text:
    Guelph Hotel Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1064.
    Promulgated August 8, 1927.
    Where pursuant to the terms of a lease it is canceled prior to the expiration of the term thereof and the lessee is paid an amount as a rebate, the unamortized cost of the lease less the amount received as a rebate should be spread over the unexpired term of the lease from the beginning of the taxable year to the date of cancellation and the portion of such amortized cost falling in the taxable year should be deducted from gross income.

      George H. Graven, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.

      This is a proceeding for the redetermination of a deficiency in income tax for 1919 of $1,739.92. The petitioner also alleges error on the part of the respondent in making a determination of an overassessment for the year 1920; but since no deficiency has been found for any year except 1919 that is the only year properly before the Board for consideration. The question in issue is the proper method to be used in determining a deduction for the unamortized cost of a lease where the lease, pursuant to its terms, was canceled prior to the expiration of the term thereof and the lessee was paid a rebate in accordance with the terms of the lease.
    FINDINGS OF FACT.
    On or about February 1, 1916, the petitioner acquired a five-year lease on a combination apartment house and hotel in New York City, for which it paid $15,967.90. The lease provided that it could be terminated after the expiration of 3 years from its date by the lessor upon his giving 90 days’ notice to the lessee and by paying a rebate of $4,000. The lessor gave notice to the petitioner in November, 1919, to vacate the premises at the expiration of 90 days. The premises were vacated between February 1 and February 10,1920, and the petitioner received the sum of $4,000 in 1920.
    ' The unamortized cost of the lease on January 1,1919, was $6,385.16.
    In its income-tax return for 1919 petitioner stated that depreciation had been claimed in prior income-tax returns in respect of the lease in the amount of $8,158.80, and claimed the deduction from gross income of $7,804.10, the difference between the exhaustion previously taken and the cost of the lease. The respondent has redetermined the deficiency for 1919 in the following manner:
    Amortization of leasehold claimed-$7, 804.10
    Amortized portion of lease_$6,385.16
    Less amount received in cancellation_ 4,000. 00
    Amount to he amortized over three months_ 2, 385.16
    Two months amortization allowed for 1919_ 1, 590.10
    Amortization disallowed_ 6,214.00
   OPINION.

Smith:

The issue presented by this proceeding is the proper method to be used in determining the deduction for loss or for exhaustion in 1919 of the leasehold here in question. The petitioner deducted from gross income in its income-tax return for that year $7,804.10 for exhaustion of its leasehold. At the hearing it was stipulated by the parties to the proceeding that the unamortized cost of the leasehold on January 1, 1919, was $6,385.16 and not $7,804.10, the amount claimed in the return. The petitioner contends that it is entitled to deduct from gross income of 19X9 the entire unamortized cost of the lease as of January 1, 1919, and that it is obligated to return and in fact did return as income for 1920 the $4,000 received by it in 1920; that the operation of the leased premises from the date of the receipt of the notice from the lessor to vacate was entirely without profit and that therefore the entire loss from the cancellation all fell within the year 1919.

In our opinion there is no merit in the contention of the petitioner that it received $4,000 income in 1920 as a result of the rebate received. The respondent correctly offset the unamortized cost of the lease on January 1, 1919, namely, $6,385.16, by the amount of $4,000, which, as a result of the notice given to the petitioner in November, 1919, was to be paid in 1920, when the premises were vacated. The unamortized cost of the lease from January 1, 1919, to the expiration of the 90-day period, assumed to be January 31, 1920, in the absence of evidence as to the exact date, was $2,385.16. The taxing statute permits the deduction of a reasonable amount for exhaustion of property, and we think that the $2,385.16 should be spread ratably over the 13-month period, January 1, 1919, to January 31, 1920, and that the exhaustion allocable to the year 1919 was twelve-thirteenths thereof, or $2,201.68.

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

Considered by Littleton and Love.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    Grafton Stave & Heading Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12879.
    Promulgated Aug. 8, 1927.
    Evidence not sufficient to establish claim for deduction from gross income on account of dismantling of buildings and equipment.

      John L. Bledsoe, Esq., for the petitioner.

      W. E. Lawder, Esq., for the respondent.
    The respondent has determined a deficiency in income and profits taxes for the year 1920 in the amount of $1,040.22, as the result of (1) reducing the petitioner’s opening inventory for 1920 by the sum of $9,355.21, and (2) disallowing a claimed reduction in the amount of $8,435.14 taken by the petitioner as obsolescence on buildings and equipment dismantled in 1920. The respondent concedes that his reduction of the petitioner’s opening inventory for 1920 by the sum of $9,355.21 was improper, leaving as the.sole issue in dispute, the claim for so-called obsolescence above mentioned.
    BINDINGS OP PACT.
    The petitioner is an Illinois corporation tvhich was organized in 1903 and surrendered its charter in 1925.
    Prior to 1912 the stave mill and the heading mill of the petitioner were separate plants at different locations. In the fall of 1911, petitioner’s stave mill was constructed at Pocahontas, Ark. In January, 1912, a fire occurred at its heading plant, which was located at Bigger, Ark. It was then decided to consolidate the two mills in one location at Pocahontas, Ark. The heading mill was constructed at Pocahontas in 1912. The stave and heading departments of the petitioner thereby became physically joined in one plant location. The new heading machinery purchased in 1912 was entered on the petitioner’s books at its cost price plus freight and installation. On December 31, 1915, the book accounts of the stave mill and the heading mill were consolidated. At that time the petitioner’s books showed stave mill construction at $8,543.66; heading •mill construction at $17,224.31; and dry kiln, tracks and other items all belonging to the heading department, at $79,115.
    After December 31, 1915, the petitioner’s books show certain additions and improvements to and in the equipment of the plant at costs as set forth below:
    1916
    Lighting plant- $281. 96
    Saw joinder- 244. 36
    Railroad switch- 268. 08
    Tools for plant- 199.18
    1917
    Storage- 53. 91
    Hardware- 10. 62
    Track rails- 132. 30
    Unknown item- 179. 56
    Machinery addition- 100. 00
    Blow pipe fittings- 24. 73
    Exhaust wheel- 72.00
    Nails_ 12. 00
    Water tank- 4.92
    Fire wall construction_j._1,917. 43
    1918
    Kiln track- 45. 87
    Nails used in construction- 3. 90
    Total- 3,550.82

      Among the assets used exclusively in the heading mill were a concrete dry kiln that cost between $5,000 and $6,000, a shed that cost around $2,500, a trestle track (not including rails) that cost not less than $450, and a Corliss engine that cost $1,500. The Corliss engine was purchased by the petitioner in 1911, and the concrete dry kiln, shed and trestle track, were constructed by the petitioner in 1912.
    During the five-year period ending December 31, 1919, the petitioner wrote off as depreciation 40 per cent of the book value of buildings and equipment in the heading department. At the close of 1920, petitioner’s mill, construction and machinery account on .the books stood at a total of $24,280,84.
    Timber of the size and quality used in the manufacture of headings, and available to the petitioner, was exhausted some time in the year 1919. The heading mill was closed down in November, 1919, and was dismantled throughout the year 1920. In dismantling, the petitioner took out all of the heading machinery and stored it in another building, and tore down the mill cover that had shedded this machinery. The machinery so dismantled consisted of up-to-date machines which were sold in 1920 and subsequent years. Substantially all of these machines were purchased in or around the year 1912 and the petitioner sold several of them in 1920 and years subsequent thereto at original cost. The Corliss engine was covered over and has not been used or sold since November, 1919.
   OPINION.

Lansdon :

At the hearing of this proceeding, counsel for the respondent admitted that the petitioner’s opening inventory for 1920 had been improperly reduced by the amount of $9,355.21. As this point is conceded by the respondent, it requires no further consideration.

The evidence adduced in support of the petitioner’s claim for a deduction from gross income in 1920 in the amount of $8,435.14, is indefinite and inadequate. The manufacture of headings was discontinued in November, 1919. Some of the machinery was sold during the taxable year and later years for amounts equal to its original cost to the petitioner. The Corliss engine was protected from the weather and remained in the possession of the petitioner. No evidence was introduced as to the depreciated or unrecovered cost on December 31,1920, of the dry kiln, shed, trestle track, Corliss engine, or any other assets forming the basis of the claimed deduction. The schedule of costs of additions and improvements set forth in the findings of fact obviously applies to the entire plant, including the stave mill as well as the heading mill. From the record, we are unable to ascertain how the petitioner arrived at its claimed deduction for so-called obsolescence in the amount of $8,435.14. We are of the opinion that the petitioner has not established his claim to a deduction from gross income in 1920 because of the dismantling of its heading mill and equipment. See Marigold Garden Co., 6 B. T. A. 368.

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

Considered by Stiornhagen, Green, and Arundell.


author: Love:

text:
    Philip Dietz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5803.
    Promulgated August 8, 1927.
    1. On the evidence, held, that certain expenditures made prior to April 1, 1916, alleged to have been for “ buildings ” and “ equipment,” the nature of which is not disclosed, can not be classified as capital expenditures, and depreciation thereon is not allowable.
    2. In the absence of evidence as to useful life of a well, depreciation can not be allowed.
    3. Depreciation on horses and wagons which is reflected through inventory can not be allowed as a separate deduction.

      R. M. O’Hara, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies asserted by the Commissioner for the calendar years 1914, 1918, 1919, and 1920, in the amounts of $4,419.11, $8,204.49, $2,990.49, and $3,256.19, respectively. The petitioner filed a return for the fiscal year ended March 31, 1914, and also a return for the period from April 1, 1914, to December 31, 1914. The income determined for the fiscal year was prorated on the basis of sales to the period beginning April 1, 1914, and ending December 31, 1914, giving the income for the calendar year 1914. There are involved in this proceeding only such parts of the deficiencies as result from certain alleged errors on the part of the Commissioner. The errors alleged are as follows:
    1. The Commissioner has, in arriving at the allocable income for the three-month period from January i, 1914, to March 31, 1914, and for each of the succeeding calendar years, disallowed as a capital expenditure for the purpose of depreciation, the amount of $6,481.56.
    2. The Commissioner has failed to allow depreciation on horses and wagons used by the petitioner in his business.
    FINDINGS OF FACT.
    The petitioner is an individual engaged at Brooklyn, N. Y., as an ice and coal merchant and manufacturer of ice, and was so engaged during the years 1916 to 1920, inclusive.

