author: Korner, Chairman:

text:
    Caribou Oil Mining Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18474.
    Promulgated March 15, 1927.
    Tlie letter appealed from was not a notice of a final determination of a' deficiency by the Commissioner and does not form the basis for an appeal to the Board. The Board is without jurisdiction in the premises. Section 283 (k) of the Revenue Act of 1926 continues the procedure outlined in the Revenue Act of 1924 with respect to appeals following jeopardy assessments made under the provisions of the Revenue Act of 1924.

      Maxwell E. McDowell, Esq., for the respondent.
    This proceeding was heard on the motion of the respondent to dismiss for lack of jurisdiction in the Board to hear and determine the appeal, on the ground that the Commissioner’s letter of May 14, 1926, which is alleged as the basis of the appeal, is not a deficiency letter from which an appeal to this Board will lie under section 274 (a) of the Revenue Act of 1926.
    FINDINGS OF FACT.
    On or about May 14, 1920, petitioner filed with the collector of internal revenue for the first district of California an income and profits-tax return for the calendar year 1919, showing a total tax liability thereon of $50,503.33.
    On December 17, 1924, petitioner executed a claim for refund of 1919 income and profits taxes in the amount of $11,147.70. This claim was based upon the ground that the existence, during the year 1919, of certain abnormalities affecting its net income for that year entitled it to have its profits-tax liability determined under the provisions of sections 327 (d) and 328 of the Revenue Act of 1918. This claim was not filed with the collector until a later date.
    On February 26, 1925, the Commissioner, by a so-called 30-day letter bearing that date, notified the petitioner of a deficiency in income and profits taxes for the year 1919 in the amount of $44,051.48. ,
    On March 10, 1925, petitioner filed with the collector the claim for refund of 1919 income and profits taxes in the amount of $11,147.70, which it had executed on December 17, 1924. This claim was recorded in the Claims Control Section of the Income Tax Unit on April 10, 1925.
    On March 14, 1925, Commissioner addressed a further communication to the petitioner in respect of the deficiency of $44,051.48 found due for the year 1919, which contained the following statement:
    It is deemed practicable to close your return for tlie year 1919 prior to the final decision relative to your application for relief under section 210 for the year 1917. Any adjustment of your tax liability for the year 1919 resulting from an adjustment of your 1917 tax liability will be made when such determination is reached.
    This letter supersedes letter dated February 26, 1925, because of the impending expiration of the Statute of Limitation.
    On or about March 14, 1925, the Commissioner, pursuant to the provisions of section 274 (d) of the Revenue Act of 1924, made a jeopardy assessment of $44,051.48, on a special March, 1925, list.
    On March 18, 1925, petitioner replied to the 30-day letter of February 26, 1925, protesting against the assertion of the deficiency of $44,051.48, and the adjustments of net income and invested capital upon Avhich such deficiency was based; and making application to have its profits-tax liability for the year 1919 determined under the provisions of section 328 of the Revenue Act of 1918.
    On March 24, 1925, the collector gave notice and made demand upon the petitioner for the payment of the deficiency to which the jeopardy assessment related. The petitioner did not make payment; nor did it, within 10 days from the date of the collector’s notice and demand, file a claim for abatement of the deficiency, or any part thereof, accompanied by proper bond, as provided for by section 279 (a) of the Revenue Act of 1924.

      On or about April 2,1925, and prior to the expiration of the 10-day period from the date of the collector’s notice and demand, the Commissioner, by telegraph, advised, instructed, requested or suggested to the collector that collection of the deficiency be withheld.
    On March 12,1926, the Commissioner addressed to the petitioner a letter which reads as follows:
    Caeibou Oil Mining Company,

      %15 Martcet Street,

      San Francisco, California.

    Sirs : Reference is made to your corporation income and profits tax return for the calendar year 1919.
    You are advised that after careful consideration and review, your application under the provisions of section 327 for assessment of your profits tax as prescribed by section 328 of the Revenue Act of 1918, has been allowed. Your profits tax is based upon a comparison with a group of representative concerns which in the aggregate may be said to be engaged in a lite or similar trade or business to that of your company.
    The result of the audit under the above mentioned provisions is as follows:
    Net Income
    Net income, Bureau letter dated March 14, 1925_$214, 988. 73
    • Computation of Tax
    - 66,119. 28 Profits tax, Section 328.
    _$214,988.73 Net Income-
    Less:
    $66,119.28 Profits tax_
    2, 000. 00 Exemption_
    - 68,119.28
    Amount taxable at 10%_$146, 869. 45 - 14, 686. 95
    Total tax assessable- 80, 806. 23
    Tax previously assessed:
    Original assessment, Acct. #403592_$50, 503. 33
    Additional Assessment, March, 1925, Pg. 1, Line 2,
    Special 9_ 44,051.48
    Tax previously assessed_ 94, 554. 81
    Total tax liability_ 80, 806. 23
    Overassessment_ 13, 748. 58
    In accordance with the above conclusions, your claim for the refund of $11,147.70 will be allowed in full.
    The overassessment shown above will be scheduled at the expiration of thirty days from the date of this letter in the form of a Certificate of Overassessment; which will reach you in due course through the office of the Collector of Internal Revenue for your district and will be applied by that official in accordance with Section 284 (a) of the Revenue Act of 1926.

      A copy of this letter has been furnished your representative, Mr. Claud I. Parker, 910-912 Investment Building, Washington, D. C., in accordance with the authority conferred upon him by your company.
    Respectfully.
    C. R. Nash,

      Assistant to the Commissioner. By

      Acting Chief of Section.

    On May 14, 1926, the Commissioner addressed a further letter to the petitioner, which reads as follows:
    Cabibou Oil Mining Company,

      %15 Market Street,

    , . San Francisco, California.

    Sirs :
    Reference is made to your protest dated April 2, 1926, against the result of the allowance of your application for assessment of your profits tax for the calendar year 1919 under the provisions of Section 328 of the Revenue Act of 1918, as set forth in Bureau letter dated March 12, 1926.
    After a careful review of your protest and of all of the evidence submitted in support of your contentions, you are advised that the Bureau holds that the profits tax is based upon a comparison with a group of representative concerns which in the aggregate may he said to be engaged in a like or similar trade or business to that of your company.
    Accordingly, the conclusions set forth in the above mentioned letter, are sustained.
    A copy of this communication has been furnished your authorized representative, Mr. Claud I. Parker, 910-912 Investment Building, Washington, D. C.
    Respectfully.
    C. R. Nash,

      Assistant to the Commissioner. By

      Acting Chief of Section.

    Certificate of overassessment No. 774358 was issued on or about May 18, 1926, in tlie amount of $13,748.58, and was applied by the collector against the deficiency of $44,051.48 to which the jeopardy assessment related, leaving a balance due of $30,302.90.
    On June 10,1926, the collector gave notice and made demand upon the petitioner for the payment of the reduced deficiency of $30,302.90. The petitioner did not make payment; nor did it file a bond with the collector to stay the collection of the deficiency, as provided in section 279 (f) of the Revenue Act of 1926.
    On July 12, 1926, petitioner filed an appeal with this Board, alleging as the basis of its petition the Commissioner’s letter - of May 14, 1926.
   OPINION.

Korner, Chairman:

It is apparent that the Commissioner’s letter of March 12, 1926, constituted only a voluntary abatement of prior assessments pursuant to his allowance of special assessment. under the provisions of sections 327 and 328 of the Revenue Act of 1918. It was not in any sense a rejection in whole or in part of a claim in abatement against such assessment, for no claim in abatement had been, or has since been, filed. The petitioner had protested the jeopardy assessment made in March, 1925, and had applied for special assessment. The letter of March 12, 1926, advised the petitioner of the abatement growing out of the allowance of its application.

The letter of May 14, 1926, was but a reiteration and affirmation of the action theretofore taken of which petitioner had been notified on March 12, 1926. It should be noted that the letter of May 14, 1926, was in no sense an advice of action taken with respect to an abatement claim. It could not have amounted to the determination by the Commissioner of a deficiency, for the reason that no claim in abatement of the outstanding assessment had been filed.

Section 283 (k) of the Revenue Act of 1926 continues the procedure outlined in the Revenue Act of 1924 with respect to appeals following jeopardy assessments made under the provisions of the Revenue Act of 1924. Under that procedure the right of the taxpayer to appeal to the Board is based solely on the final determination by the Commissioner of a deficiency in his rejection of a proper claim in abatement, filed within 10 days of the receipt of the collector’s notice and demand for the tax so assessed. Since no such claim was ever filed by this taxpayer, the letter of May 14, 1926, does not constitute such a final determination of deficiency, and no appeal lies to the Board therefrom.

Motion granted. Proceeding dismissed.


source: Caselaw Access Project

author: MillikeN:

license: Public Domain

text:
    Woodruff Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7262.
    Promulgated March 15, 1927.
    Increased salaries paid to each of the two principal officers and stockholders, whose experience and efforts were responsible for the unusual profits earned, held reasonable and deductible, where the ratio of net profits, after the deduction, to average investment was greater than such ratio in other years when lesser salaries were paid.

