author: Marquette

text:
    Appeal of JOSEPH W. BETTENDORF.
    Docket No. 2035.
    Submitted May 11, 1925.
    Decided January 19, 1926.
    1. Interest awarded in a decree against a trustee as damages for tbe conversion of tbe trust property, is not interest on indebtedness, within the meaning of section 214 (a) (2) of the Revenue Acts of 1918 and 1921.
    2. A judgment constitutes a debt, and interest paid thereon is properly deductible in ascertaining net income subject to tax.

      Joe R. Lane, Esq., and E. B. McQuinn, G. P. A., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.

      Before Marquette and MoRRis.
    This appeal is from the determination of a deficiency in income tax for the years 1918 to 1921, inclusive, in the amount of $250,-320.48. The amount involved herein is $180,754.34 of the total deficiency of $182,963.27 for the years 1920 and 1921, and it arises from the disallowance as deductions from gross income of certain alleged interest paid by the taxpayer in those years.
    FINDINGS OP PACT.
    The taxpayer is an individual residing at Bettendorf, Iowa. From the year 1895 to June 3, 1910, he was associated with his brother, William P. Bettendorf, in the Bettendorf Axle Co., a corporation with a capital stock of $500,000, consisting of 1,000 shares of common stock of the par value of $100 each, and $400,000 of preferred stock. Of the common stock, 355 shares were held by the taxpayer, 643 shares by William P. Bettendorf, and 2 shares were issued to other individuals to qualify them to act as directors. On June 3, 1910, the net value of the corporation’s property exceeded $2,000,000.
    William P. Bettendorf, a resident of the State of Iowa, died intestate June 3, 1910, leaving his widow, Elizabeth H. Bettendorf, and his father and his mother as his heirs-at-law. Under the laws of the State of Iowa the widow was entitled to one-half of the estate and the parents to the other one-half. Aside from household furnishings and life insurance, the estate of William P. Bettendorf consisted of 643 shares of the common stock of the Bettendorf Axle Co., certain patents, the use of which had been assigned by him to the Bettendorf Axle Co., and $802,340 royalties due him from the Bettendorf Axle Co. for the use of the patents. As a set-off against the amount due Williafn P. Bettendorf from the Bettendorf Axle Co., he had at the time of his death overdrawn his salary and dividend account with that company to the extent of about $122,000. Upon the petition of the widow the taxpayer was on June 8, 1910, appointed administrator of the estate of William P. Bettendorf and duly qualified. An inventory was filed, but an appraisement was waived, at his instance, by the heirs of the estate. On June 18, 1910, he was elected president of the Bettendorf Axle Co., and on July 9, 1910, the widow and the parents of William P. Bettendorf entered into a contract with the company by the terms of which the company released its claim for the amount by which the decedent had overdrawn on his salary and dividend account with the company, and the widow and the parents relinquished all royalties mentioned. On the same day the widow and the parents transferred all letters patent held by William P. Bettendorf, and those applied for, to the taxpayer, as trustee, with authority and obligation on his part permanently to license the company to make use thereof without exacting any compensation; and this he did immediately.
    In the latter part of May, 1911, the taxpayer suggested to Elizabeth H. Bettendorf the purchase by him of her portion of the stock in the Bettendorf Axle Co.; and on June 1 following he made her a written proposal to pay therefor the amount of $431,252. In his written proposal he represented that the value of her stock, less her proportionate share of certain amounts then owing by the estate of William P. Bettendorf to the Bettendorf Axle Co., was the amount offered by him therefor. On June 7, 1911, Elizabeth H. Bettendorf accepted the taxpayer’s proposal to purchase her stock and on the same day she, with the parents of William P. Bettendorf, requested the taxpayer, in writing, as administrator of the estate of William P. Bettendorf, to make distribution of the shares of stock of the Bettendorf Axle Co., owned by the estate of William P. Bettendorf, and to transfer to her the portion thereof, i. e., 321½ shares belonging to her. On the same day the taxpayer, as administrator, transferred to Elizabeth H. Bettendorf, 321½ shares of the stock of the Betten-dorf Axle Co. held by the estate of William P. Bettendorf, and she immediately transferred them to the taxpayer and received therefor the amount of $431,252.
    In the year 1912 the taxpayer and others organized a new corporation, known as the Bettendorf Company, with a capital stock of $7,500,000, divided into common stock of the par value of $5,000,000 and preferred stock of the value of $2,500,000. The new corporation purchased the property, assets, and good will of the Bettendorf Axle Co. on or about February 17, 1913, for $7,500,000, and appears to have paid therefor with its own capital stock.
    After the organization of the new corporation, but a short time before the acquisition by it of the assets of the Bettendorf Axle Co., Elizabeth PI. Bettendorf, the widow of William P. Bettendorf, entered into negotiations with the taxpayer looking to the payment to her by him of additional consideration for the stock she had sold to him and for the royalties and patent rights she had relinquished and assigned to the Bettendorf Axle Co. As a result of these negotiations the taxpayer agreed to pay, and she agreed to accept, $50,000 in settlement of all matters in controversy, and on February 8, 1913, a written agreement to that effect was entered into by her and the taxpayer. By this agreement, however, she elected to receive from the taxpayer, in lieu of $50,000 cash, 500 shares of preferred stock in the Bettendorf Co. of the par value of $100 each. That amount of stock was thereupon delivered to her by the taxpayer.

      In May, 1915, Elizabeth H. Bettendorf brought a suit in equity in the District Court of Scott County, Iowa, against the taxpayer, for rescission and cancellation of the contract of settlement of February 8, 1913, and for an accounting and equitable relief. The court, upon trial of the case, found that the taxpayer stood in a fiduciary relationship to, and was trustee for, Elizabeth H. Bettendorf from and after June 8, 1910, and owed to her a duty to make full and complete disclosures concerning all facts in relation to his dealings with her; that, as administrator of the estate of William P. Bettendorf, and as trustee for Elizabeth H. Bettendorf, he failed to make full and complete disclosures to her of the value of the stock of the Bet-tendorf Axle Co. and of the patent rights and royalties belonging to the estate of William P. Bettendorf and committed a breach of his duty toward her to his own financial advantage and at her expense ; and that he continued to be trustee for her for the difference between the actual value on June 7,1911, of the stock purchased by him from her and the amount paid by him therefor, and for the amount by which he had benefited in inducing her to release and transfer her interest in the royalties and patents referred to, and that he should account to her therefor. The court found that the amount still due on the stock was $329,514.51, and that the amount by which he had benefited by the release and transfer of her interest in the royalties and patents was $142,415.35. The court, on June 5, 1916, decreed that the taxpayer should account to Elizabeth H. Bettendorf for the amounts of $329,514.51 and $142,415.35, with interest at 6 per cent on the latter amount from July 9, 1910, and entered a judgment in her favor for the total amount of $522,394.34, with interest thereon at the rate of 6 per cent from the date of the decree. The court also ordered the annulment and cancellation of the contract of settlement of February 8, 1913, with certain exceptions, and ordered Elizabeth H. Bettendorf to account to the taxpayer for the $50,000 of preferred stock received by her under that settlement and for the dividends received by her on the stock. Upon appeal to the Supreme Court of Iowa, the decree of the District Court was modified so as to include therein interest on the amount of $329,514.51 from July 7, 1910, to the date of the decree. The case is reported in Bettendorf v. Bettendorf, 190 Iowa, 83; 179 N. W. 444.
    On December 30, 1920, the taxpayer paid to Elizabeth H. Betten-dorf the amount of $319,468.37, representing (a) all of the interest allowed by the District Court in the original decree, or $50,462.48; (b) all of the additional interest allowed under the modification of the decree by the Supreme Court, or $98,746.03; and (c) all of the interest on the judgment as modified from June 5, 1916, to and including the 30th day of December, 1920, or $170,259.86. On February 28,1921, the taxpayer paid to Elizabeth H. Bettendorf the sum of $4-76,584.51, representing the principal sum of $471,129.86 included in the judgment referred to, and interest thereon from December 30, 1920, to February 28, 1921, amounting to $4,654.65.
    The taxpayer kept his books on the cash receipts and disbursements basis and, in computing his net income for the years 1920 and 1921, deducted the amounts of $319,468.37 and $4,654.65, respectively, paid in those years to Elizabeth H. Bettendorf as interest. The Commissioner disallowed the deductions and determined that there is a deficiency in tax for the year 1920 in the amount of $180,542.85 and for the year 1921 in the amount of $2,420.42.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Buie 50.
   OPINION.

Marquette

: The only question presented by this appeal is whether or not the taxpayer, in computing his net income for the years 1920 and 1921, is entitled to deduct the amounts of $319,468.37 and $4,654.65, respectively, paid by him to Elizabeth H. Bettendorf in those years, under the circumstances set forth in the findings of fact herein. The taxpayer contends that the payments in question represented interest on indebtedness and are deductible under the provisions of section 214 (a) (2) of the Kevenue Acts of 1918 and 1921, which respectively provide that, in computing net income, there shall be allowed as deductions:

(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, in the ease of a nonresident alien individual, the proportion of such interest which the amount of his gross income from sources within the United States bears to the amount of his gross income from all sources within and without the United States.
(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

The Commissioner urges that the payments involved herein, made ■ by the taxpayer to Elizabeth H. Bettendorf, were not interest on indebtedness, but constituted a part of the damages to which she was found by the court to be entitled on account of the taxpayer’s conversion of her property and property rights.

