text:
    Appeal of CARL LANG, ABRAHAM LANG, and IRVING LEWIN.
    Docket No. 2912.
    Submitted July 22, 1925.
    Decided January 21, 1926.
    1. A partner agreed to sell Ms partnersMp interest to the otter two partners, provided that tte sales price should be $210,000 or $225,000, with varying provisions effective upon the exercise of either option by the vendees. Held, that the difference of $15,000 is not deductible as interest by tte succeeding partnership.
    2. The taxpayer’s distributive share of partnership income determined.

      M: L. Seidmcm, G. P. A., for the taxpayers.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Mauqttette and MoRRis.
    This appeal is from the determination of aggregate deficiencies in income taxes for the year 1922 in the amount of $3,028.61. The taxpayers were partners and the deficiency is divided:
    Carl Lang_„_$1,796.29
    Abraham Lang_ 651.44
    Irving Lewin_ 583.88
    The main question is whether an item of $15,000 constituted interest and was therefore deductible in computing the net income of the partnership. A question is also raised as to whether the partnership income should be increased by $3,486.47, the difference between the profits used in the computation of the price to be paid Hoffman, upon the purchase of his interest by the other two partners, and his profits as computed by the Commissioner.
    FINDINGS OF FACT.
    The taxpayers, Carl Lang and Irving Lewin, were, for the first 10 months of 1922, partners with one M. C. Hoffman, engaged in the manufacture of silk under the firm name of Lang & Hoffman.
    The three taxpayers were, for the last two months of 1922, partners, engaged in a business which succeeded to that previously referred to, the new partnership being conducted under the firm name of Lang & Lewin.

      The firm of Lang & Hoffman was dissolved on November 1, 1922. pursuant to the following written agreement:
    Agreement' made this 1st day of November, 1922, by and between Oarl Lang •and Irving Lewin of the City of New York, parties of the first part and Meyer 0. Hoffman of the same place, party of the second part:
    The parties mutually agree as follows:
    The party of the second part agrees that he will retire from the co-partnership firm of Lang & Hoffman, manufacturers of and dealers in silks, now located at 118 Madison Avenue, New York City and will sell, assign and transfer to the parties of the first part all his interest in all the assets of every kind and nature of said firm, including trade marks, trade names and copyrights upon payment by the parties of the first part of the purchase price agreed upon at the sum of Two hundred and ten thousand ($210,000) Dollars, to be paid at the times hereinafter provided.
    The parties of the first part agree to purchase the said interest of the party of the second part for the said sum of Two hundred and ten thousand ($210,000) Dollars, and to pay the same as follows: Twenty-five thousand ($25,000) Dollars upon the execution hereof; Twenty-five thousand ($25,000) Dollars on or before the expiration of fifteen days from the execution hereof and the balance of One hundred and sixty thousand ($160,000) Dollars on or before the 1st day of. December, 1922, together with interest on said postponed payments at the rate of six per cent (6%) per annum from the date hereof.
    The party of the second part hereby agrees to loan to the parties of the first part at the time of the final payment hereunder, the sum of Twenty-five thousand ($25,000) Dollars to be evidenced by the negotiable promissory note of the parties of the first part payable with interest on May 1,1923 and in case the successors of the said co-partnership of Lang & Hoffman should become incorporated, the said note of Twenty-five thousand ($25,000) Dollars shall be secured by Fifty thousand ($50,000) Dollars at par value of the preferred stock of the said corporation. The said corporation, or if the said successors shall not be incorporated, then the said firm or co-partnership shall assume the payment of all liabilities and obligations of the said firm and the said parties of the first part shall execute and deliver to the party of the second part an agreement indemnifying him against any liability by reason of such liabilities or obligations of the said firm of Lang & Hoffman as now or then existing.
    Upon the consummation of the contract, the name of the party of the second part shall be discontinued in connection with the said business by the said firm or its successors.
    The said party of the second part shall have the right to enter and carry on any business similar to that now carried on by said firm and shall not be debarred from dealing with present customers of the said firm. The said firm or its successors in carrying on their business, may designate themselves as-successors to the firm of Lang & Hoffman.
    Upon the final payment the said party of the second part’s connection with the said firm shall cease as of November 1, 1922, and said party of the second part shall not be entitled to any drawings or profits from said date, nor shall he be liable for any losses from said date. Until, however, the final payment is made hereunder, the party of the second part shall remain a partner with all rights as such.
    It is agreed as to any actions now pending, either in favor of or against the said firm, the parties of the first and second parts shall share in the proceeds and bear any losses, damages or expenses that may accrue in accordance with, their present partnership interests as if this agreement had not been made.

