author: MilliKEN:

text:
    C. E. Conover Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9830.
    Promulgated September 6, 1927.
    The cost of stock which by the evidence is shown to be worthless within the taxable year may be deducted as a loss sustained.

      Nathan Feinberg, G. P. A., for the petitioner.

      Frank 8. Easby-Smith, Esq., for the respondent.
    This proceeding results from the determination by respondent of a deficiency in excess-profits and income taxes for the calendar year 1921, amounting to $1,816.25.
    Petitioner avers error was committed with relation to the following issues: (1) Failure to allow a deduction from income of a loss of $7,000 representing an investment in stock which became worthless in 1921; (2) invested capital for 1921 was reduced by respondent by the amount of the income tax for the prior year, prorated, whereas it should not be so reduced.
    FINDINGS OF FACT.
    Petitioner is a New Jersey corporation, with principal offices in New York, N. Y.
    At the end of the calendar year 1921 petitioner was the owner of 75 shares of the preferred and 72 shares of the common capital stock of Gordon Suspender Co., Inc., a New York corporation organized in 1909. All of this stock was purchased by petitioner for cash in May, 1920, at a cost of $7,000. Upon purchasing the stock, the petitioner became the selling agent for the Suspender Company and acted in that capacity until July, 1921, when petitioner decided the agency was unprofitable due to the decline in demand for suspenders and its inability to collect from the Suspender Company the commissions amounting to $1,046.65 due on sales. Petitioner endeavored to dispose of its holdings of the capital stock of the Suspender Company during the year 1921 but was unsuccessful. Careful investigations were made in 1921 by the officers of the petitioner, which convinced them that the stock of the Suspender Company was worthless, and an entry was made on the books charging to profit and loss the investment in the stock. The account receivable for commissions due from the suspender company was charged to profit and loss in 1921.
    The Gordon Suspender Co., Inc., was advised in July, 1921, that petitioner would no longer act as its selling agent, and during the year that petitioner would withdraw its selling and financial support. This action was considered to mean the end of the Suspender Company, since it had no other outlet for its product, was insolvent due to heavy declines in the market prices of its inventories, and could not realize on its assets. It was determined in December, 1921, by the Suspender Company to complete a contract then one-fourth completed with the United Cigar Stores Co. and thereafter to liquidate the business. The contract was completed in the middle of 1922. The merchandise and equipment of the Suspender Company were placed in storage after completion of the United Cigar Stores Co. contract to await the possibility of a sale. Such assets as could be sold were disposed of in 1922, and the balance in 1928. After liquidation liabilities of about $600 remained and were paid off by cash contributed by two stockholders. Nothing remained for distribution to the stockholders. The sales of the Suspender Company amounted to $14,313.10 in 1920, $14,531.85 in 1921, and $6,870.00 in 1922, of which $4,882.60 was for contract goods mentioned above.
    The books reflected the following assets, liabilities and capital stocks:

    Inventories at December 31, 1920, and December 31, 1921, were taken at cost. The fair market value of the inventories on December 31,1921, was less than 15 per. cent of the cost.
    The patent expired in 1921, and was not considered sufficiently valuable to renew.

      The following tabulation indicates the year of sale and the sum realized therefrom for merchandise and machinery:

   OPINION.

MilliKEN:

The second issue is disposed of by the provisions of section 1207 of the Revenue Act of 1926 which sustains the determination of the respondent. Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

The remaining issue concerns the year in which a deduction from income may be taken on account of the loss of an investment by petitioner in the capital stock of another corporation which became insolvent and was liquidated. It is not denied by respondent that a deduction of the cost may be taken for stock which becomes worthless, but respondent contends that the stock under consideration has not been established to have become worthless in 1921. Consequently, he disallowed the deduction of $7,000 claimed.

From the facts it is apparent that at the close of the year 1921, the financial and commercial position of the Gordon Suspender Co. was valueless and hopeless. It had an inventory valued at cost which could not be disposed of except at a great sacrifice. The fair market value of its inventory at the close of the year 1921 was less than 15 per cent of the cost. Its balance sheet showed it to be involved financially. It had defaulted in payments of its current obligations and the petitioner, its selling agent, had advised the Suspender Company that it would no longer sell its product. It was definitely decided in the year 1921 to complete a contract and dissolve. It did this. The respondent is reversed. The stock which petitioner held in the Gordon Suspender Co. represented a total loss in the year 1921. Cf. Joslyn Manufacturing & Supply Co. v. Commissioner, 6 B. T. A. 749; Henry M. Jones v. Commissioner, 4 B. T. A. 1286; J. J. Melick v. Commissioner, 6 B. T. A. 70.

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

Considered by Marquette, Phillips, and VAN FossaN.


source: Caselaw Access Project

author: Phillips :

license: Public Domain

text:
    Samuel B. Price, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11764.
    Promulgated September 6, 1927.
    Debts held to bave been ascertained to bave been worthless and charged oft in the taxable year.

      Samuel B. Price pro sé.

