author: Phillips :

text:
    Appeal of Ernest P. Waud and The Northern Trust Co., Executors, Estate of George F. Griffin.
    Docket No. 5612.
    Promulgated April 16, 1927.
    Where under the will of a decedent the income of a trust fund is payable to a designated beneficiary for a period of years, or in the event of the death of such beneficiary is payable to his estate, and such beneficiary dies, held, that the annual income from the trust fund is taxable as income to the estate of such deceased beneficiary.

      Raymond M. Ashcraft, Esq., for the petitioners.

      Arthur H. Murray, Esq., for the Commissioner.
    This matter comes before the Board upon an appeal by the executors of the estate of George F. Griffin, deceased, late of Chicago, Ill., from the proposed assessment by the Commissioner against the estate of an additional income tax of $4,869.84, for the period from May 4, 1920, the day following decedent’s death, to December 31, 1920. The executors allege that the Commissioner erred in determining the income of this estate by including in the gross income subject to tax $29,451.80 representing dividends on capital stock distributable during the taxable period to this estate from the trustees of the estate of Thomas A. Griffin. The facts are stipulated.
    FINDINGS OP PACT.
    The petitioners are the executors of the estate of George F. Griffin, deceased, late of Chicago, Ill., and have their principal office at 50 South LaSalle Street, Chicago.
    Thomas A. Griffin, father of George F. Griffin, died August 12, 1914, a resident of Massachusetts, leaving a will which was admitted to probate in the Probate Court of Suffolk County, Massachusetts, and leaving his daughter, Marie G. Dennett, and his son, George F. Griffin, the decedent in this case, surviving him. The wife of Thomas A. Griffin did not survive him. The will of Thomas A. Griffin provided that all of his stock in the Griffin Wheel Co. should ' be held by the trustees named therein for a period of ten years from the date of his death, during which time the net income derived therefrom or from the proceeds thereof should be paid in equal shares to the-said son and daughter. The will directed that at the end of the ten-year period one-half of tlie trust estate should be divided in equal shares between the said son and daughter, and the remaining one-half continued in trust for the grandchildren of Thomas A. Griffin.
    The will of Thomas A. Griffin further provided that in the event of the death of either of the said children of Thomas A. Griffin, the issue of such child should take the share of the trust estate and of the income therefrom to which the deceased child would have been entitled if living, with a remainder - over in each case to the other child in the event of the death of either child without issue.
    After the death of Thomas A. Griffin, his daughter, Marie Den-nett, his son, • George F. Griffin, and the trustees of the estate of Thomas A. Griffin entered into a compromise agreement, modifying certain provisions of the- will. It was provided in the agreement that in the event of the death of either the said Marie Dennett or George F. Griffin, during the ten-year period following the death of Thomas A. Griffin, the share of the income to which the one so dying would have been entitled during the remainder of the term of ten years, should be taken by the estate of that one, rather than the issue, as provided in the will. The compromise agreement was subsequently approved by the decree of the Supreme Judicial Court of Massachusetts.
    , George F. Griffin, son of the said Thomas A. Griffin, was a resident of Chicago and died- on May 3, 1920.
    George F. Griffin until his death received one-half of the net income of the trust estate created under his father’s will. Since the death of George F. Griffin, and until August 12, 1924, the end of the ten-year period, his estate has received his portion of such net income in accordance with the will of Thomas A. Griffin, as modified. The present value of the right of the estate of George F. Griffin to the income from the Thomas A. Griffin trust from May 3, 1920, the date of his death, to August 12, 1924, was determined as of the date of his death and included in his gross estate for purposes of the Federal estate tax. The value placed on this item in the estate-tax return was $554,723.42.
    The income distributable to the estate of George F. Griffin from the trustees of the estate of Thomas A. Griffin, according to the terins of the will of Thomas A. Griffin as modified by the compromise agreement, from May 3, 1920, to the end of that year, is the basis for the deficiency assessment in this case.
    The executors of the estate of George F. Griffin, in their income-tax return for the period from May 4 to December 31,1920, no.ted the fact that the estate had distributable funds from the estate of Thomas A. Griffin during the period, but stated that these funds were not included in the gross income of the estate of George F. Griffin subject to tax because they were advised that the funds in question represented corpus or capital of the estate and not income. The amount of distributable income to the estate of. George F. Griffin from the estate of Thomas A. Griffin during the period from May 4, to December 31, 1920, and represented by dividends on capital stock, was $29,451.80; the remainder was exempt from tax, as determined by the Commissioner. The Commissioner on auditing the return of the estate of George F. .Griffin has included in its gross income the portion of such distributable income from the estate of Thomas A. Griffin represented by dividends on capital stock. Whether or not this fund should be treated as income, or part principal and part income, is the only question involved in this proceeding.
    In a proceeding brought by the executors and trustees, of the estate of George F. Griffin a decree was entered by the Superior Court, Cook County, Illinois, on February 10, 1925, in which the court found and. determined that as. between those persons entitled to the income in the George F. Griffin estate and those persons eventually entitled to the principal thereof,* each payment received by the estate of George F. Griffin from the trustees of the estate of Thomas A Griffin during the remainder of the said ten-year period represented both principal and income to the estate of George F. Griffin, and that the present worth as of the date of the death of George F. Griffin, of each payment to be received, represented principal and that the portion of such payment in excess of such presept worth represented income, and the executors and trustees were directed to account accordingly to the beneficiaries of the estate of George F. Griffin, for the payments so received.
   OPINION.

Phillips :

Although an attempt has been made to distinguish the situation here from that passed upon by the Supreme Court in Irwin v. Gavit, 268 U. S. 161; 45 Sup. Ct. 475; 5 Am. Fed. Tax Rep. 5380, we fail to see any legal distinction which would take this case from under the reasoning of that decision.

The court advanced two grounds for its decision in that case. As to the first of these it said:

We think that the provision of the act that exempts bequests assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so called simply because of a. severance between it and the principal fund. * * * The money was income in the hands of the trustees and we know of nothing in the law that prevented its being paid and received as income by the donee.

This reasoning has the same weight here as it had there. Later in its opinion the court, in what appears to be the second line of reasoning followed in reaching its conclusion, said:

A gift of the income of a fund ordinarily is treated by equity as creating an interest in the fund. Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it. The fund is appropriated to the production of the same result whichever form the gift takes.

Here the comparison is to an estate for years rather than for life, but otherwise no apparent distinction may be drawn.

It' is suggested in effect that at the time of his death the decedent was vested with an estate for years, that his estate acquired it from him by devise or bequest, and that here the principal of the bequest was another bequest, the realization of the whole of which it is sought to tax as income. However, it would appear from the stipulated facts that the property came to the estate of George F. Griffin by virtue of a trust created by the will of Thomas A. Griffin, as modified by an agreement between the beneficiaries and the trustees. The interest of George F. Griffin in the fund ceased with his death and the interest of his estate then arose pursuant to the previous agreement and not under any gift, devise or bequest of his. That which the estate took never had been the property of the decedent, if we correctly interpret the stipulation. Under the agreement his rights • ceased with his death and the rights of the next beneficiary of the agreement, his estate, came into fruition under the agreement but through no bequest of his. The income which it is sought to tax being, therefore, received by the estate as a beneficiary of the trust created by Thomas A. Griffin, the estate here involved is in no different position than was the beneficiary in the case of Irwin v. Gavit, supra.