Interest is the compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention. 83 Corpus Juris, 118. In Bouvier’s Law Dictionary, interest is defined as “the compensation which is paid by the borrower of money to the lender for its use, and, generally, by a debtor to his creditor in recompense for his detention of the debt.” In the case of Redfield v. Ystalyfera Iron Co., 110 U. S. 174, the court, in speaking of interest, said:

Interest is given on money demands as damages for delay in payment, being just compensation to tbe plaintiff for a default on tbe part of his debtor. Where it is reserved expressly in the contract, or is compelled by the nature of the promise, it becomes part of the debt, and is recoverable as of right; but when it is given as damages, it is often matter of discretion.

It is therefore necessary, in order to arrive at a proper solution of the question presented herein, first to determine whether the interest included in the decree of the District Court for Scott County, Iowa, as modified by the Supreme Court, in the suit referred to in the findings of fact, was compensation for the use or forbearance of money or damages for the detention of money. From the opinion of the Supreme Court of Iowa in that case, reported in 190 Iowa, 83, it seems clear to us that the interest included in the decree was given as damages for the wrongful detention by the taxpayer of money which he, as trustee, held for the use and benefit of Elizabeth II. Bettendorf. The court in its opinion, speaking of the alleged contract of settlement of February 8, 1913, said:

Tbis was not a case where tbe fraud was perpetrated by parties dealing at arm’s length; tbe plaintiff bad a right to rely upon defendant, and was not at fault in not doubting tbe fairness of all bis transactions; and we are of tbe opinion that it cannot be said that tbe plaintiff should be estopped by tbe .contract of 1913 from claiming damages ⅜ * *.

The court, in awarding interest on the difference between the value of the stock which the taxpayer acquired from Elizabeth H. Bettendorf and the amount he had paid her therefor, said:

The defendant acquired plaintiff’s stock at that time, and has since enjoyed all tbe advantages of its ownership, and so manipulated it that restoration is impossible. There seems no good reason for denying plaintiff compensation for tbe use of tbe money which she should then have been paid for tbe stock, and which through deception defendant avoided paying. What happened was tantamount to the conversion of the deficiency in the purchase price by defendant in his trust capacity, and is clearly within the rule which includes interest from the date of conversion as part of the damages allowed. See Doyle v. Burns, 123 Iowa, 488; In re Estate of Young, 97 Iowa, 218; Hook v. Payne, 14 Wall. 252; Ludington v. Patton, 121 Wis. 649; 99 N. W. 614. The award is merely for the difference between what the fiduciary actually paid and what he should have paid for the stock, and simple interest thereon at the legal rate is not only just, as lie lias enjoyed the income from the stock, but adequate inasmuch as the cestui que trust intentionally parted with said stock.

The taxpayer contends that, even if the amount included as interest in the decree referred to was awarded as damages, it is interest nevertheless. Assuming that contention to be true, we are, nevertheless, of the opinion that such interest is not deductible in computing the taxpayer’s net income as “ Interest paid or accrued * * * on indebtedness.” The relation of trustee and cestui que trust is entirely different from the relation of debtor and creditor. A trustee holds the legal title to property for the use and benefit of the cestui que 'trust, the equitable title thereto being in the cestui que trust. There is no debt due from the trustee to the cestm que trust, but the trustee must account for the trust property and the income and profits therefrom, or, if he converts them to his own use, respond in damages. In the case under consideration the court expressly held that the taxpayer, at the time he induced Elizabeth H. Betten-dorf to assign and transfer her interest in the patents and royalties owned by and due to the estate of her husband, and to sell her shares of stock in the Bettendorf Axle Co., was a trustee for her, and he continued to be, until the day of the decree, a trustee for her for the amounts by which he had benefited on account of the assignment of the patents and royalties and the amount of the difference between the actual value of the shares of stock at the time of the sale and the amount paid her' at that time. It therefore appears that the relation of debtor and creditor did not exist between the taxpayer and Elizabeth II. Bettendorf at any time during the period June 8, 1910, to June 5, 1916, and that the interest included in the decree of the court in the case of Bettendorf v. Bettendorf was not interest on indebtedness, within the purview of section 214 (a) (2) of the Revenue Acts of 1918 and 1921, and hence is not deductible in* computing the taxpayer’s net income for the years in which it was paid.

With reference to the amounts of $170,259.86 and $4,654.65 paid by the taxpayer to Elizabeth H. Bettendorf on December 30, 1920, and February 28, 1921, respectively, as interest on the judgment rendered in the case of Bettendorf v. Bettendorf, as modified by the Supreme Court of Iowa, a different situation exists from that presented by the payment of the amounts included as interest in the judgment. Whatever may have been the legal relation of the taxpayer and Elizabeth H. Bettendorf prior to June 5, 1916, he was from that date and until February 28, 1921, indebted to her in the amount of the judgment rendered against him. A judgment is an obligation for the payment of money, 33 Corpus Juris, 1056; a security record, Provident Savings Life Assurance Society v. Ford, 114 U. S. 635; often denominated by courts as a debt of record, Heinl v. Terre Haute, 161 Ind. 44; 66 N. E. 450. It is evidence of indebtedness of the highest degree known to the law. Ambler v. Whipple, 139 Ill. 311; 28 N. E. 841. While it is true, as pointed out by counsel for the Commissioner, that interest upon judgments allowed by statute is not interest in the strict sense but is in the nature of liquidated damages for delay in payment, Wyoming National Bank of Laramie v. Brown, 7 Wyo. 494; 53 Pac. 291; Morley v. Lake Shore Railway Co., 146 U. S. 162, we nevertheless are of the opinion that it is interest on indebtedness, within the meaning of section 214'(a) (2) of the Revenue Acts of 1918 and 1921. The indebtedness does not fall within any exceptions provided in those sections, and it therefore follows that the taxpayer, in computing his income for the years 1920 and 1921, is entitled to deduct the amounts paid by him in those years as interest thereon. In all other respects the determination of the Commissioner is approved.

On reference to the Board, Phillips dissents.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of LOUIS ABRAMS.

      Docket No. 4659.
    Submitted October 1, 1925.
    Decided January 19, 1926.

      George G. Witter, Esq., for the Commissioner.
    Before Trammell and Love.
    This is an appeal from the determination of a deficiency in income tax for 1922 in the amount of $818.63. It arises from the fact that the Commissioner included in taxable income for that year $10,221.53, as profits realized in the exchange by the taxpayer of his interest in a partnership for stock in a successor corporation.
    The answer of the Commissioner admits all the material allegations of fact contained in the taxpayer’s petition, and the appeal was submitted upon the pleadings,
    FINDINGS OF FACT.
    Prior to July 1, 1922, the taxpayer owned a one-half interest in a certain partnership operated under the trade names of Metropolitan Bedding Manufacturing Co. and Metropolitan Furniture Manufacturing Co. The other partner was Max Ostrow. This partnership was terminated on June 30,1922, by the withdrawal by Ostrow of $15,000, whereupon the taxpayer became the sole owner of the business.

      After the termination of the above partnership, the taxpayer entered into a second partnership agreement, dated July 29, 1922. with Harry Horblit, under the terms of which the taxpayer contributed the business of the Metropolitan Bedding Manufacturing Co. and the Metropolitan Furniture Manufacturing Co., and Horblit contributed in cash and notes $15,000. The taxpayer had a two-thirds interest and Horblit a one-third interest in this partnership.
    In August, 1922, the taxpayer and Horblit entered into an agreement with Henry Rachman to form a corporation. The taxpayer and Horblit agreed to transfer the interest of the partnership to the corporation as their interests existed on July 1, 1922. The profits from that date to the date of incorporation were to be held in trust for the benefit of the three parties to the agreement. The taxpayer, in addition to his interest in the partnership, agreed to give his promissory note to the corporation for $5,000, and Rachman agreed to pay in to the corporation $25,000 in cash and notes. Tire authorized capital stock of the corporation was 750 shares, having a total par value of $75,000, and was issued as follows:
    Par value.
    Harry Horblit, copartnership interest, 150 shares_$15, 000
    Henry Rachman, cash and notes, 250 shares- 25, 000
    Louis Abrams, copartnership interest, 300 shares_ 30, 000
    Louis Abrams, note, 50 shares- 5, 000
    On the above state of facts, the Commissioner determined that the taxpayer received the equivalent of cash to the extent of $30,000 for his interest in the partnership, which the Commissioner determined cost him $19,778.47, making a difference of $10,221.53, representing taxable profit from the transaction.
   DECISION.

The determination of the Commissioner is approved.


author: Trammell:

text:
    Appeal of PERCIVAL H. TRUMAN.
    Docket No. 5346.
    Sumbitted October 10, 1925.
    Decided January 19, 1926.
    A partner who keeps his books on the cash basis is required to report his distributive share of the partnership income computed on the accrual basis, if that is the basis adopted by the partnership for keeping its bo.oks and reporting its income, when no ques-. tion is raised that such methods do not correctly reflect the income of the partnership.

      Perdval E. Truman pro se.

      J. W. Fisher, Esq., for the Commissioner.

      Before Phillips and Trammell.
    This is an appeal from the determination of a deficiency in income taxes for 1920 in the amount of $138.43. The deficiency results from the fact that the Commissioner included in the taxpayer’s income for that year his distributive share of the income of the partnership of which taxpayer was a member, the income of the partnership being determined on the accrual basis, while the taxpayer kept his books and made his returns on the cash basis. The question is whether the taxpayer, who kept his books on a cash basis, should be taxed on his distributive share of partnership income determined on an accrual basis.
    FINDINGS OF FACT.
    The taxpayer was a member of the law partnership of Barnett & Truman during 1920. The partnership kept its books and made its returns on the accrual basis. The taxpayer kept his books and made his returns on the basis of cash receipts and disbursements.
    The distributive share of the taxpayer for 1920 in the partnership income, reported on the accrual basis, was $22,065.69, while on the cash basis it was $21,278. The return for the partnership was made by Barnett, the senior partner, who kept his own books on the same basis as the partnership.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Trammell:

The question presented by this appeal is whether an individual partner who keeps his own books on the cash basis is required to include in his income his distributive share of partnership income determined on an accrual basis, or whether the distributive share in the partnership’s income should be determined on the basis of cash receipts and disbursements.