      W. F. Gibbs, Esq., for the respondent.
    This proceeding arises from the determination by the Commissioner of a deficiency of $2,138.06 in income tax for 1920.
    It is alleged that the respondent committed error in disallowing $8,307.21 claimed by the petitioner as a deduction for bad debts in 1920.
    FINDINGS OP PACT.
    The petitioner is an individual residing at 1727 North Washington Avenue, Scranton, Pa.
    The brother of petitioner was engaged in operating a stock ranch in South Dakota. At various times from May 24, 1909, to March 3, 1913, petitioner had loaned to his brother sums of money aggregating $5,550, and had taken promissory notes for same, some of which were secured by chattel mortgages on the ranch stock. In 1920 petitioner ascertained that his brother had given up the stock business and that the notes were worthless. He charged them off on his books of account. Some time thereafter the notes were returned to the maker.
    In making out his income-tax return for 1920 petitioner deducted from his gross income $8,307.21, representing the principal sum of these notes, with accrued interest, as debts ascertained to be worthless and charged off in the taxable year.
    Petitioner kept his accounts on a cash receipts and disbursements basis and no part of the amount representing interest accrued after March 1,1913, had been treated as income in his accounts or reported by him as taxable income.
    The Commissioner disallowed all of the deduction claimed.
   OPINION.

Phillips :

In 1920 petitioner was the holder of obligations to pay money in the principal sum of $5,550. These obligations represented loans which he had made to his brother at various times from May 24, 1909, to March 3, 1913.

In 1920 petitioner learned that his brother had met with reverses in the ranch business; that he had disposed of his stock and was working for wages; that he had lost money in a bank failure and could not meet his obligations. He also learned that the chattel mortgages on the stock had not been renewed as he had supposed These debts were then ascertained to be worthless and charged off his books of account.

There is no question that these loans were bona fide business transactions. In 1909 the brother had undertaken the business of stock raising on a ranch in South Dakota, and the loans in question were made to assist him in establishing that business. For many years prior to 1909 petitioner had loaned him from time to time sums of money aggregating many thousands of dollars. These loans had all been repaid. When making the loans here in question due business precautions were taken to secure payment, to the extent of investigating the brother’s situation and the requirement of chattel mortgages. They were not charged off his books of account until 1920, when they were first ascertained to be worthless. The disposition of the notes thereafter can not affect the character of the debts ascertained to be worthless and so charged off.

On his income-tax return in 1920 plaintiff claimed a deduction of $8,307.21 for bad debts. This sum included the principal of $5,550, and accrued interest. The petitioner kept his accounts on a cash receipts and disbursements basis and had never included in income any part of this accrued interest. The accrued interest, therefore, was not a proper deduction from gross income in 1920. Appeal of Charles A. Collin, 1 B. T. A. 305.

The principal sum of $5,550, representing debts ascertained to be worthless in 1920, was deductible from gross income of that year.

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

Considered by Marquette, MillikeN, and VaN Fossan.


author: Phillips:

text:
    S. P. Freeling, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5163.
    Promulgated September 6, 1927.
    1. Petitioner, an attorney retained to prosecute an action on behalf of the State of Oklahoma, held not to be an officer or employee of the State to the extent that the amount paid him could not be taxed.
    2. Amount paid for personal services to be performed in the future is income when received.
    3. Petitioner was to be reimbursed for expenses paid in the litigation. Held, such expenses are not deductible.

      8. P. Freeling, Esq., pro se.

      P. M. Clark, Esq., for the respondent.
    This appeal is from a determination by the Commissioner of a deficiency in income taxes for the year 1922 in the amount of $1,296.

      BINDINGS OP PACT.
    Petitioner resides in Oklahoma City, Oída., and is an attorney at law duly admitted to practice as such in Oklahoma. In 1922 he was attorney general of the State of Oklahoma.
    Petitioner, in January or February, 1922, while he was Attorney General, entered into a contract with the Governor and other School Land Commissioners of Oklahoma to represent the State as its attorney in certain litigation with the State of Texas with respect to the boundary between the two States. The fee for his services was fixed at $15,000 and this amount was paid to him during 1922. It was estimated that the litigation would continue for three years. Thereupon the petitioner resigned the office of Attorney General and devoted substantially his entire time during 1922 to the professional services which he had contracted to render his State. In the latter part of 1922 he became connected with a law firm. While connected with this law firm in 1922 he gave advice to clients but did not carry on a regular practice. Taxpayer, in his 1922 income-tax return, returned $2,450 as income from his profession from sources other than the State of Oklahoma.
    There was only $300 in the fund that was available for the purpose of paying the expenses of the litigation involving the boundary dispute. Petitioner paid the expenses necessary to carry on the litigation, amounting to from $6,000 to $8,000, and has not been reimbursed, except that the $300 available for the purpose was used. Substantially all of such expenses were paid in 1922. In the early part of 1923 a new governor took office. This governor had not been supported politically by the petitioner. He stated publicly that expenses incurred by petitioner would not be paid to him.
    The legislature of Oklahoma was not in session in 1922.
    In 1923 the governor and the attorney general who succeeded petitioner directed the clerk of the Supreme Court of the United States to pay petitioner any rebate that might exist after the litigation was terminated, in order that petitioner might be repaid his expenses. On Ocober 13,1926, the date of the hearing, the litigation had not yet terminated.
   OPINION.

Phillips:

Petitioner contends that, while the fee, amounting to $15,000, which he received from the State was a lump sum, it was compensation for three years services at $5,000 a year. Whether this contention be true or not, it was in fact income in 1922, for the entire amount was received by petitioner in 1922 for personal services rendered or to be rendered. See Jackson v. Smietanka, 272 Fed. 970; 2 Am. Fed. Tax Rep. 1408, and Forbes v. Nichols (U. S. District Court, District of Massachusetts, July 27, 1927).