      The parties of the first part agree that upon final payment they will procure for and deliver to the party of the second part a release from Abraham Lang, releasing the party of the second part of and from any claim on his part as a creditor of the said firm. The party of the second part agrees that upon final payment he will execute and deliver any further documents or papers necessary or proper to consummate the transfer of his said interests in said business and to complete the agreement on his part.
    It is understood that the purchase price to be paid hereunder to the party of the second part includes the amounts owing by the said firm of Lang & Hoffman to the Estate of Charles Hoffman and to the party of the second part personally, the said party of the second part assuming and agreeing to pay the said obligations to the said Estate and upon the closing hereunder the said party of the second part shall surrender for destruction the note of the firm held by the said Estate for Eifty thousand ($50,000) Dollars and the check or checks of the firm for Ten Thousand ($10,000) Dollars and will also at the time deliver an instrument in the form of a general release executed and acknowledged by the three executors of the Estate, releasing the firm of Lang & Hoffman from any liability whatsoever. At the same time the parties hereto will execute and deliver to one another general releases mutually releasing one another from all claims of every kind excepting matters to be performed under this agreement and the parties of the first part will at the same time deliver to the party of the second part a general release of all claims against the party of the second part executed and acknowledged by Abraham Lang.
    It is further agreed that the parties of the first part shall have the option upon the first day of December, 1922, the date hereinbefore fixed for the closing of this contract, provided they shall have given at least ten (10) days notice in writing of the exercise of said option to the party of the second part, to purchase the interest of the party of the second part in said business at the price of Two hundred and twenty-five thousand ($225,000) Dollars instead of the price of Two hundred and ten thousand ($210,000) Dollars hereinbefore provided, such price of Two hundred and twenty-five thousand ($225,000) Dollars to be paid as follows: One' hundred thousand ($100,000) Dollars in cash, the party of the first part to receive credit on account of such payment for the sum of Twenty-five thousand ($25,000) Dollars paid on the execution hereof and any further sum paid by him prior to the closing of this contract, and the balance of the purchase price amounting to One hundred and twenty-five thousand ($125,000) Dollars shall be paid by the parties of the first part as follows: Twenty-five thousand ($25,000) Dollars on the 1st day of February, 1923; Twenty-five thousand ($25,000) Dollars on the 1st day of May, 1923; Twenty-five thousand ($25,000) Dollars on the 1st day of August, 1923; Twenty-five thousand ($25,000) Dollars on the 1st day of November, 1923 and Twenty-five thousand ($25,000) Dollars on the first day of February, 1924. Said instalments to be evidenced by the promissory negotiable notes of the parties of the first part, payable at said respective dates without interest.
    It is agreed that in case of default for ten (10) days in payment of any of the aforesaid notes, all of the remaining notes shall immediately become due and payable at the option of the party of the second part. The Twenty-five thousand ($25,000) Dollars loan does not apply to this alternative proposition.
    It being understood that if the said business shall then or thereafter be incorporated the said notes shall be secured by the stock preferred and common of the said corporation issued to or held by the said 'parties of the first part or their nominees or belonging to them but not less than Two hundred and ten thousand ($210,000) Dollars in book value, exclusive of good will, trade marks, trade names or labels.
    It being agreed that if the parties of the first part should refuse to deliver the said stock as security after the incorporation of the business, the party of the second part may at his option, call and declare due all of the aforesaid notes delivered to him in addition to any remedy that he may have to recover the said securities.
    It being understood that the parties of the first part may anticipate the said payments or any of them. And also as payments are made that the party of the second part will surrender to the parties of the first part five per cent (5%) of the said stock deposited as collateral.
    Should the parties of the first part default in carrying out this contract in accordance with either of the foregoing alternatives, then the party of the second part may retain as liquidated damages, the sum of Ten thousand ($10,000) Dollars out of the amounts theretofore paid by the parties of the first part on account hereof and the balance shall then be returned to the parties of the first part and this contract shall cease and be void, and the interest of the party of the second part in said business to remain unimpaired.
    The partnership of Lang & Lewin was forthwith organized on November 1, 1922, the books of the old partnership being continued and not closed.
    The individuals, Carl Lang and Lewin, exercised the option stated in their agreement with Hoffman to pay the amount of $225,000 for Hoffman’s interest in the partnership assets of Lang <& Hoffman, and $100,000 was paid on account during 1922, the balance of $125,-000 being covered by notes delivered in 1922 but payable over 1928 and 1924.
    The profits of the partnership of Lang & Hoffman were divisible between:
    Per cent.
    Hoffman,_45
    Lang- 45
    Lewin_10
    The profits of the partnership of Lang & Lewin were divisible between:
    „ , Per cent.
    Carl Lang_60
    Abraham Lang_20
    Lewin_20
    The aggregate net profits of both partnerships, Lang & Hoffman, and Lang & Lewin, for the year 1922, were $72,233.74. In arriving at the value of Hoffman’s interest as of November 1, 1922, the profits for the entire year were estimated at $75,000 and Hoffman’s interest therein at $34,412.50. The taxpayers subtracted this amount from the aggregate net profits of the two partnerships, and then deducted $15,000 as interest, the balance being returned by them according to their respective interests.

      The Commissioner treated both partnerships as a single business unit during the year 1922 and computed the net income as a unit. As the actual amount of net income was $72,238.74, instead of $75,-000, the Commissioner determined that the taxable income of each partner was:
    Hoffman_$80,926.03
    Carl Lang_ 24, 784. 63
    Abraham Lang- 8,261. 54
    Lewin_ 8,261.54
    72,233.74
    Hoffman’s profits were first computed by the Commissioner and subtracted from the aggregate net profits of the two partnerships, the remainder being allocated to the taxpayers in proportion to their interests in the new partnership.
    The Commissioner conceded at the hearing that an amount of $8 interest, withheld at the source on tax-free covenant bonds, was erroneously included in the income of Carl Lang.
    DECISION.
    The deficiencies should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 10 days’ notice, under Eule 50.
   OPINION.

MoRRis:

The taxpayers contend that the difference between $210,-000 which Carl Lang and Lewin might have paid under the agreement with Hoffman, and the $225,000 which they in fact paid, or $15,000, was in the nature of interest and deductible by the partnership of Lang & Lewin in determining its income for 1922.

The best evidence of its nature is the contract itself. The language is specific:

Tbe parties of the first part shall have the option upon the first day of December, 1922 * * * to purchase the interest of the party of the second part in said business at the price of $225,000 instead of the price of $210,000.

Under the first option the purchasers were obligated to pay the entire sum of $210,000 by December 1, 1922, with interest at the rate of 6 per cent from November 1, 1922, on the installment payments provided for under that option. Under the second option, fixed and flat amounts were provided for, $100,000 by December 1,1922, against which the $25,000 paid at the execution of the agreement of November 1, 1922, would be credited, and the balance of $125,000 in five payments of $25,000 each on February 1, May 1, August 1, and November 1, 1923, and February 1, 1924. The installments were “to be evidenced by the promissory negotiable notes of the parties of the first part, payable at said respective dates without interest.”

The fact that interest at 6 per cent was provided for under the first option and no interest on deferred payments under the second, might be the basis for the argument that the $15,000 was in the nature of interest, but it is just as conceivable that, by reason of the higher purchase price, Hoffman was willing to waive any claim to interest. The parties were free to make such arrangement and provide such terms as they saw fit — interest under one situation, no interest under another. The taxpayers, Carl Lang and Lewin, elected to pay a higher price, obtain a longer period for completing the payment and to save themselves from any interest obligations during that period.

The second question raised in the appeal is solved by a correction of what, in our opinion, is an improper allocation by both the taxpayers and the Commissioner of the aggregate net profits of the two partnerships to the various partners. The evidence shows a different interest in the partnership income of the two partnerships than that determined by the Commissioner. It also appears that, upon the dissolution of the old partnership, the books were not closed to determine the profits for the ten-month period. The aggregate net profits for the year 1922 were $72,233.74, but the net income of each partnership can not be determined. Under these circumstances, it is our opinion that ten-twelfths of the net profits for the year should be allocated to the partnership of Lang & Hoffman and two-twelfths- to the partnership of Lang <⅞ Lewin, and should be accounted for by the taxpayers in proportion to their respective interests therein, as set forth in the findings of fact.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    Appeal of MAX LEVY & CO.
    Docket No. 3247.
    Submitted July 6, 1925.
    Decided January 21, 1926.
    Additional salary held to be reasonable and a proper deduction > for tbe year 1920.

      Fred L. Van Dolsen, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Green and Moréis.
    This is an appeal from the determination of a deficiency of $4,012.80 in income and profits taxes for the calendar year 1920. The taxpayer alleges error on the part of the Commissioner in disallowing as a deduction the sum of $10,000 as additional salaries to officers.

