author: Korner, Chairman:

text:
    Appeal of NEW YORK TRUST CO. et al., Executors of the Estate of JOHN BALLOT, Deceased.
    Docket No. 6382.
    Submitted November 16, 1925.
    Decided February 4, 1926.
    1. In order to confer on tbe Board jurisdiction of tbe subject matter of an appeal, tbe appeal must lie from tbe determination of a deficiency in tax, as defined in section 273 of tbe Revenue Act of 1924.
    2. Where taxpayer filed a return and showed thereon an amount as tbe tax, and such amount is not increased by tbe Commissioner, there is not a deficiency, as defined by section 273 of tbe Revenue Act of 1924, notwithstanding a portion of such amount remains unpaid and a claim for its abatement has been rejected by tbe Commissioner.

      Leo B. Kagan, Esq., for the taxpayer.

      M. N. Fisher and J. T. Dorteh, Fsgs., for the Commissioner.
    Before Korner.
    This is an appeal from an alleged final determination by the Commissioner of a deficiency in respect of income tax for the taxable period from April 2, 1922, to December 31, 1922, arising under the Revenue Act of 1921. The exact amount in controversy appears to be $40,134.03. The Commissioner moved to dismiss the petition for lack of jurisdiction in the Board, on the ground that the appeal is not from a determination of a deficiency, as defined by the Revenue Act of 1924.
    FINDINGS OF FACT.
    1. John Ballot died at New York City, on April 1, 1922, leaving a will dated March 25, 1922, wherein he nominated and appointed the New York Trust Co. and Elsie Josina Ballot as executors and trustees under such will.
    2. The New York Trust Co., as one of the executors of the estate of the said decedent, made and filed income-tax returns for the taxable period from January 1, 1922, to April 1, 1922, and for the taxable period from April 1,1922, to December 31, 1922, as follows:
    (a) Return (Form 1040) of the net income of the decedent for the period from January 1, 1922, to April 1, 1922, the date of the death of the decedent.
    (b) Fiduciary return (Form 1041) on behalf of the estate of John Ballot, the decedent, showing the net income received by the executors for the period beginning April 1, 1922, and ending December 31, 1922.

      (c) Individual income-tax return (Form 1040) for the estate of the decedent for the taxable period from April 2, 1922, to December 31, 1922.
    3. An item of $108,150, which forms the subject of the controversy in the present appeal, was included by the executors, as current taxable income of the estate of the decedent, in the fiduciary return (Form 1041) and in the individual return (Form 1040) on behalf of the estate for the period from April 2, 1922, to December 31, 1922. The tax computed on this item and so reported in the returns just referred to was in the amount of $40,134.03.
    4. The taxpayer paid a portion of this tax as thus reported. This payment appears to have been in the amount of $29,824.62. The remainder of the tax just referred to was unpaid when, on or about December 14, 1923, the executors filed a claim for abatement (in the amount of $10,033.52) against the unpaid remainder of the tax shown on the return, and at the same time filed a claim for refund of the amount of the tax theretofore paid on such return. This refund claim was for $29,824.62. At or about the same time these claims were filed, the executors filed so-called “ amended returns ” (on Forms 1040 and 1041), and in both such amended returns the item of $108,150 was eliminated as taxable income and a revised tax liability was therein set up by reason of such elimination.
    5. On February 11, 1925, the Commissioner notified the executors that an audit of the income-tax return for the period January 1 to April 1, 198®, disclosed a deficiency in tax and that this deficiency was due to the fact that the item of income of $108,750. had accrued to decedent prior to his death and should have been reported in the return for the prior period, January 1 to April 1, 1922, instead of for the period April 2 to December 31, 1922, as it had in fact been reported by the executors.
    6. On February 18, 1925, the executors filed with the Commissioner a protest against the proposed deficiency for the period from January 1 to April 1, 1922, called the Commissioner’s attention to the claims for abatement and refund filed by them relative to the period from April 2 to December 31, 1922, and requested an explanation as to why no reference was made to these claims in the Commissioner’s letter of February 11, 1925.
    7. On March 14, 1925, the Commissioner, by letter, acknowledged the executors’ letter of February 18, 1925, just referred to, and notified taxpayer that the Commissioner’s letter of February 11, 1925, was sustained, i. e., that the item of income of $108,750 was properly allocable to the first period of the year 1922, instead of to the latter period in that year, that the claims for abatement and refund for the latter period, in respect of such income, had been allowed, and that- proper adjustments would thereafter be made by way of certificates of overassessment and credit. The executors were requested to indicate whether or not they asquiesced in the determinations and adjustments indicated, and were further advised that, if they did not so acquiesce, a hearing would be granted in the matter upon request of the executors.
    8. On March 25, 1925, the executors indicated their dissent and protest to the determinations and adjustments just outlined above, and on April 24, 1925, a conference was held in Washington, between the Commissioner and the executors. Thereafter, on July 7, 1925, the Commissioner forwarded to the taxpayer two letters. One of these letters advised the taxpayer that the item of income of $108,750 had finally been determined to be income for the second period of the year 1922, i. e., the period from April 2 to December 31, 1922. This determination was in accordance with the manner in which it had been reported by the executors in the income-tax returns filed by them and first referred to hereinabove. That letter further advised the executors that their claims for abatement and refund covering this second period of the year 1922 would, accordingly, be rejected and that such rejection would appear on the next approved schedule.
    9. In his other letter of July 7, 1925, the Commissioner advised the executors that he had reversed his ruling contained in his letter of February 11, 1925, and had determined that the item of income of $108,750 properly represented taxable income to the estate for the period April 2 to December 31, 1922. The letter added: “You may, therefore, disregard office letter dated February 11, 1925.” The closing paragraph of this letter of July 7, 1925, contained the following:
    Prom the information now on hand it appears that the correct taxes are $4,137.10 and $40,134-03 for the periods January 1, to April 2, 1922, and April 2, to December 31, 1982, respectively, as stated on the original returns. (Italics ours.)
    10. The executors treated the two letters of July 7, 1925, as statutory deficiency letters, under the provisions of the Revenue Act of 1924, and the Commissioner’s determinations therein as the final determination of a deficiency, as defined in that statute, and brought this appeal.
   OPINION.

Korner, Chairman:

The issue here raised is as to the jurisdiction of this Board to hear and determine the merits of the controversy between the parties. The executors have filed a petition appealing from an alleged final determination by the Commissioner of a deficiency in income tax for the period from April 1922, to December 31, 1932, due from the estate of the testator. The Commissioner has filed a motion to dismiss the appeal, for the reason that there has not been a determination of a deficiency in tax, as provided by the Revenue Act of 1924, as a predicate for the right of the executors to appeal here.

Stripped to their essential elements, the facts are: The executors made a return of income and tax thereon. Thereafter, they discovered what they insist was error in that they included an item as income which was not income. They filed claims for refund and abatement, supported by an amended return showing the income, and the tax thei'eon, in a lesser amount. After certain conferences were held, the Commissioner rejected the claims and determined the tax to be as reported by the executors in the returns originally filed by them.

Whether or not jurisdiction obtains turns on whether there was a determination of a deficiency by the Commissioner. Much of the executors’ argument was directed to the issue of determination as defined in Appeal of Terminal Wine Co., 1 B. T. A. 697, and as applied in Garneau's Appeal, 1 B. T. A. 75, and similar cases. We pass for the moment the question of determination, because á mere determination by the Commissioner is, of itself, not sufficient to support jurisdiction. The determination from which a taxpayer may appeal is one which fixes the amount of deficiency in tax. It is the final decision by which the controversy as to the deficiency is settled and terminated, and by which a final conclusion is reached relative thereto and the extent and measure of the deficiency defined. Appeal of Terminal Wine Co., supra, p. 701. If, therefore, the determination made by the Commissioner is not the determination of a deficiency as defined by the statute, then jurisdiction does not obtain.

The Revenue Act of 1924 expressly defines the term “ deficiency,” as follows:

Sec. 273. As used in this title the term “ deficiency ” means—
(1) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed, or collected without assessment, shall first be decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax.

The facts disclose that a return was filed by the executors for the period in question here. The amount shown as the tax on that return has not been increased by any previous assessment (or collection made without assessment) as a deficiency, nor has the amount shown as the tax upon that return been decreased by any amounts abated, credited, refunded, or otherwise repaid in respect of such tax. This being so, the amount shown as the tax on the return filed by the executors has been in nowise changed by any determination of the Commissioner. The-letter of the Commissioner from which this appeal is taken does not find a deficiency. It advised the taxpayer that the original return as filed was correct. It did not advise the executors that the Commissioner proposed to assess a tax greater than that shown by them on their return.

The Commissioner is now proposing to collect the exact amount shown as the tax upon the return as filed by the executors; hence, it can not be said there is a proposal to collect a deficiency in tax, as defined in section 273, above quoted.

