author: Milliken:

text:
    E. S. Frischkorn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7879.
    Promulgated June 20, 1927.
    1. Where the Commissioner in his 60-clay letter has designated a certain transaction a gale hut where upon the hearing it is shown that it was an exchange, and where petitioner has suffered no surprise it is the duty and province of the Board of Tax Appeals to disregard the terminology and determine the correct deficiency, if any.

      2. The value oí shares of stock in certain corporations determined.
    3. A claim for deduction of certain amounts as interest paid disallowed because not proven.
    4. A claim for a deduction of money expended for traveling expenses incident to petitioner’s business disallowed because not proven.
    5. A claim for a deduction of certain worthless debts denied because petitioner did not prove that he first ascertained them to be worthless in the taxable year.

      J. E. Amide, C. P. A., and Ehner J. Binford, Esq., for the petitioner.

      G. E. Curl, Esq., for the respondent.
    This is a proceeding for redetermination of deficiencies in income taxes for the years 1919, 1920, and 1921 in the total amount of $65,032.53. These deficiencies arise by reason of: (1) Inclusion by the respondent in petitioner’s gross income for the year 1919, the sum of $80,342, alleged to be the profit realized from a transaction involving the transfer of certain real estate by petitioner to the Frischkorn Development Co., (2) refusal of respondent to allow a deduction from gross income for 1919 of $1,922.69, representing expenses alleged to have been incurred by petitioner in the maintenance and operation of an automobile for business purposes, (3) inclusion by the respondent in petitioner’s gross income for 1920 of the sum of $62,000 alleged to be profit arising from the transfer of certain real estate to the Frischkorn Homes Co., (4) refusal of respondent to allow as deduction from petitioner’s gross income for 1920, interest paid during the year in the sum of $2,585.19, (5) refusal of respondent to allow a deduction from petitioner’s gross income for 1920 for traveling expense in the sum of $1,825, (6) refusal of respondent to allow as a deduction in taxpayer’s income for 1921, expenses incurred by taxpayer for traveling and entertainment for business purposes in the sum of $4,020.97, (7) refusal of respondent to allow as a deduction from taxpayer’s gross income for the year 1921, a loss sustained in the disposition of an automobile in the sum of $218, and the sale of horses in the sum of $494, and (8) refusal of the respondent to allow as a deduction from taxpayer’s gross income for the year 1921. losses incurred on account of bad debts in the sum of $3,002.
    The petitioner withdrew at the hearing item numbered 7, and in brief filed by its counsel, waives error concerning item 2.
    FINDINGS OF FACT.
    The petitioner is an individual, residing at Detroit, Mich. He has assisted in the organization of many corporations, which he and those associated with him used as instrumentalities ior the purchase, improvement, and sale of real estate. Among these corporations are the Frischkorn Real Estate Co., the Frischkorn Development Co., the Frischkorn Homes Co., the Dunbar Realty Co., the Faunce Realty Co., and the Frischkorn Construction Co.
    In the early part of May, 1919, the petitioner, together with W. B. Faunce, W. J. Davie, Fred Warner, Sam Pfau, George M. Frischkorn and others, procured the incorporation under the laws of Delaware of the Frischkorn Development Co. The specific purpose for which this corporation was organized, was the acquisition, improvement and sale of real estate. It was understood that Faunce, Warner, Davie, and the other associates of petitioner were to advance the money with which to acquire real estate; that the petitioner was to furnish his valuable services both in the acquisition and the disposition of the real estate, but was to contribute no money; that the real estate to be purchased was to be acquired in the name of one of the associates and by him conveyed to the corporation; that the associates were to be reimbursed in stock, or stock and cash, and the stock was to be apportioned among the members of the group, and a certain number of shares were to be transferred to petitioner and his brother, George M. Frischkorn, for the consideration above mentioned.
    Under its charter as amended, the Frischkorn Development Co. had an authorized capital stock of 1,500 shares of common stock without nominal or par value and $150,000 of preferred stock divided into 1,500 shares of the par value of $100 each. The common stock was given as a bonus with the purchase of the shares of preferred stock. The common stock had no value.
    The preferred stock-issued by the corporation, carried a fixed, yearly, cumulative dividend of I per cent, but no more, payable before any dividends were set apart or paid on the common stock. The preferred stock certificates contained the following provision:
    The holders of preferred stock shall, in case of liquidation or dissolution of the company, be entitled to be paid in full both the principal of their shares and the accrued dividends charged before any amount shall be paid to the holders of the general or common stock. The holders of preferred stock shall not be entitled to vote.
    The said preferred stock, or any part thereof, may at the option of the board of directors be redeemed at One Hundred and Five Dollars ($105.00) per share, together with all accrued dividends, at any dividend paying period.
    On May 13, 1919, the petitioner acquired for the benefit of himself and his associates, two tracts of land in Dearborn Township, Wayne County, Michigan. The consideration paid for this land was $76,938, of which $31,938 was paid in cash, and for the remainder of $45,000 purchase-money mortgages were issued. No part of the cash consideration was paid by the petitioner out of his own funds. The first meeting of the stockholders of the company was held on the 27th day of May, 1919. The petitioner presented to the stockholders an offer to sell the corporation the said two tracts of land subject to the two mortgages aggregating $45,000, and to accept in payment, 630 shares of the preferred stock of the company and 630 shares of the common stock. By proper resolution, the stockholders advised the directors to accept the proposition. The first meeting of the board of directors was held on the 9th day of June, 1919, and a resolution was then adopted to accept the offer of petitioner, and directed that there be delivered to the petitioner, his nominee or assigns, 630 shares of preferred stock and 630 shares of common stock. On May 27, 1919, the Frischkorn Development Co. issued to E. S. Frischkorn its stock certificates, Nos. 1, 2, 3, and 4, for a total of 630 shares of its preferred stock. The stubs of these certificates Nos. 1, 2, 3, and 4 recite that the stock issued was treasury stock and each bears canceled documentary revenue stamps to the value of 5 cents for each share issued. Thereafter, beginning on June 12, 1919, and continuing through June 16, 1919, the petitioner transferred to his associates all the 630 shares. The stub of each certificate so transferred, bears canceled documentary revenue stamps at the value of 2 cents per share.
    On the 29th day of May, 1919, the petitioner acquired out of the funds contributed by his associates, a tract of land in the County of Wayne, State of Michigan. The consideration paid for this tract of land was $60,000, of which $20,000 was paid in cash and for the remainder a purchase-money mortgage was executed. At a meeting of the board of directors of the company, held oh the 10th day of June, 1919, the petitioner proposed to convey this property to the corporation in consideration of the assumption by it of the mortgage and 320 shares of preferred stock of the company. By a proper resolution, the offer was accepted. On June 14, 1919, the corporation issued to the petitioner its certificate No. 24, for the 320 shares of the preferred stock. The stub of this certificate shows that it was an original issue and it bears canceled documentary revenue stamps in a total amount equal to 5 cents for each share issued. Beginning with June 14, 1919, petitioner again transferred this stock to his associates with the result that after having made all transfers required by the agreement between him and his associates, he remained the owner of 81% shares of the preferred stock. The stub of each certificate so transferred bears canceled documentary revenue stamps at the value of 2 cents per share. The total number of shares of preferred stock issued by the corporation in pursuance of the resolutions of the board of directors, adopted June 9 and June 10, 1919, was 950 shares, and the total cost of the property in money to the petitioner’s associates, for all of said land, was $51,938. The value of each share of preferred stock, at the time of issue, was $87.26.
    Previous to October 25, 1919, the petitioner had acquired with money contributed solely by his associates, certain parcels of land in Wayne County, Michigan. The land was acquired by him for a total consideration of $79,120, of which $35,400 was paid in cash and the remainder, $43,720, ivas represented by purchase-money mortgages. At a meeting of the board of directors of the corporation, held on the 25th day of October, 1919, the petitioner proposed to sell to the corporation, the above tract of land subject to the mortgages of record, in consideration of 550 shares of the preferred stock and 550 shares of the common stock and $17,680 in cash. By a proper resolution, this offer was accepted by the board of directors and an issue of 550 shares of preferred capital stock was directed to be delivered to the petitioner. The minutes contain the following:
    The Treasurer of the Company was then instructed to pay Mr. E. S. Erisch-korn the $17,680.00 from the Treasury of the Company.
    The corporation paid the petitioner the $17,680 above referred to, and on October 27, 1919, it issued to him certificate No. 40 for 550 shares of preferred stock of the company. On the stub of this certificate are canceled documentary revenue stamps in a total amount equal to 5 cents for each share issued. On November 1, 1919, the petitioner transferred the 550 shares to W. B. Faunce. W. B. Faunce thereupon transferred the stock to his associates, including the petitioner, who became the owner of 95 shares of stock. The stub of each certificate so transferred bears canceled documentary revenue stamps at the value of 2 cents per share. The value of the 95 shares of preferred stock of the Frischkorn Development Co., which were received by the petitioner in consideration of his services thereafter to be rendered, was $100 per share. The total gain made by the petitioner in this transaction was $9,500, plus $17,680, the cash received by him from the company.
    In the summer of 1920, the petitioner, his brothers Charles R. Frischkorn and George M. Frischkorn, and W. J. Davie entered into an agreement to enter into contracts for the purchase of certain parcels of ground, hereinafter described. During the months of June and August, 1920, W. J. Davie advanced to petitioner $30,000 to be applied upon the purchase price. During the same months, Charles R. Frischkorn advanced to his brother, $5,000, for the same purpose and petitioner contributed $13,000. George M. Frischkorn paid nothing.
    On the 13th day of August, 1920, petitioner entered into a contract for the purchase from one Mende of the following described land in Wayne County, Michigan: Easterly 30 acres of the east half of west half of the northwest quarter, section 11, township 2 south, range 10 east. The consideration for the agreement to purchase was $70,000, of which $10,000 was paid in cash and the remaining $60,000 was to be paid in equal annual installments of $10,000 each, until the whole amount was paid. The petitioner agreed to subdivide the property and sell it in lots and Mende agreed to enter into conveyances of the lots upon payment to him out of the purchase price, a sum of money at the rate of $4,000 per acre.
    On the same day, petitioner entered into an agreement with Emile Chevillot and his wife, for the purchase of the following described property in Wayne County, Michigan: North 20 acres of the west 40 acres of the east half of the northwest quarter of section 11, township 2 south, range 10 east, and the west half of the southeast quarter of the northwest quarter of section 11, township 2 south, range 10 east. The consideration for this contract of sale was $92,000, of which $18,000 was paid in cash and the remaining $74,000 was to be paid in sums of $12,000 each year thereafter. The contract contained covenants as to subdivision and payment similar to those in the contract with Mende.
    On the 12th day of August, 1920, petitioner entered into a contract with Henry Bender and his wife for the purchase of the following described property in Wayne County, Michigan: West half of the west half of the northwest quarter of the west 10 acres of the east half of the west half of the northwest quarter, section 11, township 2 south, range 10 east. The consideration for this purchase was $100,000 of which $20,000 was paid in cash and the remainder to be paid as follows: $2,600 on or before one year after date, $2,500 on or before two years after date, $25,000 on or before three years after date, $25,000 on or before four years after date, and $25,000 on or before five years after date. The contract contained covenants as to subdivision and payment similar to those in the Mende contract.
    For the purpose of subdividing and selling the above described properties, the petitioner, George M. Frischkorn, W. J. Davie, R. H. Menders and Frank Renaud organized a corporation, under the laws of Delaware, under the name of Frischkorn Homes Co. The organization of this company was perfected as of the 24th day of August, 1920. This company had an authorized capital stock of $150,000 preferred stock, divided into 1,500 shares of the par value of $100 each, and 1,500 shares of common stock without nominal or par value. The preferred stock certificates contained the following provision:
    Tbe holders of preferred stock shall, in case of liquidation or dissolution of the company, be entitled to be paid in full both the principal of their shares and the accrued dividends charged before any amount shall be paid to the holders of the general or common stock.
    The said preferred stock, or any part thereof, may at the discretion of the Company be redeemed at par, together with all accrued dividends, on August 15th, 1921, or any dividend day thereafter.
    The common stock had no value. At a directors’ meeting held on August 30, 1920, petitioner offered to transfer the above contracts of sale to the Frischkorn Homes Co. in consideration of the issue by that company to him and his nominees of 1,100 shares of preferred stock and 1,100 shares of common stock of the company. On the same day, August 30, 1920, the corporation issued to the petitioner a certificate of stock, No. 1, for 1,100 shares of the preferred stock. Thereafter, on September 30,1920, petitioner transferred 50 shares of the preferred stock out of his certificate for 1,100 shares to Charles B.. Frischkorn. On the same day, he transferred 70 shares of his 1,100 shares to his brother, George M. Frischkorn. For this stock, George M. Frischkorn paid nothing at any time. On September 13, 1920, petitioner transferred 296 shares of his 1,100 shares to W. J. Davie, and on the 16th day of December, 1920, he transferred 4 shares of the said stock to W. J. Davie. W. J. Davie was also a subscriber to 4 shares of stock at the inception of the corporation.
    The value of each share of preferred stock issued to petitioner was $43.63. After the transfer of the stock to George M. Frischkorn, Charles B. Frischkorn and W. J. Davie, there remained in petitioner’s possession 680 shares of the preferred stock. W. J. Davie was active sales manager for the various Frischkorn enterprises and expected to derive a large amount of remuneration from the sales of property controlled by the Frischkorn Homes Co. George M. Frisch-korn and petitioner were experienced realtors. Their long experience was, in the judgment of their stockholders, such as to justify their preference in the issuance of the stock. The lands acquired by the above contracts, were the only properties ever owned or controlled by Frischkorn Homes Co. during the existence of the corporation.
   OPINION.