      FINDINGS OF FAOT.
    1. The taxpayer is a close corporation, having its principal place of business in Chicago, Ill., and is engaged in the business of purchasing, collecting, assorting, selling, and shipping broken glass.
    2. This business was organized and developed solely through the efforts of Maxwell Levy, who started it in 1895. He developed the business from the Atlantic seaboard to Texas, the greater portion of the business, however, being transacted in Chicago. The method of doing business was as follows: A glass factory would find that it had a surplus of some color of glass. It would sell this to the taxpayer, who would resell it to some other factory which was short of that particular color. It would be shipped in the name of the taxpayer to this second person, the bill of lading being made in the name of the taxpayer. In Chicago the glass was hauled to the taxpayer’s plant by truck, where it was assorted as to color, all foreign substances removed, loaded into box cars and shipped to the factories for remelting and manufacturing. Only that gathered in Chicago went into the Chicago plant. The term “ cullet ” is applied by the company to the commodity. This name was copyrighted in 1913 and is the taxpayer’s trade-mark.
    3. In 1917 Levy organized the present taxpayer corporation with a capital stock of $75,000, divided into 750 shares of a par value of $100 each. Of the capital stock he owned 749 shares and his wife owned one share. The wife was secretary but took no active part, except to sign necessary legal papers. Levy was president, treasurer, and general manager, performed all the official duties relating to the corporation and had sole charge of the business. He was in complete chargé of all its finances and gave all his time and attention to the business.
    4. In its original income-tax return the taxpayer deducted $15,000 as salaries to officers. The Commissioner allowed but $3,600, the same as in prior years. At the hearing it developed that a portion of the $15,000 was intended to include additional salary for the prior year and that it was intended to claim $10,000 additional for 1920, making a total of $13,600 for salaries for that year. The taxpayer did not hold any regular directors’ or stockholders’ meetings, nor were there any official records of corporation proceedings. During 1920 and prior years, Levy withdrew from the corporation for living expenses amounts considerably in excess of the regular salary allowed him. In the year 1920 he drew out approximately $10,500 for such expenses. In December, 1920, he directed the bookkeeper to enter an additional salary allowance of $10,000 for the year 1920. An entry of $10,000 was made as of December 31,1920.

      The taxpayer’s gross purchases in 1920 amounted to $60,570.42 and its gross sales to $108,825.53. The net earnings of the taxpayer, after deducting the additional salaries as expenses, exceeded 16 per cent of the invested capital.
    5. The taxpayer’s books were kept on the accrual basis.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Hule 50.
   OPINION.

MoRRis:

The sole question in this appeal is whether the $10,000 additional salary should be deducted as an expense of the taxpayer for the year 1920. To be a proper deduction the liability for the additional salary must have been incurred in the year 1920 and the amount must be reasonable. Section 234 of the Revenue Act of 1918 provides as follows:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered. * * *

In this appeal there was some question as to when the liability was incurred. This was a one-man corporation with very incomplete records. The entries on the books of the taxpayer as of December 31, 1920, are ambiguous and there might possibly be a question whether, according to bookkeeping methods, a proper charge was made for the additional salary. There was some confusion as to whether this was a charge for salary or an adjustment of good will. However incomplete and ambiguous the entries in the books were, the testimony is clear that Levy, the president and manager, in December, 1920, directed his bookkeeper to make such an entry and that the bookkeeper did attempt to do so. Under the circumstances we must conclude that this was a corporate act.

As to the reasonableness of the amount, it appears that in prior years Levy regularly allowed himself as salary from $3,000 to $3,600, using the remainder of the profits as dividends. It also appears, however, that he was the moving spirit and sole factor in building up this profitable business and that, even by allowing the additional salaries, there would be a net earning of over 16 per cent. We feel that Levy, in prior years, has been extremely modest in the amounts allowed himself as salaries and that, in view of the volume of the business, the net earnings and the performance of all the work by Levy, an additional $10,000 would not be unreasonable.


text:
    Appeal of DAVID S. GOLDSTEIN.
    Docket No. 5161.
    Submitted November 24, 1925.
    Decided January 21, 1926.

      M. Manning Marcus, Esq., for the taxpayer.

      L. 0. Mitchell, Esq., for the Commissioner.
    Before Gratjpner, TRAmmell, and Phillips.
    Taxpayer appeals from the determination ©f a deficiency of $2,447.29 income tax for 1919, and alleges three errors:
    1. That salary received by the taxpayer from the Goldstein Neumann Co. has been overstated by $2,200;
    2. That the amount realized from the sale by taxpayer in 1919 of stock of the Goldstein-Neumann Co. has been overstated by $4,043.46; and
    3. That the cost of such stock to the taxpayer was determined at $32,834.05, instead of $49,600, as claimed by taxpayer.
    The testimony of the taxpayer with reference to the cost to him of the stock sold in 1919 is conflicting and unsatisfactory. It is impossible to make any findings of fact therefrom.
    FINDINGS OP FACT.
    In June, 1919, taxpayer sold 248 shares of the capital stock of Goldstein-Neumann Co. for a total consideration of $43,000. During 1919 taxpayer received salary from the Goldstein-Neumann Co. of $2,325.
   DECISION.

The determination by the Commissioner of the cost of the stock is approved. The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, under Bule 50.


text:
    Appeal of PETERSEN MOTORS, INC.
    Docket No. 4577.
    Submitted October 13, 1925.
    Decided January 21, 1926.

      Edgar T. Wagner, Q. P. A., for the taxpayer.

      Ellis W. Manning, Esq., for the Commissioner.
    Before Gratjfner, Trammell, and Phillips.
    This is an appeal from the determination of a net deficiency of $286.75 for the period from March 15, 1920, to December 31, 1922. If or the period from March 15 to December 31, 1920, the Commissioner found neither a deficiency nor an overassessment; for the year 1921 he found an overassessment of $447, and for the year 1922 he found a deficiency of $683.75. The controversy arose out of the dis-allowance by the Commissioner of a deduction for the year 1920 of an amount of $7,900, stated to have been paid for a lease. The taxpayer now alleges error on the part of the Commissioner in refusing to allow it to prorate the amount over the unexpired term of the lease.
    FINDINGS OF FACT.
    The taxpayer is a corporation, organized in March, 1920, and doing business as an automobile agency at Philadelphia, Pa.
    F. J. Petersen and W. F. Smith, having made arrangements to acquire the agency for the sale of Jordan automobiles at Philadelphia, went to that city in February, 1920, to locate a place of business. No suitable place of business was then available, except the premises at 919 North Broad Street, then in possession of the Mc-Curdy Brainard Co., whose contract for the sale of Jordan cars had been canceled. Petersen and Smith, as individuals, entered into a contract with that company on February 26,1920. The contract provided, among other things, for the acquisition by them of those premises.
    The parts of that contract material to this appeal are as follows:
    6. Messrs. Petersen and Smith agree to pay to the McCurdy Brainard Co., Inc., a sum of $7,900.00 which the McCurdy Brainard Co., Inc., figure is their cost of securing, arranging and equipping their present place of business located at 919 North Broad St., Philadelphia.
    * * * * * * *
    8. The McCurdy Brainard Co. agree to turn over to Messrs. Petersen and Smith the lease which they now have on the building which they occupy at 919 North Broad St., and which lease expires thirty-three (33) months after April 1, 1920. Messrs. Petersen and Smith are to pay the same monthly rental, namely $812.50, as the McCurdy Brainard Co., Inc. now pay. In the event that* the McCurdy Brainard Co., Inc. are not able to arrange a transfer of the lease, they are to effect an arrangement whereby they agree to sublease the building to Messrs. Petersen and Smith at the rate mentioned.
    9. The McCurdy Brainard Co., Inc. agree to turn over to Messrs. Petersen and Smith on the morning of March 15th any bona fide, unfilled orders covering retail sales with deposits attached. It is understood that Messrs. Petersen and Smith will make delivery of the cars covered by such orders, and upon delivery of cars covered by such orders, will divide the commission fifty-fifty and will pay to the salesman who sold the car his commission out of the fifty per cent belonging to the McCurdy Brainard Co., sending to the McCurdy Brainard Co. a remittance for the balance due them.
    10. The McCurdy Brainard Co., Inc. state that they have at the present time a number of orders covering sales made in Philadelphia, known as retail orders, on which they have not secured any deposit. It is understood that they will turn these orders over to Messrs. Petersen and Smith.
    11. McCurdy Brainard Co., Inc. state that they have contracts with various dealers throughout the territory to be covered by Messrs. Petersen and Smith and that they have at the'present time orders from various dealers in this territory for immediate shipment. They agree to turn over to Messrs. Petersen and Smith any unfilled orders they have on March 15th.
    12. The McCurdy Brainard Co., Inc. state that they have at the present time cash deposits from various dealers in the territory. They agree to retain these deposits, giving to Messrs. Petersen and Smith the opportunity of first interviewing the various dealers with the idea of inducing them to continue to do business with them. In cases where they are successful they will endeavor to have the dealer give them an order on the McCurdy Brainard Co., Inc., authorizing the McCurdy Brainard Co., Inc., to transfer to Messrs. Petersen and Smith such deposits.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of BLOGG & LITTAUER, INC.
    Docket No. 5297.
    Submitted December 8, 1925,
    Decided January 21, 1926.