But the executors call attention to the fact that they filed a claim for refund (of a portion of the tax paid on the return filed by them) and a claim for abatement (of the portion of the tax remaining unpaid on the return filed by them), and that they also filed an amended return, wherein is shown the tax to be as now computed and contended for by them. They argue from this the following propositions: (1) The return of the executors should be read as a whole, including the amended return and the claims for refund and abatement filed by them; (2) a deficiency may exist in the case of an original erroneous return filed by a taxpayer; (3) the allowance by the Commissioner on March 14, 1925, of the claims of abatement and refund, on the basis of the amended return as filed by the executors, brings this case within the literal provisions of section 273 (1) of the Revenue Act of 1924.

We will discuss the propositions in their order. The Board has shown, in the Appeal of National Refining Co., 1 B. T. A. 236, that no provision is made for the filing of an amended return in either of the Revenue Acts of 1916, 1917, 1918, or 1921. In that appeal the Commissioner contended that, by the filing of an amended return, the taxpayer had extended the period of statutory limitation on the assessment and collection of a tax, in so far as such amended return disclosed taxes in addition to those disclosed by the original return. This contention was based on the theory that, to the extent of such additional taxes so disclosed, the amended return amounted to a limited waiver of the taxpayer to have such additional taxes determined, assessed, and collected within the statutory period running from the date of the filing of such amended return. It is unnecessary to repeat here the reasoning which led to the Board’s conclusion in the opinion in that appeal. Suffice it to say that, in conformity with the decision in that appeal, the Board here holds that an amended return can not be considered such a return as may be taken by this Board as a predicate for jurisdiction of the instant appeal. Ibid. p. 241. To the same effect see Appeal of Mabel Elevator Co., 2 B. T. A. 517.

In support of their second proposition (that a deficiency may exist in the case of an original erroneous return filed by a taxpayer), the executors cite Jackman's Appeal, 2 B. T. A. 515, and Appeal of Continental Accounting & Audit Co., 2 B. T. A. 761. Both are clearly to be distinguished from the instant appeal. In the Continental Audit Appeal the taxpayer filed a document in the form of a return, but did not purport to show as the tax the amounts set out in that document. At the time of filing the document, referred to as the return, it annexed to it a statement or protest to the effect that no tax was due from it and that the return was not a true return of its tax liability. The Board held that the statement annexed to the return constituted a part of the return and should not be ignored, and that, when read as a whole, the entire return showed no amount as the tax or showed the tax to be zero.

In the instant appeal these elements are lacking. The executors filed their return and showed thereon certain amounts as the tax. Thereafter, they sought to revise this amount and filed an amended return, together with abatement and refund claims, for that purpose. We do not believe the situations just compared are parallel, nor that the Continental Audit Appeal is authority for the executors’ second proposition.

In Jackman's Appeal, supra, the Commissioner determined a deficiency to exist. That deficiency was in accordance with the meaning defined in section 273 of the Revenue Act of 1924. As a defense to the deficiency proposed, the taxpayer set up an overpayment of taxes on its original return. It was not the alleged error in the original return which was taken by the Board as the predicate for its jurisdiction, but it was the statutory deficiency determined by the Commissioner. In line with its decision in the Appeal of Hickory Spinning Co., 1 B. T. A. 409, the Board held that it might consider the overpayment claimed by the taxpayer as a proper defense to an asserted deficiency. Jackman's Appeal does not offer a parallel to the instant appeal and does not support the executors’ contention here.

The third proposition argued by the executors depends for its premise on a favorable resolution of their first two propositions and must stand or fall with them. Since we conclude that the premise is not well founded, the executors’ conclusions to the third proposition must fail.

We are of the opinion that the letters of July 7, 1925, received by the executors from the Commissioner, do not constitute a determination by that officer of a deficiency in tax, as defined by the statute. In view of our position on this point,' it is unnecessary to discuss whether the Commissioner’s letters constitute a final determination of some other issue between the parties.

The Board is without jurisdiction and the appeal must be dismissed for that reason.


source: Caselaw Access Project

author: Keener, Chairman:

license: Public Domain

text:
    Appeal of JOSEPH P. McMULLEN, Executor under the last will of CHARLES B. LAFFERTY, Deceased.
    Docket No. 8101.
    Submitted December 3, 1925.
    Decided February 4, 1926.
    Appellant’s testator acquired a vested interest in tbe estate of bis grandfather and beld such interest at tbe time of bis death; tbe value of that interest was properly included in tbe gross estate of appellant’s testator for tbe purposes of the Federal estate tax under tbe Revenue Act of 1921.

      Thomas Boylan, Esq., for the taxpayer.

      Frank T. Horner, Esq., for the Commissioner.
    Before Korner.
    This appeal is from the determination of a deficiency in the amount of $3,391.99, in respect of an estate tax, of which deficiency the taxpayer was notified by the Commissioner in a letter dated September 10, 1925. The question presented is whether or not Charles B. Lafferty had. at the time of his death, a vested interest in the estate of his grandfather, Charles Lafferty.
    FINDINGS OF FACT.
    1. The petitioner is the duly appointed, qualified, and acting executor of the last will and testament of Charles B. Lafferty, who died December 4,1923. At the time of his death, Charles B. Lafferty was a resident of the Commonwealth of Pennsylvania.
    2. Charles Lafferty, grandfather of the decedent Charles B. Laf-ferty, a resident of Pennsylvania, died at Philadelphia on October 10,1885, leaving a last will and testament, which was duly admitted to probate and record. That part of his last will and testament pertinent here is as follows:
    Fifth: — On tbe death, or marriage, of my Wife, all tbe rest, residue and remainder of my Estate, Real and Personal, which I may own at my decease, excepting my household goods and furniture, a pair of horses and two carriages, which my Daughter, Rose Ella, is to have, I give, devise and bequeath unto my Executors, their Heirs and Assigns, to have and to hold the same during the life of my children hereinafter named, and the life of the survivor of them, and thenceforth until my youngest grand-child living at the decease of my surviving Child shall arrive at lawful age, or would be of such age if afterwards dying, in trust, to collect the rents, interest, income and dividends thereof, and after deducting taxes and all proper charges, to pay the following annuities to wit: — •
    Unto my Daughter, Anna Lafferty, Two Thousand Dollars;
    Unto my Son, Patrick Lafferty, Two Thousand Dollars;
    Unto my Son, Francis Lafferty, Two Thousand Dollars;
    Unto my Son, Charles Lafferty, Two Thousand Dollars;
    Unto my Daughter, Mary McGinnis, Two Thousand Dollars; and
    Unto my Daughter, Rose Ella Lafferty, Two Thousand Dollars;
    in equal quarterly sums from the date of my decease; and should the net rents and income not suffice to pay said annuities in full, they shall abate pro rate; and should such rents and income in any year enable my Executors to pay more than said annuities they shall be increased accordingly, such payment of the excess to be at times convenient to my Executors in theii management of my said Estate.
    And as I intend said annuities for the personal comfort and maintenance of those for whom it shall be held in trust, it is my will that said annuitants shall have no power to assign or anticipate, the same; nor shall the said annuities be liable to the debts, contracts, or engagements, of said annuitants or any of them, or of any husband any of them may have, nor to any execution or attachment, against them or any of them; and should it be necessary to avert any such consequence it shall be the duty of the Executors and Trustees themselves to apply the annuities directly to»the support and comfort of the annuitants or annuitant; any excess always being taken as a part of said annuities.
    Sixth: — Should any one or more of my said Children die, and leave no issue living at his or her decease, the share, or shares, of such shall be held and applied as part of my original trust residuary Estate, for the increase of the annuities of my surviving Children and the issue of any of them then deceased, subject to the restrictions, limitations and exemption from contracts and debts and liabilities for executions and attachments, and with and subject to the same powers; and so to the same limitation over shall take effect, subject as aforesaid, if any of my children shall leave issue living at his, or her death, and such issue shall all die during theib muíoisity leaving no issue then living.
    Seventh: — And the said Executors shall hold the said residuary Estate, and all the accretions thereto by the death of any of the beneficiaries as aforesaid, as to any of my Children who shall leave issue living at his or her death, subject to his or her disposal, and notwithstanding coverture, by any last will or writing in the nature thereof, of such share of the residuary Estate, original of accrued, of which, under the limitations of this Will, he or she was at his or her death, entitled to the rents and income, to and among his or her child, children or issue, in such shares, proportions and estates, absolutely or upon trusts, as he or she may so will or appoint, but subject to the trusts of this Will during the time limited as aforesaid for the same to endure, and the limitations over to the surviving children or the issue of deceased children; that is, during such trust the annuities shall be subject to the disposal of my children as aforesaid, and the shares of the residuary Estate to take effect in possession at the expiration of the trust.
    Eighth: — But should any of my children die leaving issue him or her surviving, and make no appointment or disposal of my Estate as authorized aforesaid, then my Executors shall hold the share he or she might have so willed or appointed, in trust for the child, children or issue of such decedent, or decedents, living at his, hee op theik death, and the issue of any deceased child or descendant, in equal shares, so however that such issue or descendants shall take equally, only the proportion that their deceased parent would have taken ip then living ; but subject to the trust hereinbefore created, until the limitation thereof shall expire, and subject to said restrictions and conditions, as to liability to contracts, and debts, and exemptions from executions and attachments as aforesaid and to the limitation over as above said in case of all the issue of any of my children dying in theie minobity without issue.
    3. Francis Lafferty, son of Charles Lafferty, also a resident of Pennsylvania, died May 14, 1896, leaving a last will and testament, which was duly admitted to probate and record. His will provided, after making certain bequests not material here, .that “ all the rest, residue and remainder of my property, I give, devise, and bequeath to my three children, share and share alike, absolutely.” The three children of Francis Lafferty were, Frank J. Lafferty, Eose E. Carr, and Charles B. Lafferty, the decedent herein. Frank Lafferty died, intestate and without issue, some time prior to the year 1901, and Eose E. Carr died, testate, on December 26, 1901, leaving two children, Edward L. Carr and Sarah Eeilly. Sarah Eeilly died testate some time prior to the year 1923, leaving one child, Eose Marie Eeilly.
    4. The taxpayer filed an estate-tax return for the estate of Charles B. Lafferty, deceased, and also filed an affidavit setting forth that, in addition to the items enumerated in the return, the taxpayer believed that Charles B. Lafferty had, at the time of his death, a vested one-eighth interest in the estate of his grandfather, Charles Lafferty, which estate was still being held in trust; that other parties of interest denied this claim; that the rights of the said Charles B. Lafferty and of the estate of Charles Lafferty would not be determined unti] the termination of the trust provided by the will of Charles Laff-erty, and that the trust would not terminate until the death of Charles H. Lafferty, the only surviving son of Charles Lafferty.
    5. Upon audit of the return in question, the Commissioner included, as a part of the gross estate of the decedent Charles B. Lafferty, subject to the Federal estate tax, “decedent’s one-eighth undivided absolute vested interest in the estate of Charles Lafferty, deceased,” determined to be of the value of $229,278.98. The value of the property thus included in the gross estate of taxpayer’s testator is not in dispute and is found to be $229,278.98.

      DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Keener, Chairman:

The only question presented for determination by this appeal is whether or not Charles B. Lafferty had, at the time of his death, a vested interest in the estate of his grandfather, Charles Lafferty. It is conceded by the parties to this appeal that, if he had such an interest, it is properly to be included as a part of the gross estate subject to the Federal estate tax. It is also agreed by the taxpayer and the Commissioner that the interest, if any, was a one-eighth interest. The parties are in accord as to the value thereof.

By item 7 of his will, Charles Lafferty gave to each of his children, among other .things, the right of disposal by will or writing in the nature thereof “ of such share in the residuary estate * * * of which * * * he or she was at the time of his or her death, entitled to the rents or income, to and among his or her children or issue, * * * absolutely or upon trust,” and it is contended by the Commissioner that this right of disposal or appointment was exercised by Francis Lafferty in his last will and testament, thereby vesting in his children, of whom Charles B. Lafferty was one, an interest in the estate of Charles Lafferty.

From a reading of item 7 of the will of Charles Lafferty, we are of opinion that the right of disposal or appointment given his children was not limited to the income to which each child was entitled, but extended to an interest in the estate itself, that is, “ such share of the residuary estate of which ” the child “ was at the time of his or her death entitled to the rents or income,” the shares of the residuary estates so disposed of not to take effect in possession, however, until the termination of the trust provided by the will of Charles Lafferty. Therefore, if Francis Lafferty validly exercised the power of appointment or disposal given to him, his children, upon his death, became the owners of a vested interest in the estate of their grandfather and entitled to the income thereof during the continuance of the original trust and to the possession of such interest upon the termination of the trust. If the power of disposal or appointment was not validly exercised by Francis Lafferty, then it will be necessary for us to examine and ascertain the legal effect of item 8 of the will of Charles Lafferty, which provided for the disposition of his estate in the event his children failed to exercise the power of appointment or disposal provided by item 7 of his will.

While the identical right or interest of Charles B. Lafferty to or in the estate of his grandfather has not been expressly passed upon and determined by the highest court of Pennsylvania, there have been numerous suits involving the estate of Charles Lafferty and the rights and interests of his children and issue therein, which rights and interests are, in effect, identical with those of Charles B. Lafferty. We think that the results of those cases disclose the attitude of the Supreme Court of Pennsylvania toward the question presented here. Bose E. Carr was a sister of Charles B. Lafferty, and her interest in the estate of her grandfather was exactly the same interest as that of Charles B. Lafferty. Her interest also arose under the will of Francis Lafferty. Bose E. Carr , died in 1901, leaving a last will and testament. The question arose as to whether her interest in the income of the estate of Charles Lafferty passed to her executors under her will or to her children under the will of her grandfather, it being contended that Francis Lafferty, her father, had not exercised the power of disposal or appointment which was given to him under the will of .Charles Lafferty. The auditing judge of the Orphans’ Court of Philadelphia County, Pa., (Judge Ashman) held that the income involved should be paid to the guardian of Bose E. Carr’s minor children. Exceptions to the adjudication were taken by the executor of the estate of Bose E. Carr and were sustained by the Orphans’ Court. The opinion of that court, by Judge Penrose, relating to the issue here involved, is set out in the statement of the case of In re Lafferty's Estate, 209 Pa. 44; 57 Atl. 1112. The Orphans’ Court, in sustaining the exceptions, said:

We think that the share of income belonging to the estate of Rose E. Carr should be awarded to her executor, and not to the guardian of her children. Under the will of her father, exercising the power of appointment given to him by the will of his father — the present testator — she acquired the absolute ownership of the share appointed to her, though possession of the legal estate cannot be had until the termination of the trust created by the grandfather’s will. But in the meantime her share of the income must go as she had directed by her will, viz, to her executors-, who are charged with the payment of the annuities there provided for; the residue only, after such payment, passing to the guardian of her children. The error has probably arisen from reading the will of the original testator as if the limitations attached to the powers of appointment given by him to his children extended to the estates given by them to their children, although the power is to appoint “ to and among his or her children or issue in such shares, proportions, and estates, absolutely or upon trusts, as he or she may so will or appoint.” The donees of the power could not exercise it in favor of person® not belonging to the designated class of objects, but their appointees acquired all rights of ownership, unlimited in power of disposition.

The decree of the Orphans’ Court was affirmed, and that portion of the opinion quoted above was approved by the Supreme Court of Pennsylvania. In re Lafferty’s Estate, supra. The decision of the Supreme Court was per curiam, but the syllabus in the report of the case is enlightening. It is as follows:

1. Testator left his property in trust, which trust was not to terminate until his youngest grandchild living at the death of his last surviving child arrived at full age. The will gave to each of the testator’s children power to appoint to his or her children absolute estates or on trust, as he or she might determine. A son left his estate to his three children absolutely. One of them died, directing certain annuities to be paid out of her estate, and gave the residue to her children. At the time of her death the trust under her grandfather’s will had not terminated. Held, that the income thereof was payable not to the guardian of the granddaughter’s children, but to her executor.

After a lapse of six years, the same question was again presented to the Supreme Court of Pennsylvania, on appeal from a decree of the Orphans’ Court of Philadelphia, concerning the disposition of the income to which Rose E. Carr was entitled under the will of her grandfather, Charles Lafferty. The income in question was again awarded to the executors of the estate of Rose E. Carr. Appeal of Philadelphia Trust, Safe Deposit & Ins. Co., In re Lafferty’s Estate, 230 Pa. 496; 79 Atl. 711. The court, at page 712, said:

In Lafferty’s Estate, 209 Pa. 44, 57 Atl. 1112, this court affirmed the decree of the orphans’ court, by which the share of the annuity to which, under the will of her grandfather, Rose E. Carr would have been entitled, if living, was awarded to her executor. That decision necessarily involved the determination of the question whether or not the will of Francis Lafferty was a valid exercise of the power of appointment given to him in the will of his father. After the lapse of some six years, precisely the same question, in the same estates, under the same wills, is again presented by the decree from which the present appeal is taken.
The decision in Lafferty’s Estate, 209 Pa. 44, 57 Atl. 1112, became the law of the case, and stands as such. It must be accepted as a final adjudication of the question involved.

From the foregoing decisions of the Supreme Court of Pennsylvania, it is apparent that, under the laws of the Commonwealth of Pennsylvania, Rose E. Carr had a vested interest in the estate of her grandfather, Charles Lafferty, and that the court regards the validity of the exercise of the power of appointment by Francis Lafferty as a closed question. It is obvious that the interest of Charles B. Lafferty in the estate of his grandfather was an interest exactly similar to that of Rose E. Carr. If the power of appointment exercised by Francis Lafferty was valid as to Rose E. Carr and vested in her an interest in the estate of Charles Lafferty, it was valid as to Charles B. Lafferty, and likewise vested in him an equal interest in the same estate. It is difficult to conceive that the Supreme Court of Pennsylvania would hold otherwise. We are, therefore, of the opinion that Charles B. Lafferty, at the time of his death, had a vested interest in the estate of his grandfather, Charles Lafferty.