Milliken:

Petitioner contends that since the respondent in his 60-day notice, which is the basis of this proceeding, refers to the transactions involving the conveyances of real estate to the Frisch-korn Development Co. and the Frischkorn Homes Co. as “sales,” he can not be taxed on profits arising therefrom unless it be shown that these transactions were in fact sales in the technical sense of that term, and even though these transactions were in fact exchanges, he should now escape all taxation on gain realized from what was an exchange rather than a sale. This Board was not created for the sole purpose of reviewing rulings made by the respondent, but was created for a broader purpose, i. e., of determining the correctness of deficiencies in tax found by the respondent. When all the facts of record conclusively prove a transaction to be an exchange rather than a sale, it is our duty to pass upon the question of law and fact thus raised, with its consequent effect on the taxability or nontax-ability of the transaction. In his petition in this proceeding, petitioner not only raises the question of the taxability of the exchange, but quotes as the law of his case, section 202(b) of the Revenue Act of 1918, and article 1566 of Regulations 45, as amended by T. D. 2924, all of which refer to exchanges. The testimony taken by him before the date of the hearing was largely addressed to the question of gain arising from the exchange of the various pieces of property for the stock of the corporations. The petitioner has not been misled. There is no merit in this contention.

At the hearing, the auditor of the Frischkorn Development Co. testified that the certificates for 630 shares of the preferred stock of the company issued on May 27, 1919, were never in fact issued to the petitioner; that the word “ canceled ” written across the face of each certificate indicates that these certificates were void and that they were in fact void. The witness stated that these certificates were issued in his absence and that as soon as he returned to the office, he marked them canceled, in order to show that they were void. He further testifies that the word “ canceled ” written in red ink across the face of the certificates issued June 14,1919, and October 27, 1919, to petitioner, for 320 and 550 shares, respectively, indicates that they too were void. There is no testimony that the auditor was absent when these last-mentioned certificates were issued. The fact is that the corporation pursued the same method in the case of the purchase of every piece of real estate which it acquired. The stock certificate book of the corporation shows that each of the certificates issued to petitioner was stamped with the amount of documentary revenue stamps required by section 1107(3) of the Revenue Act of 1918, for original issues of stock, and that all the other stubs of certificates were stamped at the rate required by section 1107 (4) of said Act, for transfers of stock. The stubs of each of these certificates show that the issue was from treasury stock. Every other certificate can be traced back, not to treasury stock, but to one of these original issues. We, therefore, reject the testimony of the auditor on this point, and accept that of petitioner, who testified:

Q. Were tlie 1,500 shares of stock of the Frischkorn Development Company, the certificates of which were written out to you, were they ever actually owned by you, and were they delivered to you?
A. No, they were simply issued to me for the purpose of making proper transfers. They were never even torn out of the book, as you will notice. Then the stock to my partners in the deal, was issued to them.
Q. Do you mean that the original certificates which were made out to you, were canceled, and other certificates made out to the interested parties?
A. Yes, that is it.

It thus appears that the preferred stock of the Frischkorn Development Co. was first issued to petitioner and then by him transferred to his associates in compliance with the terms of a previous agreement between them.

The testimony introduced at the hearing, shows that petitioner and certain others, including W. B. Faunce, Fred Warner, and W. J. Davie, entered into an agreement to purchase the properties which were conveyed to the Frischkorn Development Co. out of moneys advanced by them. The testimony does not show how much any one contributed to the enterprises, except that F. W. Warner testified that he advanced over $25,000. Petitioner introduced no testimony to the effect that he advanced any amount. On the contrary, his brother, George M. Frischkorn, testified:

Q. Was It because of the fact that these other stockholders were looking to you and to Mr. E. S. Frischkorn largely for the success of the business, that you and Mr. E. S. Frischkorn were able to secure an interest in the Frischkorn Development Company without cost to yourselves?
A. Yes.

It is thus shown that petitioner paid nothing for his preferred stock in the Frischkorn Development Co. in the way of cash or property, and that the only consideration for the transfer of the 81% shares of preferred stock, which he received out of the first two transactions, and the 95 shares of stock which he received out of the third set of transactions, was the services he was to render in the future. He was thus paid for his services in advance.

We have determined a value for the 81% shares of stock, in the light of all the evidence to be $37.26 per share, and the petitioner thus realized income in the sum of $3,036.69.

We are of the opinion that the 550 shares of preferred stock issued on October 27, 1919, had a value equal to the par value thereof. The corporation had been actively engaged in business for about five months. It had been successful, as shown by the fact that about four months later it not only declared a dividend on its preferred stock, but that it had a surplus sufficient to enable it to begin to redeem such stock at 105 cents on the dollar, and that it did on that date begin to redeem such stock at that rate. The respondent has found that the stock was worth par. The burden is on the petitioner to show that the respondent erred and he has introduced no testimony whatever on this point. We hold, therefore, that the 95 shares of stock issued to the petitioner out of the 550 shares of stock issued on October 27, 1919, were worth $9,500. The record shows that the petitioner, in addition to these 95 shares of stock, received $17,680 in cash, making a total gain in this transaction of $27,180.