      The petitioner kept a separate set of books for the coal business and for the ice business. The petitioner’s books show that during the period from July 19, 1915, to March 31, 1916, he expended the amount of $6,432.33 on the following items:
    Buildings_$1, 067. 27 '
    Equipment_:_ 3,390.89
    Well construction_ 1, 973. 70
    The item for well construction was for a new well used in the ice business. The well, about 60 feet deep, was walled with brick, and a tube equipped with a strainer extended into the ground from the bottom thereof. No part of the brick wall or the tube has been replaced. The water capacity of the well has diminished in some degree since it was sunk and it has been in operation for about ten years.
    The petitioner carried on his books for each of the years in question, an inventory of horses and wagons. The loss or gain, if any, was ascertained by evaluating the horses and wagons on hand at the opening of the year, adding thereto purchases made during the year and then subtracting therefrom the closing evaluation of horses and wagons. In each of the years in question a loss was shown on the inventory and was deducted from gross income by the petitioner. For the years 1917 and 1918, depreciation on horses and wagons was reflected in the losses shown on the inventory and deducted from gross income and allowed by the Commissioner. For the years 1919 and 1920, the inventory was made up in the same manner as for 1917 and 1918.
    The petitioner on his income-tax returns for the years 1917, 1918, 1919, and 1920, in addition to the losses on account of horses and wagons taken as a deduction from gross income for those years, elaimed depreciation on this account.
    Upon audit of the petitioner’s income-tax returns, the Commissioner disallowed as a deduction from gross income as a business expense for the year 1917, the amount of $6,432.83 on the ground that such expenses were applicable to the period prior to April 1, 1916. For each of the years 1917, 1918, 1919, and 1920 the Commissioner disallowed depreciation claimed on horses and wagons.
   OPINION.

Love:

The petitioner now contends that the amount of $6,432.33 disallowed as a deduction for expenses during the year 1917, constitutes a capital expenditure prior to that period and should be included in the petitioner’s assets for the purpose of depreciation for all of the years involved herein.

At the hearing conducted in this appeal no evidence whatever was adduced to show the nature of the expenditure made with respect to and classified on petitioner’s books as buildings and equipment. Simply because of this classification on the books we can not assume that the expenditures were made for capital assets. For all we know, the equipment may have had a life of only one year and the expenditure classified as “ building ” may have been for repairs not of a capital nature. These expenditures, therefore, under the showing made, are not properly allocable to capital assets.

The expenditure of $1,973.70 for well construction, in our opinion, was for a capital asset. However, the evidence with respect to the depreciation of this asset is very unsatisfactory. It was shown that the well had been in operation for about ten years and during that time no further expenditures had been made on it. It was further shown that its water capacity had diminished in some degree since it was sunk but that it is still in use. Upon this showing we are unable to fix the rate of depreciation thereon, for like Jacob’s well of old, it may last indefinitely. This asset may, therefore, be one which, by its very nature, is not depreciable.

With respect to the second error alleged, the petitioner admitted and the evidence shows that the depreciation claimed on horses and wagons was reflected for the years 1917 and 1918, in the losses shown on the inventory of that account, which losses were allowed by the Commissioner as a deduction from gross income for those years. For the years 1919 and 1920, losses shown on the inventory of horses and wagons were also deducted from gross income for those years and the deduction allowed by the Commissioner. The petitioner • was unable to state whether depreciation on horses and wagons was for 1919 and 1920, as it was in the former years, reflected in the losses shown in the inventory of horses and wagons. In the absence of affirmative evidence to the contrary, we must approve the Commissioner’s determination in disallowing depreciation thereon.

Judgment will be entered for the respondent.

Considered by Smith and LittletoN.


author: Aeundell :

text:
    Estate of Charlotte C. Lozier, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7513.
    Promulgated August 8, 1927.
    Grift of property by decedent to her children within two years of her death, helé, on the evidence, not made in contemplation of death.

      W. O. Magathan, Esq., and Louis E. Guillow, Esq., for the petitioner.

      J. F. Greaney, Esq., for the respondent.

      The Commissioner has determined a deficiency in estate tax of $3,111-37. The petitioner assigns as error the action of the Commissioner in including in the gross estate certain farms of decedent on the ground that they were transferred in contemplation of death.
    FINDINGS OF FACT.
    The decedent died intestate on March 12, 1922, at the age of eighty-one or eighty-two years, at the home of her daughter, Estelle L. Baker in Newton, Mass.
    In early life she moved to Indiana with her parents, was married in that State and continued to live in the town of Aurora, Ind., until 1916. Throughout her life she lived in a quite, unostentatious manner, the simple life of a country town. She always experienced good health and came from a long-lived stock, some of her family having lived to the age of ninety years or over. In 1916 her home in Aurora, which was located on the banks of the Ohio River, suffered from the disastrous flood of that year and water reached to the second floor of her home. Thereafter, during the balance of her life, she spent her time between the homes of her two daughters. She lived with her daughter, Estelle L. Baker, from the fall of 1918 until well into the summer of 1919, and again from July, 1921, to the date of her death. The balance of the time from 1916 was spent with her daughter, Perle L. Smith. Until December 15, 1921, decedent’s general health continued excellent and she required no medical attention. While in Newton in 1921 she was in the habit of spending a good deal of time outdoors. She attended church almost every Sunday and assisted in the housework at her daughter’s home. During this period she talked of buying a home in Newton with the idea of bringing her furniture and belongings from Aurora to that place. On December 15, 1921, she suffered a slight or partial stroke of paralysis which affected her speech and power of movement for a few days. She was attended by her son-in-law, John Walter Baker, a retired Navy surgeon, and by a Dr. Stubbs. They found her pulse strong and her condition generally good for a woman of her years. Within a day or two after her illness she was up and dressed, though she was never thereafter as active as she had been. It was not until in January, 1922, that it was deemed advisable to employ a nurse, at which time a companion nurse was engaged. After her illness decedent went on with her affairs substantially as before the attack, her mental condition remaining the same, and she was in good spirits until her death. She was never advised by the attending physician of the nature of her illness.

      Decedent in the summer and fall of 1921 owned over 2,000 acres of farm land in South Dakota, over 600 acres in Minnesota, a farm of over 800 acres in northern Iowa and 240 acres additional in central Iowa, besides her homestead in Indiana. She also owned $60,000 in Liberty bonds and other securities, stocks and money in the bank, amounting to $30,000 or $40,000.
    In 1916 she advised her two daughters of her intention to give ' them one or more of her farms and went to see a lawyer with a view to the drafting and execution of the necessary papers to put the matter into effect. She was strongly urged by the lawj'er not to do so and was warned of the evil consequences often attendant upon parents giving their property to their children. Decedent mentioned her intention of making a gift of the farms in 1918 and again in 1919, but let the matter drift without taking any definite action. In 1920 one of her daughters, Mrs. Smith, was in financial straits in connection with the estate of her deceased husband and decedent was concerned lest if she gave the lands to her daughters, the creditors of Mrs. Smith might get possession of the latter’s share. In 1921, upon her return to Newton, she stated that the farms were a source of trouble to her, and moreover she did not need the income from them as much as her children did, and expressed her intention of at once making a deed of gift to her daughters. In November, 1921, she sent word to Louis E. Guillow, an attorney of Boston who had theretofore performed some legal services for her, to come to see her relative to preparing the necessary deeds. Thereafter, and within the first two or three days of December, 1921. Guillow called on decedent and discussed with her the matter of making the gifts, but did not immediately draw the instruments because the old deeds containing the descriptions of the property could not be located. On this occasion decedent stated to Guillow th^t she wanted the overdue rent from the farms to come to her in order that she might use that money to pay the taxes to become due on the farms in January, 1922. She was assured that the transfer would not affect her right to receive the rents then due and payable. Some time after this conversation and prior to decedent’s illness, the old deeds were found and turned over to Guillow, who arranged at the time that the deeds of gift would be prepared and brought back for execution on December 17, 1921. On the latter date decedent executed the warranty deeds conveying the farms to her daughters, Estelle L. Baker and Perle L. Smith, which deeds contained no condition or reservation of interest in the grantor. Immediately upon the execution of the deeds decedent sent for her daughter, Estelle L. Baker, and delivered the deeds to her with the remark, “ This is a Christmas present for you and Perle.” Decedent was in the habit of making Christmas gifts to her children and one Christmas had given each an automobile. During the last two years of her life she contributed from seven to ten dollars a week for her maintenance and laundry while in the homes of her daughters.
   OPINION.

Aeundell :

Section 402(c) of the Eevenue Act of 1921 provides that there shall be included in the gross estate of a decedent the value of any property of which the decedent has made a gift in contemplation of death or a transfer intended to take effect in possession or enjoyment at or after death, and further provides that a transfer within two years of death of a material part of a decedent’s property shall, unless shown to the contrary, be deemed to have been made in contemplation of death. The gifts here in question were made within two years of death, and under the presumption of law created by the statute must be deemed to have been made in contemplation of death, unless the evidence produced serves to overcome that presumption.

In the well-considered opinion of Rea v. Heiner, 6 Fed. (2d) 389, the court, after reviewing a number of State and Federal authorities, states:

There is a common agreement that the words “ contemplation of death ” mean not the general knowledge of all men that they must die; that it must be a present apprehension, from some existing bodily or mental condition or impending peril, creating a reasonable fear that death is near at hand; and that, so arising, it must be the direct and animating cause, and the only cause, of the transfer. If this apprehension, so arising, is absent, there is not that contemplation of death intended by the statute, especially when another adequate motive actuating the gift is shown.