Several decisions of the lower courts of Pennsylvania have been cited to us, in which it was held that, where a child of Charles Lafferty died without having exercised the power of appointment or disposal provided by item 7 of the will of Charles Lafferty, his issue then living took a vested interest in the estate of Charles Lafferty under paragraph 8 of his will. It is not necessary, however, to discuss these decisions here, since we are of the opinion that the interest in the estate of Charles Lafferty involved herein came to Charles B. Lafferty under paragraph 7 of his grandfather’s will and not under paragraph 8 thereof.


author: Ajrundell:

text:
    Appeals of CLARENCE E. POPE and MRS. CLARENCE E. POPE.
    Docket Nos. 2151, 2500.
    Submitted October 7, 1925.
    Decided February 4, 1926.
    Value of buildings determined for purpose of fixing a reasonable allowance for depreciation.

      H. F. Driemeyer, Esq., for the taxpayers.

      Robert A. Littleton, Esq., for the Commissioner.
    Before SteRnhagen, Lansdon, and Aeundell.
    The appeals of the taxpayers named above were heard together. The appeal of Clarence E. Pope is from the determination by the Commissioner of additional income taxes for the calendar years 1919, 1920, and 1921, in the amount of $713.41. The appeal of Mrs. Clarence E. Pope is from the determination by the Commissioner of additional income taxes for the year 1921 in the amount of $66.25. The question involved is the amount of depreciation allowable on certain buildings located in East St. Louis, Ill. The rates of depreciation were not in dispute, but only the value of the buildings. At the hearing the taxpayers called several witnesses to testify as to the value of the buildings, apart from the land, as of the date of the acquisition of the property by Clarence E. Pope in 1914.
    FINDINGS OF FACT.
    During the year 1914, Clarence E. Pope acquired by purchase certain improved property, more particularly described as Lots 51 and 52, Block 3 of Second St. Claire Subdivision, City of East St. Louis, St. Claire County, Ill. For this property he paid the sum of $80,000. The property is located on the corner of Broadway and Collinsville Avenue, which was, in 1914, and now is, one of the principal business corners of the City of East St. Louis. At the time of purchase, all of the property was improved with frame buildings and one brick building. The brick building fronted on Collinsville Avenue and was 25 feet wide. The buildings contained five stores, which were rented at the time of purchase for $875 per month. The rent received for these stores has never been less than that amount. The buildings were constructed more than 30 years ago. In 1910, the store in the corner building was substantially reconstructed by tearing out and removing the roof and the side walls, and a new store was constructed, which was 25 by 56 feet in dimensions. Repairs were made from time to time upon the buildings. The fair value of the buildings, at the time of their purchase by Clarence E. Pope in 1914, was $30,000, the value of the brick building being $5,000 and the value of the frame buildings being $25,000. On October 13,1920, the taxpayer, Clarence E. Pope, deeded to his wife a three-fourths interest in the property.
    DECISION.
    The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Rule 50. The rates of depreciation heretofore used by the Commissioner should be applied.
   OPINION.

Ajrundell:

The taxpayer, Clarence E. Pope, claimed in his re* turns for the years in question that a valuation of $5,000 should be placed on the brick building located on the property, for the purpose of depreciation, and this valuation was conceded to be correct and was used by the Commissioner in making his determination. The evidence clearly establishes the fair market' value of the buildings, both brick and frame, to be $30,000 at the time of the purchase of the property in 1914. No evidence was introduced as to the value of the property at the date of acquisition by Mrs. Pope of a three-fourths interest therein. It therefore becomes necessary to approve the Commissioner’s determination in the appeal of Mrs. Clarence E. Pope.


text:
    Appeal of ISAAC C. JENKS.
    Docket No. 3392.
    Submitted November 11, 1925.
    Decided February 4, 1926.

      Isaac G. Jenks pro se.

      George G. Witter, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This is an appeal from the determination of a deficiency of $70 in income tax for 1921.

      FINDINGS OF FACT.
    Since 1891, taxpayer has been a commissioned officer in the United States Army. In 1920 he was commissioned a colonel in the Regular Army and, during 1921, was engaged in the active performance of his duties as such officer. During the period from January 1, 1921, to March 3, 1921, he received as salary from the United States, for active services in the military forces' of the United States, a sum in excess of $1,191.05.
   DECISION.

The determination of the Commissioner is approved. Appeal of O. W. Rethorst, 1 B. T. A. 448; Appeal of Godwin Ordway, 2 B. T. A. 428.


text:
    Appeal of NORFOLK & WESTERN RAILWAY CO.
    Docket No. 3601.
    Submitted October 12, 1925.
    Decided February 4, 1926.

      John E. McOlure, Esq., for the taxpayer.
    Before Marquette, Green, and Love.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $40,251.99. The appeal relates only to so much of- the alleged deficiency as results from the Commissioner’s inclusion in the taxpayer’s imome of the 2 per cent portion of the income tax borne by the Director General of Railroads in accordance with the provisions of the Federal Control Act.
    FINDINGS OF FACT.
    1. The taxpayer is a Virginia corporation, with its principal office at Roanoke.
    2. During the year 1919, the taxpayer’s properties were upder the control of and were operated by the Director General of Railroads, as provided for by the Federal Control Act.
    3. In accordance with the provisions of the Act, and as a result of his control of the taxpayer’s properties, the Director General bore the Federal income tax in the amount of $325,461.40.
    4. The Commissioner has included the amount of tax so borne by the Director General in the taxpayer’s income for the year 1919.
   DECISION.

The deficiency should be computed by excluding from the taxpayer’s income the amount of the tax borne by the Director General of Railroads. Appeal of New York, Ontario & Western Ry. Co., 1 B. T. A. 1172. Final determination will be settled on 7 days’ notice, under Rule 50.


author: MoRRis:

text:
    Appeal of WILLIAM SCHOLES & SONS, INC.
    Docket No. 3196.
    Submitted August 22, 1925.
    Decided February 4, 1926.
    Under tbe circumstances of this appeal, capital expenditures made by a tenant at will ou leased premises are not deductible as ordinary and necessary expenses, but must be prorated oyer tbd useful life of tbe property covered thereby.

      Joy 0. Haills, L. Doma Laitham and Rióhcmd 8. Doyle, Esqs., and Thomas- W. Evefs, G. P. A., for the taxpayer.

      Blount Ralls, Esq., for the Commissioner.
    Before Marquette and MoRris.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1918 to 1920, inclusive, in the amount of $10,048.11. Taxes for 1920 only are in controversy, as all claim of error with respect to those for 1918 and 1919 was waived at the hearing.
    The question is whether the taxpayer, as lessee under a tenancy at will, is entitled to deduct the cost of improvements to the real estate, made in 1920, from its income of that year.
    FINDINGS OF FACT.
    The taxpayer is a Pennsylvania corporation, with principal office located in Philadelphia. It was organized in 1906, when it succeeded to the business previously done by two Scholes brothers as partners. The business was that of manufacturing woolen and worsted yarns. At the time of the transfer to the corporation, the individuals retained their title to the real estate as tenants in common and leased the same to the corporation. The lease was not in writing and no written* lease was thereafter executed. The original arrangement between the owners of the real estate and the taxpayer was that the taxpayer should pay a rental of 5 per cent of the cost of the land and building in 1885, and there was an understanding that the taxpayer should bear the expense of all taxes, insurance, and repairs. No definite period for the occupancy ivas ever agreed upon. In 1920 it was agreed that the taxpayer should pay rental at the rate of 7 per cent, and rental of $6,444 was paid in that year, instead of the $4,296 paid in 1918 and 1919.
    • Upon the incorporation of the business in 1906, John Scholes and Joseph Scholes owned 51 and 49 per cent of the stock and a two-thirds and one-third interest in the real estate, respectively. John Scholes died in 1910, leaving his stock and interest in the realty to his three children. Joseph Scholes died in 1920, his interest in the real estate and one-half of his stock passing to his son Joseph Scholes, who held the balance of the stock in trust for some nieces and nephews. During 1920 the four individuals owning the real estate owned stock in the corporation. The taxpayer has occupied the leased premises from the date of incorporation to the present time.
    The fair rental for the property in 1920 was about $20,000.
    The taxpayer in 1920 made the following expenditures, which it deducted in its return for that year:
    New boiler_.-$6, 709.56
    Building of second floor office and alterations- 1,783.06
    Installing wiring, lights, phones, and switches in office throughout
    plant_ 947.99
    Alterations to building_ 1, 045. 73
    Total. 10, 486. 34
    The Commissioner disallowed the same and determined a deficiency for 1920.
    DECISION.
    The determination of the deficiencies for 1918 and 1919 are approved. The deficiency for the year 1920 should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Kule 50.

   OPINION.

MoRRis:

It was argued on behalf of the taxpayer that, whether the improvements were ordinary and-necessary expenses or capital expenditures, the cost thereof was deductible in 1920. From the designation of the items, and in the absence of evidence to the contrary, we conclude that they were capital expenditures, the cost of which is not deductible in the return for 1920, unless the nature of the lease under which the property was held justifies such deduction. Appeal of Simmons & Hammond Manufacturing Co., 1 B. T. A. 803. Counsel has submitted ample authority to convince us that the taxpayer was a tenant at will and that the tenancy was subject to termination by the lessors at any time. On the record in this appeal, it does not follow, however, that these capital expenditures are deductible as ordinary and necessary expenses.

