author: Love :

text:
    William Reibert, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8602.
    Promulgated September 1, 1927.
    1. Where the assets of a partnership were transferred to a corporation in exchange for stock thereof, gain or loss resulted to the partners under the Revenue Act of 1918, though the transfer of the assets in exchange for the stock was effected while article 1566, Regulations 45, construing such transfer and exchange not to result in gain or loss to the partners, was in force.
    2. The March 1, 1913, value of the partnership assets plus the cost of assets subsequently acquired thereby, determined.
    3. The fair market value of the corporate stock determined.

      S. Leo Buslander, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1919 in the amount of $1,173.62. Only so much of the deficiency is in controversy as results from the respondent’s inclusion in the petitioner’s net income for 1919, of the amount of $12,186.17, representing a profit resulting from the exchange of the petitioner’s interest in a partnership to a corporation in exchange for stock.
    FINDINGS OF FACT.
    During the year 1913, the petitioner and his brothers, Otto and Edward, were partners in the retail ice business in the Borough of Sewickley, Pittsburgh, Pa., in which each of the partners had a one-third interest. The ice business had for many years prior to 1913 been conducted by the father of the petitioner and his brothers, and upon his death the brothers succeeded him in the business.
    In the year 1914, Edward Reibert died and the petitioner and his brother Otto, purchased from the widow of Edward Reibert the interest in the business which he had at the time of his death. The amount paid for that interest is not disclosed by the record.
    Thereafter, the petitioner and Otto Reibert carried on the business as partners, each having a one-half interest therein. In 1914, they began to increase the facilities and later erected an ice plant and small office building, and purchased additional equipment. The partnership between petitioner and his brother, Otto, continued until June, 1919, when a corporation known as the Reibert Ice Co., was organized for the purpose of taking over the business. The corporation issued its capital stock of $100,000 par value to the petitioner and his brother Otto, in equal amounts, in exchange for all of the assets of the partnership.
    The assets transferred to the corporation were not subject to any indebtedness at the time of transfer. At the time of incorporation of the business, friction existed between the petitioner and his brother. Immediately after incorporation in June, 1919, Otto Rei-bert sold his stock, having a par value of $50,000 and representing a one-half interest in the business, for $30,000, and thereafter worked as an employee in the business. The purchaser bought the stock under an arrangement whereby the petitioner agreed to continue in business with him. The petitioner and the purchaser of Otto Reibert’s stock conducted the business for about a year thereafter, (he petitioner being the manager thereof. During this period the business made a little profit. The petitioner was ill and unable properly to attend to the business during a large part of this period.
    Some time during the year 1920, due to his bad health, the petitioner sold his stock of the par value of $50,000, being one-half of the outstanding capital stock, for $20,000.
    Upon audit of the petitioner’s return for the year 1919, the Commissioner determined that the fair market value of the stock received in June, 1919, was $30,000 and also determined that the March 1, 1913, fair market value of the petitioner’s interest in the partnership business, plus the cost of additions thereto, which was in June, 1919, transferred to the corporation for one-half of its capital stock, amounted to $17,813.83. By reason of these determinations the j amount of $12,186.17 was added to the petitioner’s taxable income for the year 1919,
   OPINION.

Love :

The petitioner alleges that the respondent erred in increasing his income for the year 1919 by the amount of $12,186.17, as a result of the transfer of his interest in the partnership to the corporation in exchange for its stock of the par value of $50,000, which stock he sold in 1920 for $20,000. The petitioner raises two issues of fact and one of law. He contends that the stock received by him in June, 1919, did not have a fair market value of $30,000 as determined by the respondent, and that his interest in the partnership assets as of March 1, 1913, plus the cost of the additions thereto amounted to more than $17,813.83. The petitioner further contends that as a matter of law the respondent is estopped from asserting the deficiency by reason of the fact that in June, 1919, the time of the transfer of the assets of the partnership to the corporation, the regulations at that time in force and made under the Revenue Act of 1918 provided that the transaction was not a closed one and that gain or loss should be determined when the stock was sold. If the petitioner is correct in this contention, it would be unnecessary for us to consider the other issues, so we will consider the question of estoppel first.

Article 1566 of Regulations 45, promulgated pursuant to the Revenue Act of 1918, in force in June 1919, the time of the transfer of the partnership assets to the corporation, provided in part:

Art. 1566. Exchange of property and stock, (a) Where property is transferred to a corporation in exchange for its stock, if the previous owner of the property receives 50 per cent or more of the stock of the corporation, so that an interest of 50 per cent or more in such property remains in him, then no gain or loss is realized by such owner from the transaction. For the purpose of ascertaining the gain or loss from the subsequent sale by the stockholder of any stock so received for such property, the stock is to be considered as substituted for the property, and the cost of the property or (if acquired prior thereto) its fair market value as of March 1, 1913, is the basis for determining the amount of such gain or loss. * * *

The petitioner testified that he had consulted an accountant who had advised him of this regulation and had informed him that the transaction set forth in the findings of fact would result in no tax liability. However, on September 26, 1919, Treasury Decision 2924 was issued and in part provided:

(1) Article 1566 of Regulations 45, first authorized April 17, 1919, is considered as not being warranted in law, and is hereby modified to read:
Art. 15G6. Exchange of property and stock. — Where property is transferred to a corporation in exchange for its stock, the exchange constitutes a closed transaction and the former owner of the property realizes a gain or loss if the stock has a market value, and such market value is greater or less than the cost or the fair market value as of March 1, 1913 (if acquired prior thereto), of the property given in exchange. * * *

It is contended on behalf of the petitioner that the transaction involving the transfer of the assets to the corporation having been consummated at a time when the original regulations were in force and which provided that no gain or loss would result therefrom until the stock was sold, the respondent is now estopped from asserting a deficiency in tax by reason of the modified regulation issued thereafter. We are unable to agree with this contention.

It is well settled that the Commissioner of Internal Revenue by his regulations can not add to or detract from the taxing statutes enacted by Congress. Congress alone is the only body authorized to make any change in the statutes enacted by it. In considering the force of a regulation in conflict with the statute, the United States Supreme Court in the case of Morrill v. Jones, 106 U. S. 466, said:

The Secretary of the Treasury cannot by his regulations alter or amend a revenue law. All he can do is to regulate the mode of proceeding to carry into effect what Congress has enacted.

Consequently, a regulation which does not properly interpret the statute, and is not warranted in law, is invalid and of no force or effect. T. T. Rudolph v. Commissioner, 6 B. T. A. 265.

The petitioner does not contend that the original regulations, article 1566, of Regulations 45, was not invalid. He does not question the right and authority of the Commissioner to revoke the original regulation or amend it in part.

Article 1566 as originally promulgated and which is set out above, was based on section 202 of the Revenue Act of 1918, the pertinent part of which is as follows:

Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be — ■
* * * * * * *
(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 * * *.

We are of the opinion that the original regulation, article 1566, was not warranted in law for the reason that it went beyond what Congress had enacted. Congress provided nothing to the effect that if any owner of property transferred it to a corporation for stock and received therefor 50 per cent or more of the stock, so that an interest of 50 per cent or more remained in him, there would be no gain or loss. The original regulation as promulgated added to the statute something that Congress did not enact. Clearly, therefore, it was not warranted in law and was of no force or effect.

Section 202 of the Revenue Act of 1918, supra, provides for a gain or loss under the prescribed conditions, and if, in fact, the transaction in question came within the provisions of that section, and met the conditions prescribed, then, unless the property exchanged was of the same value as the property received, a gain or loss must have occurred, notwithstanding any regulation in force at the time the transaction was consummated which provided that no gain or loss occurred. The liability for taxes was incurred by reason of the statute — not by reason of the regulations.

We come next to the first question of fact. Did the stock received by the petitioner in June 1919, have at that time a fair market value of less than $30,000, the amount determined by the respondent? The burden of proof is on the petitioner to submit such evidence as will enable us to decide that the determination of the respondent is incorrect. Appeal of Bonta Narragansett Realty Co., 1 B. T. A. 208. The evidence shows that Otto Reibert sold his stock, of which he had received the same amount as the petitioner, for $30,000. The fact that there were not other sales of stock of a close corporation during the year does not establish that the stock did not have a readily realizable market value. Appeal of J. W. Solof, 1 B. T. A. 776.

We see no reason for disturbing the respondent’s determination in this respect and the same is approved.

We come now to the second question of fact. The petitioner contends that the fair market value of his interest in the partnership assets as of March 1, 1913, plus the cost of additions thereto, was in excess of the amount of $17,813.03 as determined by the respondent and used for determining the gain derived from the exchange of those assets for stock in the corporation. One of the former partners estimated at the hearing that the March 1, 1913, value of the partnership assets then owned by the partners, and the cost of assets subsequently acquired and transferred to the corporation in June, 1919, in exchange for capital stock was $42,143.48.

Most of the properties owned were subject to depreciation. We are not informed in regard to the useful life of the depreciable items or the extent of the depreciation sustained, and in the absence of such evidence we can not hold that the Commissioner erred in his valuation; hence, it is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Steenhagen :

license: Public Domain

text:
    Cement Gun Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5302.
    Promulgated September 1, 1927.
    1. Taxpayer in 1914 acquired patent licenses in consideration for promises to pay royalties. Later taxpayer issued additional stock said to be in consideration for the same licenses. Held, no deduction for exhaustion of said licenses since no cost was established.