The second contention of taxpayer is that the fee was salary of a public officer, and not taxable as such. The United States Supreme Court, in Metcalf & Eddy v. Mitchell, 269 U. S. 514, had occasion to consider the question here involved. There it was held that a consulting engineer, engaged as such by a State or. local subdivision for work not permanent or continuous in character on public water supply and sewage disposal projects, whose duties are prescribed by his contract, and who takes no oath of office and is free to accept other concurrent employment, is neither an officer nor an employee of the State so as to be exempt from taxation. Under the principles laid down in that decision we are of the opinion that petitioner was not a public officer after his resignation as Attorney General in 1922. Appeals of Robert G. Gordon, 5 B. T. A. 1047, and Emma B. Brunner, Executrix, 5 B. T. A. 1135.

Petitioner’s third contention is that his claims against the State of Oklahoma for expenses incurred in carrying on litigation under his contract with the State were uncollectible and that, therefore, he should be allowed a deduction for the amount of these expenses. We understand that petitioner was to be reimbursed for such expenses, and that such amounts constituted a claim which petitioner had against the State for reimbursement. It would, therefore, appear necessary that petitioner bring himself under section 214 (a) (7) of the Revenue Act of 1921 which provides that there shall be allowed as a deduction debts ascertained to be worthless and charged off within the taxable year.

Taxpayer testified that he expended between $6,000 and $8,000 for expenses during 1922. His claim against the State was not repudiated in 1922 but was repudiated in 1923. The legislature was not in session in 1922 and, therefore, could not have appropriated funds in that year for the payment of his claim. Although the governor of the State stated publicly that the claim would not be paid, in 1923 he directed the clerk of the Supreme Court of the United States to pay petitioner any rebate that might exist after the litigation was terminated. The petitioner could not have ascertained his claim against the State to be uncollectible in 1922 and there' is no certainty as yet that it is worthless. There is no other provision of law which has been called to our attention or of which we have knowledge, under which the amount claimed as a deduction could have been allowed in 1922.

Decision will be entered for the respondent.

Considered by Maequette, MillixceN, and Van FossaN.


text:
    National Industrial Alcohol Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4853.
    Promulgated September 6, 1927.
    1. No deduction for the obsolescence of a trade name may be allowed.
    2. It was claimed that a valuable trade name was built up over a period of years by advertising. The cost of such advertising had been charged to expense. Held, that in the absence of any evidence on which the cost of such advertising may be apportioned between annual expense and cost of building up a trade name, no cost has been established for the trade name and no loss is proven when its use is discontinued, due to prohibition.
    3. Deduction for obsolescence of beer vats and tanks, having no value after prohibition, allowed.
    4. Deduction for obsolescence of portion of brewery building not allowed.

      B. M. CP Ham, Esq., for the petitioner.

      C. H. Curl, Esq., for the respondent.
    The proceeding arises from the determination by the Commissioner of deficiencies of $12,457.39 and $6,819.67 in income and profits taxes for the fiscal years ended May 31, 1919, and May 31,1920. Petitioner alleges that the Commissioner erred in computing net income in failing to allow any deductions in these years for losses resulting from the obsolescence of good will, trade names and trade brand and from the discard of tangible assets used in the manufacture of beer.
    FINDINGS OF FACT.
    Petitioner was organized on March 25, 1911, under the laws of Louisiana, with its principal office in New Orleans, for the purpose of manufacturing, bottling and selling beer. It adopted the trade name “ Old Heidelberg ” for its product and used this trade name for its beer from 1912 until November 3, 1919. Between these dates, petitioner spent $30,820.62 for newspaper and souvenir advertising in the development of its business as follows:
    Fiscal year ended May 31—
    1913_$5,833.59
    1914_ 6,200. 69
    1915_ 6, 734. 06
    1916- 7,056.05
    1917- 4,996.23
    30,820.62
    Nothing was spent for advertising after 1917. Its business consisted solely of the one product, “ Old Heidelberg ” beer. The amounts expended in advertising the trade name in newspapers and other advertising mediums were treated on the books of the corporation as expenses. On November 3, 1919, petitioner abandoned the manufacture of beer and the use of the trade name “ Old Heidelberg ” and entered upon the cereal-beverage, or near-beer business. In August, 1921 petitioner began to manufacture and sell industrial alcohol, which was not made as a by-product of the near beer, but as a separate enterprise. The net profit in the fiscal year ended May 31, 1920, during six months of which petitioner manufactured beer, was $85,274.83. During the fiscal year ended May 31, 1921, the company lost money on its brewery and made a profit on its distillery. The corporation discontinued the near-beer business in 1923 but continued its distillery business.
    For the manufacture of its beer, petitioner had two brick buildings, separated by a driveway. Each was three stories high and of the same dimensions — 100 feet by 50 feet. The walls of the brewery building were 2 feet thick and the walls of the cellar building were 4 feet thick and contained cork for insulation purposes. The foundation of the cellar building was heavier than the foundation of the brewery building. Only the cellar building had refrigeration pipes. The two buildings cost $115,348.93 in 1912. The depreciated cost as of May 31, 1918, including additions, was $124,119.09. These two buildings were constructed as a complete unit.
    Petitioner had both wooden and steel vats installed in the cellar building when it began to manufacture beer. There were 24 steel tanks having a capacity of 180 barrels each and 8 steel tanks having a capacity of 215 barrels each. The 24 smaller tanks were on one floor. The 8 large tanks and 50 wooden tanks were on the other two floors.
    The steel vats cost $19,712, of which the 24 smaller tanks cost $14,083.20 and the eight larger tanks $5,628.80. The wooden tanks cost $6,486.50. Such vats were depreciated by petitioner at the rate of 5 per cent per annum. Actual depreciation did not exceed that amount. The building is so constructed that the steel vats could not be removed without demolishing the building. The wooden vats could be removed, piece by piece, but could not be sold for an amount sufficient to pay the cost of removing them.
    After prohibition, the brewery building and one floor of the cellar building were used in the manufacture of near beer. Two floors in the cellar building and the vats contained therein, consisting of the 8 large steel vats and the 50 wooden vats, were not used after November 3, 1919.
    In computing net income the Commissioner refused to allow any deduction for loss or obsolescence of good will, trade names, trade brands or buildings and equipment.
   OPINION.