It is provided in paragraph (a) of section 218 of the Revenue Act of 1918 as follows:

That individuáis carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner’s net income is computed.

Paragraph (d) of section 218 provides:

The net income of the partnership shall be computed in the same manner and on the same basis as provided in section 212 except that the deduction provided in paragraph (11) of subdivision (a) of section 214 shall not be allowed.

Section 212 (b) provides as follows:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall bb made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.

The expression “net income,” as used in section 218 (a), has the same meaning when used in section 212 (b). The net income of the partnership, the distributive share of which is taxable to the partners, is the net income computed upon the basis of the method of accounting regularly employed in keeping the books of the partnership, provided such method clearly reflects the income of the partnership. That it did so reflect the income of the partnership is not questioned in this appeal. The partner’s distributive share, referred to in section 218, is that share of the income of the partnership computed on the accrual basis.

The taxpayer contends that he did not know or consent to the use of the accrual method adopted by the partnership. This fact seems to us to be immaterial. The books were kept by the order of the senior partner. It was one of the liabilities, which the taxpayer assumed when he became a partner, that he was subject to.be bound by the action of his associate within the scope of the partnership. The adoption of a method of bookkeeping is clearly within the scope of the partnership. The principle of mutual agency is one of the characteristics of a partnership.


author: Littleton

text:
    Appeal of CRAMER-KRASSELT CO.
    Docket No. 3416.
    Submitted October 13, 1925.
    Decided January 19, 1926.
    In the absence of proof of expenditures over a period of years in the establishment of a business, together with the nature of the expenditures, all of which were charged to expense, no determination of the value of good will which might be included in invested capital can be made.

      Carl B. Bix, Esq., for the taxpayer.

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

      Before James, LittletoN, Smith, and Trussell.
    This is an appeal from the determination of deficiencies in income and profits tax for the calendar years 1919 and 1920 in the amounts of $103.16 and $5,663.46, respectively, arising from the action of the Commissioner in disallowing, as invested capital, good will in the amount of $50,000.
    FINDINGS OF FACT.
    Taxpayer is an advertising agency incorporated under the laws of the State of Wisconsin, with principal office at Milwaukee. It was incorporated in 1898, succeeding a partnership formed in 1895.
    As a part of its operations, it established and conducted its own advertising, printing, and art departments for the purpose of rendering a complete advertising service within its own establishment.
    From the outset salesmen were employed whose duties were to visit prospective clients and endeavor to induce them, first, to advertise and, secondly, to conduct their advertising through the medium of the facilities offered by the taxpayer. Circular letters, mailing cards, and broadsides of considerable quantities, all setting out the necessity for, and advantage to be gained by, advertising, were prepared and distributed to. the advertising public, prospective clients, and proprietors of establishments. About 1900 a house paper, or trade organ, was established under the name of Advertising Wisdom. The first issues were prepared and edited by the two sole stockholders, but later professional advertising writers were employed for that purpose. Taxpayer also purchased articles on advertising prepared by specialists in this line which it utilized for distribution with its own literature.
    As a result of these intensive campaigns, taxpayer, by 1911, had . succeeded in establishing itself as a well-known advertising agency and had secured the recognition of publishers throughout the United States and foreign countries, thus entitling it to receive the usual differential or commission on advertising placed with their publications accorded only to agencies of a recognized standard.
    Over the period 1898 to 1911 the total salaries paid to the two stockholder officers amounted to $50,623.32. The total salaries and commissions paid to salesmen during the same period amounted to $50,124.45.
    All expenses incurred and amounts paid out in building up the business have been charged as operating expenses to profit and loss. In 1904, the directors authorized the setting up on the books of a good will account in the amount of $10,000, a corresponding credit entry being made to profit and loss. Similarly, in 1906, $15,000 was added to the good will account, and, in January, 1911, a further sum of $25,000. This entry of good will on the books of account was decided upon by the directors in order to give recognition to the valuable good will which had been created through the expenditures made in the conduct of campaigns to build up the business.
    Until 1912 no capital stock had been issued by the taxpayer for any purpose, the capital paid in and the earnings being credited to the accounts of the two stockholders. In March, 1912, capital stock of $100,000 was issued to the stockholders in liquidation of their accounts. This included $50,000 theretofore set up on the books as good will and credited to the individual accounts.
    The Commissioner eliminated from the computation of invested capital good will which the taxpayer had included therein in the sum of $50,000, and it is from this action of the Commissioner that the taxpayer appeals.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Littleton

: If the taxpayer is to be permitted to include good will in its invested capital, it must result from the restoration to surplus of amounts expended in prior years for the purpose of increasing the earning capacity of its business — in acquiring something of permanent use in the business. The Commissioner eliminated the item under consideration from invested capital for two reasons: First, because of the taxpayer’s failure to show that the amounts set up on the books in 1904, 1906, and 1911, as good will, bore any direct relation to the actual expenditures made in the acquisition of an asset of that character; and, secondly, that, as a matter of good accounting, it is optional with the taxpayer whether expenditures of the character here under consideration shall be charged to a capital account or treated as cost of current operations, and, since the taxpayer elected to treat them as cost of current operations concurrently with the transactions, a revision of that election can not now be permitted.

The views of the Board as they relate to the second reason for the Commissioner’s action have been clearly stated in the Appeal of Gilliam Manufacturing Co., 1 B. T. A. 967, and the Appeal of Goodell-Pratt Co., 3 B. T. A. 30, in which 'we had under consideration the identical question presented by this appeal. Suffice it to say, as was said in those appeals, that a taxpayer has no option to treat capital expenditures as operating expenses and that, upon a proper showing that the expenditures sought to be restored to surplus were in fact capital expenditures, the taxpayer may make such restoration and include the amount thereof in invested capital.

However, we point out here that, in each of the above-cited appeals, the fact that the expenditures were of a capital nature and the amounts actually expended were clearly established, which is not the case in this appeal. The Board is satisfied that prior to the taxable years the taxpayer had built up a good will of considerable value in its business; however, we are not convinced from the evidence before us that the total of the amounts restored to capital in 1904, 1906, and 1911, is at all fairly representative of the expenditures actually made in the acquisition of this good will. Proof of the expenditures actually made in the building up of good will is entirely lacking. Although the taxpayer submitted proof of the salaries and commissions paid to executive officers and salesmen, there is no competent evidence before us upon which a fair apportionment thereof to capital and expenses can be predicated.


text:
    Appeal of BANK of BRADY.
    Docket No. 1899.
    Submitted July 3, 1925.
    Decided January 19, 1926.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tehssell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1920 in the amount of $159.09, and of overassessments for the years 1919 and 1921 in the amounts of $18.21 and $45.99, respectively. The deficiency and the overassessments are the result of adjustments of invested capital and depreciation deductions made by the Commissioner in his audit of the taxpayer’s returns for the said years. The appeal was submitted upon the pleadings and depositions furnished on behalf of the taxpayer.
    FINDINGS OE FACT.
    The taxpayer is a Nebraska corporation with its principal place of business at Brady. It was organized in 1904 and immediately began carrying on the business of banking, occupying a small building on lots 1 and 2 of block. 11 in the said city.
    In 1910 it purchased the above-described property, paying therefor the sum of $3,250. In 1914 it sold the building for $310. The building was thereupon removed, and upon the same land the taxpayer constructed a banking building, at a cost of $3,340.85, which had a reasonable useful life of 50 years. This building was completed' in the year 1914 and the taxpayer has since occupied it as its place of business.

      During the time from the organization of .the taxpayer to the end of the year 1921 the taxpayer purchased from time to time banking-house fixtures, furniture and equipment and used the same in its business, the dates of the acquisition thereof and the cost being as follows:
    1904_$502.10 1915_ $48.05
    1907_1_ 275. 75 1916_ 22. 56
    1908_ 253. 85 1919_ 575.20
    1909_ 304. 50 1920_ 2,073.68
    1914_ 771.25 1921_ 152.48
    A reasonable allowance for exhaustion, wear and tear of the fixtures, furniture and office equipment is an amount computed for each year on the basis of 6 per cent of the cost of the equipment in use during each year respectively.
   DECISION.

The deficiency for 1920, and the overassessments for 1919 and 1921, should all be computed in accordance with the foregoing findings of fact. .Final determination will be settled on 15 days’ notice, in accordance with Rule 50.


text:
    Appeal of GEORGE W. BAUMHOFF.
    Docket No. 1624.
    Submitted November 9, 1925.
    Decided January 19, 1926.

      Bernard Greensfelder, Esq., for the taxpayer.