The ownership of the stock of the corporation and of the real estate was vested in the Scholes family, all the members thereof having an interest in the real estate being stockholders of. the corporation. The business of the corporation has been conducted on the leased property continuously from 1906 to the present time. We have already considered a similar contention based on a similar state of facts in the Appeal of Sentinel Publishing Co., 2 B. T. A. 1211, except that, in that appeal, the tenancy was from year to year. The decision in that appeal is controlling here. Accordingly, the cost of the improvements made by the taxpayer in 1920 should be prorated over their useful life. See also Appeal of Walle & Co., Ltd., 1 B. T. A. 1064; Appeal of Thatcher Medicine Co., 3 B. T. A. 154.


text:
    Appeal of L. & M. HOLDING CO.
    Docket No. 4979.
    Submitted October 28, 1925.
    Decided February 8, 1926.

      W. H. Lauder, Esq., for the Commissioner.
    Before Marquette, MorRis, Green, and Love.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1921 in the amount of $1,355.42. The taxpayer alleges error in the Commissioner’s inclusion in 1921 income of an amount which it claims was income in 1922.
    FINDINGS OE FACT.
    1. The taxpayer is a New York corporation, with its principal place of business in New York City.
    2. The taxpayer owns an apartment house located at 782 West End Avenue. It employs the Real Estate Management Co., of New York City, which, in consideration of a commission, collects the rents, attends to the leasing of apartments, hires and pays employees, and supervises the operation of the building.
    3. Once a month the Management Co. makes an accounting to the taxpayer. This is usually done toward the end of each month, when all rent checks have been collected. The Management Co. then remits to the taxpayer the net proceeds of the monthly rents.
    4. The check in settlement of the account for the month of December, 1921, in the amount of $5,191.24, was issued by the Management Co. and received by the taxpayer on Monday, January 3, 1922.
    5. Taxpayer’s books were kept on the cash receipts and disbursements basis.
   DECISION.

The determination of the Commissioner is approved. Appeal of Julia A. Strauss, 2 B. T. A. 598.


author: MaRquette:

text:
    Appeal of CAMDEN & BURLINGTON COUNTY RAILWAY CO.
    Docket No. 4991.
    Submitted October 26, 1925.
    Decided February 8, 1926.
    The amount of income tax borne by the Director General of Railroads under the Federal Control Act did not constitute income to the taxpayer. Following Appeal of New York, Ontario & Western Ry. Oo., 1 B. T. A. 1172.

      Percy S. Orewe, Esq., for the Commissioner.
    Before Marquette, MoRRis, Green, and Love.
    This appeal results from the Commissioner’s inclusion in the taxpayer’s income, for the years 1918, 1919, and 1920, of the amounts of the 2 per cent tax paid by the Director General of Railroads as a result of his control of the taxpayer’s properties under the provisions of the Federal Control Act.
    The deficiency letter, which was dated April 29, 1925, advised the taxpayer of the determination of deficiencies for the years 1919 to 1921, inclusive, in the aggregate amount of '$6,678.73, and an over-assessment for the year 1918 in the amount of $75.56, resulting in an alleged net deficiency of $6,603.17.
    The only portion of the alleged deficiency in controversy is stated by the petition as follows: 1918, $67.46; 1919, $56.21; and 1920, $9.36.
    FINDINGS OF FACT.
    1. The taxpayer is a New Jersey corporation, with its principal place of business at Broad Street Station, Philadelphia, Pa. Its properties are leased to the Pennsylvania Railroad Co., of the same address.
    2. The taxpayer is a common carrier subject to the provisions of the Interstate Commerce Act. During the years 1918 and 1919 and the months of January and February, 1920, its properties were under the control of and were operated by the Director General of Railroads, as provided for by the Federal Control Act.
    3. In accordance with the provisions of the Federal Control Act, and as a result of his control of the taxpayer’s properties, the Director General bore a 2 per cent portion of the Federal income tax in amounts as follows:
    Fear. Amount of tax.
    1918_$562.17
    1919_ 562.17
    1920_ 93.90 '
    4.The Commissioner has included the amount of the tax so paid by the Director General in the taxpayer’s income for each of the respective years.

      5. The effect of including the amount of the tax borne by the Director General for the year 1918 in the taxpayer’s income was to increase the taxpayer’s alleged income-tax liability for that year by the amount of $67.46. Of this amount $37.48 was paid by the taxpayer as the result of an assessment during March, 1924, and the remaining $29.98 was made the subject of an abatement claim.
    The deficiency letter advised the taxpayer that the abatement claim, which was in the amount of $105.54, was being, allowed in the amount of $75.56.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice,' under Eule 50.
   OPINION.

MaRquette:

The Commissioner’s proposition of law denying the Board’s jurisdiction as to the year 1918 is regarded, for purposes of this appeal, as a plea in bar, and it is hereby overruled on authority of the Board’s decisions in Appeal of E. J. Barry, 1 B. T. A. 156; Appeal of Hickory Spinning Co., 1 B. T. A. 409; and Appeal of Fort Orange Paper Co., 1 B. T. A. 1230.

The amount of the 2 per cent tax paid by the Director General of Bailroads in accordance with the provisions of the Federal Control Act is not income to the taxpayer. Appeal of New York, Ontario & Western Ry. Co., 1 B. T. A. 1172. The Commissioner was therefore in error in including such payments in the gross income of this taxpayer.

However, with respect to the year 1918, it appears from the petition that a portion of the tax assessed on such inclusion has been paid, and a claim for abatement filed as to the balance thereof, to wit, $29.88. As to so much of the tax for 1918 as has been paid, the Board has no jurisdiction, and can only direct that the amount of the tax for that year unpaid be disallowed. It follows that the claim for abatement, in the amount of $105.54 for 1918, should have been allowed in full, and that so much of the proposed deficiencies for 1919 and 1920 as results from the inclusion of the amount of the tax paid by the Director General must be disallowed.


author: MaRQuette:

text:
    Appeal of SHAMOKIN VALLEY & POTTSVILLE RAILROAD CO.
    Docket No. 4944.
    Submitted October 26, 1926.
    Decided February 8, 1926.
    Tbe amount of income tax borne by the Director General of Railroads under the Federal Control Act did not constitute income to the taxpayer. Following Appeal of New York, Ontario & Western By. Go., 1 B. T. A. 1172.

      Percy 8. Crewe, Esq., for the Commissioner.
    Before Marquette, Morris, Green, and Love.
    This appeal is the result of the Commissioner’s inclusion in the taxpayer’s income, for the years 1918, 1919, and 1920, of the amounts of the 2 per cent tax paid by the Director General of Railroads as a result of his control of the taxpayer’s properties under the provisions of the Federal Control Act.
    The deficiency letter, dated April 27, 1925, advised the taxpayer of the determination of deficiencies for the years 1919 to 1921, inclusive, in the aggregate amount of $16,790.96, and an overassessment for the year 1918 in the amount of $134.97, resulting in a net deficiency of $16,655.99.
    The portion of the alleged deficiency in controversy is stated by the-petition as follows: 1918, $120.50; 1919, $101.42; 1920, $16.74.
    FINDINGS OF FACT.
    1. The taxpayer is a Pennsylvania corporation, with its principal place of business at Broad Street Station, Philadelphia, Pa. Its properties are leased to the Pennsylvania Railroad Co.
    2. The taxpayer is a common carrier subject to the provisions of the Interstate Commerce Act. During the years 1918 and 1919, and the months of January and February, 1920, its properties were under the control of and were operated by the Director General of Railroads, as provided for by the Federal Control Act.
    3. In accordance with the provisions of the Federal Control Act, and as a result of his' control of the taxpayer’s properties, the Director General bore a 2 per cent portion of the Federal income tax in the amounts as follows:
    Year. Amount of tax.
    1918_$1,004.24
    1919_._ 1, 004. 23
    1920_ 167. 37
    4.The Commissioner has included the amount of the tax so paid by the Director General in the taxpayer’s income for each of the respective years.

      5. The effect of including the amount of the tax borne by the Director General for the year 1918 in the taxpayer’s income was to increase the taxpayer’s alleged income-tax liability for that year by the amount of $120.50. Of this amount $66.94 was paid by the taxpayer as the result of an assessment during 1924, and the remaining $53.56 was made the subject of an abatement claim.
    The deficiency letter advised the taxpayer that the abatement claim, which was in the amount of $188.53, was being allowed in the amount of $134.97.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

MaRQuette:

The Commissioner’s motion to dismiss for want of jurisdiction as to the year 1918 must be overruled, on authority of the Board’s decisions in Appeal of E. J. Barry, 1 B. T. A. 156; Appeal of Hickory Spinning Co., 1 B. T. A. 409, and Appeal of Fort Orange Paper Co., 1 B. T. A. 1230.

