author: Littleton:

text:
    Appeal of WARNER SUGAR REFINING CO.
    Docket No. 2108.
    Submitted October 6, 1925.
    Decided April 21, 1926.
    Upon tbe evidence held, that tbe assessment by the Commissioner on March 31, 1924, of a deficiency in respect of tbe tax for tbe calendar year 1917 was not barred by tbe statute of limitations.

      Daniel H. Morgan, Esq., for the taxpayer.

      Ward Loveless, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the calendar year 1917 in the amount of $110,-583.55. The issue is whether under the limitation imposed by the Revenue Act of 1917, and under the waiver filed by the taxpayer on February 18, 1921, of any and all statutory limitations as to time within which assessments based upon its liability for income and profits tax for the calendar year 1917 might be entered, the right of the Commissioner to assess the amount of $110,583.55 had expired before the same was assessed in March, 1924.
    The Commissioner moved to dismiss the appeal upon the ground that the Board is without jurisdiction to determine the issue raised.
    FINDINGS OF FACT.
    The taxpayer is a New Jersey corporation with principal office at New York City. It filed an income and profits-tax return for the calendar year 1917 showing a net income of $2,125,782.39, and paid a tax of $611,604.23. Upon an office audit an additional assessment of $15,054.39 was made in 1919. Thereafter, the Commissioner examined taxpayer’s books of account and, in January, 1921, advised it that he proposed to assess a further additional tax of $403,766.42, whereupon, in protest of the proposed assessment, taxpayer filed an application for assessment of its profits tax under the provisions of section 210 of the Revenue Act of 1917. On January 12, 1921, the Commissioner mailed the following letter to the taxpayer:
    Wakneb Sugar Refining Co.,

      79 Wall St., New York, N. Y.

    Sibs : Assessment of additional income and profits taxes as tbe result of tbe audit and verification of returns for tbe taxable year 1917 must be made by tbe Commissioner of Internal Revenue, under tbe law, witbin three years after tbe due date for filing tbe returns tberefor. Unless sucb assessments are made in tbe cases of 1917 calendar-year returns, before March 1, 1921, collection can be enforced only by suit, unless tbe taxpayers execute waivers of their rights under this provision of the law.
    In this situation, it will be necessary in order to protect the interest of tbe Government to audit every 1917 return and to make assessment before March 1, 1921, of all additional taxes which may appear to be due, unless waivers are executed and filed by the taxpayers with this Bureau.
    The officers of the Income Tax Unit are reluctant to proceed with the speed necessary to audit all 1917 returns before March 1, 1921, because the result inevitably would be to impose assessments based on more or less superficial determinations of the true liability. It would be very much better, in the judgment of these officials, both for the Government and for the taxpayers, to permit the orderly completion of the present program of thorough and intensive audit work. In this opinion several members of representative industries, whose advice has been sought by the Bureau, concur. It is the view that the general filing of waivers by the taxpayers will be conducive of the most accurate and fair adjustment of the tax liability in each instance.
    You are therefore requested to execute and return to this office the enclosed form of waiver and to take this action as promptly as possible in order that plans of the Bureau for auditing the 1917 returns may not have to be changed on account of uncertainty as to the disposition and intention of taxpayers with respect to this request.
    Respectfully,
    [Sgd.] G. Newton,

      Deputy Commissioner.

    In response to this letter the taxpayer executed and mailed to the Commissioner the following waiver:

      Warner Sugar Refining Co., a corporation organized under the laws of the State of —-, in consideration of the assurance given it by officials of the Income Tax Unit of the Bureau of Internal Revenue that its liability for all Federal taxes imposed by the Act of Congress, approved October 3, 1917, for the year ended December 31, 1917 on its net income received from all sources in said year, shall not be determined except after deliberate, intensive and thorough consideration, hereby waives any and all statutory limitations as to the time within which assessments based upon such liability may be entered. It is understood, however, that the above corporation does not, by the execution of this waiver, admit in advance the correctness of any assessment which may be made against it for said year by the officials of the Income Tax Unit.
    Executed this 18th day of February, 1921.
    (Signed) Warner Sugar Refining Company,

      Corporation.

    By W. Warner, Vice-President.

    [corporate seal.]
    Attest :
    R. W. Bell, Secretary.

    Approved:
    D. H. Blair, Commissioner of Internal Reverme,

      Jan. SI, 1923.

    Thereafter, the Commissioner determined the taxpayer’s net taxable income for the year to be $2,431,250.24, which is admitted by the taxpayer to be correct. The Commissioner granted the taxpayer’s, application for assessment of its profits tax under the provisions of: section 210; determined a profits tax of $626,776.31 and a total tax: liability for the year of $735,073.86, or an additional income and profits tax of $108,414.74. On April 27, 1923, the taxpayer was advised of this computation and granted 30 days within which to appeal under the provisions of section 250 (d) of the Eevenue Act of 1921. An appeal was filed by the taxpayer and, after consideration thereof by the Commissioner, he made no change in the amount of the tax, and the additional tax of $108,414.74 was assessed in March, 1924, and was subsequently paid by the taxpayer. On March 31, 1924, the Commissioner reexamined taxpayer’s application for assessment of its profits tax under section 210 and concluded that he had made a mistake in his determination. Accordingly, on that date, he assessed a further additional tax of $110,583.55, of which he advised the taxpayer by letter as follows:
    IT*E*SM Treasury Department,
    CDL-7809 Washington, Mar. SI, 199,4.

    Warner Sugar Repining Company,

      79 Wall Street, New Yorh, N. Y.

    Sirs : Reference is made to your income and excess profits tax returns Forms 1031 and 1103, for the calendar year 1917 and to office letter dated April'27, 1923, wherein you were advised of the determination of your tax liability for that year under the provisions of Section 2Í0 of the Revenue Act of 1917, resulting in an additional tax of $108,414.74.
    A reexamination has been made of your application for assessment of your excess profits tax under the relief provisions of the Revenue Act of 1917, together with all other evidence in the case, and you are advised that tlie above-mentioned determination of your tax liability was erroneous.
    A correct computation of your tax liability under Section 210 of the Revenue Act of 1917 has been made, disclosing a further additional tax for that year which will be listed immediately, without giving the usual thirty-day notice, as provided in Section 250 (d) of the Revenue Act of 1921. A detailed computation of the amount of this additional assessment is shown in the attached statement.
    The Bureau will, therefore, entertain a claim in abatement if filed within ten days of receipt of notice and demand from the Collector of Internal Revenue for your district in accordance with the provisions of Article 1006, Regulations 62.
    An appeal covering the basis of the claim should be filed setting forth in full all information upon which you base your protest against the above assessment and any additional facts in support of your claim for the application of the relief provisions of the Revenue Act of 1917. This appeal should be filed in triplicate and should be addressed to the Commissioner of Internal Revenue for the specific attention of IT*E*SM; CDL-7809..
    If an appeal is not filed, under no circumstances should payment be. made until a bill is received from the Collector of Internal Revenue for your district and remittance should then be made to him.
    Respectfully,
    [Sgd.] J. G. Bright,

      Deputy Commissioner.

      The statement attached to the above-mentioned letter is as follows:
    STATEMENT
    In re: Warner Sugar Refining Company, 79 Wall Street, New York, N. Y.
    Excess Profits Tax, at 30.62%_$744,448. 82
    Net Income-$2,431,250. 24
    Less: Excess Profits Tax_ 744,448. 82
    Taxable at 2% and 4%_ 1, 686, 801.42
    Tax at 2%_' 33,736.03
    Tax at 4%_ 67,472.06
    Total Tax Liability_ 845,656.91
    Tax Assessed:
    Original Assessment, Serial #11757834_$611, 604.23
    Additional, August 1919, page 96, line 8_ 15, 054. 39
    Additional, August 1923, pago 19, line 2_ 108,414. 74
    Total. 735,073. 36
    Additional Tax. 110, 583. 55
    Pursuant to the Commissioner’s letter, the taxpayer filed a claim for the abatement of the assessment of $110,583.55. On December 26, 1924, the Commissioner mailed the following letter to the taxpayer:
    WARNER SUGAR REPINING COMPANY,

      79 Broadway, New York, N. Y.

    Sirs : Reference is made to your corporation income and excess profits tax return for tbe calendar year 1917.
    You are advised that the Solicitor of Internal Revenue in Recommendation No. 161, dated August 1, 1924, has sustained the action of the Income Tax Unit in reopening and reconsidering your return for 1917 under the provisions of Section 210 of the Revenue Act of 1917 and assessing an additional tax of $110,583.55.
    The recommendation, as approved, states in substance (a) that the Commissioner of Internal Revenue may assess any tax found to be due even though said tax may have previously been erroneously abated or refunded, provided such assessment is made within the time prescribed by Statute, and (b) that the comparatives used in the revised data sheet are in the aggregate fairly representative of this taxpayer in all of the material particulars specified in the Act, and that the percentage of final tax to net income shown by the revised data sheet is fair both to the taxpayer and to the Government.
    In accordance with the above conclusions, your claim for the abatement of $110,583.55 will be rejected.
    Any further communication relative to this case should bear the symbols IT: E: SM-CDL-7809.
    Respectfully,
    [Sgd.] J. G. Bright,

      Deputy Commissioner.

    From the action of the Commissioner, as disclosed by the above letter, the taxpayer appealed and assigned as the only error that the Commissioner was without legal authority to assess and collect the $110,583.55.
   OPINION.

Littleton:

This appeal does not contest the correctness of the net taxable income, nor does it allege that the Commissioner committed an error in his determination of the deficiency for the year 1917, but alleges that the Commissioner was without legal authority in March, 1924, to assess or collect the deficiency of $110,583.55. The Commissioner moves to dismiss the appeal upon th*e ground that the Board is without jurisdiction to determine the issue raised.

The Board has jurisdiction to decide the question of whether the assessment was barred by the statute of limitations. Appeal of the National Refining Co. of Ohio, 1 B. T. A. 236. See sections 283 (f) and 906 (e) of the Revenue Act of 1926.