We have had much difficulty in unraveling the confused mass of evidence which has been adduced by the petitioner with reference to his transactions with the Frischkorn Homes Co. On all the facts as presented by the record, we are convinced that W. J. Davie and Charles R. Frischkorn did not purchase the shares of stock in this company which stand in their names, from the company, but that they acquired them by reason of entering into an agreement with petitioner prior to the organization of the corporation to acquire the contracts of purchase which were afterwards transferred to the corporation. In other words, these persons acquired their shares of stock by reason of their respective interests in the contracts transferred. This contention is borne out by the excerpt from petitioner’s cash book and journal, filed by the auditor. This excerpt showed that W. J. Davie paid to the petitioner $5,000 on June 30, 1920; $13,000 on August 11, 1920; $10,000 on August 18, 1920; and $2,000 on August 30, 1920, making a total of payments to the petitioner by Davie of $30,000, all but $2,000 of which was paid to petitioner before the corjioration was fully organized and before any stock was issued. This same excerpt shows that Charles ft. Frischkorn paid to petitioner $5,000 on August 13, 1920. These are all the payments that the record discloses were made by any one to the petitioner in these transactions. George M. Frischkorn testified that he paid nothing.

The only persons whom the record discloses to have been active in securing the contracts of purchase which were afterward transferred to the Frischkorn Homes Co., were petitioner and his brothers, Charles R. Frischkorn and George M. Frischkorn, and W. J. Davie. It is true that George M. Frischkorn testified that perhaps Guy W. Ellis was interested. However, the stock book of the company discloses that Ellis did not acquire any stock in the company until December 31, 1921, or a year and four months after the transaction took place. This eliminates him. The cash consideration paid for these contracts by these four persons, amounted to $48,000. Of this amount, George M. Frischkorn paid nothing, Charles R. Frischkorn contributed $5,000, and W. J. Davie contributed $30,000. It is thus shown that petitioner contributed $13,000.

After the petitioner received the 1,100 shares of preferred stock, he transferred first and last 300 shares to W. J. Davie, 50 shares to Charles R. Frischkorn, and 70 shares to George M. Frischkorn. These were the only transfers which he made to those who were interested with him in the purchase .of the contracts. No other transfer can be regarded as a transfer to a person interested in the purchase, since there is no evidence in the record to that effect. After deducting the shares transferred to his brothers and to Davie, there were left in petitioner’s hands 680 shares, and the difference between the value of these shares, as above indicated, and the $13,000 found to have been contributed by petitioner' toward the purchase of the contracts, is gain to him for the year 1920.

The action of respondent in refusing to permit the petitioner to deduct from his return for 1920, an item of $2,585.19, claimed to have been paid as interest, is approved, since there is no evidence in the record indicating that the petitioner paid such interest, or any part thereof. Petitioner claims, in his brief filed in this proceeding, that his cash book and journal which was introduced as evidence at the hearing, discloses items of interest paid by him during the year 1920. While it is true that the cash book and journal was introduced in evidence by the auditor, his testimony does not indicate that the book contained items showing interest paid by the petitioner during the taxable year.. The petitioner, with the consent of respondent, secured the right to withdraw this exhibit and substitute in its place, photostat copies of so much thereof as they deemed pertinent to the questions in issue. Petitioner availed himself of this privilege and filed a photostat copy of certain portions of the book, but this photostat copy contains no items which in any way relate to interest.

Petitioner urges that respondent erred in refusing to permit him to take as deductions from gross income for the years 1920 and 1921, certain expenses incurred in those years in traveling and entertaining in pursuit of his business. The only testimony introduced by the petitioner, with respect to traveling expenses, is that of himself and his auditor. The petitioner, in his depositions, makes the following-statement :

Q. Did you, or did you not, expend any moneys for traveling or entertaining during the year 1920, in connection with your business affairs?
A. Yes, I did. X expended a great deal in traveling in the interest of the Company, and also in entertaining, maintaining automobiles for clients and out-general business.

He further testified:

Q. Is it your opinion that your boohs for 1920 will correctly show the amount you expended for this purpose — for expenses?
A. No, I never turned in any expense account.
Q. In your opinion, Mr. Frischkorn, the amounts that may be entered on your books, as having been expended for traveling and entertaining, in that year (1920), is it your opinion that you actually expended that much money?
A. Yes, and I spent more than that. Amounts set aside for expenses by no means cover my expenses during those years.
Q. Did tlie same conditions prevail during 1921, in regard to traveling and entertaining expenses?
A. Yes.

No books of account have been produced which contain any entries relative to traveling and entertainment expenses. The auditor produced at the hearing 4 checks, amounting in all to $775, which were issued during the year 1920 and 35 checks issued in 1921, amounting in all to $3,741.50. These checks are petitioner’s personal checks and many of them are drawn in favor of the Frischkorn Real Estate Co. It is not shown by any competent evidence for what purpose these checks were used. The only person who could testify to that effect is petitioner himself and he has given no such testimony. Further, the petitioner has failed to prove that the traveling was done in pursuit of his own business rather than that of the corporations with which he was connected, and if for the business of the corporations, whether he was to be reimbursed or not. In fact, he has not shown that during these years he was engaged in any private business, other than for his corporations. On the evidence of record, we sustain the action of respondent in disallowing these deductions. Appeal of Barnett Weiss, 3 B. T. A. 228; Appeal of Sam Israel, 3 B. T. A. 663; Appeal of Franklin M. Magill, 4 B. T. A. 272.

The petitioner’s last claim is that the respondent erred in refusing to permit him to deduct as worthless debts, the following: Debt of George W. Stewart for $1,350; debt of P. J. Moran, $52, and debt of H. F. Baker, $1,600, which he alleges were found to be worthless and charged off in the year 1921. Although petitioner has proven that these debts were worthless and were charged off in 1921, he has introduced no evidence whatever as to when he first ascertained them to be worthless. The petitioner has, therefore, failed to produce the proof required by section 214(a) (7) of the Revenue Acts of 1918 and 1921, and the action of respondent in denying these deductions is sustained.

Judgment will be entered on 15 days1 notice, u/nder Rule 50.


source: Caselaw Access Project

author: Milliken :

license: Public Domain

text:
    Penn Chemical Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9247.
    Promulgated June 20, 1927.
    1. Cash value of tangible property paid in for capital stock determined.
    2. No evidence adduced which would bring the petitioner within the terms of section 210 of the Revenue Act of 1917, or section 328 of the Revenue Act of 1918, so as to entitle it to special assessment.

      K. N. Parlcinson, Esq., for the petitioner.
    . L. G. Mitchell, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and excess-profits taxes for the years 1917 and .1918 aggregating $11,298.56. The petitioner avers errors were committed with reference to the following issues: (1) The value of lands and buildings paid in for capital stock in 1910; (2) the application of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918. All other issues raised in the petition were withdrawn by the petitioner.
    FINDINGS OF FACT.
    Petitioner is a Pennsylvania corporation with its principal office and place of business at 1322-1336 Washington Avenue, Philadelphia, having been incorporated in the year 1910 with an authorized capital stock of $500,000. In 1882, Clement R. Wainwright, Israel R. Wainwright, Joseph C. Wainwright (brothers), Clarence James and Frank P. Harned, formed a partnership for the manufacture and sale of caustic soda or lye. Harned and James were experienced in the lye industry and were in possession of trade secrets and the Wainwright brothers possessed the necessary capital. The Wainwrights advanced to the partnei’ship, as a loan, $100,000, to draw interest at 6 per cent per annum and to be repaid in $5,000 blocks, and they also purchased land and buildings at and adjacent to 1332-1336 Washington Avenue, Philadelphia, Pa., which properties were thereafter used by the partnership on a rental basis of 6 per cent net on the purchase price of the properties, the partnership in addition paying all taxes, upkeep expense and cost of new improvements, title to remain in the Wainwrights. The properties were acquired by the Wainwrights at a total cost of $45,000.
    Upon the death of James, his partnership interest was purchased by Harned. Israel Wainwright died in 1886, and his interest in the partnership and in the realty passed by inheritance to his brothers, Clement and Joseph Wainwright. Clement died in 1896 and his interest passed, by inheritance, to his brother Joseph. By 1896, Joseph Wainwright and Harned were the sole owners in the business and Joseph Wainwright had become sole owner of the realty.
    In 1906, F. King Wainwright and Clement R. Wainwright, sons of Joseph Wainwright, for a cash consideration of $30,000, acquired the partnership interest of their father, resulting in a new partnership with F. King Wainwright, Clement R. Wainwright and Harned each owning approximately a one-third interest. This new partnership continued to use the land and buildings on the same basis as its predecessor.

      On April 1, 1909, King and Clement Wainwright purchased from their father the land and buildings for $45,000, giving the father a mortgage for $45,000 and pajfing no cash. In 1909, the brothers commenced the erection of a new factory and office building, the structure being completed in 1910. The cost of the building was $65,000 and was borne by the brothers.
    On March 23,1910, this structure, together with all land, buildings and machinery permanently affixed thereto, was sold by the brothers to petitioner, for stock in petitioner to the par value of $65,000 and the assumption by the petitioner of a mortgage of $45,000, or total consideration of $110,000.
    Between-1882 and 1910, the partnership made alterations and improvements of the land and buildings. All costs were charged to expense and title to such additions or betterments passed to the Wainwrights.
    The properties are located in the heart of the industrial section of Philadelphia, and have a switch from the Pennsylvania Railroad running into the premises.
    The actual cash value of the lands and buildings, when paid in to petitioner for capital stock, was $150,000.
   OPINION.