Phillips :

Petitioner claims a loss for the obsolescence of its good will, trade names and trade brands. It bas, heretofore been held that such items are not the subject of an obsolescence deduction within the meaning of the Act. Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; Appeal of Manhattan Brewing Co., 6 B. T. A. 952; William Zakon v. Commissioner, 7 B. T. A. 687.

We have held, however, in the last cited case that a loss may be had in the year in which such property is abandoned or becomes worthless. The difficulty here is to determine, if possible, what may be considered as the cost of a trade-mark, built up by advertising in the course of the years. From 1913 to 1917 petitioner spent $30,820.62 in advertising its one product. No doubt a part of this cost resulted in an immediate benefit to the petitioner and was reflected in its current sales. At least, petitioner appeared to believe so, for it charged off the entire amount at once. Perhaps another part of this expenditure for advertising might be considered as creating a permanent good will. Certainly all sums spent in advertising a trade-marked product are not to be considered as the cost of the trade name. Here we meet the same situation as confronted us in Northwestern Yeast Co., 5 B. T. A. 232, and Richmond Hosiery Mills, 6 B. T. A. 1247, being without any evidence of the basis on which the cost of advertising the product may be divided between current annual expense and the creation of a capital asset. Any apportionment we might attempt would be unsupported by evidence and would scarcely rise to the dignity of a guess. In the circumstances, no deduction can be allowed. Since the petitioner has had the benefit of these deductions in computing its taxable income in the years in which the advertising took place, it does not appear that any injustice will result.

The petitioner claims that it should be entitled to a deduction in the taxable years for the discontinuance of the use of two-thirds of its cellar building and the 8 steel vats and 50 wooden vats which were no longer used. The evidence is sufficient to permit a computation to be made of the depreciated cost of these items, if any deduction is proper. So far as the vats on which deduction is claimed are concerned, it appears that petitioner abandoned their use on November 3, 1919, never used them thereafter and that they have no salvage value. In our opinion their depreciated cost may be deducted as obsolescence over the period from December 18, 1917, to January 16, 1920. Appeal of Manhattan Brewing Co., supra. We fix January 16, 1920, the effective date of the National Prohibition Act, as tht~ ¡expiration of the period, rather than November 3, 1919, because ii w&s not certain until this later date that the equipment could not again be used.

A different situation arises with respect to the building. While petitioner discontinued the use of two-thirds, there is nothing in the record to indicate that this structure was obsolete or becoming so. It is not sufficient to sustain a deduction to show only that the building can not be used in the petitioner’s business. It is entirely possible that such a building was convertible for use in some other business in which refrigeration was necessary. There is no evidence that any effort was made to dispose of the building, or to find any other use for it. The action of the Commissioner in refusing to allow any obsolescence on the building must be approved.

Decision will be entered on 15 days'1 notice, nmder Rule 50.

Considered by Marquette, MillieeN, and VaN FossaN.


text:
    Frank J. Vlchek, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5301.
    Promulgated September 6, 1927.
    Gain upon tbe sale of stock transferred upon the books of the corporation from the name of the petitioner to that of his children, held to be taxable to petitioner.

      William 8. Hammers, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
    The petitioner seeks a redetermination of a deficiency of $11,665.96 determined by the Commissioner for the year 1917, the amount of which was recomputed at $14,865.52 by the Commissioner after the notice of determination of the deficiency had been mailed to the petitioner and his appeal filed with the Board. The questions at issue arise out of the sale of 3,032 shares of the capital stock of the Vlchek Tool Co. and the issues presented for determination are as follows:
    (1) Did the taxpayer own 3,032 shares of the capital stock of such company at the time of sale or were 3,000 shares owned by his children?
    (2) What was the fair market value of stock of another company which was received as a part of the sales price?
    (3) What was the fair market value on March 1, 1913, of the good will of the Vlchek Tool Co.?
    (4) Did the Commissioner overrule a decision of his predecessor and, if so, was such action proper?