      Glaude A. Hope, Esq., for the taxpayer.

      P. J. Bose, Esq., for the Commissioner.
    Before Phillips and Teammell.
    This is an appeal from the determination of a deficiency of $1,147.28, the Commissioner having determined a deficiency of $3,684.21 income and profits taxes for the fiscal year ending November 30, 1918, and overassessments of $766.47 and $1,770.46 for the respective fiscal years ending November 30, 1917, and November 30, 1919. Taxpayer alleges error for failure to permit as a deduction $6,500 voted to officers as additional salaries for 1918.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation, with its principal office in the City of New York, engaged in the sale of cloaks and suits for women. During the years involved in this appeal, Solomon E. Blogg, the president, was the owner of 432 shares of the capital stock, and Edward R. Peckerman, the treasurer, was the owner of 165 shares of the capital stock of taxpayer. Six hundred shares were outstanding. The directors were Blogg, Peckerman, Agnes Dolan and two relatives of the principal stockholders. Miss Dolan was also secretary and head bookkeeper. Each of the directors held a qualifying share. The affairs of the corporation were operated by Blogg and Peckerman, the other directors taking no active part. The meetings of the directors were infrequent, and at such meetings the wishes of Blogg and Peckerman were invariably executed.
    Prior to 1918 Blogg’s salary was $10,000 and Peckerman’s $8,500. Both of them were actively engaged in the conduct of the business and devoted their full time to it. In August, and again in October, 1918, Blogg and Peckerman conferred concerning an increase in salary, but no decision was reached. In the first part of November, 1918, they agreed between themselves that Blogg’s salary for the fiscal year ending November 30, 1918, should be $15,000 and Pecker-man’s $10,000. This decision was communicated to Miss Dolan by Blogg. She expressed her approval.
    Blogg and Peckerman had drawing accounts with the taxpayer and their personal accounts were charged with the amounts of withdrawals. It was customary to credit the salary for the year at the close of the year and its entry upon the books was treated as one of the closing entries. For 1918, taxpayer’s bookkeeper, in accordance with her usual custom, prepared on loose sheets the closing entries which she considered proper. Such closing entries, however, were not entered upon taxpayer’s permanent records of account until after an audit of the books by an accountant.
    In January, 1919, the accountant examining the books found the entry relating to the increase in salary among such proposed closing entries and expressed to the bookkeeper his opinion that such increase should be approved by the directors. On February 8, 1919, a meeting of the directors was held and they approved such increases in salary. Thereafter, the books of the taxpayer were closed as of November 30, 1918, and the closing entries included such additional salary. Taxpayer claims, as a deduction for salaries, $15,000 for Blogg and $10,000 for Peckerman. The Commissioner allowed $10,-000 for Blogg and $8,500 for Peckerman.
    It was stipulated upon the hearing that the services performed by Blogg for the taxpayer during the year ending November 30, 1918,. were reasonably worth $15,000 and that the services performed by Peckerman for the taxpayer during the year ending November 30,. 1918, were reasonably worth $10,000.
    At no time prior to February 8, 1919, was there any formal or informal meeting of the board of directors or of a majority thereof at. which such additional salaries were voted or approved.
    Such additional salaries were not allowed as a deduction in 1919..
   DECISION.

The deficiency determined by the Commissioner should be computed by allowing as a deduction for the fiscal year ending November 30, 1919, the additional salaries of $6,500, authorized in February, 1919. Appeal of Van de Kamps Holland Dutch Bakers, 2 B. T. A. 1247. Final determination will be settled on 10 days’ notice, under Bule 50.


text:
    Appeal of JANE B. COATES.
    Docket No. 5456.
    Submitted December 7, 1925.
    Decided January 21, 1926.

      Oscar O. Pogge, Esq., for the taxpayer.

      Bruce A. Low, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income tax for the years 1919, 1920, 1922, and 1923, in the gross amount of $682.60.
    FINDINGS OF FACT.
    The taxpayer was, during the years involved, a married woman living separate and apart from her husband. She received, under a written agreement made and entered into between herself and her husband, the amount of $1,800 per annum during her natural life or until she remarried. These payments were to be made in the nature of and in lieu of alimony. The agreement above referred to was entered into and executed on the first day of April, 1911, but was not acknowledged before a notary public until June 3, 1920. It was in effect, however, and had been carried out according to its terms from the date of its execution.
    During the years involved in this appeal the Commissioner included in the gross income of the taxpayer the above amount paid to her by her husband under said agreement.
    During the years'1919, 1920, and 1922, the taxpayer had living with her a daughter, who was over 18 years of age but who was incapable of self-support on account of her physical condition and was dependent upon the taxpayer.
    The taxpayer, on May 10, 1922, received $3,533.16, as a loan to the Pilocura Co., and deposited the same in her own name in the bank. 5 The property on which the loan was secured belonged to the Pilocura Co., a corporation, and did not belong to the taxpayer, and the money received and deposited in her name belonged to that company.

      Ob. July 28, 1922, real estate situated at 1704 Kilbourne Place, Washington, D. 0., was sold and the net amount of cash received, $919.12, was deposited in the bank to the credit of the taxpayer. The property sold did not belong to the taxpayer but was the property of the Pilocura Co., and the money received belonged to that company.
    During 1922 the Pilocura Co. authorized the taxpayer to purchase for its account property situated at 1708 Irving Street, Washington, D. C. This property was sold in May, 1923, and the net amount of cash received, $3,341.25, was deposited to the credit of the taxpayer. This money belonged to the Pilocura Co., and did not belong to the taxpayer.
    During 1923 the taxpayer received the sum of $394.19, which was deposited in the bank in her own name. This amount was received by her as treasurer of the White Cross Society, a charitable organization, and was not the property of the taxpayer.
   DECISION.