Milliken :

In the first issue, we are concerned with the determination of the cash value of tangible property paid in for capital stock. The issue is common to both years and arises out of a chain of transactions between brothers, father and sons, and partners of many years’ association, under circumstances which lead very reasonably to belief in the contention of the petitioner that the values assigned by the parties were merely nominal and that dealings for years had been characterized by a disregard of real values and of fine distinctions as to individual interests. F. P. Harned testified that about the year 1905, he was offered $105,000 for the property and that in 1910, in his judgment, the property was worth $190,000. F. K. Wainwright testified, in his opinion, the property was worth between $150,000 and $160,000 in 1910, when turned over to the corporation. We are satisfied that the land and buildings, when paid in for capital stock of $65,000 par value, had a cash value of $150,000 and that the paid-in surplus of $40,000 thus resulting, is attributable to the value of the land.

In the second issue, the petitioner relies upon a showing of unusually large income earned without expenditures for salesmen and advertising, and that no salaries were paid officers during the taxable years. There is no evidence that invested capital can not be determined or of abnormality of capital or income, and accordingly the respondent is sustained on this issue.

Judgment will be entered on 15 days’ notice, wnder Rule 50.


author: TRUssedl:

text:
    Sydco Photoplay Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10221.
    Promulgated June 21, 1927.
    Invested Capital.' — Tlie actual cash value of a leasehold and theatre equipment, furniture, etc., paid in to a corporation for stock determined both for the purposes of invested capital and deduction for exhaustion.

      Jacob Mortens, Jr., Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the year 1921, for which the Commissioner has determined a deficiency of $3,718.14. The petitioner alleges error on the part of the Commissioner (1) in failing to include in the computation of invested capital the value of a leasehold acquired with capital stock; (2) in failing to allow as a deduction from income an aliquot part of such leasehold value due to the exhaustion of the lease; (3) in failing to include in invested capital the value of furniture, equipment and fixtures acquired with capital stock; and (4) in failing to allow proper depreciation on furniture, equipment and fixtures thus acquired.
    FINDINGS OP PACT.
    The petitioner is a corporation organized in 1914 under the laws of the State of New York with an authorized capital stock of a par lvalue of $50,000. Its principal office was at 331 Madison Avenue, New York City.
    On June 30, 1913, Charles J. Stumpf and Henry J. Langhoff acquired from George F. Johnson a lease on premises described as follows:
    Beginning at tlie intersection of the southeasterly side of Westchester Avenue with the northerly side of One hundred and sixty-first Street, and running thence northerly along the southeasterly side of Westchester Avenue, two hundred and fourteen feet and ninety-nine one-hundredths of a foot, more or less, to the intersection of the southeasterly side of Westchester Avenue with the westerly side of Hewitt Place; running thence southerly along the westerly side of Hewitt Place, two hundred and fifty-eight feet and fifty-nine one-hundredths of a foot, more or less, to the intersection of the westerly side of Hewitt Place with the northerly side of One hundred and sixty-first Street, and thence westerly along the northerly side of One hundred and sixty-first Street, two hundred and twenty-three feet and fifty-seven one-hundredths of a foot, more or less, to the point or place of beginning.
    The lease provided among other things, that the term of the lease was from October 1, 1913, to October 1, 1934, that the landlord would erect a building thereon in accordance with certain specifications; that the net rental would be $12,750 a year; and that the tenants would pay all taxes and other expenses incident to ownership except interest and principal of mortgages.
    On July 19, 1913, the owners of this leasehold sold a one-third interest therein to Sydney S. Cohen in consideration of $5,000, representing a deduction from a commission owed to Sydney S. Cohen by Charles J. Stumpf and Henry J. Langhoff on another real estate deal, and a further consideration of the transfer of $5,000 par value of stock of the Palace Holding Co. from Cohen to Stumpf and Langhoff, in which company Stumpf and Langhoff owned a controlling interest and for which stock Mr. Cohen had paid $5,000 a short time previously.
    In March, 1914, Charles J. Stumpf, Henry J. Langhoff and Sydney S. Cohen, parties of the first part, entered into an agreement with Albert J. Norton and George Balsdon, parties of the second part, which provided in part as follows:
    Whekeas, the parties of the first part are now the lessees of a certain parcel of land with a building now in the course of erection thereon, which said building is adai>ted for amusement purposes, situated at and occupying the entire triangular block in the Borough and County of Bronx, City of New York, bounded by Westchester Avenue, 161st Street and Hewitt Place, which said real property is hereafter, for convenience, referred to as the “ theatre property,”
    Now, Therefore, It Is Agreed as Follows :
    I. The parties of the second part agree to purchase at their- own expense, all of the equipment, furniture, machinery, scenery, fixture's, etc., more particularly referred to in the annexed Schedule A, and to install the- same at their own expense in the said theatre property. The said fixtures are to be installed under the supervision of Sydney S. Cohen and must be furnished and installed in a manner satisfactory to him. All of the said articles referred to in said Schedule A are to be purchased and installed by the parties of the second part at once, and said theatre property shall be completely equipped and all of said furniture and machinery and other articles referred to in said Schedule A. shall all be completely supplied within ten days after the said theatre property is ready for occupancy. The date when said theatre property is ready for occupancy shall bo determined by the issuance of the certificates by the various municipal departments having jurisdiction thereof, particularly the issuance of a license permitting the giving of motion picture exhibitions therein.
    II. In consideration of .the equipment of said theatre property by the parties of the second part as hereinbefore sot forth, it is agreed that a corporation is to be organized under the Laws of the State of New York, capitalized at $50,000. The said capital stock to consist of live hundred (500) shares of common stock, each of the par value of $100. No preferred stock shall he issued. Upon the organization of said company the parties of the first part agree to transfer to said corporation, all of their rights in and to the lease ol' said theatre property hereinbefore referred to, reserving to themselves, however, the sum of Throe thousand, one hundred eighty-seven and 50/100 ($8,187.50) dollars, which the said parties of the first part have deposited with the landlord as advanced rental under and pursuant to the terms of the aforesaid lease. The said sum of $8,187.50 is to he assumed by the said corporation, when organized, as a debt owing to the parties of the first part, and the said corporation, when organized, will execute to said parties of the first part a corporation note payable on demand for said sum. The parties of the first part agree, however, that no demand shall be made for the payment of said note provided that said note is paid in three equal monthly installments.
    III. It is hereby agreed that the lease now owned by the parties of the first part and proposed to be transferred to said corporation is valued at the sum of Thirty thousand ($30,000) dollars and that upon the transfer of said lease to said corporation there shall be issued to the parties of the first part capital stock of said corporation of the value of $30,000, — $10,000 of stock to be issued to each of the said Charles .T. Stumpf, Henry J. Langhoff and Sydney S. Cohen.
    IV. The parties of the second part agree that all of the fixtures, furniture, machinery, etc., referred to in Schedule A and to be installed by them as herein set forth are to be installed for the benefit of said corporation and that they will execute any and all bills of sale or other documents that may be necessary to transfer to said corporation good title to ail of said property. It is further agreed that the property so purchased and installed by the parties of tire second part, as set forth in Schedule A, is valued at the sum of $20,000 and upon the execution of the papers sufficient to transfer to said corporation good and clear title to all of said property, and upon the production of satisfactory evidence that all of said property has been paid for, that the said corporation will issue to the parties of the second part capital stock of the par value of $20,000, — stock of the value of $10,000 to be issued to each of the said Albert J. Norton and George Balsdon.
    Some time between March 1, 1914, and April 17, 1914, the Sydco Photoplay Corporation was organized.
    On April 17, 1914, an agreement was entered into between George F. Johnson, landlord, and Charles J. Stumpf, on behalf of himself and Henry J. Langhoff, his partner, tenants, whereby certain alterations were to be made to the building and the rental thereof increased, beginning May 1, 1914, from $12,750 to $15,250, but also provided that a new lease should be drawn up setting forth all of the conditions embodied in the agreement. This lease was executed May 1,1914.
    On July 6,1914, the lease on the premises involved was transferred from Charles J. Stumpf and Henry J. Langhoff to the Sydco Photo-play Corporation.
    Pursuant to the agreements previously entered into between the parties, $30,000 par value of stock was issued to Messrs. Stumpf, Langhoff and Cohen; also, furniture and fixtures were installed. On March 4, 1915, at a meeting of the stockholders of the petitioner, it was agreed to issue to A. J. Norton $20,000 par value of stock in payment for furniture, equipment and fixtures which he had installed, his promise to pay for certain additional equipment, and the cancellation of indebtedness-of $2,200 owed A. J. Norton by the petitioner.
    The following schedule shows the items and amounts allowed by the respondent as a basis for depreciation.
    Projection machine_$1, 500. 00
    Draperies_ 1, 814.19
    Signs (flash)_ 460. 00
    Electric equipment_ 426.41
    Chairs_ 119.00
    Carpets_ 238.94
    Fountain_ 160. 00
    Ticket chopper_ 35. 00
    Organ_ 3, 000.00
    Piano_ 225. 00
    Seats___ 4, 685. 76
    Total_ 12,664.30
    None of this amount was allowed by the respondent in the computation of invested capital.
    The petitioner introduced testimony and exhibits to show that the carpets cost $1,306.18 instead of $238.94 and that the seats cost $6,264.55 instead of $4,685.76. It further introduced testimony showing that the following items were also furnished and paid for by Norton and Balsdon.
    Asbestos curtain rigging- $385. 00
    Asbestos curtain_ 165. 80
    Exhaust fans_ 1, 637.00
    Automatic ticket machine_ 250.00
    Scenery_ 400.00
    Nursery room equipment_ 500.00
    Flex loom sign_ 256. 53
    Vacuum cleaner_ 34. 00
    Sale_ 30. 00
    Uniforms_ 50. 00
    Motion picture machine equipment_ 87. 77
    Electric fixtures_ 85. 00
    Cartage for scenery- 3. 00
    Iron work_ 155.00
    Stove and chair_ 6.25
    The total of these items furnished by Norton and Balsdon as shown above is about $19,400.
    Norton and Balsdon also forgave indebtedness of the petitioner to them for $2,200, representing services rendered and expenses in selecting and installing the furnishings and equipment and in preliminary advertising.
    The value of the leasehold acquired by the petitioner for $30,000 par value of stock was $30,000 and the value, after being installed, of the furniture, equipment, and fixtures, which were acquired for $20,000 par value of stock, was $20,000.
    The lease when acquired by the petitioner had an unelapsed term of 20 years, 2 months and 25 days.
   OPINION.