It is contended that because the right to receive these dividends was valued and taxed as a part of the gross estate of the decedent, such value can not be taxed as income. But, referring to the reasoning of the Supreme Court in Irwin v. Gavit, supra, it would appear that the situation is to be treated as though the taxpayer had received an estate for years in certain property. The estate may have a present value, but the income produced by the property is nevertheless income and taxable as such. In legal contemplation the taxpayer’s right was to receive the accretions to a principal fund and under the constitution and taxing acts these are held to be income. Irwin v. Gavit, supra; Heiner v. Beatty, 17 Fed. (2d) 743.

The fact that the state court has decided that a part of this income is distributable to those entitled to the corpus of the estate and a part to those entitled to the income of the estate, can not affect the question whether such amounts are income to the estate during the period of administration. The situation is similar to that which arises with respect to profits from the sale of assets of the estate, but since the decision of the Supreme Court in Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509; 41 Sup. Ct. 386; 3 Am. Fed. Tax Rep. 3102, there is no ground for the contention that such gains are not taxable, although they may, for distribution in the state court, constitute a part of the corpus.

Decision will he entered for the Gomnmssioner.


source: Caselaw Access Project

author: Milliken :

license: Public Domain

text:
    Audubon Park Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9629.
    Promulgated April 16, 1927.
    1. Where the Commissioner computed the gain under the Act of 1918 from a sale of property acquired prior to March 1, 1913, by using March 1, 1913, value as a basis,' and the petitioner establishes a greater value as of that date, the value proven should be substituted for that determined by the Commissioner as the basis, though cost is undisclosed, as the latter element is not essential to the computation, it being presumed that the March 1, 1913, value determined by the Commissioner was greater than cost, for the effect of increasing such value as a basis for computing gain is to get further away from the alternative basis, cost.
    2. The March 1, 1913, value of a real estate subdivision determined from ppinion evidence.
    3. A bad debt deduction disallowed, where debtor was known to have been insolvent in years prior to the one in which the deduction was claimed.

      John B. Baskin, Esq., for the petitioner.

      L. G. MitchellEsq., for the respondent.

      This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1919, in the amount of $50,655.39. This deficiency arises from a determination by the Commissioner of a gain of $152,801, resulting from a sale by the petitioner in 1919, of 353 acres of land, to the United States, and from his disallowance as a deduction of a- promissory note of G. R. Hunt, which petitioner claims was found to be worthless and was charged off during the year 1919.
    FINDINGS OP FACT.
    Petitioner, whose original name was Prestonia Realty Co., is a Kentucky corporation, with its principal office at Audubon .Park, Louisville, Ky. Prior to 1910, but at what cost does not appear, the Prestonia Realty Co. acquired approximately 760 acres of land, situated about two miles south of the present limits of the City of Louisville, Ky. The corporation dedicated this property as a subdivision for residential purposes. Streets, blocks, sidewalks and golf links were laid out on the plat and dedicated to the use of the purchasers of lots in the subdivision.
    The whole 760 acres may be divided into three parts. The northerly part, containing 230 acres and being that portion nearest the City of Louisville, was first improved and put on the market. These 230 acres had been improved prior to March 1, 1913, as follows: Streets and sidewalks had been constructed over the greater part of it. A 6-inch water main, which connected with the city water system, had been laid at the expense of the company. Electricity for lighting purposes had been brought in, as was also the telephone. On March 1, 1913, negotiations were in progress with the Louisville & Interurban Railroad Co., looking to the extension of its line into the park, and the operation of a 20-minute service. The contract for this facility was finally made on March 31, 1913. South of the 230 acres was the golf course, which contained 129.5 acres. Prior to March 1, 1913, the golf links had been improved, and a clubhouse had been erected. The remainder of the 760 acres lay south and east of the golf course, and bordered thereon. This remaining portion was, on March 1, 1913, unimproved, except that some leveling had been done and trees had been planted. Prior to March 1, 1913, there had been laid out in this portion, but not constructed, .except along the northern part thereof, streets and drives which had been dedicated, to the property owners of the whole subdivision. This portion of the land contained the 353 acres which were sold to the United States.
    The following sales were made prior to March 1, 1913:
    In 1909 and 1910, 38 lots were sold for the aggregate amount of $74,951.98, or at the average price per acre of $3,098.00. In 1911, one lot of 90 by 200 feet was sold for $1,200. In 1912, 36 lots were sold for the sum of $38,695, or at about $3,225 per acre. In 1913, and prior to March 1, only 1 lot of 50 by 200 feet was sold, for the price of $620.
    At the outbreak of the World War, the Government proposed to establish an army camp near the City of Louisville. The National Camp Land Co. was organized for the purpose of acquiring land for the camp. The petitioner leased to this company the 353 acres in controversy, for the term of two years, with the privilege of three additional years, at a rental of one dollar per annum. This lease was assigned by the National Camp Land Co. to the United States, and the land became part of Camp Taylor. In 1919, the United States purchased the 353 acres for the sum of $301,351. The Commissioner computed the deficiency upon the March 1, 1913, value of the tract, which he placed at $123,500, or at $350 per acre.
    In 1911, what are called the Smyeer interests, purchased two-thirds of the capital stock of petitioner for $25,000 cash, and their obligations to pay $25,000 of the floating debt of the petitioner and $200,0(30 of its then existing mortgage debt.
    There was situated on the 353 acres a nursery, which was destroyed by the Government and for which the Commissioner has allowed the petitioner the sum of $25,000, or has added, in computing the gain, to the March 1, 1913, value of the 353 acres (i. e. $123,500) the sum of. $25,000. This amount, allowed for the nursery is not in controversy. The sole issue is, What was the March 1, 1913, value of the 353-acre tract in controversy, exclusive of the nursery ?
    The value of the land on March 1, 1913, exclusive of the nursery, was $800 per acre, or in all, $282,400.
    In the summer of 1913, G. E. Hunt, one of petitioner’s stockholders, was hard pressed by his creditors. In order to help him settle with them, the petitioner, on August 1, 1913, conveyed to him, free of lien, several lots in the subdivision, in consideration of his note of that date of $50,000. The note bore interest at 5 per cent per annum. The lots were disposed of by Mr. Hunt in the settlement of his debts. The only property owned by Mr. Hunt at this time, Avas a house and lot in the subdivision (whether encumbered or not, does not appear), and 80 shares of petitioner’s stock. This stock was pledged to secure the note, and also to secure a note of Mr. Hunt to the petitioner, dated November 24, 1915, for $2,747.82, and a mortgage debt of the petitioner to the Fidelity & Columbia Trust Co., to the extent of $105,000. The stock was sold at judicial sale, on June 18, 1917, for $3,043.86. It does not appear on which debt this sum was credited. Subsequent to the date of this sale, Mr. Hunt possessed no. property whatever. In 1916 or 1917, Mr. Hunt, who had a wife and three children dependent upon him for support, moved to Cincinnati, Ohio, and accepted a position in a brokerage concern at a salary, the amount of which does not appear, and perhaps also on a commission basis. There was no change in Mr. Hunt’s financial condition from June 17, 1917, until his death, which occurred in 1924. Mr. Hunt and the other stockholders of the company had been intimate friends for many years. The petitioner’s minute book contains the following:
    At a called meeting of the stockholders of the Audubon Park Realty Company^ held in the Company’s office, 1003 Starks Bldg., on Monday, Sept. 15th, 1919, at 10 o’clock A. M., there were present Messrs. D. A. Keller, Jacob L. Smyser, Jas. L. Smyser, H. L. Smyser and E. G. Steiden, representing all of the stock of said Company, as also the Board of Directors of same.
    Mr. H. L. Smyser reported an interview with Mr. G. R. Hunt of Cincinnati on Sept. 5th, at which interview Mr. Hunt announced that on account of his many obligations, he had lost several chances of entering into business on his own initiative, and that he was confronted with either taking the bankruptcy law or arranging in some way with his creditors for the cancellation of his debts. Mr. Hunt reported that outside of his obligation to his Family, with whom he could arrange matters, and the obligation of $50,000 and interest to the Audubon Park Realty Company that he owed only about $900, which amount he could take care of. tie further said he knew the request was an unusual one, but that he had absolutely no chance of paying his obligation to us and asked for a cancellation of same. After discussing the matter in its every phase and realizing that we have no chance of having this note paid, and that through bankruptcy proceedings a stigma would be held against him through life, it was moved by Mr. I-L L. Smyser, seconded by D. A. Keller, that the Secretary be instructed to return to Mr. Hunt his note for $50,000 and write to him the following letter:
    G. R. Hunt, Esq.,
    c/o W. E. Hutton & Co.,
    Cincinnati, Ohio.
    Dear Mr. Hunt :
    I have been instructed by the Directors of our company, who own all of the stock, to enclose you your note of August 1st, 1913, for $50,000 to this Company, and to say that we sincerely hope that through this action on our part you will be enabled to again establish yourself in some business that will prove satisfactory far beyond your most sanguine expectations.
    With best wishes, we are,
    Yours very truly,
    Audubon Park Reamt Company
    (Signed) E. G. Steiden, Secy.
    There being no further business, the meeting on motion adjourned.
    (Signed) E. G. Steiden, Secy.
    (Signed)
    Jas. L. Smyser,
    Vice-Pres.