This statement of law is abundantly supported by the authorities. Shwab v. Doyle, 269 Fed. 321; Spreckels v. State, 30 Cal. App. 363; 158 Pac. 549; Vaughan v. Riordan, 280 Fed. 742; Meyer v. United States, 60 Ct. Cls. 474. Also see Appeal of Philip T. Starch, 3 B. T. A. 514; Appeal of Spencer Borden, Jr., 6 B. T. A. 255.

Appfying the law as thus expressed to the facts as set forth in the findings, we have no hesitation in reaching the conclusion that the gifts were not induced by a present apprehension of death and were not made in contemplation of death as that expression had been interpreted.

Decedent had in mind making the gifts to her daughters for a number of years and was dissuaded from doing so first, in 1916, by the sage advice of her counsel, and again by fear that the creditors of one of her daughters might deprive her of the benefits she wanted to confer. At the time she definitely determined to delay no longer, in 1921, she was in excellent health and had practically never known a sick clay in her life. It is true she had passed the allotted three score years and ten, but she was from a long-lived family and was optimistic that she had manjr years yet to live. She retained to herself an estate more than sufficient to give her all of the comforts to which she was accustomed and by her act was both able to help her children, who needed assistance, and to relieve herself of the management of farms located at distant places which had been only a trouble and bother to her. While it is a fact that she suffered a slight stroke of paralysis two days before the execution of the transfers, the evidence is uncontroverted that while yet in unimpaired health the plans and details had been determined upon and the instruments themselves were in process of preparation. Indeed on the date of execution of the transfers, two days after her spell, she had sufficiently recovered to be up and dressed.

Respondent has suggested that the transfers were made to take effect in possession and enjoyment at or after death because the evidence disclosed that decedent retained to herself the rents then due for the farms. This contention is without merit. The instruments of conveyance were absolute.

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

Considered by Stbrnhagen and Geioen.


author: Littleton:

text:
    Joseph Edward Phillips, Executor of the Last Will and Testament of John D. Phillips, Deceased; Mary Virgil Johnston, Executrix of the Last Will and Testament of Joseph W. Phillips, Deceased; George E. Phillips; and Katherine P. Keenan, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6352.
    Promulgated August 9, 1927.
    The transfer of real estate, under circumstances disclosed by the evidence, two years, ten months and eight days prior to the donor’s death, hold not to have been made in contemplation of death.

      Jesse Black, Jr., Esq., for the petitioners.

      Henry Ravenel, Esq., for the respondent.
    A return was made for the estate of Joseph N. Phillips, who died July 8, 1922, and the tax of $350.0(5 shown thereon was paid. The Commissioner has determined a deficiency in estate tax on the transfer of the net estate of Joseph N. Phillips of $2,076.56. The issue is whether or not deeds made by Joseph N. Phillips, August 30, 1919, conveying certain real estate to his children, were made in contemplation of death. The Commissioner contends that the transfer of the real estate is taxable, within the meaning of section 402 (c) of the Revenue Act of 1921. Petitioners insist such transfers were not made in contemplation of death, and no estate tax is due thereon.
    FINDINGS OF FACT.
    Joseph Edward Phillips, executor of the last will and testament of his father, John E>. Phillips, deceased, and George E. Phillips are both residents of Tazewell County, Illinois. Mary Virgil Johnston, executrix of the last will and testament of Joseph W. Phillips, deceased, formerly her husband, is a resident of Peoria County, Illinois.
    Joseph N. Phillips died intestate on July 8, 1922, a resident of Tazewell County, Illinois, at which time he was a few months over eighty years of age. His wife, Emma Phillips, predeceased him, dying intestate, a resident of the same county on July 26, 1919. She owed no debts and no administration was had on her estate. She left surviving her, as her sole heirs at law, her-husband, Joseph N. Phillips, and her children, John D., George E., and Joseph W. Phillips, and Katherine P. Keenan, all adults.
    Mrs. Phillips, at the time of her death, owned a farm of several hundred acres in Tazewell County, Illinois, which was occupied by her son, George E. Phillips, as tenant. ■ At the time of her death and of the death of J oseph N. Phillips, the latter was the owner of about 775 acres of land in Tazewell County, Illinois. This land, with the exception of a small part of the homestead tract which was then farmed by Joseph N. Phillips on his own account, was occupied by their sons J ohn D. Phillips and J oseph W. Phillips, as tenants. The only heirs at law of Joseph N. Phillips at the time of his death were his children, the before-mentioned children of his wife, Emma Phillips.
    Some years prior to the death of Emma Phillips, her husband, Joseph N. Phillips, had often expressed his intention to his children of giving his land to them. He and his wife agreed that their farms should be given to their children. Neither intended to make any will.
    A short time after the death of Mrs. Phillips, Joseph N. Phillips had a conference with his children and again expressed his intention of deeding his land to them, including his interest in the land that belonged to his deceased wife. The matter was discussed with the understanding that he would retain an annuity of $4,000 for his life, to be paid to him by his children, if decedent should become in need of same, and he desired them to divide the land among themselves as he suggested and as they wished.

      On August SO, 1919, at the Green Valley Bank, in the village of Green Valley, Ill., Joseph N. Phillips executed, acknowledged and delivered to his children a warranty deed, conveying all of his own land and also executed, acknowledged and delivered a quitclaim deed to them, conveying all his interest in the land of his deceased wife, retaining a lien in the warranty deed for the annuity or annual payment of $4,000 to him, during his life. On that date, Joseph N. Phillips was seventy-seven years of age.
    Afterwards by deeds dated August 30, 1919, and acknowledged January 1, 1920, to carry out the desires of his children, himself and his wife, the children exchanged deeds between themselves, making such conveyances to each other as would give each child the entire fee title to the land their father and mother desired them to have and which was acceptable to each. These conveyances included the transfer of the farm owned by their mother.
    Since such conveyances, each of said children or their legal representatives have been in absolute possession, ownership and control of the property to which they so acquired title.
    Joseph N. Phillips was a successful business man, and for many years was the president, a stockholder, and a director of the Green Valley Bank, and continued as such until the time of his death. The decedent was active in business affairs until the date of his death. It was decedent’s custom to drive unaccompanied by anyone from his home, a distance of three miles, to the village of Green Valley. He frequently drove several miles to visit with his children. Prior to the date of the conveyances mentioned, the decedent actively superintended the operation of his farms, and personally operated a portion of the farm. For several years prior to his death he received occasional medical attention from his family physician for minor and inconsequential ailments of such a temporary character as not to cause him to feel any concern about his health. At the time of making and delivering the deeds of conveyance to his children, he was in his usual good health, mentally competent to transact business, and there was nothing in his conduct or conversation indicating that he was making the transfers for any reason other than to carry out a long expressed intention to divide his property among his children. He had often commented upon the fact that an old friend of his, Edward Bailey, had divided his property among his children during his lifetime, that this was the proper thing to do, and that he intended to do likewise. At the time of the execution and delivery of the deeds to his-children on August 30, 1919, Joseph N. Phillips did not contemplate death within the reasonably near future and the condition of his health gave him no cause to do so.
    Before and after his wife’s death, Joseph N. Phillips was competent to, and did, transact business, and up to within a few months of his death he was active physically for one of his age. He was in a bedfast condition prior to his death for only a few weeks. Previous to that time he was going around the houses and barns on his farm as usual, having relieved himself of actual management of farm matters. Hypostatic pneumonia was the immediate cause of the decedent’s death.
    The State of Illinois attempted to levy a succession or inheritance tax on the transfer of the estate of Joseph N. Phillips, the contention of the State being that the deeds conveying the lands here in question to his children were made in contemplation of death. On January 7, 1927, the County Court of Tazewell County, Illinois, rendered a final decree from which no appeal was taken, in which decree the court upon substantially the same evidence as has been submitted in this proceeding made a finding that said deeds were not made in contemplation of death, and that there was no inheritance tax due the State of Illinois from said estate.
   OPINION.

Littleton:

The question presented is whether the conveyances made by the decedent to his children on August 30, 1919, were made in contemplation of death, within the meaning of section 402 (c) of the Revenue Act of 1921, which provides that the value of the gross estate shall be determined by including the value at the time of the death of all property of the decedent to the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of death, except in the case of a bona fide sale for a fair consideration in money or money’s worth.

No general rule can be formulated which will fit all cases, but each ease must be examined and determined on its own facts and circumstances in the light of the experience which the courts have gained in dealing with such matters. For this purpose the donor’s age, physical condition, and any action contemplated to be taken by him with respect to his health, as well as the length of time he survives the making of the transfers, are all proper matters to be considered in determining whether or not the act was done in contemplation of death. (People v. Danks, 289 Ill. 535; 124 N. E. 627.)

The evidence shows that the decedent was vigorous and active for one of his age; that he had no ailments prior to making the conveyances to his children, nor afterwards, until within a few months of his death, that interfered with his usual and customary activities.

Prior to making the conveyances and afterwards, up to his last illness, his mind was clear and he was competent to transact and did transact business. The doctor, the only one who — so far as the evidence shows — ever prescribed or treated him for any ailment, testified that at the date the deeds were executed there was nothing in the decedent’s physical condition that would lead him to believe he was in danger of a sudden or early death, and that he considered the decedent a vigorous man for his age. The doctor further testified he did not see decedent for possibly ten days prior to his. death and gives it as his opinion that death was due to hypostatic pneumonia, saying: “ Because two or three months prior to his death I observed an organic heart lesion, the circulation became poor and that is what we would expect, and that is what usually happens as a terminate and immediate cause of death.” The doctor, however, explains that in making out a certificate of death as a matter of form, he gave as the cause of death “ senile cerebral atrophy,” knowing that the decedent had had that for some years and he wished to state something that the state board of health would accept as a cause of death. He then further states that “The cerebral senile atrophy is a slow progressive affair and is not alarming as to any man’s death, and the fact that the man would develop a heart lesion and then had the other would not contribute to the possibility of an early death particularly.” The physician further testified that if a man lives temperately as the decedent did and his general condition of health otherwise is good, as was true in this case, heart lesion is not likely to result fatally; that the habits of life of decedent were just what a physician would want and expect so as not to be alarmed about heart lesion, and that he never at any time said anything to the decedent about any heart lesion and the decedent “ never seemed to think he was sick at any time.”