The deficiency determined by the Commissioner is disallowed.


text:
    Appeal of JOHN C. MOORE CORPORATION.
    Docket No. 3437.
    Submitted August 1, 1925.
    Decided January 22, 1926.

      Kendall B. Castle, Esq., for the taxpayer.

      Benj. E. Bounders, Esq:, for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of deficiencies in income and profits tax for the calendar years 1918, 1919, and 1920, in the amounts of $2,128.71, $1,886.39, and $6,975.75, respectively. The deficiency for 1918 is not questioned, and, of the total deficiencies for 1919 and 1920, only approximately $800 and $5,600, respectively, are involved in the issue raised by the appeal.
    The taxpayer alleges that the Commisioner erred in refusing to allow it to deduct as an expense, or as a loss, the amounts of $2,000 in 1919 and $14,000 in 1920, claimed to have been the amounts paid by it in excess of the value of certain real property purchased on December 26, 1912, under an agreement to pay to the person from whom the property was purchased $10,000 each year during her life, which annual payment was increased in 1916 to $14,000 a year.
    FINDINGS OP FACT.
    Taxpayer is a New York corporation with principal office at Rochester. For some time prior to December, 1912, it had occupied, under lease from Hattie I. Moore, a certain building located at 69 Stone Street, at an annual rental of $5,000, in addition to the cost of all repairs, taxes, and carrying charges. On December 26, 1912, an agreement was entered into between the taxpayer, as party of the first part, and Hattie I. Moore, owner of the property, as party of the second part, as follows:
    Whereas the party of the second part has prepared and executed a deed dated June 17, 1912, for the purpose of conveying to the party of the first part the building and premises in the City of Rochester, County of Monroe, and State of New York, occupied by the party of the first part under lease from the party of the second part, but said deed has not yet been delivered.
    Now therefore, in consideration of the conveyance of said premises and the delivery of said deed, the party of the first part hereby covenants with the party of the second part that it will pay to the party of the second part the rent of said premises as reserved in said lease to the 31st day of January, 1913, and thereafter it will pay to the party of the second part the sum of Ten Thousand Dollars ($10,000) per annum during her lifetime, such payments to be made in monthly installments.
    Pursuant to the above agreement, Hattie I. Moore executed and delivered to the taxpayer a warranty deed to the property in question, and thereafter, from 1913 to 1916, inclusive, received from the corporation $10,000 per annum. Hattie I. Moore was born in 1858 and, on the date of the contract and conveyance of the property by her to the taxpayer, she was in very poor health. The condition of her health continued to decline and, in the latter part of 1916, she contended that, for this reason, the taxpayer should increase the annual payment to $14,000, which it did; and that amount was paid to her from January 1, 1917, to 1920, inclusive. The value of the property at the time it was acquired and . on March 1, 1913, was $80,000. The value of an annuity of $10,000 for the life of Hattie I. Moore on January 1, 1913, was $106,173.96. Her life expectancy was 17.4 years.
    The taxpayer capitalized the total annual payments made in the years from 1913 to 1918, inclusive, and $12,000 of the payment made in 1919, amounting tó the sum of $80,000, and deducted the remaining $2,000 of the 1919 payment and the payment of $14,000 in 1920 as expenses in those years. The Commissioner disallowed the deduction of the payments of $2,000 and $14,000, and held that, notwithstanding the value of the property at the time it was acquired, the payments made during the life of Hattie I. Moore constituted a part of the purchase price agreed to be paid for the property and should be capitalized.
   DECISION.

The determination of the Commissioner is approved.


author: Moeris

text:
    Appeal of MATTIE COWELL and MONA COWELL, Executrices of the Estate of ROBERT COWELL, Deceased.
    Docket No. 691.
    Submitted July 10, 1925.
    Decided January 26, 1926.
    Tie March 1, 1913, value oí certain stock sold by the decedent July 1, 1919, determined.

      B. B. Pettus and Wilton E. Wallace, Esqs., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before MaRquette and MoRRis.
    This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $22,531.61. The question involved is the gain realized by the decedent on the sale of certain stock in 1919.
    FINDINGS OF FACT.
    The petitioners are the duly appointed executrices of the estate of Robert Cowell, late of Omaha, Nebr., who died June 20,1924. On March 1, 1913, he owned 40 shares of stock in Thomas Kilpatrick & Co., a corporation organized in 1895 under the laws of Nebraska and engaged in the retail mercantile business in Omaha. The decedent was one of the original incorporators. The stock of the company was closely held by persons connected with the active conduct of the business. Under the by-laws no stockholder could dispose of his holdings without giving the company the prior option to purchase, and if the company bought the stock it was required to then offer it to other stockholders in proportion to their respective holdings. The original capital stock consisted of 100 shares of $1,000 par value. All increases in the outstanding capital stock were by means of stock dividends. Such dividends were declared prior to 1913 to the extent of 100 per cent, making the par value of stock outstanding on March 1, 1913, $200,000.
    In June, 1916, the decedent purchased from the estate of Thomas Kilpatrick 24 shares of the stock at $1,400 per share — a total cost of $33,600 — thus giving him a total stock ownership of 64 shares, which was increased in November, 1917, to 128 shares by a 100 per cent stock dividend. He sold this stock July 1, 1919, for $1,390 a share, making a total of $177,920.
    At the time the decedent acquired the additional stock in 1916, the Kilpatrick estate sold stock to other persons then actively connected with the company at $1,400 a share. The beneficiary of the estate had means independent of her interest in the estate and accepted as a fair criterion the price that Kilpatrick had received on a sale of five shares to one Kayser in 1912, which value was an approximation of the book value on February 1, 1912. The only other sale of stock between 1908 and those in 1916 was one to Kayser, in the former year, at $800 a share.
    The net income of the company for the following years was:
    1913_ $36,527. 09
    1914_ 17,162. 30
    1915_ 26, 030. 40
    1916_ 79, 597. 48
    1917_ 77,065.79
    1918_ 63, 723. 79
    1919 (4 months) 37,953. 65
    The hook value of the tangible assets of the company on March 1, 1913, was $301,986.62. The value of the intangible assets on that date was $80,802.41. The total value of the outstanding stock on March 1,1913, was $382,789.03.
    The fair market value of the 40 shares of stock owned by the decedent on March 1, 1913, was $76,557.80, which exceeded the cost thereof.
    DECISION.
    The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Moeris

: Two errors were alleged by the taxpayer in the determination as made by the Commissioner; first, that no consideration was given to appreciation' in the value of real estate between the date of acquisition and March 1, 1913, in determining the March 1, 1913, value of the stock; and, second, that cost instead of June, 1916, value was used as the basis for the determination of the gain realized from the sale of the 24 shares acquired by purchase at that date.

The second contention is readily disposed of by the mere reference to the language of the Revenue Act of 1918, section 202 (a) (2), which provides that in the case of property acquired on or after March 1, 1913, the cost shall be the basis for the purpose of ascertaining the gain derived from the subsequent sale thereof.