      Cincinnati, Sept. 19, 1919.

    To the Officers and Directors of THE
    Audubon Park Realty Company
    Louisville, Ky.
    Gentlemen : ■
    Your valued favor of the 16th instant, with my enclosed note for Fifty Thousand Dollars received.
    I am at a loss to express in adequate terms my sincere gratitude for this great kindness. I thank you one and all, and trust some day soon I can assure you in person of my keen appreciation.
    Sincerely yours,
    (Signed) G. R. Hunt.
   OPINION.

Milliken :

In order to ascertain the .gain or loss, under the Bevenue Act of 1918, resulting from the sale of property acquired prior to March 1, 1913, the following three elements must appear: (1) The cost of the property, (2) its value on March 1, 1913, and (3) its sale price (United States v. Flannery, 268 U. S. 98; McCaughn v. Ludington, 268 U. S. 106; Appeal of Anniston City Land Co., 2 B. T. A. 526).

Here the cost of the 353 acres is absent. However, the Commissioner based his determination of deficiency on 1913 value, and we must assume that in so doing, he followed the law, and therefore, that the March 1,-1913, value was greater than, or at least equal to, the cost of the property. Since the taxable gain is ascertained by deducting from the sale price the cost of the property or its March 1, 1913, value, whichever is the greater, it follows that adding to the March 1, 1913, value results in getting further away from cost. On the other hand, since loss is computed by deducting the sale price from the cost or the March 1, 1913, value, whichever is the lesser, any addition to either of said values has the effect of bringing them together, and the absence of a knowledge of one makes it impossible to say where they will meet. The difference between the computation of loss and gain in such cases, is obvious. We must, therefore, proceed upon the assumption that the March 1, 1913,- value, of the tract of land involved was greater or was equal to its cost (Appeal of George W. Baumhoff, 3 B. T. A. 392; Appeal of Gilbert Butler, 4 B. T. A. 756).

In fixing the March 1, 1913, value at $123,550, the Commissioner to a large extent based his finding on an' appraisement of the tract made on February 5, 1913, for the purpose of ascertaining whether a then existing mortgage deed was well secured. The appraisal fixed a value of that portion of the 760 acres involved in this proceeding at $300 per acre. It clearly appears from the evidence that the president of tbe trust company which held the mortgage directed that the unimproved part of the tract should be appraised as “ acre property” without reference to its value for subdivision purposes, and that the appraisal was made in pursuance of this direction. It further appears that the appraisers kept in view the fact, that under the laws of Kentucky the mortgage could only be foreclosed by proceedings in court, followed by a judicial sale. The property was, therefore, not only appraised merely as acre property, but its value as such was placed at a very conservative figure.

The Commissioner also relies on the affidavit of Alphons Schoen-bachler, who is a dairyman, and owns land in the neighborhood, and who in his affidavit, valued the 353 acres as follows: 200 acres at $275 per acre, and 153 acres at $350 per acre. The Commissioner introduced a letter from the petitioner’s vice president, dated March 29, 1921, in which both the cost and the March 1, 1913, value were fixed at $99,783.46.

It is shown that the vice president took his figures from the books of the company and that the $99,783.46 did not represent either the cost or the March 1, 1913, value of the property, but was a balance remaining on the debit side of the real estate account as of December 31, 1918, on unsold portions of the subdivision.

Schoenbachler’s deposition was taken and it now appears that he possesses little knowledge of real estate values except when such property is used for farming or dairying purposes.

The deposition of D. F. Murphy, one of the men who made the appraisement of February 5, 1913, was taken and he now testifies that in his opinion the 353 acres, when viewed as subdivision property and when the advantages which had been secured prior to March 1, 1913, to the subdivision as a whole, are taken into consideration, were worth as of that date, $1,000 per acre. It appears that Mr. Murphy, on October 6,1924, gave as his opinion, in his affidavit, that the property was worth on March 1, 1913, from $750 to $800 per acre. Mr. Murphy had for 20 years prior to 1904, been tax assessor of the City of Louisville, and since that date he has been continuously employed by the Fidelity Trust Co. and its successor, the Fidelity & Columbia Trust Co., in charge of appraisals.

Among the other witnesses introduced by the petitioner, were four realtors of long experience: Jo. Hieatt, Walter S. Adams, Arthur E. Mueller, and George Henriott. These witnesses placed the March 1, 1913, value at from $850 to $1,000 per acre. The witnesses, Hieatt, Mueller and Henriott, state that as of March 1, 1913, the value of the 353 acres was enhanced to the extent of from $350 to $500 per acre by the improvements made on the remainder of the tract, and by tbe fact that a purchaser of lots in this tract had the right to participate in these benefits.

Taking these figures in connection with the appraisement of February .1, 1918, and also in connection with the valuations arrived at by- the various experts, it is fair to conclude that the 353-acre tract was worth $800 per acre on March 1,1913.

The burden is on the petitioner to show not only that the $50,000 note of G. R. Hunt was worthless and charged off during the year 1919, but also that it was ascertained to be worthless during that year. This burden the petitioner failed to meet. It appears that the financial condition of Hunt underwent no material change after the sale of his stock in June, 1917. The Commissioner did not err in refusing to allow this deduction.

Judgment will be entered on 15 days' notice, v/nder Bule 50.


text:
    Bruner Woolen Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7892.
    Promulgated April 16, 1927.
    A net loss sustained during the taxable year 1921 may be deducted from tbe income of a portion of tbe taxable year 1922, due ■ to dissolution, under section 204, Revenue Act of 1921.

      John A. Selby, Esq., for the petitioner.

      J. L. Deveney, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in tax for the year 1922, in the amount of $2,368.85. In the original petition and answer filed in this case, but one issue was presented and that related to the right of the petitioner to the benefits of section 204 of the Revenue Act of 1921, in computing net income for the taxable year 1922. In the amended answer filed by respondent it is averred that the deficiency should be increased for the year 1922 by the addition of the 25 per cent delinquency penalty, as prescribed by section 3176 of the Revised Statutes, as amended.
    FINDINGS OF FACT.
    Petitioner was incorporated under the laws of the State of New York, had its principal place of business at 395 Fourth Avenue, New York City, and on June 29, 1922, was dissolved under the laws of the State of New York. Petitioner for the year 1921 suffered a net loss, as that term is used and defined in section 204 of the Revenue Act of 1921, in the sum of $18,653.26, and in filing its tax return for the year 1922, sought to deduct said net loss in determining its net income.
    Petitioner filed, on October 10, 1923, with the collector of internal revenue, its return for the year 1922, reflecting its income for the period beginning January 1, 1922, and ended June 29, 1922, the date of dissolution of the petitioner.
   OPINION.