It may be well that when the conveyances in question were made Joseph N. Phillips contemplated death at some time in the future, but men perform acts daily with the knowledge that death may overtake them any moment. Men all wish to accomplish certain things before that fateful day and in that sense things may be done in contemplation of death, but this general and certain knowledge that to all death cometh soon or late is not what is meant by the phrase “ in contemplation of death ” as used in the Revenue Act.

In Meyer v. United States, 60 Ct. Cls. 474, it is said:

A review of the authorities is scarcely necessary to sustain the proposition that the contemplation of death referred to in the statute is not that contemplation of death which must he present with all of us, mindful of its certainty at some time, we know not when, but it is that state of mind which by reason of advanced age, serious illness, or other producing cause induces the conviction that death in the near future is to be anticipated. If it be said that there need not be a conviction that death is imminent, there must at least be a belief that it is to be expected in the very near future rather than in the usual course of events; and in this state of mind, in this belief in the near approach of death, must be found the motive for the conveyance if it is properly to be characterized as made in contemplation of death.

In the case of Rea v. Heiner, 6 Fed. (2d) 389, the District Court of the Western District of Pennsylvania stated:

There is a common agreement that the words “ contemplation of death ” mean not the general knowledge of all men that they must die; that it must be a present apprehension, from some existing bodily or mental condition or impending peril, creating a reasonable fear that death is near at hand; and that, so arising, it must be the direct and animating cause, and the only cause, of the transfer. If this apprehension, so arising, is absent, there is not that contemplation of death intended by the statute, especially when another adequate motive actuating the gift is shown.

As stated in Rosenthal v. People, 211 Ill. 306; 71 N. E. 1121:

A gift is made in contemjdation of death when it is made in expectation of that event, or with that event in view.

To the same effect are People v. Burkhalter, 247 Ill. 600; 93 N. E. 379; People v. Carpenter, 264 Ill. 400; 106 N. E. 302; People v. Porter, 287 Ill. 401; 123 N. E. 59; People v. Shaffer, 291 Ill. 142; 125 N. E. 887.

By the term “ in contemplation of death ” is not meant on the one hand the general expectancy of death which is entertained by all persons for every person knows that he must die. * * ® But a transfer may be said to be made “ in contemplation of death ” if the expectation or anticipation of death in either the immediate or reasonably distant future is the moving cause of the transfer. (Shwab v. Doyle, 269 Fed. 328; Gaither v. Miles, 268 Fed. 692.)
This court has held that the words “ in contemplation of death,” as used in general tax laws imposing a transfer tax, is of property made in contemplation of death of the grantor or vendor, do not refer to that general expectation which every mortal entertains but rather an apprehension which arises from some existing condition of body or some impending peril. (Bakers Estate, 163 N. Y. 607.)

In Spreckels v. State, 30 Cal. App. 363, the court said:

A reasonable and just view of the law in question is that it is only where the transfer of property by gift is immediately and directly prompted by the expectation of death that the property so transferred becomes amenable to the burden; or, as counsel for the respondents with singular aptness states the proposition: “ It is only when contemplation of death is the motive without which the conveyance would not be made that a transfer may be subjected to the tax.” That is, the expectation of death must be the' direct, specific, and immediate animating cause of the transfer.

Applying these principles to the facts in this proceeding, the Board has no difficulty in reaching the conclusion that the decedent did not make the conveyances of real estate to his children in contemplation of death within the meaning of the Revenue Act of 1921.

The State of Illinois instituted proceedings to collect a succession or inheritance tax from the estate of this decedent, which was resisted by these same petitioners.

The Illinois statute imposing the tax, provides:

When the transfer is of property made by a resident * * * by deed, grant, bargain, sale or gift made in contemplation of the death of the grantor, vendor or donor, or intended to take effect in possession or enjoyment at or after such death.

On January 7, 1927, the County Court of Tazewell County Illinois, by final decree, unappealed from and the time for praying an appeal having now expired, held upon substantially the same facts as we have before us that the deeds in controversy were not made in contemplation of death and that no inheritance tax on said estate was due the State of Illinois. While such finding is not conclusive upon this Board, it is entitled to weight, especially in view of the similarity of the Illinois statute to the Federal statute on the same subject of taxing gifts, transfers, etc., made in contemplation of death.

The transfers made by decedent on August 30, 1919, were not, in the opinion of the Board, made in contemplation of death within the meaning of the statute. Philip T. Starck, Executor, 3 B. T. A. 514.

The evidence shows that the decedent was strong and active, physically and mentally, at the time he made the conveyances to his children, and so remained, for one of his age, until a few months prior to his death, and never seemed to think he was sick at any time.

Judgment wül be entered for the petitioners on 15 days' notice, under Bule 50.

Considered by Smith.


author: Littleton :

text:
    Carl G. Stifel, Trustee, Estate of Otto F. Stifel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6470.
    Promulgated August 9, 1927.
    Debts, not ascertained to be worthless and charged off as such on decedent’s books during the taxable period, can not, when later ascertained to be worthless, be claimed as a deductible allowance in computing net income of the decedent for said taxable period.

      W. G. H. Kessler, Esq., for the petitioner.

      Henry Ra/venel, Esq., for the respondent.
    The Commissioner determined a deficiency of $1,155.24 in the income tax of Otto F. Stifel for the period January 1, 1920, to August 18, 1920, the date of his death.
    The trustee insists the Commissioner erred in computing decedent’s taxable net income in refusing to allow as a deduction certain alleged worthless notes aggregating $61,500.32.

      FINDINGS OE FACT.
    Carl G. Stifel is a resident of St. Louis, Mo., and is the trustee of the estate of Otto F. Stifel, deceased, who was also a resident of St. Louis.
    Otto F. Stifel was an officer and the owner of 149 shares of the 450 shares of the capital stock of the One Wheel Truck Co., a Missouri corporation. During the period April 17, 1918, to June 23, 1920, he advanced said corporation $61,500.32, taking therefor the notes of the corporation. The One Wheel Truck Co. was not a success and at the date of the death of Otto F. Stifel the corporation’s liabilities exceeded its assets. Although this situation existed early in 1920 the decedent continued to make advances to the corporation during the year 1920 prior to his death for the purpose of finishing certain merchandise so that it could be disposed of together with certain other merchandise which the corporation had on hand. The balance sheet of the One Wheel Truck Co. at August 31, 1920, was as follows:

    Otto F. Stifel kept a regular set of books of his personal affairs. Stifel did not ascertain the notes to be worthless and charge them off on his books during the taxable period involved, nor was any deduction claimed therefor in the income-tax return filed for him for the said period, January 1 to August 18, 1920.
    The patents owned by the One Wheel Truck Co. were of a value less than $15,000.
   OPINION.

Littleton :

The decedent maintained personal books of account. Although he was an officer and a stockholder of the One Wheel Truck Co. and was familiar with its financial condition prior to his death, there is no evidence that he considered the notes which he held to be worthless. He did not charge them off on his books of account. Counsel for the estate contends “ that the fact that the notes of the One Wheel Truck Co. were not charged off on the taxpayer’s books is wholly immaterial as bearing upon the issue since said fact constitutes merely a bookkeeping entry or may be ascribed to faulty bookkeeping, and does not in itself affect or alter the worthlessness of the debts. Furthermore, it is a well known and established fact that mere bookkeeping entries can not create income or affect the income, but the facts underlying such entries must determine the tax liability of a taxpayer.”

Section 214- (a) (7) of the Revenue Act of 1918 provides that in computing net income there shall be allowed as deductions debts ascertained to be worthless and charged off within the taxable year. Under the provisions of the statute, it is necessary to an allowance of a deduction for bad debts that such debts shall have been ascertained to be worthless and charged off. In Ed. G. Lasater, 1 B. T. A. 956, the Board held that “ Under the provisions of the Revenue Act of 1918 a so-called bad debt is an allowable deduction from gross income only when ascertained to be worthless and charged off within the taxable period. The charging off of bad debts should, in the case of a taxpayer keeping regular books of account, be evidenced by such book entries as will effectually eliminate the amount of the bad debt from the book assets of the taxpayer.” See also Winthrop Ames, 1 B. T. A. 63; Greenville Textile Supply Co., 1 B. T. A. 152; Donalsonville Oil Mill, 1 B. T. A. 167; Murchison National Bank, 1 B. T. A. 617; Jessie B. Wadsworth, Executrix, 1 B. T. A. 1043; Dover Iron Co., 1 B. T. A. 1123; Mason Machine Works Co., 3 B. T. A. 745.

Judgment will be entered for the respondent.

Considered by Smith.


text:
    Emma C. Gundlach, Executrix, Estate of J. H. Gundlach, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6599.
    Promulgated August 9, 1927.
    The evidence in this proceeding is insufficient to enable the Board to determine whether or not the Commissioner erred in his determination of the gain or loss upon the sale in 1920 and 1921 of property acquired from 1909 to 1920.

      Henry H. Oberschelp, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for 1920 and 1921, in the respective amounts of $642.76 and $369.32, as a result of the Commissioner charging the petitioner with $7,102.46 in 1920 and $4,152.49 in 1921, as depreciation, in computing the gain or loss upon the sale during said years of various pieces of his improved real estate acquired between 1909 and 1920.