The amount of the 2 per cent tax paid by the Director General of Railroads in accordance with the provisions of the Federal Control Act is not income to the taxpayer. Appeal of New York, Ontario & Western Ry. Co., 1 B. T. A. 1172. Therefore, the Commissioner was in error in including such payments in this taxpayer’s gross income.

The situation here presented in regard to the year 1918 is exactly . similar to that in the Appeal of Camden & Burlington County Ry. Co., 3 B. T. A. 602. As to so much of the tax resulting from the said inclusion as has been paid, to wit, $66.94, the Board has no jurisdiction. The balance, amounting to $53.56, was the subject of an abatement claim and, as it remains unpaid, it is disallowed. It follows that the claim for abatement for 1918, so far as it resulted from the said inclusion, should have been allowed in full, and that so much of the proposed deficiencies for 1919 and 1920 as result from the inclusion of the amount of the tax paid- by the Director General must also be disallowed.


text:
    Appeal of NEW YORK, BROOKLYN & MANHATTAN BEACH RAILWAY CO.
    Docket No. 4945.
    Submitted October 26, 1925.
    Decided February 8, 1926.

      Percy S. Crewe, Esq., for the Commissioner.
    Before Marquette, Moréis, GreeN, and Love.
    This is an appeal from the determination of a deficiency in income taxes for the years 1918,1919, and 1920, in the amount of $11,589.94. The only controverted point is the correctness of the Commissioner’s inclusion in income of the 2 per cent portion of the income tax paid by the Director General of Railroads in accordance with the provisions of the Federal Control Act.
    The petition states the amount of the alleged deficiency in controversy as follows: 1918, $78.46; 1919, $64.20; 1920, $10.14.
    FINDINGS OF FACT.
    1. The taxpayer is a New York corporation, with its principal place of business at Broad Street Station, Philadelphia, Pa. Its properties are leased to the Pennsylvania Railroad Co.
    2. During the years involved, the taxpayer was a common carrier subject to the provisions of the Interstate Commerce Act, and its properties were under the control of and were operated by the Director General of Railroads, as provided for by the Federal Control Act.
    3. In accordance with the provisions of the Federal Control Act and as a result of his control of the taxpayer’s properties, the Director General bore a 2 per cent portion of the Federal income tax in the amounts as follows:
    Veai'. Amount oi tax.
    1918-$612.16
    1919- 642.03
    1920- 101.38
    4.The Commissioner has included the amount of the tax so paid by the Director General in the taxpayer’s income for each of the respective years.
   DECISION.

The deficiency should be computed by excluding from the taxpayer’s income the amount of the tax borne by the Director General .of Railroads. Appeal of New York, Ontario & Western Ry. Co., 1 B. T. A. 1172. Final determination will be settled' on 7 days’ notice, under Rule 50.


author: Smith:

text:
    Appeal of PARKER SHEET METAL WORKS, INC.
    Docket No. 1998.
    Submitted September 24, 1925.
    Decided February 8, 1926.
    Tbe taxpayer and Combined Industries, Inc., were not affiliated from March 25, 1918, to December 31, 1919, inclusive.

      Max Bolmih, O. P. A., for the taxpayer.

      P. S. Gxewe, Esq., for the Commissioner.
    Before Littleton, Smith, and Trtjssell.
    This appeal is from determinations of deficiencies for the years 1918 and 1919, as follows:
    1918_$7, 472. 64
    1919_ 8, 087. 96
    In the pleadings the Commissioner raised a question as to the jurisdiction of the Board with reference to the deficiency in tax for the year 1918, which was waived at the hearing. The sole question in issue is whether the taxpayer was affiliated with' Combined Industries, Inc., for the years 1918 and 1919.
    FINDINGS OF FACT,
    The taxpayer is a New York corporation, with its principal office in the City of New York. It was incorporated in 1906. During the years 1918 and 1919 it had 250 shares of stock outstanding. From April 6, 1918 (when the first stock of Combined. Industries, Inc., was issued and when it acquired shares of common stock of the taxpayer) , to December 31, 1919, the only stockholders of the taxpayer were Combined Industries, Inc., which owned 167½ shares (67 per cent), and three individuals, who owned 82½ shares (33 per cent), two of whom were prominent holders of the common voting stock of Combined Industries, Inc., and one of whom, owning 35 shares (14 per cent of the total), was an owner of approximately 4 per cent of the preferred nonvoting stock of Combined Industries, Inc.
    Combined Industries, Inc., was incorporated on March 25, 1918, under the laws of the State of New York, and from April 6, 1918, to December 31, 1919, inclusive, had both common and preferred stock outstanding. Neither the taxpayer nor Combined Industries, Inc., derived as much as 50 per cent of its gross income from Government contracts between April 6, 1917, and November 11, 1918, both dates inclusive. The names of the stockholders of both corporations at different dates were as follows:

      Stockholdings of Parker Sheet Metal Works common stock — par value $100 each.

    No changes in stockholdings occurred between any of the dates above mentioned.

      Stockholdings of Combined Industries, Inc., common stock — par value $5 each.

    1 This company, The General Platers Supply Co., was held by the Commissioner to be affiliated with Combined Industries, Inc., for 1918 and 1919.
    No changes in stockholdings occurred between any of the dates above mentioned.

      Stockholdings of Combined Industries, Inc., preferred stock — par value $5 each.

    1 The 3,000 shares issued to Geo. W. Levett on Aug. 15, 1918, were in liquidation of amounts owed to him by the corporation. Entry for same was not made on the general books until May, 1919.
    No changes in stockholdings occurred between any of the dates above mentioned.
    At the time Combined Industries, Inc., became interested in the taxpayer, the latter was insolvent and its affairs were being managed by a creditors’ committee. It had practically no assets. Combined Industries, Inc., furnished it with all its working capital. The same directors were directors of both companies and the same officers were officers in both companies. Combined Industries, Inc., was interested in two or three other corporations and, in the case of the taxpayer, kept its name because it was known to the trade— the sheet metal business. It got orders for it and even guaranteed its accounts in many instances. It furnished rent and paid salaries to the telephone operators. It loaned the taxpayer money up to $40,000 at one time. For such services it received a management fee, which was taken in lieu of salaries for officers.
    The minority stockholder of the taxpayer was M. K. Sessler, who owned no shares of the voting stock of Combined Industries, Inc. He never interfered with the management of the taxpayer, although cognizant at all times of what was taking place.
    DECISION.
    The determination of the Commissioner is approved,
   OPINION.

Smith:

From the date of its organization in 1918, to December 31, 1919, inclusive, Combined Industries, Inc., owned 67 per cent of the shares of stock of Parker Sheet Metal Works,' Inc. Hymen Rosenberg and Albert Blumlein, stockholders of Combined Industries, Inc., owned an additional 19 per cent of the stock of Parker Sheet Metal Works, Inc. The balance of the stock of the last-named corporation was owned by M. K. Sessler, who owned none of the voting stock of Combined Industries, Inc., and only a little more than 4 per cent of the nonvoting preferred stock of that company.

The question presented by this appeal is whether Combined Industries, Inc., and Parker Sheet Metal Works, Inc., were affiliated from the date of the organization of the former corporation in 1918, to December 31, 1919. The taxpayer claims that the two corporations were affiliated under the provisions of section 240 (b) ■of the Revenue Act of 1918, by reason of the fact that Combined Industries, Inc., owned 67 per cent of the voting stock of Parker Sheet Metal Works, Inc., and that the balance of the voting stock of the last-named corporation was owned or controlled by closely affiliated interests.

The evidence as to whether the shares of the voting stock of Parker Sheet Metal Works, Inc., not owned by Combined Industries, Inc., were owned or controlled by closely affiliated interests, is not convincing. The only witness to appear for the taxpayer at the hearing was the president of the two corporations. He testified that both corporations were operated as a single unit, as set forth in the findings of fact. He further testified, in part, as follows:

Q. Who determined the amount of the management fee?
A. That was agreed — we practically determined it.
Q. By “we” you mean the Combined Industries?
A. The president and treasurer of the Parker were also officers of the Combined. We would sit down and say “ Well, we think so much shall be-a fair management fee,” and it was agreed upon.
Q. Were there any stockholders of the Parker that were neither officers-nor directors of that company, or of the Combined?
A. Yes, there was one.
Q. What was his name?
A. Mr. Sessler.
Q. Did he know what was going on in the way of exercise of manag-einent the Combined had over the Parker?
A. Yes.
Q. Did he ever raise objection to the management or the amount of compensation you charged for the management and financing?
A. During that period?
Q. During that period?
A. No.
Q. Was he also a stockholder of the Combined Industries?
A. Very small.
Q. You mean on preferred stock?
A. He had some preferred stock.
Q. Who was the principal stockholder of the Combined Industries?
A. I was.
Q. Did you have enough stock to control the policies of that company?
A. I did.
Q. To elect a Board of Directors if you wished to?
A. Yes.
Q. Could the Combined Industries control the Board of Directors and policies of the Parker Sheet Metal Works on account of stock control?
A. Absolutely.
Q. How much stock control did it have?
A. 67⅛ per cent at that time. We later acquired more.
Q. After these years in question?
A. Yes, but during those years we had 67½ per cent.