Milliken :

The respondent erred in his failure to allow petitioner the net loss sustained in 1921, in computing the net income for the year 1922. Appeal of Carroll Chain Co., 1 B. T. A. 38; Appeal of Patapsco Ballast Co., 1 B. T. A. 1081.

The issue relating to the imposition of the 1925 delinquency penalty was raised by the amended answer filed by the respondent, and the burden of proof was on him to support the same. The only facts before us show that the return was filed with the collector of internal revenue on October 10, 1923. The due date for filing the return was March 15, 1923, yet for all we know, there may have been an extension of time granted within which the return was to be filed, and even if no extension was granted the petitioner, the delinquency in filing the return may have been due to reasonable cause. The respondent has not borne the burden of proof and we find no justification for the imposition of the 25 per cent delinquency penalty.

Judgment will he entered on 10 days' notice, under Rule 50.


text:
    Leland Stave Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9353.
    Promulgated April 18, 1927.
    A net loss sustained during a fractional part of a year, due to a ■ change of accounting period, may not be deducted from the net income of other years under section 204(b), Revenue Act of 1918.

      O. R. Ewing, C. P. A., for the petitioner.

      J. A. Adams, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and profits taxes for the calendar year 1920, in the amount of $2,135.10. Petitioner alleges that the Commissioner erred in refusing to allow a net loss sustained by it during the 9-month period ending December 31, 1919, and that the net loss was a deduction in computing the net income for the calendar year 1920, and relies upon the provisions of section 204(b) of the Revenue Act of 1918.

      FINDINGS OF FACT.
    Petitioner is a Mississippi corporation, incorporated in March, 1918, with principal office at Leland. Prior to March 31, 1919, the books of petitioner were kept and tax returns were made upon the basis of the fiscal year ending March 31. Prior to the close of the fiscal year ended March 31,1919, the corporation had operated under the name of the Miller Stave Co., but at the end of the fiscal year March 31, 1919, changed the name of the corporation to the Leland Stave Co. At the close of the fiscal year March 31, 1919, petitioner requested permission of the respondent to change its basis of reporting income from a fiscal year basis to a calendar year basis. Respondent granted the request and petitioner accordingly filed a return of its income for the period March 31, 1919, to December 31, 1919, and a return for the calendar year 1920. For the nine months ending December 31, 1919, petitioner sustained a net loss of $8,219.69.
   OPINION.

Milliken :

In the Appeal of Tacoma Grocery Co., 1 B. T. A. 1062, we held that a corporation changing its accounting period from a fiscal year to a calendar year in 1919, is not entitled to the benefits of section 204(b) of the Revenue Act of 1918, and that decision is controlling in the case at bar.

Judgment will be entered for the respondent.


author: Milliken:

text:
    Seton Falls Realty Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18757.
    Promulgated April 18, 1927.
    In determining gain or loss upon the sale of depreciable property due allowance must be made for depreciation sustained in prior years, whether or not such depreciation has been recovered by deductions therefor.

      Frank S. Bright, Esq., for the petitioner.

      W. F. Gibbs, Esg. for the respondent.
    This proceeding results from the determination of a deficiency in income tax for the calendar year 1922, in the amount of $231.05. The deficiency in question arises by reason of the addition by the Commissioner to the selling price of certain buildings of the sum of $1,896.84 for depreciation, which had not been taken by petitioner in any income-tax return during the ownership of the property by petitioner.

      FINDINGS OF FACT.
    During the year 1918, petitioner acquired a brick dwelling house, paying therefor a consideration of $27,090.69, and during the year 1922, sold the same for $32,071.64. In its return filed for the year 1922, petitioner reported the difference between the sales price and purchase price, or the sum of $4,980.95, as income for .the year. Between the dates of purchase and sale, the petitioner made no deduction for depreciation sustained on account of such building in any income-tax return filed for any years included in or forming a part of such period and during the said year there was no net income of the petitioner from which depreciation, if sustained, could have been deducted. Upon the examination of the income-tax return of petitioner for the year 1922, the respondent increased the net income reported from the sale by the sum of $1,896.34, representing depreciation claimed by the respondent to have been sustained upon said building at a rate of 2 per cent per annum for three and one-half years, being the period such property was held by petitioner. Based upon such understatement of income, the respondent has computed the deficiency for the calendar year 1922 in the amount of $237.05.
   OPINION.

Milliken:

The question raised by the petitioner has previously been considered by us and decided adversely to petitioner’s contention. In determining gain or loss upon the sale of depreciable property, due allowance must be made for depreciation, whether or not deductions therefor have been taken by the taxpayer in prior years. Appeal of Even Realty Co., 1 B. T. A. 355; Appeal of Cotton Concentration Co., 4 B. T. A. 121; Appeal of Capital City Investment Co., 4 B. T. A. 933; Island Line Shipping Co. v. Commissioner, 4 B. T. A. 1055; Gertrude B. Whittemore v. Commissioner, 6 B. T. A. 339

Judgment will he entered for the respondent.


author: Milliken

text:
    King-Parker, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8315.
    Promulgated April 18, 1927.
    Reasonable salaries paid to officers of a close corporation found to have been informally authorized within the year and helé to be deductible expense.

      Paul F. Myers, Esq., for the petitioner.

      C. H. Curl, Esq., for the respondent.
    This proceeding results from Commissioner’s determination of a deficiency in income and profits taxes for the calendar years 1920 and 1921-, in the total amount of $1,859.15, of which approximately $1,642.99, relating to the year 1920, is in controversy. The petitioner contests the disallowance of a portion of the deduction claimed for salaries paid for 1920.
    FINDINGS OF FACT.
    Petitioner is a New York corporation, with principal offices in the City of New York. From the incorporation, in 1919, through the year in question, all the stock, save some qualifying shares, was owned by Henry King and Charles S. Isaacs, who were president and secretary-treasurer, respectively. These two individuals conducted the business as their own, the remaining directors being named only for the purpose of complying with the law. They had advanced money to the petitioner from time to time, as it was needed in the business, which advances were represented by petitioner’s promissory notes. None of these advances were repaid in whole or in part, but remained outstanding obligations of the petitioner through the year in controversy.
    Due to the need of money in the business, the salaries of the two officers and stockholders were made dependent to a large degree upon the financial success of the business. A formal resolution, under date of May 23,1919, fixed the salaries of King and Isaacs as $50 per week, each, and such other compensation as the board of directors decided from time to time to be fair and proper additional compensation for the services rendered. No further formal action was taken regarding salaries until after the year in question. During the year 1920, each officer was actually paid $50 per week until June 1, and thereafter $60 per week until the close of the year. In addition to these regular weekly payments, additional compensation for personal services actually rendered, in the amounts specified, was made to each of the officers on the dates indicated below:

    These amounts were paid to King and Isaacs pursuant to an informal meeting and agreement between them, after a discussion and consideration of the services rendered by them and the ability of the corporation to pay.
    During 1920 King and Isaacs each were paid a salary totaling $5,810. The respondent allowed the total paid at the rate of $50 per week during the first part of the year, and $60 per week during the latter part of the year, but disallowed the irregular payments stipulated above as not being authorized within the year, or as representing dividends or sums withdrawn in repayment of advances made to the petitioner by King and Isaacs.
   OPINION.