      The petitioner contends that this is error because no depreciation had ever been claimed or deducted in any of his income-tax returns. Petitioner insists that his property was investment property, not used in his trade or business and, furthermore, was kept in such good state of preservation that there was no depreciation. He also claims that if there was any depreciation the rate charged was excessive.
    FINDINGS OF FACT.
    J. H. Gundlach, the original petitioner in this proceeding, was a resident of St. Louis, Mo., and was engaged in the business of buying, selling, and renting real estate, and acting as a general real estate agent. He died since the institution of this suit and the same was revived in the name of Emma C. Gundlach, his executrix.
    In 1920- and 1921, he sold various pieces of improved real estate which he had acquired at various times from 1909. The Commissioner charged him with $1,102.46 in 1920 and $4,152.49 in 1921, as depreciation upon the property sold in computing the gain or loss upon the sales made in the taxable years.
    In filing his income-tax returns for years prior to 1920 and 1921, petitioner never claimed any deduction or took any credit for, nor was any allowance made on account of, depreciation or exhaustion, wear and tear of property.
   OPINION.

Littleton:

The evidence does not disclose how many pieces of improved property the petitioner owned and sold in 1920 and 1921, when any of it was purchased, what any of the property cost, or what the March 1, 1913, value of it was, nor, at what price any of the property was sold.

There is no evidence as to when any of the buildings or improvements were constructed, nothing as to the character of their construction, nor what work or repairs were done on them to keep thém in the alleged good state of preservation, nor the cost of such work.

It is insisted in argument and in the broad statement made by the one witness examined in petitioner’s behalf, that the improvements on the properties in question when sold in 1920 and 1921, were in as good or better condition than when they were new.

The inability of this witness to give, when asked, proper detailed information in regard to the properties, shows his broad statement to be a mere conclusion, not based on any lmown facts.

It is also argued that the properties sold were not such as were used in petitioner’s trade or business. It is claimed such were investment properties and not subject to depreciation.

It is sufficient to say there is no evidence showing that the properties were not used in petitioner’s trade or business. The Commissioner held that they were. Upon a consideration of the record we affirm the Commissioner’s determination. Even Realty Co., 1 B. T. A. 355. U. S. v. Ludey, 274 U. S. 295.

Judgment will he entered for the respondent.

Considered by Smith.


text:
    Milton M. Cohn, Executor, Estate of Oscar Mandel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1566.
    Promulgated August 9, 1927.
    In the absence of evidence indicating error on tbe part of the Commissioner in determining the value of decedent’s interest in a partnership business, his action is affirmed.

      John M. Bullwan, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    The Commissioner determined a deficiency in estate tax due in 1923 in the amount of $3,142.22 but now states that the amount should be $3,126.53, no question being raised by this proceeding as to the difference.
    The controversy relates to the Commissioner’s valuation of the decedent’s interest in a mercantile business operated as a partnership and known as “ My Store.”
    FINDINGS OF FACT.
    Milton M. Cohn, executor of the estate of Oscar Mandel, who died March 9, 1922, is a resident of Chicago, Ill. Oscar Mandel was a member of a partnership composed of himself and Albert Schwarz-man, who were, the owners of a general department store business operated in Bloomington, Ill., and known as “ My Store.”
    Each of the partners devoted practically his entire time to the conduct of the business, and neither received any salary as compensation for such services other than his share of profits as a partner.
    The combined services of the partners in operating and managing the business were reasonably worth $25,000 yearly. Oscar Mandel was the more capable and efficient of the two. The business was carried on in leased buildings and in the same locality for about 20 years. The main building had five stories and was one and one-half blocks off the public square of Bloomington. Space in other buildings was rented for certain departments of the firm’s business. Such space was within a block of the public square. Facing the public square was the more desirable location for stores, and there were about 20 stores on the square. There was only one other department store in Bloomington of the same general character as that of Mandel and Schwarzman.
    The mercantile business of Mandel and Schwarzman was not as good in 1921 and 1922 as it had been for several years immediately preceding. During 1921 and 1922, and on March 9, 1922, the farmers in the vicinity of Bloomington were in bad financial condition and during those years also there had been strikes in Bloomington and a number of laborers had moved away. This, as well as the general postwar conditions, caused a decline in the net earnings of the business. Certain departments of the store were doing but little business.
    The capital invested and the amount of gross sales and net profits of the firm of Mandel and Schwarzman for the period January 31, 1912, to January 31, 1925, were as follows:

   OPINION.

Littleton :

The estate returned the interest of the decedent in the firm of Mandel and Schwarzman at a value of $177,500. The Commissioner determined the decedent’s interest to have been of the value of $232,997.75 and, as a result, determined the deficiency here in controversy. The evidence submitted is insufficient to enable the Board to determine whether the Commissioner’s determination of the value is erroneous. The estate claims that the value of the decedent’s interest in the firm of Mandel and Schwarzman was not in excess of 75 per cent of the inventory of the business and some testimony was given to this effect. The record, however, contains no evidence as to the inventories of the business or as to the value of the inventory on March 9,1922, the date of the death of Oscar Mandel.

Judgment will he entered for the respondent.

Considered by Smith.


author: Lpitleton :

text:
    Ideal Reversible Hinge Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6327.
    Promulgated August 9, 1927.
    “ Market price ” inventory prepared by petitioner and approved by the Commissioner accepted in lieu o£ “fair value” inventory contended for by petitioner.

      Sterling P. King, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding involves a proposed deficiency for the calendar year 1920 in the amount of $7,766.08. The question involved concerns the value of merchandise inventory.
    FINDINGS OF FACT.
    The petitioner is a Missouri corporation with its office and place of business in St. Louis.
    During 1920 and for several years prior thereto, petitioner was engaged in the manufacture of various designs of phonographs for jobbers, the particular design depending upon the desire of the particular jobber for whom the article was being manufactured.
    On December 31, 1920, petitioner had on hand completed and partly finished phonographs, and in addition, motors, tone arms, hardware, lumber, parts of dismantled machines, such as legs, panels, etc., and various other items of material which would enter into the finished product.
    In the latter part of 1920, there was a slump in petitioner’s business to the extent that while it had average sales for the eleven months preceding December, 1920, of approximately $8,000 per month, its sales for December, 1920, amounted to only $938.16, and for the period from January 1, 1921, to April 15, 1921, amounted to $133.27. This was accompanied by a great reduction in the price at which phonographs were selling on the market.
    The phonographs which the petitioner had on hand, both completed and in process, at December 31,1920, were manufactured under a contract with the Shapleigh Hardware Co., dated May 31,1920, for 3,000 machines, which called for delivery as fast as completed. At December 31, 1920, 1,600 machines under this order had not been delivered. No machines were accepted by the Shapleigh Hardware Co. from December, 1920, until May, 1921, when machines were accepted under the aforementioned contract. The motors which were on hand at December 31, 1920, had been supplied to the petitioner by the Shapleigh Hardware Co., and those which were not used were ultimately accepted back by the Shapleigh Hardware Co. at the prices at which they were billed to the petitioner.

      When the petitioner took its inventory at December 31, 1920, it set np three amounts as follows: cost, $37,342.81, market price, $27,864.39 and fair value, $9,820.55. Petitioner used the cost inventory in preparing its income and profits-tax return for 1920, and the market-price inventory in preparing its state income-tax return. After an examination by a revenue agent, the Commissioner accepted the market-price inventory as representing the fair market value of the inventory at December 31, 1920, i. e., allowed this as showing an inventory based on cost or market, whichever was lower. Petitioner contends in this proceeding that the fair-value inventory of $9,820.55 should be used. The fail' value ivas arrived at on the basis of what the petitioner thought the various articles would sell for, a percentage reduction of from 50 to 100 per cent being used.
   OPINION.

Lpitleton :

The question at issue in this case is the market price of petitioner’s inventory at December 31, 1920, no question being-raised as to the applicability of the “ cost or market, whichever is lower ” basis, or that market was lower than cost at December 31, 1920.

The evidence is not clear as to the method pursued by the petitioner in arriving at the valuation for its inventory, though it was shown that the market'-price inventory, which was prepared by the petitioner and accepted by the Commissioner, was prepared on the basis of what the petitioner considered it could replace the various items for by purchasing them in the market. The fair-value inventory for which the petitioner now contends, ivas based on what it considered could be realized on a sale of the finished articles and material on hand. The reductions from cost to fair value seem to have been made in an arbitrary manner. For example, typical notations on the inventory sheet are that a certain group of items could not be sold for 50 cents on the dollar, and a reduction was then made of one-half to arrive at a fair value.

The Board is not convinced that the fair-value inventory, as claimed by the petitioner, represents an inventory taken on the basis of cost or market, whichever is lower. Doubtless, there was a great slump in petitioner’s business at or near the close of 1920, but this of itself would not authorize the determining of market without regard to the price at which items in an inventory were selling on the open market. “ Market value ” has been interpreted by the courts on various occasions. Sanford v. Peck, 63 Conn. 486; 27 Atl. 1057, contains the following definition:

The expressions “ actual value,” “ market value,” or “ market price,” when applied to any article, mean the same thing; they mean the price or value of the article established or shown by sales, public or private, in the way of ordinary business.

Likewise, Barrett v. The Wacousta, 2 Fed. Cas. 928:

To make a market price there must be buying and selling, purchase and sale. The price of gold on ’change is fixed by sales made. A price cannot be established by a mere offer to sell, or an offer to pux*chase. Sales must be consummated by agreement to make a market price. The minds of the buyer and seller must unite on a price.

The further consideration exists that the completed phonographs which petitioner had on hand, as well as those which were partly finished, were manufactured under a contract for their sale at a fixed price. Eventually, at least some of these machines were accepted under the contract, and the motors which had been billed to the petitioner by the Shapleigh Hardware Co. for use on machines being-manufactured for this company were accepted back by the company at the same price as billed to the petitioner. The question might well arise here whether any valuation other than cost could be used where the petitioner is protected against a change in market prices by existing contracts at an inventory date, Ewing-Thomas Converting Co., 1 B. T. A. 121.

