252.65
    Jan. 1, 1918, to November 14, 1918_ 59,228.99
    Total additions to November 14, 1918- 146, 481.54
    Nov. 14, 1918, to December 31, 1918_:- 27, 227.77
    Jan. 1, 1919, to December 31, 1919- 11,462.32
    Jan. 1, 1920, to June 30, 1920- 8,167.58
    Total additions to June 30, 1920. 193,339.21

      One vessel had been completed and delivered and the other eleven were in various stages of construction when the Armistice was signed. Soon thereafter, notice to suspend work on the- unfinished vessels was issued and the contracts declared canceled. Later the contracts were extended so as to allow completion of all twelve of the vessels, the specifications for the last two being changed to provide for saving equipment and the price therefor being reduced from a profit of $40,000 to a profit of $20,000 on each. All the work was completed in 1920 and the plant shut down in that year. In 1921 it was sold for $30,000, which was its salvage value. Both the petitioner and the Emergency Fleet Corporation had realized when work on the Government contracts was begun that the shipyards would have only a salvage value after the completion of the Government contracts.
    Although amounts spent by the petitioner for additions to plant from April 6, 1917, to June 30, 1920, aggregated $193,339.21, only a small portion of these expenditures was ever approved in advance by the Emergency Fleet Corporation. Repeated requests for such approval were made to the district representatives of the Emergency Fleet Corporation and to headquarters in Washington, D. C., but they were for the most part denied. The petitioner made claims for depreciation on unauthorized additions to plant and continued to make claims therefor until it obtained final settlement under its contracts in 1923.
    Under date of May 28, 1917, F. C. Knapp, president of the petitioner, received a letter from George W. Goethals, general manager for the Emergency Fleet Corporation, which provided in part as follows:
    As regards the depreciation for the cost of the plant it is understood that this is based on your expression that upon the conclusion of contracts for the Emergency Fleet Corporation there will be no profitable business remaining for your company, and that, therefore, the entire cost of the plant will have to be absorbed within practically three or four years from the time it was purchased. This, of course, is a matter which is subject to adjustment upon the conclusion of the corporation’s contract in case the conditions at that time do not accord with your expectations, as stated hereinabove.
    The Emergency Fleet Corporation allowed during the years 1918, 1919, and 1920, as depreciation or obsolescence of plant in computing the cost of the twelve vessels under the terms of the contracts, a total of $50,236.99. The total claimed for plant depreciation from the Emergency Fleet Corporation amounted to $249,012.53. This claim was adjudicated by the Claims Commission of the United States Shipping Board on February 3, 1923, and was allowed for a total amount of $200,000, less $50,236.99 theretofore allowed. The additional payment made to the petitioner in 1923 was $149,763.01.

      The petitioner kept its books of account on the accrual basis. It reported the $50,236.99, allowed by the auditors as obsolescence of plant from November 14, 1918, to June 30,1920, as having accrued— $3,100.66 in 1918, $27,998.58 in 1919, and $19,236.75 in 1920. These amounts were included in the gross income shown on the income-tax returns filed for those years. No part of the claim against the Emergency Fleet Corporation for additional depreciation or obsolescence not approved by the district auditors was set up as accrued income on the petitioner’s books for the years 1918, 1919, and 1920.
    In his computation of tax liability for the years 1918, 1919, and 1920, the Commissioner allowed the deduction of $17,999.53 for depreciation for the year 1917. He determined that the depreciated cost of the plant and facilities as of November 14, 1918, was $218,-268.60. To the depreciated cost as of that date the Commissioner added the cost, as determined by him, of the additions made to the plant over the period November 14, 1918, to June 30, 1920, amounting to $46,857.67, giving a total of $265,126.27. That amount less salvage, $30,000, the Commissioner allowed as obsolescence for 1918, 1919, and 1920, in the amounts of $16,754.36, $146,625.91, and $71,746, respectively.
    In his audit of the petitioner’s returns for the years 1918,1919, and 1920, the Commissioner added to the gross income reported by the petitioner, $8,948.34 for 1918; $83,467.42 for 1919; $57,347.25 for 1920, the sum of these being the additional amount for depreciation received by the petitioner in 1923 from the Emergency Fleet Corporation in compromise of its claim for plant depreciation. This amount was apportioned to the income over the three years in the same ratio that the $50,236.99 depreciation allowed by the Emergency Fleet Corporation was apportioned to the deduction.
   OPINION.

Smith:

This appeal presents the question of the proper treatment to be accorded an amount of $149,763.01 representing depreciation on the petitioner’s plant, which was paid to it in 1923 by the United States Shipping Board Emergency Fleet Corporation under certain contracts between the corporation and the petitioner. The contracts giving rise to the claim for the amount provided that depreciation should be an element in determining the cost of the ships to be built by petitioner whereby the United States was to pay the cost of the construction of the ships plus a fixed fee. The amount was allowed by the Emergency Fleet Corporation in 1923 specifically as “ depreciation.” The Commissioner in determining the deficiency has called the entire allowance for depreciation “ obsolescence.”