      A. H. Fast and Robert A. Littleton, Esqs., for the Commissioner.
    Before Sterni-iagen, Lansdon, and Arundell.
    This appeal is from the determination of a deficiency of $1,722.30 in income tax for the year 1920, arising out of the sale of property and out of an exchange by the taxpayer of property for property. The issues are the cost of the property sold, the value of the property acquired, and the cost or March 1, 1913, value of the property disposed of by the exchange. Upon these issues there is much conflicting evidence, including the various opinions of witnesses as to the value and also the varying testimony of witnesses as to the facts.
    FINDINGS OF FACT.
    On June 1, 1909, the taxpayer acquired a half interest in a farm in Jefferson County, Mo., from George Breidenbach in exchange for $5,000 cash, 34 shares of stock of the Keyes Farm & Dairy Co., and his promise to have Breidenbach elected president of the Keyes Company. The value of the 34 shares of stock at the time of this exchange in 1909 was $544, and the cost of the taxpayer’s half interest in the farm was $5,544. In the absence of any evidence of the value of this half interest in the farm on March 1, 1913, we find that it was no more than the cost of $5,544. This half interest was sold in the taxable year 1920 for $10,000, and the taxpayer thereby realized a gain of $4,456.
    In 1904 the taxpayer acquired a farm in St. Louis County, Mo., which contained a frame building two years old. In 1920 the building became untenantable and dangerous because of erosion of the foundation and rotting of the supporting timbers, and it was torn down. In the absence of evidence of cost or March 1, 1913, value, or actual exhaustion, we find that the taxpayer sustained no loss in 1920.
    In 1920 the taxpayer acquired 25,000 shares of stock in the Farm Products Land & Investment Co., a Colorado corporation, in exchange for (1) a half interest in a 620-acre farm in Jersey County, Ill., (2) 18 lots near Grafton, Ill., and (3) one-fifth of the total capital stock of the Herkert Realty Co., a Missouri corporation.
    The value of the 25,000 shares of stock in the Farm Products Land & Investment Co., when acquired by the taxpayer in 1920, was $21,000.
    The cost and March 1, 1913, value of the half interest of the taxpayer in the aforesaid 620-acre farm in Jersey County, Ill., was $5,236.52.
    The aforesaid 18 lots near Grafton, Ill., were without value on March 1, 1913.
    The aforesaid one-fifth of the capital stock of the Herkert Realty Co. had a value on March 1,1913, of $9,000.
    The taxpayer realized a gain, on the last-mentioned transaction of exchange, of $6,763.48.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be made on 15 days’ notice, under Rule 50.


author: Arundell

text:
    Appeal of DAVID G. JOYCE.
    Docket No. 476.

      Submitted October 22, 1925.
    Decided January 19, 1926.
    The expense incurred by a husband in resisting a claim by his wife attacking the validity of a postnuptial agreement, which purported to limit and fix their respective property rights, is not an ordinary and necessary business expense, even though the husband’s sole business or occupation was the management and conservation of his estate.

      J. Harry Covington, Esq., M. P. Wormhoudt, Esq., and Howard Kroehl, C. P. A., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Sterni-iagen and Arundell.
    This is an appeal from the determination of a deficiency of less than $10,000 in income taxes for 1920. The taxpayer alleges that the Commissioner erroneously disallowed a deduction of $22,500, claimed as a business expense and designated as “ legal and professional expenses paid for transacting affairs.”
    The evidence consists of a stipulation of facts, signed by counsel, with documentary exhibits annexed thereto, and an affidavit by the taxpayer offered on behalf of the Commissioner. It was stipulated that the amount éxpended and claimed as a deduction was $15,000.
    FINDINGS OF FACT.
    In 1912 the taxpayer married Boberta Acuff. In 1913 they entered into a postnuptial agreement with each other which purported to define and fix all of the property rights of each during their respective lives and during the continuance of the marriage and after its dissolution, whether by death or divorce. Under the terms of this agreement the taxpayer deposited with the Northern Trust Co., of Chicago, Ill., as trustee, $200,000 par value of securities, and the trustee was to pay the income therefrom to the taxpayer’s wife, Boberta Acuff Joyce. In 1916 the agreement was modified so that the taxpayer was substituted as trustee.
    In 1920 taxpayer’s said wife employed attorneys to bring about an annulment or modification of the postnuptial agreement. In order to resist the attack upon this agreement, the taxpayer engaged counsel in connection with such proposed attack.
    Thereafter, and in 1920, Boberta Acuff Joyce instituted a proceeding in the Superior Court of Cook County, Ill., for a divorce of said Boberta Acuff Joyce from the taxpayer, in which she prayed that the court decree to her such portions of the property of David G. Joyce, or such sums of money to be paid to her by him as might be necessary and proper for her maintenance, in proportion to his property and income.
    During the progress of said proceeding the said postnuptial agreement of 1913, as modified in 1916, was further modified by a new agreement between the parties, dated August 26, 1920, which agreement is still in force.
    The last-mentioned agreement provides for a trust fund of $200,-000, and the payment of the income therefrom to Boberta Acuff Joyce during her lifetime. At her death the trust is to terminate and the principal is to revert to the taxpayer, or, if,he be not then living, to his nominees or to his legal heirs, legal representatives or assigns. Each of them releases any right, title or interest in the property of the other, and every other right arising out of the marital relation, except the right of Roberta Acuff Joyce to receive the money awarded in the decree mentioned below. The said agreement contains the following preambles, among others:
    Whereas, the said second party has heretofore filed her bill in chancery in the Superior Court of Cook County, being cause No. 354,970 in said court against said first party, praying for divorce and alimony; and
    * * ⅜ * * * *
    Whereas, on issue duly joined in the said cause, a hearing has been had upon the question of the right of the second party to a decree of divorce against the first party on the ground of extreme and repeated cruelty; and
    Whereas, the court which has heard said evidence has announced that, in the opinion of the court, the evidence presented justifies and requires the entry of the decree of divorce and the said court has set down for further hearing matters involving the question of said alimony and the question of how far. if at all, the said second party hereto is bound by the provisions of the said agreement dated October 24, 1913; and
    Whereas, the parties hereto desire to avoid further litigation and question <>n matters relating to alimony and the settlement of the property rights of the respective parties hereto and for that purpose have agreed to modify the said agreement of October 24, 1913, in the respects hereinafter set forth and to appoint The Merchants Loan and Trust Company as Trustee in place of the said David G. Joyce.
    In the final decree of divorce is contained the following:
    The Court doth further find that, during the continuance of such marriage and on or about the 24th day of October, 1913, the complainant and defendant ■entered into a trust agreement by which securities of a nominal or par value of Two Hundred Thousand ($200,000.00) Dollars were set apart as a trust fund with the Northern Trust Company as Trustee under certain terms in said agreement set forth.
    The Court finds that the complainant has claimed that the said trust agreement is not binding upon her and that she was not precluded thereby from claiming an allowance in this suit commensurate with the income and property of the said defendant, but the Court further finds that, since the taking of testimony in this cause, in support of the allegations of the bill of complaint as to extreme and repeated cruelty, the complainant and defendant have agreed upon a modification of the said trust agreement, by the terms of which the said complainant shall, during the full term of her natural life, receive the income from a trust fund of the principal amount of Two Hundred Thousand ($200,000.00) Dollars, and by the terms of which all the principal of said trust fund shall, at the- death of the complainant revert to the defendant or his legal representatives, legatees or assigns, and that, since the hearing of the evidence in this cause and before the entry of this decree, the complainant, having been fully advised of her rights in the premises and the defendant likewise fully advised of his rights in the premises,, have executed such modified agreements.
    The Court finds that, in connection with the said modification of the said agreement, the said complainant and defendant, through. their respective counsel, have agreed that, if a decree of divorce should be entered in this cause, the defendant should pay to the complainant the sum of Fifty Thousand ($50,000.00) Dollars In cash in a lump sum in lieu of all other claims for alimony, temporary or permanent, and that the defendant should further pay to the complainant for the expenses of this suit and for solicitor’s fees the further sum of Fifteen Thousand ($15,000.00) Dollars and that, upon the making of such payments, the said complainant and the said defendant should respectively be barred of all further claims, title or interest of every name and nature whatsoever in the property of the other whether such property be real, personal or mixed and that each of the said parties shall, from the date of the entry of this decree, be released from all obligations of every nature and description to support or contribute to the support of the other party hereto; the Court being fully advised in the premises it is ordered, adjudged and decueed, that the defendant pay to the complainant the sum of fifty thousand ($50,000.00) dollars in cash, in lieu of all claims for alimony, temporary or permanent and in lieu of dower inchoate or consummate the right of homestead and of all other or further claims, title or interest of every name and nature in- and to the property real or personal of the defendant, and that the defendant should ’ further pay to the complainant, for the expenses of this suit and for solicitor’s fees, the further sum of Fifteen Thousand ($15,000.00) ■ Dollars and that upon the making of such payments, the said complainant and the said defendant should respectively be barred from all further claims, title or interest of every name or nature whatsoever, in the property of the other, whether such property be real, personal or mixed, and that each of the said parties shall from the date of the entry of this decree be released from all obligations of every nature and description to support or contribute to the support of the other party.
    The taxpayer’s sole business from which he derived any income during 1920 was the investment, management, and preservation of his estate or property interests. His only income consisted of dividends on stock and interest on bonds owned by him, such stock and bonds constituting the whole of his estate. They were stock and bonds of corporations of which he was a director or officer, and he devoted his time to these corporations without compensation in order to protect his investments therein.
    The expenditure made by the taxpayer in connection with the proceedings respecting the postnuptial agreement, which is claimed as a deduction, was $15,000, paid to his attorney, who did not represent him in the divorce proceeding.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Arundell

: The only question in this appeal is whether or not the expenditure of $15,000 for legal services, in the circumstances set forth in the findings of fact, may be properly classified as a business expense, so that the taxpayer shall be entitled to deduct it from his gross income. Section 214 (a) (1), Eevenue Act of 1918, provides that there shall be allowed to individuals as deductions, “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” It is argued on behalf of the taxpayer that he is engaged in the business of managing, investing, and preserving his estate, and that the attack, or threatened attack, by his wife on the postnuptial agreement was an attack upon or a claim against his property. It is not asserted that the expense of every litigation which might result in diminishing the taxpayer’s estate would be a business expense. The contention is that the agreement related to his property, and, since the property was the “subject matter” of his business, the agreement had the effect of giving him greater freedom in managing his “business property”; therefore, the expense of defending and maintaining this agreement is a business expense. This reasoning is ingenious, but we do not think it is sound. We pass the question of whether this taxpayer was carrying on any trade or business, because its answer is unnecessary to a decision of the case. We think the expenditure, in any event, was not a business expense within the meaning of the statute.