It is the contention of the taxpayer that the Commissioner was without legal authority to assess the deficiency of $110,583.55 in March, 1924, by reason of the fact that the three-year period of limitation within which he was authorized by the statute (Revenue Act of 1917) to make assessments against it of additional tax for the calendar year 1917 had expired and that his authority to determine and assess the amount of $110,583.55 had expired under the waiver executed by it on February 18, 1921. In other words, it is the position of the taxpayer that the waiver of the statute of limitations had expired when the Commissioner made the assessment of $108,414.74 in March, 1924.

The time within which the Commissioner was authorized to assess the tax here in question was governed by section 14 (a) of the Revenue Act of 1916. That Act contained no express provision that the time within which the Commissioner could assess the tax might be extended or waived by the taxpayer. However, the taxpayer, in consideration of the assurance given it by the Commissioner that any tax which might be due for the calendar year would be assessed only after deliberate and careful consideration, expressly waived its right to insist upon any assessments in respect of its 1917 'tax being made within the period prescribed by the statute. The taxpayer could effectively waive verbally or in writing its right to insist upon assessments being made within the statutory period of limitation. Randon v. Toby, 11 How. 493; State Loan & Trust Co. v. Cochran, 130 Cal. 245; 62 Pac. 466; Wells, Fargo & Co. v. Enright, 127 Cal. 669; 60 Pac. 439; Bridges v. Stephens, 132 Mo. 524; 34 S. W. 555; State Trust Co. v. Sheldon, 68 Vt. 259; 35 Atl. 177; Ennis v. Pullman Palace-Car Co., 165 Ill. 161; 46 N. E. 439; Holman v. Omaha & C. B. Ry. & Bridge Co., 117 Iowa, 268; 90 N. W. 833; Shutte v. Thompson. 15 Wall. 151.

There is no provision in the various Revenue Acts which provides that the Commissioner may not make more than one assessment in respect of the tax for any year, and we find no reason for holding in this appeal that, when the Commissioner' assessed the amount of $108,414.74 as an additional tax for 1917, after a hearing granted to the taxpayer pursuant to the provision of section, 250 (d) of the Revenue Act of 1918, he was thereafter prohibited from making a further determination and assessment of an additional amount under the law within the time prescribed by the statute, or if that limitation is waived, under the terms of such waiver. In the Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856, the Board said:

It- lias long been recognized, both by tbe Commissioner and all of his predecessors, as well as taxpayers generally, that reconsiderations of liability to internal-revenue taxes were both proper and lawful. * * *. The principle or rule of law to the effect that reconsiderations and adjustments of tax liability can be properly made seems to have been recognized by Congress. [Citing sections 1309 and 1312, Revenue Act of 1921.]

In considering the matter of the determination of overassessments, credits, refunds, and interest, the court, in the case of Girard Trust Co. v. United States, 270 U. S. 163, decided March 1, 1926, said:

To have made the interest calculable to the date of actual payment would have led to uncertainty and confusion, as the Comptroller General indicates, and it was doubtless for that reason that Congress qualified its desire to pay interest for the exact time during which the money was detained to a date which was practical from an administrative standpoint. Nor does the fact that pending the carrying out of the direction of the Commissioner of Internal Revenue to make the refund, he might reverse himself, change the finality of his decision allowing the refund. If he does so, the date fixed as the date of the allowance under the section is changed of course, but the mere fact that he can reverse a final allowance does not prevent its being a final allowance, any more than when a court renders a judgment, its ability within the term to set it aside or change it affects its finality, if it is not changed. We think, therefore, that the words “ to the date of such allowance ” do not carry interest to be paid on refunds down to the time of payment.

This brings us to the question of whether the waiver filed by the taxpayer on February 18, 1921, expired prior to the assessment of $110,583.55.

This question must be determined from the language of the waiver executed by the taxpayer and the evidence concerning the same. The original waiver signed by the taxpayer, by its vice president, and bearing the corporate seal, provides that—

in consideration of the assurance given it by the officials of * * * the Bureau of Internal Revenue that its liability for all Federal taxes * * * fon the year ended December 31, 1917, on its net income received from all sources in said year, shall not be determined except after deliberate, intensive and thorough consideration, hereby waives any and all statutory limitations as to the time within which assessments based upon such liability may be entered. It is understood, however, that the above corporation does not, by tile execution of this waiver, admit in advance the correctness of any assessment which may be made against it for said year * * *.

It will be noted from the above that this taxpayer waived any and all statutory limitations as to the time within which assessments might be made of all Federal taxes for which it was liable upon its net income received from all sources during the calendar year 1917. It had a right to decline to execute this waiver and to insist upon assessments in respect of any tax for that year being made within the statutory period, and in executing the same it had a right to include therein any condition it thought proper and, if accepted by the Commissioner, he would have been bound by its provisions. This waiver was executed after conferences between the officers of the company and its counsel, and the only condition contained in the waiver is that the officers of the Bureau of Internal Revenue should not determine the corporation’s liability for tax except after deliberate, intensive, and thorough consideration, and that it did not' admit in advance the correctness of any assessment which might be made against it for the year 1917. No limitation was specified in the waiver as to the time beyond the statutory period within which the Commissioner might make assessments based upon the net income of the corporation for the year 1917. The language “within which assessments * * * may be entered ” is subject only to the interpretation that more than one assessment was contemplated. No notice was ever served upon the Commissioner by the taxpayer prior to the assessment of the amount here in controversy as to when it would regard the provisions of the waiver as having been fully complied with by both parties and become inoperative.

On November 11, 1922, and January 6, 1923, before the audit had been completed and before any assessment in respect of the additional tax for 1917 had been made, and while the Commissioner and the taxpayer were engaged in conferences in respect of its tax liability for that year, the Commissioner submitted to the taxpayer a form of written waiver of limitations provided in section 250 (d) of the Revenue Act of 1921. Upon the receipt of this blank the taxpayer’s counsel handed it to the representative personally engaged in conferences with the Commissioner respecting the tax and advised that the outstanding waiver was sufficient authority for the Commissioner to proceed. Conferences were thereafter had upon the taxpayer’s contention between the Commissioner and its representatives and on April 23, 1923, the Commissioner, proceeding under the Authority of the original waiver and the provisions of the Revenue Act of 1921, mailed the taxpayer a letter setting forth that, as a result of conferences with the Income Tax Unit, an additional tax of $108,414.74 was disclosed, and advised it that, under the provisions of the Revenue Act of 1921, 30 days would be granted for the filing of an appeal to be heard by the agency designated by him for that purpose. Such an appeal was filed by the taxpayer and conferences were thereafter held thereon and the amount of $108,414.74 was subsequently assessed. Upon reconsideration of his action the Commissioner decided that he had made a mistake in the assessment of $108,414.74 in respect' of the amount of the profits tax computed under the provisions of section 210 of the Revenue Act of 1917, and on March 31, 1924, he made a further assessment of $110,583.55 and advised the taxpayer on the same date that a claim for abatement of all, or a portion thereof, would be entertained, and that an opportunity would be afforded to contest the correctness of the amount assessed. The taxpayer availed itself of this privilege, filed a claim for the abatement of the amounts so assessed, and had various conferences with the Commissioner concerning the same between that time and December 26, .1924, when the Commissioner rendered his decision that the claim should be denied. From this decision the taxpayer appeals.

Under the language of the waiver and all of the evidence in the appeal, the Board is of the opinion that the Commissioner had authority to make the assessment of $110,583.55 and that his assessment thereof was in all respects legal.

The deficiency is $110,583.55. Order will T>e entered accordingly.

James concurs in the result only.

On reference to the Board, SteeNhageN concurs in the result only.

Phillips dissents.


source: Caselaw Access Project

author: Phillips :

license: Public Domain

text:
    Appeal of LOGAN & BRYAN.
    Docket No. 4008.
    Submitted December 11, 1925.
    Decided April 21, 1926.
    Where a partnership engaged in a general brokerage business acquired seats on various exchanges from its members at an agreed valuation based on their then market value, under an agreement that, at the termination of the partnership, each seat should be returned to the member in whose name it stood at its then market value, any gain or loss in the meantime to he accounted for as partnership gain or loss, held, that, on the dissolution of the partnership, the difference between the values at dates of acquisition and disposition constitutes gain or loss for the purpose of determining the income of the partnership under the Revenue Act of 1917.

      E, St. Glair Thompson, Esq., for the taxpayer.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.

      Before Phillips and Tkammell.
    Taxpayer appeals from the determination by the Commissioner of deficiencies of $25,405.47 and $3,799.30, profits tax for 1917.
    BINDINGS OF FACT.
    Prior to 1917 various partnerships had conducted a general brokerage business in New York and Chicago under the firm name of Logan & Bryan. While the firm name continued the same, there were changes in the personnel of the successive partnerships. On December 30, 1916, articles of copartnership were entered into between ten individuals to carry on such business under the name of Logan & Bryan from January 1, 1917, to June 30, 1917, inclusive (referred to hereinafter as the first partnership). Such contract of copartnership remained in operation to July 31, 1917, when a new partnership (referred to hereinafter as the second partnership) was organized, consisting of nine of the ten individuals composing the first partnership and two others who were not members of the first partnership.
    Upon its organization the first partnership acquired, from different members of the partnership, seats upon various exchanges where the partnership transacted its brokerage business. Such seats stood in the names of the individual members, but were contributed to the partnership as a part of the capital contribution of the members. Such seats were taken over by the partnership at their then market value and, upon’ the dissolution of the partnership, were returned to the respective partners in distribution at their market value at the date of such dissolution, any profit or loss occurring by reason of a change in market value being charged into the profit and loss account of the partnership and shared by all of the partners. The same procedure was followed by the second partnership.
    On January 1, 1917, the first partnership acquired such stock exchange seats from the individual partners at a total valuation of $170,403. Prior to July 31, 1917, two seats which had been acquired at a valuation of $23,000 were disposed of by sale for $17,000. At the termination of the first partnership, the remaining seats were distributed to the members in whose names the respective seats stood, and received by such partners in distribution at a valuation of $117,503. During the period from January 1, 1917, to July 31, 1917, such partnership charged to its profit and loss account, as a loss upon the sale and distribution of such seats, $35,900, which was shared by all of the partners in the same proportion in which they shared other profits and losses.