      FINDINGS OF FACT.
    The petitioner is a citizen of the United States residing in Cleveland, Ohio. Prior to 1895 his business was that of blacksmith. In that year he began to manufacture tools. In 190& his foundry building was destroyed by fire, some of the machinery and stock being saved. Thereafter, in the same year, the Ylchek Tool Co. was incorporated with a capital stock of $25,000, of which $7,000 was issued to the petitioner for the machinery and stock saved and for cash and $4,000 to the petitioner for good will. Seven thousand dollars par value of such stock was purchased by friends of the petitioner for cash. The Commissioner has determined the March 1, 1913, value of $25,000 par value of the stock then outstanding to be $81,142.35.
    Prior to 1913 the company paid no dividends, a part of the profits being put back into the business and a part spent in advertising. The company was engaged in the manufacture of small tools which it sold through jobbers and large retail organizations. To promote sales it furnished such jobbers and retailers with plates or cuts with which to illustrate their catalogues.
    In 1917 there were outstanding 6,000 shares of common stock of the par value of $50 per share. The petitioner was the president of the company and owned 3,032 shares of its stock. On August 10, 1917, he gave to one Trunecek an option to purchase the stock owned and controlled by him and as much more as he might secure from the other stockholders in said company at $100 per share payable in cash or as might be otherwise agreed upon after the acceptance of the option by Trunecek. The option provided that it should expire on November 10, 1917. Trunecek assigned such option to a syndicate which proposed to purchase the corporation. The syndicate, however, was unable to secure subscriptions for the purchase of such stock, or the assets of the corporation, in excess of $450,000. Shortly prior to the date when the option was to expire the syndicate managers approached the petitioner, advised him of the situation, and suggested that he accept, in lieu of $150,000 cash, stock in a new corporation to be organized to take over the assets of the Ylchek Tool Co. The petitioner agreed to do so.
    On November 14, 1917, Trunecek made an offer in writing to the Ylchek Tool Co. to purchase all its property and assets as a going concern subject to all its obligations in exchange for 6,000 shares of the preferred stock and 2,250 shares of the common stock of a corporation about to be organized under the laws of the State of Ohio, which corporation was to have the same name and is hereafter referred to as the new company. The transfer of the property and payment of the purchase price was to be accomplished by the deposit of the stock of the new company with the National Commercial Bank of Cleveland, such certificates to be delivered by the bank to such party or parties as the seller should direct upon deposit with the bank on or before November 30, 1917, of the stock of the old corporation and of proper deeds or other instruments transferring title to the property and rights purchased. The proposition was accepted by a vote of the stockholders of the Ylchek Tool Co. held November 26, 1917. This contract was assigned by Trunecek to the members of the syndicate who had agreed to purchase the stock of the new company.
    During 1919 the petitioner received from the National Commercial Bank of Cleveland out of such transaction $153,200 in cash and $150,000 par value of the preferred stock and $22,500 par value of the common stock of the new company.
    On November 6, 1917, the petitioner caused a certificate for 1,000 shares of the stock of the Vlchek Tool Co., theretofore owned by him, to be issued to each of his three children, Henry, Yalerion, and Mary, thereby reducing the stock standing in his name to 32 shares. Such certificates when issued were delivered by the petitioner to his children and by them to their mother, who placed them in a strongbox used by the family for papers, jewelry, and other valuables. The children were present at the meeting of the stockholders held on November 26, 1917, hereinabove referred to, and voted such stock. When the cash of $153,200 and the stock in the new company were received by the petitioner from the National Commercial Bank of Cleveland he delivered one-third of such cash to one of his sons and placed the balance on deposit in various banks in his own name. The stock of the new company was issued in his name. The interest upon the bank accounts and dividends upon the stock of the new company were paid to the children or added to the bank accounts. In 1919 the Ylchek Investment Co. was organized and the stock of the new company and the cash on deposit in the banks were transferred to that company. Stock was issued in four equal parts to the three children and the wife of the petitioner. The intention to organize such investment company for the purpose of holding and investing the proceeds of the sale of the stock of the Vlchek Tool Co. existed prior to the transfer of the stock of the Vlchek Tool Co. from petitioner to his children.
    Upon his 1917 income-tax return the petitioner stated that he was the owner of 3,032 shares of the stock of the Ylchek Tool Co. and that he had received the proceeds attributable to such a number of shares. In various proceedings before the office of the Commissioner of Internal Revenue the petitioner stated in affidavits that he was the owner of such stock. In the first petition filed with the Boajd the petitioner did not claim any error in attributing ownership of such stock to him. In an amended petition the petitioner first claimed that 3,000 shares of such stock was the property of his children.
    The Commissioner determined the value of the stock of the new company received by the petitioner to be $150,000.
    Between September 22, 1922, and December 18, 1922, a certificate of overassessment was issued from the office of the Commissioner of Internal Revenue, Income Tax Unit, wherein it was held that such stock should be eliminated from the computation in determining the income of the petitioner.
   OPINION.

Phillips:

There is not sufficient evidence from which we may determine a March 1, 1913, value of the stock different from that determined by the Commissioner. The determination made by him is based upon the capital and surplus of the corporation as shown by its books and includes no allowance for good will. The petitioner testified from memory that the earnings for the years from 1909 to 1912 were approximately $88,000. Since it appears that no dividends were paid and that the surplus of the corporation in 1913 was only $56,000, we are not inclined to attach much importance to the statement made with reference to the approximate earnings in the absence of any explanation of the discrepancy between the proper earnings and the surplus. Furthermore, there is nothing in the record from which we may determine whether an adequate salary for the service rendered by the petitioner to the corporation in those years was deducted in determining the earnings. The record would indicate that it was doubtful whether such was the case. On the record the action of the Commissioner must be approved.

It is the contention of the petitioner that the stock of the new company had no fair value and can not be included in the computation of the income. The evidence discloses that $450,000 of the $600,000 par value of the stock of the new corporation was sold. It is urged that because the syndicate was unable to secure subscriptions for the remainder, it had no fair market value. The petitioner had his choice of either accepting this stock or demanding cash, under the option granted, in which latter event the sale probably would not have been carried out. The other stockholders were all to receive cash. He accepted the sto*ck in lieu of the cash. In view of all the surrounding circumstances, we are of the opinion that no error was made in treating this stock as worth its par value.