On a consideration of the entire evidence, however, the Board is of the opinion that when the petitioner prepared an inventory on the basis of replacement cost of the items in its inventory, this more nearly represents a market value for its inventory than that which we are now being asked to accept as .the fair value of its inventory.

Judgment will be entered for the respondent.

Considered by Smith.


author: Smith:

text:
    Central Auto Equipment Co., Successor to Bittel-Leftwich Service Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10506.
    Promulgated August 12, 1927.
    Taxpayer held, not affiliated with the Bittel-Leftwich Tire Service Co. of St. Louis from January 1, 1918, to November 30, 1920, inclusive.

      Joseph P. Renard, Esq., for the petitioner.

      P. J. Rose, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the period July 1 to November 30, 1918, and for the fiscal years ended November 30, 1919, and November 30, 1920, aggregating $2,515.94. The proceeding is based upon the dis-allowance by the respondent of affiliation of the petitioner with the Bittel-Leftwich Tire Service Co. of St. Louis, from July 1, 1918, to November 30, 1920, inclusive.
    FINDINGS OF FACT.
    The Bittel-Leftwich Tire Service Co. of St. Louis, in order to extend its business in the State of Illinois, established a branch in Springfield, Ill., which it caused to be incorporated on September 20, 1915, under the name of Bittle-Leftwich Tire Service Co. The St. Louis company was engaged in business as dealers in automobile accessories, tires, tubes, vulcanizing, etc., and the branch established at Springfield, Ill., was engaged in the same business. On December 1, 1919, the name of the Illinois corporation was changed to Central Auto Equipment Co., which is the petitioner. In July, 1919, the name of the Missouri corporation was changed to the Lee Tire Service Co.
    The petitioner was organized with a capital stock of $10,000 divided into 100 shares of a par value of $100 each. This stock was issued as follows:
    Owner: Shares
    O. G. Bittel_ 49
    B. O. Leftwich 48
    A. Turner-_ 1
    Phil Stewart_ — 1
    Helen Murray-_ 1
    Total-100
    At a meeting of the stockholders of the petitioner held November 8, 1917, it was voted to increase the authorized capital stock from 100 to 500 shares, par value $100 per share, and additional shares of stock were issued. There were 348 shares outstanding on November 30, 1918, as follows:

    There were no substantial changes in stock ownership during 1919. The stock held by B. O. Leftwich, trustee, was transferred to A. Chouteau,'trustee, and two additional shares were issued to others, making a total of 350 shares of stock outstanding at the end of 1919. There were a few minor changes in stock ownership during 1919 and the holdings of A. Chouteau, trustee, were reduced to 220 shares — 40 shares being returned as treasury stock.
    B. O. Leftwich and A. Chouteau were officers of the petitioner and were trustees for the Missouri corporation or its stockholders. The stock held by A. Turner and D. C. Griffin was merely for qualifying purposes and was within the custody and control of the officers of the corporation. The balance of the stockholders were not employees of the company and paid cash for their stock.
    Most of the minority stockholders voted their stock by proxy, naming A. Turner as their proxy, but the proxies in no wise contain authority in any way to control the stock of the person issuing a proxy nor did anyone other than the holders of the stock, except in the case of the trustee’s stock, and in the case of the shares standing-in the name of Griffin and Turner, have control over the stock owned by the individual stockholder. Proxies were given for each stockholders’ meeting. Goods were sold by the Missouri company to the petitioner at cost plus from 2 to 5 per cent for handling charges, freight, drayage, insurance, etc.
    The Missouri corporation controlled the business policies of the petitioner in all its details. Checks of the petitioner were countersigned by an officer of the Missouri corporation who was also an officer of the petitioner. These checks had to be sent to St. Louis for signature and then were returned to the petitioner and mailed out.
    The petitioner filed a consolidated return with the Bittel-Leftwich Tire Service Co. of St. Louis, and with its successor, the Lee Tire Service Co., for the taxable periods under consideration herein. The respondent has computed deficiencies in tax upon the basis that the companies were not affiliated.
   OPINION.

Smith:

The petitioner claims to be affiliated with the Bittel-Leftwich Tire Service Co. of St. Louis, Mo., which claim has been denied by the respondent. The only issue in this case is the affiliation or nonaffiliation of the companies during the taxable periods July 1, 1918, to November 30, 1918, and the fiscal years ended November 30, 1919, and November 30, 1920.

The evidence shows that the two companies were in the same line of business; that the control of the business was under the guiding influence of representatives or nominees of the Missouri corporation. Separate books of account were kept by each company and the only evidence of intercompany relations is a purchasing arrangement whereby the "petitioner secured its merchandise and supplies at cost to the Missouri corporation plus handling charges.

The fact that the business policy and management were dictated by the Missouri corporation or its stockholders is not determinative of the issue; for the control of the business of a corporation is not control of the stock as contemplated by the statute. Appeals of Old Colony R. R. Co., 1 B. T. A. 1067; Norwich & Worcester R. R. Co., 2 B. T. A. 215; Watsontown Brick Co., 3 B. T. A. 85. In Appeal of Greenville Coaling & Export Corporation, 4 B. T. A. 183, it was stated:

The fact of intercompany relations, or the absence of them, without the necessary stock ownership or control as provided in the statute, is not sufficient to permit or require affiliation.

The stock ownership of the petitioner as presented in the evidence may be summarized as follows:

The ownership of stock by the trustee plus qualifying shares shown above does not of itself amount to “ substantially all ” the stock as required by the statute. Appeals of Industrial Co. of Binghampton, 2 B. T. A. 360; James Butler Grocery Co., 4 B. T. A. 378; Kiddy Shoe Service, Inc., 5 B. T. A. 268.

The minority stock in the petitioner was owned by investors who paid cash for their stock and acquired absolute ownership therein without any condition or agreement as to resale. They were not employees and were in no way connected with the Missouri corporation. The fact that the minority stockholders gave proxies for the voting of their stock is immaterial. As was stated in Appeal of Tunnel Railroad of St. Louis, 4 B. T. A. 596:

The giving of proxy is not a relinquishment by the donor of any of the rights of ownership or control.

In Wofford Oil Co. v. Commissioner, 5 B. T. A. 115, it was stated relative to a minority interest that a feeling of helplessness does not indicate any control of stock.

Although the question of affiliation or nonaffiliation of corporations is not to be determined solely on the basis of mathematical computations of stock holdings, Appeal of Hagerstown Shoe & Legging Co., 1 B. T. A. 666, we think that it can not be said that the Missouri corporation owned directly or controlled through closely affiliated interests, or by a nominee or nominees, substantially all of the stock of the petitioner or that substantially all of the stock of the two corporations was owned or controlled by the same interests during the taxable periods involved herein.

Judgment will he entered for the respondent.

Considered by LittletoN.


author: Steenhagen :

text:
    Paul N. Myers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7283.
    Promulgated August 12, 1927.

      Leon F. Cooper, Esq., and B. E. Glessner, Esq., for the jietitioner.

      F. 0. Graves, Esq., for the respondent.
    This is a proceeding for the redeiermination of a deficiency of $663.46 in income taxes for 1920. Respondent refused to allow a deduction for a loss alleged to have been sustained in that year by reason of the alleged worthlessness of stock.
    FINDINGS OF FACT.
    The petitioner is an individual residing in St. Paul, Minn.
    In 1912 the petitioner became acquainted with one P. K. Nielsen, who was the inventor of a cream separator. The letters patent covering this invention had been issued to Nielsen and by him assigned to the Helix Cream Separator Co., a Minnesota corporation, organized January 9, 1906. The corporation had a manufacturing plant where there were employed ten or fifteen men, and was engaged in manufacturing and selling cream separators. Nielsen, who was the principal common stockholder of the corporation, endeavored to enlist financial aid in support of the enterprise. The petitioner had an investigation made of the machine and its manufacture by a méchanical engineer. After receiving a favorable report from the engineer, and after having tried out one of the separators on his own farm, and having found it to be satisfactory, the petitioner began lending money to the company. He made loans at various times and received notes for the amounts advanced. It was agreed that he could elect whether to take stock for the amount of the notes or have the notes paid. By 1914, the money lent and the interest due thereon had accumulated to $17,700. During this entire period the petitioner made frequent visits to the plant of the company.