Milliken

The respondent concedes the reasonableness of the total salary payments made to King and Isaacs in the year 1920. The question presented is whether the compensation to the two officers and directors was properly determined and constituted a deductible expense for the year. From the evidence adduced we have found as a fact that the payments were made for personal services actually rendered in the year 1920, as distinguished from repayments for loans or money advanced or dividends declared or paid. Petitioner was a close corporation and the additional salaries claimed as a deduction were agreed upon and authorized pursuant to the informal agreement entered into and meetings held in the year 1920. See Appeal of Reub Isaacs & Co., 1 B. T. A. 45.

Judgment will be entered on 15 days’ notice, in accordance with Bule 50.


text:
    Booth Furniture & Carpet Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 426.
    Promulgated April 18, 1927.
    1. An open account carried on tlie corporate books with the principal stockholder and his estate, held to be an account receivable and an allowable inclusion in invested capital. .
    2. In the absence of evidence showing ownership of stock, its cost, or selling price, the disallowance of an alleged loss upon the sale thereof is approved.
    8. The Board has no jurisdiction respecting years for which deficiencies are not asserted.

      John E. Tucker, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and profits taxes for the fiscal year ended June 30, 1920, in the amount of $1,747.77, and of overassessments for the fiscal years ended June 30,1918 and 1919, in the amounts of $3,974.15 and $76.73, respectively. Error is alleged in the respondent’s exclusion from invested capital of an account receivable of the principal stockholder; the exclusion from invested capital of building and loan association and Louisiana Fair bonds as inadmissible assets; and the disallowance of a loss claimed to have resulted during the fiscal year ending in 1920 from the sale of certain stock. The item with respect to the exclusion of the building and loan association and Louisiana Fair bonds was eliminated by agreement at the hearing as not being in controversy. The respondent entered a plea in bar to the jurisdiction of the Board as to the years for which overassessments were determined.
    FINDINGS OF FACT.
    Petitioner is a Louisiana corporation with its principal office at Shreveport. Until his death on July 12, 1919, W. H. Booth was its principal stockholder and president. After the death of Booth, E. L. Colquitt, general office man, managed the business for a short time until Mrs. W. H. Booth, who had succeeded her husband to the presidency, assumed active management. Colquitt died in 1922; and Mrs. Booth died on April 18, 1924.
    Prior to and during the years under consideration, the petitioner carried on its books an open account with W. H. Booth, to which there were charged amounts withdrawn by him or paid out in his behalf for personal bills, and to which there were credited, from time to time, cash payments made by him on account, salary credits, and dividends on corporate stock other than the petitioner’s. Following the death of Booth, the account was continued under the designation “W. H. Booth Estate.” The debit balances in the account at the beginning of the three years under consideration were as follows:
    At July 1, 1917_$17,391. 78
    At July 1, 1918_ 20,036.64
    At July 1, 1910_ 9, 560. 30
    The petitioner did not declare nor pay any cash dividends during the fiscal years under consideration.
    In computing the gross estate of W. H. Booth, for estate-tax purposes, the respondent treated the indebtedness of the decedent to the petitioner as a debt, and allowed a deduction of one-half of the amount thereof. The account receivable represented a debt due to the petitioner from W. H. Booth and/or his estate; and the same has been paid in full. The respondent disallowed this account as invested capital for the fiscal year ended June 30, 1920.
    On July 1, 1919, the petitioner carried on its books of account, certain shares of the capital stock of the Youree Hotel Co., at a value of $5,000. From July 1, 1917, to September 24, 1919, there were credited to the account of W. H. Booth and/or the account of the W. H. Booth estate, twelve items of $100 each, six items of $200 each, and one item of $400, all of which items represented dividends on the stock of the Youree Hotel Co. The stock referred to was sold on or about September 24, 1919; and on the same date the “Youree Stock” account was credited with the sum of $5,000 to close the account, the ledger account showing that the corresponding debit entry was made against cash. The petitioner claimed a deduction for the fiscal year 1920 of $2,500, as a loss sustained from the sale of the stock in question, and the deduction was disallowed by the respondent.
   OPINION.

Milliken :

The respondent’s plea in bar, with respect to the fiscal years ending in 1918 and 1919, is well taken. The jurisdiction of the Board, with respect to years for which no deficiencies are asserted, was considered and decided adversely to the petitioner in Appeal of R. P. Hazzard Co., 4 B. T. A., 150, and Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The record does not disclose the reason for respondent’s action in disallowing as invested capital, for the fiscal year 1920, the account receivable standing against W. H. Booth and/or his estate, on the petitioner’s books of account. The right of a corporate taxpayer to include in its invested capital funds advanced to stockholders, as bona fide loans, has been upheld in the Appeal of Kale C. Ryan, Executrix, 2 B. T. A. 1130, and Appeal of Ruckman Coal Co., 5 B. T. A. 534. The balance in the account at the beginning of the year in question represented a valid obligation of W. H. Booth and/or his estate, for funds advanced to him or his estate by the petitioner, or paid in his or its behalf for personal bills; It was so regarded by the petitioner as evidenced by its books of account. That the advances made to Booth and his estate by the petitioner, were considered by Booth and his executors as loans, is evident from the facts that from time to time, prior to his death, Booth made partial repayment through substantial cash payments and by applying to the accounts amounts due as salary, and the subsequent liquidation of the account, in full, by his executors.

Further, the respondent, for the purposes of the estate tax, considered the advances to Booth as loans by the petitioner, and allowed as a deduction, in valuing the gross estate, one-half of the amount of Booth’s indebtedness on account of such loans. The respondent’s action in allowing only one-half of the indebtedness to the petitioner, as a deduction in valuing the gross estate, appears to have been based upon the fact thát Booth was a resident of the State of Louisiana, at the time of his death, and subject to the community property laws of that State. The respondent’s action in disallowing the indebtedness of Booth and/or his estate to the petitioner as invested capital for the fiscal year 1920, is in error.

The petitioner claimed a deduction, for the fiscal year 1920, in the sum of $2,500, representing an alleged loss sustained from the sale of certain shares of the capital stock of the Youree Hotel Co., and the deduction has been disallowed by the respondent. . There is grave doubt in our minds as to whether ownership of this stock vested in the petitioner or in W. H. Booth and/or his estate. Obviously, if it vested in the latter, petitioner is not entitled to deduct any loss which may have resulted from the sale. Petitioner’s bookkeeper testified at the hearing that the stock in question -was the property of the petitioner; but she testified further, that she had never seen the stock certificates, and, though the dividend checks had passed through her hands in the ordinary routine of office affairs, she could not recollect to whom such checks were payable. We were not told why the dividends paid on this stock during the period September 24, 1919, to June 30, 1921, in the total amount of $2,800, were credited to the account of W. H. Booth and/or his estate. The bookkeeper simply testified that if ownership of the stock vested in the petitioner, the dividends were erroneously credited to Booth’s account.

At the time of the sale the stock referred to was carried on the books at a value of $5,000. When the stock was sold, or shortly thereafter, cash was charged with the sum of $5,000 and “Youree Stock ” account credited with a like amount. The bookkeeper testified that the difference between the book value of the stock, $5,000, and the selling price, $2,500, was later charged off as a loss; but how ? Certified copies of the surplus account are in evidence and the loss does not appear as a charge against that account. The stock was sold on September 24,1919; and the ledger sheets bearing the account of W. H. Booth and/or his estate from that date to June 80, 1921, are missing from petitioner’s records, so that it is not possible now to check that account to determine if the loss, if any was sustained, was charged against it.