The effect of the agreement may have been all that the taxpayer claims, but that does not determine the character of the agreement or of the claims for its modification. Also, his purpose in entering into the agreement, or in resisting the attacks upon it, is not determinative of the nature of the expense. Any kind of liability to which he might have been subjected, however remote from the carrying on of his business, would have the same results to his estate. The taxpayer’s argument ignores the genesis of the rights which he attempted to settle and limit by the postnuptial agreement. Whatever rights the wife had arose out of the marriage relationship, and her claims subsequent to the postnuptial agreement were certainly of the same origin. It is this fact which must determine the nature of the expense of opposing or adjusting those claims. To say that it was an ordinary and necessary expense incurred “in carrying on any trade or business ” would be to broaden the scope of this language beyond any reasonable interpretation of it.

It is hardly necessary to allude to the fact that marriage is a personal relationship, except for the purpose of pointing out that the legal rights and obligations annexed to the relationship are also personal, and the expenses connected therewith would, we think, come within the classification of personal or family expenses. The Revenue Act expressly provides that personal and family expenses may not be deducted from gross income.


text:
    Appeal of LARS J. FIKSDAL CO.
    Docket No. 3780.
    Submitted October 12, 1925.
    Decided January 19, 1926.

      Harleigh H. Hartman, Esq., for the taxpayer.

      Ellis W. Hamming, Esq., for the Commissioner.
    Before Phillips and TRAmmell.
    This is an appeal from determinations of deficiencies in income and profits taxes for the calendar years 1919 and 1920, in the respective amounts of $2,258.34 and $648.53, a total of $2,904.87. The controversy arises from the disallowance by the Commissioner of a claimed deduction of $12,500 par value of capital stock issued in 1920 and claimed as additional compensation to an employee for services rendered in 1919.
    PINDINGS OP PACT.
    The taxpayer is a South- Dakota corporation with its principal office at Webster, and is engaged in the general merchandise business. For a number of years prior to 1919 there were two general merchandise stores in Webster, i. e., the taxpayer and the H. C. Tegtmeier . Co. In June, 1917, the owner of substantially all of the stock of the Tegtmeier Co. was David Williams, an active official of a bank in Duluth, who devoted no time to the business, except by way of consultation and advice. In January, 1917, Geo. H. Hammerbacker was employed as general manager of the store operated by the Tegt-meier Co. Hammerbacker had been engaged in various mercantile businesses for a number of years. In June, 1917, Hammerbacker purchased $14,500 par value-of the capital stock of the Tegtmeier Co. from Williams, giving his note therefor. This stock represented approximately one-half of the total capital stock. Hammer-backer’s salary was $1,800 in 1917; $2,000 in 1918; and $2,500 in 1919.
    In 1919 the question of consolidation of the two stores was discussed between Hammerbacker and Lars J. Fiksdal, the president of the taxpayer. About November 25, 1919, they went to Duluth to see Williams and, on the trip there, an oral agreement ivas reached between Hammerbacker and Fiksdal that, if the Tegtmeier store sho'uld be purchased by the Fiksdal Co., Hammerbacker was to receive one-half of the profits of the business for 1919.
    Arriving in Duluth, they found Williams prepared to sell, and an agreement was prepared selling the stock of merchandise, book accounts, and all assets of the H. C. Tegtmeier Co. for $36,000, the Fiksdal Co. assuming payment of- all merchandise accounts, notes payable aggregating $9,000, and all taxes. This sale was based primarily upon the January 1, 1919, inventory and balance sheet of the Tegtmeier Co. Williams was oht of touch with the business and the amount agreed upon was the amount suggested by Hammer-backer as reasonable.
    The store operated by the Tegtmeier Co. was promptly taken over by the taxpayer and continued with Hammerbacker as manager.
    An inventory of the Tegtmeier store was taken by Hammerbacker on or about January 1,1920, and showed a profit for 1919 of approximately $21,000. Hammerbacker contended that, as these profits were unusually large and were due to his efforts, he. should receive more than one-half thereof. At a meeting held on January 14, 1920, the stockholders of the taxpayer agreed to and did issue $12,500 par value of its capital stock to Hammerbacker. Taxpayer claimed on account thereof a deduction of $12,500 from its 1919 income, as additional compensation to Hammerbacker.
   DECISION.

The determination of the Commissioner is approved.


author: MoRRis:

text:
    Appeal of PENINSULAR STATE BANK OF DETROIT.
    Docket No. 4172.
    Submitted September 21, 1925.
    Decided January 19, 1926.
    The determination of the Commissioner disallowing a deduction of the balance of the taxpayer’s investment in certain bonds and treating certain items as capital expenditures rather than ordinary and necessary expenses, approved.

      William M. Donnelly, Esq., for the taxpayer.

      Lee I. Park, Esq., for the Commissioner.
    Before MaRQUette and MoRRis.
    This is an appeal from the determination of deficiencies of $912.53 and $4,136.61 in income and profits taxes for the years 1916 and 1920, respectively, overassessments of $639.58, $842.34 and $365.38 having been found for the years 1918, 1919, and 1921, respectively. The questions involved are the deductibility as ordinary and necessary expenses of the cost of small safes and the cost of installing a police signalling system, and the deductibility of the balance of the taxpayer’s investment in certain bonds.

      BINDINGS OP PACT.
    The taxpayer is a Michigan corporation engaged in the banking business in Detroit. During the years 1919, 1920 and 1921, the taxpayer charged to expense the aggregate amount of $4,760, which represented the cost of small auxiliary safes purchased by the taxpayer at less than one dollar apiece and loaned to savings depositors under the agreement that, if they were not returned to the taxpayer, a charge of one dollar would be made therefor. This fee has never been exacted. The safes were used by the recipients to accumulate small savings, the keys to the safes being retained by the taxpayer. It was the expectation of the taxpayer that, upon bringing the safes to the bank for the purpose of opening them, the holder would deposit the contents in its savings department. Some of the safes were damaged or lost from time to time. Some customers used the same safes for many years.
    During the years 1919, 1920, and 1921, the taxpayer charged to expense the aggregate amount of $7,519.56, which represented the cost of a signalling system which was installed throughout the 27 branch banks of the taxpayer in Detroit, with concealed buttons, by means of which there could be prompt notification communicated to the police department of Detroit in the event of bank robberies. The installation was insisted upon by the Detroit Clearing House Association and the police. On four occasions of its use, it was ineffective in accomplishing its purpose, but it is still utilized to the extent of 90 per cent of its installation.
    In the year 1919 the taxpayer deducted as worthless the amount of approximately $14,000, representing the balance of an investment in bonds of the Nestor Lumber Co. The taxpayer received liquidating dividends on the bonds during 1914 to 1918, inclusive, in the total of 66 per cent of the principal of the bonds, and an additional 2 per cent was paid to the taxpayer in 1920. The debtor still has assets in the form of timber lands located in Michigan. As late as 1922 the taxpayer, upon making inquiry, was advised by the receiver of the Nestor Lumber Co. that, due to liquidating dividends, the face amount of all bonds had been reduced from $264,600 to $84,672, and that an offer had been made for the purchase of the assets for $24,-000. During 1919, 1920, and 1921, the receiver sold some of the land and received therefor the total amount of $14,150.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

MoRRis:

Several questions pertaining to the year 1917 are raised by the petition, but the Commissioner, according to the deficiency letter, has found neither an overassessment nor a deficiency for that year. We are, therefore, without jurisdiction.

The auxiliary safes and police signalling system, the cost of which the taxpayer claims is deductible in 1919, 1920, and 1921, have not been shown to have been items of current expense. The safes are used by depositors for the purpose of accumulating small savings. Some of them have gone through the process of being filled, opened, and reissued for many years. The police signalling system, during the taxable years in question, served the purpose for which it was installed. . The slight reduction in its utilization was occasioned by the removal of a few push buttons, which were so located as to be conducive to the sending of false alarms.

The deduction of the balance of the taxpayer’s investment in the bonds of the Nestor Lumber Co. is disallowed, as the bonds were not proven to have been worthless in 1919.


text:
    Appeal of THE CUYAHOGA CO.
    Docket No. 3721.
    Submitted October 27, 1925.
    Decided January 21, 1926.

