author: ARTjndell:

text:
    F. A. Douty, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7477.
    Promulgated Nov. 28, 1927.

      John A. Goilier, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent. *
   OPINION.

ARTjndell:

The petitioner alleges that the purchase of the Box Company stock and the Export Company stock from the Cooks and Dooley was not a personal transaction, but was for and in behalf of the Box Company. The contract for the purchase of the stock, which we have set out at some length, does not sustain the petitioner’s claim. It clearly sets forth the fact that the petitioner is the purchaser. He signed the contract as principal, and not as agent for the Box Company; he was the maker and principal obligor of the notes given for the balance of the purchase price and the Box Company was merely a guarantor and hence only secondarily liable. In asking us to find that the Box Company was the purchaser of the stock, the petitioner is asking that we read into the agreement something that will vary its terms which plainly name the petitioner as purchaser.

We do not have in evidence the method of computing gain which respondent used in determining the deficiency involved. His counsel stated at the hearing that the amount of the gain was arrived at by deducting from $311,087.88, the amount of petitioner’s indebtedness which was canceled, the cost of the stock turned in, $192,551.49, resulting in a gain of $124,536.39. The evidence is insufficient to permit of a check of the figures used by the respondent. Among the elements missing are the cost to petitioner of his original holdings of stock in the two companies and the cost of the Export Company stock subsequently acquired. Copies of both petitioner’s personal and special accounts carried on the Box Company ledger were introduced in evidence, but both accounts contain many items that are unexplained, so that we are unable to find from them whether or not the Commissioner erred in his determination of the amount of indebtedness canceled. If, as a matter of law, a taxable gain might result from a transaction such as is here involved, we must, in view of the state of the record, assume that whatever the Commissioner’s computation was, it was correct.

The transaction, in brief, was that petitioner purchased outstanding stock of the Export Company and the Box Company, paying therefor with funds advanced by the latter. After the stock was thus paid for, the Box Company issued a stock dividend to petitioner, who thereupon turned in to the Box Company his stock in the Export Company and surrendered to the Box Company a part of his stock in it, which company then canceled his indebtedness to it.

The effect of the transaction was, as we see it, the same as if the Box Company had paid petitioner $317,087.88 for stock which cost him $192,551.49. The fact that a part of the $317,087.88 was advanced to petitioner to pay for the stock makes it none the less a part of the price received on its sale to the Box Company. In short, he received more than he paid for the stock and the amount of such excess constitutes income.

Judgment will be entered for the respondent.

Considered by Steen hagen and Gkeen.


source: Caselaw Access Project

author: Trttssell :

license: Public Domain

text:
    Cherokee Ochre Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9846.
    Promulgated November 29, 1927.

      F. L. Pearce, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
   OPINION.

Trttssell :

The record of this action contains the testimony of a capable and experienced mining engineer who is thoroughly familiar with properties here under consideration as well as similar properties throughout the Georgia mining districts. In his testimony he states without qualification that the petitioner’s ochre deposits on March 1, 1913, had a value in the ground of $1.50 per ton and that the petitioner’s deposits of barytes ore on the same date had a value in the ground of 60 cents per ton. The witness further testified at considerable length concerning the history and development of these and similar mining enterprises and the selling prices of ores over long periods of time and respecting the barytes ore royalties paid in cases where such ores were removed under royalty leases. The record also contains evidence that immediately upon the beginning of the World War in 1914, and continuously thereafter the values of ochre and barytes ores were on a continuing upward movement, reaching peak prices at the close of and since the war and considering the witness’s testimony in connection with developments since 1913 it appears that his unqualified opinion of value on March 1, 1913, may have been unconsciously influenced by the much higher values prevailing in later years. And, while no question can be raised as to the qualifications of the witness to give opinion testimony upon matters here under consideration, we are led to the conclusion from all the facts contained in the record that his estimate of March 1, 1913, values are too high and, in view of this consideration and of all the record of this action, we are of the opinion and have so found that for the purposes of this action, the March 1, 1913, value of the petitioner’s ochre ores was $1 per ton, and that the March 1, 1913, value of the petitioner’s barytes ore was 40 cents per ton, and that these values should be used as a basis for the depletion deduction during the years here under review.

The deficiencies may be recomputed in accordance with the foregoing fundings of fact and opinion upon 15 days’ notice, pursuant to Bule 50, and judgment will be entered accordingly.

Considered by LittletoN, Smith, and Love.


author: Tkussell :

text:
    Appeal of Konrad Schreier Co.
    Docket No. 3600.
    Promulgated November 29, 1927.

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

      John D. Foley, Esq., for the Commissioner.
   OPINION.

Tkussell :

In Appeal of Manhattan Brewing Co., 6 B. T. A. 952, the Board held that those tangible properties of a brewing company, which lost much of their value by reason of national prohibition legislation, were properly subject to a claim for the obsolescence under section 234 (a) (7) of the Revenue Act of 1918 and that part of the amount of such obsolescence is an allowable deduction from gross income for the calendar year 1918. In the instant case the petitioner’s business of producing barley malt used in the manufacturing of malt liquor was subject to the same or similar conditions as were the properties used directly in the production of malt liquor. In the instant case the petitioner was compelled to discontinue both its malt liquor brewing business and its business of producing barley malt and we are, therefore, of the opinion that the interpretation of the obsolescence provisions of the Revenue Act of 1918 applies to the property of a malting plant under the circumstances of this case in the same proportion that it applies to a property used directly in the brewing business.

In the case at bar the credible and uncontradicted testimony establishes as proven facts that the petitioner’s malt house and machinery were completely thrown into disuse when the petitioner ceased to operate its malting plant in the year 1920. From the beginning of the year 1918 the petitioner had foreseen the ultimate destruction of its malting business and had from that time until 1920 gradually reduced the use of such plant until its operation was finally abandoned. The testimony further establishes that the malt house was designed and built peculiarly for use as a malt plant; that the machinery and equipment installed therein were- imbedded in the building and can not be removed without completely wrecking the building. The testimony further proves that the machinery specially designed for the production of malt could not have been then used or at any time since used for any other purpose, and that even though it might have been removed from the building it would have no market value and that the cost of removal would exceed any possible salvage value of machinery as well as the building itself. We are, therefore, of the opinion that the amount of the depreciated cost of the malt house and its machinery on the date that its use was discontinued in 1920 was a total loss and that this petitioner is entitled to claim as a deduction from gross income the amount of such loss distributed equally over the period from January 31,1918, to October 31, 1920, and prorated into the taxable years 1918, 1919, and 1920.

Respecting the malt plant elevator, the testimony establishes the fact that the use of this elevator was completely discontinued in October, 1920, and that from that time until the time of the trial of this action it had remained wholly unused and that during that period the petitioner had been able to find no probable or possible future use for this property; that its construction was designed peculiarly for use as a grain elevator; that there was no use for such an elevator in the community in which the petitioner’s property was located; that it was situated in a territory devoted chiefly to dairying, where little grain was produced; and that it was not in a location where it could be used as a terminal elevator. The testimony is convincing that at the time when its use was discarded there was no possible future use in sight and its design and construction were of such a character as to make it substantially impossible to remodel it for other uses. • This elevator, however, was constructed of brick and concrete in the year 1913, and in the ordinary course of business should have had many years of life before it could have become useless from the result of ordinary exhaustion, wear and tear, and, although the testimony in the record, respecting this elevator, is of the same character as the testimony regarding the malt house, we still lean to the opinion that this elevator property should not be treated as a complete and total loss. And, although the record furnishes us with no testimony and no guide which could lead us to the determination of its salvage or possible future usage, the record does furnish a complete description of the elevator building and a detailed inventory of the machinery and equipment installed therein. From an examination of the descriptions of these properties, we are convinced that while it may be true that at the time the use of this property was discontinued there may have been no ready market for such property, we are not convinced that it was then a total loss. Other people in other places were carrying on a grain-elevator business and it seems entirely possible that this elevator machinery could then have been and at any time since might be, removed from the elevator building and sold to other people having-use for such machinery. The building itself might at some future time prior to its disintegration on account of exhaustion come into use and that therefore it may not be said to have been a total loss. Taking this view of the situation, we are led to the conclusion that instead of allowing a total loss on the elevator and machinery, as claimed by the petitioner, we may properly determine a different measure of such loss and for the purpose of this case we are of the opinion that the allowable obsolescence on the elevator and machinery is for the period here under consideration 60 per cent of its depreciated cost as of October, 1920.