Furthermore, not a shred of evidence was presented to show the cost of the stock; hence, we are in no position to determine whether or not an actual loss was sustained. What then is the situation with which we are confronted? Just this: The ownership of the stock has not been satisfactorily established; the petitioner’s books of account, on their face, show that the stock was sold at its book value; and the cost of the stock, or its March 1, 1913, value if acquired prior to that date, has not been proven. How then can we determine whether or not a loss was sustained upon the sale of the stock in question, and, if so, who sustained the loss? Under the circumstances, the respondent’s action in refusing to allow the deduction claimed, must prevail.

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


text:
    Samuel Riker, Jr., Executor, Estate of J. Amory Haskell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7102.
    Promulgated April 18, 1927.
    1. Loss upon a bona fide sale o£ stock allowed, tbe March 1, 1913, value being determined to be cost as tbe stock was acquired just prior and subsequent to that date.
    2. A country club membership acquired by a corporate officer that he might have uninterrupted privacy for consultations on occasional business trips to that locality held acquired for personal convenience, and a loss sustained upon its sale is not deductible.
    3. A farming enterprise found to have been conducted for profit, and losses sustained therein held deductible.

      Lawrence A. Basher, Esq., for tbe petitioner.

      W. Frank Gibbs, Esq., for tbe respondent.
    This is a proceeding for the redetermination of deficiencies of income tax for tbe calendar years 1920 and 1921, in the total amount of $5,477.53. These deficiencies arise from the refusal of the Commissioner to allow the following deductions: (1) A loss of $9,998 resulting from a sale made in 1920 of shares of stock of the Big Salmon Dredging Co.; (2) a loss of $349 arising from a sale made in 1920 of shares of stock of the Sunset Mining & Development Co. and from certain assessments made on that stock; (3) a loss of $600 resulting from a sale made in 1921 of a share of stock of the Bloomfield Hills Country Club; and (4) losses to the extent of $9,087.87 incurred in 1921 in the operation of a farm at Middletown, N. J. At the hearing, the petitioner withdrew his allegations with respect to item two. This leaves for consideration items one, three and four.
    FINDINGS OF FACT.
    The petitioner is the executor of the estate of J. Amory ITaskoll, who died in the latter part of 1923. The decedent resided on his farm at Middletown, N. J., and had an office at 224 West Fifty-seventh Street, New York City. He was a man of affairs. He was a vice president of the General Motors Corporation, and was connected in an official capacity with E. I. du Pont de Nemours & Co.
    • Mr. Haskell acquired 25,000 shares of the stock of the Big Salmon Dredging Co., a gold-dredging enterprise, for which he paid $10,000. This sum was paid as follows: $3,750 on October 4, 1912, $3,750 on October 11, 1912, and $2,500. on April 16, 1913. The shares had a par value of one dollar each and the stock purchased prior to March 1, 1913, had a March 1, 1913, value of the cost thereof. On April 29,1920, Haskell placed these shares, properly endorsed, with Adrian H. Muller & Son, 55 Williams Street, New York, with the request that they advertise and sell the stock. Advertisement was made and the stock sold by Muller & Son, who, on May 12, 1920, remitted to Mr. Haskell, $2 as the net proceeds of the sale.
    During the year 1918, Haskell made frequent trips to Detroit, Mich., to attend business meetings of the General Motors Corporation. In order that he might have uninterrupted privacy for consultations, he became a member of the Bloomfield Hills Country Club. This membership he acquired by the purchase of one share of the stock of the Club, for which he paid, on October 8, 1918, the sum of $1,100. Because of the condition of his health, he made few trips to Detroit in 1921, and thereafter went to Detroit only when it was absolutely necessary. On June 6, 1921, he sold his share of stock for $500.
    In 1906 Haskell began purchasing land near Middletown, N. J. First and last he acquired about 260 acres for which he paid at rates ranging from $95 to $800 per acre. He built his residence, a mansion of 26 rooms, on part of this tract. From a date long prior to 1921, the taxable year in question, Haskell was actively engaged in farming a part of this property. Between 80 and 40 acres were used as orchards, gardens, lawns and for private stables appurtenant to the dwelling. From 15 to 100 acres were cultivated or used for pasture. The remainder was woodland. While there was no physical separation except, fencing, of the farm land from that pertaining to the dwelling, Haskell, from the beginning, made an economic division of the property. He was rigidly thorough in the matter of accounting, keeping separate accounts for the farm and for household expenses. For the farm, two books were kept, a combination cash book and journal and a ledger. These books had been carefully kept for over 15 years. In them was meticulously entered every item of income and outgo. Haskell required monthly statements from his bookkeeper. The farm and household accounts were never confused. All supplies furnished by the farm to the household were paid for in cash and proper entries made on the books of the farm. On the other hand, the vegetable gardens and the fruit trees were allotted to the residential part of the tract and no charges for fruit or vegetables were made or entered on the books.
    The principal industry of the farm was dairying. A dairy route was operated which had over 100 customers. There were employed on the farm about 30 men. There was paid for hired help in the year 1921, the sum of $9,121.52. The opening inventory for 1921 showed assets of the value of $28,231 and the closing inventory, $23,915. The total sales made during the year amounted to $17,034.14. There were other miscellaneous receipts of $1,514.42. The gross profits for the year were $11,355.73. The expenses, depreciation, and repairs amounted to $20,443.60. The net farm loss was, therefore, $9,087.87, the amount claimed in the petition.
    In addition to milk and its products, and a few other minor items, there were produced on the farm during the year 1921, 975 bushels of corn, 900 tons of alfalfa, 2,400 tons of hay, 600 tons of straw, 1,200 tons of ensilage, and 150 tons of beets. The opening inventory for 1921 shows 43 cattle with a total value of $19,575, and the closing inventory contained 41 cattle with a total value of $16,585. The amount received during the year for milk, cream and butter, was $14,932.35.
    As a general rule, Haskell spent Wednesdays and Saturdays, in addition to Sundays, at his home, during which days he supervised the management of his farm and consulted with his superintendent. He entertained at his home in the manner that would be expected of one in his social and financial position. While he from time to time exhibited his stock at farmers’ fairs, he did not keep his farm as a show place.
    With the possible exception of one year, the farm always showed losses, the amounts of which do not appear in the record. Haskell’s wife and his brother-in-law, Hiker, often remonstrated with him for carrying on farm operations which were continually resulting in losses. His response always was that in the end he would make it pay. He often stated that eventually he expected to retire from general business and that then his farm would be his sole interest, and out of it he would make money.
   OPINION.

Milliken:

(1) The investment made in the stock of the Big Salmon Dredging Co. was a transaction entered into for profit. While the record does not show when the stock was issued to Mr. Haskell, it appears that it was paid for just prior to and just after March 1, 1913. Its value was its cost, $10,000. There is nothing in the record to impeach the bona fides of the sale in May, 1920. The Commissioner, therefore, erred in refusing to allow the loss claimed.

(2) The purchase by Haskell of one share of stock in the Bloomfield Hills Country Club was clearly not a transaction entered into for profit. Nor can it be held that the loss arising from the sale of the share was a loss incurred in trade or business. The purchase of the share of stock was made rather for the personal convenience of Haskell than for business purposes. The Commissioner did not err in refusing to allow the deduction of this loss. Franklin M. Magill v. Commissioner, 4 B. T. A. 272; Appeal of Arthur B. Chivers, 4 B. T. A. 1083.