      R. A. MihiTls, O. P. A., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
    This proceeding results from the determination by the respondent of a deficiency in income and profits taxes for the year 1920, in the amount of $10,880.26. The petitioner contests only that portion of the deficiency due to respondent’s disallowance of $20,000, deduction claimed for salaries paid to officers, and the disallowance of $4,818.99 of the amount claimed as a depreciation deduction. At the hearing, petitioner waived the error with respect to depreciation, leaving in issue only the reasonableness of the salaries paid to officers for services rendered.
    FINDINGS OF FACT.
    Petitioner is a Minnesota corporation, engaged in the wholesale and retail lumber business, with principal offices in Duluth. It was incorporated in 1907 to take over and continue the business conducted by C. B. Woodruff, as a sole proprietorship, from 1886 to 1905, and as a partnership, from 1905 to 1907, composed of C. B. Woodruff and A. W. King, under the name of The Woodruff Lumber Co. The business was taken over, upon incorporation, at its book value, and A. W. King paid in $39,200 in cash. The stock holdings, on January 1, 1920, and December 31, 1920, after a stock dividend of about 50 per cent had been declared in October, were as follows:

    Petitioner operated a sash and door factory, manufacturing sash, doors, interior finish and store work; acted as the wholesale representative of other companies located elsewhere, and was engaged in the retail lumber business. The lumber business was highly competitive and petitioner had developed a number of special lines of business which a segregation of accounts of the various branches of its business had indicated were less competitive and more profitable. It had early specialized in handling heavy timber for shipbuilding, vessel and bridge repairs, mines, grain elevator construction, and the street railway business. By 1920 it had also developed a specialty in furnishing pattern lumber and lumber suitable for manual training work in schools.
    The president and secretary-treasurer were experienced lumbermen and were in complete control of the policies of the petitioner corporation. They devoted all their time to petitioner’s affairs, their office hours being from 8 a. in. to about 6 p. m. The principal sales made during 1920 were to customers they had secured and retained as an established clientele through many years of fair dealing and service with the trade. Woodruff, the president, had charge of a branch yard operating in the east end of Duluth. He also did practically all of the lumber buying. His knowledge of lumber, and his long acquaintance with those associated with the lumber mills of that vicinity, enabled him to make very advantageous purchases, especially on piling which those mills were anxious to close out. King, the secret ary-treasurer, was in charge of the sash and door factory and handled the financial affairs of the petitioner. He also purchased the glass needed in petitioner’s business and arranged for its insurance. His knowledge of the glass market enabled him to buy advantageously. He put the petitioner’s properties in such shape as to enable petitioner to obtain unusually low insurance rates, considering the nature of the business.
    Both Woodruff and King personally indorsed all of the paper of the petitioner, and were able to secure for it very liberal credit. King also borrowed money on his personal credit for the use of the petitioner, when he considered it good policy to reduce the petitioner’s paper.
    A composite balance sheet for the years 1917 to 1921, inclusive, is as follows:

      The net sales of petitioner, for the years 1907 to 1922, inclusive, are as follows:

    A condensed statement of petitioner’s operations during the years 1917 to 1921, inclusive, is as follows:

    The large profits during 1920 were in part due to advantageous purchases of lumber and glass when prices were low in 1919. The large supply of materials on hand necessitated the buying, in 1920, of only enough to fill in, A minimum of buying at high 1920 prices, and the unusual sales made during that year, left petitioner with a small amount of goods on hand at the close of 1920 when prices were lower.
    The president and secretary-treasurer were the only stockholders who were regularly engaged in the petitioner’s affairs and were the only officers to whom salaries were paid. Fremont Woodruff, a brother of the president, was vice president, but, aside from acting in an advisory capacity, he rendered no services. During years prior to 1920, the petitioner needed capital and the officers sought to develop the business on a conservative basis. Their salaries were fixed on the basis of their actual needs. Prior to 1917, they each drew $175 per month. During 1918, they each drew $225 per month for the first six months, and $400 per month for the remainder of the year, and a bonus of $3,000 each. During 1920, they each drew $400 per month and a bonus sufficient to make the salary paid to each, in that year, total $20,000. The bonus payments were informally authorized by the two officers, who controlled the petitioner’s policies, and were paid within the year.
    During 1920, the employees of the petitioner numbered between 60 and 70, which was a substantially larger number than had been formerly employed. Beginning with the year 1918, the petitioner adopted the custom, then prevalent in that locality, of paying bonuses to employees rather than increasing fixed salaries. The bonuses paid to employees and officers during the years 1918 to 1921, inclusive, are shown by the following table:

      The petitioner corporation has been successful in its operations from the beginning. It has paid dividends in every year except one. The average investment and the percentage of net profits earned thereon for the years 1911 to 1921, inclusive, are shown by the following table:

    The petitioner claimed the $40,000 paid to its president and secretary-treasurer as a deduction in its return for 1920. An examining-revenue agent took no exception to the salary deduction as claimed. The respondent determined that the salaries paid to the two officers were in excess of reasonable compensation for services rendered, and disallowed $10,000 of the salary paid to each officer, or $20,000 of the deduction claimed, as unreasonable.
   OPINION.

MillikeN:

The only question presented is whether the salary of $20,000 paid to each of the two officers during 1920 was reasonable compensation for personal services actually rendered in that year. The evidence is all to the effect that the compensation paid was reasonable compensation for the services rendered. The two officers were men of long experience in the lumber business. They were responsible for the successful growth of the business in former years, as well as its successful operations in 1920. They kept in close touch with the markets and were skillful buyers. The unusual sales of 1920 were due almost entirely to their efforts. The net profits of the petitioner corporation for 1920, after the salaries and all other expenses had been paid, represented a return of 16.94 per cent on the average investment for the year. The ratio of net profits to average investment for 1920 is greater than the average over the five-j^ear period from 1911 to 1921.

We are of the opinion that, measured by the results accomplished, both from the standpoint of volume of business transacted and profits to the corporation arising therefrom, the salaries paid to its officers were not unreasonable or excessive for the services rendered. The deficiency will be recomputed, allowing the $40,000 salary deduction claimed.

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


author: Teammell :

text:
    Queen City Printing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6985.
    Promulgated March 15, 1927.
    The amount of traveling expenses determined and allowed as a deduction.

      H. A. Murrill for the petitioner.

      8. S. Faulkner, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for 1919, 1920, and 1921, in the amounts of $863.10, $667.53 and $223.46, respectively. The deficiencies result from the disallowance of traveling expenses of the president of the petitioner corporation, the disallowance of a deduction claimed as a loss on the sale of a safe, the disallowance of a deduction claimed on account of depreciation, and the inclusion in income of the profit on the sale of an automobile.
    The petitioner introduced no evidence with respect to the deduction claimed in the amount of $150 as a loss on the sale of the safe, or with respect to the profit on the sale of an automobile, the evidence being confined to the question of the traveling expenses and the depreciation.
    FINDINGS OF FACT.
    The petitioner is a North Carolina corporation, with its principal office and place of business at Charlotte. It was engaged in the printing business. It owned its plant and equipment. In 1916 a reorganization was begun which was perfected the latter part of that year or the first part of 1917. The plant was overhauled and a new value was put upon it. Additional stock was sold and the charter was amended, and from that time the authorized capital stock was $50,000.
    The respondent disallowed depreciation claimed by the petitioner in its return for 1920 to the extent of $2,970.68, and disallowed depreciation claimed in its return for 1921 to the extent of $2,234.63. The respondent disallowed a deduction of $1,800 claimed by the petitioner on account of traveling expenses paid to the president of the corporation.

      Murrill, president of the company, was engaged during 1919 in traveling over a large part of the United States in behalf of the corporation. He made several trips to Washington, Baltimore, Chicago, Philadelphia and New York; from New York, to Chicago and return; to Atlanta, Memphis, Nashville, New Orleans, and other places. During 1919 the petitioner had considerable. labor trouble in its plant, and its president was engaged during a considerable part of the year in finding printers and other employees to carry on the work of the corporation. The petitioner’s plant was an open shop. During 1919, union men were employed there and there were various strikes during the year in different departments of the plant.
    Murrill, president of the company, paid out in traveling and other expenses while away from Charlotte, where the plant was located, $8,000 in undertaking to secure employees to carry on the work and to break up and prevent strikes, which amount was paid to him by the corporation. He made an itemized statement of the amount of such expenses and handed it to a clerk in the office to be placed upon the books, but the statement was torn and only that part of it which contained expenses amounting to $1,200 was actually placed on the books, the other part being lost. The respondent allowed as a deduction that part of the expenses which appeared upon the books. The amount of the expenses disallowed by the respondent to the extent of $1,800 was actually paid by the petitioner during the year involved in carrying on its trade or business.
   OPINION.

Teammell :

We are convinced by the testimony that the petitioner actually expended the amount of $8,000 for expenses of traveling, food and lodging of its president while away from the place of business of the petitioner during 1919. Murrill, the president, testified that he kept and made a statement of the expenses and handed them to a clerk in his office to be placed on the proper books of the petitioner, but that the statement was torn and a portion of it was lost. We are satisfied as to the truth of the statements made by the witness on the stand and are of the opinion that the amount of $1,800, in addition to the amount of $1,200 allowed by the respondent for such expenses, should be allowed as a deduction.

With respect to the question of depreciation, there is no evidence as to the kind or character of the assets, the cost thereof or any other facts upon which we could find that the determination of the respondent was not correct. We therefore affirm the action of the respondent in that respect.

3STo testimony was introduced with respect to the other alleged errors and we must affirm the determination of the respondent in all respects, except with respect to the disallowance of traveling expenses in the amount of $1,800, as above set forth.

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


author: Trammell :

text:
    Edward J. Turner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18543.
    Promulgated March 15, 1927.
    Under the Revenue Act of 1921, the March 1, 1913, value of property must be reduced by depreciation sustained in determining the gain from the sale of property.