The petitioner further alleges that the former Commissioner of Internal Revenue had decided that such stock had no fair market value and that any profit on the transaction should be taxed when disposition was made of the stock. The record, however, fails to show that any former Commissioner has passed upon the question. Apparently, the petitioner relies upon a certificate of overassessment issued in the latter part of 1922 at which time the present Commissioner was in office. The record does not present the question whether one Commissioner may overrule the determination of his predecessor on a question of fact.

It is the petitioner’s contention, raised for the first time in an amended petition filed with this Board, that the proceeds from only 32 shares of the capital stock of the Ylchek Tool Co. were his property at the time of the dissolution of that company or the sale of its stock and that the remaining 3,000 shares had previously been given to his children. The record is conflicting and it is difficult to know what is the truth. There is no doubt that such stock was transferred to the children on the books of the corporation and that they voted it at a meeting of the corporation which authorized the sale of the assets to the new corporation. There is no doubt that the petitioner had delivered the stock to his children and that the proceeds finally found their way into the hands of the children except to the extent that their mother received an equal interest with them. All such facts indicate a bona fide gift of the stock to the children.

The fact that the father thereafter handled the receipt of the proceeds and attempted to keep it intact for the children is entirely consistent with the contention that they were the owners. The action of the father was no more than natural, considering the age of the children and their lack of business experience. On the other hand, it appears that prior to the time when the transfer was made to the children the matter of forming a family corporation to hold the proceeds was discussed and it was agreed that the proceeds should be placed in such a corporation. It would seem that all the details for the sale had already been arranged. Nothing remained to be attended to except to receive the proceeds. In such circumstances there may be a very grave question whether the petitioner transferred and delivered the stock to his children with the intention that they should have such stock, or under an agreement that the proceeds of the sale should be theirs to be invested in a family corporation under the control of the petitioner. A gift involves more than a delivery of the property. 'There must be the present intention that the property so delivered shall be the property of the cfonee. Ordinarily delivery implies such an intention but such is not the case here because it appears that the intention was not that the stock should belong to the children but that the proceeds should go to an investment corporation of which they should be the owners. The stock appears to have been delivered with the understanding that such should be the case. There are further facts which confirm this belief. In the original return filed by tbe petitioner and in affidavits furnished to the Commissioner of Internal Revenue which were produced on cross-examination of the petitioner, statements were made that he was the owner of all of this stock. In the original petition filed before the Board no claim was filed that he was not the owner and it was not until an amended petition was filed herein that it was claimed that any gift of the stock had been made to the children. The person who had handled petitioner’s tax matters before the Commissioner, called to the stand as a witness, testified that the 1911 return had been prepared, by another accountant who had included the proceeds as income to the petitioner; that during the investigation and controversy with the Unit he had found the record showed that the proceeds had been considered as having been received and taxable to the petitioner and that it was not until the latter part of 1924, in examining the minute books and old stock records for other information that he had found the records showing the gift of the stock to the children prior to the date of the sale and that upon questioning the petitioner about such transaction the petitioner had stated that the transfer to the children was not made to avoid any tax and that on the advice of counsel petitioner had always included it in his tax returns.

Considering the entire record we are of the opinion that the transfer and delivery of the stock to the children prior to its sale was not for the purpose of vesting ownership of such stock in them and did not do so and that the petitioner is taxable upon any income which results by reason of the ownership of such stock.

Decision will he entered for the respondent.

Considered by Marquette and Van Fossan.

Milliken not participating.


author: Milliken :

text:
    Giant Tire & Rubber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9412.
    Promulgated September 6, 1927.
    1. Petitioner acquired certain properties for cash and capital stock subsequent to March 3, 1917. The determination of the respondent that section 331 of the Revenue Act of 1918 is applicable in the computation of invested capital is not disturbed due to lack of evidence.
    2. Cost of properties destroyed by fire determined for the purpose of computing the loss resulting therefrom.

      Victor BLeintz, Esq., for the petitioner.

      A. B. Marrs, Esq., and Alva G. Baird, Esq., for the respondent.
    Proceeding for the redetermination of a deficiency of $22,530.36 in income and profits taxes for 1918. The issues are: (1) Actual cash value at date of acquisition of certain real and personal properties, acquired for cash and capital stock in May, 1917, and the value allowable for invested capital purposes; (2) cost of the properties acquired in May, 1917, for the purpose of determining the loss resulting from their destruction by fire; and (3) respondent’s rejection of the comparatives suggested by the petitioner as the basis for determining the excess and war-profits taxes under section 328 of the Sevenue Act of 1918.
    FINDINGS OF FACT.
    Petitioner, an Ohio corporation with its principal office at Find-lay, is engaged in rebuilding automobile tires and tire accessories. Prior to May, 1917, the business was carried on at Akron, Ohio, in rented quarters.
    At Findlay, Ohio, the Toledo Findlay Tire Co., for about one year had been conducting a business of building new automobile tires. The business was not successful and had passed into the hands of a receiver, who, in or about January, 1917, offered the plant, machinery, and equipment for sale.
    • Prior to May, 1917, petitioner’s officers and directors, on several occasions, had considered the possibility of enlarging their plant facilities either by new construction or the purchase of a plant. The business had outgrown the quarters which it was occupying at Akron. Petitioner’s secretary and treasurer made three or four trips to Findlay to ascertain the condition of the plant and equipment of the Toledo Findlay Tire Co. and its adaptability to the manufacturing operations of petitioner’s business. The first of these inspection trips was made in March, 1917; and following the reports of the secretary and treasurer, petitioner’s officers and directors determined upon the purchase of this plant with its machinery and equipment.
    Claude E. Hart, petitioner’s president, purchased the plant, machinery, and equipment of the Toledo Findlay Tire Co. at a receiver’s sale, some time between January, 1917, and May 15, 1917, paying therefor the sum of $26,500 cash. The funds for the purchase were advanced by the petitioner and charged on its books to the account of its president. On or about May 15, 1917, Hart conveyed the aforementioned properties to the petitioner for a consideration of $26,500 cash and $50,000 par value of petitioner’s common stock. Hart, without any obligation to do so, distributed the said $50,000 par value of common stock to the other stockholders, pro rata according to their holdings of common stock.