Respecting the claimed loss upon brewery buildings and equipment, it appears that the same situation exists as above outlined regarding the malting plant elevator and its equipment and following the reasoning there set forth, we fix the obsolescence loss on such equipment at 60 per cent of the depreciated cost.

The obsolescence here allowed on brewery property may be spread over the period from January 31, 1918, to January 16, 1920, and the obsolescence loss upon malt plant properties may be spread over the period from January 1, 1918, to October 31, 1920.

The deficiency may he recomputed in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Rule 50. Judgment will he entered accordingly.

Considered by LittletoN, Smith, and Love.


author: Smith:

text:
    Equity Union Creamery & Mercantile Exchange, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10391.
    Promulgated November 29, 1927.

      Charles Kershenbaum., C. P. A., for the petitioner.

      M. E. McDowell, Esq., for the respondent.
   OPINION.

Smith:

The deficiency herein complained of was assessed by the respondent against the petitioner in April, 1925. Claim for abatement was duly filed and upon the rejection of a portion of the abatement claim the petitioner filed its appeal with this Board. The Board has jurisdiction to redetermine the deficiency under section 283 (b) of the Revenue Act of 1926.

It is the contention of the petitioner that the collection of the rejected portion of the abatement claim is barred by the statute of limitations; that more than 5 years had elapsed from the date of the filing of the petitioner’s return for the fiscal year ended November 30, 1918, to the date of the final adjudication of the abatement claim; and that the “ income and profits tax waiver ” filed on February 11, 1924, was invalid on the ground that the general manager did not have authority to execute the consent.

Section 239 of the Revenue Act of 1918 provides:

That every corporation subject to taxation under this title * * * Shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. * * *

The only return filed by the petitioner for the fiscal year ended November 30, 1918, complying with the above quoted portion of the statute, was filed on November 13, 1922. Pilliod Lumber Co., 7 B. T. A. 591. Five years had not elapsed from that date to the adjudication of the abatement claim by the Commissioner on November 12, 1925, or to the date of the filing of the petition -with this Board, namely, December 28, 1925. In view of this situation the statute of limitations had not operated to bar the collection of the deficiency and it is not necessary to consider the merits of the contentions of the petitioner with respect to the invalidity of the consent filed on February 11, 1924.

The petitioner claims the right to deduct from gross income a dividend of 5 per cent paid upon the capital stock of the petitioner during the taxable year. Claim is made that this represented interest for the use of money. This point must be ruled adversely to the claims of the petitioner in view of the decisions of the Board in Appeal of Sacred Heart Cooperative Mercantile Co., 2 B. T. A. 24, and Appeal of Farmers Cooperative Association, 5 B. T. A. 61.

Judgment will he entered for the respondent.

Considered by Littleton, Teussell, and Love.


author: SteRNHagen:

text:
    Estate of Marcus D. Fairchild, Nellie B. Fairchild, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19022.
    Promulgated November 29, 1927.

      Henry Logan, Esq., and Chester A. Allen, C. P. A., for the petitioner.

      Arthur H. Fast, Esq., for the respondent.
   OPINION.

SteRNHagen:

The petitioner says that respondent has overstated the decedent’s gross estate by improperly including two items which were not part of the decendent’s property at death and by overvaluing certain stock and real property owned.

The respondent held that petitioner owned 379 shares of the stock of Bluebird Securities, Inc. Petitioner has proven that 100 of these shares were owned by decedent’s wife, who had owned separate property and had contributed to the corporation separately. The stock certificate for 100 shares had been issued to her in 1919, and she was thus presumed to be the owner. Great Northern Railway v, Smietanka, 273 U. S. 182. The value of this stock was not within the gross estate and respondent is reversed as to this item.

The respondent held the value of Bluebird Securities, Inc., stock to be at the rate of $177 a share. Petitioner alleges that this is excessive and that the value was $138.15 a share. The proof is insufficient to sustain the lower value claimed. It consists of the testimony of an accountant who examined the books and prepared a balance sheet. He satisfactorily verified the ownership and value of certain listed stocks among the assets, but as to other items he had no personal or direct knowledge and was not qualified to give evidence. Even assuming that the value of the Bluebird stock was proven to be exactly equal to the value of the assets of the corporation minus the liabilities, such valuation would require proper evidence of each item of such assets and liabilities. Without proof, for example, of the alleged note payable of $25,000 or of officers’ account current $13,853.59, other than their statement on the constructed balance sheet, the true value of the Bluebird stock as something less than found by respondent has not been established. Respondent is therefore sustained in his valuation of $177 a share.

The respondent held that the value of the Ditmas Avenue property at death was $33,000. The evidence establishes a value of $27,500. The property was owned by decedent and his wife as tenants by the entirety and the wife contributed to the purchase price. This property should be excluded from the gross estate under authority of Estate of Charles I. Hudson, 5 B. T. A. 711.

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

Considered by GreeN and Arundell,


author: SteeNhageN :

text:
    H. Randolph Guggenheimer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 13625.
    Promulgated November 29, 1927.

      H. Randolph Guggenheimer, Esq., pro se.

      T. M. Mather, Esq., for the respondent.
   SteeNhageN :

Deficiencies in individual income taxes of $122.12 for 1920 and $457.48 for 1921.

FINDINGS OF FACT.

Petitioner was a member of a law partnership in 1920 and kept his accounts and made his return on the basis of actual receipts and disbursements.

Between 1911 and March, 1915, he loaned to Oral J. Wyndham $3,510.54, of which $261 was repaid, the last item of repayment of $100 being received September 1, 1914. There was reason to expect repayment at all times until September, 1920. The debt of $3,249.54 was in 1920 ascertained to be worthless and charged off by petitioner, and is a deduction.

Prior to December 31, 1912, petitioner rendered service to Amy T. Worthington for which he on that date sent her a bill for $100. He sent her subsequent bills, and his last demand was made on July 22,1914. Thereafter she moved and he was unable to find her. This debt was not ascertained in 1920 to be worthless and is not deductible in that year. The debt of $75 of Enrico Aresoni, an opera singer, for services, bill for which was sent in 1913, was not ascertained in 1920 to be worthless and is not deductible in that year.

The Commissioner added $155.83 to petitioner’s income for 1921 received through partnership distribution. This amount was in excess of his share of the partnership income and was not received by petitioner.

Petitioner, prior to 1914, performed legal services for one Lawrence, for which he charged $2,207.19. On February 24, 1914, he received $250 on this account, and this is all that was paid. Whether it was “charged on” the books and included in income does not appear. (See Charles A. Collin, 1 B. T. A. 305.) It was charged off in 1921. Whether it was ascertained to be worthless prior thereto does not appear. It is not deductible in 1921.

An amount of $251 was due prior to December 31, 1912, for legal services performed for the Rapid Remedy Co. The amount was charged off in 1921, but it does not appear when it became or was ascertained to be worthless. It is not deductible in 1921.

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

Considered by Gkeen and Aeundell.


author: Tkussfal:

text:
    Edmund H. Fleming et al., Executors, Estate of C. F. Fleming, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7212.
    Promulgated November 29, 1927.

      Shannon B. Charlton, Esq., for the petitioners.

      John W. Fisher, Esq., for the respondent.
   OPINION.

Tkussfal:

The petitioners’ motion for the substitution of parties petitioner is denied. Section 3467 of the Revised Statutes provides that:

Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he acts, before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate for the debts so due to the United States, or for so much thereof as may remain due and unpaid.

Under the Revenue Act of 1921 both the estate of a decedent and the executors are liable to the Government for the payment of any lawful tax levied under the estate-tax provisions of the Act and the liability of the executors is personal. See United States v. Rodenbough (U. S. D. C., E. Dist. Pa.), decided September, 1927.

The respondent has included the value of the real estate involved in this action in the gross estate of the decedent, justifying his action under section 402(c) of the Revenue Act of 1921, which is as follows:

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 or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money’s worth * * *.

The transfers here in question were made in the year 1911 at a time when there was no tax upon transfers of property of deceased persons. The transfers were made in entire good faith and for good and valid reasons and at a time when the grantor was in good and sound health, in which condition he continued until a few months prior to his death, 13 years later, and at a time when there had occurred no incident which could suggest to the grantor the thought of impending death. We are, therefore, of the opinion that these transfers can not be held 'to have been made in contemplation of death.