With reference to the other contention, we are not convinced, on the evidence submitted, that the real estate had a greater value on March 1, 1913, than the value found by the Commissioner and appearing on the company’s books. Some of the property was acquired by the company at dates shortly prior to 1913, and the actual cost at those dates is more conclusive as to the value on March 1, 1918, than the opinion evidence advanced by the taxpayer in support of a greater value.

The real appreciation in the value of the real estate, which was considered by the decedent in determining his sales price of $1,390 a share, occurred subsequent to 1913, and accompanied the general trend of higher values which took place from 1914 on.

The Commissioner allowed a good will valuation of $73,530.20 for the entire capital stock outstanding on March 1, 1913, which should be increased to $80,802.41, as set forth in the findings of fact, and the deficiency should be computed on the facts therein found.


text:
    Appeal of DAVID FELDMAN.
    Docket No. 5604.
    Submitted November 17, 1925.
    Decided January 26, 1926.

      David T. Wiener, Esq., for the taxpayer.

      W. F. Gibbs, Esq., for the Commissioner.
    Before Littleton, Smith and Trttssell.
    This is an appeal from the determination of a deficiency in income tax for the calendar year 1923 in the amount of $443.96, arising from the following:
    (1) Inclusion in gross income of a second-trust note at its face value of $7,500.
    (2) Failure to allow a deduction of $500 from the sales price of the property as commission paid thereon.
    (3) Increase of the taxpayer’s income on account of groceries for personal use from $500 to $1,000.
    FINDINGS OF FACT.
    Taxpayer is a resident of the District of Columbia, engaged in selling groceries at retail. In 1923 he acquired, through the sale of a brick store and residence building at 500 Twelfth Street N. E., Washington, D. C., a second-trust note of the face value of $7,500 as part of the sales price thereof. In computing the profit upon the sale the Commissioner included the second-trust note at its face value of $7,500. The fair market value of the second-trust note at the time received in 1923 was 70 per cent of its face value, or $5,250. The taxpayer paid a commission of $500 upon the sale of the property.
    During 1923 taxpayer provided his family, consisting of himself, his wife, and five children,, the elder being 11 years of age, with such vegetables and groceries as were required from the store ■operated by him, without keeping a separate account thereof. In his return for tbe taxable year he included the amount of $500 as income on account of groceries for personal use, which amount the Commissioner increased to $1,000. In observance of religious laws, taxpayer ate no meat or bread such as he carried in his store. Income to the taxpayer on account of groceries for personal use from his store amounted to $500 during the taxable year.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, under Kule 50.


text:
    Appeal of WHOLESALE COAL CO.
    Docket No. 4515.
    Submitted November 17, 1925.
    Decided January 26, 1926.

      Frederick O. Bolmerder, O. P. A., for the taxpayer.

      John W. Fisher, Esq., for the Commissioner.
    Before Phillips and Trammell.
    Taxpayer appeals from the determination of a deficiency of $9,884.19, income and profits tax for 1920, and alleges error on the part of the Commissioner in disallowing a deduction of $20,774.51, claimed to be a debt due taxpayer from the Knickerbocker Corporation ascertained to have been worthless and charged off during the taxable year.
    FINDINGS OF FACT.
    On April 29, 1920, taxpayer entered into an agreement with the Knickerbocker Corporation to deliver to it 50,000 tons of coal, at $4.75 per ton, f. o. b. cars at mines, such coal to be shipped at the rate of 5,000 tons per month commencing May 1, 1920. The contract provided for immediate payment upon presentation of bills of lading to Hennevig & Co., bankers, at New York City. The credit of the Knickerbocker Corporation was not good and at the time the contract was entered into a confirmed credit was established by the Knickerbocker Corporation with Hennevig & Co. for the purpose of making payment for the coal. In October, taxpayer’s officers heard rumors affecting the credit of Hennevig & Co. and shipments were curtailed. Taxpayer was assured by officers of Hennevig & Co. that the credit of that corporation was not affected, and in the latter part of October payment for coal shipped to that date was made in full. In November a large number of small shipments was made. Taxpayer found itself unable to collect promptly for these shipments, and, in the latter part of November, Hennevig & Co. were unable to meet freight charges. On November 30 the Knickerbocker Corporation was indebted to taxpayer in the sum of $45,395.18. A few small shipments were made after that date. On December 14, 1920, approximately $36,500 was paid on the account and thereafter no other shipments were made.
    During December, the Knickerbocker Corporation informed taxpayer that it was in bad shape financially, but threatened to bring suit against taxpayer for damages for failure to make deliveries in accordance with the contract. The taxpayer had at all times been in default in its deliveries under the contract. Fearing that the Knickerbocker Corporation might go into bankruptcy and that taxpayer would be held liable for substantial damages, taxpayer agreed to take notes in payment of its claim and to cancel the contract upon the further payment of $5,000 in notes. This arrangement was made in the latter part of December, 1920. Subsequently, early in January, 1921, the agreement was reduced to writing, general releases were exchanged, and the taxpayer received notes of Hennevig & Co. to the order of Knickerbocker Corporation, endorsed by Knickerbocker Corporation to its order. The balance due taxpayer on December 31, 1920, was $21,235.20. The notes received by taxpayer amounted to $25,000, of which $20,000 was considered to be for the amount due and $5,000 for cancellation of the contract. The account was charged off its books by taxpayer in December, 1920.
    Hennevig & Co. went into bankruptcy in February, 1921. In April, 1921, the notes were turned over to an attorney for collection from the Knickerbocker Corporation. Investigation disclosed that the Knickerbocker Corporation' had ceased all business and was without any known assets, and no legal action was taken or collection made.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of HENRY RIFFEL.
    Docket No. 3576.
    Submitted October 17, 1925.
    Decided January 26, 1926.

      Benjamin Mahler, Esq., for the taxpayer.