      Gharries E. Smith, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1922 in the amount of $642.18. The deficiency arises from the action of the respondent in reducing the March 1, 1913, value of a building by depreciation sustained in determining the amount of gain on the sale thereof in 1922, such depreciation not having been claimed as a deduction in the income-tax returns of the petitioner in years prior to 1920.
    No testimony was introduced, all of the facts being stipulated.
    FINDINGS OF FACT.
    The petitioner is an individual and a citizen of the United States, residing at Rutherford, N. J.
    In May, 1908, the petitioner acquired real property located at 74 — 80 Park Avenue, Rutherford, N. J., at a cost of $18,500. The fair market value of said property as of March 1, 1913, was: Land $13,062.50, buildings $18,500 — total $31,562.50.
    Subsequent to March 1,1913, the petitioner expended for improvements on said building the sum of $858.45. Prior to 1920 the petitioner, in making his income-tax returns, made no claim for depreciation on said property. In 1922 he sold the said property for $56,928.80. In reporting the transaction in his 1922 return, the petitioner added depreciation to the purchase price equal to the sum deducted as such in his income-tax returns for the years 1920 and 1921, in the total sum of $740. The respondent adjusted depreciation on said building from $740 to $3,268.33, by computing depreciation on the March 1, 1913, value of the building ($18,500) at the rate of 2 per cent for eight and five-sixths years, that is, from March 1, 1913, to December 1, 1921.
   OPINION.

Trammell :

There is no question between the petitioner and the respondent as to the rate of exhaustion, wear and tear, as both used the same rate. The petitioner, however, in determining the gain from the sale of the property, disregarded the exhaustion sustained, except for the two years, when he claimed deductions in his income-tax returns with respect thereto. Under the Revenue Act of 1921, it is immaterial whether the petitioner deducted any amount on account of exhaustion, wear and tear in determining his gain from the sale of property. Ho can not, under that Act, reduce his taxable gain from the sale of property by not claiming deductions for exhaustion, wear and tear sustained. This case is governed by the Appeal of Even Realty Co., 1 B. T. A. 355. See also Appeal of Cotton Concentration Co., 4 B. T. A. 121; Appeal of Capital City Investment Co., 4 B. T. A. 933; Island Line Shipping Co. v. Commissioner, 4 B. T. A. 1055; and Gertrude B. Whittemore v. Commissioner, 6 B. T. A. 339.

Judgment will be entered for the respondent.


text:
    Melvin Behrends, Petitioner, v. Commissioner of Internal Revenue, Respondent. Leopold Behrends, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8086, 8087.
    Promulgated March 15, 1927.

      Lawrence Koenigsberger, Esq., for the petitioners.

      Bruce A. Low, Esq., for the respondent.
    The above two proceedings were consolidated for the purposes of trial. They involve the same facts and the same questions of law. Both of the proceedings are for the redetermination of deficiencies in income tax for the calendar year 1924. In the case of Melvin Behrends the deficiency asserted is $439.98, and in the case of Leopold Behrends the deficiency asserted is $560.26.
    The deficiencies arise from the action of the respondent in disallowing 25 per cent reduction upon so much of the tax in each of the c.fl>ses as is computed upon the income attributable to the calendar year 1923, the two individuals being members of a partnership which kept its books on a fiscal year basis.

      No testimony was introduced, both cases being submitted on the pleadings. At the hearing the respondent admitted all of the material facts alleged in the respective petitions which had not been admitted in the answer.
    FINDINGS OF FACT.
    In the case of Leopold Behrends, the total income reported by him for the calendar year 1924 is the sum of $20,781.11. Of this amount $11,853.81 represents eleven-twelfths of his share of the net income from Behrends, a partnership, for the fiscal year ended January 31, 1924. In making his return the petitioner computed his tax on said sum of $11,853.81 at 1923 rates and then deducted 25 per cent therefrom, amounting to the sum of $500.26.
    In the case of Melvin Behrends, the total income reported by him for the calendar year 1924 is the sum of $13,803.11. Of this amount $11,853.81 represents eleven-twelfths of his share of the net income from Behrends, a partnership, for the fiscal year ended January 31, 1924. In making his return he computed his tax on said sum of $11,853.81 at 1923 rates, and deducted 25 per cent therefrom, amounting to $439.98.
    The respondent disallowed the 25 per cent deduction claimed in the case of both of the petitioners.
   OPINION.

Teammell :

The decision on the question involved in these proceedings is governed by the Ap-peal of Charles Colip, 5 B. T. A. 123, and Appeal of C. A. Weaver, 5 B. T. A. 313.

Judgment will he entered for the respondent.


author: MuRdock:

text:
    Hugo A. Lindenberg, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. J. Fox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6878, 6880.
    Promulgated March 15, 1927.
    Evidence held insufficient to establish market value of goods inventoried at cost.

      G. Clive Clark, Esq., for the petitioners.

      J. S. Halstead, Esq., for the respondent..

      The above-entitled proceedings were consolidated at the hearing. The Commissioner determined deficiencies for each of the above petitioners for the years 1919, 1920, and 1921, as set forth below:

      Hugo A. Linderiberg

    Year. - Amount.
    1919 Additional tax due-$14.42
    1920 Additional tax due_ 702. 59
    - $777.01
    1921 Over-assessment_ 128. 92
    Net deficiency- 648. 09

      E. J. Fox

    1919 Additional tax due_$193. 55
    1920 Additional tax due_ 767. 04
    - $960. 59
    1921 Over-assessment_ 143. 57
    Net deficiency_ 817.02
    The petitioners acquiesce in the changes made by the Commissioner, but now allege error in that they have overstated their partnership inventories for the fiscal years ended April 30, 1920, and April 30, 1921, by taking them at cost instead of at market.
    FINDINGS OF FACT.
    The petitioners, during the taxable years 1919, 1920, and 1921, were wholesale jewelers, doing business in Cincinnati, Ohio, as a partnership under the firm name of Lindenberg & Fox. A large part of their business consisted of the sale of diamonds and watches.
    Inventories of the partnership stock as' of April 30, 1920, and as of April 30,1921, were taken on the basis of cost. Some of the goods included in these two inventories were later sold at less than cost.
   OPINION.

MuRdock:

The petitioners have attempted to prove that the market value of their goods was lower than cost. They introduced in evidence the original sheets of adding machine figures used in taking their inventories with the totals set out. The only indication of what goods these figures represent is that on each sheet there is a general statement of what is represented on that page, such as “ Safe #3— Jewelry,” “ Diamonds,” “ Cabinet between saves,” and Wrist-Gents watches.” On some of the pages there is a gross total from which certain percentages are deducted to arrive at a net figure which also appears. In addition three sheets were introduced in evidence showing a description of certain articles, the stock number, the April 30, 1920, inventory value, the date sold, the sale price, and the loss in respect to each. These articles represented only a small portion of the goods inventoried. The sales took place in 1920, 1921, 1922, and 1923.

From these exhibits and from the testimony offered we are not able to determine the market value of any goods as of the dates of the inventories, nor are we able to determine how cost compared with market value.

Judgment will be entered after 15 days' notice, under Bule 50.


author: Lansdon:

text:
    Union Paving Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 803.
    Promulgated March 15, 1927.
    1. Petitioner is engaged under contracts in constructing and maintaining streets and highways in the Commonwealth of Pennsylvania and political subdivisions thereof. Hem, that profits ' from such contracts should be included in taxable income.
    2. Petitioner is required by its contracts to maintain for a fixed period all roads and streets which it constructs. It set apart on its books in the taxable year an amount which it designated as “ Prepaid Maintenance.” During such year it actually expended a much smaller sum for maintenance. Held, that the “ Prepaid Mainte- - nance” fund should be included in taxable income and that the amount actually expended for maintenance should be deducted therefrom as ordinary and necessary expense.
    3. Commissioner’s readjustment of invested capital by increasing reserve for depreciation not disturbed.

      Joseph A. Lamorelle, Esq., and Walter Biddle Saul, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    The Commissioner has asserted a deficiency in income and profits taxes for the year 1918 in the amount of $5,758.58. Three issues are involved: (1) Whether income derived from contracts with States or political subdivisions thereof is taxable by the United States; (2) refusal of Commissioner to allow -a deduction from income on -account of alleged prepaid charges for maintenance of paving; and (3) the Commissioner’s reduction of the invested capital of the petitioner by an alleged arbitrary addition to depreciation reserve of plant and equipment at December 31, 1916.
    FINDINGS OF FACT.
    The petitioner is a Delaware corporation with its principal office at Philadelphia, Pa. It was organized in 1912. Its only business in 1918 was paving roads and streets for the Commonwealth of Pennsylvania and municipal subdivisions thereof, and maintaining the same. It keeps its books and makes its income and profits-tax returns on the accrual basis. All work is done on contracts secured by bidding in competition with other parties engaged in the same business.
    The petitioner’s contracts specify fixed amounts as compensation and such amounts are usually received in full at or soon after the completion and acceptance of each job. A condition of each contract is that the petitioner must make all necessary repairs for an agreed term, usually three but in some instances for five or more years, and that the streets and roads shall be in good condition at the end of such period. To provide for a maintenance fund the petitioner sets up on its books an account in amounts equal to one cent per square yard of surface paved. During the year 1918 it charged this account with the amount of $19,476.56, and in the same year it discharged its maintenance obligations at a cost of $4,184.40.
    Plant and equipment, including trucks and automobiles, were acquired by the petitioner at various times between the date of incorporation and December 31, 1917. Depreciation was accounted for on the books and in income and profits-tax returns in such manner as in the best judgment of the petitioner represented the actual asset values at the close of each year. The books are not in evidence. The total cost of plant and equipment and the total amount of depreciation written off are not disclosed by the record.
    Upon audit of the petitioner’s income and profits-tax returns for 1918 the Commissioner disallowed the amount of $19,476.56, set up as a reserve for liability under maintenance contracts, as a deduction from gross income and allowed the amount of $4,184.40, readjusted invested capital by increasing accrued depreciation in the amount of $73,829.02, made other adjustments of income and invested capital not in question here and asserted the deficiency in controversy.
   OPINION.