TRUssedl:

The lease was acquired by two individuals in June, 1913. Between that date and July 6, 1914, when the lease was turned over to the petitioner, numerous improvements had been made in the adjoining neighborhood. A subway station was located at the corner oí the property, and several multi-floor apartment houses were built in the immediate section. About one month after the original lease was acquired, a one-third interest was sold to Sydney S. Cohen for a consideration which would indicate that the leasehold had a value between $15,000 and $30,000. Sydney S. Cohen, a man of wide experience in theatrical ventures and leases, testified that in his opinion the lease was worth at least $30,000 and that the consideration furnished by A. J. Norton had a value in excess of $20,000. A. J. Norton and George Balsdon with full knowledge of the value at which the leasehold was to be turned in to the corporation, 'agreed to equip the theater in consideration of the issuance to them of $20,000 par value of stock. The amounts which were subsequently spent by them, as supported by various vouchers, and the testimony of Sydney S. Cohen in respect thereto, would indicate that an estimate of $20,000 for furnishing and equipment of the theater was conservative. The vouchers submitted, together with Mr. Cohen’s testimony, and the provisions of the contract with Norton and Balsdon, convince us that the furnishings and equipment as completely installed by Norton and Balsdon were worth the $20,000 claimed. The determination of this point strengthens the valuation of $30,000 for the leasehold, since Norton and Balsdon, as experienced men in the operation of theatres and the valuation of theatrical property, would no', be willing to accept a two-fifths interest in the company by expending $20,000 in cash and services, unless they believed the leasehold had a value of at least $30,000.

Accordingly, we are of the opinion that $30,000, the value of the leasehold, and $20,000, the value of furnishings and equipment, should be included as invested capital at acquisition and should be the basis for computing invested capital for the year 1921.

Since the leasehold is subject to exhaustion, the petitioner is entitled to deduct from income each year an aliquot part of $30,000, its cost, based upon a life of 20 years, 2 months and 25 days.

The respondent and the petitioner are apparently in agreement as to the depreciation rate on furnishings and equipment. The petitioner is entitled to use as a basis for depreciation the value of $20,000 for furniture and equipment acquired for stock, in place of $12,-664.30, used by the respondent.

The deficiency may be recomputed in accordance with the foregoing findings and opinion upon 15 days’ notice, pursuant to Rule 50, and judgment will be ente/red accordingly.


author: Mildikicn:

text:
    Web Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5595.
    Promulgated June 21, 1927.
    A joint return of husband and wife having been filed for the calendar year 1922, separate returns may not be subsequently filed for that year.

      George G. Witter, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income tax for the calendar year 1922, in the amount of $64.65. The question to be decided is whether the petitioner, who, together with his wife, filed a joint return of income for the calendar year 1922, may subsequently file a separate return of income for that year on the basis of the community property law of Texas. There were no appearances for the petitioner and we make our findings of fact from the admissions contained in the answer filed by the respondent.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Marshall, Tex. He filed a joint return of income for himself and wife for the calendar year 1922, and subsequent thereto endeavored to file a separate return of income for the calendar year 1922.
   OPINION.

Mildikicn:

Wo have decided in R. Downes, Jr., v. Commissioner, 5 B. T. A., 1029, that where a man and wife living in Louisiana filed a joint return and included therein the income of both, they could not subsequently file a return on a separate basis under the community property law. This proceeding falls squarely within that decision.

Judgment wül be entered for the respondent.


text:
    J. W. Macon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11312.

    Promulgated June 21, 1927.
    A joint return for busband and wife having been filed for the calendar year 1923, separate returns may not be subsequently filed for that year.

      J. M. McMillin, Esq., for the petitioner.

      Shelby Faulkner, Esq., for the respondent.
    This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1923, in the amount of $569.08. Three errors were assigned: (1) The respondent erred in not allowing petitioner a deduction for oil depletion of $2,848.49; (2) the respondent erred in considering the amount received as a bonus by petitioner in connection with the sale of certain oil leases and totaling $14,650, as income to petitioner for the year 1923; (3) the respondent erred in refusing to accept a separate return for the year 1923, after the petitioner had filed a joint return of income for the year 1923.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Moran, Tex. For the calendar year 1923, he filed a joint return of income, which return included the community income of himself and wife. Subsequently, he endeavored to file a separate return of income for the calendar year 1923, which the respondent refused to accept.
   OPINION.

Milliken:

At the date of trial of this proceeding, petitioner failed to appear and his counsel stated that without his testimony no evidence could be introduced in support of the first and second assignments of error. No reason was offered for the nonappearance of petitioner and no motion made for a continuance of the hearing. Concerning the first and second assignments of error, the determination of the respondent is sustained.

We have decided in R. Downes, Jr., v. Commissioner, 5 B. T. A., 1029, that where a man and wife living in Louisiana, filed a joint return and included therein the income of both, they could not subsequently file a return on a separate basis under the community property law. This proceeding falls squarely within that decision.

Judgment will be .entered for the respondent.


author: Littleton :

text:
    Williams Steamship Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8725.
    Promulgated June 21, 1927.
    An interest-bearing demand promissory note was liona tide paid in for stock on April 8, 1919, and was satisfied and discharged by the maker by the transfer of certain stock to the corporation. The evidence shows that the note had a cash value equal to the face amount thereof and that the stock transferred to the corporation was worth par and it is, therefore, held that the promissory note constituted invested capital from April 8 to April 10, the date on which the maker thereof satisfied the note by the transfer of the stock, and that the stock received by the corporation in exchange for the note should be considered at a value of $124,700 in the computation of invested capital from and after April 10, 1919.

      Mark Eisner, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
    The Commissioner determined deficiencies in income and profits tax for the fiscal years ending March 31, 1920 and 1921, in the amounts of $8,559.87 and $202.28 respectively. Petitioner claims that the Commissioner erred in refusing to permit it to include in invested capital for the taxable years an interest-bearing promissory note of $124,700 given to it by George T. Williams, its president and sole stockholder on April 8, 1919, the time of organization, for capital stock. The alternative claim is made that if the value of the note is not included in invested capital for the taxable years, petitioner should be permitted to include, in computing invested capital, stock of another corporation transferred to the petitioner within two days after the execution of the note and in lieu thereof.
    BINDINGS OF FACT.
    Petitioner is a New York corporation organized to act as American agent for a steamship company organized and operating under the laws of Canada. Prior to the organization of petitioner on April 8, 1919, George T. Williams was engaged with another corporation operating certain steamships. In 1918 that corporation was dissolved and Williams, who was otherwise wealthy, received upon dissolution $600,000. On April 3, 1919, Williams and others organized a corporation known as the Convoy Steamship Co. of Halifax, under the laws of the province of Nova Scotia, Canada, with a capital stock of the par value of $250,000 consisting of 2,500 shares of the par value of $100 each. Williams purchased 1,247 shares of this stock for cash at par and the remaining 1,253 shares were purchased by two other individuals for cash at par. With this $250,000 and $250,000 borrowed from the Equitable Trust Co. of New York, the Convoy Steamship Co. immediately purchased the steamship War Oonvoy from the British Munitions Board, Canada, the total purchase price being $1,632,000.
    During the year 1919, the Convoy Steamship Co. also purchased the steamships Enrona and Devona, the first costing $550,000 and the second costing $690,000. The entire purchase price of these steamships was paid by the Convoy Steamship Co. within the year 1919 from profits derived from cargoes.
    On April 8, 1919, Williams organized the Williams Steamship Co., the petitioner herein, under the laws of the State of New York, with an authorized capital stock of $300,000 consisting of 3,000 shares of the par value of $100 each, for the purpose of having that company act as the American agent for the Convoy Steamship Co., and turned over to this corporation certain tangible assets not involved in this proceeding. It was the intention of Williams at the organization of petitioner to pay in to it his $124,100 par value of the stock of the Convoy Steamship Co., for an equal amount of petitioner’s stock, but, inasmuch as the Convoy Steamship Co.’s stock had not reached Williams on April 8, 1919, he paid in to petitioner his interest-bearing demand promissory note for $124,700 for that amount of its stock pending the arrival of the Convoy Steamship Co.’s stock, with the understanding between him and the corporation that upon the arrival of the Convoy Steamship Co.’s stock it would be turned over to petitioner in lieu of and in satisfaction of the note. On April 10, 1919, Williams received the $124,700 par value of the Convoy Steamship Co.’s stock, and on that date turned same in to petitioner in lieu of his promissory note in accordance with the understanding. The note which Williams had given the corporation for stock was not formally canceled when the Convoy Steamship Co.’s stock was substituted for it but the note has at all times been in the possession of Williams, who was the principal officer and stockholder of petitioner with the exception of qualifying shares, and it was definitely understood between petitioner and Williams that his note had been fully satisfied upon delivery by him of the Convoy Steamship Co.’s stock. At the time Williams gave his note for $124,700 to the petitioner he was financially responsible and possessed cash and liquid assets of the value of approximately $600,000. At all times since April 8, 1919, Williams has owned, among other property, bonds and securities of other corporations and Liberty bonds of a value in excess of $204,000. The note was never used by the petitioner for any purpose and was formally canceled by Williams in 1921. At the time the note for $124,-700 was given by Williams to petitioner for stock it had an actual cash value equal to its face amount. The $124,700 par value of the stock of the Convoy Steamship Co., of Halifax had on April 10,1919, at the time it was transferred to the petitioner, an actual cash value of that amount.
   OPINION.