(3) The decedent’s right to take the deduction of $9,087.87, resulting from the operation of the farm during the year 1921, turns on the question whether he engaged in farming as a business, with the expectation of making gain, or for recreation or pleasure. See Thomas F. Sheridan v. Commissioner, 4 B. T. A. 1299, and Reginald C. Vanderbilt v. Commissioner, 5 B. T. A. 1055, where the authorities are so thoroughly collated as to make further citation unnecessary.

The farm in question was a well equipped dairy farm. It was operated in a businesslike manner. Its accounts were kept so as to show the most minute items of income and outgo. Its only relation to the residence was that of propinquity. This gave Haskell a better opportunity to superintend his farm than if he had lived at a distance from it. He availed himself of the opportunity to the fullest extent compatible with his other interests. The products of the farm were sold, even the family paying for what they consumed. The dairy route was similar to that operated by ordinary dairy farms. The farm was not carried on for display. The cattle had an average value of $44 per head. Cattle of this value are not kept for display.

All the essentials of a farming business were present, unless such losses were incurred in the taxable year and in previous years as to demonstrate that Haskell carried on this enterprise without the hope of ever making it profitable and for the gratification of a personal whim. That the latter element is absent is shown by the volume of production, the amounts received from sales, and the methodical way in which the farm was operated. So far from this undertaking being a personal whim, the uncontradicted evidence shows that Mr. Haskell repeatedly stated that he not only intended to make his farm pay, but that he expected to make it pay. The fact that losses occur •is only one of the evidential facts from which it is to be determined whether one carries on farming as a business or only for recreation. If losses, or even repeated losses, were the only criterion by which farming is to be judged a business, then a large proportion of the farmers of the country would be outside the pale. It is the expectation of gain, and not gain itself which is one of the factors which enter into the determination of the question. We have not the means of placing ourselves in Mr. Haskell’s shoes and if we could, we should be slow in holding that his repeatedly expressed judgment was wrong. It is sufficient that the farm was operated in a businesslike manner and with a well defined and possibly reasonable hope that profits would eventually accrue. These factors being present, it follows that the decedent was engaged, during 1921, in farming as a business and that the losses incurred in this operation are a proper item of deduction, under section 214(a) (4) of the Revenue Act of 1921.

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


text:
    Mutual Iron Works, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9091.
    Promulgated April 19, 1927.
    In the absence of evidence showing whether a predecessor partnership earned any income, or whether the return filed by the successor corporation constituted a valid election under section 330, Revenue Act of 1918, it can not be determined that partnership income was erroneously included by the Commissioner.

      Oscar Ferger, G. P. A., for the petitioner.

      T. M. Willcins, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and profits taxes for the year 1918, in the amount of $579.44. Error is alleged in that the respondent included in the income of the petitioner the income of a predecessor partnership.
    FINDINGS OF FACT.
    Petitioner is a corporation organized on February 25, 1918, under the laws of the State of New Jersey, and having its principal office at 907 Communipaw Avenue, Jersey City, N. J. It was the successor of a predecessor xoartnership, which was in existence from January 1, 1918, to February 25, 1918. The partners of the predecessor partnership, who were also the stockholders in the successor. corporation, originally filed individual tax returns reporting ■the income from the partnership and the income of the corporation. In March, 1925, the respondent requested petitioner to file a corporation return of income, which was done, and which return purports to cover the period January 1, 1918, to December 31, 1918, or- the period during which the partnership existed, as well as the period from February 25, 1918, to December 31, 1918, during which time the corporation existed.
   OPINION.

Milliken:

Petitioner assigns error in that the return filed by it in March, 1925, included the income of the predecessor partnership, which income should have been excluded from the return as filed by the petitioner. No evidence was introduced and our findings-of fact result from admissions made at the hearing of this cause by counsel for the respondent. We are unable to determine if petitioner made a valid election pursuant to the provisions of section 330 of the Revenue Act of 1918, so that the income of the predecessor partnership, from January 1', 1918, to date of organization of petitioner on February 25, 1918, should be included as the income of the successor corporation, or if the necessary conditions precedent to the applicability to section 330, have been met. We also have no evidence before us that the partnership derived or earned any net income for the period January 1, 1918, to February 25, 1918. It is accordingly impossible to determine whether the return filed by petitioner in March, 1925, actually included any income earned by the predecessor partnership.

Judgment will be entered for the respondent.


text:
    George A. Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward T. Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jonathan Brown, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7993, 7994, 8002.
    Promulgated April 19, 1927.
    The statute oí limitations contained in the Revenue Act of 1924 bars deficiencies for the year 1916 after the expiration of five years from the date the return was filed.

      Starr Parsons, Esq., and John J. Leonard, Esq., for the petitioners.

      J. E. Marshall, Esq., for the respondent.
    These proceedings result from the determination of deficiencies in tax in the appeal of Edward T. Brown for the calendar years 1916, 1920, and 1921, in the aggregate amount of $1,588.73; in the appeal of Jonathan Brown, Jr., for the calendar years 192Q and 1921, in the aggregate amount of $3,671.48; and in the appeal of George A. Brown, for the calendar years 1920 and 1921, in the aggregate amount of $2,429.56. The three appeals were consolidated by appropriate motion for hearing and decision. The sole issue raised in the appeals of Jonathan Brown, Jr., and George A. Brown, relates to the proper share of the taxable net income for the calendar years 1920 and 1921 from the copartnership of Jonathan Brown & Sons, of Salem, Mass. It was stipulated at the hearing of these proceedings by counsel for the respective parties, that the correct net income from the copartnership for the years 1920 and 1921', in the appeal of Jonathan Brown, Jr., for the calendar year 1920 was $114,923.89 and for the calendar year 1921 was $17,606.18, and in the appeal of George A. Brown, his correct net income from the copartnership for the year 1920 was $96,248.32 and for the year 1921 was $9,725.20. In the appeal of Edward T. Brown, it was stipulated that his correct net income from the copartnership for the year 1920 was $46,238.34 and for the year 1921, $3,905.31. Only one question remains for decision and that relates to the proposed deficiency determined against Edward T. Brown for the year 1916, and the only question involved is whether the proposed deficiency was barred by the statute of limitations at the date of the issuance of the deficiency letter by the respondent.
    FINDINGS OF FACT.
    Edward T. Brown is an individual, residing at Swampscott, Mass., and on February 28, 1917, he filed with the collector of internal revenue at Boston, Mass., his individual and original return of income for the calendar year 1916. On August 13, 1925, the Commissioner mailed to Edward T. Brown, a notice of deficiency, registered, advising him of his determination of the deficiency for the year 1916, in the amount of $786.94.
   OPINION.

Milliken :

Section 277(a) (2) of the Revenue Act of 1924 provides that the amount of income or profits taxes imposed by “ the Revenue Act of 1916, the Revenue Act of 1917, * * * and by any such Act as amended, shall be assessed within five years after the return was filed.” The deficiency letter from which the appeal for the year 1916 was taken, was mailed to the petitioner more than five years after the return was filed on March 27,1917, and the limitation of time within which taxes must be assessed for the year 1916 had expired.

The deficiencies in tax, if any, for the years 1920 and 1921, in the three appeals, should be recomputed in accordance with the stipulations of the parties, as concerns the net income from the copartnership for those years.

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


text:
    Walter A. De Camp, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8263.
    Promulgated April 19, 1927.
    Under section 207 (b), Revenue Act of 1924, the normal taxes and surtaxes on income received by a partner during his calendar year 1924 from a partnership reporting on a fiscal year basis, are computed by treating the whole of such income as income for a single year, 1924, by applying the lower 1924 rates to that fraction of such income (plus income from other sources, less deductions and credits) apportionable to 1924, and by applying to the remainder of such income the rates designated by the next higher brackets of the 1923 schedule, the “ next higher brackets ” being interpreted to mean that the 1923 rates begin on the income scale where the lower rates of 1924 are terminated by the apportionment of the remainder of the income to the 1923 rates.