Lansdon:

During the taxable year the petitioner was engaged solely in the business of paving and patching streets and roads under contracts with the Commonwealth of Pennsylvania and certain municipal subdivisions thereof. It contends that, as this work was done for a State and the political subdivisions thereof, it is exempt from Federal taxation since it was income resulting from the discharge of governmental functions. It is now well established that the salaries of persons acting as officers of a State or a political subdivision thereof in the discharge of its governmental functions are not subject to Federal taxation. The petitioner, however, was not an official or even a salaried employee of the Commonwealth of Pennsylvania or any of its political subdivisions during the taxable year. The petitioner’s contention on this point can not be allowed. Metcalf & Eddy v. Mitchell, 269 U. S. 514; Appeal of Robert G. Gordon, 5 B. T. A., 1047; Appeal of Emma B. Brunner, 5 B. T. A. 1135.

The petitioner set apart the amount of $19,476.56, received on contracts completed in 1918, as prepaid cost of maintenance, and did not include such amount in its taxable income in its income and profits-tax return for such year. The Commissioner properly added this amount to income and properly deducted actual cost of maintenance for such year from taxable income as ordinary and necessary expense. Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Uvalde Co., 1 B. T. A. 932; Appeal of Chapin Construction Co., 3 B. T. A. 25.

The Commissioner reduced the petitioner’s invested capital in the amount of $73,829.02 by increasing the accrued depreciation of the petitioner’s assets at December 31, 1917. The petitioner alleges that it accounted on its books for all actual depreciation of its plant and equipment and that in many instances it charged the cost of replacements and other capital expenditures to expense. It takes the position that depreciation is a matter of fact that can be more equitably ascertained by proof and experience than by the application of arbitrary percentage formulas on a straight-line basis, and cites several decisions of this Board in support of its position.

In every appeal in which the Board has reversed the action of the Commissioner on issues similar to this, the petitioner has proved that the amount of depreciation written off was, in view of all the facts, a reasonable allowance for the exhaustion, wear and tear of assets. In the instant proceeding the petitioner relies entirely on proof of the action of the Commissioner. There is no evidence upon which we can base findings of fact adverse to the determination of the Commissioner. Appeal of City National Bank, 2 B. T. A. 623.

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


text:
    St. Paul Steam Laundry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5961.
    Promulgated March 16, 1927.
    The value, if any, of intangible assets acquired for stock held not established by the evidence.

      Frank W. Wilson, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.

      This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921, in the amounts of $660.43 and $670.95, respectively. The deficiencies arise from the action of the respondent in excluding from invested capital an amount claimed by the petitioner to represent good will acquired for stock.
    FINDINGS OF FACT.
    The petitioner is a South Dakota corporation, having its principal place of business in St. Paul, Minn. It was incorporated September 24, 1915, for the purpose of taking over the laundry business of William B. Webster who had, from about 1900 until the time of his death, conducted the business as an individual. Webster died in April, 1915, and the laundry business was transferred by the ad-ministratrix of his estate in exchange for all the capital stock, which was later distributed to the heirs of Webster according to their interest in the estate.
    The tangible assets, according to the books, amounted to $34,915.32 at the time the business was transferred to the corporation. Stock of the par value of $50,000 was issued to the administratrix in exchange for the laundry business, including tangible assets and such good will as the business had.
    The earnings for the calendar year ended December 31, 1911, were $15,296.60; for the calendar year ended December 31, 1912, they were $12,774.93; for the period from January 1 to July 31, 1915, they were $3,671.95. No competent evidence was offered as to the earnings for the years 1913 and 1914.
    The gross earnings for the calendar year ended December 31, 1911, were $70,034.01; for the twelve months ended December 31, 1912, they were $68,389.65, and for the seven-month period ended July 31, 1915, they were $45,225.36.
    The net earnings subsequent to the organization of the corporation up to December 31, 1921, were as follows:
    Year ended Dec. 31. Amount.
    1915 (five months) $1, 863. 73
    1916_ 7, 096. 77
    1917_ 8, 044. 67
    1918_ 400. 51
    1919_ 1, 504. 86
    1920_ 7, 257. 51
    1921_ 10, 038. 33
    Total- 35, 405. 36
    The tangible assets used in the business, averaged over the period from the time of the organization of the corporation to the close of 1921, were $33,561. The average annual earnings were $5,389.80.
   OPINION.

Trammell :

If the petitioner acquired good will for stock at the time of its organization, or at any other time, it is entitled to include the value thereof, subject to the statutory limitations, in its invested capital. The question then is, What was the value, if any, of the good will acquired?

There is testimony as to the earnings during a portion of the period prior to the organization of the corporation. For a portion of the period no competent testimony was offered with respect thereto. The petitioner sought to establish the earnings for 1913 and 1914 by the testimony of a witness without competent records and whose testimony depended upon recollections. It was shown, however, that he was not present during a portion of those two years. Hor was any testimony introduced as to what the tangible assets were during any period prior to the organization of the corporation, except on the day when the assets were transferred to the corporation. The tangible assets might have been greater or less during the period when the earnings were made in prior years. We can not assume that they remained constant.

It is to be noted, also, that the earnings for 1915, immediately prior to the organization of the corporation, were considerably less than in the earlier years. During the first year of the operation of the corporation the earnings were smaller than at any other period.

While subsequent earnings may be considered of evidentiary value for the purpose of corroborating the value of intangible assets established by prior earnings'and by other evidence, such testimony alone can not be the basis of a determination as to the value of intangible assets.

The respondent has determined that the petitioner did not acquire good will of value for stock and from the testimony introduced we are unable to determine that the respondent was in error in that respect.

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


author: TRAmmell:

text:
    E. J. Stilwell Paper Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7301.
    Promulgated March 16, 1927.
    Deductions claimed as compensation for services allowed.

      Stanley B. Houck, Esq., W. Y. Smiley, Esq., and R. H. Doe, Esq., for the petitioner.

      D. D. Shepard, Esq., for the' respondent.

      This is a proceeding for the redetermination of a deficiency in income and profits tax for 1920 of $4,202.82, of which $3,965.65 is in controversy. The deficiency results from the disallowance of a deduction of $10,000, claimed by the petitioner as officers’ salaries, on the ground that the amount was not salaries but a distribution of profits.
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation, with its principal office at St. Paul. During the year 1920 it was engaged in the wholesale distribution of paper in that city and the surrounding territory.
    During 1920, E. J. Stilwell, who for about fifty years had been engaged in the paper business in Minneapolis and St. Paul, was president and treasurer of the petitioner corporation. In that capacity he approved policies relating to the business of the corporation and such invoices as were to be paid. He also approved the hiring of salesmen. He conferred daily with the first vice president and the secretary with respect to matters relating to the business of the company.
    P. A. Beckjord, who had been with the company since 1916, was vice president and active manager. He supervised the salesmen and each day conferred with them as to their duties and as to prices. He had charge of the credits and also of the purchase of merchandise. Every day he discussed with one or more of the other officers, personally or over the telephone, questions relating to purchases, sales, credits, salesmen and the general management and conduct of the business. In addition to the foregoing, Beckjord was a salesman and during the year made about one-half of the corporation’s total sales of $524,846.81. Beckjord had an office in the Stilwell Paper Co.’s place of business and devoted his entire time to the affairs of the company.
    L. B. Boswell, who for 29 years had been in the paper business in the Minneapolis-St. Paul territory, was second vice president of the company. Pie checked over all sales and bills and accounts payable. He, with the other vice president, supervised the salesmen and the general operation of the business. During the year he made a ten-day trip to the east and several out-of-town trips in behalf of the company. He spent an average of two hours per day in the work of petitioner.
    W. ,E. Swartwood ivas secretary of the company in 1920. He supervised the financial end of the business, the borrowing of money at banks and the details in connection therewith. He supervised the credits and passed on all credits of any consequence. He also had supervision of the Ebooks and with the auditor drew off the balances and made up the monthly statements. He spent two or three hours a day in connection with the business and frequently went to its office at closing time.
    The four officers above named were the only stockholders of the Stilwell Paper Co. Their stock holdings were as follows:
    Sharps.
    E. J. Stilwell, president and treasurer-150
    P. A. Beckjord, vice president- 50
    L. K. Boswell, vice president_150
    W. E. Swartwood, secretary_150
    Stilwell, Boswell, and Swartwood were the directors.
    It was the practice to have one formal meeting annually of the stockholders and one formal meeting annually of the directors. The officers, however, held informal conferences at frequent and irregular intervals, at which the policies and practices to be followed by the corporation were discussed.
    With the exception of Beckjord, all the officers of the petitioner were officers of the Minneapolis Paper Co., which had its principal office in Minneapolis. Those who were officers of the Minneapolis Paper Co. had their office in the place of business of the Minneapolis Paper Co.
    Prior and subsequent to the year 1920, salaries were not paid the officers. At an informal meeting of the directors in July, 1920, the question of officers’ salaries was raised. Stilwell, the president and treasurer and the controlling power of the corporation, agreed that salaries should be paid the officers. However, the amount of such salaries was not determined until a meeting of the directors in December, 1920, after the probable profits of the business had been determined. It was then agreed by Stilwell that he, Boswell and Swartwood should have a salary for the year of $3,000 each. Stil-well decided at that time that Beckjord, who had received a salary of $400 per month, or $4,800 per year, should be allowed an additional amount for the year of $1,000.
    A closing entry under date of December 31, 1920, was made on the books of the company showing salary credited to the officers as decided on by Stilwell. No cash was paid the officers, but interest-bearing investment certificates dated January 2, 1921, were issued to them. Nothing was ever paid on these certificates, and during the latter part of July and the first part of August, 1922, they were surrendered by the officers to the company and were canceled.
    The following is a statement for 1920, 1921, and 1922, of the gross sales, less returns and allowances, gross income, deduction for officers’ salaries and net income after deducting officers’ salaries:

      The gross income of $55,029.12 for 1922 includes an amount of $10,000, which represented the amount of the certificates of indebtedness issued to the officers in payment of their salaries for 1920 but which were returned to the company and canceled in 1922.
    The loss of $82,666.77 for 1921 was carried forward to 1922 and used as an offset to the net income of $13,517.65. Therefore, there was no taxable income for 1922.
    The petitioner’s books were kept on the accrual basis.
    Written records were not kept of the informal meetings of the directors. Records, however, were made of the formal meetings of the stockholders and of the directors. These records are general in nature and contain no specific authorization for payment of officers’ salaries. The only portion of the minutes of the stockholders’ meetings and of the directors’ meetings held on January 20, 1920, and January 18, 1921, that could be construed as having any bearing on the payment of officers’ salaries are as follows:
    Stockholders’ Meetings January 20, 1920, and January 18, 1921.
    It Is Hereby Resolved that all business heretofore transacted by this corporation through its officers, directors and employees is hereby ratified and approved.
    Directors’ Meetings of January 20, 1920, and January 18, 1921.
    It Is Hereby Resolved that all business heretofore transacted by this corporation through its officers, directors and employees be and the same is hereby ratified.
    The petitioner in its income-tax return for 1920 claimed a deduction of $10,000, representing a salary of $3,000 each to Stilwell, Boswell and Swartwood, and an additional $1,000 to Beckjord. The respondent disallowed the deduction upon the ground that the amount was a distribution of profits on the basis of stock ownership and was not compensation for services rendered.
   OPINION.

TRAmmell:

The issue presented is whether the amount of $10,000 represents salaries or whether it represents a distribution of the profits of the corporation to the stockholders on the basis of their stock holdings.

In considering the question of whether amounts paid to officers of a corporation were salaries or a distribution of profits, we said, in the Appeal of Woodcliff Silk Mills, 1 B. T. A. 715, that:

Whether amounts paid constitute compensation for personal services actually rendered or are an attempt to distribute profits as salaries is, in the last analysis, a question of fact to be determined from all the evidence, * * * The fact that salaries paid to its officers by a corporation are in direct proportion to the stockholdings of the respective officers is strong evidence of an intent to distribute profits as salaries and must be overcome by clear evidence showing that the salaries are reasonable in amount and actually represent compensation for personal services rendered.

We think that the evidence in this case shows that the amounts allowed the officers and credited to them on the books during the taxable year were compensation for services. Considering the services rendered, the experience of the officers and other facts, we think that the amounts were reasonable. The officers had not been paid salaries in prior years and they had been insisting on being paid some amount for their services. The question had been discussed prior to the end of the year, but decision was reserved until the amount of profits for the year could be estimated with some degree of accuracy. Before the close of the year it was agreed as to the amount to be paid as evidenced by book entries.

A corporation is entitled to deduct a reasonable allowance for salaries of its officers. If the amount allowed them is reasonable for services rendered it should not be disallowed merely because the amount allowed each officer is in proportion to his stock ownership.

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


author: Lora:

text:
    John T. Woodruff & Son, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6864.
    Promulgated March 16, 1927.

      M. Garl Levine, Esq., for the petitioner.

      J. L. Deveney, Esq., for the respondent.
   Lora:

This proceeding seeks to have redetermined a deficiency in income tax for the year 1918 in an amount less than $10,000.

The sole question involved is the reasonableness of a salary paid the president in 1918 of $27,000, the respondent claiming that a salary of $18,000 was reasonable and adequate.

FINDINGS OF FACT.

The petitioner is a New York corporation with its principal office at Long Island City. It has outstanding stock of $10,000, of which $4,000 was issued for good will. In 1918 all the stock was owned by Walter B. Woodruff, who was president and general manager of the corporation. The business conducted by petitioner is general construction work under contracts.

Walter B. Woodruff devoted all his time to the operations of the petitioner, and personally solicited business for it. The business obtained by petitioner was dne almost entirely to the personal efforts of Woodruff and to his reputation in that line of work. He made estimates, determined cost of construction, and made the bid for petitioner. He superintended all construction work done by petitioner. The gross amount of business done in 1918 was in excess of $392,500, and the gross profits exceeded $54,000. The profits of the business were due primarily to the efforts, influence and business management of Woodruff. There being no stockholders save himself, there were no meetings of the board of directors and hence no fixing of salaries in that formal manner. Managers of other similar companies in that vicinity and competitors of petitioner were paid salaries of $20,000 to $30,000 per annum. Woodruff determined what his salary should be, being controlled therein by salaries paid other managers as well as by the profits realized for the year. He fixed his salary for 1917, 1918, 1920 and 1921, at $27,000 per annum. For 1919, owing to smaller profits realized, he fixed his salary at $18,000. He did not usually draw out the full amount of such salary and left amounts above his drawing account in the corporation.

In 1918 he drew out approximately $6,000 but credited to himself a salary of $27,000, and in his individual return reported $27,000 received. After deducting all expenses, including salary, the net income of the corporation for 1918 was $3,638.40. To that amount the Commissioner added $9,000, being the difference between $27,000 salary deducted by petitioner and $18,000 allowed as a reasonable salary by the Commissioner.

Under all the circumstances of this case, $27,000 was a reasonable salary for Woodruff for the year 1918.

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


author: Love :

text:
    Fort Worth Warehouse & Storage Co., Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 3864.
    Promulgated March 16, 1927.
    If a debt is ascertained to be worthless and charged off within the taxable year, the right to deduct it from gross income is not affected by the fact that the amount of the debt is later recovered.

      H. S. Lattimore, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This proceeding is to redetermine deficiencies in income and profits tax for the years 1920 and 1921, totaling $2,304.10.

      There are two issues: (1) The right of the petitioner to deduct an alleged bad debt in 1921; and (2) the proper rate of depreciation of petitioner’s warehouse for each of the years 1920 and 1921, the petitioner claiming 3 per cent and the respondent haying allowed 2 per cent.
    FINDINGS OF FACT.
    The petitioner is a Texas corporation with its principal place of business at Fort Worth.
    In the early part of 1920 the petitioner received from a railroad company for .storage a shipment of automobile bodies consigned to the Texas Motor Car Co. The arrangement for their storage was made with an officer of the petitioner orally by an agent of the railroad company. The railroad company had not delivered them to the consignee because the latter was not able to pay the freight charges thereon. No warehouse receipt was issued. Storage charges accumulated and bills were made and sent to the railroad company, and in 1921, when the petitioner pressed the railroad company for their payment, the latter denied liability therefor and asserted that in placing the goods in storage it had acted for the consignee. Thereupon, the petitioner instituted suit against the railroad company and the Texas Motor Car Co. for recovery of the amount claimed to be due. The railroad company answered and denied liability. Shortly thereafter the Texas Motor Car Co. went into a receivership. After an investigation, including an inspection of the receiver’s report, the petitioner’s attorney advised it that there ivas no chance of collecting from the Texas Motor Car Co., as there were no assets from which to satisfy claims of general creditors, and he also advised petitioner that he did not believe judgment could be obtained against the railroad company. The petitioner then instructed its attorney in the latter part of 1921 to discontinue the action, which was done early in 1922. The petitioner charged off the amount of its claim in December, 1921.
    The automobile bodies were of sheet steel, of a special design. In or about the month of September, 1921, the railroad company advertised the bodies for sale at public auction and sent notices of the proposed sale to the shipper. Although a number of persons inspected them, no bids were received. The bodies were turned over to the railroad company by petitioner at some time, but the evidence does not show when. In the latter part of 1925 they were still in the possession of the railroad company.
    At a meeting of the board of directors of the petitioner held in January, 1922, the vice president and general manager reported that this account had been charged off as a loss. Thereupon, one of its directors, who had extensive business relations with the railroad company, being a heavy shipper of freight on that railroad, undertook to collect the amount from it through negotiation, and subsequently the railroad company paid it.
    The petitioner owns a warehouse situated in Fort Worth the construction of which was begun in 1914 and completed in 1915 or 1916.
   OPINION.

Love :

We will dispose of the claim for depreciation first. There is no evidence in the record as to the character of the building, of what material constructed, dimensions, manner of finish, or character of service to which it was subjected. We are totally unable to determine the useful life of the building, and hence must approve the determination of the Commissioner as to that claim.

We come now to the question of the right to charge off the alleged bad debt. There is no controversy in regard to the question of the existence of the claim for storage fees, nor as to the amount of such fees. The claim primarily was against the Texas Motor Car Co. Petitioner sought to hold the railroad company secondarily liable. That petitioner, beginning in 1920, had charged this claim on its books is evidenced by the fact that it billed the same to the railroad company from time to time until the railroad company affirmatively denied liability.

It then filed suit against the Texas Motor Car Co. and the railroad company. The railroad company answered denying liability. Its attorney then advised it that, by reason of the insolvency of the Texas Motor Car Co., a judgment against it would be worthless; that in view of the denial of liability by the railroad company and the fact that no warehouse receipt had been issued for the goods, there was but little chance of proving its case in court against that company, and he advised it to abandon the effort to collect the claim. The suit was abandoned and the debt charged off in 1921.

There is no escape from the conclusion, under the evidence, that petitioner had a debt due it for services rendered. That debt was due, primarily, by the Texas Motor Car Co. Petitioner was advised by its attorney that it probably could not prove liability on the part of the railroad company. The Texas Motor Car Co., after investigation, was known to be insolvent. We believe that, under the circumstances of this case, petitioner was fully justified in concluding in 1921 that the debt was worthless. That it was afterwards voluntarily paid by the railroad company does not affect its status as it existed in December, 1921. Appeal of Egan & Hausman Co., 1 B. T. A. 556.