      The second partnership acquired from its members the seats which were distributed to them by the prior partnership and credited them with the then market value of such seats in the sum of $117,-503. At its termination on December 31, 1917, .such seats were again distributed to the various members of the partnership at their then market value of $105,553, and a loss of $11,950 was charged upon the partnership books, which loss was shared by the partners in the same manner as other losses and expenses.
    Excess-profits-tax returns were made by both partnerships during the taxable year. The first partnership claimed as a deduction the sum of $35,900, as a loss upon the purchase and sale and distribution of such seats, and the second partnership claimed a deduction of $11,950 for such a loss. These deductions were disallowed by the Commissioner, who determined deficiencies of $25,405.47 against the first partnership and $3,799.30 against the second partnership. These deficiencies were determined in the following manner:
    Under date of March 13, 1923, the Commissioner mailed letters to each of the partnerships advising them that additional assessments were to be made against the first partnership for $26,311.03 and against the second partnership for $5,717.24. Liability for $905.56 ivas admitted by the first partnership and for $1,917.94 by the second partnership. Assessments of the amounts determined by the Commissioner were made without any hearing or opportunity for a hearing. Payments were made of the amounts admitted by the partnerships to be due and claims for abatement were filed by the first partnership for $25,405.47 and by the second partnership for $3,799.30. Hearings were thereafter granted on the abatement claims, and on March 13, 1925, the two partnerships were notified by the Commissioner that their claims for abatement had been reiected, and from such notice of rejection the taxpayers appeal.
   OPINION.

Phillips :

It is conceded by the Commissioner that the stock exchange seats were partnership assets, and there does not appear to be any question concerning the values used, which affected all the partners and were arrived at by agreement between them. The Commissioner contends, however, that the distribution of the seats to the partners upon the termination of the partnership resulted in no profit or loss which is deductible by the partnership.

Under the Revenue Act of 1917, partnerships are made subject to an excess-profits tax, and, for the purpose of that tax, are treated as legal entities. A partnership is entitled to the same deductions as are allowed to individuals, and when the partnership took these seats as a contribution to its capital at their market value at that time, with the agreement that the seats were to revert to the owners thereof at the termination of the partnership at their then market value, and such agreement is carried out, the difference between the value at which they come into the partnership and the value at which the partnership disposes of them under the agreement is a loss or a gain, for the purpose of computing the income of the partnership as well as for an accounting between the partners themselves.

There is no intention in this opinion to hold that a profit or loss results to a partnership or corporation from the distribution of its assets in kind upon liquidation. Here we have an agreement which provides, in effect, that the seat shall be purchased by the partnership on organization and sold by it at the time of dissolution. The profit or loss from the transaction arises out of the performance of the agreement and has no relation to the dissolution of the partnership. The profit or loss arising out of the agreement is to be computed in the same manner, whether the agreement is to be carried out on the date of dissolution or on some other date.

The deficiencies should be redetermined by allowing as deductions the losses claimed.

Order of redetermination will he entered on 10 days' notice, under Rule 50.

On reference to the Board, James dissents.


author: Teussell :

text:
    Appeals of BELLE R. WEAVER and Estate of M. E. WEAVER.
    Docket Nos. 2924, 3852.
    Submitted November 16, 1925.
    Decided April 21, 1926.
    1. Joint ketubns of husband and wife. — In the case of a husband and wife residing in Louisiana and subject to the community property laws of that State, the husband is authorized to make return of income from community property, and such return, which contains a report of all the gross income produced by or accruing to both husband and wife, although made in the husband’s name only, is the joint return required by law.
    2. Statute of limitations. — The statute of limitations contained in section 277 (a) (2) of the Revenue Act of 1924, in respect to income-tax returns for the calendar year 1918, began to run on the day following the filing of the original returns in the instant cases, and its running can not be in any way affected or suspended by the later making of amended returns.

      W. W. Spaulding, Esg., for the taxpayers.

      B. G. Simpioh, Esq., for the Commissioner.

      Before Littleton, Smith, and Trttssell.
    These appeals are from determinations of deficiencies for the calendar year 1918, in the case of Belle R. Weaver of $2,862.42, and in the case of the estate of M. E. Weaver of $2,654.22. Each of the petitioners pleaded that more than five years had run from the dates of filing the returns and the dates of mailing of the deficiency letters, and that any assertion of deficiencies was barred by the statute of limitations. The facts being substantially the same in each appeal, they were consolidated for hearing and argument pursuant to agreement by counsel.
    FINDINGS OF FACT.
    During the calendar year 1918, Belle R. Weaver was the wife of S. P. Weaver and was then living with her husband. M. E. Weaver, since deceased, was then the wife of T. L. Weaver, and was during that year living with-her husband. S. P. Weaver and T. L. Weaver were partners doing business as Weaver Bros., at Shreveport and Flora, La. S. P. Weaver was also the local manager for the Quachita Lumber Co., Monroe, La. Neither husband nor wife, in either case, had any income from any source other than the business of those partnerships, except that each of said parties had exempt interest on Liberty bonds, T. L. Weaver received dividends on the stock of domestic corporations in the amount of $1,030, and S. P. Weaver received a salary of $2,400 from the Quachita Lumber Co. of Monroe, La.
    On the 14th day of March, 1919, S. P. Weaver made an income-tax return on Department Form 1040, for the year 1918, in which there was reported gross income from—
    Salaries:
    Weaver Bros., Shreveport, La-$6, 000. 00
    Quachita Lumber Co., Monroe, La- 2, 400. 00
    Income from Weaver Bros, partnership_ 14, 377. 82
    Total gross income- 22, 777. 82
    For the year 1918, T. L. Weaver, on March 14, 1919, made an income-tax return on Department Form 1040 in which there was shown income from—
    Salaries, Weaver Bros., Plora, La-$6, 000. 00 Income from Weaver Bros, partnership_ 14, 377.81 Income from dividends on stoch of domestic corporations- 1, 030. 00 Total gross income_ 22,407.81
    In response to questions printed on said forms it was stated, in each case, that the taxpayer was, during the year 1918, married and living with his wife and that his wife made no separate return.

      Each of the said returns was filed with the collector .of the district of Louisiana on March 15, 1919, and was made in good faith as containing a report of all income from all sources received or accruing to the said parties and their respective wives during the year 1938. Pursuant to said returns, S. P. Weaver paid, within the time required by law, income taxes in the total amount of $3,125.12, and T, L. Weaver likewise paid taxes in the total amount of $2,700.94.
    The captions of these returns carried only the names of S. P. Weaver and T. L. Weaver, respectively, and the forms bore only the signatures of the same persons.
    Thereafter, and on or about March 3, 1921, the Commissioner caused to be published as Treasury Decision No. 3138, an opinion of the Attorney General, advising, in substance, that under the laws of the State of Louisiana all the gains and profits received or accruing to husband and wife were community property and that husband and wife might make separate income-tax returns, each reporting one-half of the community income, and have their liability to income taxes computed on the basis of separate returns.
    Thereafter, and during the month of May, 1921, the persons hereinabove named sought to take advantage of the privilege apparently held out to them by said Attorney General’s opinion, and for that purpose, and on the 24th day of May, 1921, the said S. P. Weaver caused to be prepared two Forms 1040, one of which he signed as a separate return for himself and the other he signed as agent as a separate return for his wife, Belle B. Weaver, in these two forms the same gross income, reported by him in March, 1919, was divided equally between himself and his wife, and the tax computed upon each of such forms was $1,124.23, total tax liability shown on the two forms $2,248.46. These two forms, together with a claim for credit or refund for the difference between the amount paid on the return made in March, 1919, and the two forms made in May, 1921, were filed with the collector of internal revenue of the district of Louisiana on May 27, 1921.
    On the same day T. L. Weaver caused to be prepared two Forms 1040, one of which he signed as a separate return for himself and the other he signed as agent as a separate return for his wife, M. E. Weaver. In these two forms the same gross income reported by him in March, 1919, was divided equally between himself and his wife, and the tax computed upon each of such forms was $950.88, total tax shown on the two forms $1,901.76. These two forms, together with a claim for credit or refund of the difference between the amount paid on the return made in March, 1919, and the two forms made in May, 1921, were filed with the collector of internal revenue of the district of Louisiana on May 27,1921.

      On March 12, 1925, the Commissioner mailed to each of the petitioners herein so-called deficiency letters, dated on that day, in which he determined deficiencies against Belle it. Weaver, in Ihe sum of $2,862.42, and the estate of M. E. Weaver in the sum of $2,654.22. These letters show that the asserted deficiencies are based upon an inquiry as to the gains and profits of the Weaver Bros, partnership, and that such inquiry developed that the respective shares of gains of said partnership accruing to the partners, respectively, were larger in amount than the amount theretofore reported in the returns previously made.
    • At the hearing the Commissioner admitted that the deficiency asserted against Belle R. Weaver should have been credited with and reduced by the amount of $1,124.23, and that the deficiency asserted against the estate of M. E. Weaver should have been credited with and reduced by the amount of $950.88.
    Each of these petitioners pleaded as a complete defense against the asserted deficiencies the statute of limitations contained in section 277- of the Revenue Act of 1924. The Commissioner contends that said statute of limitations should be considered as having begun to run on May 27, 1921.
   OPINION.