The terms of the instrument by which the transfers were made specifically provide that the trustees therein named shall at once, on the execution and delivery of the transfer instruments, immediately take possession of said premises subject only to the life interest of the grantor. It appears that under the term of that instrument the title of the trustees became fixed and indefeasible. We must, therefore, conclude that the transfers were not intended to take effect at or after the death of the grantor.

The facts in this case bear a close analogy to the trust created in the year 1907 by the grantors described in the case of Nichols v. Coolidge, 274 U. S. 531, and following the reasoning and the decision of the Supreme Court in that case, we must hold that the real estate here in question did not constitute a part of the decedent’s estate at the time of his decease and the value of such property may not be included in computing his gross estate for the purpose of determining the amount of the estate tax upon his net estate.

There is no deficiency. Judgment wiU be entered accordingly.

Considered by Littleton, Smith, and Love.


author: Teussell:

text:
    Otto T. Brehmer et al., Executors, Estate of August F. W. Brehmer, Petitioners. v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5844.
    Promulgated November 29, 1927.

      W. Oarey Martin, Esq., for the petitioners.

      John W. Fisher, Esq., for the respondent.
   OPINION.

Teussell:

The testimony in the record of this case convincingly establishes that in the years 1914 and 1919 and 1920, when the transactions herein described took place, the grantor, August F. W. Brehmer, at such times a retired farmer, was still in good health; that he had up to 1920 no thought of approaching death, and that up to the time of these transactions there had occurred no incident which, in the ordinary course of life, should or could have caused him any apprehension of impending death. We are, therefore, satisfied that the transfers here in question were made not in contemplation of death.

In the original grants made in 1914 the instruments of conveyance were in the form of ordinary warranty deeds but contained reservations respecting the income and profits from the farms and required that such income and profits should accrue to the grantor and his wife during their respective lives, or the survivor. In the instruments of conveyance made in the years 1919 and 1920 the reservations respecting rents and profits were specifically relinquished and thereupon the grantees acquired an absolute and indefeasible title to their respective parcels of land and subject to no encumbrance other than such mortgage liens as the grantees had themselves placed upon their land.

We can not escape the conclusion that the grantor in these transactions intended to and did convey to the grantees the entire interest in the property conveyed and that the grantor after giving the deeds in 1919 and 1920, retained no interest in nor claim upon lands conveyed, and that the grantees then took complete possession and enjoyment of their respective farms. We are thus brought to the conclusion that the transfers were not intended to take effect in possession or enjoyment at or after the grantor’s death.

The situation in respect to these transfers is somewhat analogous to the trust described in the case of Nichols v. Coolidge, 274 U. S. 531, and under the decision of the Supreme Court in that case the value of the properties described in the case here at bar can not be included in the gross estate of the decedent.

The deficiency in estate tax should he computed in accordance with the above findings of fact and opinion. Order of redeterndnation will he made upon 15 days’ notice, under Bule 50.

Considered by Littleton, Smith, and Love.


author: Siefkin :

text:
    Big Western Oil & Gas Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7150.
    Promulgated November 29, 1927.

      H. J. Wightman, Esq., for the petitioner.

      Granville JS. Borden, Esq., for the respondent.
   OPINION.

Siefkin :

The evidence is clear that the sale of the leases in question was instituted and completed in the year 1918 and the entire consideration paid to petitioner or its creditors in that year. The respondent erred in including the profit from the sale in 1919.

As to depletion, the evidence is too slight to justify us in disturbing the allowances of the respondent, and we must approve his determination in that respect.

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

Considered by Mourns and Murdock.


author: Siefkin' :

text:
    Hugh MacRae, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4284, 19271.
    Promulgated November 29, 1927.

      Raymond N. Beebe, Esq., for the petitioner.

      T. M. Wilkins, Esq., for the respondent.
   OPINIOST.

Siefkin' :

Petitioner relies upon opinion evidence as to the general advantages accruing to the holder of the majority control of a utility and asks us to determine that the March 1, 1913, value of petitioner’s 3,371 shares in the Tide Water Power Co. was at least 25 per cent more than $111 a share, the value determined by the respondent and the price at which small lots were sold by- petitioner in 1912 and 1913. A witness who was well qualified to express an opinion testified that the controlling interest in a public utility was worth at least 25 per cent more per share than a minority interest. He based such opinion, not only upon the control of the majority over dividends, but also upon the fact that holding companies are the large purchasers of controlling interests in public utilities from which they derive not only the benefit of management, the benefit of naming the salaried officers, but also to designate who shall receive large fees for management under operating contracts. All of this may be admitted as a general proposition without, however, proving petitioner’s contention. Petitioner uses a price of $111 a share as the fair market value of minority stock. The only evidence of this consists of two sales at that price of 10 shares each made by him late in 1912 and early in 1913. Petitioner’s financial secretary testified that she handled the transactions and that the buyers in each case were good friends of the Tide Water Power Co. One of them approached petitioner through a banker who named the price and petitioner “let him have it.” These conditions do not justify us in using $111 as a fair market value of a minority interest. Without such a premise, petitioner has failed to sustain the burden of proving the March 1,1913, value of the stock sold to be more than the amount determined by respondent.

On the question of the value of the Oleander Development Co. stock at the time it was received by petitioner in 1922, there is abundant evidence that there was no real market for the shares in that .company at that time and that there was no real market for the real estate which constituted the assets of the company. Although there is some conflict in the evidence, it is also our opinion that the evidence establishes that the liquidation of the company would, in all probability, take a considerable number of years. Under these circumstances, we conclude that petitioner did not, by reason of his receipt of the stock in the Oleander Development Co., receive property with “ a readily realizable market value ” under section 202 (c) and (e) of the Revenue Act of 1921. The scattered sales of a few small lots to petitioner’s secretary and the circumstances surrounding the only other two sales in the company’s history are not indicative of the value contemplated by the statute. See Phillips v. United States, 12 Fed. (2d) 598, 603; Appeal of A. L. Englander, 1 B. T. A. 760; Appeal of Samuel Graydon, 2 B. T. A. 552; Appeal of Anton M. Meyer, 3 B. T. A. 1329.

The evidence as to the deduction for the debt owing petitioner from M. F. H. Gouverneur is that both petitioner and Gouverneur considered the debt a valid and existing one up until 1922 and in that year petitioner, finding Gouverneur ill with tuberculosis and disappointed in his expectations of obtaining considerable amounts of money from certain patents and without assets more than sufficient to support himself and family, determined the debt to be worthless and directed that the amount be charged off on his books, which was done. Subsequently petitioner released Gouverneur from the debt and Gouverneur gave petitioner a release as to any anticipated profits from certain business transactions of petitioner in which Gouverneur had an interest. It is argued by respondent that petitioner thus received a consideration for the cancellation of the indebtedness. This contention we deem answered by the evidence, which is uncontradicted, that the release by Gouverneur was given merely to clear the records and that it effected no other purpose, a portion of the transaction in question having resulted in such a large loss that no hope of utimate profit remained.

Respondent also argues that the personal friendship of petitioner and Gouverneur implies that the cancellation of the debt was a gift. It seems to us that the other circumstances negative this implication and that the petitioner and Gouverneur treated the debt as a business transaction and that petitioner has satisfied the requirements of section 214 (a) (7) of the Revenue Act of 1921 in ascertaining the debt to be worthless and charging it off in the year 1922. The deduction should be allowed.

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

Considered by Littleton, MoeRis, and Müedock.


author: Sternhagen:

text:
    The Ohio Clover Leaf Dairy Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6778, 13029.
    Promulgated November 30, 1927.

      Thomas 0. Marlar, Esq., Harry J. Gemty, Esq., and L, T. Konopák, O. P. A., for the petitioner.
   ORDER DENYING REHEARING.

Sternhagen:

The petitioner being dissatisfied with the Board’s decision of November 5, 1927, has filed this motion for rehearing, for leave to amend its pleadings, and upon rehearing to submit further proof. The principal dissatisfaction is that it was taken by surprise when the Board decided that the facts stipulated were not sufficient to support a decision that the petitioner was as a matter of law entitled to certain deductions for depreciation and loss. It is not said that the Board’s findings of fact are incomplete. The petitioner says, however, that it was intended by both parties to submit all the facts necessary to support the issue of law. It does not appear whether the respondent agrees with this or not. All that appears is that the respondent was willing to submit the case upon the stipulation as made.