      By the summer of 1914, the petitioner had been in the active management of a business for twenty years, and he resigned for the purpose of taking a year’s vacation. He advised Nielsen that he would put no more money in the business at that time, and that he would take stock for the money advanced by him. On July 16, 1914, he exchanged the notes for 1,770 shares of the preferred stock of the Helix Cream Separator Co., having a par value of $10 a share. The company did not have the money with which to pay the notes. The petitioner and his family soon thereafter went to South Carolina. The stock issued to petitioner was the only preferred stock issued by the Helix Cream Separator Co.
    On his return in the spring of 1915, the petitioner became engaged in the consolidation and financing of three concerns in St. Paul. This required his entire time and he gave no attention to the affairs of the Helix Cream Separator Co. In the fail of 1915 or some time in 1916, Nielsen asked petitioner if he would put any more money in the business. Petitioner refused, but stated he was willing to allow the money he had already invested to remain. That was the last time petitioner saw Nielsen.
    In 1919 the petitioner started an investigation to determine the status of his investment. He visited 693 Raymond Avenue, St. Paul, the place where the business had last been conducted, but found others in occupancy who could give him no information as to the Helix Cream Separator Co. He wrote a letter to the postmaster at Minneapolis, where Nielsen had lived, who refused, under the regulations of his department, to give information as to the address of Nielsen or the company. At the postmaster’s suggestion, however, he addressed letters to Nielsen and the company on December 16, 1919. These were returned to him unclaimed. He received a letter dated December 11, 1919, from the Union State Bank at Minneapolis, stating that they had not seen Nielsen for a number of years. The woman who had formerly been the secretary of the company informed him in December, 1919, that Nielsen had gone to Texas to sell land to make money to put in the business, and that she did not know where he was.
    In 1915 there were placed in storage at the warehouse of the Skel-let Company in Minneapolis some office furniture, machinery, patterns, and boxes of loose odds and ends of machinery, for the Helix Cream Separator Co. The charges for hauling and storing these goods were never paid. In the spring of 1918 the storage company advertised them and placed them on sale with other articles on which charges had not been paid. No one bid on these goods and the storage company bid them in for the amount of the charges.
    One Barney Anderson was the owner of some common stock of the Helix Cream Separator Co. On March 11,1914, he and one E. E. Austin each gave a note for $2,000 to the company at Neilsen’s solicitation. As security for payment of the notes each was given a chattel mortgage on the property of the company, described as follows:
    All tlie property of every hind and character owned by the said Helix Cream Separator Company situated in, around, and about the premises known as 098 Raymond Ave. in the City of St. Paul, Ramsey County, Minnesota, consisting in part of equipment, machinery, tools, stock on hand, Cream Separators completed and in process of manufacture, all fixtures, belts, pullej's, all material, office furniture, and office and factory supplies.
    The notes were sold to a bank who enforced payment from Anderson and Austin. Anderson and Austin never foreclosed their mortgages.
    In 1917 Austin located one John B. Ogden, apparently a promoter of sorts, who, he believed, could revive the business. Although Anderson had little faith in Ogden, the following contract was entered into between the three:
    Tins Agreement made and entered into this lJ/th day of November, 1917, by and between Barney Anderson, E. E. Austin and John B. Ogden, all of the City of Minneapolis, Minnesota,
    Witnesseth, That whereas the said Barney Anderson and E. E. Austin are the owners of the assets of the Helix Cream Separator Company, a corporation, and the said company is not now operating and said Barney Anderson and E. E. Austin are desirous of securing the services of the said John B. Ogden hereafter known as the party of the second part, to organize a company to take the place of the said Helix Cream Separator Company and put the same on its feet, und in order to induce the said party of the second part so to do:
    Now Therefore, the said parties of the first part do hereby agree to sell and convey to party of the second part an undivided one-third interest in the principal assets of the said company as far as they may have the same under their possession and control, or be in a position to obtain the same, subject to all claims, however, against the said assets for storage charges or expenses incurred in keeping the same, and any further assets formerly belonging to said company which they may hereafter acquire or may be able to acquire as practicable, such as the patents formerly belonging to said Helix Cream Separator Company;
    In Consideration Thereof, the said party of the second part does hereby agree to and with the said parties of the first part to devote his efforts to the organization of a new company to be organized under the laws of the Stale of Minnesota, with a capital stock of One Hundred and Fifty Thousand, the same to be divided in shares of One Hundred Dollars ($100.00) each, and further that he will agree to sell and convey, together with parties of the first part the entire assets formerly owned by said corporation and now held by parties of the first part, to said new corporation so to be formed, and receive in payment therefor the estimated value of his said one-third interest in said assets in stock of said corporation, the parties of the first part to likewise each receive in stock of said company the same amount each for their one-third interest and not exceeding the sum of Fifteen Thousand Dollws in stock. Further, that if the directors of said corporation so to be formed, the same to be a manufacturing corporation, is desirous to secure the services of party of the second part as a financial agent to sell stock of said company and organize the same as a going concern, that the parties of the first part will agree to vote for or consent that party of the second part shall receive the sum of Fifteen Hundred Dollars ($1,500.00) in cash from the first sales of stock after paying organization expenses, as his compensation for such promotion and stock selling, in addition to any amount that may be agreed upon by the directors of said corporation so to be formed and party of the second part, as additional compensation therefor.
    It is further agreed that the party of the second part shall furnish the amount of the necessary cash expense to be paid for the incorporation fees and attorney’s fees for organizing such corporation, the same to be reimbursed to him out of the first sales of stock that may be made.
    In Witness Whereof, the parties hereto have signed these presents this 1/fth day of November, 1917.
    (Signed) Barney Anderson
    E. E. Austin
    John B. Osden
    In 1919, about one year after the Skellet Company had purchased the goods of the Helix Cream Separator Co.- which had been stored with them, Ogden approached them, stated that he knew about the company and machinery and was interested in it. He induced the storage company to move the articles to 2112 Fourth Avenue, Minneapolis. At that place Ogden set up an office and had a storage room where he kept the machinery. ■ Ogden had a draughtsman at the place who was engaged in drawing plans. A name appeared on the window of the place, which, if not “Helix Cream Separator Company,” was similar thereto. Ogden endeavored to secure financial assistance for the venture but could not. He remained at this place of business until early in 1920, when he abandoned it. The Skellet Company again took possession of the property, with the exception of the office furniture, which had disappeared, and sold it as junk.
    In his income-tax return for 1919 the petitioner deducted the amount of $17,700 as a loss. This was disallowed by the respondent. The amount was later approved as a deduction for 1920, and subsequently the respondent determined that it was not an allowable loss in either year. In determining the deficiency here involved, the respondent had disallowed a deduction of $17,700 covering the alleged loss.
    The records of the Secretary of State of Minnesota show that the authority granted to the Helix Cream Separator Co. to do business as a corporation has not been revoked or canceled.
    So far as is known, the patent rights in the separator manufactured by the Helix Cream Separator Co. are still owned by it.
   ■ OPINION.

Steenhagen :

While it may be true, as petitioner’s counsel say, that the time when stock becomes worthless is not such a fact as can be fixed with certainty, nevertheless the finding must be reasonably made in relation to such certain facts as are available. Merely because men may differ as to the proper period within which the loss is established as a deduction, a taxpayer may not postpone the deduction out of all relation to the evidence at hand. The law does not require the taxpayer to be an incorrigible optimist, United States v. White Dental Manufacturing Co., 274 U. S. 398, nor will he be permitted to postpone his deduction as if it did.

The evidence before us indicates that long before 1919 the company had neither assets nor prospects, and that there was no gainsaying the worthlessness of the stock long before the taxable year. The vague activities of Ogden had nothing to do with petitioner’s stock. Ogden was in some way concerned with the property formerly owned by the corporation, but the property had already been sold for storage, and the corporation’s interest wiped out.

Judgment will be entered for the respondent on 15 days’ notice, wider Rule 50.

Considered by Geeen and Arundell.


author: SteRnhagen:

text:
    A. W. E. Capel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7069.
    Promulgated August 12, 1927.

      Laurence Gra/oes, Esq., for the petitioner.

      L. G. Mitchell, Esq.; for the respondent.
    The petitioner seeks a redetermination of his liability for income taxes for 1920,1921, and 1922. The deficiency notice upon which this proceeding is founded states an overassessment of $485.85 for 1920, and deficiencies of $75.66 and $411.85 for 1921 and 1922, respectively.
    The petitioner assigns as errors the following actions of the respondent :
    1. Determining profit on liquidating dividends received in 1920 from the Francis Cotton Mills, Inc., without giving effect to amounts subsequently repaid.
    2. Determining profit on liquidating dividends received in 1920 from the Capelsie Cotton Mills by using an erroneous March 1, 1913, value.
    3. Overstating income received in 1920 from Troy Garment Manufacturing Company, a partnership.

      4. Including in petitioner’s income for 1920, 1921, and 1922, liquidating dividends on stock alleged to have been owned by his son.
    5. Overstating profit realized in 1922 on sale of stock of Smither-man Cotton Mills.
    6. Overstating rentals received in 1922.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Troy, N. 0.
    The petitioner owned 101 shares of-the Francis Cotton Mills, Inc, During 1920 the corporation sold its assets and petitioner received a liquidating dividend. Petitioner received from the secretary-treasurer of the corporation a notice dated November 14, 1923, advising him that the liability of the corporation for income taxes had been determined to be $111,000, and that only $45,387 was on hand to pay the taxes, that it would be necessary to raise by assessment $05,505, and that petitioner’s share was $5,555. Petitioner paid this amount on January 11, 1924.
    The Capelsie Cotton Mills, a corporation, was organized in 1901. The petitioner was president of the corporation and owned 75 shares of its stock. He gave 15 of these shares to his son, W. C. Capel. These were transferred on the books of the corporation, and under date of April 18,1901, two certificates, one for 10 shares of stock and one for 5 shares, were issued to W. C. Capel in his name. The petitioner was thereafter the owner of record on the books of the corporation of 60 shares of its stock.
    W. C. Capel pledged his certificates of stock as security for a loan. He was unable to repay the loan, and on December 31, 1920, the petitioner paid $2,500 to take up his son’s note. The petitioner received the certificates of stock and kept them in his possession. Pursuant to instructions given to the secretary-treasurer of the Capelsie Cotton Mills by the petitioner, all dividends on these 15 shares of stock were paid to petitioner.
    There are no endorsements on the certificates of stock, and at no time since they were issued to W. C. Capel have these shares been canceled or transferred to any other person on the books of the corporation.
    The 15 shares of stock were the property of W. C. Capel, and the liquidating dividends thereon were paid to him by petitioner.
   OPINION.

SteRnhagen:

The Commissioner has determined an overassessment of $485.85 for 1920. There is nothing in the record showing that the overassessment arises from the respondent’s action on any claim for abatement, and the Board has no jurisdiction for that year. Cornelius Cotton Mills, 4 B. T. A. 255; E. F. Cremin, 5 B. T. A. 1164. This disposes of the first, second and third assignments of error and that portion of the fourth which relates to 1920.

The fourth issue involves the propriety of including within petitioner’s income the liquidating dividends on the 15 shares of stock owned by his son, W. C. Capel. The respondent determined that the petitioner was the owner of 75 shares, and included in income liquidating dividends received thereon in determining the petitioner’s tax liability. The evidence is, in our opinion, sufficiently clear that petitioner owned only 60 shares and had only the possession of the 15 shares without ownership. He received the liquidation distribution as to such 15 shares on behalf of his son, and the amount was not his income. Upon this point the respondent is reversed. See Ball-Thrash & Co. v. McCormick, 162 N. C. 471; 78 S. E. 303; Journal Publishing Co. v. Barber, 165 N. C. 478; 81 S. E. 694.