The applicable provisions of the taxing statute are as follows:

That in the case of a corporation subject to the tax imposed by section 230 the term “ net income ” means the gross income as defined in section 233 less the deductions allowed by section 234, and the net income shall be computed on the same basis as is provided in subdivision (b) of section 212 or in section 226. (Section 232, Revenue Act of 1918.)
(b) The net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * * (Section 212, Revenue Act of 1918.)
(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions :•
* * * * * * *
(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence;
(8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * * (Section 234, Revenue Act of 1918.)

We think that it is immaterial that the allowance was designated by the Emergency Fleet Corporation as depreciation and by the Commissioner as obsolescence. It meets all the tests of the allowance provided by the statute for amortization, and we think that subdivision (8) of section 2S4 of the Revenue Act of 1918, above quoted, is applicable.

Deficiencies before us relate to the years 1918, 1919, and 1920. In his deficiency letter the Commissioner has related the $149,763.01 received by the petitioner in 1923 back to the years 1918, 1919, and 1920, and has apportioned the amount to the three years in the same ratio as the $50,236.99 allowed as depreciation by the Emergency Fleet Corporation was apportioned. No question is raised by this appeal as to the correctness of this allocation provided the $149,763.01 is to be considered as in anywise affecting the tax liability for the years 1918, 1919, and 1920.

In his deficiency letter the Commissioner increased gross income for the years 1918, 1919, and 1920, by the $149,768.01 in question, apportioned as above indicated. At the hearing counsel for the Commissioner admitted that this was in error, and contended that the gross income should not have been increased but that the allowance for obsolescence or amortization should have been reduced in like amount, and that the net incomes, as shown by the deficiency letter, were correct.

We think that the position of the Commissioner with respect to this matter is correct. It is thoroughly in line with the reasoning of the Board in the Appeal of G. M. Standifer Construction Corporation, 4 B. T. A. 525, where a different conclusion was reached solely for the want of such facts as are here presented. In that appeal the award from the Emergency Fleet Corporation was a lump sum settlement of a great many totally dissimilar claims, to which no allocation. of the award was attempted in the settlement agreement, or was possible thereafter. We find the following language in the opinion:

Whether the Government contracts tinder which a taxpayer produced articles contributing to the prosecution of the war specifically provided for amortization as such or, in other words, provided that the Government would pay the cost, or any part thereof, of the facilities acquired or constructed by a taxpayer in order to carry out the contracts, seems to us to be not controlling. The real question is: Did the Government actually pay or bear the expense of any part of the cost of such facilities'? If it did, such part of the cost borne by the Government must be subtracted from the cost of facilities acquired by the taxpayer upon which the amortization deduction is allowed. There is no deduction allowed to a taxpayer with respect to such part of the cost of facilities which was not borne by him. Whether such cost of facilities was actually borne by the Government originally when the facilities were acquired, or whether it was borne by the Government subsequently when the settlements of the contracts were made between the Government and the taxpayer, is immaterial. We believe that the contention of the Government in this regard, as a matter of law, is well founded, but whether such principle is applicable to the facts in this case presents more difficulty
* * * * * * *
It does not necessarily follow that, because the Standifer Corporation made a claim for reimbursement of a part of the cost of facilities, any part of such claim was allowed in the final lump sum settlement. The taxpayer filed claims exceeding $11,000,000. Included therein were damages for breach of contract, settlement for facilities, and various other claims. * * *
From a consideration of all the evidence, we are of the opinion that no part of the cost of the facilities on which amortization is allowable can be considered to have been borne by the Government, and that the taxpayer is entitled to the deduction for amortization without reduction of the cost of facilities by any part of the amount of the settlement with the Fleet Corporation.

In the case before us, the claim was for a specific amount for depreciation of property as an element of cost of the ships, and that claim was allowed for $200,000, less $50,236.99 theretofore allowed.

The contentions of the petitioner that the claim against the Emergency Fleet Corporation had. no determinable value during the years 1918,1919, and 1920, that under a strict legal construction of the contracts no recovery could ever have been had, and that the petitioner never accrued any amount in respect of the claims on its books, are either not proven or are not material. The fact is that an amount representing depreciation with the identical status of that previously determined as a part of the cost of the vessels was actually received. We believe that time is not of the essence, and that the additional amount received in 1923 was a part of the cost of construction of the plant not borne by the petitioner and is not deductible as depreciation, obsolescence, or amortization under the Revenue Act of 1918.

Judgment will be entered on 15 days' notice, under Rule 50.

Milliken and Van Fossan not participating.