It must be obvious that the Board can not reach a conclusion as to the deficiency under attack except upon the facts of record. Where the facts are in dispute it must weigh the evidence and decide the facts accordingly. Here no facts were in dispute, but the parties rested their several contentions upon an agreed statement. The issue, therefore, was none other than whether the facts stipulated were sufficient to discharge the petitioner’s burden of proof as prescribed under Rule 30 to establish the error of the Commissioner’s determination. It is settled by innumerable decisions of the Board that a taxpayer’s right to a deduction under section 234 (a) (I) for exhaustion, wear and tear, depends upon whether he has actually suffered such exhaustion. Depreciation is a fact. It is not sufficient that a taxpayer has made book entries or that he has set up a reserve. He must prove that his property has in fact been suffering from exhaustion, wear and tear, and the amount thereof. The petitioner here has by the stipulation proved only that it charged a certain amount on its books to a depreciation account and deducted this amount upon its income-tax return. The Commissioner has submitted that this is insufficient to justify the deduction. From the face of the record this was what the Board was required to decide, and it could not assume that either party was misled.

In petitioner’s motion it is said:

If, in the view of this Board, the parties failed to present the facts in proper form, neither intending to take advantage of the other, this Board was in error in deciding this case against petitioner and instead of so doing, this Board should have pointed out the deficiency of the stipulation of facts and should have required or permitted an amendment of the stipulation, or should have required or permitted an amendment of the petition or answer and the submission of additional or supplemental proofs.

This goes beyond the function of the Board. The Board must assume that the parties represented by their counsel have presented the case intelligently according to their best interests, and except in a clear case of injustice or under extraordinary circumstances, the Board takes the record as it finds it and decides the issues in accordance therewith. The function of the Board is primarily judicial and not inquisitorial. It is only in this way that the Board can discharge the burden of deciding the many cases before it. Its task could not be effectively accomplished if it were to seek out in each case facts which the parties may have omitted from the record without knowing until after the decision whether such omission was deliberate or inadvertent.

The Board in the present case gave full and careful consideration to the record submitted in an earnest effort to decide the controversy as the parties presented it, and it can not now open the record and prolong the proceeding after full opportunity to be heard has been given. It is therefore

ORDERED that the motion be and it hereby is denied.


author: Smith :

text:
    Turners Falls Power & Electric Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 26305.
    Promulgated December 1, 1927.

      Howard, W. Brown, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
   OPINION.

Smith :

Section 204(a) of the Revenue Act of 1921 defines the term “net loss.” Subdivision (b) of the same section provides:

If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; * * *

Section 200 of the same Act provides:

That when used in this title — •
(1) The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term “ fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1921, shall be the calendar year 1921 or any fiscal year ending during the calendar year 1921.

In Appeal of Arthur Walker & Co., 4 B. T. A. 151, the Board held:

For the fiscal year ending March 31, 1921, taxpayer sustained a net loss as defined in section 204(a) of the Revenue Act of 1921. With the approval of the Commissioner it changed its fiscal year and filed a return for the period beginning April 1, 1921, and ending February 28, 1922, and claimed the right to deduct a portion of such net loss from the income for such period. SelA, that no part of such net loss may be allowed as a deduction.

The petitioner claims that its case is distinguishable from the above appeal for the reason that the petitioner is not attempting to deduct a net loss for a twelve-month period from the income of a succeeding period less than a twelve-month period; that the petitioner is claiming the right to deduct a net loss for a fractional part of a year from the gross income of a full taxable year. We are not impressed, however, by this argument. The reasoning in the Arthur Walker & Co. appeal is equally applicable here. Congress has specifically defined the term “ taxable year” as meaning a twelve-month period. In the Revenue Acts of 1924 and 1926, Congress has seen fit to define a taxable year differently and to provide that “ The term ‘ taxable year ’ includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made.”

It has not provided that this new definition for a “ taxable year ” shall have any retroactive effect. We must assume that if Congress had intended it to have a retroactive effect it would have so provided. This it has not done. To modify the definition of the term taxable year,” as contained in the Revenue Act of 1921, for the purpose of giving relief to the instant petitioner, would, as said in the Walker (& Go. appeal, supra, be tantamount to legislation. For these reasons the point in issue must be decided adversely to the contentions of the petitioner.

Judgment will be entered for the respondent.

Considered by Trussell, Love, and Littleton.


text:
    Rose P. Crane, Executrix, Estate of Frederick G. Crane, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10695, 15374, 16789.
    Promulgated December 1, 1927.

      Laurence Graves, Esg., and James F. Bacon, Esq., for' the petitioner.

      P. J. Bose, Esq., for the respondent.
   OPINION.

Smith :

Both the Revenue Acts of 1918 and 1921 provide that in computing net income there shall be allowed as deductions “Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business ” or if incurred in any transaction entered into for profit, though not connected with the trade or business. The petitioner contends that the decedent’s farming operations above described were carried on as a “ business ” within the meaning of the term as it is used in the statutes and for a profit, and that the losses sustained are, therefore, deductible in computing net income. The respondent contends that the decedent was not engaged in farming as a trade or business; that the farm was not operated for profit but for pleasure, and that the losses were, therefore, personal losses and are not deductible.

We can not agree with the respondent’s contentions. The mere fact that a farm has been operated over a number of years at a loss for each year, the fact upon which respondent mainly relies, does not justify the conclusion that the farm was not operated as a business enterprise or with the hope and expectation of realizing a profit. Plant v. Walsh, 280 Fed. 722; Samuel Riker, Jr., Executor, 6 B. T. A. 890; Moses Taylor, 7 B. T. A. 59.

Business has been defined by the Supreme Court as “that which occupies the time, attention, and labor of men for the purpose of livelihood or profit.” See Flint v. Stone Tracy Co., 220 U. S. 107. The evidence is that the operation of the farm here in question occupied, during the taxable years, practically all of the time, attention and labor of some 35 men, including the decedent. The evidence further shows that the farm was operated upon a practical and business-like basis and that the decedent made considerable effort from time to time to turn the yearly deficit into a profit. His ultimate failure in this may have been due to numerous causes. Some of them have been ascertained and recounted. About the year 1917 the herd of pure-breed cattle was found to be infected with tuberculosis. Later on it developed that another disease known as contagious abortion was afflicting the herd. As a result of these diseases the herd had to be disposed of at a heavy loss extending over the years 1917 to 1921. Excessive rainfall during the year 1919 caused considerable damage to the crops, which made it necessary to purchase feed for the stock during the year 1920, increasing operating expenses for that year. The evidence shows that the decedent made every effort to put his farm upon a profitable basis. In the first place he improved his lands. He introduced pure-breed cattle. He put into operation a dairy and a poultry business. He purchased cattle to fatten for the market. He raised hogs and draft horses for sale. He set out a large orchard for the purpose of producing fruit for the market. Certainly these are efforts that are usually put forth for business reasons and for the purpose of gain. He kept a separate bank account for the farm and employed a bookkeeper to handle the farm accounts. He finally engaged an expert accountant to install a thorough accounting system whereby the exact result of the operation of each department could be ascertained. Some of the departments which persistently showed losses were discontinued.

The decedent devoted practically all of his time to the farm. It was not a diversion or a hobby with him but a vocation. He was himself a farmer. His interest was centered in farming as a profession. He strove to make his farm an exemplary one and to demonstrate to other farmers of his community the practicability of scientific farming. He employed men educated along these lines and capable of carrying out his ideas. He was not a sportsman. His farm boasted neither a golf course nor a race track, nor any of the other so-called luxuries often associated with a wealthy man’s country estate. Every effort of the farm was directed towards the production of merchantable produce. All of the produce was marketed to the best advantage possible. The gross receipts for each of the years 1917 to 1922, inclusive, ranged from approximately $21,000 to $70,000. The losses ranged from approximately $52,000 to $100,000. On an average the losses for each year were about twice the gross receipts. In the case of Thatcher v. Lowe, 288 Fed. 994, which is relied upon by the respondent, the losses for each of the two years were over $16,000 and the gross receipts were $1,100 in one year and $1,600 in the other. In that case the court said that the test was one of actual intention and that it had nothing to go on but the gross receipts and losses. Here there is ample evidence to overcome the presumption, if any, that because no profit was actually earned over a period of years it was not a business undertaken for profit.

In the case of Plant v. Walsh, supra, the test of whether a farm was operated as a business was said to be whether farming was engaged in as a regular occupation and in accordance with recognized' business principles and practices. To the same effect is Wilson v. Eisner, 282 Fed. 38.

We think that the evidence in this case meets these tests as well as those which we have heretofore laid down in Samuel Riker, Jr., supra; Thomas F. Sheridan, 4 B. T. A. 1299; August Merckens, 7 B. T. A. 32, and Moses Taylor, supra, and that the losses sustained are deductible in computing net income for the years in question.