      H. A. MiMUs, O. P. A., and L. 0. Weiss, O. P. A., for the taxpayer.

      W. Frank Gibbs, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This is an appeal from determinations of deficiencies in income and profits taxes for the calendar years 1919 and 1920 in the respective amounts of $1,022.69 and $2,661.36, a total of $3,684.05.
    FINDINGS OF FACT.
    Taxpayer is an Ohio corporation with its principal office at’ Cleveland. In 1892 taxpayer acquired by assignment two leases of adjoining parcels of real estate, located at the intersection of the south side of Superior Avenue and the east side of the Public Square, .in the City of Cleveland. One of the leases was executed in 1888 and the other in 1892, and both expire on April 1, 1988. The leases require the payment of a flat rental during the entire term of $12,100 per annum and the payment of all taxes, assessments, and water rents. The property has a frontage of 165 feet on Superior Avenue and 66 feet on the Public Square.
    Superior Avenue is the main thoroughfare between east and west Cleveland. The street cars serving the business section of Cleveland have the Public Square as their terminus. In 1913 the taxpayer’s building was in the center of the financial district and was occupied mainly by prominent brokerage and legal firms. On March 1, 1913, taxpayer’s leasehold interest had a fair market value of $450,000.
    In its income-tax returns taxpayer deducted exhaustion of said leasehold interest upon the basis of a March 1, 1913, value of $500,000. The Commissioner, in computing the deficiency, has allowed exhaustion of such leasehold upon a value of $136,334.87, admitted to be the value of such leasehold when acquired by the taxpayer in 1892.
    In 1894 the taxpayer completed the construction of a building on the leased premises, consisting of eight stories and a basement. The ground floor is constructed for the use of retail stores and the upper floors for offices. The elevators — one freight and three passenger— are electrically operated and are of light wire mesh cab construction. They do not go below the ground floor. Some of the stores are reached by stairs leading down from the street level. The building is of steel and brick construction and is lacking in many of the facilities of the more modern office buildings. The corridors in the building have a low wainscoting of Tennessee marble, the trim is wood, toilet facilities are confined to two floors, and only a few of the offices have running water. On the Superior Avenue side the building has three tiers of bay windows and on the public square it has two such bays. The offices are large and, because of the type of construction, the building is difficult of subdivision to meet the needs of present-day tenants.
    Commencing in 1918 a large number of modern office buildings have been constructed in the immediate neighborhood of the taxpayer’s property. These include the Federal Reserve Bank, the Guaranty Title & Trust Building, and the Union Trust Building. Directly across the Public Square is the Hotel Cleveland, and diagonally across the Public Square is the site for a proposed union station — a project which real estate men of Cleveland consider certain of completion and which will serve not only as a station for the railroad companies entering Cleveland, but also for suburban traffic — the upper floors of which will be constructed for use as offices. These new office buildings have served to make the offices in taxpayer’s building less desirable, and at the same time have greatly increased land values and taxes. By the close of 1918 it could reasonably be anticipated that the useful economic life of the taxpayer’s building would have ceased by January 1, 1935, at the latest, and that by that time it would be necessary to demolish its building for the purpose of erecting a larger and more modern building upon the premises. Taxes upon the property increased from $13,341.90 in 1916 to $27,492.47 in 1920, and the assessed valuation from $858,000 to $1,205,810. Rentals, after deduction of expenses of operation, taxes, and insurance, but before deducting depreciation, obsolescence, or amortization of the building or leaseholds, increased from $18,365.16 for 1915 to $25,266.45 for 1918 and to $34,017.58 in 1919. In computing the deficiency the Commissioner allowed depreciation upon the building upon the basis of a life of 50 years from 1894, the date of completion.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact by allowing as deductions (1) exhaustion upon the March 1,1913, valuation of the leasehold; and (2) wear and tear and obsolescence upon the building, based upon the termination of its useful economic life on December 31,1934. The basis to be used is the depreciated cost or March 1, 1913, value of the building, used by the Commissioner as the basis in computing the deficiency, which basis was not questioned upon this appeal. Final determination will be settled on 15 days’ notice, under Rule 50.


author: Trammell

text:
    Appeal of EARL M. PALMER.
    Docket No. 5447.
    Submitted October 17, 1925.
    Decided January 21, 1926.

      Helé, that the entire profits arising from the business of Ber-thold Stern Flour Oo. during the eleven-month period in 1918 and during the year 1919 were the income of the taxpayer, and the payment of $25,000 in settlement of a dispute and litigation was a capital expenditure.

      Arthur D. Cloud,, Esq., for the taxpayer.

      M. N. Fisher, Esq., for the Commissioner.
    Before Gratjpner and Trammell.
    This is an appeal from the determination of a deficiency in income tax for 1919 in the amount of $4,371.72.
    FINDINGS OF FACT.
    The taxpayer is an individual who resided in Chicago, Ill. Prior to February 1, 1918, one Berthold Stern owned and operated a flour selling agency, known as the Berthold Stern Flour Co. Stern had a contract with the Hubbard Milling Co., of Manicato, Minn., manufacturers of flour, which gave him the exclusive right to buy and sell that company’s flour in Chicago. This right was subject to with.drawal at any time by the Hubbard Milling Co. upon 30 days’ notice.
    On February 1, 1918, the tangible assets of Berthold Stern Flour Co. consisted of:
    Cash_:_$38, 366.13
    Bonds_ 1, 000.00
    Flour on hand at cost- 38, 494.39
    Equipment_ 5, 500. 00
    Due from E. M. Palmer_ 1, 087.00
    Accounts receivable_ 24, 462. 32
    Prepaid insurance_ 196. 50
    109,106.34
    There was a liability of $58,128.96 owing to the Hubbard Milling Co. for flour purchased. During January, 1918, Stern was called into the military service of the United States. Before entering the service he made an oral agreement with the taxpayer, who was a personal friend and who was also the son of the president and manager of the Hubbard Milling Co., by the terms of which Stern agreed to take all the accounts receivable and pay all debts, except the debt of the Milling Co. He was to leave in the business flour which cost $38,494.39, equipment of the value of $5,500, and cash in the amount of $14,188.57, or a total of $58,128.96, the amount of the debt due to the Milling Co. In addition, Stern transferred to the taxpayer a leasehold for the place of business, its good will, customers, and the organization of the going business.
    The taxpayer paid no cash, but assumed the debt of $58,182.96 to the Hubbard Milling Co. and procured the substitution of himself as debtor. It was agreed that the taxpayer was to manage and continue the business under the name of Berthold Stern Flour Co., and that he was to take all profits of the business until Stern returned from his military service. If Stem failed to return, the taxpayer was to keep the entire business, but if and when Stern returned he was to have the right to purchase a half interest in the business upon the same basis as that on which the taxpayer secured the business.
    On February 2, 1918, the taxpayer and Stern signed, in duplicate, the following memorandum of their agreement:
    Chicago, 2/2, 1918.
    In consideration of $5,500.00 and the total indebtedness to the Hubbard Milling Co. of tbe Berthold Stern Flour Co. receipt of which is hereby acknowledged, I hereby transfer to E. M. Palmer the Berthold Stern Flour Co. business, including one Buick Oar, one Ford car, one Old Reliable truck, Furniture and Fixtures, Stock and Good will located on premises at 452 No. Jefferson St., Chicago, Ill.
    It is further agreed that the accounts receivable as they appeared on the books Feb. 1st belong to Berthold Stern. In consideration of the above Iii. M. Palmer agrees to sell to Berthold Stern one half interest in the Berthold Stern Flour Co., upon his return from the army, on the same basis as the above business was sold to him.
    Berthold Steen.
    E. M. Palmee.
    And I hereby assign lease on property at 452 No. Jefferson St., for which said E. M. Palmer assumes full liability.
    Berthold Steen.
    E. M. Palmes.
    When Stern returned from military service in December, 1918, he immediately visited the taxpayer in Chicago, asked for the return to him of the half interest in the business, and offered to pay for the same according to his understanding of the agreement. The taxpayer declined to make a conveyance of the half interest and negotiations were continued for some time.
    On March 24, 1919, Stern filed a suit for specific performance of the contract, and, on July 17, 1919, he filed an amended bill of complaint asking for a rescission of the contract and an accounting. Evidence was taken before a master in chancery, who submitted a report in which he recommended as follows:
    That the transaction between Stern and the taxpayer, which culminated on February 2, 1918, was both a contract and a trust, under which Palmer was obligated faithfully to manage and continue the business during Stern’s absence in the Army, and, upon his return, to restore one-half of the business to Stern; that, for faithfully carrying out this contract and trust, Palmer was to have the entire profits during Stern’s absence and a one-half interest in the business after Stern’s return, and that, in any event, Stern was entitled to one-half of the profits made by the business after his return from the Army and after his demand upon the taxpayer to restore his one-half interest.
    The master further found from the evidence introduced before him that the taxpayer had taken unto himself, and intended to keep for himself alone, the right to sell the Hubbard flour, and that the taxpayer had made it impossible to return to Stern any part of the chief asset of the Berthold Stern Flour Co. business — namely, the good will which inhered in the Hubbard brand of flour and which was committed by Stern to the faithful keeping of the taxpayer during Stern’s absence in the Army. The master further found that the taxpayer had broken his contract and violated his trust in a matter so substantial and essential that the entire object on Stern’s part for entering into the contract was destroyed. The master concluded and recommended that the oral contract between the taxpayer and Stern and the memorandum in writing be rescinded and canceled by a decree of the court, and that the decree restore, as nearly as was consistent with strict equity, the status quo of the parties; and he further recommended that the taxpayer be decreed to account to Stern for all receipts and expenditures of the business from January 31, 1918, to the day of the accounting, that the taxpayer be enjoined from doing any act or taking any part in the conduct of the business, that all profits from said business, from January 31, 1918, to the day of the accounting, be decreed to belong to Stern, and that the taxpayer be decreed to be entitled to not more than a salary of $150 per week and his traveling expenses.
    The taxpayer, through his counsel, filed objections to the master’s report, but, before the objections were heard, the taxpayer and Stern settled their differences by the payment of $25,000 by the taxpayer to Stern, and the suit was dismissed.
    The profit from the business for the last 11 months of 1918 amounted to $19,871.47, and for 1919 to $28,772, a total of $48,-643.46.
    The taxpayer did not at any time convey a one-half interest in the business to Stern in accordance with the contract. The $25,000 paid by the taxpayer to Stern was a final settlement of all differences between them, and Stern thereafter claimed no further interest in the business or the profits therefrom.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Trammell

: There are two questions involved in this appeal. The first is, whether the profits arising from the business of Berthold Stern Flour Co., during the eleven-month period in 1918 and during 1919, should be included in the taxable income of the taxpayer for 1919; and the second question is, whether the taxpayer is entitled to a deduction on account of the $25,000 paid by him to Stern in settlement of the claim that Stern had against him. The Commissioner held that taxpayer should include in his 1919 income the profits for 1918 and 1919 and might deduct the payment of $25,000.