Judgment will be entered on 16 days’ notice, under Bule 60,


author: Love:

text:
    C. W. Carey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2432.
    Promulgated March 16, 1927.
    1. Expenditures made on an oil well which proved worthless and was abandoned, are deductible as a loss in the year in which the well was abandoned.
    2. Deduction of pro rata share of expenses of operating oil wells allowed as business expense.
    3. Expenses of operation and depreciation of an automobile used to transport petitioner between his residence and oil field where his business was, and in transporting him over the field to look after his several wells, were deductible as business expenses.
    4. Evidence helé insufficient to show Commissioner’s determination of depreciation was incorrect.

      Don T. Haynes, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding to redetermine a deficiency in income tax for the year 1919, amounting to $2,034.20. The petitioner alleges, in substance, that the respondent erred in:
    (1) Disallowing a loss of $5,330.14 sustained by petitioner in the Seven Oil Co.
    (2) Disallowing a deduction of $4,830.25, expenses borne by petitioner in connection with the Crowe! 1-Willis Co.
    (3) Disallowing a loss of $2,050 in connection with Carey Bros. Oil Co.
    (4) Disallowing a deduction of $1,000 as expense of operation and depreciation of an automobile used in business.
    (5) Reducing allowance for depreciation from $1,176, as claimed in petitioner’s tax return, to $175.80.
    (6) Rot allowing a loss of $2,332.49 in the Carey-Willis Drilling Co. to conform to a revenue agent’s report on that company.
    At the beginning of the hearing, the petitioner withdrew the third assignment of error, and reduced the amount of deduction claimed under the second assignment from $4,830.25 to $2,652.
    Ro evidence was introduced relative to the sixth alleged error.
    FINDINGS OF FACT.
    The petitioner resides in Wichita Falls, Tex.
    In 1919 he was in the business of developing oil properties and was engaged in several such enterprises together with other persons.
    A group of seven individuals associated under the name of “ Seven Oil Company ” acquired an oil lease. One of them was E. S. Carey, a brother of petitioner, who had a one-seventh interest. E. S. Carey assigned to petitioner one-half of his interest. The group drilled a well which turned out to be a dry hole and then abandoned the enterprise in 1919. The total amount expended for the purchase and development of the property was $70,000.
    The Crowell-Willis Co. was the name under which the petitioner and three other individuals engaged in an oil development enterprise. The petitioner had a one-eighth interest. They drilled wells and were producing oil. Each individual received his pro rata share of the proceeds of the operations and paid his proportionate part of the operating expenses. The petitioner paid in the taxable year, as his share of such expenses, $2,652.
    In September, 1918, the petitioner bought a Buick 6-E-45 automobile for which, including equipment, he paid $1,652.70. He used this automobile in 1919 for traveling from his home in Wichita Falls to oil fields where he was operating, about fourteen miles away, and in going from one well to another. During this year he expended $498.64 for maintaining and operating the automobile, and he claims a total deduction of $1,000 for such expenditures and depreciation of the automobile. The roads from his home office to the oil fields, as well as roads in that field, were in bad condition, and resulted in hard service on the automobile, and under those conditions the useful life of a car was three years.
    The petitioner,'in his income-tax return, deducted $1,176 for depreciation of the equipment used in the several enterprises in which he was engaged. This amount was reduced by the Commissioner to $175.80. ^ The Crowell-Willis Co. had four producing plants, each consisting of pumping equipment, tanks and other essential parts, the cost of each plant being about $10,000, which plants were depreciable property.
   OPINION.

Love:

(1) The petitioner claims to have sustained a loss of $5,380.14 on the Seven Oil Co. venture. He acquired one-half of his brother’s one-seventh interest and claims that $70,000 was spent in the enterprise for both the lease and the development work, but the amount expended by each does not appear in the record. As the petitioner owned a one-fourteenth interest, his part of that expenditure was $5,000, which was a loss to him, and as the enterprise was abandoned in 1919, it constituted a deductible loss in that year.

(2) The petitioner is entitled to deduct $2,652 as his share of the operating expense of the Crowell-Willis Co.

(3) Petitioner’s automobile was used by him primarily and principally in his oil and gas business, in transporting him from Wichita Falls to the oil fields and over the field to the several wells which his company was operating, and such traveling was a necessary incident to his business. Hence he is entitled to deduct depreciation and the amounts paid for operating the car as ordinary and necessary expenses. He spent $498.64 in maintaining the car and claimed $501.36 as depreciation, which amount is reasonable and should be deducted from gross income.

(4) There is not sufficient evidence to enable us to find the amount of depreciation on the oil well equipment, and we therefore can not disturb the respondent’s determination in respect to that item.

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


text:
    O. C. Lee, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. D. Carr, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7403, 7404.
    Promulgated March 16, 1927.
    1. Petitioners were the only stockholders of a corporation that was dissolved by surrender of charter. Thereafter, they took over all the assets of such corporation in proportion to their stock holdings and continued the business in substantially the same manner in which it had been theretofore conducted. Helé, that, in the circumstances disclosed by the evidence herein, the business was operated as a partnership during the taxable year.
    2. Evidence helé insufficient to prove that certain accounts receivable were ascertained to be worthless and charged off during the taxable year.

      G. S. Alexander, Esq., J. J. Willingham, Esq., and G. M. Stanton, Esq., for the petitioners.

      D. D. Shepard, Esq., for the respondent.
    The Commissioner asserts deficiencies in income taxes for the year 1920 as to O. C. Lee and C. I). Carr in the respective amounts of $2,351.69 and $10,461.10. The issues raised are (1) whether the Carr-Lee Grocery Co. was operated as a partnership during the taxable year, and (2) whether the petitioners received taxable income during the year as members of a partnership. At the hearing the parties agreed that the two proceedings should be consolidated for hearing and decision.
    FINDINGS OF FACT.
    The Carr-Lee Grocery Co., hereinafter referred to as the corporation, was incorporated about the year 1909, and was dissolved by the surrender of its charter on December 1, 1919. At the date of dissolution, O. O. Lee and C. D. Carr owned 28 and 72 shares, respectively, of the outstanding capital stock. An appraisal, to which the respondent has agreed, determined the value of accounts receivable and inventories in the respective amounts of $101,492.29 and $83,262.98, and, upon this valuation, the gain resulting from the liquidation of the company was determined, and the taxes thereon were assessed and paid. The values so determined and agreed to were less than the book value of the assets in the respective amounts of $42,746.30 and $14,503.36. These reductions of book values represented accounts receivable regarded as uncollectible and merchandise in the inventories that was unsalable.
    During the taxable year to December 31, 1920, the business was continued in all respects as it had been conducted by the dissolved corporation, except that there was an unusually vigorous effort to make collections and so reduce the amount of accounts receivable. Carr and Lee continued as executives of the enterprise. Traveling men were employed to solicit patronage and make collections in the trade territory that had been developed by the corporation. Merchandise to be resold to customers was bought in the usual way. During this period the total trade turnover was $1,186,808.75, and the total gross profit was $112,899.17. On March 12, 1921, a partnership return of income was made to the collector of internal revenue for the district of Georgia.
    The amounts of $42,746.30 and $14,503.36, respectively, representing reductions of book values of accounts receivable and of merchandise inventories at December 1, 1919, were not charged off the books either as worthless accounts or as losses. During the taxable year collections of accounts listed as worthless at date of the dissolution of the company were made in the amount of $41,279.90.
    Upon audit of the partnership income-tax return made by Carr and Lee for the year 1920, the respondent added the amount of $41,279.90 to gross income and determined the deficiencies now in controversy.
    The business was reincorporated on or about January 1,1921, with capital stock in the amount of $100,000, divided into 1,000 shares of the par value of $100 each, of which 250 shares were preferred and 750 were common stock. The entire amount of preferred stock of the par value of $25,000 was issued to Carr, who thereafter took no part in the management of the business. The opening balance sheet of the new company was as follows:

      Care Lee Grocery Co.,
    Augusta, Ga January 1, 1921.
    ASSETS.
    Cash on hand and in banks
    Bank_ $1, 118. 57
    Drawer_ 1, 268. 88
    -$2, 387. 45
    Horse and dray_ 2, 000. 00
    Merchandise per inventory_ 75, 782. 36
    Less not accepted by new corporation_ 24, 092. 09
    - 51, 690. 27
    Store and office fixtures__ 1, 500. 00
    Real estate_ 396. 41
    Sou. Atlantic Export Co_ 300. 30
    A/C Rec. per books_ 118, 114. 01
    Less not accepted by new corporation_ 45, 123. 12
    - 72, 990. 89
    Total assets_ 131, 265. 32
    LIABILITIES.
    Accounts payable_ 7, 265. 32
    Bills payable- 24, 000. 00
    Capital stock..- 100, 000. 00
    131, 265. 32
    The incorporators of the new company reduced the merchandise inventories and accounts receivable as balance sheet items in the respective amounts of $24,092.09 and $45,123.12, but retained such rejected accounts and merchandise on its books and in its inventories for the purpose of making collection and sales for Carr and Lee.
    Carr had long planned to retire from business when he should reach the age of 60 years, which was some time in 1920. The dissolution and liquidation of the corporation, the operation of the business during the taxable year by Carr and Lee, and the incorporation of the new company at January 1, 1921, were all done to permit Carr to retire without loss of his investments and profits, and to enable Lee to continue the business with unimpaired good will and credit.
   OPINION.