      John F. Greaney, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in estate tax, in the sum of $9,621.94, on the estate of Henry Eiffel, who died March 24, 1922. The deficiency arose from the inclusion by the Commissioner in the gross estate of the decedent of certain property transferred to his wife and son by deeds executed and delivered in the year 1910, which transfer the Commissioner held was intended to take effect in possession or enjoyment at or after decedent’s death. A portion of the deficiency also resulted from the disallowance of a portion of the administration expenses.
    FINDINGS OF FACT.
    Henry Eiffel died testate March 24, 1922. Emilia Eiffel, his surviving spouse, was appointed and is now the executrix of said estate.
    The decedent and his wife, for over 50 years prior to December, 1910, had been engaged in the retail butcher business in and about New York City. Together, with a son, they devoted all their time to the business. The wife worked in the shop from 7 a. m. to 1 p. m. each day, taking orders and acting as cashier. She looked after the money and made the deposits in the bank in her husband’s name. The son also worked long hours but only drew money for his incidental expenses. During this time the business had been prosperous and the profits were invested in real estate. Having accumulated considerable income-producing property, and desiring to rest from his labors, the decedent, in December, 1910, sold out and retired from business. Feeling that the efforts of the wife and son had contributed materially to the amassing of his fortune, he transferred to his wife and son certain of the real estate of a value aggregating $261,500. The transfer was made by deeds absolute on their face, with no written restrictions. The deeds were actually delivered in December, 1910, although they were not recorded until after the death of the husband.
    The decedent, prior to 1910, employed a real estate firm, as agents, to manage the real property, collect the rents, and make certain investments from time to time. These agents would remit the net rents in the name of Henry Eiffel. After the transfer of the said real estate, the arrangement was still continued and the same firm was employed to handle the business. In the transactions with this firm there was no segregation of the income derived from this property and the property of the decedent, but the remittances continued in the name of the decedent during his lifetime. The wife usually handled the finances and, upon the receipt of the money from the real estate, would deposit it in her husband’s name. The wife kept no separate bank account and wrote no checks. The portion of the real estate transferred to the son, however, was personally managed by the son and not by the realty firm. The husband and wife, subsequent to 1910, kept no accurate separate account of their respective incomes. They both put all their receipts and income in the one account. Included in the account was approximately $17,000 received by the wife from her mother prior to 1910.
    During the period from 1914 to 1920, the decedent invested a portion of this joint account, so accumulated, in first mortgages of the value of $110,000, which he delivered to his wife and son. In 1917 he executed a will and left an annuity of $5,000 to his daughter, a life estate to his wife, and the residue of the estate to his son.
    The estate-tax return showed a gross estate of $223,833.49 and a net estate of $169,871.26. The Commissioner increased the gross estate by including therein the transfers made in 1910 of the value of $261,500, on the ground that the transfers were intended to take effect in possession or enjoyment at or after death.
    In the return the executrix claimed a deduction of $2,548.33 as commission as executrix, and $9,000 as attorney fees. The commission of the executrix had not been paid, but $6,270 had been paid as attorney fees. The Commissioner allowed a deduction of $6,270 as attorney fees, but no deduction for the commission of the executrix, as the same had not been paid. The estate was still in process of administration and considerable administrative work remained to be done before the closing of the estate and the fixing of fees by order of the court.
   DECISION'.

The deficiency determined by the Commissioner is disallowed.


author: Sternhagen

text:
    Appeal of MEAD CONSTRUCTION CO.
    Docket No. 4843.
    Submitted November 5, 1925.
    Decided January 26, 1926.
    Amounts withheld by a city from a paving contractor out of the contract price as a deposit to assure proper repairs during a specified period are income under the accrual system.

      Merle Walker, Esq., and Albert H. Winter, O. P. A., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.
    Before Sternhagen, LaNsdoN, and ArttNdell.
    The Commissioner determined a deficiency of $5,212.64 in income and profits tax for 1922, from which the taxpayer appeals. The issue depends upon whether the amount of a so-called deposit held by the city in connection with the performance of contracts for public work is within the taxpayer’s income.

      FINDINGS OF FACT.
    The taxpayer is an Indiana corporation engaged, during the taxable year, in the performance of certain contracts for paving streets of the City of Indianapolis. It kept its books of account on the accrual basis.
    The contracts were awarded on competitive bids, the amount of which had been computed in accordance with the requirements of the city so as to include an amount to cover the guaranteed maintenance of the paving for a specified period. In 1922, the guaranty period was three years, but theretofore it had been five years. These contracts and all similar contracts contained ■ the provisions of general specifications prescribed by the city, among which, together, with others not here important, were the following:
    36. Guarantee. The work shall be done in such a substantial manner that no repairs shall be required for a period of three (3) years . . . from the time of approval of the final assessment roll by the Board of Public Works. . . . The said Contractor shall keep said works in good repair during the time of the guarantee period. . . . The Contractor warrants his workmanship and all materials used in the work and agrees that during the guarantee period specified he will at his own expense make all repairs which may become necessary by reason of improper workmanship or defective materials. . . . In ease such repairs become necessary the city shall give written notice to the Contractor to make the same and in case of failure of the Contractor to commence such repairs within thirty (30) days after such notice is received, the city may make such repairs either by its own employes or by independent contract, and may thereupon recover from the Contractor and his sureties the reasonable cost of the repairs so made. . . .
    37. Deposit of improvement bonds. As an additional guarantee that the Contractor will properly repair and maintain the improvement specified for the guarantee period, as above provided, the Contractor will be required to deposit with the City Controller improvement bonds of the City of Indianapolis, United States Government Bonds or cash in a sum equal to ten (10) per cent of the cost of said improvement, which sums shall be and constitute a Repair Guarantee Fund in the hands of the City for the purpose of securing the repair of said improvement, for the guarantee period by the Contractor to the satisfaction of the Board of Public Works, and also for the purpose of indemnifying the City for any expenditures on account of damages or injuries to persons or property occurring during the progress of the work of the guarantee period. The face value of such bonds shall at no time during the guarantee period be decreased to an amount less than ten (10) per cent of the cost of said improvement, but the Contractor will be permitted to receive and receipt, from time to time, for all maturing interest coupons. Subject to the above conditions, at the end of the guarantee period, all bonds so deposited, with all unpaid coupons, shall be turned over to the Contractor or his assigns.
    * ⅜ * * ⅝ * ‡
    45. Bond. Within five (5) days after the successful bidder shall have been notified of the acceptance of his bid he shall file with the Board of Public Works an approved bond in an amount not less than fifty (50) per cent of the estimated contract price, but in no case shall a bond be accepted for less than five hundred ($500.00) dollars conditioned to guarantee the full and complete performance of his work according to the terms of the contract, and that he will comply with and carry out all the terms and provisions of said contract, said bond to be in full force and effect up to and including the final acceptance of the work, or the approval of the final assessment roll, after which it will cease to be operative, subject to the following conditions, to-wit:
    (a) Before the Contractor shall be released from his bond he shall file, with the City Controller, bonds or cash as provided by Section 38 [37] of the General Specifications.
    The general practice as to contracts such as those here in question is governed by a statute of Indiana, called the Barrett Law. After the work is completed the assessment roll is prepared. Property ' owners have thirty days to elect to pay the assessment in cash or in ten payments. Bonds are then prepared in a series payable annually from one to ten years. These bonds are payable to the contractor or bearer solely out of the fund derived by the city from payments made by the assessed property owners. The bonds may not be paid out of the city’s general fund and this is never done. The bonds are issued to the contractor to the amount of 90 per cent of the contract price. The remaining 10 per cent is withheld by the controller as the deposit provided by section 37 of the general specifications above quoted. Sometimes the contractor receives cash, but not usually. The taxpayer may substitute cash or other acceptable bonds as his deposit and in some instances the taxpayer substituted Liberty bonds. In no case have bonds been issued to the taxpayer or cash paid in the full amount of the contract price, in the first instance; the 10 per cent deposit has always been withheld until the expiration of the guarantee period. In 1922 the amount withheld was $46,133.02.
    The taxpayer, in its accounts, set up a “ maintenance reserve ” of the amounts withheld on deposit by the city, and this amount was not included in its taxable net income. The Commissioner included it and determined the deficiency.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Sternhagen