      2. Commissioner disallowed snob deduction for 1919 an. partially for 1920, and claimed by amended answer an increased deficiency for 1920. Held, under the Revenue Act of 1926, section 274 (e), that the deficiency should be increased.

      Chester A. Gwinn, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    Deficiencies in income and profits taxes of $327.99 for 1919, and' $4,949.94 for 1920. Petitioner claims a ded'uction for exhaustion of rights under a license agreement.
    FINDINGS OF FACT.
    The petitioner is a New York corporation, with its principal place of business at Allentown, Pa. It is the licensee of certain patents under the following agreement:
    General Cement Products Company
    License Agreement
    TO
    ■ Cement Gun Company, Inc.
    This Agreement made this 1st day of January, 1914, by and between the General Cement Products Company (hereinafter called the “Licensor”), a New York Corporation, and Cement Gun Company, Inc. (hereinafter called the “Licensee”), a New York Corporation, IVitnesseth:
    Whereas, the Licensor is the owner by mesne assignments of the full and exclusive right, title and interest in and to certain inventions and improvements, and the United States patents therefor, the same being a process of producing and depositing plastic or adhesive mixtures, patented February 14th, 1911, No. 984,254, hereinafter called the “ Cement Gun Process ”, and an apparatus for mixing and applying plastic or adhesive materials, patented May 9th, 1911, No. 991,814, hereinafter called the “ Cement Gun ”; and
    Whereas, the Licensor has retained to itself and is the owner of the full and exclusive right, title and interest under said patents or said inventions, except as hereinafter mentioned, in that portion of the United States and its possessions hereinafter particularly described, as to which and in which the Licensor desired to grant the rights to the Licensee herein set forth:
    Now Therefore, in consideration of the premi&es and One Dollar to each in hand paid, the receipt whereof is hereby acknowledged, and of the mutual covenants and agreements herein contained, the parties hereto have covenanted and agreed as follows:
    I. The Licensor hereby grants under said patents to the Licensee the full and exclusive right to manufacture, use, sell and license others to manufacture, use and sell the said Cement Gun Process and said Cement Gun upon the terms, conditions and limitations hereinafter set forth in the following territory, to wit:
    The States of Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Delaware. Maryland. District of • Columbia, Virginia, Norfh Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Tennessee, Kentucky, West Virginia, Louisiana, Texas, Arkansas, Oklahoma, New Mexico, Arizona, Utah, Colorado, Kansas, Nebraska, Idaho, Montana, Wyoming, North Dakota, South Dakota;
    Minnesota, excepting the Counties of Fairibault, Blue Barth, Nicolet, Leseur, Kice and Goodhue, and that part of said State southeast of said counties;
    Iowa, excepting that part thereof lying east of the western boundary lines of Kossuth, Humbolt, Webster, Boone, Dallas, Madison, Clark and Decatur Counties;
    Missouri, excepting the Counties of Marion, Shelby, Macon, Linn, Livingston, Grundy and Mercer and the territory northeast of the same;
    Illinois, excepting that part thereof lying north of the southern boundary line of Madison, Clinton, Marion, Clay, Richmond and Lawrence Counties (not including, however, in said exception DuPage County) ;
    Ohio, excepting the Counties of Hamilton and Cuyahoga;
    Alaska; the Philippine Islands, Porto Rico and the other Insular possessions of the United States, excepting only the Hawaiian Islands;
    Also upon all property of the United States Government wheresoever situated, and also upon all property of all steam railroads, throughout the entire United States and its possessions, excepting in the States of California, Oregon, Washington and Nevada and the Hawaiian Islands.
    It being understood however, that a certain number of these Guns have heretofore been sold or licensed for use not exceeding one hundred Guns, however, in the above described territory.'
    II. This license and all rights hereunder shall vest and remain in the Licensee during the full term of the life of such patents and of any renewals thereof, unless the Licensee shall cease to maintain its corporate existence as a solvent entity and commercial going concern, in which event, or in the event that, a trustee or receiver shall be appointed and the Company shall not cause him to be discharged within six months thereafter, all rights hereunder granted to the Licensee shall then cease and determine, provided written notice to that effect be given by the Licensor to the Licensee, anything herein contained to the contrary notwithstanding.
    III. This license shall be deemed to cover and include the right to manufacture, lease, use and sell the Cement Gun Process and the Cement Gun and all improvements and inventions relating thereto and inventions of a similar character that may be used in connection therewith, which may be now or hereafter owned or controlled by the Licensor. Should the Licensee acquire or have the right to acquire any improvements in the Cement Gun Process or the Cement Gun, which improvements shall also be covered by the claims of the patents aforesaid, during the term of this agreement, it shall forthwith make discovery thereof to the Licensor and the Licensor shall have the right to acquire the same upon reimbursing to the Licensee the cost to it if it shall have acquired said right, or upon payment of the amount necessary to acquire said right; it being understood that the Licensor shall pay all expenses involved in obtaining the letters patent covering said invention.
    If the Licensor shall not acquire said rights within thirty days after notice to it, then the Licensee shall have the right to retain if it has acquired or to acquire the same and retain the ownership therein.
    IV. The Licensee admits the validity of the aforesaid patents covering the Cement Gun and the Cement Gun Process, and agrees that it will not, directly or indirectly! while this agreement remains in force, question or deny the validity or scope of said patents or the title of the Licensor therein. In the event of the Process patents being sued upon for infringement, and of the entry of a final decree in the Court of highest jurisdiction into which the question of the validity of said patent may be taken, which decree shall deny the validity of said patents, or any of them then the Licensee may, by notice in writing to the Licensor, forthwith cancel and terminate this agreement, but all apparatus manufactured or sold by the Licensee under patents owned or controlled by the Licensor up to that time shall remain forever licensed under said patents.
    Y. Should for any reason any of the rights heretofore granted under said patents to any other Licensee or Licensees lapse or revert to the Licensor, the territory to which the same relates may at the option of the Licensee be included with that to which this license relates and included within the term hereof.
    VI. The Licensor reserves to itself as royalty, and the Licensee will pay to the Licensor, ten per cent (10%) of the gross amount received for the sale of each Cement Gun hereafter sold by the Licensee or sold by its consent or by its sub-licensee, during the life of this contract. Cement Guns sold in combination with other machines or accessories shall be deemed to have been sold at a sum equal to the average price for Cement Guns during the preceding calendar year, save for the first year it shall be the average price for that year.
    VII. Loyalties shall apply to the sale of the Cement Gun, with fifty feet of rubber material hose and fifty feet of rubber water hose included, but shall not apply to compressors or repair parts or supplies. The Cement Gun shall be deemed to be the mechanism depicted in the annexed cut or its equivalent.
    VIII. The Licensee will keep accurate and correct account of Cement Guns sold and will on the 10th day of each month render a statement of such sales and the payments received thereon and make payment of the royalties, based upon the amount received by it or by its sub-licensees, for the calendar month preceding.
    IX. The Licensee shall have the right in the name of the Licensor to defend and institute all legal proceedings deemed neeessary by it to protect itself in the rights herein granted, or to establish or defend the legality of such patents, and the Licensor hereby agrees to cooperate in all such legal proceedings, and grants full power of attorney to the Licensee to perform all such acts as may be necessary in carrying on such legal proceedings, the expense involved in such proceedings to be paid by the Licensee, who may from time to time, however, deduct one-half of such expense from the royalties due, or to become due, to the Licensor. The Licensor shall, so far as to it known, keep the Licensee informed of any claim of infringement of or of prospective litigation affecting the validity of said patents.
    X. The Licensee may at any time after February 14, 1928, elect to terminate this agreement, or may continue it till such later times as it may see fit.
    XI. The Licensee will not elect to revoke this agreement prior to the expiration of the process patent because of any judicial decree determining the invalidity of the same, provided it shall still continue to use apparatus covered by any of the other of said patents which have not been held invalid.
    XII. The Licensee will permanently mark in the castings of the Gun in such manner as to indicate plainly where, when, and by whom said Gun was manufactured, it being the intent and purpose of this agreement that all Guns hereafter manufactured shall be permanently marked in such manner as to be readily identified.
    XIII. It is the intention hereby to convey to the Licensee all rights to manufacture, lease, use, and sell Cement Guns, and Cement Gun Process in all United States territory not heretofore granted to the Pacific Cement Gun Co., Los Angeles Cement Gun Company, General Cement Gun Company, Cincinnati Cement Gun Company and the Parsons Stoker Company and Alexander & Baldwin, Limited.