Nowhere in the record is it stated definitely that Rosenberg and Blumlein were officers or directors of Combined Industries, Inc. Sessler, who owned 14 per cent of the stock of the taxpayer, was neither an officer nor a director of that corporation. It will be noted that the president of both corporations testified that there was one stockholder' of the taxpayer who was neither an officer nor a director of Combined Industries, Inc. Possibly, it might be inferred that the other two individual stockholders of the taxpayer, namely, Rosenberg and Blumlein, were officers or directors of Combined Industries, Inc., but we can not make a finding of fact by inference. Neither can we infer that Rosenberg and Blumlein, who owned only a small percentage of the stock of Combined Industries, Inc., were closely affiliated interests. We therefore have a situation in which the proof is simply that Combined Industries, Inc,, owned 67 per cent of the stock of the taxpayer from the date of the organization of Combined Industries, Inc., in 1918, to the end of the •calendar year 1919. Is the ownership and control of 67 per cent of the stock of another corporation sufficient to make the corporations affiliated where the two corporations are operated as a single business unit?

We have held in the Appeals of Wadhams & Co., 2 B. T. A. 569, and Ullman Manufacturing Co., 2 B. T. A. 1294, that an ownership by the principal corporation of 80 per cent of the stock of the subsidiary ivas not enough to warrant consolidation, even though in each appeal the evidence showed that both corporations were operated as a single business unit. For more cogent reasons we must hold that the taxpayer and Combined Industries, Inc., were not affiliated from the date of the organization of the latter in 1918 to the end of the calendar year .1919.


author: Smith

text:
    Appeal of CARRIE W. MEINHARD.
    Docket No. 2100.
    Submitted November 3, 1925.
    Decided February 8, 1926.
    Value of leasehold at January 8, 1917, determined.

      Henry F. Wolff, Esq., for the taxpayer.

      Ellis W. Marming, Esq., for the Commissioner.
    Before Smith, LittletoN, and Trussell.
    This is an appeal from the determination of a deficiency in income tax for the years 1918, 1919, and 1920, in the aggregate amount of $72,625.75, resulting from the refusal of the Commissioner to allow a deduction for exhaustion of a certain leasehold in New York City, a half interest in which the taxpayer acquired by gift on January 8,1917, and owned during the taxable years involved. The taxpayer and the Commissioner have entered into a stipulation of the principal facts involved in the appeal, other than those of valuation.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in New York City. Under date of April 10, 1902, a lease was entered into between Louisa M. Gerry, of Newport, R. I., and Walter J. Salmon, of New York City, covering the building known as the Bristol Building, located at the northwest corner of 42nd Street and Fifth Avenue, New York City, fronting 74½ feet on Fifth Avenue and 125 feet on 42nd Street, for a term beginning May 1, 1902, and ending April 30, 1922.
    Thereafter, and in the year 1902, Walter J. Salmon duly assigned, transferred, and set over to Morton H. Meinhard a one-half interest in the said leasehold and the net profits thereof, and said Morton H. Meinhard thereby acquired a one-half interest therein. On January 8, 1917, Morton H. Meinhard duly assigned, transferred, and set-over all of his right, title, and interest in and to said leasehold and the net profits thereof to the taxpayer (his wife) by way of absolute gift;-
    Since said transfer, the taxpayer has received all net profits thereof to which she thereby became entitled, and has reported the same each year in a separate Federal income-tax return, to wit, $35,278.40 for 1918, $54,522.65 for 1919, and $68,796.38 for 1920' In each of her returns for those years she has taken, as a deduction for depreciation, exhaustion, and amortization of her right, title, and interest in said lease and leasehold estate, the sum of $37,309.04, which deductions have been disallowed by the Commissioner.
    At the time of the taxpayer’s acquisition of her half interest in the leasehold, the property was being operated as a general office building. There were eight floors in the building, consisting of the ground floor, the mezzanine floor, and six upper floors. The ground floor was rented for stores, the mezzanine floor for clothing shops, merchandise show rooms, etc., and the six upper floors as offices.
    The lease on the Bristol Building, in which the taxpayer owned a one-half interest during the years 1918, 1919, and 1920, was held in the name of Walter J. Salmon. The consideration for the lease was an annual rental of $55,000, which amount was net to the lessor, taxes, insurance, repairs, and all charges of operating the building being borne by the lessee. The rentals collected, the operating costs, including taxes, insurance,_ etc., and the profits to the lessee for the full period of the lease, were as follows:

    1 Loss.
    On January 1,1917, the 13 leases on stores on the ground floor were for the full term of the lease of the Bristol Building, or to April 30, 1922. The leases on some of the stores provided for a slightly increased rental during the last years of the term, the total .rentals from the stores for the last year of the term being approximately $10,000 more than for the year 1917. Most of the offices were rented from year to year.
    The fair cash value of the entire leasehold on January 8, 1917, was $270,000, and the taxpayer’s one-half interest therein was $135,000.

      DECISION.
    The deficiency should be determined in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Buie 50.
   OPINION.

Smith

: It has been stipulated between the Commissioner and the taxpayer that on January 8,1917, Morton H. Meinhard duly assigned, transferred and set over all of his right, title and interest in and to the leasehold on the Bristol Building, in which he had owned a one-half interest from 1902, to the taxpayer (his wife) by way of absolute gift. The taxpayer is entitled to deduct from gross income in her tax returns, for the years 1918, 1919, and 1920, a reasonable amount for the exhaustion of her interest in the leasehold. Appeal of Grosvenor Atterbury, 1 B. T. A. 169. The only question before this Board is the value of her interest on January 8, 1917.

The evidence before this Board on the question of value consists of the testimony of three witnesses produced by the taxpayer. The testimony of two of them consists of a survey of income and expenditures made in connection with operations mider the lease. The third witness testified as an expert in real estate appraisals. The taxpayer’s principal reliance is upon an estimate of value made by the expert appraiser, based upon the excess of a purported fair rental value of the land and building over the actual rental reserved in the lease. The appraiser testified that a fair return on real estate in New York City on January 1, 1917, was 5 per cent on land value and 7 per cent on building value. He further testified that, in appraising the value of the leasehold in 1925 as of January 1, 1917, he found the fair market value of the land upon which the Bristol Building was located to have been $2,982,666 and the fair market value of the building, $217,710. From these figures he found the fair net rental value of the entire property to be $161,572.70 a year. The rental reserved in the lease was $55,000 a year, resulting in an excess of fair rental value in the opinion of the appraiser in the amount of $106,572.70. He stated that this is an annual benefit as of January 1, 1917, which the lessee received through having a low rent. The lease in question had an unexpired term from January 8,1917, of approximately five years and four months. The appraiser then determined the purchase value of the leasehold in question, by the use of the Inwood tables for the purchase of the unexpired terms of leaseholds, as follows:

Annual benefit $106,572.70, multiplied by 4.21236 for the period, multiplied by 1.02721 for what is termed as the constant monthly factor.

The result arrived at is approximately $480,000. This formula is calculated at an interest rate of 6 per cent, compounded.

The appraiser then proceeds to estimate the value in question by two other methods, which he states, however, are merely by way of corroboration. The first is based upon the average rental which could be obtained for the property for the period between 1917 and 1922, computed as follows: (1) Rental floor area on ground floor for stores, 7,500 square feet, $20 a square foot, or a total of $150,000 a year gross rental for floor space; and (2) rentable space, upper portion of building, 42,000 square feet, $2.75 a square foot, or $115,500 gross. The total gross rent is $265,000, from which is deducted an estimated total expense of operation of $167,075, leaving a net profit of $98,425. The expense estimated consists of 40 per cent of gross rent for repairs, insurance, water rates, taxes, etc., 5 per cent for probable vacancies in upper or office portion, and the rent reserved on the basic lease of $55,000 a year. Applying the Inwood tables at 6 per cent for the unexpired term of approximately five and one-third years, produces a figure of about $443,882.72.