No evidence was introduced in support of the fifth assignment of error, and the respondent is sustained.

The sixth assignment of error is that the respondent overstated rentals received by petitioner. The only evidence offered on the issue thus raised was the testimony of an accountant who had prepared from the petitioner’s pass book a statement purporting to show rentals and expenses incurred in connection therewith. This statement included all items which were indicated on the book as being for rents and those which examination led him to believe were rental items. It was developed on cross-examination that cash items which did not go through the bank would not be reflected in the statement prepared by the accountant. No competent evidence of the actual facts with regard to receipts from rentals was introduced. On this issue the respondent is sustained.

Judgment will be entered on 15 days1 notice, under Rule 50.

Considered by Green and Arundell.


author: Akundell:

text:
    D. R. McDonald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7280.
    Promulgated August 12, 1927.
    Instruments construed and held to be oil and gas leases and not sales of capital assets within the meaning of section 206 of the Revenue Act of 1921. Berg v. Commissioner, 6 B. T. A. 1287, followed.

      E. W. R. Ewing, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.

      This proceeding involves a determination of a deficiency in income tax for the year 1922 in an amount less than $10,000. The question at issue is whether the consideration received by petitioner for leasing certain oil and gas rights in lands owned by him in the State of Arkansas falls within the classification of gains from the sale of capital assets as provided by section 206 of the Revenue Act of 1921.
    FINDINGS OF FACT.
    In 1908 petitioner bought from his parents 160 acres of land in Union County, Arkansas, for $200, the land being described as the southwest quarter of section 34, township 15 south, range 16 west. The property was cutover timber land and was acquired with the idea of occupying it for a home and for farming purposes. Shortly after the purchase petitioner moved on the land and cleared 30 acres which he planted to crops. After two years’ residence on the land petitioner leased the property for farming purposes.
    In 1918 an oil and gas well was drilled in Union County which development was followed by drilling 'elsewhere in the county and in the year 1921 a successful well was brought in some distance from petitioner’s land. In July, 1922, oil was discovered in what is known as the Smackover field within which petitioner’s property was located. As a result of the interest engendered by the drilling of wells, petitioner had offers for the leasing of his property during the years 1918 and 1919 at prices ranging from $1 to $10 per acre, but did not avail *himself of the offers to lease. In 1921 he leased 40 acres of his farm to the Smackover Oil & Gas Co. and received stock in that company in consideration of the lease.
    ‘ On September 9, 1922, petitioner leased to Pat Marr “ all of the N. W. quarter of the S. W. quarter of Section 34, Township 15 S., Range 16 West, and containing 40 acres more or less ” for a term of five years and for a consideration of $3,000 in cash and $200 per year for the gas from each well where gas only is found and one-eighth part of the oil recovered from the premises.
    Petitioner leased to the Houston Oil Co. of Texas under date of October 14, 1922, the southwest quarter of the southwest quarter of section 34, township 15 south, range 16 west, consisting of 40 acres more or less. The consideration for this lease was a cash payment of $20,000 and one-eighth of all the oil produced and saved from the premises, $200 per year for the gas from each well where gas only was found, and $50 per year for the rights to manufacture casinghead gas.

      On October 20, 1922, petitioner leased to the Federal Petroleum Co. the southeast quarter of the southwest quarter of section 34, township 15 south, range 16 west, “ less such rights and interest as the railroad which crosses said land may have thereon.” The consideration for this lease was $15,000 cash, one-eighth of the net proceeds from the sale of gas from each well and $40 per year for the privilege of deferring the date of boring the well, which was to be commenced on or before October 20, 1923.
    The granting clause in each of the leases involved herein reads substantially as follows:
    Have granted, demised, leased and let and by these presents do grant, demise, lease and let unto the said lessee, for the sole and only purpose of mining and operating for oil and gas, and laying pipe lines and of building tanks, towers, stations and structures thereon to produce, save and take care of said products, all that certain tract of land situated in the County of Union, State of Arkansas, * * * [description of the land]
    The lessees of the first and third tracts described above drilled wells upon them, but neither oil nor gas was found in paying quantities and the petitioner received no further income from this source during the taxable year. The respondent computed petitioner’s tax liability for the year 1922 under sections 210 and 211 of the Revenue Act of 1921.
   OPINION.

Akundell:

In the case of Henry L. Berg v. Commissioner, 6 B. T. A. 1287, we had occasion to pass on the identical «question raised in this proceeding and to construe an instrument substantially similar to the leases in the instant case. The leases considered in the Berg case covered land situated in the State of Arkansas, wherein is located the subject matter of petitioner’s leases. For the reasons set forth in the opinion in the Berg case we are satisfied that the amounts received under the terms of the leases given by petitioner were not “ gains from the sale or exchange of capital assets ” within the meaning of section 206 of the Revenue Act of 1921, and the determination of the Commissioner is accordingly affirmed. See also John T. Burkett v. Commissioner, 7 B. T. A. 560.

Judgment will ~be entered for the respondent.

Considered by SteRNHagen and Muedock.


author: AkuNdbll :

text:
    Elsie Kasper, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph Anfenger, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alma Anfenger, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mariam Basch, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph Basch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7857-7861.
    Promulgated August 12, 1927.
    The evidence does not establish that respondent erred in Ms computation of allowance for depreciation.

      George E. H. Goo&ner, Esq., for the petitioners.

      B. A. Littleton, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies as follows:

    The only issue is as to the method used of computing depreciation on property owned by a partnership of which the petitioners are members. The appeals were consolidated for hearing and decision.
    findings of fact.
    The petitioners are members of the pai tnership of Joseph Basch & Co., which is engaged in business at Los Angeles, Calif. The interests of the petitioners are as follows:
    Elsie Kasper_ one-fourth
    Joseph Anfenger. one-eighth
    Alma Anfenger__. one-cighth
    Mariam Basch_ one-fourth
    Joseph Baseli_ one-fourth

      The business of the partnership is that of renting rugs, furniture, and b?ic-a-brac to motion picture producers in and near Los Angeles County for use in dressing motion picture sets. The partnership owns all of the equipment that it so rents out. The furniture is of the kind known as “ period,” some of which is purchased in various cities in the United States and some in foreign countries. Only a small part of the furniture is antique, the rest being reproductions of antique and period furniture. The partnership carries no modern types of furniture.
    The furniture and equipment is rented by the week, the rental charge being a certain percentage of the cost or value of the article. The charges formerly made were 10 per cent for the first week and 5 per cent for each succeeding week, but in recent years, due to competition and to the fact that many studios have acquired extensive collections of furniture and equipment for dressing sets, the partnership has been forced to reduce its rental charges. The rental charges are usually based on the purchase price of the particular article, plus freight and the cost of any labor necessary to put the piece in condition to rent.
    When a call is received for an article it is taken by truck to the receiving room of the motion picture studio and from there to the set in which it is to be used. The furniture receives hard usage while it is in the hands of the studios and all pieces rented are put through the partnership shop for repairs and cleaning before being placed on the floor again for rental purposes. Costs of repairing are borne by the partnership except when an article is damaged by a studio to an extent that it is beyond repair, in which case the cost of the article is charged to the studio and deducted from inventory. Some of the partnership’s furniture has been in its place of business for several years and has never been rented.
    The partnership has never sold any of its furniture or equipment. Its entire income is from rentals.
    In the years 1920 and 1921 the partnership set up a reserve for depreciation equal in each year to 50 per cent of the purchases for that year, 25 per cent of the purchases for the preceding year, and 5 per cent of the purchases for each of the next preceding five years. It has followed the same procedure in subsequent years. The Commissioner allowed depreciation at the rate of 14 per cent per year on a straight line basis, thereby increasing the income of the partnership for the years 1920 and 1921. In auditing the returns of the petitioners the Commissioner increased their reported income by a proportionate share of the increased income of the partnership, which gives rise to the deficiencies here involved.
   OPINION.

AkuNdbll :

We have repeatedly reí used to affirm any theoretical method of computing depreciation. Appeal of Kinsman Transit Co., 1 B. T. A. 552; Otis Steel Co. v. Commissioner, 6 B. T. A. 358. In the latter case we said that depreciation “ must be determined from the facts of each particular case.” The facts in the present case show that some of the partnership’s furniture upon which it claims a depreciation of 50 per cent for the year in which purchased was not rented during that year; some of it has never been rented although in the possession of the partnership for several years. It can not be said, in the face of such facts, that all of the furniture depreciated to the extent claimed by the petitioners. Moreover, the petitioners have failed to establish that the first rental of furniture depreciated it to the extent claimed for the purpose for which it was used. One of the partners testified that upon the sale of furniture and delivery of it to the home of the purchaser, “ it immediately becomes secondhand furniture and the value is immediately reduced from 50 to 75 per cent.” Another partner testified that the first rental of furniture to a studio depreciates its sales value at least 50 or 75 per cent. These estimates, it will be noted, refer to depreciation in sales value of furniture as a result of its sale or rental. The partnership was not engaged in selling furniture and care was taken to impress that, fact upon us. Its business was that of renting its furniture and other equipment.

The recent case of United States v. Ludey, 274 U. S. 295, holds that “ the amount of the allowance for depreciation is the same which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost.” The amounts to be deducted from income for depreciation thus depend upon the period of the useful life of the depreciable assets. The record does not show that the partnership’s merchandise suffered depreciation for the purpose used through its first rental beyond the 14 per cent allowed by the respondent. We must, therefore, affirm the respondent’s determination in all the appeals.

Judgment will be entered for the respondent,

Considered by Steenhagen and GeeeN.