Judgment will "be entered on 15 days' notice, v/nder Rule 50.

Considered by Tktjsssíll, Love, and Littleton.


author: Love :

text:
    Eli J. Taylor, Petitioner, v. Commissioner of Internal Revenue, Respondent. James D. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. A. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. D. W. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. F. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3050-3053, 3163.
    Promulgated December 1, 1927.

      Lee /. Park, Esq., S. L. Walker, Esq., and S. A. Blustein, G. P. A., for the petitioners.

      M. E. McDowell, Esq., and J. Harry Byrne, Esq., for the respondent.
   OPINION.

Love :

The issues in this case have all been disposed of by stipulation except one. This one is the value, if any, at March 1, 1913, of the lease of the Brown Coal Co. for the purpose of depletion or exhaustion.

The petitioners undertook to prove the value by three witnesses. One was a partner in the Brown Coal Co., who testified that the partnership gave an option in 1913 to sell the leasehold for $300,000, including the plant and equipment. The option was never exercised. It was in effect merely an offer to sell and as such is worthless as evidence of the value.

Another witness, a mining engineer and geologist, was of the opinion that the lease had a value of $189,000 on the basis of an estimated value of 5 cents a ton for the coal in place over and above the royalty of 10 cents a ton provided by the lease. It appeared, however, that a lease of coal lands in the vicinity of this mine was made in 1913 at 10 cents a ton. While those lands were less favorably situated than petitioner’s mine, we think that the testimony does not satisfactorily show that this fact would result in a difference in value of 5 cents a ton, or what difference in value would result from the difference in location.

The other evidence as to value consisted of the statistics showing the results of operation set forth in the findings of fact (which were stipulated), and testimony as to an appraisal based thereon by the so-called HoskoldV formula. The petitioners, as a part of their proof, attempted to appraise the leasehold by this formula as it is applied in appraising mineral in place, and they contend for a valuation thus arrived at of $172,604.16.

While such appraisals are used to aid in determining value in the absence of more persuasive evidence, there are two defects in petitioners’ application of the formula, which preclude us from accepting their conclusions therefrom. One is that in finding the average annual operating profit (which is one of the factors in the formula), the petitioners used the operating profits for the years from 1911 to 1915, inclusive; the other is, that they included in the figures used not only operating profits from coal sales but also those arising from selling merchandise and renting tenement houses.

As to the first, it is almost axiomatic that the ascertainment of value retrospectively must be based on facts known or reasonably in prospect at the valuation date. It therefore follows that subsequent earnings are not evidentiary of value on that date. While such earnings have been admitted in evidence by the Board, it was only as corroborative of other testimony as to prospects based on factors known at the valuation date to exist. Appeal of Dwight & Lloyd Sintering Co., 1 B. T. A. 179. In the present case, the testimony does not show that from facts known on March 1, 1913, increased earnings might then reasonably have been anticipated. It was therefore improper to employ in the calculation the profits for the years 1913, 1914, and 1915.

It was also improper to include with the operating profits from coal sales the profits from the mercantile business and tenement houses. As stated above, the formula as employed by petitioners is a method which purports to appraise mineral in place. Among the factors in the formula, as applied to a coal mine, are the operating profits per ton, the remaining number of tons in the mine, the rate at which it will be extracted. To these factors, the sale of merchandise and the renting of houses have no direct mathematical relation, however closely they may be related as business adjuncts to the mining operations. They are different kinds of businesses, affected by different conditions. When other than the prescribed factors are introduced into a formula, its validity is destroyed.

If only profits from coal sales, for the years 1908 to 1912, are used, the analytical appraisal shows a present worth March 1, 1913, of $109,677.11. It will be seen that this amount falls short by $46,283.45 of funding the value, including replacement, of (he mining plant and equipment, which was stipulated to be $155,960.56.

On the other hand, the profits from the mercantile business and tenement houses were relatively large. On an investment in buildings and fixtures valued at $23,148.87, the average operating profit during the five years preceding 1913, was $11,429.29. These profits must be considered in determining what value, if any, the leasehold had on March 1, 1913. If the leasehold as a whole had a value, the petitioners are entitled to deduct the exhaustion of such value over the remaining life of the leasehold. Appeal of Royal Collieries Co., 1 B. T. A. 369.

After a careful consideration and analysis of the results of all of the operations carried on under the lease, we have found that it had a value on March 1, 1913, of $45,000. The petitioner is entitled to deductions for the exhaustion of this value over the life of the lease, which we have found to be 40 years.

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

Considered by Trussell, Smith, and Littleton.


author: Lope:

text:
    Plainfield Grain Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1420.
    Promulgated December 1, 1927.

      W. H. Cryder, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
   OPINION.

Lope:

It will be noted that the Commissioner assessed additional taxes in the amoimt of $4,403.75, and later rebated $178.77 of that amount, leaving a deficiency in the amount of $4,224.98.

The only error assigned was that the Commissioner refused to grant special assessment under section 328 of the Revenue Act of 1918. On that issue there was no evidence offered further than that found in paragraph 5 of the findings of fact, and those facts are not sufficient within themselves to entitle petitioner to special assessment. (See section 327 (d) (1).)

The deficiency for 1919 is redetermined in the amoimt of $4,£24-98. Judgment will he entered accordingly.

Considered by TRussell, Smith, and Littleton.


text:
    R. D. Lidstone Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4133.
    Promulgated December 1, 1927.

      Frank J. ATbus, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   OPINION.

Love :

The Commissioner erred in disallowing as a deduction from gross income for 1917 the amount of $6,300. The total amount of $8,900 paid to the three officers constituted reasonable compensation for services rendered during that year by petitioner’s officers.

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

Considered by Trussell, Smith, and Littleton.


author: Love:

text:
    Chester F. Morrow, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10488, 13011.
    Promulgated December 1, 1927.

      H. W. Schultheis, Esq., and Alfred 8. Niles, Esq., for the petitioner.

      A. G. Bouchard, Esq., for the respondent.
   OPINION.

Love:

By section 216 (c) of the Revenue Acts of 1921 and 1924, it is provided that in computing the normal tax a single person shall be allowed a personal exemption of $1,000 and the head of a family shall be allowed an exemption of $2,500, except that the Revenue Act. of 1921 restricts this exemption to $2,000 where the net income is in excess of $5,000.

The petitioner takes the position that during the years 1923 and 1924 he was the head of a family and is entitled to the exemption of $2,000 and $2,500 for the respective years. The respondent contends that the petitioner is entitled only to the exemption of $1,000 provided in the case of a single person.

We have heretofore had occasion to pass upon the question involved in this proceeding in Hannah D. Stratton, 5 B. T. A. 1025.

In view of the Board’s reasoning in the above-quoted proceedings, we are of the opinion that the petitioner herein was not the head of a family within the meaning of the Revenue Acts of 1921 and 1924.

Judgment will be entered for the respondent.

Considered by Trussell, Smith, and LittletoN.


text:
    Frank E. Norton and Stuart M. Don, Executors, Estate of Harriet M. Don, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5594.
    Promulgated December 1, 1927.

      John F. MeCarron, Esq., and George E. Hamilton, Jr., Esq., for the petitioners.

      L. G. Mitchell, Esq., for the respondent.
   OPINION.

Tkussell :

The issue in this case is whether the respondent erred in refusing the petitioners the right to deduct from the gross income of the estate of Harriet M. Don the amount of inheritance or transfer taxes paid by the executors during the taxable year to the nine States named in the findings of fact.

Section 214 (a) (3) of the Revenue Act of 1921, with certain exceptions not pertinent to this proceeding, permits an individual for the purpose of ascertaining his net income to deduct from his gross income “ taxes paid or accrued during the taxable year.”

Section 219 of the same act provides :

(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate.

Subdivision (b) of said section 219, in effect provides, with exceptions not material here, that the net income of an estate shall be computed in the same manner as that of an individual. The question then is whether the inheritance or transfer taxes paid by the executors are deductible from the gross income of the estate or are deductible by the distributees. We must be guided by the nature of the tax as imposed by the state statutes as construed by their courts. Keith v. Johnson, 271 U. S. 1.

Under authority of the Board’s decision in the case of Oliver Prescott, et al., Executors, v. Commissioner, 8 B. T. A. 582, the taxes paid by the executors to the States of New York, Connecticut, West Virginia, New Jersey, and Michigan under their respective transfer or inheritance-tax statutes are legal deductions from the 1922 gross income of the estate of Harriet M. Don, which was in the process of administration.