Teussell :

The taxes here in' controversy are individual income taxes and are for the calendar year 1918. The statute levying such taxes is the Revenue Act of 1918, and section 223 of that Act provides:

That every individual having a net income for the taxable year of $1,000 or over if single or if married and not living with husband or wife, or of $2,000 or" over if married and living with husband or wife, shall mate under oath a return stating specifically the items of his gross income and the deductions and credits allowed by this title. If a husband and wife living together have an aggregate net income of $2,000 or over, each shall make such a return unless the income of each is included in a single joint return.

All of the income, except interest on Liberty bonds, and in one case of dividends on the stock of domestic corporations, and in the other of salary from Quachita Lumber Co., was produced by the business of the partnerships of which S. P. and T. L. Weaver were partners; neither of the wives had any separate estate or any partnership interest in the business of the partnerships as generally understood. However, the statutes of Louisiana contain provisions under which gains and profits accruing during the continuance of the marriage relation are regarded as the community property of husband and wife in equal parts. Portions of the Louisiana statutory provisions (Revised Civil Code), cited by tbe Attorney General in his opinion published as Treasury Decision 3138, are as follows:

Art. 2332. The partnership, or community of acquets or gains, need not be stipulated; it exists by operation of law, in all cases where there is no stipulation to the contrary.
Art. 2399. Every marriage contracted in this State, superinduces of right partnership or community of acquet's or gains, if there be no stipulation to the contrary.'
Art. 2402. The partnership or community consists of the profits of all the effects of which the husband has the administration and enjoyment, either of right or in fact, of the produce of the reciprocal industry and labor of both husband and wife, and of the estates which they may acquire during the marriage, either by donations made jointly to them both, or by purchase, or in any other similar way, even although the purchase be only in the name of the two and not of both, because in that ease the period of time when the purchase is made is alone attended to, and not the person who made the purchase.
Art. 2404. The husband is the head and master of the partnership or community' of gains; he administers its effects, disposes of the revenues which they produce, and may alienate them by an onerous title, without the consent and permission of his wife.

All persons involved in these appeals, in respect to their domestic and property relations, and the two partnerships, in respect of their businesses, were subject to and governed by the foregoing provisions of the Louisiana statutes. By virtue of the adoption of the Attorney General’s opinion as published in T. D. 3138, it appears to have become the settled practice in the Treasury Department to accept separate individual income-tax returns by husbands and wives in which the so-called community income may be equally divided between the two and income taxes computed upon such basis. It will be observed that the above-quoted article 2404 of the Louisiana statutes provides that “ the husband is the head and master of the partnership or community of gains; he administers its effects, disposes of the revenues which they produce, and may alienate .them by an onerous title, without the consent and permission of his wife.”

It thus appears that, under this statute, S. P. Weaver and T. L. Weaver possessed ample authority to manage, dispose of, and to alienate the gains and profits accruing to or produced by the business of Weaver Bros., or other enterprises in which they were interested, as they saw fit and in accordance with their own best judgment; that the authority to. administer and dispose of gains and profits includes the right and the duty to make income-tax returns required by the United States Revenue Acts; and -that when, on March 14, 1919, they prepared and filed forms of income-tax returns for the calendar year 1918 purporting to be made in accordance with section 223 of the Revenue Act of 1918, and in preparing such returns included therein all the items of gross income and allowable deductions pertaining to both themselves and their wives and the respective shares of the net income of the partnership of Weaver Bros, computed in accordance with the method of accounting regularly employed in keeping the books of such” partnership (Revenue Act of 1918, section 212(b)) such returns were not only the income-tax returns of S. P. and T. L. Weaver, respectively, but were also the joint returns of each husband and wife, respectively, as required by law.

The forms of returns filed on May 27, 1921, contain no facts concerning gross income or allowable deductions which were not contained in the returns made on March 15, 1919. ■ The forms last filed purported only to divide the same gross income and the same allowable deductions equally between husband and wife in each case. Such forms of return are simply amendments of the original joint returns and relate back to and become a part of the original joint return. The Board has held in the Appeals of National Refining Co. of Ohio, 1 B. T. A. 236; Mabel Elevator Co., 2 B. T. A. 517; and New York Trust Co., 3 B. T. A. 583, that amended returns, not being returns required by law, do not furnish a starting point for the running of the statute of limitations, and we are, therefore, brought to the conclusion that in each of the present cases the five-year statute of limitations provided for in section 277 (a) (2) of the Revenue Act of 1924 began to run on the 16th day of March, 1919, and that on the 12th day of March, 1925, the Commissioner was without authority of law to make assessments of any income tax for the year 1918 against either of the petitioners herein.

Order of redetermination will he entered on 15 days' notice, vmder Rule 50.


author: Lansdon:

text:
    Appeal of BARKER-JENNINGS HARDWARE CORPORATION.
    Docket No. 5265.
    Submitted February 5, 1926.
    Decided April 21, 1926
    1. On the evidence, held, that the petitioner proved no good will that can be included in its invested capital for the taxable year.
    2. On the evidence, held, that agreements to subscribe for stock may be included in invested capital only when and to the extent that payments thereon are made.
    3. Request for special assessment denied.

      E. H. Shelton, Esq., for the taxpayer.

      Arthur E. Murray and F. 0. Graves, Esqs., for the Commissioner.

      Before SteRnhagen, Lansdon, and Arundell.
    The Commissioner has determined deficiencies for the fiscal years ended November 30, 1918, and November 30, 1919, in the respective amounts of $4,661.42 and $51.39. The petitioner asserts that the Commissioner erred, (1) in the disallowance of a deduction of $6,000, alleged to have been paid as a business expense in the first taxable year; (2) in disallowing, as an element of invested capital, good will in the amount of $283,006.83, alleged to have been acquired by gift from a predecessor corporation; (3) in disallowing subscriptions for stock as elements of invested capital; and (4) in refusing to select representative corporations to be used as comparatives in computing tax liability, for the years involved, under section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The Barker-Jennings Hardware Co., hereinafter designated as the company, was a Virginia corporation with its principal office at Lynchburg, where it had been engaged in dealing in hardware at wholesale since its organization in 1869. It was burned out on December 2, 1917. Thereafter it liquidated its affairs and retired from business.
    On December 22, 1917, a meeting of all the stockholders was held and the minority interests, 20 or more in number, all of whom were employees of the company, decided, with the concurrence of the majority holders, to organize a new corporation to take over and continue the business. Thereupon the Barker-Jennings Hardware Corporation, hereinafter referred to as the corporation, was formed with authorized capital stock in the amount of $275,000, of which $200,000 was to be common and $75,000 preferred stock. Sales of stock were restricted to employees of the company. No one could hold more than 200 shares of common and all stock subscriptions were payable in cash, but subscribers who could not pay in full by January 1, 1918, were permitted to make initial partial payments, and required to pay 6 per cent interest on all unpaid balances. Certificates were not issued until payments in full had been made. All subscribers complied with the requirements for the payment of interest on their unpaid balances due the corporation on account of stock subscriptions. All the stock was subscribed for on or before J anuary 1, 1918.
    The receipts of the corporation on account of capital stock at the organization meeting were for common $62,900, for preferred $75,000. Subscribers for more than one-half of the common made first payments at that time. By the middle of J anuary all but three of the subscribers had made initial payments and at that time the amounts received exceeded $180,000. The total amount subscribed for on which no payments had been made was then $3,000.
    The corporation took over at cost $21,000 worth of goods which the company had stored in a neighboring warehouse; bought of a salvage concern $60,000 worth of goods, once the property of the company, which it sold at a profit; accepted delivery of a large quantity of merchandise for which the company had placed orders before the fire; and filled orders for merchandise in the amount of about $125,000, which the company had taken prior to its liquidation.
    In its income and profits-tax return for 1918, the taxpayer included in the computation of its invested capital $283,006.73 on accoimt of good will acquired from the company. Upon audit the Commissioner refused to include any good will in the invested capital of the corporation.
   OPINION.

Lansdon:

The first contention of the petitioner is that it should be allowed to deduct $6,000 from its income for the fiscal year ended November 30, 1918, as an ordinary and necessary expense incurred in the purchase of certain catalogues which it used in advertising its wares and business. The evidence adduced in support of this issue is so vague, inconclusive, and contradictory that we are unable to make any findings of fact based thereon sufficient to enable us to disturb the. determination of the Commissioner. The exact amount paid in this connection can not be ascertained from the testimony, nor is the Board able to determine whether the expenditure, if actually made, was in the nature of an operating expense deductible from current income or a capital outlay to be charged off over a period of two or more years.

The petitioner asserts that it acquired good will from the company that should be included in the computation of its invested capital for each of the taxable years in the amount of $283,006.73. There is no evidence that either the predecessor or its stockholders ever transferred any such good will to the petitioner, nor is there any persuasive proof of the value of good will possessed by the company at the date of its liquidation. Nothing in the record enables us to determine the value for good will claimed or that, in fact, it was ever acquired by the taxpayer in any way or form that justifies us in allowing it as an element of invested capital for the taxable years.

The taxpayer claims $275,000 invested capital on account of capital stock actually paid for and issued during its fiscal year 1918. No stock was issued to any subscriber until he had paid for it in full. No notes in payment were given by the subscribers. The Commissioner held that the stock subscriptions, as such, could not be included in invested capital, and recognized only the payments thereon from the dates when made. This gives $222,912.68 as the average invested capital on account of such stock subscriptions and payments thereon. His determination is clearly in accordance with the decision of the Board in Appeal of the Central Consumers Wine & Liquor Co., 1 B. T. A. 1190.

No admissible evidence in support of the request for determination of tax liability under sections 210 and 328, respectively, of the Revenue Acts of 1917 and 1918, was offered, and therefore the Commissioner must be sustained in his ruling on that issue.

The deficiencies are $1,661.1$ for the fiscal year ended November SO, 1918, and $51.39 for ' the fiscal year ended November SO, 1919. Order will be entered accordingly.


text:
    Appeal of SHERMAN STALTER CO.
    Docket No. 4313.
    Submitted February 17, 1926.
    Decided April 21, 1926.