      In Witness Whereof, the respective parties hereto have caused this instru-merit to be duly executed the day and year first above written.
    General Cement Products Company,
    By Bobt. L. McElroy,
    President.
    Attest :
    A. M. Crooker,
    Secretary
    (Corporate Seal)
    Cement Gun Company, Inc.,
    By Edward T. Magoffin,
    President.
    Attest :
    K. A. Fox,
    Secretary
    (Corporate Seal)
    Approved :
    Robert L. McElroy
    John E. Shepherd
    The original of this contract has written on the back thereof a memorandum dated August 13, 1914. This memorandum was not introduced in evidence, and the substance thereof was not shown.
    Patent No. 984,254, issued February 14, 1911, covers a process of applying plastic or adhesive materials to surfaces. This process is known as the cement-gun process. Patent No. 991,814, issued May 9. 1911, covers an apparatus for mixing and applying plastic and adhesive materials. This apparatus is knov/n as the cement gun. The principle utilized in the process and apparatus is the transportation and application of materials by compressed air and the hydration of such materials in the process of application. Apparently they are used principally in the making and application of concrete. Concrete made and applied by this process and apparatus is superior in many respects to concrete produced otherwise.
    The process and apparatus were invented by Carl E. Akeley, who assigned his rights therein to the McElroy-Sheplierd Co., a New York corporation, to whom these patents were issued. The McElroy-Shepherd Co., and John E. Shepherd and one McElroy, the organizers and principal stockholders of the company, during a period of approximately four years expended over $60,000 in the development and perfection of these inventions. In addition, such services as were rendered by Akeley, McElroy and Shepherd were rendered without cost.
    Shortly after the issuance of the letters patent, McElroy and Shepherd formed a corporation, known as the General Cement Products Co., for the purpose of separating their interests in these patents from other interests. To this company the McElroy-Shepherd Co. gave an exclusive license for the manufacture, sale and use of cement guns and the right to license others so to do. This license covered the entire territory of the United States except for the rightsrto some restricted areas theretofore granted by the McElroy-Shepherd Co., which covered the sale and use but not the manufacture of cement guns.
    The Gerferal Cement Products Co. licensed the companies set forth below to sell and use the cement gun in the territory indicated. The consideration received for the license is indicated in each case where such consideration was shown in the evidence.
    The New York Cement Gun Co. was given a lieense for New York City and the surrounding territory. For this license the General Cement Products Co. received 51 per cent of the capital stock of the New York Cement Gun Co., and the subscribers to the remaining stock were to furnish $100,000 working capital.
    The Eastern Cement Gun Co. was given a license for the State of Pennsylvania, most of New Jersey, Delaware, and Maryland. For this it paid to the petitioner one-half its capital of $1,000,000 common stock and $500,000 preferred stock, $90,000 in first mortgage bonds and $10,000 cash. The subscribers for the remaining stock paid in $100,000 working capital. .
    The General Cement Gun Co. had a license for Illinois, Indiana, part of Wisconsin, part of Minnesota, part of Missouri, and part of Iowa. For this it paid $50,000 cash and onerhalf of its capital stock. The remaining subscribers agreed to furnish $100,000 capital. •
    The Pacific Cement Gun Co. was given a license for the entire State of California, with the exception of Los Angeles County. For this it paid 51 per cent of its capital stock of $500,000. It had a working capital of $150,000.
    The Cincinnati Cement Gun Co. was given a license for Hamilton County, Ohio. For this it paid $50,000 in cash and 51 per cent of its capital stock of $10,000. The remaining stockholders furnished working capital of $5,000.
    The New England Cement Gun Co. was given a license for the New England States. For this it paid 51 per cent of its capital stock and the remaining stockholders were responsible1 for $50,000 working capital.
    The rights for the Hawaiian Islands were sold for $25,000, and in addition thereto the purchasers agreed to buy cement guns at a stipulated price.
    Licenses were also given to the South Jersey Cement Gun- Co. and the Los Angeles Cement Gun Co. The territories covered and the considerations paid are not shown. .
    These licenses covered only the right to use and sell cement guns, and did not cover the right to manufacture the guns, with the possible exception of the license issued to the General Cement Gun Co., as to which the evidence is not clear. No royalties were reserved in these licenses, but it was agreed that in furnishing machines to these companies the General Cement Products Co. should have a definite percentage of profit on the sales price.
    The Canadian rights were sold for $50,000 and a one-third interest in a corporation with a captial stock of $1,000,000. The Russian rights were sold for $60,000. It is not shown whether these rights included the right to manufacture, sell and use, or only the right to sell and use, nor is it shown whether the rights were sold by the McElroy-Shepherd Co. or the General Cement Products Co.
    The petitioner was incorporated in December, 1918. In 1914 the General Cement Products C.o. entered into the contract with the petitioner which is set forth above. For the purposes of making this arrangement with the petitioner, the General Cement Products Co. reacquired some of the rights it had previously sold to others.
    The petitioner was a fully organized and going concern from the date of the license, January 1, 1914. It sold guns from the time of its incorporation. The following are the minutes of a special meeting of the stockholders of the petitioner held on August 14, 1914:
    Minutes of a special meeting of the stockholders of the Cement Gun' Company, Inc., held at Room 110, 27 Pine Street, New York City, on the 14th day of August, 1914, at 11:00 A. M.
    The meeting was called to order by Mr. Edward T. Magoffin.
    Upon motion, Mr. Magoffin was made Chairman of the meeting, and K. A. Fox was elected Secretary.
    Upon call of a roll of the stockholders of record, the following were found to be present in person':—
    Arthur J. Baldwin- 98 shares
    Edward T. Magoffin- 1 share
    K. A. Fox- 1 share
    representing all of the stock issued and outstanding.
    Proof that the meeting was called upon notice such as is required for the annual meeting of the corporation, to wit, a waiver of notice of the meeting and of the publication thereof and of the lapse of time by all of the stockholders, was read and placed on file.
    The following motion was duly made and seconded and a vote taken thereon:—
    Resolved that the capital stock of the Cement Gun Company, Inc., be increased from the present amount thereof, to wit, $100,000, consisting of 1,000 shares of the par value of $100 each, to $600,000, to consist of 6,000 shares of the par value of $100 each.
    The resolution was duly adopted by the affirmative vote of the holders of more than a majority of the stock of the company, 100 shares voting in its favor, and no shares voting against its adoption.
    Upon motion duly made and seconded, a vote was then taken on the following preamble and resolution:—
    Whereas, the stockholders of this corporation have duly authorized an increase of the capital stock of the company from $100,000 to $500,000, to cpn-gjgf; 5,()QQ shares of tfte par v^liie of $100 eacli; £¡n<}

      Whereas, the present authorized capital stock of the corporation consists wholly of one class of stock, and it has been found desirable to classify the new stock into common and preferred,
    Now, Therefore, Be It Resolved that the said authorized increase of capital stock, amounting to $400,000, be classified so that $300,000 thereof, consisting of 3,000 shares of the par value of $100 each, shall be common stock, and $100,000 thereof, consisting of 1,000 shares of the par value of $100 each, shall be preferred stock, and that the said preferred stock shall be entitled to preference and priority over the common stock in manner following:—
    The holders of the preferred stock shall be entitled to receive, and the corporation shall be bound to pay, a fixed cumulative dividend at the rate of but not exceeding six per cent, per annum before any dividends shall be set apart or paid in excess thereof. The preferred stockholders shall also be entitled to a preference in the assets on the dissolution of the company;
    Resolved Further that the President and the Secretary of the Company and the Chairman or President and the Secretary of this meeting be and they hereby are authorized and directed to make, execute, and file proper certificates of the proceedings of this meeting in the offices respectively of the Secretary of State of New York and the Clerk of Orleans County, and to do all acts and things that may be necessary to comply with the provisions of law applicable to and regulating the increase in stock of the company and the issuing of common and preferred stock.
    The votes of stockholders owning 100 shares of stock of the corporation, out of a total of 100 shares issued and outstanding, having been cast in favor of said resolution, and none against the same, the same was declared duly adopted.
    There being no further business, the meeting adjourned.
    (Signed) K. A. Fox '

      Secretary

    The following are the minutes of a special meeting of the board of directors of the petitioner held on August 18, 1914:
    Minutes of a special meeting of the Board of Directors of the Cement Gun Company, Inc., held at Room 110, 27 Pine Street, New York City, on the 18th day of August, 1914, at 11.00 A. M.
    There were present Edward T. Magoffin, K. A. Fox, and Elmer E. Wigg, being a majority of the Board.
    A waiver of notice of the meeting, signed by all of the directors, was presented and ordered filed.
    The President reported that a certificate authorizing the increase of the capital stock of the Company from $100,000 to $500,000 and classifying the stock of the Company into $100,000 of six per cent, cumulative preferred stock and $400,000 of common stock had been filed in the office of the Secretary of State of New York; that a duplicate of such certificate had been forwarded to the Clerk of Orleans County for filing; and that the organization tax upon the increase of capital stock had been paid.
    The President submitted the following proposition from Leonard D. Baldwin to the Company:—
    “New York, August 18, 1914.

      “ To the Cement Gun Company, Ino.
    “ Gentlemen :—
    “ I hereby make you the following proposition:—
    “(1) I hereby offer to transfer and convey or cause to be transferred and conveyed to your Company all of the net assets of the New York Cement Gun Company, a New York corporation, including all of its rights of every kind;

      “(2) I agree to Rave issued to your Company a license from the General Cement Products Company, a New York corporation, in the form submitted herewith.