There remains to be decided the question of the deductibility of the taxes paid by the executors to the States of Colorado, Illinois, Kansas, and Wisconsin. Neither counsel has referred us to any decisions by the highest courts of these States nor have we been able to ascertain that there are any such decisions involving the precise question here involved.

The Colorado inheritance-tax law, Compiled Laws of Colorado, 1921, Chapter 156, imposes “ upon the transfer of any property ” from the deceased to any beneficiary, a tax graduated in proportion to the amount of the inheritance and with respect to the degree of relationship of the beneficiary. The said act further provides:

7489. Taxes — When due — Discount—Interest—Bond for payment. Sec. 6. All taxes imposed by tbis act shall be due and payable at the death of the decedent, except as hereinbefore provided * * *
7490. Tax a lien — Exception—Notice—Personal liability — Enforcement of lien. Sec. 7. Every tax imposed by this act shall be and remain a lien upon the property passed and transferred until paid, * * * The person to whom the property passes or is transferred and all executors, administrators and trustees shall be personally liable for the payment of all such taxes * * *.
7491. Administrator deduct tax — No distribution until paid — Sale of property to pay tax. Sec. 8. Any administrator, executor, or trustee having any charge or trust in legacies or property for distribution subject to the said tax, shall deduct the tax therefrom, or if the legacy or property be not money, he shall collect a tax thereon upon the appraised value thereof from the legatee or person entitled to such property, and he shall not deliver or be compelled to deliver any specific legacy or property subject to tax to any person until he shall have collected the tax thereon, * * *. All administrators, executors, or trustees shall have full power to sell so mucli of the property of the decedent as will enable them to pay said tax, in the same manner as they may be enabled to do by law, for the payment of debts of their testators and intestates, * * *.

The Illinois inberitance-tax law, Callaghan’s Illinois Statutes Annotated, 1924, vol. 7, ch. 120, ¶396, imposes “ upon the transfer of any property ” from the deceased to any beneficiary, a tax graduated in proportion to the amount of the inheritance and with respect to the degree of relationship of the beneficiary. The said act further provides:

¶398. Tax — When payable} § 3. All Taxes imposed by this-Act, unless otherwise herein provided lor, shall be due and payable, at the death of the decedent, * * *
¶399. Taw — How, when, and by whom payable.} § 4. Any administrator, executor or trustee having any charge or trust in legacies or property for distribution subject to the said tax shall deduct the tax therefrom, or if the legacy or property be not money he shall collect a tax thereon upon the appraised value thereof from the legatee or person entitled to such property, and he shall not deliver or be compelled to deliver any specific legacy or property subject to tax to any person until he shall have collected the tax thereon; * * *
¶400. Liability and powers of executors, administrators and trustees.} §5. All executors, administrators and trustees shall be personally liable for the payment of taxes and interest, * * *. They shall have full power to sell so much of the property of the decedent as will enable them to pay said tax, in the same manner as they may be enabled to do by law, for the payment of duties of their testators and intestates, and the amount of said tax shall be paid as hereinafter directed.

The Kansas succession-tax law, Revised Statutes of Kansas, 1923, ch. 79 — Taxation, art. 15 — Taxation of Legacies and Successions, imposes a tax upon “ All property * * * which shall pass by will or by the laws regulating intestate succession,” at rates graduated in proportion to the amount of the inheritance and with respect to the degree of relationship of the beneficiary. The said act further provides:

79-1502. Payment of tax; lien. Except as hereinafter provided, taxes imposed by the provisions of this act shall be payable to the county treasurer * * * by the executors, administrators or trustees, * * *. Property * * * subject to taxes as aforesaid, * * * shall be charged with a lien for all taxes and interest thereon * * *.
79-1506. Collection of tax by representative or trustee. An executor, administrator or trustee holding property subject to said tax shall deduct the tax therefrom or collect it from the legatee or person entitled to said property; and he shall not deliver property or a specific legacy subject to said tax until he has collected the tax thereon. An executor or administrator shall collect taxes due upon land which is subject to tax under the provisions hereof from the heirs or devisees entitled thereto, and he may be authorized to sell said land according to the provisions of section 9 if they refuse or neglect to pay said tax.

The Wisconsin Inheritance Tax Act, Wisconsin Statutes, vol. 1, 1925, sec. 72.01, imposes “ upon the transfer of any property ” from a deceased to any beneficiary, taxes graduated in proportion to the amount of the inheritance and with respect to the degree of relationship of the distributees. The said act further provides;

72.05 Lien. (1) Personal Liability. All taxes imposed by this act shall be due and payable at the time of the transfer, except as hereinafter provided; and every such tax shall be and remain a lien upon the property transferred until paid, and the person to whom the property is transferred and the administrators, executors, and trustees of every estate so transferred shall be personally liable for such tax until its payment.
(2) Payment; Receipt. * * *
(3) Bond or Receipt Necessary. But no executor, administrator or trustee shall be entitled to a final accounting of an estate, in settlement of which a tax is due * * *.
72.07. Executors; poioers; collection; payment. Every executor, administrator, or trustee shall have full power to sell so much of the property of the decedent as will enable him to pay such tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator or intestate. Any such administrator, executor, or trustee, having in charge or in trust any legacy or property for distribution, subject to such tax, shall deduct the tax therefrom; and within thirty days therefrom shall pay over the same to the county treasurer, as herein provided. If such legacy or property be not in money, he shall collect the tax thereon upon the appraised value thereof, from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under this act, to any person until he shall have collected the tax thereon. * * *

In the case of Keith v. Johnson, supra, the Supreme Court had under consideration the New York transfer-tax law, art. 10, Tax Law, Consolidated Laws, which imposes a tax “ upon the transfer of property” from the deceased (§220) at rates graduated, according to the amount of the inheritance and with respect to the degree of the relationship of the beneficiary. §221, 221(a). The said statute further provides:

224. Hen of tax and collection Toy executors, administrators and trustees. Every such tax shall be and remain a lien upon the property transferred until paid and the person to whom the property is so transferred, and the executors, administrators and trustees of every estate so transferred shall be personally liable for such tax until its payment. Every executor, administrator or trustee shall have full power to sell so much of the property of the decedent as will enable him to pay such tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator’ or intestate. Any such executor, administrator or trustee having in charge or in trust any legaey or property for distribution subject to such tax shall deduct the tax therefrom and shall pay over the same to the state comptroller or county treasurer, as herein provided. If such legacy or property be not in money, he shall collect the tax thereon upon the appraised value thereof from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under this article to any person until he shall have collected the tax thereon. * * *

A comparison of each of the transfer or inheritance-tax laws of the States of Colorado, Illinois, Kansas, and Wisconsin, with the New York transfer-tax law shows that they are not distinguishable in any material aspect. In each instance the State looks primarily to the decedent’s personal representative and to the estate for the payment of the transfer or inheritance taxes.

Under authority of Keith v. Johnson, supra, the executors are entitled to deduct from the gross income for the year 1922 of the estate of Harriet M. Don, the amount of the transfer or inheritance taxes paid to the States of Colorado, Illinois, Kansas, and Wisconsin. See also United States v. Mitchell, 271 U. S. 9.

Judgment will be entered for the petitioners.

Considered by Smith, Love, and Littleton.


author: Teussell :

text:
    Auto Specialties Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10449, 15928.
    Promulgated December 1, 1927.

      Paul F. Myers, Esq., and John B. Yates, Esq., for the petitioner.

      Grcumille S. Borden, Esq., for the respondent.
   OPINION.

Teussell :

The sole question to be determined in this appeal is the value of the patents owned by the petitioner on March 1, 1913. In support of petitioner’s claim for value it introduced various witnesses who testified as to the superiority of the device manufactured under the petitioner’s patents as compared with other devices then in existence. Two of these witnesses placed a value of some $500,000 on these patents. The first witness, Borgun, determined his value from estimated annual earnings of $149,344. The other witness, Milnor, presented a long series of curves and estimates of future probability from the year 1913 to the year 1927, inclusive, in which he estimated the probable increase of sales of open cars, the probable increase in the inhabitants of the United States, the probable increase in sale of bow-holders, and the probable profits to be realized from the sale.