Littleton :

There was a definite understanding and agreement between petitioner and Williams on April 8,1919, when he gave his note for $124,700 for that amount of petitioner’s stock, that as soon as the 1,247 shares of stock of the Convoy Steamship Co. for which Williams had theretofore paid $124,700 in cash was received, the same should be turned in to the petitioner in lieu of the promissory note and this was done on April 10, 1919, two days after the note was given. The only reason the note was given was because the Convoy Steamship Co.’s stock was late in reaching Williams and it ivas desired to perfect the organization of the petitioner. Although the' note of Williams was not formally canceled until a subsequent year it was definitely understood by him and the corporation that the delivery of the Convoy Steamship Co.’s stock on April 10 satisfied and discharged the note. Williams was entirely solvent and fully able to'pay his note and from the evidence we are of the opinion that it had an actual cash value at the time paid in for stock of $124,700. It was bona fide paid in for stock on April 8 and constituted invested capital of the petitioner on April 8 and April 9,1919. Hewitt Rubber Co., 1 B. T. A. 424. On April 10,1919, Williams paid the note by delivery to the petitioner of $124,700 par value of the Convoy Steamship Co.’s stock, which stock we are of opinion from all the evidence had an actual cash value at that time equal to its par value. In any event, when petitioner exchanged an asset having a cash value of $124,700 for the 1,247 shares of the Convoy Steamship Co.’s stock, that was the cost of such stock to the petitioner. On and after April 10,1919, the promissory note of Williams having been paid, although not formally canceled, was not a bona fide asset of the petitioner. In computing petitioner’s invested capital after April 8, 1919, the promissory note of Williams should be considered at the value of $124,700 for two days, and, thereafter, the stock of the Convoy Steamship. Co. should be considered at a like value.

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


author: Smith :

text:
    Marshall & Spencer Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4574.
    Promulgated June 21, 1927.
    The salaries paid to its principal officers by tbe petitioner in 1921 held to be reasonable in amount and deductible from gross income.

      A. D. McNeill, Esq., and Wdlt&r Muclclow, O. P. A., for the petitioner.

      Joseph B. Harlacher, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for 1921 in the amount of $4,525.96, arising in part from the disallowance of a deduction from gross income of $9,600, representing a portion of the salaries paid to the petitioner’s principal officers in 1921.
    FINDINGS OF FACT.
    The petitioner is a Florida corporation with offices in Jacksonville, and is engaged in the buying and selling of building materials. It has a capital stock of $25,000, divided into 250 shares of the par value of $100 each. During the year 1921, 122 shares stood in the name of Edward S. Spencer, the president and treasurer of the corporation; 3 shares in the name of L. E. Spencer; and 125 shares in the name of S. A. Marshall. The corporation has been in business since 1911. During the first few years of its existence, the active officers drew only nominal salaries in an effort to build up a surplus. The surplus at December 81, 1919, was approximately $28,000, and for the year 1920 the executive salaries were fixed at $7,200 for E. S. Spencer and a like amount for S. A. Marshall. These officers were engaged in no other business during the taxable year; devoted their entire time to the business of the petitioner; did all the buying and selling; and supervised all of the business and much of the detail thereof. The corporation had a profitable year in 1920 and reported a net income of $15,448.83 in its income-tax return for the year. In January, 1921, the board of directors voted to increase the salary of each active officer from $7,200 per annum to $12,000 per annum, and during the year 1921, $1,000 was either paid or credited monthly upon the books of account of the petitioner to each of its principal officers. Each officer was privileged to draw the entire amount of his salary as credited and during the most of the time the entire amount of the credit was exhausted by withdrawals. The corporation never paid any dividends upon its shares of stock. Its net income for 1921, after the deduction of $24,000 salaries for its principal officers, was $6,223.47:
    Of the $24,000 deducted for salaries of its officers, the Commissioner disallowed the deduction of $9,600 and the deficiency is occasioned in a large measure by such disallowance.
   OPINION.

Smith :

The only question presented by this proceeding is whether the $24,000 which was charged as salaries on the petitioner’s books of account and paid to its principal officers during the year 1921 is deductible from gross income in its income-tax return. The respondent has disallowed the deduction of $9,600 of the amount taken as a deduction and has allowed the deduction of only the same amount as was shown as a deduction from gross income in the income-tax return for 1920.

At the hearing of this proceeding, several prominent business men of Jacksonville testified as to the reasonableness of the salaries paid to Spencer and Marshall. Although the payment of large salaries to the principal officers of a corporation, who own substantialy all the stock of the corporation, invites scrutiny to determine whether they are simply a distribution of profits to shareholders, we are of the opinion that in the instant case the amounts paid represent only reasonable compensation and that the $24,000 paid by the corporation for the salaries of its principal officers is deductible from gross income of 1921.

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


text:
    C. L. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bernice K. Bullard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7565, 7566.
    Promulgated June 21, 1927.
    The March 1, 1913, fair market price or value of 6,500 acres of land sold in 1919 determined.

      J. L. O'Connor, Esq., for the petitioners.

      Henry Rmenel, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income tax in the case of C. L. Johnson for the year 1919 in the amount of $1,770.40, and in the case of Bernice K. Bullard for the year 1919 in the amount of $999.06, and for the year' 1920 in the amount of $2,099.69. The cases have been consolidated for the purpose of decision. The point in issue with respect to the year 1919 is' the fair market price or value on March 1, 1913, of a certain tract of land sold in 1919, and with respect to 1920 whether the petitioner is entitled to make a return on the installment basis of profit on the sale of a tract of land in 1920.
    FINDINGS OF FACT.
    Prior to March 1, 1913, C. L. Johnson, Bernice K. Bullard, and B. F. Bullard acquired by purchase 8,117 acres of land in Polk County, Florida. The cost of the land was less than its fair market value as of March 1, 1913. The land was sold in 1919 for $172,567.95. Each petitioner, being the owner of an undivided one-third interest in the land, Avas entitled to one-third of the profit derived from the sale thereof. In their income-tax returns for the year 1919, petitioners claimed that the fair market value of the land as of March 1, 1913, was at the rate of $20 per acre and computed the gain derived by each from the sale by taking one-third of the difference between the net selling price and the March 1,1913, value assumed to be $20 per acre. The respondent conceded the March 1,1913, value claimed by the petitioners as to 1,617 acres of the land but determined the March 1, 1913, value of the remaining 6,500 acres of the land situated in township 29 south, range 28 east, Polk County, Florida, to be $17 per acre instead of $20 per acre as claimed by the petitioners and such determination resulted in increasing the net income of each petitioner in the amount of $6,500.
    The 8,117 acres of land in question was on March 1, 1913, unimproved land, portions of it being covered with a growth of pine trees, part of which had been turpentined. This tract of land was valuable for the growing of citrus fruit and was in an orange-grove section. The land was more valuable for the growing of oranges than for anything else. Wild lands in this section had begun to attract land dealers and buyers along about 1912. There was a marked increase in the value of these lands between 1905 and 1913. In March, 1912, the Atlantic Coast Line was engaged in building a line from Haines City to Sebring, and the town of Lake Wales was just starting during that year. A tract of 360 acres in section 36, township 29 south, range 27 east, was sold in 1912, a'part for $20 per acre and another part for $25 per acre. There were a number of other sales in the general locality of the tract here in question in 1912 or 1913 at about the same prices. Lands just west of the 8,117 acre tract in question were purchased in 1912 for $20 and $25 per acre and sold in 1913 in tracts of 10 acres and 20 acres from $60 to $125 an acre.
    The fair market price or value on March 1, 1913, of the 8,117 acres of land was $20 per acre.
    On April 16, 1920, Bernice K. Bullard sold 2,000 acres of land to I. A. Yarnell for a total consideration of $327,259.03, receiving in payment therefor $67,259.03 in cash and 4 promissory notes, each in the amount of $65,000, due one, two, three, and four years after date, as the balance of the purchase price of the lands. In computing his income tax for the year 1920, Bernice K. Bullard paid an income tax on the whole profit derived from the sale.
   OPINION.

Smith :

At the hearing of these cases it was admitted by counsel for the respondent that section 1208 of the Bevenue Act of 1926 was applicable in the determination of the tax liability of Bernice K. Bul-lard for the year 1920, and that his tax liability for that year should be computed upon the basis of an installment transaction.

The only other question in issue is the March 1, 1913, fair market price or value of the 8,117 acre tract of land, a one-third undivided interest in which was owned by each of the petitioners, which tract was sold in 1919. The respondent has conceded a value of $20 per acre for a portion of the tract but has determined the fair market price or value on March 1, 1913, of the balance of the tract, amounting to 6,500 acres, at $17 per acre instead of the claimed value of $20 per acre.