      “ For and in consideration of said property you are to:—
    “(a) Pay me $10,000 in cash and $20,000 in notes with interest, $10,000 of such notes payable on August 15, 1915, and $10,000 on August 15, 1916;
    “(b) Issue to me or my nominees $390,000 (par value) of the common stock of your Company and $50,000 (par value) of the sis per cent, cumulative preferred stock of your Company, such stock to be fully paid and non-assessable.
    “ Said stock, notes, and cash shall be delivered to me upon proper transfers to your Company of the aforementioned property being made.
    ■ Very truly yours,
    (Sgd.) Leonard D. Baldwin.”
    After discussion, the following resolution was unanimously adopted:—
    WheReas, Leonard D. Baldwin has offered to convey or cause to be conveyed to this Company all of the assets of every kind and nature of the New York Cement Gun Company and to cause to be issued to this Company a license from the General Cement Products Company in the form submitted to this meeting, a copy of which license is annexed to the minutes of this meeting, and to accept in payment therefor $10,000 in cash and $20,000 in notes with interest and $390,000 (par value) of the common stock of this Company and $50,000 (par value) of the preferred stock of this Company, all of which is more fully set forth in the said proposition of Leonard D. Baldwin; and
    Whereas, the directors of this Company have examined into the aforementioned property, and the same is necessary for the business of this Company and to carry out its contemplated objects,
    Now, Therefore, Be It Resolved that the Company accept the offer of Leonard D. Baldwin and purchase the aforesaid property that the same be adjudged and declared to be of the reasonable value of $470,000; and that the Company issue in payment therefor to the said Leonard D. Baldwin or his nominees $390,000 (par value) of the fully paid and non-assessable common stock of this Company and $50,000 (par value) of the fully paid and nonassessable six per cent, cumulative preferred stock of this Company, and pay to him in cash the sum of $10,000, and make, execute and deliver to him two promissory notes for $10,000 each, with interest, dated August 15, 1914, one payable August 15, 1915, and the other August 15, 1916, said stock, notes, and cash to be issued and delivered by the officers of the Company upon receiving proper transfers of the said property.
    The President presented a license agreement with the General Cement Products Company in the form submitted with the proposition of Mr. Leonard D. Baldwin.
    The following resolution was unanimously adopted:
    Resolved that the officers of the Company be and hereby are authorized to execute and deliver on behalf of the Company the said license agreement.
    The resignation of Mr. J. W. Baldwin as a director of the Company was received and on motion was accepted. Mr. Leonard D. Baldwin was unanimously elected a director of the Company to fill the vacancy caused by the resignation of Mr. J. W. Baldwin.
    The resignation of K. A. Fox as Treasurer of the Company was presented and on motion was accepted. Mr. Leonard D. Baldwin was unanimously elected Treasurer of the Company to fill the vacancy caused by the resignation of K. A. Fox.
    There being no further business the meeting adjourned.
    (Signed) K. A. Fox, Secretary.

      There are appended to the above minutes of the meeting of the board of directors the offer from Leonard D. Baldwin set forth in the minutes, and a copy of the contract of January 1, 1914, set forth above.
    Leonard D. Baldwin and Arthur J. Baldwin are brothers.
    The petitioner sold to the Pittsburgh Plate Glass Co. the right to use the cement gun process in the manufacture of glass. For this the Pittsburgh Plate Glass Co. paid $4,000 and purchased a number of cement guns.
    Tinder date of April 15, 1916, the following agreement was made between Samuel W. Traylor and Leonard D. Baldwin and Arthur J. Baldwin:
    Memobandum of an Agreement made by Leonahd D. Baldwin and Arthur J. Baldwin with Samuel W. Traylor, Witnesseth :
    That Whereas, the Cement Gun Co., Inc., is a New York corporation, with an authorized capital stock of $500,000., consisting of $400,000 of Common Stock and $100,000 of Preferred Stock, full paid, issued and outstanding, with the exception of $25,000. of Preferred Stock, and having equal voting rights; and
    Whereas, said Cement Gun Co., Inc., hold an exclusive license to manufacture, sell and deal in Cement Guns under the terms of a license issued to it by the General Cement Products Company, owner of the United States Letters Patent, (Los Angeles, Cincinnati and Hawaiian Islands excepted) whereby a royalty of Eleven per cent. (11%) upon the selling price is reserved to said General Cement Products Company; and
    Whereas, a similar contract is being negotiated with the owners of the Canadian patents on the basis of a Ten per cent. (10%) royalty; and
    Whereas, said Cement Gun Co., Inc., is a going concern with cash, bills and accounts receivable materially in excess of its bills and accounts payable, other than such as are owing to said Baldwins, to whom there is owing notes to the amount of $20,000, with interest from August, 1914, and $4,688.33 on open account, and with an inventory of Cement Guns, Compressors and accessories of the reasonable value of more than $15,000; and
    Whereas, said Baldwins desire to secure the benefit of the experience of said Traylor in the management of said Company, and said Traylor desires to secure an option to purchase a controlling interest in said corporation, which said Baldwins are willing to grant, ehiefly for the benefit which they deem will accrue to the remaining stock which they hold.
    Now, Therefore, in consideration of the premises and the sum of One Dollar, by each to the other in hand paid, receipt of which is hereby acknowledged, the parties hereto have mutually covenanted and agreed as follows:
    1. Said Baldwins own or control a majority of the capital stock of the Cement Gun Co., Inc.
    2. The management of said Company shall forthwith be turned over to said Traylor, who may select a majority of the Board of Directors. Samuel W. Traylor shall be elected President, and a Secretary and Treasurer to be selected by him.
    3. Said Traylor will pay to said Baldwins forthwith the sum of $30,000., for which he shall receive on January 1st, 1917, $10,000. of the Preferred Stock of said Company from said Baldwins, and if on or before said first day of January, 1917, said Traylor shall pay to said Baldwins the further sum of $15,000., they shall deliver to him $15,000. additional .Preferred Stork and $70,000. of Common Stock of said Company. If said Traylor shall pay to said Baldwins the further sum of $13,666. with interest at 5% per annum from January 1st, 1917, on or before the first day of November, 1917, he shall receive from them therefor $13,666. of Preferred Stock and $39,000 of Common Stock of said Company; and if said Traylor shall pay to said Baldwins the further sum of $13,667 with interest at 5% per annum from January 1st, 1917, on or before the first day of September, 1918, he shall receive from them therefor $13,667. of Preferred Stock and $40,000. of Common Stock of said Company; and if said Traylor shall pay to said Baldwins the further sum of $13,667. with interest at 5% per annum from January 1st, 1917, on or before the first day of July, 1918 [sic], he shall receive from them therefor $13,667. of Preferred Stock and $40,000. of Common Stock of said Company.
    4. If said Traylor shall fail to exercise any option above set forth and to make payment of the amount provided on any day above set forth, his right to make that and any subsequent payments and secure stock as above set forth shall then cease and determine.
    5. So long as said option remains open to said Traylor he shall be entitled to name a majority of the Board of Directors and to dictate the policy of the Company.
    6. While said Traylor is so in control of the Company he will loan to the Company such moneys, if any, as may be necessary to pay all its debts, which shall be repaid to him before any dividends are declared or paid by the Company, but not to pay the indebtedness to said Baldwins.
    7. In case said Traylor does not intend to make any payment after the first hereinbefore specified he will so notify said Baldwins of his election at least ten days before the day on which any such payment is to be made, and will thereupon turn over to said Baldwins the resignations of the Directors of the Company theretofore nominated by him and be entitled to receive from the Company and will accept its notes at one year for any moneys due him for moneys advanced to it in accordance herewith, with interest at the rate of 5% per annum.
    8. Leonard D. Baldwin and Kobert L. McElroy, Directors of the Company, shall remain and be entitled to re-election as Directors of the Company from time to time, and as such to have at any time during business hours access to the books, records and correspondence of the Company, and full information of its doings from its officers and employees.
    9. Said Traylor will in all reasonable ways promote the interests of the Company for the benefit of himself and the other stockholders.
    10. If said Traylor shall make payment of $15,000. above specified on January 1, 1917, said Baldwins will purchase from the Treasury of the Company, at par, $25,000. of the Preferred Stock of the Company, the proceeds to be applied upon account of its indebtedness to them; the remainder of such indebtedness, if any, to be paid to them before any dividends are declared.
    11. It is understood and agreed that said Baldwins will loan to said Company any reasonable assistance or advice, and said Leonard D. Baldwin will co-operate in the management of the Company to any reasonable extent desired by Mr. Traylor.
    12. The corporation will not at any time pay any salaries, except to officers actually engaged in the Company’s business.
    13. Samuel W. Traylor may act herein individually or for the benefit of such corporation as he may select, controlled by him, but this contract shall not be otherwise assignable.

      14. This contract is made on the basis that the holders of all Preferred Stock shall waive all dividends that may have accumulated prior to January 1st, 1917.
    In Witness Whereof, the respective parties hereto have hereunto set their hands and seals this 15th day of April, 1916.
    Leonard D. Baldwin (L. S.)
    Arthur J. Baldwin
    by L. D. Baldwin,
    Atty. im, faot. (L. S.)
    Samuel W. Traylor (L. S.)
    Witness: *
    H. G. Parley.
    As to S. W. T.
    G. Walter Smith.
    Attached to this agreement is an assignment as follows:
    In consideration of the sum of One Dollar ($1.00), the receipt whereof is hereby acknowledged, I hereby assign all my right, title and interest in and to the within agreement to the Traylor Engineering & Manufacturing Company. However, should the said Traylor Engineering & Manufacturing Company decide not to exercise its option January 1, 1917, as provided in the within agreement it is understood and agreed that the said Traylor Engineering & Mfg. Company will give me such reasonable notice, not less than thirty (30) days, as may be necessary in order that I may arrange to take over the contract personally, if I so desire.
    June 20, 1916.
    S. W. Traylor
    The Traylor Engineering & Manufacturing Company hereby agrees to the above terms.
    Traylor Engineering & Meg. Company
    By W. J. Roberts Vice-President.

    Attest :
    E. N. Crispen

      Secretary.