      Harvey I). Jacobs, Esq., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Phillips and Tkammell.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1919, in the amount of $13,271.56. The taxpayer alleged error on the part of the Commissioner in determining that a, gain resulted from the sale of a certain dredge. Other errors alleged by the taxpayer were waived at the hearing.
   FINDINGS OF FACT.

The taxpayer was a corporation engaged in the business of engineering and construction work. Its specialty was dredging and excavation work for canals, tunnels, foundations for large buildings, and harbors. Its president, manager, and principal stockholder was one D. E. Stalter. Stalter was a well-recognized engineer, as well as a designer of dredges and machinery. In 1911 the taxpayer had a contract for some excavation work on the New York barge canal. For this work it designed and constructed its own machinery. Among the machinery was a large dredge known as the Lyon. The dredge was specially designed and constructed for this work and was exceptionally well built at a low cost. The taxpayer purchased material of better quality than that ordinarily used for such a dredge and, on account of market conditions, was able to purchase the material at very low prices. It was able to purchase steel for the hull at approximately one-half the usual market price from the American Locomotive Works, which, being nearly idle, took contracts at a low price to keep their crews together. Various parts, such as boilers, motors, engines, and pipe, were purchased direct from the manufacturers rather than through jobbers. Employees of the taxpayer, personally supervised by the said Stalter, assembled and constructed the dredge. Stalter also personally designed and made the working plans and specifications.

The total cost to the taxpayer of labor and material used in the construction of the said dredge, as shown upon its books, was $127,-821.67. The taxpayer did not enter upon its books any cost for the designing, engineering, supervision or any overhead expenses. The engineering cost of the same type of drfedge would have been approximately $10,000. During the period 1911 to March 1, 1913, there was a rise in the cost of labor and material of approximately 10 per cent.

The taxpayer used said dredge for its own work for eight years, and in 1919 sold it for $180,000. This amount also included some equipment purchased subsequent to March 1, 1913, over which there is no controversy. It was stipulated that depreciation should be computed at the rate of 5 per cent from March 1, 1913, to the date of sale.

The taxpayer fixed the March 1, 1913, value at $160,000, depreciated the same at 4 per cent, and reported in its return a gain of $25,185.86 on the transaction. The March 1, 1913, value of $160,000 was not placed upon the books of the taxpayer until after the sale of the dredge in 1919. In its petition the taxpayer claimed that the March 1, 1913, value was in excess of the selling price and that no gain resulted from said sale.

The fair market value of the dredge on March 1, 1913, was $160,000.

Order of redetermination will he entered on 10 days’ notice, wider Rule 50.


author: TRussell :

text:
    Appeal of EAGLE SHOE MANUFACTURING CO., INC.
    Docket No. 5593.
    Submitted February 2, 1926.
    Decided April 21, 1926.
    Bad debts ; deduction in pakt. — -Under the Revenue Act of 1921, a corporate taxpayer is entitled “ when satisfied that a debt is recoverable only in part,” to charge off the part not recoverable.

      John J. Barry, Esq., for the taxpayer.

      F, O. Graves, Esq., for the Commissioner.

      Before James, Littleton, Smith, and TRussell.
    • This proceeding was taken with a view to securing a redetermination of an asserted deficiency in income tax for the calendar year 1921 in the amount of $320.39. The petition alleges error on the part of the Commissioner in declining to allow a deduction from gross income of $3,203.85, a portion of an account which the taxpayer on December 31, 1921, deemed to he recoverable only in part.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation with its principal office at Everett. Some time prior to December 31, 1921, the taxpayer had upon its books an open merchandise account against the Jolles Shoe Co., of Boston, Mass., in the amount of $5,272.25. The debtor had become insolvent and its affairs were being wound up in bankruptcy proceedings. Prior to the end of the year 1921 the bankrupt estate had distributed a creditors’ dividend in the amount of 25 per cent of their claims, thus reducing the taxpayer’s claim to $3,954.19, at which amount it stood on the taxpayer’s books on the morning of December 31, 1921. On that date, the taxpayer, being then satisfied that a large part, if not all, of said claim could never be recovered, wrote off of said account the amount of $3,203.85, charged the same to profit and loss for the year 1921, and claimed that amount among its bad debt deductions in its income-tax return for that year.
    The bankrupt estate of the Jolles Shoe Co. never paid another creditors’ dividend or made any further distribution to the creditors in any form whatever, and on February 10, 1922, the balance of said account was written off and charged to profit and loss. The Commissioner restored the amount of $3,203.85 to the taxpayer’s income for the year 1921, and upon that basis computed the deficiency of $320.39.
   OFINION.

TRussell :

The writing off of bad debts and their deduction from gross income during the taxable year ‘here under consideration is governed by section 234 (a) (5) of the Revenue Act of 1921, which reads as follow^:

Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

The record of this case proves that on December 31, 1921, the taxpayer’s debtor was bankrupt and that, after having received a 25 per cent creditors’ dividend, the taxpayer was satisfied that little if any more conld be recovered upon its account, and thereupon exercised its sound business judgment in writing off approximately three-fourths of the balance of said debt and claiming the same as a deduction from gross income in the year 1921, and when, in the year 1922, it developed' that no further payments were to be made from the debtor’s estate, the remaining balance of such account was written off. We are of the opinion that the taxpayer acted well within the limits of sound business discretion, as well as within the provisions of the above-quoted portion of the Revenue Act of 1921, and that its claim for a deduction from gross income for the year 1921 on account of the Jolles Shoe Co.’s debt should be allowed.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.


text:
    Appeal of EDWARD S. VAIL BUTTERINE CO.
    Docket No. 5449.
    Submitted January 15, 1926.
    Decided April 21, 1926.

      Robert E. Acorn, Esq., for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before James, Littleton, Smith, and TRttssell.
    This is an appeal from the determination of a deficiency in income and profits tax for the fiscal year ending June 30,1920, in the amount of $1,847.88. It is alleged that certain formulae and processes for use in the manufacture of oleomargarine, paid in for $150,000 par value of stock in 1916, had an actual cash value at that time of $75,000, and that the Commissioner erred in his determination that these formulae and processes had no actual cash value at the time paid in.
   FINDINGS OP FACT.

The taxpayer is a Delaware corporation engaged in the manufacture of oleomargarine at Chicago, Ill. It was organized in September, 1916, by one Ward, Edward S. Yail, and L. E. Roberts, with an authorized capital stock of $500,000, consisting of 20,000 shares of preferred .and 30,000 shares of common stock having a par value of $10 each.

Edward S. Yail had for about 28 years prior to 1916 been in the employ of various manufacturers of oleomargarine. During a greater portion of this time his duties brought him in contact with the actual manufacture of this product, with the result that he acquired considerable knowledge as to the. manufacture of butter substitutes. He acted as vice president of at least two of the companies with which he had been connected and, in some instances, acted as salesman.

In the manufacture of oleomargarine the proper use of oils, milk, salt, and of temperatures is essential. During the period herein-before mentioned, Yail had acquired a thorough knowledge of the processes employed in such manufacture, particularly as to the temperature at which the ingredients entering into the manufacture of this article should be mixed, and the quantity of oils, milk, and salt to be used. In connection with his activities he made various experiments. From time to time he made notes of the quantities of materials, the processes of mixing, and the proper temperature necessary at various stages in the process of manufacture.

In 1912, Vail became associated with the Carey-Vail Co. and received certain stock of that company in exchange for his agreement to take charge of the manufacture of oleomargarine and to demonstrate to the company and its employees the processes and methods known to him in the manufacture of oleomargarine. He remained with this company about one and one-half years. Prior to his connection with the taxpayer, he had never furnished any one, in writing, with the processes and formulae used by him in the manufacture of oleomargarine, nor had this process, prior to 1918, been completely reduced to writing by him.

A short time prior to the organization of the taxpayer, L. E. Roberts, a promoter, having knowledge of Vail’s experience, discussed with him on many oócasions the matter of their joining in the organization of a company for the manufacture of butterine. The proposition of Roberts was that he would promote the company and sell its stock upon Vail’s reputation and his knowledge of the manufacture of oleomargarine. Finally, after making inquiry concerning Roberts, Vail agreed to become associated with him in the organization of such a company. The promotion of a company was accordingly undertaken. It was agreed between Vail and Roberts that a certain amount of stock should be issued to the former in exchange for his various formulae and processes in use in the production of oleomargarine, and that Vail should agree to remain with the company for at least five years and hake charge of its manufacture. It was further agreed between them that one-half of the stock to be issued to Vail for his formulae and processes, and his agreement to take charge of the manufacturing end of the business, should become the property of Roberts for his services in promoting the company and selling its stock.

The first step after organization of the corporation was the acquisition of a plant for manufacturing purposes. To this end negotiations were opened with one W. H. Darlington, and after consultation between Ward, Vail, Roberts, and Darlington a building owned by the latter, which had theretofore been used as a serum plant, was acquired by the corporation for a consideration of $75,000, which the company agreed to discharge by issuing $19,000 par value of preferred stock, paying $21,000 in cash, and executing a mortgage for $35,000. With the $19,000 par value of preferred stock, $10,000 common stock was issued as a bonus. Thereupon, W. H. Darlington became president of the corporation. Thereafter, during 1916 and throughout the year 1917, L. E. Roberts and other salesmen were actively engaged in the sale of the corporation’s stock to the public. In all instances the preferred stock of the corporation was sold at par and the common stock was given as a bonus, ranging from one share for each share of preferred purchased to one share of common for every two shares of preferred. In making sales of the taxpayer’s stock, the experience and ability of Edward S. Vail, his knowledge of the process of manufacturing oleomargarine, and his agreement to take charge of the manufacturing end of the business were urged upon the prospective purchasers as an inducement to purchase such stock. In this connection Vail accompanied Roberts in his campaign for the purpose of explaining to prospective subscribers the prospects of success in the manufacture of oleomargarine. In a few instances a small number of shares of common stock were sold at par.