The second corroborative method used by the appraiser is based upon actual returns from the building as shown by the books. By the use of the Inwood .tables at an interest rate of 6 per cent, the following result is worked out:

It should be noted, with respect to the basic method used by the appraiser in determining value, that it is only theoretical. He has chosen to use unknown factors rather than known factors. In his second corroborative method he has taken earnings of the leasehold for a period subsequent to January 8, 1917, rather than known earnings in years prior thereto. The evidence does show that the stores were rented on January 1, 1917, to April 30, 1922, the sub-lessees agreeing to pay a slightly higher rental during the last two or three years of the term. It could be foreseen on January 1, 1917, that the lessee would receive gross rentals for the stores for the year 1921 of approximately $10,000 more than was received for the year 1917. It could not, however, be foreseen what the expenses of operation would be during the last years of the lease term, or whether there would be any more profit in the operation of the building for the year 1921 than there was for the year 1917. The office space was rented principally from year to year. No evidence has been introduced in this appeal that there was any decided upward trend in rents for office space in the vicinity of the Bristol Building during the years 1915, 1916, and 1917. According to the testimony of the expert appraiser, the great demand for office space came after 1918. We are not convinced from the testimony of the witnesses that the great profits from the leasehold for the years 1919, 1920, and 1921 could have been foreseen in 1917. Those increased profits were attributable principally to the higher prices for which the offices rented during those years, and the increase in office rentals in the vicinity of the Bristol Building did not take place until about 1920. The average net income from the lease-. hold for the three-year period February 1, 1916, to January 31, 1919, was $68,021.13. That amount is somewhat in excess of the net income from the leasehold for the fiscal year ended January 31, 1917. It is our opinion that a prospective purchaser of a leasehold of the character of that in which the taxpayer had a one-half interest could not fairly have computed on January 8, 1917, an annual net profit from the leasehold of more than $68,021.13, and that such profit would be subject to business hazards. Taking into consideration the increasing prices of labor and material and increasing interest rates, we think that the cash value of the leasehold at January 8, 1917, was not in excess of $270,000. The taxpayer, who had a one-half interest in the leasehold for the years 1918, 1919, and 1920, is entitled to deduct from gross income in her tax return for each of the years $25,425.64 for exhaustion of her interest in the leasehold.


text:
    Appeals of MEYER LIBERMAN.
    Docket Nos. 2212, 2213.
    Submitted April 28, 1925.
    Decided February 9, 1926.
    Certain amounts received by tbe taxpayer in the years 1919 and 1920 from the Rotary Shirt Co., held, to be the income of the taxpayer and his brother in equal proportions.

      B. L. Nutt, Esq., for the taxpayer.

      Willis D. Nance, Esq., for the Commissioner.
    Before IviNS, Marquette, and Moeris.
    These appeals are from deficiencies in income taxes of $9,128.01 and $4,296.34 for the years 1919 and 1920, respectively, arising from the inclusion by the Commissioner in the taxpayer’s gross income of $40,500 and $20,000 for the years 1919 and 1920, respectively, received by him from the Rotary Shirt Co., Inc.
    FINDINGS OF FACT.
    The taxpayer is an individual, with his principal office in New York City. During the taxable years in question, he and his brother, Isaac Liberman, operated a ladies’ wearing apparel store as a partnership. He was also president and his brother was secretary of the Rotary Shirt Co., Inc., which was organized on June 16, 1917, approximately 45 per cent of the stock thereof being owned by them. For several years the taxpayer and his brother had an oral understanding that they would contribute and share equally in. business ventures, whether entered into jointly or separately. Some time prior to 1919, the taxpayer entered into a contract with the Rotary Shirt Co., Inc., whereby he agreed to advance money and to render aid, counsel, and assistance to it, for which he was to receive 6 per cent on the money advanced and 20 per cent of the net profits of the business. His salary as president was $20,000 a year. Loans were made to the company by “Liberman Brothers.” Its merchandise accounts, especially the large ones, were guaranteed, and its negotiable paper was endorsed, by “ Liberman Brothers.”
    On April 16, 1919, the following agreement was entered into by the taxpayer and his brother:
    This agreement made the 16th day of April, one thousand nine hundred and nineteen, by and between Meyer Liberman of the Borough of Manhattan, City of New York, party of the first part, and Isaac Liberman, of the Borough of Manhattan, City and State of New York, party of the second part,
    IVITNESSETH
    Whereas, the party of the first part has made a certain agreement with the Rotary Shirt Co., Inc., of Borough of Manhattan, City and State of New York, whereby loans and advances of money not exceeding twenty-five thousand ($25,000.06) Dollars during any fiscal year shall be made by said party of the first part to said corporation, at the rate of 6% per annum, and an additional compensation of 20% of the net profits of such corporation for his readiness and willingness to make such loan as required and requested by the corporation, and for his financial services, aid, counsel, assistance, information and advice, and
    Whereas, such moneys, advances and loans are made from the funds of the copartnership of Liberman Bros., composed of the said parties of the first part and second part, and
    Whereas, the said loans, advances and moneys are made from the funds of the party of the first part and second part through the agency of the party of the first part, and
    Whereas, said party of the first part consults with said party of the second part in matters pertaining to the financial organization and service rendered to said Rotary Shirt Co., Inc.,
    Now therefore, in consideration of the premises and of the sum of One Dollar in hand paid to the party of the first part by the parties of the second part, the receipt whereof is hereby acknowledged, the said party of the first part does hereby agree and bind himself, his executors, administrators and assigns, as follows, to wit:
    That all interest, benefits, increases and income derived from the placing of loans above mentioned with the Rotary Shirt Co., Inc., be made for the account of the parties of the first and second parts equally, and to be placed to the credit of the parties of the first and second parts equally.
    That all moneys received by said party of the first part upon such loans and advances be held for the account and credit of the parties of the first and second parts equally.
    As compensation for financing services, the taxpayer received from the Rotary Shirt Co., Inc., by checks made payable to him, $40,500 and $20,000, during the years 1919 and 1920, respectively, one-half of which he gave his brother. Each reported one-half of these amounts for the years in question.
    The partnership of Liberman Brothers filed partnership returns for the years 1919 and 1920, but did not include in those returns the amounts of $40,500 and $20,000.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days7 notice, under Rule 50.
   OPINION.

MoRRis:

The taxpayer contends that the $40,500 and $20,000 received by him from the Rotary Shirt Co., Inc., during the years 1919 and 1920, respectively, were income of Liberman Brothers, and that, therefore, he and Isaac Liberman are entitled to report one-half thereof in their individual returns. The contract with the Rotary Shirt Co., Inc., was entered into by the taxpayer, the income therefrom was paid directly to him, and was not reported in the partnership return, but we are satisfied that these facts are not sufficient to sustain the Commissioner’s position. The taxpayer was actively engaged in the conduct of the affairs of that corporation; he was in constant contact with it, so it is not unusual that the negotiations and payment for the financing services should have been handled through him. Other facts indicate that the contract was for the benefit of Liberman Brothers. The taxpayer and his brother had for several years conducted business on a “ fifty-fifty ” basis, each contributing half of the required capital and sharing equally in the profits. They had an oral understanding that each would participate in any business venture undertaken by the other, which was reduced to writing in respect to their dealings with the Botary Shirt Co., Inc. Loans were made to that company from the funds of “Liberman Brothers,” its merchandise accounts, especially the larger ones, were guaranteed, and its negotiable paper was endorsed by “ Liberman Brothers,” and there was testimony to the effect that the trade recognized them as the guarantors of its accounts. For these services the taxpayer received the amounts in question, one-half of which he turned over to his brother, who reported it in his returns for the respective years.

In the light of all the evidence we are of the opinion that the taxpayer should include in his return only one-half of the compensation received for these special services; namely, $20,250 for 1919 and $10,000 for 1920. See Appeal of M. I. Stewart & Co., 2 B. T. A. 737.


text:
    Appeal of De MARTINI-ZEREGA AGENCY CO.
    Docket No. 4562.
    Submitted October 15, 1925.
    Decided February 9, 1926.

      T. Francis Campbell, G. P. A., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Marquette and Love.
    This is an appeal from the determination of deficiencies in income- and profits taxes for the calendar years 1919, 1920, and 1921, in the-total amount of. $4,367.62.
    The question is whether the taxpayer is entitled to classification as a personal service corporation.
    FINDINGS OF FACT.
    The taxpayer is a Missouri corporation, with principal office in St. Louis.
    It was organized in September, 1915, with capital stock of $5,000, consisting of 100 shares of $50 par value each, which were owned as follows:
    Shares.
    James J. De Martini_ 51
    Louis Zerega_ 44
    Victor Zerega_ 5
    All three of the stockholders were employed as officers of the taxpayer and devoted all of their time to its activities. The only other employee was a woman bookkeeper-stenographer.
    De Martini worked in the office most of the time, making contracts for loans and insurance, buying real estate for clients, soliciting insurance and selling property. The two Zeregas attended to ’the collecting of rents, soliciting insurance, and selling real estate, and also-attended to repairs for clients. For the last-mentioned, the commission received was 10 per cent of the bill.
    '■.The income of the taxpayer was derived from commissions on insurance, on sales of real estate, on the collecting of rents, on the-making of loans, and on the making of repairs, and from the gain on the sale of real estate and from interest on loans.
    The actual income.for the years in question, was:

      The expenses for the years in question were:

    The balance sheets of the taxpayer at the closing of each calendar year showed:

    In making loans to clients, the taxpayer either used its own funds, used the funds of other clients, who advanced the money to the taxpayer for the purpose, or borrowed the necessary money from banks. It charged commissions for arranging loans of funds other than its own. The largest amount owed by the taxpayer to banks at any one time during 1919 was from $3,000 to $4,000. In its insurance business, the taxpayer paid the insurance companies the premiums monthly, whether collected or not.
    The sales of real estate in which the taxpayer participated on its own account during the years in question were:

      Capital, invested and borrowed, was a material income-producing factor.
   DECISION.

The determination of the Commissioner is approved.