    The respondent determined the value of each share of the petitioner’s stock to be the amount obtained by dividing the total consideration involved in this contract by the number of shares, both common and preferred, contracted for. He then determined that the value of the license agreement was the amount obtained by multiplying the number of shares issued pursuant to the resolution of the board of directors above set forth by the value per share thus determined.
    The stock was transferred in accordance with this contract. The checks in payment, for the stock were issued to L. D. and A. J. Baldwin. Executives of the Traylor Engineering & Manufacturing Co. served as officials of the petitioner without compensation. Samuel W. Traylor acted as president of the petitioner at a salary of about $50 or $75 a month. The companies manufacturing cement guns for the petitioner were eliminated as soon as possible after the making of the above contract and the Traylor Engineering & Manufacturing Co. manufactured the cement guns for the petitioner at lower prices than could have obtained from others. Since the management was taken over by the Traylor Engineering & Manufacturing Co., then* has been a noticeable improvement in the financial affairs of the petitioner, and debts which had been accumulated by the petitioner were paid. The Traylor Engineering & Manufacturing Co. assisted the petitioner from time to time with loans.
    In its return of income tax for 1919, the petitioner stated the value of its capital stock, determined as of December 31,1918, as $31,504.42 In its return for 1920 it stated the value of its capital stock, determined as of July 31, 1920, as $100,000.
    The balance sheets of the petitioner as of December 31, of each of the years 1918,1919, and 1920, are as follows:

    The petitioner’s return of income tax for 1916 shows a net income of $201.37. Its return for 1917 shows a deficit from operations of $6,936.43.
    All contracting work under these patents is done by the Cement Gun Contracting Co., which is closely connected with the petitioner. This is a prosperous company, whose income is due entirely to the use of the cement gun and the cement-gun process, the right to which was granted to it by the petitioner.
    The General Cement Products Co. has been dissolved. Papers for voluntary dissolution were filed in the office of Secretary of State of the State of New York, June 29, 1917.
    By 1914, the process and the apparatus covered by these patents had passed the experimental stage. They were fully developed and in use all over the world, and there have been no substantial changes mechanically since that time. They were in successful operation on a commercial scale. The cement gun was on the market on a commercial basis in 1910 or 1911. The United States Government purchased some guns in 1910, 1911, and 1912.
    There have been a few minor changes or additions to the apparatus in the nature of improvements on the apparatus. Patents have been obtained for these improvements — one in 1919, one in 1921, one in 1923, and one in 1925. Royalties are paid, on one of 5 cents each, on another of 50 cents each, and on another of $1 each. These patents relate solely to the machine.
    There have been no improvements on the process.
    Three or four kinds of machines have been developed which can utilize the process known as the cement-gun process.
   OPINION.

Steenhagen :

The petitioner seeks to establish its right to a deduction under section 234 (a) (7), Revenue Act of 1918, for the exhaustion during 1919 and 1920 of the contract rights acquired in 1914 to use and manufacture under the cement-gun apparatus and process patents. To secure such an allowance it is essential, since they were not acquired by gift or prior to March 1, 1913, for petitioner to establish the cost of such rights when acquired, for it is only its investment which may be recovered by taking such allowance out of its annual income. United States v. Ludey, 274 U. S. 295; Union Metal Manufacturing Co., 1 B. T. A. 395. The petitioner claims that such cost is to be taken as $450,000, represented by so much of the par value of the $440,000 of stock and of $30,000 of cash and notes as remained after applying $20,000 to the assets of the New York Cement Gun Co. In other words, it is said in effect that the New York Company’s assets were worth $20,000; that this amount was intended to be, and was, paid in cash and notes; and that the stock was regarded as fully paid at par and was issued, together with $10,000, in exchange for the licenses in question.

The respondent traverses the basis for computing any exhaustion allowance on two grounds — first, that in the, circumstances of the acquisition there was no cost, and, second, if there was in fact a cost, such as the issuance of stock, such cost is not determinable from the evidence. In support of his first ground, respondent refers to the fact, as shown, that petitioner acquired the licenses by the contract of January 1, 1914, directly from the General Cement Products Co. in consideration, not of a capital outlay of cash or an issuance of stock, but of its promise to pay a royalty. In view of this, the later offer of Baldwin and the issuance of stock seem rather incredible. It is not reasonable to suppose that petitioner received the licenses on January 1 to run for the duration of the patents, began actually to operate under such licenses, and thereafter in August received and accepted an offer from Baldwin (its own counsel) to procure the very licenses it already had, together with the assets of the New York Company, for $10,000 in cash, $20,000 in notes, and $440,000 par value of its stock. Somewhere there is an explanation of this apparent inconsistency. But the discrepancy is not mended by the evidence. Both contracts are introduced by petitioner, and both are testified to as effective. For the petitioner to establish the cost claimed it would have to show that the licenses were acquired for the first time as a result of the Baldwin offer and to completely explain away the earlier contract and user. This it has not done; and however strange on its face the situation may appear, there is no room for a judicial surmise in substitution for the evidentiary fact. We find the contract rights or licenses were acquired without capital cost and that there is therefore no basis for an allowance for exhaustion. It may be assumed that the payment of the percentage royalties annually reduces income.

The decision on this point makes it unnecessary to determine the value of the rights in August, 1914, in order to determine the value of the stock alleged to have been issued in payment therefor, and hence unnecessary to consider what weight to give to the opinions of two of petitioner’s witnesses, one of whom, not being with the company until 1916, said the New York Company’s assets were worth, in 1914, “between $10,000 and $20,000,” and the licenses about $450,000, and the other, a promoter of patents, thought they were worth a million. And it is also unnecessary to decide whether the period of exhaustion, if allowable, would be, by reason of the terms of the contract, confined to the duration of the original patents.

The respondent, for 1919, disallowed all exhaustion because not originally claimed. This reason was abandoned before trial, presumably in conformance with Union Metal Manufacturing Co., 1 B. T. A. 395, and the defense placed on the ground above stated. For 1920 an allowance was recognized, but by amended answer this was pleaded as error and respondent moved to increase the deficiency under the authority conferred by section 274 (e), Bevenue Act of 1926. Consistently with our finding that the rights were acquired by tbe contract of January 1, 1914, the motion must be granted and the deficiency increased accordingly.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, under Bule 50.

Milliken did not participate.

       Sec. 234. (a) That in computing the Det income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

      (7) A reasonable allowance for the exhaustion» wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

       Sec. 274. (e) The Board shall have Jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.


author: Aeundell :

text:
    Harry E. Collin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9273.
    Promulgated September 1, 1927.
    Evidence does not show that any part of tbe price paid by petitioner for stock is properly attributable to tbe common stock issued as a bonus with tbe preferred, and held that the Commissioner did not err in assigning tbe entire cost to tbe preferred stock in computing tbe gain on sales of units consisting of one share of preferred and two of common.

      Harry J. Gerrity, Esq., Thomas O. Marlar, Esq., and L. T. Kono-fah, O. P. A., for the petitioner.

      Harold Allen, Esq., for the respondent.
    The Commissioner has determined deficiencies in income taxes for the years 1918 and 1919 in the respective amounts of $41,187.57 and $1,394.58. The petitioner contends that the Commissioner has erred in allocating to the preferred stock the entire price paid for certain preferred and common shares acquired in 1918 and thereafter sold.
    FINDINGS OF FACT.
    On June 25, 1918, the National Dairy Co., an Ohio corporation, entered into a contract with E. Claude Edwards and William Ford for the purchase of certain assets of the Ohio Dairy Co. which had previously been acquired by said Edwards and Ford. The consideration for the sale was the issuance by the National Dairy Co. of 6,500 shares, par value of $100 each, of its preferred stock, and 100,000 shares, par value of $25 each, of its common stock.
    On September 7, 1918, the petitioner acquired all the rights and interest of Edwards and Ford under the contract of June 25, 1918, with the National Dairy Co. The Ohio Commissioner of Sécurities ordered the return to the National Dairy Co. of 30,000 shares of the common stock covered by the above contract, and also directed that any of the unissued stock of the company which'might be issued or sold should be so issued or sold in units of one share of preferred stock and two shares of common stock. On September 10, 1918, the petitioner accepted the conditions prescribed by the Commissioner of Securities and received;

      (1) 6,500 shares oí preferred stock;
    (2) 13,000 shares of common stock, representing a bonus of two shares of common for each of the 6,500 shares of preferred stock; and
    (3) 70,000 shares of common stock.
    The total cost to the petitioner of the above 6,500 shares of preferred and 83,000 shares of common stock was $520,312.58.
    Subsequent to the foregoing transaction the petitioner during the calendar year 1918, sold 5,205 units of stock, consisting of one share of preferred and two shares of common, for which he received $520,-500; and during the calendar year 1919, he sold 295 units of stock, in like manner, for $29,500. The total number of shares thus sold was 5,500 shares of preferred stock and 11,000 shares of common stock, and the petitioner still held 1,000 shares of preferred originally acquired and 72,000 shares of the common stock. In addition to the stock sold by the petitioner on his own behalf, he was required to and did sell for the account of and without cost to the National Dairy Co., 3,500 units of stock during 1918 and 1919.
    In his income-tax return for 1918 the petitioner did not report any profit from the sale of the 5,205 shares of preferred stock in the manner above described, but in his 1919 income-tax return, after his receipts exceeded the total cost as computed by him, the petitioner reported a profit. The respondent regarded the 83,000 shares of common stock as having cost nothing, and held that a taxable proft was realized on the preferred stock sold at the rate of $19.952 for each share sold. The deficiency in tax of $41,187.57 for 1918 as determined by the Commissioner is based upon a profit of $103,850.16 alleged to have been derived from the sale of 5,205 shares of said preferred stock, and the deficiency in tax of $1,394.58 for 1919 is based upon a profit of $5,885.84 alleged to have been realized as a result of the sale of 295 shares of said stock.
    There were no separate sales of preferred stock and/or common stock during the year 1918, but all sales were made in units consisting of one share of preferred and two shares of common; and there were no sales of stock other than the sales made by the petitioner.
   OPINION.