On October 2,1916, the board of directors of the taxpayer adopted the following resolution:

Whereas, Edward S. Vail has proposed to assign, transfer, sell and convey to this corporation the nse of certain secret formulae and processes to him known for the efficient manufacture of buttorine, or oleomargarine, in consideration of the issue to him by said corporation of $150,000 of its common stock, and
Whereas, the right and opportunity to manufacture butterine or oleomargarine according to said formulae and processes are admitted by us to be a valuable property right and of the reasonable value of $150,000, and necessary for the business of the corporation,
Now, therefore, be it resolved : That said offer of said Edward S. Vail be accepted by the corporation, and upon a proper transfer of said property rights to said corporation said amount of stock be issued to him, that is to say, $150,000 of common stock.

On January 18, 1917, W. H. Darlington, W. L. Ephlin, L. E. Roberts, and Edward S. Vail, the directors of the corporation, entered into an agreement to the effect that they would each place the shares of stock held by them in escrow with a trustee for a period of five years, and that they would not sell the same without first offering such stock to the parties to the agreement. They further constituted Walter L. Darlington as their attorney in fact with full power and authority to vote said shares of stock so held in escrow for the purposes of said agreement, subject to the limitation that he should vote said stock so as to carry into effect, as the policy of the company, the following:

(a) That no officer or director of the said Ed. S. Vail Butterine Company shall receive any salary, emolument or profit for the services rendered, or to be rendered by him, in the proper performance of his or their duties, until three (3) months after said company becomes possessed of and operates a plant for the production and sale of butterine and other products to be made by said company.
(b) That the said Ed. S. Vail and the said L. E. Roberts in consideration of the faithful performance by them of all the duties pertaining to the offices to be held by them, and the duties which they may be properly called upon to perform, shall receive a salary of $3,000.00 each per annum for the first two (2) years of their services, commencing from a period three (3) months subsequent to the time said company actually enters upon the manufacture and sale of butterine; $4,000.00 per annum during the third year of said service in the employ of said company, conditioned as aforesaid, upon the performance full, final and complete, in good faith, and involving the exercise of the fullest amount of shill, energy and industry, of all the duties properly enjoined upon them.
(c) The president of said company shall have and exercise general supervision, management and control over the affairs of said company, and the officers and employees thereof.
(d) That all moneys and funds belonging to the Ed. S. Vail Butterine Company shall be deposited in the Stockmen’s Trust & Savings Bank, Chicago, Illinois, and shall be withdrawn from said bank only upon checks signed by the treasurer and countersigned by the president or the assistant treasurer of the company.
(e) That the secret formula or formulas, process or processes for the production and manufacture of butterine, and kindred products heretofore sold by the said Ed. S. Vail to said company, shall be turned over to and held by the said Walter L. Darlington as trustee for all of the stockholders of said company during the life of this contract.

This agreement further provides that—

The said parties hereby covenant and agree that in their capacity as directors of the said Butterine Company, they will at the next regular meeting of the board of directors of said Ed. S. Vail Butterine Company vote to adopt resolutions embodying the provisions of the foregoing paragraphs designated as a, b, c, d and e, and that they will not during the life of this agreement vote to repeal, modify or change in any way said resolutions, and it is hereby understood and agreed that said resolutions so to be adopted as aforesaid, are for the protection of persons about to become stockholders in said company who are to be offered the inducement that in consideration of the purchase by them of shares of the capital stock of said Butterine Company, said resolutions will be adopted and become permanently the policy of said Butterine Company in respect to the matters and things therein mentioned.
It is further understood and agreed by and between the parties hereto that aá directors of said Butterine Company, constituting a majority thereof, they will during the life of this contract, subject only to such changes as may be mutually agreed upon, vote to elect the following as officers of said company:
President, William H. Darlington,
Vice President, Ed. S. Vail,
• Secretary, J. E. Anderson,
Treasurer, L. E. Roberts,
Asst. Treasurer, W. L. Ephlin.

The taxpayer began the manufacture of oleomargarine on July 17, 1917.

The stock issued to Yail pursuant to the resolution hereinbefore quoted and that issued for property and 100 shares of preferred stock sold on December 9, 1910, at par, with which 100 shares of common stock were given as a bonus, constituted all of the stock issued during 1916. Between January 6 and December 21, 1917, 9,980 shares of preferred stock were sold to 191 purchasers for cash at $10 a share, with which a total of 6,177 shares of common stock were given as a bonus. Practically all of this stock was sold to persons not connected with the corporation, in lots ranging from 3 shares to 500 shares. The greater number of sales were in blocks of from 10 to_ 50 shares. The subscribers to this stock were actuated to purchase the same by reason of their belief that the manufacture of oleomargarine would be profitable and by reason of representations made to them concerning Vail’s ability, reputation, and experience in the manufacture of oleomargaine, and by the further representation that the corporation had acquired from him certain formulae and processes for its manufacture.

The earnings and losses of the corporation for the fiscal years ending J une 30, 1918, to 1925, inclusive, were as follows:

The formulae and processes paid in for stock, aside from the personal services agreed to be rendered by Edward S. Yail, had no actual cash value on October 2, 1916.

The deficiency is $lf8Jfl.88, Order vMl he entered accordingly.


author: Littleton :

text:
    Appeal of THE DAILY NEWS PUBLISHING CO.
    Docket No. 4158.
    Submitted February 19, 1926.
    Decided April 21, 1926.
    1. During the calendar year 1918 the taxpayer and The Republican Co. were affiliated, within the meaning of section 240 of the Revenue Act of 1918.
    2. In the absence of competent evidence to show that the Commissioner erred, (1) in increasing the taxpayer’s income on account of Federal income and profits taxes determined by him to have been deducted from gross income for 1918, a:.d (2) in not allowing an increased deduction on account of State income and franchise taxes alleged to have been paid during the year, his determination in that regard will not be disturbed.

      William W. Joñmton, 0. P. A., for the taxpayer.

      Percy 8. Orewe, Esq., for the Commissioner.
    Before James, Littleton, Smith, and TRUssell.
    This is an appeal from the determination of a deficiency in income and profits tax for the calendar year 1918 in the amount of $5,472.77. The taxpayer assigns as error (1) the refusal of the Commissioner to permit it and The Republican Co. to file a consolidated return; and (2) the increase by him of income through the disallowance of a deduction on account of income and franchise taxes alleged to have been paid to the Commonwealth of Massachusetts, and on account of Federal income and profits tax for the preceding year determined by the Commissioner to have been deducted from 1918 income.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation engaged in the publication of a daily evening newspaper at Springfield.
    On February 28, 1924, while the taxpayer’s protest to the Commissioner’s proposal to assess additional income and profits taxes' for the calendar year 1918 was pending, the Commissioner, believing that should assessment of the tax be withheld until final determination of the taxpayer’s contention, assessment and collection of any tax which might be found to be due would be jeopardized by the delay, made an assessment of $7,273.72. tie advised the taxpayer to file an abatement claim in accordance with the provisions of Regulations 62, article 1006. This claim was filed and on March 14, 1925, the Commissioner made a final determination allowing the claim in the amount of $1,800.95 and denying the same as to the amount of $5,472.77, of which amount approximately $3,000 is here in controversy.

      The taxpayer was organized on November 9, 1888, by Charles J. Bellamy, Sr., who died a short time prior to 1915. Upon his death the business passed to his son and daughter, who became the owners of the entire capital stock of the corporation, the son, Charles J. Bellamy, Jr., being at that time about 20 years of age.
    In May, 1915, Sherman H. Bowles, vice president of The Republican Co., a corporation engaged in the publication of a morning newspaper, and a close friend of the Bellamy family, opened negotiations with Charles J. Bellamy, Jr., and his sister on behalf of The Republican Co., with the view of acquiring the stock of The Daily News Publishing Co. The Republican Co. was actuated in its desire to acquire The Daily News Publishing Co. in order to compete with The Springfield Union, engaged in the publication of both morning and evening editions. These negotiations, which continued for some time, finally resulted in the purchase by The Republican Co., during that year, of 280 shares of the total outstanding 350 shares of The Daily News Publishing Co. for $160,000, the remaining 70 shares being retained by Charles J. Bellamy, Jr., for the reasons hereinafter set forth.
    At the death of his father, who was the founder of The Daily News Publishing Co., the son was desirous of carrying on the business in the way in which his father had conducted it and of eventually becoming managing editor thereof. Upon deliberation, however, he reached the conclusion that it would not be wise for him to undertake to manage the affairs of the corporation, and that in order to realize his ambition to become an editorial writer he should surrender all interest in the management and operation of the paper. Having implicit confidence in his friends with The Republican Co., and upon being assured by them that he would be given a position with The Daily News in an editorial capacity, he concluded that it was to the best interest of himself and that company to become affiliated with The Republican Co. For reasons purely personal, however, he did not desire to part absolutely with his stock ownership in the company, and he agreed to accept the offer of The Republican Co. to purchase the stock of The Daily News Publishing Co. upon condition that he be permitted to retain 70 shares, or 20 per cent, of the total outstanding capital stock.
    The desire of The Republican Co. was to secure complete ownership and control of The Daily News Publishing Co. Upon the assurance of Bellamy, however, that his wish to retain a stock interest in the business was not for the purpose of taking any part in the management or control of the affairs or policies of the company, but for the reason that he did not desire to part absolutely with the paper which his father had conducted for so many years, The Republican Co. agreed to purchase 280 shares, representing 80 per cent of the capital stock, with the express understanding, however, that The Republican Co. was to be in complete control of the management of the affairs and policies of the newspaper and that the retention by Bellamy of 20 per cent of the stock would not result in his taking any action at any time adverse to the desires of The Republican Co.
    Since 1915, The Republican Co¡ has been in complete control of The Daily News Publishing Co. and Bellamy has at no time caused his stock to be voted contrary to the wishes of The Republican Co., nor has he at any time asked for information relative to the affairs of the corporation. As he testified at the hearing, he promised The Republican Co. at the time he sold to it the stock of The Daily News Publishing Co. that his share of it should be controlled by the judgment of the officers of The Republican Co., and, further, that the voting rights of the stock held by him during the taxable years were, in fact, controlled by The Republican Co. from 1915 until it was acquired outright on April 1, 1923.
    The physical properties of The Daily News Publishing Co. and The Republican Co. were merged in January, 1916, since which time the business of both papers has been carried on in the building owned by The Republican Co., and the editions of both papers have been published with equipment belonging to The Republican Co. Separate accounting systems were maintained for each company. However, the greater portion of cost of operation was charged to The Republican Co. and the charges made against The Daily News Publishing Co. were, to a great extent, arbitrary. The two companies were • operated as a single business unit at all times -after the date of acquisition of The Daily News Publishing Co. by The Republican Co. and only a meager attempt was made .to determine the correct net income of either.
    In computing the taxpayer’s income for the year 1918, the Commissioner increased the same in the amount of $4,525.36, representing income and profits tax for 1917 determined by him to have been deducted in computing 1918 income, and, in addition, refused to allow an additional deduction of $400.38 for income and franchise taxes claimed to have been paid to the Commonwealth of Massachusetts. By reason of these and other adjustments which are not in controversy, the Commissioner increased the taxpayer’s net income of $18,700.09, as reported, to $23,191.43, upon which he computed the deficiency here in controversy.
   OPINION.