      Just prior to the purchase of the plant of the Toledo Findlay Tire Co., petitioner had outstanding $25,000 par value of common stock and a very small amount of preferred stock. Hart, petitioner’s president, owned between 30 and 33ys per cent of the common stock. To assist in financing the purchase of the Toledo Findlay Co. properties, petitioner’s common stock was increased to $100,000 par value, and of the total increase of $15,000 par value, $50,000 was issued to Hart as part consideration for the properties under consideration, and by him distributed to the other stockholders as heretofore indicated. Either before, at the time of, or after the purchase of the Toledo Findlay Tire Co. properties, petitioner issued and sold $50,000 par value of preferred stock, giving to the purchasers thereof a bonus of one share of common stock for each four shares of preferred purchased. The total par value of the common stock issued as a bonus was $12,500. The balance of the increase in the common stock, $12,500 par value, was unissued.
    At the time the properties under consideration were acquired by the petitioner, they were in good workable condition and ready to operate. The building was of sound construction; and aside from some bracing of the walls to sustain the heavy weight machinery on upper floors, which was done as a precautionary measure, no remodeling or repairs were necessary. The machinery and equipment was modern and in excellent condition, and most of it was practically new. The actual cash value of these properties, at the date paid in to petitioner, was not less than $16,500, of which $2,000 represented the actual cash value of the land.
    In May, 1918, petitioner’s plant, which comprised the properties under consideration and the additions thereto, was entirely destroyed by fire. All that remained of the buildings were the excavations and foundations, and some brick which petitioner was able to clean and use in reconstruction. Only a very small part of the machinery and equipment was salvaged. The total value of the salvaged building construction and machinery and equipment was $12,150. The cost to petitioner of such of the destroyed properties as formerly comprised the plant of the Toledo Findlay Tire Co. and were purchased by petitioner in May, 1911, was $76,500, of which $2,000 represents the cost of the land.
    Petitioner submitted to respondent a list containing the names of five concerns, which, in its judgment, were representative corporations and similarly circumstanced with respect to volume of business, gross and net income, and capital employed, as to be proper comparatives in determining its profits-tax liability under section 328 of the Revenue Act of 1918. The list included:

      Akron Tire Company, Long Island City, N. T.
    Super-Tread Tire Company, South Bend, Ind.
    Black Hawk Tire Company, Warsaw, Ind.
    Cross Country Tire Company, Buffalo, N. X.
    Overland Tire Company, Newark, N. J.
    The principal business of the above five companies was rebuilding of automobile tires. The Akron Tire Co. had a much larger volume of business than the petitioner; the difference in the number of tires produced by the petitioner and each of the other four companies was not greater than 25 per cent of petitioner’s production.
    The properties which were paid in to petitioner by its president, on or about May 15, 1917, in exchange for $26,500 cash and $50,000 par value of common stock, were included in invested capital by respondent at a value of $26,500. Eespondent also fixed the cost of these properties at $26,500, and using that cost as a basis, together with the cost of plant additions and stock in trade which were destroyed by fire, determined that the proceeds of the fire insurance policies exceeded the cost of the destroyed properties, resulting in a gain in excess of $6,000. Petitioner’s profits-tax liability was determined by respondent under the provisions of section 328 of the Eevenue Act of 1918. •
   OPINION.

Milliken :

Petitioner contends that the properties, formerly comprising the plant of the Toledo Findlay Tire Co., which it acquired from its president, Claude E. Hart, on May 15, 1917, for a consideration of $26,500 cash and $50,000 par value of common stock, had an actual cash value, at the date of acquisition, of $76,500, and that it is entitled to include these properties in its invested capital at that figure. Eespondent answers that these properties may not be included in invested capital at a greater value than $26,500, which is the price at which they were acquired by petitioner’s president at the receiver’s sale, for the following reasons: (1) That in the transaction involving the purchase of the properties in question at the receiver’s sale, for $26,500 cash, petitioner’s president was acting for and in behalf of petitioner, as its agent, and that the price paid for these properties by petitioner’s president, as agent, constitutes the cost thereof to the petitioner; (2) that the price paid for these properties by petitioner’s president shortly before he paid them in to the petitioner fixes the actual cash value thereof, at the date paid in to petitioner, at $26,500; and (3) that if the Board finds that Claude E. Hart was acting for himself, at the receiver’s sale, and not as petitioner’s president and agent, then the provisions of section 331 of the Eevenue Act of 1918 are applicable, and petitioner may not include the properties in question in invested capital at a greater value than the cost thereof to Hart.