The contract and arrangement between the taxpayer and Stern, made at the time Stern entered the Army, was verbal. Stern, however, did convey his business to the taxpayer in 1918. There being only personal property involved, the sale could be effectual and binding without a written instrument. The contact entered into, whereby the taxpayer agreed to convey a one-half interest in the property and business back to Stern, is evidence of the fact that the taxpayer did actually acquire the business. He having acquired it, it belonged to him until he disposed of it. It may be true that the court would have canceled the contract and restored the parties to the status they were in before the execution of any agreement relating to the business, but no such order or decree was ever entered. The contract undoubtedly was not void but was binding until it had been revoked or canceled. The recommendation of the master appointed to take the testimony does not have the effect of a decree of the court, and did not cancel or abrogate either the original conveyance to the taxpayer or the contract to reconvey. The fact is that the taxpayer acquired the business in 1918 and remained the owner thereof. Any profits arising therefrom belonged to him. The profits which arose from the business, while it belonged to the taxpayer in 1918, are taxable to him in that year, and those profits which arose in 1919 are taxable in that year.

The question then arises as' to whether the amount of $25,000, paid by the taxpayer in 1919 to Stern, constitutes an ordinary and necessary business expense or a capital expenditure. It was paid to Stern in settlement of litigation over the question as to whether the • conveyance and contract made between the parties were effective. The effect of the payment was that the taxpayer acquired the undisputed ownership of the business and became entitled to all profits arising therefrom. The court, if it had followed the recommendation of the master, would have held that the taxpayer had no interest in the business, except the salary which he drew and certain ■ traveling expenses. It would have put the parties back in the same situation they were in while Stern owned and operated the business himself, and the taxpayer would have been required to account for the profits. By making the payment of $25,000 he saved to himself the business and its profits.

In view of the foregoing facts, we are of the opinion that the said payment amounted to a capital expenditure and was not an ordinary and necessary expense.


text:
    Appeal of ANTOINETTE B. HELD, Executrix, Estate of WILLIAM D. HELD.
    Docket No. 1988.
    Submitted October 26, 1925.
    Decided January 21, 1926.

      W. Frank Gibbs, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income tax in the amount of $454.91 for the calendar year 1921. Of this amount the taxpayer concedes ap error of $1 made in the computation of surtax, leaving in issue $453.91, which arises from- the addition by the Commissioner of $4,200 to 1921 income, which amount the taxpayer contends was received in 1922.
    FINDINGS OF FACT.
    William D. Held, deceased, was employed in 1921 by the firm of Egbert & Case, of New York, N. Y., at a salary of $10,000. At the time of his death on December 2, 1921, he had received $5,800 of his salary for the year. The balance, $4,200, was collected after his death by his widow and executrix, the taxpayer here, who received letters testamentary from the Surrogate of Essex County, 1ST. J., on. January 6,1922. Decedent made his returns upon a cash receipts and disbursement basis. The Commissioner has added such sum of. $4,200 to the 1921 income of the decedent.
   DECISION.

The determination of a deficiency in surtax of $1 is approved. The balance of the deficiency determined is disallowed.


author: Marqttette

text:
    Appeal of GOLDSTEIN BROS. AMUSEMENT CO., INC.
    Docket No. 4131.
    Submitted July 16, 1925.
    Decided January 21, 1926.
    The taxpayer and two other corporations, held, not to have been affiliated in the years 1919 and 1920.

      Hemry Herrick Bond, Esq., for the taxpayer.

      P. 8. Crewe, Esq., for the Commissioner.
    Before. MaRquette and MoRRis.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amount of $12,501.30, and an overassessment for 1918 of $636.10, with a resulting net deficiency of $11,865.20. .

      The single question is whether the taxpayer was affiliated with other corporations during the years 1918,1919, and 1920.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation, with principal office in Springfield, and was engaged in the operation of certain moving-picture theatres. It filed an affiliated corporations questionnaire, which was executed May 14, 1920, and included the following companies :

    The questionnaire neglected to state to what year the information applied, but it was accepted by the Commissioner as relating to the year 1919. Upon the basis of that information, the Commissioner accepted a consolidated return for the first three companies named, but refused consolidation of the Natsam Features Co. and the Victory Theatre Co. The ownership of stock in the three companies, as to which consolidation was granted, was:

    The Natsam Features Co. was incorporated under the laws of Massachusetts in 1917, and was engaged in the business of acquiring and renting moving-picture rights connected with two feature pictures for the benefit of the various amusement enterprises conducted by the taxpayer and others. One hundred shares of its stock were issued, of a par value of $100 each, 30 shares being issued to Nathan E. Goldstein, 30 shares to Samuel Goldstein, and 10 shares each to Jacob Schancupp, Henry Loscoe, Samuel Wiener and Susan A. Haggerty. Schancupp was a brother-in-law of the Goldsteins; Loscoe was the attorney for the corporation, Natsam Features Co.; Wiener was a business associate of the Goldsteins; and Mrs. Hag-gerty was the wife of an employee of the company who invested $1,000 in the stock and had it issued in his wife’s name.
    The Victory Theatre Co. was organized under the laws of Massachusetts on July 21, 1919, and during the year 1921 operated a moving-picture theatre in Holyoke, Mass. Its authorized capital was $60,000 common stock, which was subscribed for as follows:
    • Shares.
    Samuel Goldstein-299
    Nathan 33. Goldstein-299
    John, E. Jennings- 2
    The stock of the Victory Theatre Co. was first actually issued as follows:
    Shares.
    July 21, 1919, Nathan E. Goldstein- 6
    July 21, 1919, Samuel Goldstein- 5
    July 21, 1919, John E. Jennings- 2
    The total issued and outstanding stock of the Victory Theatre Co. from July 21, 1919, and during the balance of that year, was held as follows:
    Shares.
    Nathan E. Goldstein- 5'
    Samuel Goldstein- 5
    John E. Jennings- 2
    The total issued and outstanding stock of the Victory Theatre Co. during the year 1920 was:
    Nathan E. Goldstein, 5 shares from January 1, 1920, to January 1, 1921.
    Samuel Goldstein, 6 shares from January 1, 1920, to January 1, 1921.
    John E. Jennings, 2 shares from January 1, 1920, to September 15, 1920.
    John E. Jennings, 5 shares from September 15, 1920, to January 1, 1921.
    Goldstein Bros. Amusement Go., 300 shares from June 1, 1920, to September 4, 1920.
    Goldstein Bros. Amusement Go., 400 shares from September 4, 1920, to December 20, 1920.
    Goldstein Bros. Amusement Go., 435 shares from December 20, 1920, to January 1, 1921.
    Other interests, 130 shares from September 15, 1920, to January 1, 1921.
    All of the “ other interests ” above set forth (with the addition of Jennings) also held bonds of the Victory Co. and had so paid their subscriptions for bonds at September 15, 1920, that the stock was then issued to them.
    Prior to the erection of the Victory Theatre there was no modern theatre in the City of Holyoke. Public-spirited citizens had been instrumental in the financing of a modern hotel and, after the erection of the same, it was decided to add to the community a first-class theatre. The Chamber of Commerce of Holyoke conferred with the Goldstein brothers, who, in Springfield and other cities, operated successful and modern motion-picture theatres. The financing of the enterprise was arranged by placing a first mortgage with a bank in the amount of $200,000 and selling bonds to public-spirited citizens in the amount of $10,000, such bonds being secured by a second mortgage. It was agreed that, for every $1,000 of bonds subscribed and paid for, the subscriber would buy $100 par value of the common stock. The stock was not issued to bondholders until the bonds had been paid in to the extent of 50 per cent of the subscription price, which, in each instance, occurred on September 15,1920.
    The bondholders, who also owned 141 shares of the stock from September 15, 1920, were represented on the board of directors of the Victory Theatre Co. by Charles E. Mackintosh. There was no evidence, by way of corporate records, showing how the stock of the minority group was actually voted at meetings of stockholders, but such minority stockholders as attended meetings never took an active jiart in the meetings or voted contrary to the Goldsteins.
    The persons other than the Goldsteins who put their money into the enterprise did not do so as an investment but rather from the motive of civic pride and interest. They had confidence in the Gold-steins and were content to leave the management of the theatre entirely to them.
    The sole activity of the Victory Theatre Co., from the date of its incorporation on July 21, 1919, until the latter part of 1920, was in the erection and equipping of a motion-picture theatre in the City of Holyoke and the necessary financing in connection therewith. No income accrued.to the company until the theatre was opened to the public late in December, 1920, or about January, 1921, from which time rent was paid by the Goldstein Bros. Amusement Co. to the Victory Theatre Co. at the rate of $2,500 per month.
    The total book cost of the land, building, and equipment, upon the completion of the theatre about December 30, 1920, was approximately $263,000, which amount was largely represented by borrowed money.
    Certain of the stockholders, other than the Goldsteins, in both the Natsam Features Co. and the Victory Theatre Co., signed undated documents by which they agreed to sell their stock to the respective companies at the price offered by any other person, but not in excess of the book value. Neither company executed the documents.
    The taxpayer loaned money to the Natsam Features Co. and to the Victory Theatre Co. on several occasions.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Marqttette

: The facts with reference to the Nats am Features Co. show that 40 per cent of the stock of that corporation was owned by others than the Goldsteins, and there is no evidence tending to prove that the minority stock was controlled by them. The mere fact of family and business relationship, standing alone, is insufficient to constitute control or to warrant a holding that persons standing in such relationship constitute the same interest with the majority. The extent of the Goldsteins’ control is a matter of speculation, and the facts with reference to the Nats am Features Co. are insufficient to warrant affiliation.