We have examined with great care the computations and estimates of future probability thus presented, but do not believe that the witnesses placed sufficient weight in the probability that the patents might become obsolete before they expired, due to the rapid improvements in the automobile industry, nor did they give sufficient weight to the competition which might arise from the sale of devices which would perform similar functions to those manufactured by the petitioner. This would result in smaller profits than those estimated by the witnesses. The record of the petitioner has shown that these estimated profits have not been realized. From the data submitted it appears that the approximate profits made by the petitioner for the years 1913 to 1920 were as follows:

1913_23 cents per set
1914_32 “ “ “
1915_34 “ “ “
1916_20 “ “ “
1917_08 “ “ “
1918_13 “ “ “
1919_19 “ “ “
1920_28 “ “ “

Subsequent events have also shown that the device during the last few years has been placed upon comparatively few vehicles, due to the large increase in the production of closed cars and various improvements or changes in open-car construction which made such a device unnecessary. We believe, also, that all of the profits realized from the manufacture and sale of this article are not entirely attributable to the patents themselves. Had the petitioner manufactured these devices without patents in competition with other concerns, it is very probable that it could have realized substantial profits therefrom. This fact was indicated in the testimony of Milnor, who stated that the profits he estimated per set were only slightly in excess of what could have been obtained with the keenest kind of competition against other patented devices. Accordingly, we are of the opinion that the value of the petitioner’s patents at March 1,1913, was $160,-000, and that such value is exhaustible over a period of 15 years from March 1, 1913.

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

Considered by Smith, Love, and LittletoN,


author: Trussell:

text:
    Guthrie Shaw, Executor, Estate of James G. Shaw, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9644.
    Promulgated December 1, 1927.

      G. N. Nelson, Esq., for the petitioner.

      L. 0. Mitchell, Esq., for the respondent.
   OPINION.

Trussell:

Upon the record we are of the opinion that decedent had ascertained during 1920 that the debt in question became worthless, and, inasmuch as he kept no books, there could be no physical charge-off, but decedent’s statement during 1920 that the amount could be forgotten was in effect a charge-off of the bad debt.

Judgment will be entered upon 15 days’ notice, pursuant to Bule 50.

Considered by Smith, Love, and Littleton.


author: TRIjssell:

text:
    Lillie M. Clark, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8049.
    Promulgated December 1, 1927.

      Harrison Brand, Jr., Esq., for the petitioner.

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

TRIjssell:

The courts and the Board have held heretofore that mere book entries alone do not and can not determine the question of the receipt of income. The only year here involved is the year 1921 and the only question with regard to the executrix’s fees for the Board to determine is whether petitioner received them during 1921. In April, 1918, the probate court turned over to petitioner the residue of her husband’s estate plus the $21,590.50 allowed by that court as executrix’s fees, and if such fees were received as such by petitioner they must have been received at that time, but we do not decide that question. Subsequent to April, 1918, the property included in petitioner’s husband’s estate became hers and she could use, transfer or sell any or all of it during her life without any restriction whatever. The two sets of accounts combined reflected petitioner’s income from her property during 1921 and the cross-entry memorandum upon which it seems the respondent relies, has no meaning whatever in regard to what income petitioner actually earned or received during 1921. The petitioner kept two sets of accounts so that at her death the property included in her deceased husband’s estate would be intact and go to the residuary legatees designated in his will. She desired to have the whole estate pass on to his relatives, including the $21,590.50, and the memorandum was made on the books merely to show that she had never accepted nor received the said amount as executrix’s fees. The said $21,590.50 was not income to petitioner during the year 1921 and upon this issue the respondent must be reversed.

The record before us shows that on June 30, 1921, the assets of the International Fur Exchange, Inc., had a book value in excess of $22,000,000 and that its deficit amounted to $207,366.90. The corporation had accounts receivable in an amount in excess of $13,000,000 and the record does not disclose how good or bad those accounts were in 1921. There is no doubt but that the stock in question declined in value during 1921, but such decline in value does not give rise to a deductible loss. W. P. Davis v. Commissioner, 6 B. T. A. 1267. The Fur Exchange was in the process of liquidation, but such liquidation of assets was not completed during 1921 and it has not been established that the stock became worthless during that year. To sustain the deductible loss claimed by petitioner it must be shown that the stock became worthless in fact during 1921, and that there was no probability that any portion of the investment would ever be recovered. See Appeal of E. O. Walgren, 4 B. T. A. 1066; Royal Packing Co. v. Commissioner, 5 B. T. A. 55. The evidence does not establish that the stock in question became worthless during 1921, resulting in a loss deductible under section 214 (a) (5) of the Revenue Act of 1921, and upon this issue the respondent must be sustained.

Judgment will be entered upon W days’ notice, pw'suamt to Rule 50.

Considered by Smith, Love, and Littleton.


author: Aeundell :

text:
    Savinar Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3624.
    Promulgated December 2, 1927.

      R. L. Jacobs, Esq., and Herbert L. Sweet, Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Aeundell :

The respondent has allowed as deductions only so much of M. Savinar’s salary for the years in question as he drew in cash during those years. He has disallowed the balance, consisting of $1,920 for 1919 and the additional compensation for 1921 amounting to $1,000, both of which items were accrued on the books, as well as the amounts voted in 1918 for 1920 and 1921, but not entered in the books until 1921, less payments actually made. In this we think he erred.

It is clear from the testimony of two of the three members of the board of directors that the salaries were voted and directed to be paid at informal meetings of the directors. Such informal action is not forbidden and in fact is a practice frequently indulged in by close corporations such as we have here. Cannon v. Farmers Union Grain Agency, 103 Ore. 41; 202 Pac. 745. See also Appeal of Reub Isaacs & Co., 1 B. T. A. 45, and Appeal of Max Levy & Co., 3 B. T. A. 422, and the decisions cited therein. Accordingly, we must hold that the taxpayer incurred liability for the salaries in question. Nor is it essential that the salary voted for 1920 and a portion, of the salary for 1921 was not accrued on the books until 1921. The facts rather than the bookkeeping entries must determine the allowability of the deduction. Doyle v. Mitchell Bros. Co., 247 U. S. 179.

There is no doubt about the reasonableness of the salaries. M. Savinar was not paid to perform daily services or labor, but to give advice concerning matters of policy. This he did. He had had a great deal of experience in the line of business the taxpayer was engaged in and was well qualified to perform the services for which he was engaged. It was not necessary for him to be at the taxpayer’s place of business at all times in order to perform the services for which he was paid.

Considering the volume of business transacted during the taxable periods and all of the surrounding facts and circumstances, we are of the opinion that the salaries in question are reasonable and their deduction should be permitted.

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

Considered by Steknhagen and Gkeen.


author: Gkeen :

text:
    Virginia Railway & Power Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Northside Viaduct Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. City Gas Company of Norfolk, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9040, 11731, 11728, 14200, 11730, 14199.
    Promulgated December 2, 1927.

      Bernard R. Youngmcm, Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
   OPINION.

Gkeen :

Was the Virginia Railway & Power Co. affiliated during the years and periods in question with the Northside Viaduct Co. and the Highland Park Co.? It operated the principal properties of these companies as a part of its integral system of railways. It owned directly 61.23 per cent of the capital stock of the Viaduct Company and 85.18 per cent of the Highland. The minority stockholders of the two latter companies did not vote either directly or through proxies any of their stock during the four years here in question. The Virginia Company voted during this period all the stock it owned in both companies. The officers of the Virginia Company were also the officers of the Viaduct and the Highland. Section 240 of the Revenue Acts of 1918 and 1921 reads in part as follows:

For the purpose oí this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

In the Appeal of Hartford c& Connecticut Western Railroad Co., 2 B. T. A. 211, the stockholdings were as follows :

The New England operated the properties of H. & O. Co. by means of a lease. After holding that the New England was a “ closely affiliated interest ” of the New Haven, we said :

* * * In the present case, however, it is contended that the existence of a substantial minority of outstanding stock should defeat affiliation. It ,is not shown that by any Act such minority has or could frustrate any purpose or plan of the New Haven, but on the contrary, the insignificant number of minority shares which voted at the stockholders’ meetings in 1917 and 1918 indicates an unobstructed control by the New Haven. * * * When one corporation so far controls the property and affairs of the other as to leave in the minority stockholders nothing but a bare interest in a division of the rental, it is quibbling to say that the minority stock is not controlled. We must conclude that the New Haven owned directly or controlled substantially all the stock of the taxpayer, and that they were affiliated within the meaning of the statute.