: By the terms of the contract the taxpayer is required to deposit Indianapolis improvement bonds1 — not necessarily those covering the contract work — or United States bonds, or cash, as a fund to guarantee the proper maintenance and repair of the improvement. In some instances the taxpayer deposited United States Liberty bonds, but usually the city withheld improvement bonds or cash, received from the assessment of the improvement. We have already held that if the taxpayer, out of its contract price, set aside a reserve for the performance of its obligation to maintain, this would not reduce its taxable net income, either on the cash basis, Consolidated Asphalt Co., 1 B. T. A. 79, or on the accrual basis, Uvalde Company, 1 B. T. A. 932. See also Chapin Construction Co., 3 B. T. A. 25; Thomas Cronin Co. v. Lewellyn, 9 Fed. (2d) 974. If, in the present appeal, the contractor in fact received the contract price and in fact transferred cash or bonds to the city for deposit as required, the contract price would have been income notwithstanding the deposit or pledge for proper maintenance. But the procedure was simplified, and the city retained the deposit fund in the first instance. The fact that it did so with the heavy hand of its municipal power does not change the taxpayer’s contractual right to the full compensation and its obligation to make deposit. The legal effect is quite the same. And this is especially so under the accrual system adopted by the taxpayer, by which it elected to determine its income not by actual receipts but by receivables. The deposit fund is no more the subject of deduction as “maintenance reserve” when it is in the possession of the city than when it is retained by the taxpayer and set up on its books, as in the appeals cited.


author: Trammell:

text:
    Appeals of M. E. GETTYS and C. C. HUMPHRIES.
    Docket Nos. 3495 and 3511.
    Submitted November 5, 1925.
    Decided January 26, 1926.
    The evidence submitted does not warrant a modification of the determination of the Commissioner that certain promissory notes received as part payment upon the sale of property were the equivalent of cash for the purpose of computing gain or loss.

      Frank Reagan, Esq., for the taxpayers.

      George G. Witter, Esq., for the Commissioner.
    Before Phillips and Teammell.
    These are appeals from the determination of deficiencies in income taxes for 1919 in the amounts of $2,662.08 and $383.52, respectively. The deficiencies arose on account of the fact that the Commissioner increased the net income of the partnership of the Gettys Lumber Co., of which both taxpayers were members, by including therein the net profit made on the sale of real estate during 1919, instead of prorating it over the years in which the payments were made, and on account of disallowing a deduction for bad debts which the partnership had taken in its return. The two appeals were consolidated at the time of the hearing.
    There is no dispute between the Commissioner and the taxpayer with respect to the purchase price of the property sold and the selling price, the only question being whether the profit arising from the sale thereof should be reported in taxable income for the year in which the sale was made, or in the years in which deferred payments were made.
    FINDINGS OF FACT.
    The Gettys Lumber Co. was a partnership, having its place of business at Jeffersonville, Ga. The members of the partnership in 1919 were M. E. Gettys, W. B. Gettys, W. M. Whitaker and C. C. Humphries. The partnership operated a sawmill and general lumber business, and also carried on farming operations.
    On July 26, 1919, the Gettys Lumber Co. sold to the Whitaker Lumber Co., a partnership, a large portion of its assets, consisting of its plant, machinery, equipment, houses, mules and horses, lumber in the yards and in the woods, and stumpage, a part of the latter being in the form of leases on timber lands owned by others. The price paid for the property was $286,000, of which $160,000 was paid in 1919, $100,000 in 1920, and $26,000 in 1921. The net profit arising from the sale was $56,371.60.
    The sale was consummated by five written instruments: (1) A deed from the Gettys Lumber Co. to the Whitaker Lumber Co., conveying all of the property involved, except certain lumber, together with the business and good will, the consideration for this deed being stated at $126,000. (2) A contract or bill of sale by which the Gettys Lumber Co. sold to the Whitaker Lumber Co. the cut lumber and dressed lumber not conveyed in the above deed. This contract provided that the Whitaker Lumber Co. should have five years from the date of the contract within which to cut and remove the timber on lands owned by the Gettys Lumber Co., with the privilege of renewal for a term of five years longer upon the payment of certain specified sums for each separate contract. This contract recited that the deferred purchase price for the lumber therein described was $114,-085.32, and a cash payment of $45,914.68 was made on the delivery of the contract. (3) Three promissory notes given in payment, two for $50,000 each, due June 1, 1920, and December 1, 1920, and one for $26,000, due June 1, 1921, all of said notes being payable to the Gettys Lumber Co. and signed by T. B. Lovelace, W. M. Whitaker, and H. M. Johnson, who constituted the partnership of Whitaker Lumber Co. The notes bore interest from date at the rate of 6 per cent per annum, waived the makers’ rights of homestead, and agreed that, in the event the notes were placed in the hands of attorneys for collection, a 10 per cent attorneys’ fee would be added thereto. Title to the property was not retained. There was no mortgage or other security given in the transaction. The contract provided that the payment for the lumber sold under the contract should be made “ as it [the lumber] is worked out and shipped, as much at least as $20 per thousand feet, or more if they desire so to do.” The Whitaker Lumber Co. agreed to fill all the orders of the Gettys Lumber Co. which were on hand at the time of the sale.
    The Gettys Lumber Co. in its 1919 partnership return claimed a deduction on account of bad debts in the amount of $12,550. The debt arose on account of sales of merchandise and supplies by the partnership to farm hands and croppers, who were employed on the farm of the partnership. In the fall of the year, after the crops were gathered, the partnership would have a settlement with its croppers — that is, tenant farmers who farmed the lands on a division of crops basis — and farm hands, and, if they did not have a sufficient amount owing to them to pay the bills for merchandise and supplies, the partnership charged off the difference as bad debts. The farm hands and croppers had no money and in 1919 the partnership was no longer in business and was unable to carry the accounts over in the hope of balancing the same the nest year. Securing judgment against the debtors would have been a useless procedure, as they had no money or property. The debts were ascertained to be worthless and were charged off the books during 1919.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Hule 50.
   OPINION.

Trammell:

With respect to the profit on the sale of the assets referred to in the findings of fact, the only question is whether the partnership received cash, or the equivalent of cash, as the consideration for the property. The notes, amounting to $126,000, were unsecured. A member of the partnership undertook to discount them at a bank in the community in which the business was located, but the bank was unable to handle the notes because the amounts thereof were too large in comparison with its capital and it could not lend money or handle notes beyond a certain percentage of its capital stock. The notes may not have been secured by mortgage or lien against any specific property, but this is not conclusive as to whether they had a fair market value when received. The testimony of a banker that his bank was not in a position to handle notes of the character of the notes involved is not sufficient to establish the fact that the notes had no fair market value. It is not so much a question of when the notes were payable or when they were paid. The real question is whether they had a fair market value. If they did, the partnership received income to the extent of the cash received and-their fair market value. We are unable to find as a fact that the notes received did not have a fair market value at the time received. This being true, we must approve the determination of the Commissioner with respect to the gain arising from the sale of the assets.

With respect to the debts claimed by the partnership to have been worthless and charged off during 1919, we have found as a fact that the debts were in fact ascertained to be worthless and charged off during that year.