Aeundell :

The facts set forth in the findings were stipulated. The petitioner’s position is that it is impossible to segregate the cost of the preferred and common stock acquired in 1918 and thereafter sold in part and consequently no income is realized until there has been a complete recovery of the cost. It is urged that the Commissioner has failed to follow his own regulations as they appear in article 39 of Regulations 45, the pertinent part of which article reads as follows:

* * * Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between the stock and seeurtities purchased for the purpose of determining the portion of the consideration attributable to each class of stock or. securities and so representing its cost, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.

It is true that the Commissioner has assigned the entire cost to the preferred stock, but we can not. say that his action in so doing is arbitrary. The Ohio Commissioner of Securities had directed that the stock be issued only in units of one share of preferred and two shares of common and had refused to sanction the transaction whereby petitioner was to receive 100,000 shares of common stock, pursuant to the original agreement between the National Dairy Co. on the one hand and Edwards and Ford on the other. As a result of the position taken by the Securities Commissioner of Ohio,.30,00G shares were surrendered to the National Dairy Co. by petitioner and this action was taken by him without in any way altering the price theretofore agreed upon.

That the common stock was offered as a bonus and its value, if any, was highly speculative and entirely prospective is clear from the record. The petitioner affords us no help in determining what value this stock may have, but contents himself with saying that a segregation can not be made. We are not persuaded by his argument. On the facts as they appear in this case we believe that the Commissioner’s segregation of cost was reasonable and it will not be disturbed.

Reviewed by the Board.

Judgment will be entered for the respondent.

Smith did not participate.


author: Smith :

text:
    Gage Hat Works, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gage Brothers & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10736, 16232, 16233.
    Promulgated September 1, 1927.
    The petitioners held to have been affiliated for the period November 1, 1918, to November 30, 1921. . .

      H. A. Mihills, O. P. A., for the petitioners.

      P. J. Bose, Esq., for the respondent.
    These three cases each raise the single issue of the affiliation status of the Gage Hat Works and Gage Brothers & Co., and have been consolidated for disposition. The deficiencies proposed are as follows:

    FINDINGS OF FACT.
    Gage Brothers & Co. was incorporated under the laws of the State of Illinois, March 3, 1887, with a capital stock of $75,000 paid for in cash. Stock dividends were. declared from undivided profits on December 26, 1891, December 12, 1902, and December 27, 1906, in the respective amounts of $45,000, $180,000, and $300,000, a total outstanding stock at October 31, 1919, being 6,000 shares with an aggregate par value of $600,000. The company was engaged in the manufacture and jobbing of ladies’ millinery. It was manufacturing a brand of hats which were advertised and sold as “ Gage Hats.” In 1910 it was found necessary to extend manufacturing facilities and for that purpose the corporation erected a factory building in the outlying district of Chicago.
    It had been the policy of Frederick Bode, who was the president of Gage Brothers & Co., to interest the help in the business and, because the business had been prosperous, there was a demand for the stock. Inasmuch as there was no stock of Gage Brothers & Co. available for the employees it was thought that by organizing the Gage Hat Works as a separate company it would be possible to interest some of the men who were responsible for the growth of the manufacturing end of the business to become stockholders in the new company. Accordingly, the Gage Hat Works was incorporated January 5, 1911, with a capital stock of $150,000 paid for in cash. The stock of this new company was apportioned to the holders of the stock of Gage Brothers & Co. in the same ratio as they held stock in the parent corporation. This was done with the understanding that some of the men who received that stock would transfer it to certain men who were more directly interested in the manufacturing end of the business. To enable the stockholders of Gage Brothers & Co. to pay for the new stock apportioned to them, Gage Brothers & Co. declared a cash dividend of 10 per cent, resulting in a distribution of $120,000. These dividends were applied to the purchase of the new stock and $30,000 additional was contributed by the stockholders. Merchandise and equipment were transferred by Gage Brothers & Co. in accordance with the minutes of a directors’ meeting held December 29,1910, which provided that the original assets appertaining to the business, such as machinery at cost less depreciation up to 1911 and merchandise at net cash value, were to be purchased by the Gage Hat Works for cash. The assets on the opening balance sheet of the Gage Hat Works were set up as follows:
    Factory merchandise_$61,003.80
    Equipment_ 63,885.91
    Automobiles_ 4,179.01
    Restaurant_:_ 2,282.06
    Insurance_ 658. 96
    Cash_ 17,990.26
    Total_ 150,000.00
    The plan of the organization of the Gage Hat Works was devised by Frederick Bode, who dominated the business of both corporations. He was president of both corporations during the taxable years here in question and, together with G. Ebeling, his brother-in-law, represented the principal stockholders in both corporations until 1914, when Ebeling retired from the active management and his stock was purchased by Bode.
    After the organization of the Gage Hat Works, the business was conducted in practically the same manner as before the separate incorporation. The customers of Gage Brothers & Co. knew of no difference in the operation of the business. The Gage Hat Works manufactured what was known as the “ Gage Hat ” for Gage Brothers & Co., exclusively. There were one or two departments of the Gage Hat Works, such as the frame department and the box department, which could manufacture more than the company itself could use and the surplus product was sold to outside interests. The frame is the foundation on which the hat is made. The box is used for shipping purposes. Very few hats were sold directly to the trade by the Gage Hat Works and those included only sales to certain export trade including houses located in New Zealand, Australia, and parts of China. A comparison of sales made by the Gage Hat Works during the heaviest months of business in the years 1919 and 1920 showed that in March, 1919, out of total sales of $224,990.67 the sales to Gage Brothers & Co. amounted to $202,183.48. In March, 1920, sales to Gage Brothers & Co. amounted to $217,798.89 out of a total sales volume for the month of $237,860.56. These two months are typical of the ratio of sales made by the Gage Hat Works to Gage Brothers & Co. and others.
    Frederick Bode directed the policies, both operating and financial, of both companies, decided on the type of merchandise that was to be manufactured, arranged for the purchase of goods and supplies, and the men who were operating the factory known as the Gage Hat Works performed their duties under his direction in the same manner as when the factory was an actual part of Gage Brothers & Co. The selling or commission arrangements between the two companies provided for the retention by the Gage Hat Works of two-thirds of - the selling price effected by Gage Brothers & Co. The remaining one-third of the selling price was the commission of Gage Brothers & Co. in making the sales. In no case did the commission vary from 33y3 per cent of the total sales price. The only profit of the Gage Hat Works represented the difference between the cost of manufacturing the hats and two-thirds of the actual selling price by Gage Brothers & Co.
    The Gage Hat Works had a deficit on October 31, 1918, of $65,160.85; on October 31, 1919, a deficit of $23,981.13; on October 31, 1920, a deficit of $37,052.44. Gage Brothers & Co. had a surplus on November 30, 1918, of $548,123.99; on November 30, 1919, of $833,134.88; on November 30, 1920, of $788,011.22.
    Owing to the methods of operation of the Gage Hat Works it was under the necessity of borrowing from the banks and others. Gage Brothers & Co. loaned it $80,000 at 5 per cent interest. This was less than the rate at which money could be borrowed from the banks and less than Gage Brothers & Co. paid to banks on loans.
    ■When in 1917 the Gage Hat Works was in need of additional working capital Bode prevailed upon his brother-in-law, Ebeling, who had retired from business in 1914, to invest in that corporation’s newly created issue of preferred stock. According to the resolution passed at a meeting of stockholders of the Gage Hat Works on July 31, 1917, it was agreed to issue 1,000 shares of preferred stock of a par value off $100 each. These shares had the same voting rights as the common stock. It was also agreed that this stock was to be purchased by Frederick Bode and George Ebeling for $100,000 in cash. Ebeling’s son, F. O. Ebeling, held a responsible position in Gage Brothers & Co.
    ■ Because of an increasing deficit of the Gage Hat Works it was deemed advisable to rearrange policies and methods of doing business, and the directors of Gage Brothers & Co. decided to take over the Gage Hat Works and organize it as a part of Gage Brothers & Co., as it'was originally organized. A reorganization was effected as of January 7, 1921.
    The issue of preferred stock by Gage Brothers & Co. was authorized and the holders of preferred stock of the Gage Hat Works were permitted to exchange their shares for shares of preferred stock of •Gage Brothers & Co., and holders of common stock of the Gage Hat Works were permitted to exchange their shares for common shares • of Gage Brothers'& Co.

      A comparison of the capital stockholdings in the two corporations, also expressed in percentages as of November 18, 1919 and 1920, discloses the following:

    Julius Cole, now deceased, was an employee who came with Bode when Gage Brothers & Co. was organized. George H. Hovey was secretary and treasurer of Gage Brothers & Co. and had been with that company more than 50 years prior to his death in 1925. G. F. Lathrop and Charles Tubach were employees who were associated with Bode throughout most of the history of Gage Brothers & Co. Both of these employees died prior to 1919 and the stockholdings of the four deceased employees were retained by their respective widows. The stockholdings shown in the name of A. E. Shutz and estate in Gage Brothers & Co. were the property of the mother of A. E. Shutz, who became secretary and treasurer of the Gage Hat Works immediately after its organization. A. E. Shutz handled all of his mother’s affairs while she was living, including the voting of the stock held in the name of the estate. Shutz is a nephew of Frederick Bode. The persons listed in the respective petitions as “ others, not stockholders ” in the Gage Hat Works or Gage Brothers & Co. were employees, mostly salesmen, and some women who were designers for Gage Brothers & Co. and created the Gage styles. No stock of either company has ever been held by any outside interest. I'. O. Eberling, a preferred stockholder, was a son of G. Ebeling and nephew of Frederick Bode.
   OPINION.