Littleton :

It is the opinion of the Board that the evidence submitted fully supports the taxpayer’s claim that during the year 1918 it was affiliated with The Republican Co., within the meaning oí section 240 oí the Revenue Act of .1018.

The principal officers of The Republican Co. testified that at the time that company acquired 80 per cent of the stock of The Daily .News Publishing Co. it was understood between them and Charles J. Bellamy, Jr., that they should have complete control of the affairs and policies of the corporation and of the voting rights of the stock which he desired to retain on account of his father’s long connection with The Daily News Publishing Co. Charles J. Bellamy, Jr., testified to the same effect, and stated that, at all times after the date of acquisition by The Republican Co. of 80 per cent of the stock, that company controlled the voting rights of the stock retained by him; that at the time of the sale he assured the officers of The Republican Co. that he would take no interest in the affairs of The Daily News Publishing Co. and that they should have complete control of the affairs and policies of the corporation, and that he would not, thereafter, vote his stock in opposition to their desires. This situation existed throughout the time that Bellamy was the owner of the stock. He was employed by The Daily News Publishing Co. in an editorial capacity, to which position he gave his exclusive time and attention, and took no interest in the business affairs of the corporation.

During the entire year 1918 up to December 15, 1918, Bellamy was in the military service of the United States and his stock during that time was not voted by anyone.

With respect to the second issue relative to the alleged erroneous increase by the Commissioner of 1918 income on account of Federal income and profits taxes determined by him to have been deducted by the taxpayer in computing its 1918 income, and his refusal to allow the taxpayer an additional deduction of $400.38 on account of Massachusetts taxes alleged to have accrued, or to have been paid, during the taxable year, the Board is unable to determine from the evidence whether or not the Commissioner erred' in this regard. The taxpayer’s counsel undertook to testify respecting these two items from information which he had obtained from others who were not present to testify and as to the contents of the books and records of the taxpayer which were not produced at the hearing. The Commissioner objected to the receipt of this testimony, upon the grounds that it was hearsay and that the books and records of The Daily News Publishing Co., which were not submitted, were the best evidence of the entries contained therein. After inquiry by the Division of the other witnesses present as to whether they had any knowledge of these matters, and upon being informed by them that they did not, the objection of the Commissioner to the testimony of taxpayer’s counsel was sustained.

In matters of this character, statements made by persons who are not present to testify and to be subjected to cross examination, and statements as to what the books and records which are not produced for examination contain, can not be accepted by the Board for the purpose of making findings of fact and of reaching a correct conclusion with reference to items to which such statements relate.

It is not necessary to discuss taxpayer’s claim that different comparatives under section 328 should be selected, since the evidence does not show that the net income of $23,191.43 for the taxable year was incorrect, and for the further reason-that the Board has held that the taxpayer and The Republican Co. were afiiliated for the year 1918, which necessitates the recomputation of invested capital.

Order of redetermination will be entered on 15 days' notiee, under Bule 50.


text:
    Appeal of ANDREW H. SCHUBERT.
    Docket No. 6667.
    Submitted February 24, 1926.
    Decided April 21, 1926.

      George D. Spolm, Esq., for the taxpayer.

      Joseph K. Moyer, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tgussell.
    This is an appeal from the determination of a deficiency in income tax for the calendar year 1922 in the amount of $235.30. The taxpayer alleged that the Commissioner erred in determining that he received income in the sum of $838.75 in the year 1922 from the sale of certain saloon fixtures. The Commissioner admitted that he determined such income and denied that he erred in doing so. The appeal was submitted on the allegations in the petition and the admissions contained in the Commissioner’s answer.
   FINDINGS OF FACT.

The taxpayer is a resident and citizen of the State of Wisconsin. In 1908 he purchased certain land in Madison for $4,000 and erected thereon a building, at a cost of $8,500, for use as a saloon. At the same time he purchased certain saloon fixtures at a cost of $3,200. The building and fixtures were used by the taxpayer and his lessees as a saloon from 1908 to 1917, and thereafter in the sale of soft drinks. The land and building were sold in 1922.

The aforementioned fixtures were sold by the taxpayer to one Daggett, in 1913, for the sum of $2,200.

The deficiency should be computed by excluding from income for the year 1922 the amount of $838.75 as the profit upon the sale in that year of saloon fixtures.

Order of redetermination will be entered on 15 days' notice, under Rule 50.


text:
    Appeal of BRADT DRUG CO.
    Docket No. 6676.
    Submitted February 24, 1926.
    Decided April 21, 1926.

      John D. Foley, Esq., for the Commissioner.
    Before James, Littleton, Smith, and TRussell.
    This is an appeal from the determination of a deficiency of $1,427-76 for the calendar year 1921.
   FINDINGS OF FACT.

The taxpayer is a New York corporation with principal office at Albany. In his answer to taxpayer’s petition, the Commissioner admitted the allegations of fact contained therein as follows:

The taxpayer corporation was organized March 7, 1917, with an authorized capital stock oí $10,000.00, all of which was outstanding at the beginning of the taxable year. In 1921 this organization was increased to $60,000.00. The increase in capital stock was issued to Mr. Warren L. Bradt for a leasehold owned by him. The lease was acquired upon a building for the purpose of conducting a retail drug business. This lease had a life of twenty years from January 1, 1920 to December 31, 1939, on a rental basis as follows:
1920 to 1925_._$12, 000. 00 per annum.
1925 to 1930_$13, 000.00 “ . “
1930 to 1940_$14, 000. 00 “
The taxpayer corporation in making its return for the year 1921 claimed as a deduction from income 7/12 of 1/19, (one year of the lease having expired) of $50,000.00 as amortization.
The Revenue Agent disallowed this deduction on account of amortization of the leasehold. Later under date of November 10, 1924, the taxpayer received a letter from the Income Tax Unit also disallowing the deduction on account of amortization of the leasehold. This action on the part of the Income Tax Unit was protested by the taxpayer but the Income Tax Unit still held that the taxpayer was not entitled to this deduction.

Upon audit of the return for 1921 the Commissioner denied the taxpayer’s claim for a deduction for exhaustion based upon a value for the lease of $50,000.

The deficiency is $1,4%7.76. Order will be entered accordingly.


author: * Tkttssell:

text:
    Appeal of GARDNER PRINTING CO.
    Docket No. 5061.
    Submitted December 10, 1925.
    Decided April 21, 1926.
    1. Value op news publications. — The original cost, plus that part of expense of building up and developing a news publication circulation structure capitalized, helé, upon the evidence, to be the measure of the value of the investment when paid in to a corporation in exchange for stock.
    2. Gains from sales. — Amounts received from the sale of assets, the cost of which has been either charged to expense or fully recovered by depreciation, are income.

      D. H. Morgan, Esq., for the taxpayer.

      John D. Foley, Esq., for the Commissioner.
    Before James, Littleton, Smith, and TRussell.
    This is an appeal from the determination of deficiencies for the fiscal years ended April 30, 1919, and April 30, 1920, in the amounts of $5,410.22 and $2,010.64, respectively. The petitioner alleges errors as follows:
    (1) That the Commissioner improperly eliminated from invested capital the amount of $59,000, the par value of stock issued by the taxpayer as payment for a so-called investment account acquired from a predecessor corporation.
    (2) That the Commissioner added to gross income in each year items of alleged gains predicated upon the sale of printing presses and other equipment.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized in May, 1907, with an authorized capital stock of $150,000, of which $105,000 was common stock and $45,000 was preferred stock, and at the time of its organization took over the assets of the Gardner Publishing Co. and the Cleveland Printing Co., predecessor corporations.
    In or about the month of April, 1905, one G. H. Gardner purchased a trade newspaper known as the “ Pattern Maker,” for which he paid $20,000 in cash. In the following month of May, 1905, he caused to be organized a corporation known as the Gardner Publishing Co., and thereupon exchanged the said trade paper for $20,000 par value of the capital stock of said company, which continued the .publication of said trade paper and sought to develop the field covered by said paper and enlarge its scope. In this effort it caused the name of the paper to be changed to “ Woodcraft ” and that name to be trade-marked. It enlarged its office, purchasing additional furniture and fixtures; put on more solicitors for subscriptions and for advertising; obtained more useful editorial material and added many other features, with a, view of making; the naner cover the entire woodworking field. During the following two years the operating expenses amounted to $50,838.82. During this two-year period the “Woodcraft” publication acquired a recognized standing as a trade journal representing the entire woodworking industry, and at the end of this two-year period the sum of the original cost of the “ Pattern Maker,” plus the operating expenses, was as follows:
    Original purchase “ Pattern Maker ”_$20, 000.00
    Operating expenses, May 1, 1005, to Apr. 30, 1906_ 26, 097. 49
    Operating expenses, May 1, 1906, to Apr. 30, 1907_ 24,441. 33
    Total_ 70, 538. 82
    Included in this total are the costs of such physical assets as office equipment, estimated not to exceed $5,000.
    On May 14,1907, the resources and liabilities of the Gardner Publishing Co. were found by its books to be as follows:
    BALANCE SHEET MAY 14, 1007.