Five persons well qualified to give an opinion as to the value of the land on March 1, 1913, have deposed that the fair market price or value of the entire track was at least $20 per acre. We are of the opinion that the fair market price or value on the basic date was $20 per acre.

Judgment will he entered on 10 days’ notice, under Rule 50.


author: Smith:

text:
    N. B. Jordan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1849.
    Promulgated June 21, 1927.
    The evidence does not show that the petitioner sustained a deductible loss in 1921 in excess of that allowed by the respondent.

      Walter Mueldovy, <C. P. A., for the petitioner.

      Joseph Hafrlaoher, E.sq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for 1921 of $97.02 arising from the disallowance of a deduction from gross income in petitioner’s income-tax return of $918.12 as a loss claimed to have been sustained in 1921.
    FINDINGS OP PACT.
    The petitioner is a resident of Quincy, Fla. In 1921, one Julian Howard had a credit with the brokerage concern of C. B. Cates & Co., Jacksonville, Fla., of $2,024.37. Howard entered into an agreement with the petitioner to the effect that he would loan him this credit. Any loss sustained upon the credit was to be a loss of the petitioner and any gain derived from the credit was to be a gain of the petitioner. Cates & Co. was not a party to this agreement and knew nothing about it. All transactions of the petitioner with the brokers were conducted in Howard’s name. With this credit the petitioner purchased in the name of Howard 100 shares of American Sumatra Tobacco Co. stock for $4,318.75. Cates & Co. became financially involved in November or December, 1921, at which time it sold the American Sumatra Tobacco Co. stock standing in the name of Howard, without any authority from either Howard or Jordan, for $3,212.50. This sale resulted in a loss to the petitioner of $1,106.25 and it left a credit to Howard on the books of Cates & *Co. of $918.12. The petitioner paid oyer to Howard in installments during the years 1921 and 1922 the amount of $2,024.37, the use of which had been loaned to him by Howard, and in his income-tax return for 1921 claimed the deduction from gross income of the full amount of $2,024.37. The Commissioner allowed the deduction from gross income of $1,106.25, representing the loss sustained upon the sale by the brokers of the 100 shares of American Sumatra Tobacco Co. stock, but disallowed the deduction of $918.12, representing the balance of the credit on the books of Cates & Co. paid over to Howard by the petitioner either in 1921 or 1922.
    In 1921, the receivers for Cates & Co. paid a dividend to Howard of $183.60, which was in full liquidation of the brokerage company. Howard paid this amount over to the petitioner and the petitioner returned the same as income of the year 1922.
   OPINION.

Smith:

The taxing statute permits the deduction from gross income in income-tax returns of an individual of—

(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
(7) Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part. (Sec. 214(a), Rev. Act of 1921.)

The evidence is not clear as to whether the petitioner paid Howard the amount owing to him on the books of the brokers in 1921 or 1922. The record does not show the assets and liabilities of Cates & Co. as of the close of the year 1921. So far as anything that is before us is concerned, the petitioner might have expected that he would sustain no loss as a result of the insolvency of Cates & Co. beyond the loss upon the American Sumatra Tobacco Co. stock transaction. Apparently, there was no privity of contract between the brokerage company and the petitioner. The latter was not subrogated to Howard’s rights as a creditor of the brokerage company until he had paid Howard the amount of the credit standing in Howard’s name upon the broker’s books. As indicated above, we have no knowledge of whether this was in 1921 or 1922.

Judgment will be entered for the respondent.


author: GReen:

text:
    Lehigh Building Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6607.
    Promulgated June 23, 1927.
    1. Tlie iair market value of a second mortgage received as a part consideration for the sale in 1919 of an apartment house determined from the evidence.
    2. During the year 1919 the petitioner voted to its president a salary of $10,000, which amount it claimed as a deduction on its return for that year. The respondent allowed $2,500 and disallowed the remainder upon the ground that it was not a reasonable allowance for salary.or other compensation for services actually rendered. Held, that inasmuch as services rendered by the president of the corporation during the taxable year were not worth to exceed the amount allowed by the Commissioner as a deduction therefor, the Commissioner’s action in this regard should be affirmed.

      John F. Malley, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent. .
    In this proceeding the petitioner seeks a redetermination of its liability for income and profits taxes for the year 1919, for which the Commissioner assessed a deficiency in the amount of $20,976.46. Of the amount so assessed the petitioner paid $9,627.58 and filed a claim for the abatement of the balance, amounting to $11,348.88. The Commissioner rejected, the claim for abatement for the full amount and the whole thereof is involved herein.
    Two errors are assigned: (1) The inclusion of a second mortgage for $47,500 at its face value, instead of a value at least $15,000 less than its face, in arriving at the amount of profit derived from the sale of a certain apartment house in 1919; and (2) the refusal of the Commissioner to allow $7,500 of an amount of $10,000 claimed as either a deduction or as part of the cost of the property, on account of compensation alleged to have been paid to Irving Judis, the petitioner’s president.
    FINDINGS OP PACT.
    The petitioner is a New York corporation with its principal office in the City of New York. Subsequent to its incorporation in 1915, the petitioner bought a parcel of land at the southwest corner of 157th Street and St. Nicholas Avenue in the City of New York and erected thereon a six-story elevator apartment house, which was completed in 1916. In order to secure funds to erect the building, it gave a first mortgage to the Metropolitan Life Insurance Co., covering the property, for $210,000, which mortgage was to fall due on September 1, 1920, and bore interest at the rate of 6 per cent per annum until the completion of the building, and at 5% per cent thereafter.
    In order to obtain the first mortgage, the Metropolitan Life Insurance Co. required the petitioner to purchase from it a piece of property for $85,000, which the petitioner immediately thereafter sold for only $66,500. This in effect amounted to the payment of a bonus of $18,500 to the insurance company. The latter also demanded as a prerequisite to the making of a loan the giving of a collateral bond by the petitioner’s president guaranteeing the successful completion of the building. Ten thousand dollars would have been a reasonable compensation to have been paid for the execution of the bond.
    On June 3, 1919, the petitioner sold the land and building to Hyman Auerbach and Louis Katz for a total consideration of $297,500, consisting of cash in the amount of $40,000, the assumption by the purchasers of the first mortgage of $210,000, and the giving by the purchasers of a purchase-money second mortgage in the amount of $47,500. The second mortgage bore interest from June 1, 1919, at the rate of 6 per cent per annum, payable December 1, 1920, and semiannually thereafter. The principal was payable in installments of $2,500 semiannually, beginning December 1, 1919, until June 1, 1924, at which time the balance of both principal and interest remaining unpaid became due and payable.
    The fair market value of the second mortgage of $47,500 received by the petitioner in 1919 was $32,500.
    The Commissioner computed the taxable profit on the sale by assuming that the fair market value of the second mortgage, as part of the consideration received, was its face value, i. e., $47,500, and by so doing increased the income of the petitioner by the amount of $15,000.
    The only stockholders of the petitioner corporation were Irving Judis and his wife, Mary Judis. They were the only directors and officers. Irving Judis was the president.
    The following is a part of the minutes of a “ special meeting ” of the directors of the petitioner held on December 16, 1919:
    The president further reported that the installment due December 1, 1919, had been paid, and that there now remains due upon said mortgage the principal sum of $45,000, with interest thereon from December 1, 1919.
    The president also reported that inasmuch as the corporation was indebted to Mrs. Judis in approximately the sum of $70,000, arrangements had been made whereby Mrs. Judis had agreed to accept from the corporation an assignment of said bond and mortgage for the consideration of $30,000, said consideration to be paid by charging the account of the corporation with Mrs. Judis with the said sum of $30,000. Mrs. Judis, who was present, confirmed tfie report of the president, and, on motion duly made and seconded, the officers; of the corporation were directed to execute a proper assignment of said bond ■ and mortgage and to charge the account of Mrs. Judis with the corporation with the said sum of $30,000.
    Mrs. Mary Judis addressed the meeting and referred to the success which had attended the conduct of the business of the corporation and stated that that success was due entirely to the efforts of the president of the corporation.
    On motion of Mary Judis, seconded by Irving Judis, the salary of the president for the year 1919 was fixed at the sum of $10,000, said payment to be made by crediting the account of Mr. Judis with the corporation with the said sum of $10,000.
    On December 27, 1919, the petitioner formally assigned the said second mortgage of $47,500 to Mary Judis, the assignment reading — - “ * * * in consideration of One Hundred ($100) Dollars, and other valuable considerations.” The assignment was recorded in the Register’s Office of the County of New York, State of New York, on December 29,1919, in Liber 3111 of Mortgages, at page 5.
    In the construction of the above-mentioned building, Irving Judis acted as the general contractor in addition to his ordinary duties as an officer. He actively superintended the erection of the building. The value of such services to the petitioner as general contractor alone (exclusive of his services as an officer) was at least $7,500.
    The petitioner corporation did not engage in any business other than that of erecting, operating and selling the property mentioned.
    The $10,000 salary voted to the petitioner’s president on December 16,1919, was credited to his account in reduction of his indebtedness to the petitioner corporation for money which had been advanced to him. No compensation had been paid or credited to him by the corporation at any time previously, although he had been the sole active officer of the corporation, and as such had had charge of the purchase of the land, the securing of the mortgage from the Metropolitan Life Insurance Co. (as a part of which transaction he gave his personal bond), the erection of the building, the securing of tenants, and, finally, the sale of the property in 1919.
    The Commissioner, in determining the proposed deficiency, allowed to the petitioner as a deduction $2,500 of the compensation of Irving Judis, and disallowed the remaining $7,500.
   OPINION.