Smith :

The petitioners claim to have been affiliated from November 1,1918, to November 30, 1921. The respondent has denied affiliation prior to January 8, 1921. In support of his denial of affiliation the respondent calls attention to the decisions of the Board in Appeal of Watsontown Brick Co., 3 B. T. A. 85; George A. Fink Co. v. Commissioner, 5 B. T. A. 76; and others.

In Appeal of Hagerstown Shoe & Legging Co., 1 B. T. A. 666, we stated:

Are we, in applying this statute, to look at the tabulated statement of stock ownership and, because it there appears that several persons are stockholders of one or the other legal entity and not of both, say that this alone is determinative? We have had occasion in other appeals on other questions to say, and we can not too often repeat, that all facts must be considered. These problems are not flat mathematical or legalistic puzzles; they are vital, and must be examined in three dimensions with the light of reality. No solution otherwise arrived at could long survive.

In the case at bar we have a situation where all of the stock of two corporations is owned by closely related interests. The only important outside interest was a brother-in-law of the principal stockholder of both corporations who had formerly been associated in the • business. The two businesses were operated as an economic unit and the Gage Hat Works was considered a department of the older corporation. This is conclusively proven by the fact that when it developed that Gage Brothers & Co. were receiving all of the profits of the business the stockholders of the Gage Hat Works were permitted to exchange their shares of stock for shares of stock of Gage Brothers & Co. upon precisely the same basis as though Gage Brothers & Co. had been correspondingly profitable with the parent company. In our opinion all of the stock of both corporations was owned or controlled by the same interests.

Reviewed by the Board.

Judgment will Toe entered for the petitioners on 15 days’ notice, under Rule 50.


author: Van Fossan:

text:
    F. Maurice Griesheimer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18709.
    Promulgated September 1, 1927.
    The 25 per cent reduction provided by sections 1200 and 1201 of the Revenue Act of 1924 is applicable to the tax payable in 1924 shown on returns for 1923 and does not apply to the 1924 tax payable in 1925, in the instance of an individual partner whose 1924 taxable income is made up in part of a share of partnership income for a fiscal year beginning in 1923.

      Kendall B. Gastle, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This is an appeal from the determination of a deficiency in income taxes for the year 1924, in the amount of $145.06 and an overassessment for the year 1923 of $33.89. The only issue involved is whether or not the 25 per cent reduction provided by sections 1200 and 1201 of the Revenue Act of 1924 is applicable to such portion of petitioner’s income returned for the calendar year 1924, as came from the proportionate 1923 earnings of a partnership which kept its books on a fiscal year basis. The case is submitted upon agreed facts.
    FINDINGS OF FACT.
    The taxpayer is an individual, residing at Rochester, N. Y., and was such a resident during the entire year 1924. He was a member of the partnership of L. Griesheimer, Steefel & Co., also of Rochester, N. Y.
    The taxpayer’s return for 1924 was filed on the basis of a calendar year. The partnership kept its books on the basis of a fiscal year ended January 31 of each year. The taxpayer, in his return for the calendar year 1924, included therein his share of the partnership profits covering its fiscal year ended January 31, 1924. Eleven-twelfths of these profits were taxed at 1923 income-tax rates and one-twelfth at 1924 rates. The Commissioner computed the tax by applying the 1923 rates to the eleven months’ earnings attributable to 1923 without making an allowance of 25 per cent under sections 1200 and 1201 of the Revenue Act of 1924.
   OPINION.

Van Fossan:

It not appearing that the overassessment arose upon the denial of a claim in abatement of an additional assessment, the Board has no jurisdiction of the appeal as to 1923. See Cornelius Cotton Mills, 4 B. T. A. 255.

The decision of the question as to 1924 involved in this proceeding is governed by the Board’s decisions in Appeal of Charles Colip, 5 B. T. A. 123, and Walter A. De Camp v. Commissioner, 6 B. T. A. 897.

Reviewed by the Board.

Judgment will he entered dismissing as to 1923, and for the respondent as to 1921¡..


author: Lansdon:

text:
    Robert E. Hunter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4123.
    Promulgated September 6, 1927.
    In the absence of proof of cost or of accrued depreciation, claim for loss resulting from demolition and reconstruction of a rental property, is disallowed.

      Hunter Wilson, Esq., for the petitioner.

      W. Frank Gihhs, Esq., for the respondent.
    The Commissioner has asserted a deficiency in income tax for the year 1921, in the amount of $799.26. The only issue is whether the petitioner sustained a loss, resulting from the partial demolition and reconstruction of a certain building in the taxable year.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Memphis, Tenn., and is now and has been for about 20 years engaged in the real estate business. In August, 1921, he purchased for $16,000 cash, a certain property described as 339-343 Beale Avenue, Memphis, Tenn., on which stood an old two-story brick-and-frame building, the first floor of which was used for stores and the upstairs for the renting of rooms. This building was not in good repair when purchased. In the latter part of October, 1921, the structure was condemned by the building inspector of Memphis, and such condemnation was approved by the Board of City Commissioners of the City of Memphis, Tenn., not later than October 26, 1921.
    The petitioner acquired the property in question for rental purposes and contemplated spending from $2,000 to $2,500 in repairing it. An architect in Memphis of 30 years’ experience was called in to examine the building regarding the necessary repairs and to make estimates as to the cost thereof. This architect was called as a witness for the petitioner and testified concerning the condition of the building when he examined it. There was a wooden floor, on wooden |oists about 2 feet from the ground, and those joists had dry-rotted and decayed. The front was of brick built on wooden columns, and they had decayed. The end walls and the side walls were in a bad condition and full of cracks, and the plumbing, wiring, roof, window frames, plastering and painting were in a very bad condition.
    Upon the advice of said architect that it was impossible to make the repairs contemplated by the petitioner, on account of the condition of the building, he was directed by the petitioner to reconstruct said building, which he did by the end of the year 1921 at a cost of $10,500. In the process of reconstruction, approximately 85 per cent of the old building was demolished, some of the walls and cross beams being retained. Some of the old material torn out, such as brick and a few old window frames, was used again in the rebuilding. The building after this reconstruction had the same height, the same dimensions, and the same general area of floor space as before, but the second floor was rearranged so as to include a few more rooms. The fair market value of the reconstructed property was around $20,000 or $21,000 on December 31, 1921.
   OPINION.

Lansdon:

The petitioner claims a deduction of $6,000 from gross income for the taxable year as a loss sustained in the involuntary demolition of a certain building acquired by him in August, 1921. The property, both land and building, was acquired in August, 1921, at the cost of $16,000 cash. There was no testimony as to that portion of the contract price representing the cost of the building alone at the date of acquisition in August, 1921. In view of the evidence adduced at the trial, it would be impossible to classify the reconstruction of the building as ordinary and necessary repairs. In the event that some of the work could be so classified, there has been no evidence introduced as to the extent thereof or the basis of its differentiation from capital expenditures.

The petitioner seems to have based his claim for the deduction of $6,000 from gross income of 1921 on the ground of a loss, or as he terms it, a loss of useful value occasioned by the involuntary demolition of a substantial part of a rental building owned by him. In support of this claim he called to the stand an experienced architect who testified that during the reconstruction of the premises there were destroyed about $6,000 of material and labor entering into the original building, due to changes in local building ordinances and the nonuse of old material. The architect testified that he so advised the petitioner at the time. On cross examination, however, the same witness stated that he did not know when the old building was constructed, or when the labor went into such building, or the cost of such labor.

The basis of the deduction claimed by the petitioner, if allowable, would of necessity be the remaining unextinguished and unrecovered cost to him of the building itself at the time of such demolition. Notwithstanding that the property was acquired in August, 1921, and the rebuilding occurred shortly thereafter, there was no attempt to segregate the purchase price of $16,000 as between the real estate and the building. It is apparent therefore that at least one of the fundamental factors upon which the deductible loss resulting from the demolition of business property must be determined has not been proven. Even if we accept the testimony of the architect as true, such testimony would form no proper basis for the deduction claimed. Under these circumstances, the Board can not do otherwise than approve the determination of the deficiency as found by the respondent.

Judgment will be entered for the respondent.

Considered by SteRnhagen, GeeeN, and Arundell.


author: Arundell:

text:
    Penn-Yale Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8076.
    Promulgated September 6, 1927.
    1. Petitioner denied classification as personal service corporation.
    2. Officers’ salary not authorized, accrued, or paid in taxable years helé not deductible.