Lansdon:

The Commissioner contends that, upon the surrender of the charter of the Carr-Lee Grocery Co. on December 1, 1919, the stockholders thereof, Carr and Lee, received the entire net worth of the assets of the corporation as liquidating dividends, and that thereafter, and until December 31, 1920, they conducted the enterprise as a partnership. He holds that such partnership collected during the year the amount of $41,279.90, which cost nothing, since it was realized from accounts receivable that were appraised as worthless at December 1, 1919, and were excluded from the liquidating dividends received by Carr and Lee. The petitioners contend (1) that, during the taxable year, Carr and Lee were not partners but liquidating trustees of the assets of the dissolved corporation and that, therefore, there could be no additional income until the full amount of the net worth of the assets at December 1, 1919, was realized; (2) that if a partnership existed, the alleged additional income resulting from the collection of accounts receivable acquired without cost should be reduced by the amount of accounts receivable, appraised as good at December 1, 1919, and included in liquidating dividends at that date, which were ascertained to be worthless at December 31, 1920.

The evidence is conclusive that Lee and Carr' took over all the assets and assumed all the liabilities of the corporation. They continued the business in the same manner, with the same customers and under the same name. We are of the opinion that, in the circumstances herein, the absence of a written partnership agreement is not sufficient to sustain the petitioners’ contention that they operated the business as liquidating trustees during the taxable year. See Appeal of S. B. Quigley, 2 B. T. A. 159.

The petitioners admit that they collected accounts receivable that had not been included in the liquidating dividends in the amount of $41,279.90. They contend, however, that other accounts receivable in the amount of $33,440.32, which had been appraised as good and included in the liquidating dividends, were ascertained to be worthless during the taxable year, and should be deducted from gross income. This contention is sound, if there is proof that accounts receivable were ascertained to be worthless and charged off during the year 1920. The only evidence of worthlessness offered is that the corporation formed on January 1, 1921, refused to accept accounts receivable then on the books in the amount of $45,123.12. It is admitted that the accounts now alleged to have been worthless were not charged off the books of the partnership in the taxable year. The evidence in support of the alleged worthlessness of such accounts is insufficient, and the failure to charge off is admitted. The action of the Commissioner in disallowing the deduction of $33,440.32 from the gross income of the partnership for the year 1920 is approved.

Judgment will he entered for the respondent.


text:
    First National Bank of Durant, Oklahoma, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6913.
    Promulgated March 16, 1927.
    Upon the evidence, deductions of a loss sustained in 1919 allowed; deductions of alleged bad debts in 1920 disallowed.

      Hubert L. Bolen, Esq., for the petitioner.

      B. H. Saunders, Esq., for the respondent.
    This proceeding is to redetermine deficiencies in income and excess-profits taxes for the years 1919 and 1920, amounting to $2,893.88. The deficiencies arise from the disallowance by the Commissioner of deductions for alleged bad debts, in 1919 of $5,195.62, and in 1920 of $6,200.
    FINDINGS OF FACT.
    The petitioner is a banking corporation, organized under the Federal Banking Act, with its place of business at Durant, Okla.
    Prior to 1919, and during 1919, 1920, and 1921, petitioner extended credit to Sam I. Hynds & Co., cotton brokers. It loaned money to them for cotton purchases, secured by negotiable bills of acceptance with the cotton as collateral security.
    On April 30, 1919, Sam I. Hynds & Co. was indebted to the petitioner in a sum in excess of $12,000, secured as follows:
    96 bales of cotton.
    $1,000 par value capital stock of the Oklahoma Cotton Cleaner Co.
    $1,350 par value capital stock of the Choctaw Chief Lead & Zinc Mining Co.
    $1,000 par value capital stock of the Smith Lee Oil & Gas Co.
    On April 30, 1919, at a called meeting of the board of directors of the petitioner, a resolution was passed, reading in part as follows:
    In going over the cotton account it was deemed wise to charge the profit account with $5,195.62 and credit it on the Hynds Cotton account, reducing this account well within the limits of safety and security.
    In accordance with the above resolution, and under the same date, the sum of $5,195.62 was charged off the books as a loss, credited to the said Hynds account, and claimed as a deduction from gross income on the petitioner’s return for the year 1919. This deduction has been disallowed by the Commissioner in his deficiency letter dated July 20, 1925.
    A part of the amount owing by Hynds & Co. on April 29, 1919, consisted of balances on bills of acceptance remaining unpaid after crediting the amounts realized from the sale of collateral, as above described. There was no security for these balances. The partners at that time had no property out of which the indebtedness could be paid. The petitioner wished to obtain the best settlement of the account it could get. Accordingly, on the date named, petitioner entered into an agreement with Sam I. Hynds under which it received promissory notes to the amount of $17,600, of which $5,500 was a secured obligation of a third party, to be applied against the indebtedness, and it released Hynds & Co. from payment of a balance of $5,195.62. The latter amount was then charged off as a bad debt. The agreement is set out in full below:
    The First National Bank of Durant, Oklahoma, and Sam I. Hynds hereby contract as follows:
    (1) The said Hynds has this day caused to be executed and delivered to said bank a note signed by Dora N. Hynds for $14,500.00 and secured by a first mortgage on certain real estate in Durant, Oklahoma, fully described in said mortgage, said note being due on or before three years from this date and bearing 7 per cent interest, payable annually; the proceeds of said note to be used in extinguishing a present indebtedness of the said Dora N. Hynds of $9,000.00 and interest and the difference is credited on the Sam I. Hynds cotton account.
    The said Sam I. Hynds has also this day made, executed and delivered to said bank his note in the sum of $12,000.00 due November 1st, 1919, bearing interest at the rate of 6 per cent per annum. The said Sam I. Hynds in addition owes the First National Bank of Durant, Oklahoma, the sum of $7,150.00 represented by open account shown on the books of said bank under the head of Sam I. Hynds Cotton Account bills of acceptance in the sum of $7,150.00, with interest to be charged against said account at the rate of 8 per cent per annum, which said account is secured by an equity in 18 bales of cotton belonging to the said Hynds, now in charge of Lehman-Stearns Company at New Orleans, La., also 78 bales of cotton represented by tickets in said bank and $1,000.00 stock at par value in the Oklahoma Cotton Cleaner Company and $1,850.00 stock at par value in the Choctaw Chief Lead & Zinc Mining Company and $1,000.00 stock at par value in the Smith-Lee Oil & Gas Company, making the total indebtedness of the said Sam I. Hynds to said bank, exclusive of the mortgage and note of Dora N. Hynds in the sum of $19,150.00.
    (2) It is further agreed that all assignments, notes, bills of exchange and other evidences of indebtedness held by said bank against the said Sam I. Hynds or the Sam I. Hynds Cotton Company, be and the same are hereby can-celled, annulled, set aside and held for naught.
    (3) The said Bank on its part agrees that during the cotton season of the year 1919-1920, that it will extend a line of credit to the said Sam I. Hynds of $100,000.00 and more if in its judgment conditions so justify. The said Sam I. Hynds on his part agrees to secure said line of credit with cotton which he shall purchase with said money and that the cotton tickets representing the cotton so purchased shall be left with said bank, secured by negotiable bills of acceptances so that the line of credit of the said Sam I. Hynds shall be in negotiable and commercial form.
    The said Sam I. Hynds further agrees that he will manage said cotton, purchase and sell the same in a good business-like manner and that he will not speculate on said sum of money or in any way use the same except in the legitimate purchase of spot cotton.
    The notes given by Sam I. Hynds and Dora N. Hynds were paid in 1919.
    On December 31, 1920, Sam I. Hynds & Co. was indebted to the petitioner in a sum in excess of $30,000, secured by certain cotton warehouse receipts and $3,350 par value capital stock, as set forth above.
    On December 31, 1920, a regular meeting of the petitioner’s board of directors was held, and the following is an extract from the minutes of the said directors’ meeting:
    The cotton accounts were gone over in detail and regarded as in good shape and well secured and liquidation proceeding in a satisfactory manner with the exception of the Hynds account.
    It was the feeling that this account contained a loss and in order to put it in a more equitable condition the officers were instructed to take Sam I. Hynds & Company’s note for $6,200.00 and credit it out to the cotton account and charge the note off and carry it at a loss.
    In accordance with the above resolution, the sum of $6,200 was charged olf the books as a loss, credited to the said Hynds account, and claimed as a deduction from gross income on the petitioner’s return for the year 1920. This deduction has been disallowed by the Commissioner in a deficiency letter dated July 20, 1925.
    Sam I. Hynds & Co. was a partnership composed of Sam I. Hynds, Henry Hynds, William Hynds, and others.
    The loans were carried on petitioner’s books in a “ memorandum acceptance account ” with Hynds & Co., and each bill of acceptance was treated as a separate transaction. When the cotton securing a given bill of acceptance was sold, the proceeds would be credited in the account against the amount due on that bill. If there was a surplus above the amount due on the bill, the surplus would be credited to the deposit account of Hynds & Co. and be subject to their order by check. If the proceeds were less than the amount due on the bill, the deficit would be left as a debit in the acceptance account until the entire account was closed out.
    After the settlement of April 29, 1919, the petitioner extended credit to Hynds & Co. during the cotton season of 1919-1920, pursuant to the above agreement.
    On December 31, 1920, Hynds & Co. owed petitioner upwards of $30,000, of which $6,200 was charged off in the circumstances set forth above. The latter amount was made up of the unpaid balances of amounts due on acceptances after crediting the proceeds from the collateral, respectively. The petitioner continued to extend credit to Hynds & Co. throughout 1921.
    During 1919, 1920, and 1921, the price of cotton fluctuated widely between 20 cents and 40 cents a pound. At one time in 1921 it was down to 10 cents.
   OPINION.