GReen:

Two issues are presented in this appeal: (1) Whether the •respondent erred in determining that the second mortgage here in question had a fair market value equal to its face value of $47,500 at the time it was received as a part of the consideration for a sale by the petitioner in 1919, instead of $32,500 as claimed by the petitioner ; and (2) whether the respondent erred in diallowing as a deduction from gross income in 1919, $7,500 of the $10,000 salary voted the petitioner’s president in 1919, and refusing to allow the said $7,500 either as a deduction for compensation or as an additional cost of the building which was erected in 1915 and 1916 and sold in 1919. The two issues will be taken up in order.

The petitioner corporation sold its property in June, 1919, subject to first mortgage of $210,000, and received in exchange $40,000 in. cash and a purchase-money second mortgage on the same property for $47,500. The second mortgage bore interest at the rate of 6 per cent per annum and was to fall due in 5 years (on June 1, 1924), with installments of $2,500 semiannually on account.

Section 202 of the Revenue Act of 1918 provides in part:

(a) That for the purpose of ascertaining gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be—
(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date;-and
(2) In the case of property acquired on or after that date, the cost thereof; * * *
(b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; * * *

The respondent found the fair market value of the second mortgage received in exchange to be equal to its face value, or $47,500 at the time it was received. The petitioner in its claim before the Commissioner contended for a value of $32,500. We find from the evidence that the value ivas not in excess of $32,500.

The petitioner produced two witnesses whose testimony is substantially to the same effect, namely, that the normal rate of discount on this class of mortgages was from 4 per cent to 6 per cent per annum in addition to‘the regular rate of interest, depending on the quality of the mortgage; that, therefore, when a mortgage had 5 years to run, it was customary in normal times to deduct a bonus or discount of from 20 per cent to 30 per cent from the face; that first and second mortgages were seldom made for amounts in excess of 66 per cent and 80 per cent, respectively, of the value of the property; that the market for second mortgages in 1919 was very precarious and uncertain; that where the equity in the property was small, discounts ran up as high as 50 per cent; and that due to the first mortgage being exceptionally large (as evidenced by the necessity for a bonus of approximately $18,500), and maturing before the due date of the second mortgage (thereby bringing in the hazard of refinancing the first mortgage at a possible loss), and the greater part of the second mortgage not being due until 1924, it was their opinion that the second mortgage here in question was a “ poor mortgage.”'

One witness placed a value on it at the time received of $29,000 and the other witness testified to $30,000. The Commissioner introduced no evidence of value.

The petitioner’s president testified that he had made many attempts in 1919 to sell the said second mortgage, but could find no purchasers except at a very heavy discount. The petitioner assigned the mortgage to Mary Judis in consideration of $30,000 after it had been reduced to $45,000.

From all the evidence we find the second mortgage here in question had a fair market value of $32,500 at the time it was received by the petitioner in 1919.

As set out in the findings of fact, the minutes of the petitioner show that “ the salary of the president for the year 1919 was fixed at the sum of $10,000.” The petitioner deducted this amount as salary on its 1919 income-tax return. The Commissioner determined that the amount of $10,000 exceeded “ a reasonable allowance for salaries or other compensation for personal services actually rendered,” within the meaning of section 234(a) (1) of the lie venue Act of 1918, and accordingly disallowed $7,500 of the $10,000 as being unreasonable. Considering only the question of reasonableness of the president’s salary for the year 1919, the Commissioner’s action would have to be sustained on the ground that the petitioner did not offer any evidence as to what might be considered a reasonable compensation for services rendered by its president during 1919. But the petitioner contends as an alternative that the $7,500 should be allowed as a part of the cost of the property sold.

The evidence offered by the petitioner on this point shows that Irving Judis was an experienced builder; that during 1915 and 1916 he acted as the general contractor in actively superintending the erection of the building; that such services alone (exclusive of his services as an officer) were worth at least $7,500; and that he received no compensation therefor. The $10,000 credited to his account in 1919 was fo'- salary for the year 1919.

There is nothing in the record to indicate that the petitioner had agreed to pay or contemplated paying Irving Judis any amount as compensation for his services rendered in supervising construction of the building. The corporate minutes expressly provide that the amount of $10,000 is salary for the year 1919, and, while it is undoubtedly true that the services rendered were of substantial value to the petitioner, still we find no justification for a conclusion on our part that the salary voted was for any purpose other than that stated in the resolution. This being true, we not only hold that the Commissioner’s action in disallowing as a deduction any amount in excess of $2,500 was entirely correct, but we further hold that salaries voted and paid for the year 1919 may not be included as an item of cost of construction of a building erected in 1915 and 1916.

Judg'ment will be entered after IS du/ys' notice, under Bule 50.

Littleton did not participate.


author: Akttndell:

text:
    Frederick J. Haynes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7247.
    Promulgated June 23, 1927.
    Petitioner and Ms wife held a note and a mortgage securing the payment thereof as joint tenants. Held that only one-half the interest paid on the note is income to the petitioner.
    ■ John P. O'Hara, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1922 in the amount of $1,624, of which the petitioner contests only $812. The issues are whether petitioner and his wife were joint owners of a certain note and whether the interest received thereon is taxable in whole or in part to the petitioner.-
    FINDINGS OF FACT.
    The petitioner is an individual residing in Detroit, Mich.
    In the latter part of the year 1921 the payees of a note given by the Maple Road Land Co., a Michigan corporation, in the principal sum of $48,000, endorsed the note over to petitioner and his wife by the following endorsement:
    Pay to tke order of Frederick J. Haynes and Clara M. Haynes his wife, not as tenants in common, but jointly with full right to the survivor.
    Charles D. Miller.
    Emma E. Show.
    At the time' of this endorsement $40,000 of the principal was unpaid.
    The note was secured by a mortgage on real estate of the Maple Road Land Co. This mortgage was assigned by the mortgagees to petitioner and his wife by an instrument, the body of which reads as follows:
    Know All Men By These Presents, That we Charles D. Miller and Emma E. Snow, of Birmingham, Oakland County, Michigan, parties of the first part, for and in consideration of the sum of Forty Thousand ($40,000.00) Dollars, lawful money of the United States of America, to them in hand paid by Frederick J. Haynes and Clara ¡VI. Haynes, bis wife, not as tenants in common, but jointly with full rights of survivorship, parties of the second part, the receipt whereof is hereby acknowledged, have sold, assigned and transferred, and hereby do sell, assign and transfer to the said parties of the second part, not as tenants in common, but as joint tenants, with full rights to the survivor, all their right, title and interest in and to a certain real estate mortgage, dated the 6th day of November in the year one thousand nine hundred and sixteen, made by Maple Koad Land Company, a Michigan Corporation, to Charles D. Miller and Emma Snow, and recorded in the office of the Register of Deeds for the County of Oakland, State of Michigan, in Liber 224 of Mortgages, on page 366.
    In Witness Whereof we have hereunto set our hands and seals this 22nd day of December in the year one thousand nine hundred and twenty-one.
    Charles D. Miller (Seal)
    Emma E. Snow (Seal)
    On the same date, December 22, 1921, the petitioner entered into an agreement with the Oakland Hills Country Club extending the Maple Road Land Co. note and increasing the rate of interest from 6 per cent to 7 per cent. The petitioner’s wife did not sign this agreement, although she is named therein as a party to it.
    In 1922 the Oakland Hills Country Club paid $2,800 as interest on the note involved, which amount was returned as income by the wife of the petitioner. The respondent in computing the deficiency appealed from added the interest to the income of the petitioner.
   OPINION.

Akttndell:

The petitioner admits that $1,400, or one-half of the interest paid on the note in 1922, represents income to him, but contends that the balance was paid to his wife and belonged to her and that he is not subject to tax thereon. It is his contention that he and his wife owned the note and mortgage jointly. The respondent denies the joint ownership and has computed the deficiency on the theory that the petitioner made a gift of the interest to his wife.

Although the common law doctrine with reference to joint tenancies in personal property has never been adopted by statute in Michigan, the Supreme Court of that State has recognized that such tenancies may be validly created by specific provision therefor in the instrument of conveyance. Lober v. Dorgan, 215 Mich. 62; 183 N. W. 942.

It therefore seems clear that the petitioner and his wife held the note here involved as joint tenants. As a result of such ownership each tenant had an equal right to share in the property so held and the income therefrom-. Thompson on Real Property, § 1710; 7 R. C. L. 811; Case v. Owen, 139 Ind. 22; 38 N. E. 395; Kissam v. McElligott, 280 Fed. 212.

The Michigan Married Woman’s Act, 3 Mich. Comp. Laws, 1915, sec. 11485, provides:

That the real and personal estate of every female, acquired before marriage, and all property, real and personal, to which she may afterwards become entitled, by gift, grant, inheritance, devise, or in any other manner, shall be aiv remain the estate and property of such female, and shall not be liable fo the debts, obligations and engagements of her husband, and may be contracted, sold, transferred, mortgaged, conveyed, devised or bequeathed by her, in the same manner and with the like effect as if she were unmarried.

As the petitioner and his wife were joint owners of the note here involved and each was entitled to one-half of the income therefrom, we are of the opinion, that in view of the provisions of the Married Woman’s Act as set forth above, one-half of the income from the note was properly taxable to the petitioner’s wife and only the remaining half was taxable to the petitioner.

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