    In May, 1907, it was proposed to merge the business of the Gardner Publishing Co. and the business of the Cleveland Printing Co. into one organization, and the taxpayer corporation was then organized and took over the going businesses of the two companies. On May 15, 1907, the taxpayer issued all of its preferred stock, $45,000, and $79,000 of its common stock, in exchange for the properties and the businesses of said two companies, as follows:
    Date issued.
    May 15,1907. Issued for the machinery, equipment, and fixtures of the Cleveland Printing Co. and Gardner Publishing Co_$65,000
    May 15,1907. Issued for the investment account of Gardner Publishing Co_ 59,000
    Thereupon and thereafter, on the following dates, taxpayer issued the balance of its authorized common stock, for which it received cash at par as follows:
    May 15,1907. Common stock issued for cash_ 19,800
    Jan. 3,1910. Common stock issued for cash--- 2,500
    Jan. 17,1910. Common stock issued for cash_ 1,500
    Feb. 25,1910. Common stock issued for cash- 2,000
    June 23,1910. Common stock issued for cash_ 200
    Total authorized issue of capital stock- 150, 000

      Of the $19,800 par value of stock issued for the same amount of cash on May, 15, 1907, a small number of shares were purchased by one Oliphant, and another small number.of shares were purchased by one Franck, who were, respectively, treasurer and general manager of the business, and one block of 100 shares, $10,000, was purchased and paid for by one F. E. Drury. Oliphant purchased other shares at par for cash at later dates.
    The taxpayer continued the publication of “Woodcraft,” and also established another trade paper known as “ Castings,” which was intended to cater to the foundry business, and continued these publications until the year 1913, when there was organized a corporation known as the Mechanical Publishing Co., and the taxpayer transferred to the latter company the publications known as “Woodcraft” and “Castings” in exchange for $75,000 par value of the stock of the latter company; but in the following year the taxpayer reacquired both of said publications in exchange for the same $75,000 par value of the stock of the Mechanical Publishing Co. The taxpayer, however, had continued as a going concern and upon the reacquisition of the publications its capital account was not changed or modified.
    In the year 1912 the taxpayer purchased a two-color press at a cost of $9,600, and added to this press a feeder at a cost of $1,750. On December 9, 1918, this press and feeder were sold for $8,000. At the hearing it was stipulated by counsel for the parties that the gain derived from this sale, after taking into consideration the accrued depreciation, was $2,650.
    During the fiscal year ended April 30, 1919, the taxpayer received $1,500 from the sale of stock of the Nesbit Service Co. The cost of this stock had been in prior years charged to operating expenses, and the Commissioner added the $1,500 so received to gross income for the fiscal year ended April 30,1919.
    During the fiscal year ended April 30, 1920, the taxpayer sold an embossing press for $1,100, and another small machine for $150. The total cost of each of these items of equipment had been in ^prior years fully recovered by depreciation, and the Commissioner added the amounts received from the sale to gross income for the fiscal year ended April 30, 1920.
   OPINION.

* Tkttssell:

Perhaps the most important asset of a news publishing business is its reading and advertising clientele. The advertising clientele is built up on the basis of an approved subscription list, and, therefore, in the parlance of the publishers’ business, this asset is known as the circulation structure. When a publishing-business is started a considerable portion of its capital goes into the development and upbuilding of this circulation structure, in much the same manner that a manufacturing business puts its capital into factory buildings and machinery which constitute its plant. So the circulation structure of a news publishing plant represents a considerable portion of the capital investment. This circulation structure is evidenced by subscription lists and book accounts which, in a well regulated publishing business, are periodically verified and audited in a manner not unlike the periodical inventorying of plant and equipment of other businesses. And to the same extent that an inventory of buildings and machinery represents capital for a manufacturing business, so a verified and audited circulation structure must represent capital of a publishing business.

In the instant case we are called upon to determine the cash or market value of a trade newspaper as of May 15, 1907, when the same was exchanged for stock of a corporation. More than 18 years have passed since the time when the facts and circumstances controlling the value of this property were matters of current interest. The bookkeeping and accounting of this business at that time were apparently crude; some of the records have been lost; and some of the actors who took part in building this newspaper are not now present to testify concerning the facts and things which enter into the computation of values.

In this situation the Commissioner disregards any evidence of value whatsoever, while the petitioner argues that we should accept its proposition that the value was equal to the par of the stock issued for the asset. Both of these positions seem to be equally untenable. The Board can not properly accept the fact that an exchange of- property for stock is proof of value, without other evidence; neither can it refuse to consider such evidence as has been produced in support of the values claimed.

An examination of the facts discloses that, during the two years of the operation of the Gardner Publishing Co., $32,933.45 of its cash capital had gone into the purchase and development of the “Pattern Maker,” later known as “ Woodcraft’’publication; that during -those two years some part of the $50,000 of operating expenses must be attributed to the work of procuring and building up subscription lists and advertising patronage, and at the end of that period there was an operating deficit of $4,822.87. Thus, it is apparent that on May 15, 1907, the “Woodcraft” publication and its circulation structure had cost its promoters a sum equal to the so-called investment account, plus the operating deficit and that unsegregated portion of the expenses which could be properly attributed to development cost. We are not impressed with the taxpayer’s argument that the value of a publication should be taken to be the amount which has actually been expended in developing it. A newspaper circulation structure is an asset which must be continually supported by such advertising and soliciting as will result in constantly bringing in new subscribers and new advertising patrons to take the place of those who, in the regular course of business, are constantly dropping off. In this situation, it appears that the best estimate of the value of this publication which can now be arrived at is the estimate which its owners and promoters placed upon it and at which they carried it upon their books of account on May 15, 1907, and that is the amount of $32,933.45.

We are, therefore, of the opinion, and so find, that in the computation of its invested capital for the year here under consideration the asset for which $59,000 of stock was issued should be treated as having a value on the date on which it was paid in in the sum of $32,933.45.

Moneys received from the sale of an asset, the cost of which had been charged to expense, are properly included in income, and amounts received from the sale of machines, the cost of which has been entirely recovered by depreciation, are held to be gains and income under the rule of the Appeal of Even Realty Co., 1 B. T. A. 355.

Order of redetermination will be entered on 15 days1 notice, under Rule 50.


text:
    Appeal of WILLIAM D. KEIR.
    Docket No. 4276.
    Submitted February 11, 1926.
    Decided April 21, 1926.

      ’William D. Keir pro se.

      Henry Ravenal, Esq., for the Commissioner.
    Before Jambs, LittletoN, Smith, and Teussell.
    This is an appeal from the determination of a deficiency in income tax for the year 1922 in the amount of $85.92.
   BINDINGS OB BAOT.

The taxpayer is an individual and a citizen of the United States residing in Canada.

In the year 1923 he filed an income-tax return with the Canadian Government with respect to income received during the year 1922. Likewise, in 1923, a return of income for the calendar year 1922 was filed in the United States, upon which the taxpayer claimed a credit for income and profits taxes paid to foreign countries (Dominion of Canada) in the amount of $107.10, representing the tax upon income of 1922 levied by the Dominion of Canada upon the taxpayer for that year and paid to the Canadian Government in the year 1923.

The Commissioner disallowed the above claim.

The taxpayer kept his books and made his return for the year 1922 on the basis of cash receipts and disbursements.

The de'ficiency for the year 19%% is $85.9%. Order will he entered accordingly.


author: James :

text:
    Appeal of ELIZABETH J. BRAY, Administratrix, Estate of RICHARD BRAY.
    Docket No. 2801.
    Submitted July 20, 1925.
    Decided April 21, 1926.
    Taxpayer’s decedent purchased securities at a cost of $10S,461.25. His estate returned said securities for Federal estate-tax purposes at $98,084.83. It sold said securities for $97,657.83. Held, upon these facts standing alone, that the estate established prima facie a deductible loss of $426.17.

      Hargrave A. Long, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before James, LittletoN, Smith, and Trttssell.
    This is an appeal from the determination of a deficiency in income tax for the period June 1 to December 31, 1920, in the amount of $3,258.73.
    FINDINGS OF FACT.
    The taxpayer is the administratrix of the estate of Richard Bray and was so acting during the taxable period in question.
    Prior to his decease, Richard Bray purchased securities at a cost of $108,461.25, which said securities were acquired by the taxpayer in her capacity of administratrix of his estate and were returned by her for the purpose of Federal estate tax at a valuation of $98,084. They were sold during the taxable' period in question for a total consideration of $97,657.83.
   OPINION.

James :

The taxpayer claims a loss on account of the sale of the above-mentioned securities, either in the amount of $10,803.42, the difference between the cost to the decedent and the sales price, or of $426.17, the difference betiveen the value as returned for estate-tax purposes and the sales price.

We are clearly of the opinion that the taxpayer is not entitled to deduction of the larger amount, since cost to the decedent was the basis from which he would compute a gain or loss on the sale, but is not the basis for his estate, which is the value at the time of receipt by it. We are likewise of the opinion that the value at which such securities were returned for estate-tax purposes establishes yrima facie, and in the absence of other evidence, the value of such securities for the purpose of computing, gain or loss on a subsequent sale. We are, therefore, of the opinion that the taxpayer is entitled to deduct as a loss the amount of $426.17, as above claimed.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.