The evidence relating to the actual cash value of the properties in question at the date they were acquired by the petitioner conclusively establishes that value to have been not less than $76,500. Three witnesses qualified by past experience to give opinion evidence as to the value of these properties were called in petitioner’s behalf. Two of them were entirely disinterested parties. They related in detail the methods followed by them in arriving at their conclusions of value. Their testimony is convincing and stands uncontroverted, and it is supported by appraisals made immediately after the fire in May, 1918, which were made the basis for the adjustment of the fire loss and which include only sound insurable values, exclusive of excavations and foundations for buildings and other noninsurable items, in excess of the value claimed by the petitioner.

Respondent contends that the price paid for these properties at the receiver’s sale by petitioner’s president conclusively establishes their actual cash value. We do not so regard it. It is merely a fact upon which we must rely until we are convinced by evidence of other facts that the sale is not significant of value. The preponderance of evidence is that the actual cash value of the properties in question was greater than the price paid therefor at the receiver’s sale, and this is the value which is includable in invested capital under the plain provisions of section 326 of the Revenue Act of 1918. See Appeal of Markenheim Co., 1 B. T. A. 1240.

Respondent’s contention that Hart, in purchasing the properties in question at the receiver’s sale, was acting in his official capacity of petitioner’s president and agent, is based upon the facts that the funds for the purchase by Hart were advanced by petitioner, and that Hart distributed the common stock alleged to have been issued to him as a part of the consideration for the properties to the other common stockholders, in proportion to their holdings. But the evidence is that Hart was acting for himself and none other; that the funds advanced to him by petitioner were charged on the books against his account; and that he sold the properties in question to the petitioner for $26,500 cash and $50,000 par value of capital stock. The distribution of the common stock, which he received as part consideration for the properties, among the other common stockholders, Hart explains as a reward for their past services in building up the company, and an assurance of their continued efforts in behalf of the company of which he was president. The proven facts do not support respondent’s contention.

Just prior to the purchase of the properties under consideration, petitioner had outstanding common stock of a par value of $25,000, and a very small amount of preferred stock. To assist in financing the purchase of the properties in question, the common stock was increased from $25,000 to $100,000 par value; and of the total increase of $75,000 par value, $50,000 was issued to Claude E. Hart as part consideration for the properties he transferred to petitioner, $12,500 was issued as a bonus to the purchasers of the preferred stock and $12,500 was unissued. Either before, at the time of, or after the purchase of the properties in question, $50,000 par value of preferred stock was sold for cash. In his answer to the petition respondent submitted as a proposition of law that section 331 of the Revenue Act of 1918 was applicable to the facts of this case, and limited the value at which the properties in question could be taken into petitioner’s invested capital to the cost of the properties to Hart, the previous owner. Petitioner, therefore, was made aware that respondent’s action in including the properties in question in invested capital at a value of only $26,500 was premised in part upon the provisions of section 331, and that it must sustain the burden of proof that this premise for respondent’s action is, under all the circumstances, erroneous. Section 331 of the Revenue Act of 1918, provides:

In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided,, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1; 1913, in computing the net ineonie of such previous owner for purposes of taxation.

Hart categorically denied on the witness stand that he owned as much as 50 per cent of petitioner’s capital stock, at any time after he transferred the properties in question to petitioner. If that be true, and the record shows nothing to the contrary, he apparently did not retain an interest of 50 per cent or more in the properties which he transferred to the petitioner. But the proof does not go far enough, since the limitations of section 331 are applicable if Hart retained a control of 50 per cent or more in the properties after transfer to the petitioner, and the record fails to disclose whether Hart did or did not retain such a control. Just prior to the transfer of these properties to the petitioner, Hart owned from 30 to 33% per cent of petitioner’s $25,000 par value of common stock. The common stock was increased to $100,000 par value, Hart receiving $50,000 par value as part consideration for the properties. There were no strings attached to the issuance of this $50,000 of common stock to Hart, and when he distributed it among the other common stockholders he did so of his own volition. Hart, then, did immediately after the transfer of the properties in question to petitioner, own more than 50 per cent of petitioner’s common stock. When was the preferred stock issued ? Who were the purchasers of the preferred stock ? Did the holders of the preferred stock have any voice in the management or control of petitioner’s business? These questions remain unanswered. ' Were we to hold that section 331 was not applicable, we would have to assume, at least, that the rights of the preferred stockholders were on a parity with those of the common stockholders, and this we are unwilling to do. Petitioner has failed to prove that the provisions of section 331 are not applicable in including the properties in question in invested capital. Under the circumstances there is no ground for disturbing respondent’s action in including the properties in invested capital at their cost to Hart, the previous owner, to wit, $26,500.

For reasons hereinbefore stated, we find the cost of the properties in question to have been $76,500, and that figure is the basis for the determination of the loss resulting from the destruction of those properties by fire in 1918. The basis of $26,500 used by the respondent, as the result of which he determined a profit in excess of $6,000, is erroneous.

Petitioner alleges error in respondent’s rejection of the comparatives which it suggested for the purpose of determining the profits taxes under section 328 of the Revenue Act of 1918.. Petitioner did not prove the allegation; nor did it show what comparatives were used by respondent, or that the comparatives used were not such as contemplated by the statute; nor has it succeeded in proving that the comparatives which it suggested are proper.

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

. Considered by Maequette and Van Fossan.