Love:

We are satisfied from the evidence that the amount of $5,195.62 was ascertained and known by petitioner on April 30, 1919, to be worthless. On that date Hynds & Co. owed petitioner an amount; in excess of $12,000. The agreement set forth in the findings of fact shows that a large part of this indebtedness was unsecured. The officers of the petitioner were well acquainted with the financial ability of the members of Hynds & Co. and their knowledge convinced them that at least a part of the unsecured debts could not be collected. They then made an agreement under which petitioner received security, put up by a third party, for $5,500 of debts previously unsecured, canceled unsecured obligations totaling $5,195.62, and agreed to extend further credit. In some circumstances, the extension of further credit would be evidence that the debtor had financial worth, and hence it would be an evidentiary fact to be considered in deciding the worthlessness of a prior debt. We think, however, the evidence shows that on April 29, 1919, the debtors had no financial worth and that the agreement then made was an attempt by petitioner to retrieve as much as possible of the indebtedness then existing. The agreement provided that the loans to be made thereafter were to be secured. The amount canceled was a loss and not a bad debt. It was not a debt after being canceled. As a loss it was deductible for the year 1919.

The evidence relating to the amount charged off in 1920 is less convincing. The board of directors of the petitioner passed a resolution expressing their feeling that the account with Hynds & Co. contained a loss and the officers were instructed to charge off $6,200. This action alone, however, can not be taken as establishing the worthlessness of the debts making up this amount, however desirable the charge-off might have been for the purpose of petitioner’s financial statements. Bank directors often find it conducive to the reputation of the bank to charge off debts which are past due. The worthlessness should be shown by more convincing evidence than the order by the board of directors to charge it off. It is not shown how much cotton petitioner held as security or what its value was at the date of the charge-off. If the value of the cotton exceeded the amounts due on the particular bills of acceptance with which it was pledged, we apprehend the petitioner could have reached the surplus to satisfy the unsecured debts. The unsecured debts had resulted from deficits in the amounts realized from time to time from the sale of the security on particular bills of acceptance. The petitioner voluntarily permitted the surplus on other bills of acceptance to be withdrawn by the debtors while it still held their unsecured and overdue obligations. The petitioner’s persistence in this practice indicates to our minds a faith in the financial prospects of the debtors. The petitioner did not suddenly discover on December 31, 1920, that such faith was misplaced, for it continued to extend credit to the debtors throughout the following year in the same manner that it had been doing in 1920. The evidence does not sustain petitioner’s contention that these debts were worthless on December 31, 1920.

The record does not disclose how much of the deficiency is for 1919 and how much for 1920. It is therefore necessary that the judgment for 1920 be entered under Rule 50.

Judgment will be entered for petitioner as to the year 1919, and for the respondent as to the year 1920, on 15 days’ notice, under Bule 50.


author: Phillips :

text:
    T. B. Hord Grain Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 2398, 7291.
    Promulgated March 16, 1927.
    1. Petitioner made its income-tax return for the fiscal year ended Juna 30, 1918. The Commissioner determined that it was entitled to have its tax computed under the special assessment section of the Act. The Commissioner computed the tax by comparison with the tax paid by representative concerns in 1917 and 1918. Petitioner claimed that for the six months of the fiscal year falling in 1917 tlie tax should be computed at the statutory rates and for the six months in 1918 should be compuied under the special assessment section. Held, where the tax is to be computed under the special assessment section, the tax for the entire year must be so computed.
    2. A return for a fiscal year ending in 1918 is governed wholly by the provisions of the Revenue Act of 1918 and not by the Revenue Acts of 1916 and 1917. Such a return is for one period of twelve months and not for two periods of six months each.
    3. Sections 335 and 328 of the Revenue Act of 1918 construed.

      Ben Jenhins, Esq., for the petitioner.

      F. O. Graves, Esq., for the respondent.
    The petitioner appeals from determinations by the Commissioner of deficiencies in income and profits taxes of $2,686.19 and $4,003.89, for the fiscal years ended June 30, 1918, and June 30, 1920, respectively. The petitioner purports to include the fiscal year ending June 30, 1919, in its appeal but it does not appear that the Commissioner has determined any deficiency for such year.
    FINDINGS OF FACT.
    The taxpayer is a Nebraska corporation with its principal office at Central City. The Commissioner determined that the taxpayer was entitled to have its profits tax liability for the fiscal year ended June 30,1918, computed upon the basis of a comparison with a group of representative concerns pursuant to the special assessment provisions of the statute. He computed the profits tax liability for such fiscal year as follows:
    Profits tax upon income of the fiscal year (12 months) at 1917 rates_$67,741.43
    Profits tax upon income of the fiscal year (12 months) at 1918 rates_ 95,498.35

      As six months of the fiscal year falls within the calendar year 1917 and six months within the calendar year 1918, the Commissioner computed the total profits tax liability to be one-half of the sum of the above amounts.
    The profits tax liability for the fiscal year ended June 30, 1918, computed on a twelve-month basis at the 1917 rates, in accordance with section 210 of the Revenue Act of 1917, is $67,741.43. The profits tax liability for this same fiscal year, computed under section 201 of the Revenue Act of 1917, is $56,302.71. The profits tax liability for the fiscal year ended June 30, 1918, computed under section 328 of the Revenue Act of 1918 on a twelve-month basis is $95,498.35. The profits tax liability for this same fiscal year, computed under section 301 of the Revenue Act of 1918, is $119,535.14.
   OPINION.

Phillips :

Believing that abnormalities existed with respect to its income and invested capital for the fiscal year ended June 30, 1918, the taxpayer sought and was granted the privilege of a computation of its tax liability under the so-called special assessment sections of the Revenue Act of 1918, sections 327 and 328. It alleges, however, that the Commissioner erred in his interpretation of the statute in computing the tax.

The fiscal year of the taxpayer ended June 30, 1918, and its return was filed for that period. The statute provides in section 335(a) for the computation of the tax in such circumstances as follows:

That if a corporation (other than a personal service corporation) makes return for a fiscal year beginning in 1917 and ending in 1918, the tax for the first taxable year under this title shall be the sum of: (1) the same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1917 which the portion of such period falling within the calendar year 1917 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title at the rates specified in subdivision (a) of section 301 which the portion of such period falling within the calendar year 1918 is of the entire period.

It will be noted that while this section provides for the computation of the 1917 portion of the tax under Title II of the Revenue Act of 1917, the 1918 portion of the tax is to be computed, not under Title III of the 1918 Act, but only under section 301. If this section of the statute be read alone, there is no authority for computing the tax under section 328, where the return is for a fiscal year ended in 1918.

The Commissioner determined, however, that the taxpayer was entitled to the benefits of the special assessment section (328). In the application of that section, instead of determining the tax upon the basis of the average tax of representative corporations with a fiscal year ended June 30, 1918 (if such there be), the Commissioner arrived at the tax by determining the average tax of representative corporations for 1917 and for 1918 and computing the tax upon the basis thereof. The tax so computed was $81,619.89, some $6,300 less than that computed under section 335.

The taxpayer claims, however, that for each six-month period the tax must be computed at the rates prescribed by statute and compared with that paid by representative concerns. The lower of the two computations must then be taken in each of the six-month periods. In this manner taxpayer seeks to have its tax for the first six months computed at the statutory rates and for the second six months under the special assessment section. We see no authority in the law to support such a contention.

The Revenue Act of 1918 repealed the Revenue Act of 1917, so far as any tax liability for a fiscal year ending after December 31, 1917, was concerned. The taxpayer is not making a return for two periods, one under the 1917 Act, the other under the 1918 Act. His return is made wholly under the 1918 Act. Looking to that Act we find provisions for computation of the tax under sections 301, 328, and 335. Section 301 has no application to the full year because of the provisions of section 335. The tax under 335 is greater than that under 328. Since the other requirements are admitted to exist, the taxpayer becomes entitled to a computation under the latter section. This is the computation which the Commissioner has allowed.

Petitioner invokes the rule that tax laws are not to be extended beyond their provisions and that doubt is to be resolved so as to avoid imposition of a tax not expressly authorized. It is not our understanding that this means that in order to benefit one taxpayer the law must be so construed that it will unjustly tax many others. With this thought in mind, an examination of the provisions of the statutes will disclose that the Revenue Act of 1917 provides only one ground for special assessment while the Revenue Act of 1918 provides several. The latter act extends these relief provisions to many taxpayers not entitled thereto under the previous act. If the taxpayer’s contention is sound, those taxpayers who have a fiscal year ending in 1918, and who have grounds for special assessment under the 1918 Act but not under the 1917 Act, can have special assessment only as to the portion of their taxable year falling in the calendar year 1918. For the portion falling in 1917 they may not have special assessment. There is nothing in the law which can support such a conclusion; rather, the law was intended to extend the benefits of special assessment to taxpayers not previously entitled thereto. This special assessment is to be for the taxable year, not for a part only. If the statute needs any construction, we believe this is the one which must be adopted as a liberal interpretation of a relief provision. But in our opinion a careful reading will indicate that the statute is sufficiently explicit to require no interpretation of its intendment.

The fundamental error in the position of the taxpayer, as we see it, is that it overlooks the repeal of the 19IT Act and the fact that the tax must be determined entirely under the provisions of the 1918 Act, even though it may be measured by the rates which prevailed in 1917. The return is for one year under the 1918 Act and not for two fiscal periods under two acts. If the tax is to be computed under the special assessment section' of the Act, it must be so computed for the entire year. To arrive at the proper amount, it may be necessary, as a basis, to use the tax paid by representative concerns in 1917, but this does not mean that the tax is levied under the 1917 Act or that the provi si ons of that act have any application. The determination of the Commissioner in respect to the computation of the tax is approved.

A further error in the computation of the deficiency for each of the years involved was alleged but no proof offered.

For the fiscal year 1920 the sole remaining allegation of error is that in computing invested capital too great a deduction was taken for the income and profits taxes for the fiscal year 1918. Having-approved the Commissioner’s determination with respect to 1918, it follows that there is no error in this respect.

Decision for the Commissioner will he entered.