      Walter A. Be Gamp pro se.

      Dwight H. Green, Esq., for the respondent.
    This proceeding results from the Commissioner’s determination of a deficiency in income tax for the calendar year 1924, in the amount of $436.42. Error is alleged in the Commissioner’s computation of the tax upon that portion of petitioner’s share of the income of a partnership, which was on a fiscal year basis, allocable to that portion of the partnership fiscal year falling within the calendar year 1923.
    FINDINGS OF FACT.
    The petitioner is an individual, residing in Cincinnati, Ohio. His return was made on a calendar year basis. He was a member of a partnership engaged in the practice of law, the partnership being on a fiscal year basis ending April 30. His share of the partnership income for the fiscal year ending April 30, 1924, was $11,963.58, of which $7,975.72 bears the same proportion to the whole as that part of such fiscal year falling within the calendar year 1923 bears to the full fiscal year, the remaining $3,987.86 being allocable to the calendar year 1924, under the same rule of proportion. Other income, including $844 dividends on stock, was received by the petitioner during 1924, raising the total of income, after allowing deductions, received by petitioner in that year to $12,341.57.
    That portion of the partnership income allocable to the calendar year 1924, plus the income received during 1924 from other sources, less allQwable deductions, amounts to $4,365.75. In making his return (on Form 1040 FY) for the calendar year 1924, petitioner reduced this amount ($4,365.75) by $844 (dividend credit) and $2,500 (personal exemption), and computed the tax on the remaining $1,021.75 at 1924 rates, using the rates in the lower brackets of the schedule prescribed for 1924 by section 210 of the Revenue Act of 1924. In determining the amount subject to the 1923 normal tax rates, he first deducted $844 (dividend credit) and $2,500 (personal exemption credit) from $7,975.72, the fractional part of the partnership income allocable to 1923. He then computed the tax on the remainder, or $4,631.72, by taking 4 per cent of the first $4,000, the rate prescribed by the Revenue Act of 1921, for 1923 income falling within the lowest bracket. He then computed the tax on the remaining $631.72 by applying the next higher rate (8 per cent) of the 1923 schedule.'
    In computing the surtax, petitioner applied the surtax rates prescribed by section 211(a)(2) of the Revenue Act of 1921 to the $7,975.72 allocable to 1923, or, in other words, computed the tax at one per cent on the amount in excess of $6,000.
    In determining the deficiency, the respondent used the amounts of net income received and the amounts allocated to the respective years 1923 and 1924, as returned by petitioner. Nor was the amount of tax as computed by petitioner under the 1924 rates revised in any wise by the respondent. The only differences in computation relate to the tax imposed at the 1923 rates on the amount of $7,975.72, allocable to 1923. The respondent computes the normal tax at 1923 rates on $7,975.72 (the credit for dividends and personal exemption taken against, this amount by petitioner having been denied), but adds $1,021.75 (the amount subject to 1924 normal tax rates after reduction by allowable credits) thereto to determine the 1923 brackets in which the $7,975.72 falls as a part of the total subject to normal rates, the higher brackets applicable to such total being applied to the $7,975.72. Under this computation, the capacity of the lower 1923 bracket of $4,000 (at 4 per cent.) is reduced to $2,978.25, and forces the remainder of the $7,975.72, or $4,997.67, into the next higher (8 per cent) bracket. Further, the respondent computed the surtax on the entire net income, $12,341.57, at 1923 rates.
   OPINION.

Milliken :

The petitioner, for the purpose of the computation of the tax, apportioned his share of the income from the partnership to the calendar years 1923 and 1924, in conformity with the statute— section 207(b) of the Revenue Act of 1924 — and contends that the total normal tax should be computed by placing the amounts thus allocated to the respective years, in the lowest brackets of the rate schedule applicable to those years. A similar contention under section 205(c) of the Revenue Act of 1921, was rejected in Appeal of Theodore Schilling, 3 B. T. A. 936. The decision in that appeal is based upon the proposition that all the income in controversy was the income of a single year and, being such, could not escape the higher rate brackets applicable thereto under the rate schedules of either of the two calendar years involved. The reasons given in that decision are equally applicable to the case at bar. But we need not here rely upon implications in the taxing statute as was done in the cited case. The computation used by the respondent and approved by us in the case cited, is expressly required in the case at bar, by the last sentence of section 207(b) of the Bevenue Act of 1924, which provides as follows:

(b) If a fiscal year of a partnership begins in one calendar year and ends in another calendar year, and the law applicable to the second calendar year is different from the law applicable to the first calendar year, then (1) the rates for the calendar year during which such fiscal year begins shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and (2) the rates for the calendar year during which such fiscal year ends shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year. In such cases the part of such income subject to the rates in effect for the most recent calendar year shall be added to the other income of the taxpayer subject to such rates and the resulting amount shall be placed in the lower brackets of the rate schedule applicable to such year, and the part of such income subject to the rates in effect for the next preceding calendar year shall be placed in the next higher brackets" of the rate schedule applicable to such year.

We think the prescribed computation clearly supports the respondent’s application of the rates in the lower brackets to that part of the income apportioned to 1924 rates, and the higher brackets to that part allocated to 1923 rates. The clear import of the statute is in conformity with the result reached under the 1921 Act in the Schilling appeal, sufra. The petitioner thinks the respondent’s computation is more obviously erroneous with respect to the surtax than it is in the case of the normal tax. We are unable to see the distinction made. The surtax is as much a part of the tax referred to in section 207(b) as is the normal tax. In both computations, the income is the income for one year, and the higher rates applicable to 1923 begin at the point on the income scale where the lower rates of 1924 are terminated by the apportionment of the remainder of the income to the 1923 rates. It should be noted that the petitioner’s contention would permit many taxpayers to escape surtaxes by the division of income between the two years, though they would be liable for surtaxes under the rate schedules for either year without such division. To illustrate: A taxpayer receiving a total income in 1924 of $16,000, $10,000 apportioned to 1924, and $6,000 to 1923, would bo liable to no surtaxes. Were we to adopt the petitioner’s interpretation, a variety of cases could be stated in which a like result would be reached. Bearing in mind that were it not for section 207 (b), the taxpayer in the illustrative case, as well as the case at bar, would need report all the income received in 1924 as subject to the 1924 normal and surtax rates, the computation urged would be contrary to the obvious intention of Congress to increase rather than decrease the tax by means of the division made in the statute.

It so happens, in the case at bar, that all the income subject to surtax is subject to the 1923 rates. The prescribed computation may be productive of some inequalities. However, as was pointed out in the Appeal of Charles Colip, 5 B. T. A. 123, Congress acted within the scope of its power in providing a simple rule to cover cases of this class, where the computations would otherwise be inherently complex.

The petitioner’s position that credit for dividends and personal exemption should be allowed against the amounts apportioned to each year, is incidental to and dependent upon his more fundamental contention that the fractions of the whole income, apportioned to the respective years, should be treated separately as income of those years in computing the tax. Since we have rejected his primary contention, we must also deny the taking of the credits as claimed. The respondent has allowed the credits in determining the amount taxable at 1924 rates, and by so doing has also reduced the amount upon which the total tax is to be computed for 1924. To allow the credit to be applied again, against the amount taxable under the 1923 rates, would be to allow a double credit against the amount taxable for 1924.

Judgment will be entered for the respondent.