In the instant case, while the record is not as complete as it might be, we believe that the Virginia Company controlled a sufficient amount of the minority stock in the Viaduct and Highland which when added to the direct holdings of 61.23% and 85.18% brings it within the statute of owning or controlling substantially all the stock. The three companies, in our opinion, are affiliated.

Was the Virginia Railway & Power Co. affiliated during the years and periods in question with the City Gas Company of Norfolk? It owned directly only 19.98% of the capital stock of the Gas Company. The remaining 80.02% was owned by the Norfolk Railway & Light Co. The latter company, however, on April 28, 1906, leased for 99 years all its properties of every description, except its franchise to be a corporation, to the Norfolk & Portsmouth Traction Company which company, by virtue of an agreement of merger and consolidation, dated May 22, 1911, was succeeded by the Virginia Railway & Power Co., the lease in question being assigned to the latter company. Paragraph seven of the lease stated that “ * * * all of the railway, light and power properties and plants owned, controlled or operated by the Lessor and Lessee are so connected as to naturally form one complete system, and it is deemed desirable, and is now proposed, to bring said properties under one management and control * * In order to carry out this proposal the lease specifically provided that among the- assets to be leased was the 80.02% “ of the capital stock of the City Gas Company.” Article II provided that “ The Lessor will surrender and deliver to the Lessee on the first day of June 1906 * * * sole and exclusive possession of all * * * certificates assigned in blank for all shares of the capital stock of any incorporated company.” Article X provided that the lessor “ will cause proper proxies to be executed and delivered to the Lessee or its appointee, so that any voting power vested in the Lessor as to all and every of said shares of stock subject to this lease, may be exercised by the Lessee, its successors or assigns.” The Virginia Company voted all the stock of the City Gas Co. and received all the dividends paid by the City Gas Co. Thos. S. Wheelwright and G. B. Williams were president and secretary-treasurer, respectively, of the two companies. The Virginia Company actually operated the business of the City Gas Co. as a part of its own system. It is, therefore, our opinion that the evidence in this case is convincing as to our conclusion that the Norfolk Kail-way & Light Co. is the closely affiliated interest through which the Virginia Kail way & Power Co. controlled the 80.02% of the stock of the City Gas Company of Norfolk, thereby bringing its control of such stock up to 100 per cent. Appeal of Huntington & Clearfield Telephone Co., 1 B. T. A. 731. Since the Virginia Company owned ‘directly or controlled through closely affiliated interests 100 per cent of the stock of the City Gas Co., the two companies are, in our opinion, affiliated within the meaning of section 240 of the Kevenue Acts of 1918 and 1921.

The respondent devoted a considerable part of his brief to the argument that the two companies should be denied affiliation for the reason that there would be a duplication of statutory invested capital to the extent of 80 per cent, if the two companies were ruled affiliated and “ that Congress intended such a vicious result should not be lightly imputed to it.” We might dismiss such a contention with the statement that the determination of the correct invested capital is not now before us, but even if we were to consider it in connection with the proposition that in construing a statute full consideration must be given to all of its provisions and a construction adopted that will permit all sections to harmonize, we see no merit to such an argument for the reason that the same question would be involved in every case of affiliation under section 240(b) (1) of the 1918 Act where the parent company owned less than 100 per cent of the stock of the other or others. It must have been involved in the Appeals of Hartford & Connecticut Western Railroad Co., 2 B. T. A. 211, L. B. Putney Mercantile Co., 3 B. T. A. 836, and Canyon Lumber Co., 4 B. T. A., 940, in wbicb cases this Board allowed affiliation with the parent company only owning 58.9 per cent, 50.2 per cent, and 50 per cent, respectively.

The question of reducing invested capital on account of prior-year income and profits taxes prorated must be decided against the petitioners in accordance with Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

Reviewed by the Board.

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


author: Murdock:

text:
    Sadie S. Stein, Jacob H. Scheuer, Alwin J. Scheuer, and Theresa Scheuer, as Executors of the Last Will and Testament of Herman Scheuer, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4621.
    Promulgated December 6, 1927.

      Walter Frank, Esq., for the petitioners.

      John F. Greaney, Esq., for the respondent.
   OPINION.

Murdock:

The question presented for decision in this case is whether the transfer on October 10, 1917, of certain assets by the deed of trust of Herman Scheuer was made in contemplation of death, within the meaning of section 402 (c) of the Revenue Act of 1918.

Herman Scheuer, the decedent, died November 11, 1921, more than four years after the transfer, and, therefore, no presumption arises under the provisions of the section in question that the distribution was made in contemplation of death.

In Electric Reduction Co. v. Lewellyn, 11 Fed. (2d) 493; 5 Am. Fed. Tax Rep. 5899, it is said:

In the construction of a taxing statute, doubts should be resolved against the government and in favor of the taxpayer. American Net & Twine Co. v. Worthington, 141 U. S. 468, 474; Benziger v. United States, 192 U. S. 38, 55; Gould v. Gould, 245 U. S. 151.

Therefore, in the absence of the presumption above referred to, the amount of the assets transferred by the deed of trust can not be included in the decedent’s gross estate where it appears that the motive for the transfer was not a specific expectation, or a reasonable fear, that death was near at hand. Shwab v. Doyle, 269 Fed. 321; Rea v. Heiner, 6 Fed. (2d) 389; or, as it has been stated in one case, “ 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.” Spreckels v. State, 30 Cal. App. 363; 158 Pac. 549. And undoubtedly, if it is shown that the decedent was actuated by other motives than a present expectation of death, the assets transferred are not taxable. Rea v. Reiner, supra; Appeal of Philip T. Starck, Executor, 3 B. T. A. 514.

In arriving at the decedent’s motive for the transfer we must not be limited by his intentions as expressed at the time, although such evidence is of primary importance. All the facts and concomitant circumstances surrounding the deed of trust, the physical condition of the decedent and his natural expectancy of life and also his conduct and actions about the time the transfer was made, are important considerations in construing his true motive.

The decedent was.a man 69 years of age, considerably past the prime of life, but in no more danger of death than the average person of his age. He was not an active man due to the fact that he had lost a leg in an accident, but neither this injury nor his general physical condition prevented him from attending to his duties at his place of business at the time of the transfer and until several weeks before his death four years later. He and his wife had periodic calls from the family physician, but, if the latter’s testimony is to be believed, and we see no reason to doubt it, the decedent’s physical condition was no worse than the average for his age and he was not advised of any danger of death being near at hand. His condition at the time was the same as it had been for some years previously. These facts as to his physical condition do not indicate that the decedent, in making the transfer, was influenced by an expectation of death.

Ten days before the execution of the deed of trust, the decedent entered into a new partnership agreement with his two sons wherein he stipulated that he was not to be called upon to do any work in connection with the business or to receive any of the profits. But, after the execution of the agreement the duties he performed differed in no way from those previously undertaken. Coincident with the deed of trust he also executed a new will, the terms of which are not in evidence. Having made the trust deed which substantially changed his property holdings and provided for his wife, it is not surprising that he wanted to change his will accordingly. These facts do not indicate that he was expecting death in the reasonably near future and it is this expectancy, or contemplation of death, which the statute requires. See Appeal of Edith D. Green et al., Executrices, 6 B. T. A. 278, wherein the Board states:

We have heretofore had occasion to review the authorities and discuss the meaning of the phrase “ contemplation of death.” Appeal of Philip T. Starck, 3 B. T. A. 514; Appeal of Spencer Borden, Jr., 6 B. T. A. 255. There we reached the conclusion that it did not include the general contemplation of death entertained by everyone, but did include a state of mind which looked forward to death within the reasonably near future.

About the time the transfer, was made he executed a three-year ■ lease for a new apartment, and in the spring of 1920, again executed a lease for another apartment for a term of three years. He continued to perform his work in connection with the business to the same extent that he had before the transfer and, together with his wife, continued to call upon their friends and to attend the theatres and other entertainments. He was generally in good spirits, and no change in his work, mode of life and general social activities was noticed, either at or after the time of the execution of the deed of trust. These facts rather indicate that he had no expectation of death in the near future. Finally, we have before us evidence of his desire to so arrange his affairs that his personal property would be relieved of some of the State tax and his income would be relieved of the increasing burden of the Federal income tax.

The new partnership agreement and the deed of trust would reduce his tax burdens. In Appeal of Spencer Borden, Jr., Executor, 6 B. T. A. 255, we had a somewhat similar situation and in this case as in that one we are convinced that the trust was not created in contemplation of death.

Judgment will be entered on notice of lb days, under Rule 50.

Considered by Mokeis and Siefkin.