Assuming that the Goldsteins controlled the stock owned by the taxpayer in the Victory Theatre Co., the proof shows actual ownership by the Goldsteins of 83½ per cent from July 21, 1919, to June 1, 1920, and, to an increased percentage, a control through the taxpayer from June 1, 1920, to September 13, 1920, when the issuance of 141 shares to other persons reduced the percentage of the Gold-steins’ ownership and control to about 75 per cent. The issuance of 35 shares to the taxpayer on December 20, 1920, did not serve materially to increase the control of the Goldstein interests. No actual control of the stock of the minority interests is shown, the only evidence being to the effect that the minority was quiescent and permitted the Goldstein interests to manage the affairs of the corporation. True, certain of the stockholders had agreed to sell their stock to the corporation at the price offered by any other person but not in excess of the book value, but there was no obligation upon the corporation to purchase, and we are unable to see how a mere option to purchase can constitute control of the stock.

In the circumstances of this appeal, we are of opinion that an ownership and control of 75 per cent of the stock of a corporation by the same interests is insufficient to constitute a control of substantially all the stock, and the Victory Theatre Co. and the taxpayer can not be affiliated upon that ground during the years in question. The same conclusion results if the taxpayer and the Victory Theatre Co. are attempted to be affiliated through the ownership by the taxpayer of stock in the Victory Theatre Co. If we assume that the taxpayer controlled the Goldstein holdings and that those two constituted closely affiliated interests, there is still no evidence of control of approximately 25 per cent of the stock, and we are unable to hold that it owned or controlled, through closely affiliated interests, substantially all the stock of the theatre company.


text:
    Appeal of LENA SPEIZER.
    Docket No. 2389.
    Submitted September 24, 1925.
    Decided January 21, 1926.

      Benjamin, Jmrett, Esq., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Geaupnee and Teammell.
    This is an appeal from the determination of a deficiency in income tax in the amount of $8,580.70 for the year 1919. The deficiency results from the holding by the Commissioner that the taxpayer realized a taxable profit on the sale of certain property.
    FINDINGS op pact.
    The taxpayer is the widow of Mark Speizer, deceased, and the administratrix of his estate. At the death of Mark Speizer on July 5,1919, he left surviving him the taxpayer and four minor children. George A. Gluck was appointed guardian of the four children. At the time of his death Mark Speizer owned a furniture and hardware store, which had a value of approximately $77,279.76.
    Under the laws of the Commonwealth of Pennsylvania the taxpayer was entitled to a one-third interest, and the minor children were entitled to a two-thirds interest, in the estate of the decedent.
    The Orphans’ Court of Mercer County, Pa., issued an order on July 21, 1919, whereby the guardian was authorized to sell to the taxpayer the two-thirds interest of the minor children in the store for the sum of $10,000, the taxpayer to assume and pay the indebtedness then ohtstanding. On August 1, 1919, the taxpayer entered into a contract for the sale of the property for a consideration of $77,279.76, of which $45,279.76 was paid in cash and a note for $32,000 was given by the purchasers for the balance due. The excess of the cash payment over the inventory value of the stock in trade, book accounts, fixtures, etc., and the payments on the principal and interest on the note were treated by the taxpayer as belonging to the estate of her deceased husband and were listed in her first and partial account as administratrix as receipts belonging to the estate.
    Pursuant to a petition of the taxpayer setting forth the facts relative to her administration of the estate, the Orphans’ Court on May 5, 1925, issued an order annulling the authorization of sale of July 21, 1919, above mentioned, for the purpose of correcting the record and showing that the sale was for the benefit of the estate of the taxpayer’s deceased husband.
   DECISION.

The deficiency determined by the Commissioner is* disallowed.


text:
    Appeal of CENTRAL FROG & SWITCH CO.
    Docket No. 5353.
    Submitted December 1, 1925.
    Decided January 21, 1926.

      FrcmJc G. Dekebach, G. P. A., for the taxpayer.

      Thomas P. Dudley, Jr,, Esq., for the Commissioner.
    Before GeaupneR, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the calendar years 1920 and 1922 in the amount of $7,840.08. The taxpayer alleges error to have been committed by the Commissioner in refusing to permit the taxpayer to deduct on its tax returns for the year 1919 and subsequent years the amount of $3,259.41, which was expended for constructing a road and laying gas and water pipes from the town limits to the plant of the taxpayer. This amount was claimed to have been expended in 1918 and capitalized on the books when the business was started in that year.
    It is also alleged that the Commissioner erred in refusing to allow deductions for expenditures amounting to $3,260.86, incurred in the latter part of the year 1918. The two amounts which the taxpayer seeks to deduct appear from the pleadings to be expenditures for expenses of the year 1918. No evidence was introduced to show that any part of such amounts should be allowed as deductions for the years 1920 or 1922.
    The taxpayer pleads that the Commissioner erred in disallowing a rate of depreciation of 25 per cent on patterns and drawings. No satisfactory evidence was introduced to prove the cost, number, or life of such patterns and drawings. The evidence was entirely insufficient to enable the Board to make any findings of material fact therefrom, and it is only from admissions contained in the Commissioner’s answer that we can make the following
    FINDINGS OF FACT.
    The taxpayer is an Ohio corporation, with its principal place of business in the City of Cincinnati, and, in the latter part of the year 1918 and during the years 1919, 1920, 1921, and 1922, was engaged in the manufacture of frogs and switches.
   DECISION.

The determination of the Commissioner is approved.


author: Sternhagen

text:
    Appeal of ABATTOIR REALTY CO.
    Docket No. 3346.
    Submitted October 14, 1925.
    Decided January 21, 1926.
    Two corporations helé affiliated.

      Howard N. Ragland, Esq., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Sterniiagen, Lansdon, and Aexjndell.
    The Commissioner determined a deficiency for the years 1919, 1920, 1921, and 1922, of $14,887.49, from all of which the taxpayer appeals, upon the ground that it was, for the taxable years in question, affiliated with the Cincinnati Abattoir Co.
    FINDINGS OF FACT.
    The Cincinnati Abattoir Co. was incorporated in April, 1893. In 1913 it was required, after a serious flood, to wreck two of its buildings, and it needed liquid assets. At that time its stock consisted of $500,000 common, $200,000 first preferred, and $300,000 second preferred. The Abattoir Realty Co. was organized in April, 1914, with-$400,000 common and $400,000 preferred. Immediately, the Cincinnati Co., by deed dated June 18, 1914, transferred all of the real property in its manufacturing plant to the Realty Co., in consideration of $800,000. This consideration was paid by the issuance of all the Realty Company’s stock in the name of the Cincinnati Co.
    On the same date the Realty Co. leased the property to the Cincinnati Co., giving to the latter the right to repurchase for $800,000. By the terms of the lease the Cincinnati Co. was to pay, in addition to the annual rental of $36,000, payable semimonthly, all of the taxes, including income taxes, of the Realty Co., and all expenses of the Realty Co. incurred in maintaining its offices and in conducting its business in respect of the leased premises. Right of reentry was reserved to the lessor after 30 days’ default. It was provided “that before any dividends are paid on the common stock of the lessee, it shall out of its surplus profits acquire by redemption or purchase at not to exceed $110 per share at least 4 per cent in par value of the whole amount of preferred stock of the lessor at that time outstanding.” The Realty Co. had no income or source of income other than the rental from the Cincinnati Co.
    The preferred stock of the Realty Co. was sold principally to the stockholders of the Cincinnati Co. and the only voting rights of this preferred stock were contained in the following provisions:
    Owners of preferred stock of the company shall have the special power to vote for and to elect a majority of its directors at any meeting of stockholders held for the purpose of electing directors.

      During the taxable years in question the Cincinnati Co. owned all of the common stock of the Realty Co. and none of the preferred stock. The preferred stock of the Realty Co. was held as follows:

    During 1919, the directors of the Realty Co. were Jesse Lippin-cott, H. B. Schmidt, Charles F. Barrett, Miles T. Watts, and Robert H. West. Barrett, Schmidt, and Lippincott owned no preferred stock of the Realty Co. West and Watts did. Barrett and Schmidt owned stock in the Cincinnati Co. Lippincott personally owned no stock, but the Cincinnati Union Stock Yards Co., of which Lippin-cott was president, owned $50,000 of such stock. Lippincott represented the Stock Yards Co. on the board of the Realty Co.
    In 1920 the directorate remained the same. In 1921 Schmidt and Watts died and Roth and Eschbook were elected directors. Roth owned no preferred stock of the Realty Co. and Eschbook did. Roth represented the John C. Roth Packing Co., the stock of which was owned entirely by the Cincinnati Co. These directors also served in 1922.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Sternhagen

: The facts set forth disclose a complete unity of the enterprise, which was inherent in the creation of the Realty Co. and has remained so since. The Cincinnati Co. has assumed the material responsibilities of the Realty Co. and dominates it completely. It owns all the common stock and its stockholders own two-thirds of the preferred. The directors are such persons as the Cincinnati Co. selects. The right of preferred stockholders to elect a majority of the directors is controlled by the Cincinnati Co. and its stockholders. The remaining preferred stockholders, even were they hostile to the Cincinnati Co. and its interests and were to vote or act in unison, could not be effectively adverse to the Cincinnati Co. But, so far as this record shows, there is no diversity of interest. Taking all the circumstances, together, we are oí opinion that the two corporations were affiliated within the taxable years in question.

On reference to the Board, Smith and TRAMmell dissent.