      Matthew TV. Wood, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    Deficiencies in income and profits taxes for the years 1920 and 1921 have been determined in the amounts of $2,055.16 and $38.44, respectively. The principal question involved is the right of petitioner to classification as a personal service corporation. In the event claim for personal service is denied, petitioner asks for a deduction for compensation for services rendered by its secretary.
    FINDINGS OF FACT.
    Petitioner was organized under the laws of the State of New York in 1914 with a capital stock of $5,000, divided into 50 shares of $100 each. All of the stock outstanding, except qualifying shares, was owned by Matthew W. Wood, a practicing attorney in New York City, who paid for the stock issued to him by turning over to the corporation certain pieces of real estate.
    Petitioner was organized by Wood for the purpose of buying and selling real estate, borrowing money thereon, collecting rents, etc. Wood was prompted to incorporate bis business in order to limit his liability in case of accident to tenants occupying this real estate, and to meet .the requirements of certain banks and trust companies.
    The corporation had no office and no employees. Wood devoted about one-half of his time to the practice of law and one-half of his time to petitioner during 1920, and less than half his time to the services of petitioner in 1921. He made no charge for his services as active head of the enterprise, which services were of the reasonable value of $5,000 per year. The method usually followed was 'for Wood to buy property with his own money and in his own name and thereafter to transfer the title to petitioner, taking back for his protection a deed to the property, which deed would not be recorded. Loans would be secured from the trust companies and banks in the name of petitioner. The property while in petitioner’s name would be repaired or’ otherwise put into shape for the market and held until it could be sold. In the meantime it was rented. All of the profits were placed in a separate bank account in Wood’s name and petitioner, as such, had no bank account.
   . OPINION.

Arundell:

The Revenue Acts of 1918 and 1921 define a personal service corporation as one “ whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * *

The petitioner was engaged in the buying and selling of real estate, the borrowing of money, the renting of property until a sale could be made, making repairs, alterations, etc. Capital, both invested and borrowed, was used in the business. The fact that Wood, the sole stockholder of the corporation, saw fit to dispense with the usual corporate formality and to treat the business as if it were his own and to appropriate the profits of the corporation without awaiting the formal declaration of a dividend, can not change the situation. In the eyes of the law a corporation is a separate and distinct entity from its stockholders and we can not disregard the fact. E. C. Huffman, 1 B. T. A. 52, and cases there cited. Petitioner is in no different situation from that in which many similar businesses found themselves under the taxing statutes. In order to save themselves from unlimited liability and to reap other advantages which come with corporate organization, many small businesses which would have otherwise operated as sole proprietorships or partnerships took the corporate- form. That there are burdens that come with such i an organization can not change the essential fact that the corporation is a separate entity. Capital was a material income-proclueing factor and it follows that personal service classification must be denied. Kossar & Co., 4 B. T. A. 1164; Seaboard Mills, Inc., 5 B. T. A. 575. While we may concede that Wood was entitled to a salary of $5,000 per annum for his services, still he made no charge to the corporation and no liability existed, and in fact, no salary was paid. There was nothing to deduct under such circumstances. Columbia Textile Co., 2 B. T. A. 472; American Central Fruit Auction Co., 3 B. T. A. 199; Williamson Milling Co., 5 B. T. A. 814.

Judgment will be entered for the resyondent.

Considered by LáNSdoN and SteeNhageN.


author: AbuNdell:

text:
    Ajax Enameling & Foundry Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7343.
    Promulgated September 6, 1927.
    Petitioner held, affiliated with A-B Stove Co.

      F. E. Wurzer, Esq., for' the petitioner.

      J. Harry Byrne, Esq., for the respondent.
   AbuNdell:

This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921 in respective amounts of $9,662.79 and $10,669.96. The only issue is whether the petitioner was affiliated with the A-B Stove Co. On motion of respondent at the hearing, the A-B Stove Co. entered an appearance as a party to the proceeding although it does not appear that any deficiency is proposed against it.

FINDINGS OE FACT.

The petitioner is a Michigan corporation having its principal office at Battle Creek. It was organized in 1913 as the A-B Enameling & Foundry Co. and operated under that name until 1916 when it was changed to the Ajax Enameling & Foundry Co.

The organization of the petitioner was conceived by the A-B Stove Co. and had its inception in a resolution adopted at a meeting of the stockholders of the Stove Company. All of the incorporators of the petitioner were stockholders of the Stove CompanjL

The petitioner was organized for the purpose of making and selling to the A-B Stove Co. castings and enameled parts and during the period of its existence, including the taxable years, it made all the castings and porcelain and enameled parts used in the Stove Company stoves. The petitioner did some work for others than the Stove Company, but by agreement between the petitioner and the Stove Company the work done for the latter received precedence over that of others. Occasionally employees of the Stove Company were loaned to the petitioner and in such cases a charge was made against the petitioner for the services of the employees. The office of the petitioner was in that of the Stove Company, but separate books were kept for each company.

During the taxable years the positions of president, vice president, and secretary-treasurer of both companies were held, respectively, by F. K. Berry, John T. Woodhouse, and P. C. De Yol. The president and secretary received nominal salaries from the petitioner and drew their principal salaries from the Stove Company. Each company had an executive committee composed of the same persons. The directors elected in January of each year were as follows:

F. K. Berry_Both companies.
J. T. Woodhouse-Both companies.
P. O. De Yol_Both companies.
L. C. Wurzer_Both companies.
C. R. Graham_Both companies.
A. J. Reedy-Both companies.
C. E. Bartenbach_Stove Company only.
T. L. Moran_Stove Company only.
H. Matthews_Ajax Company only.
W. L. Smith_Stove Company only in 1920, and both companies in 1921.

Moran and Smith were engaged in the sales department of the Stove Company. Matthews was superintendent of the foundry of the Ajax Company.

The stockholders owning stock in both companies, the amount and percentage of the stock held were as follows:

The remaining 35 shares of stock of the Ajax Company were held by two of its employees. Of the remaining shares of the Stove Company the employees owned 395, or 7.1 per cent and some was owned by relatives of the principal stockholders.

The stockholders’ and directors’ meetings of both companies were held in the offices of the Stove Company. At the annual stockholders’ meetings in January of each year some of the stockholders were represented by proxies. There was never any dissenting vote cast by the minority stockholders.

In January, 1922, the petitioner was dissolved and its assets were taken over by the A-B Stove Co.

Petitioner and the A-B Stove Co. were affiliated within the meaning of the Revenue Acts of 1918 and 1921 during the years 1920 and 1921.

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

Considered by Steenhagen and GeeeN.


author: MillikeN :

text:
    Joseph E. Barlow, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7622.
    Promulgated September 6, 1927.
    Evidence held insufficient to show that petitioner is entitled to the deduction claimed, for the year 1019.

      Robert R. Faulkner, Esq., for the petitioner.

      P. L. Peyton, Esq., for the respondent.
    This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1919, amounting to $3,082.23.
    Petitioner, while not claiming same on his return filed for the calendar year 1919, avers he is entitled to a deduction of approximately $18,000, resulting from the destruction by flood of certain growing crops.
    FINDINGS OE FACT.
    Petitioner is a citizen of the United States, residing in Havana, Cuba. In June, 1918, he purchased a farm of approximately 1,200 acres, located about 5 miles northwest of Driscoll, Nueces County, Tex. The farm was originally acquired with the intention of making a gift of the same to R. D. Barlow, brother of the petitioner. The farm was operated in 1919 by R. D. Barlow and his three sons. There was an oral agreement between petitioner and his brother whereby the former was to receive as rent a one-third share of the grain and a one-fourth share of the cotton raised on the farm. E. D. Barlow was to be responsible for all expenses incident to the raising and gathering of the crops. Petitioner advanced to his brother sums of money in 1919 with which to make the crops and same was to be repaid by the latter out of the crops to be grown. Approximately 1,000 acres were under cultivation in the year 1919 — 700 in cotton and 300 in grain. E. D. Barlow maintained a record of sums advanced to him by petitioner in 1919 but such record has been destroyed. E. D. Barlow, in the year 1919, expended approximately $6,000 in building houses, boring wells, installing a water supply and placing improvements on the farm. He also borrowed from sources other than petitioner approximately $17,000 in the year 1919, which sum was used by him to prepare the farm land for cultivation purposes. Petitioner sold the farm in 1920.
    On September 14, 1919, a storm or flood occurred in the vicinity of the farm which resulted in the complete destruction of all growing crops. Petitioner had no insurance on the growing crops.
    At the time of the flood the cotton was ready to be picked and the grain would soon be ready to harvest. Eemittances were received by a Texas- Bank in 1919, from petitioner, to be credited to the drawing account of E. D. Barlow, as follows: January 31, 1919, $3,000; May 19,1919, $4,000; December 13,1919, $1,995; December 31,1919, $5,000.
   OPINION.

MillikeN :

Counsel for petitioner claims the right to a deduction of Eighteen Odd Thousand Dollars ” under the provisions of section 214 (a), (1), (4), (5), (6), or (7) of the Eevenue Act of 1918, but is uncertain as to just which of these provisions of the statute is applicable. We are unable, from the record, to determine the basis upon which the deduction claimed of “ Eighteen Odd Thousand Dollars ” is computed.

During the year 1919, the farm was operated by the brother of the petitioner under an oral agreement set forth in the findings of fact. We are unable to determine the sums advanced by petitioner to his brother for that purpose. We are also unable to determine if the debt due from the brother was to be canceled in event of crop failure. We are uninformed of the ability of the brother to pay the debt in the event of a crop failure. The brother of petitioner borrowed large sums of money which he used for the purpose of preparing the land for cultivation. If there was a debt due petitioner by reason of sums advanced, we are uninformed whether the sums expended by the brother would entitle him to a set-off. Petitioner seeks an allowance for the growing crops which were destroyed and submits as proof of the amounts to which he is entitled, pamphlets published by the Department of Agriculture as to the general costs of production of cotton and the general estimated annual weighted prices received by producers in general for the year 1919. The estimates standing alone do not prove the cost of production to petitioner in the State of Texas, or the price of cotton in the fields in Texas unpicked at the time of the flood.

J udgment will be entered for the respondent.

Considered by Marquette, Phillips, and VaN FossaN.