Volume 18 — Board of Tax Appeals

1. Where the will of a decedent directs that the income of the residuary estate shall be collected by trustees and the amount in excess of an annual payment made to the widow shall be accumulated for the benefit of minor children and the trustees accumulate and file returns of such excess income, held that the amounts thus accumulated are taxable to the trustees on a single trust. 2.

1. Petitioner, in order to get the Government to build a fireproof hospital instead of a frame hospital, agreed to make a contribution of $1,000,000 toward its erection. He also guaranteed the contractor against loss in the erection of the hospital. Held that an amount paid in 1921 under such guaranty does not constitute a net loss within the provisions of section 204 of the Revenue Act of 1921. 2. Held that respondent erred in allowing as a deduction as a loss in 1922 an amount paid in that year in accordance with such guarantee.

Where after the death of one partner a surviving member of the firm purchased the interest of the deceased partner and also part of the interest of a second partner and the firm took no steps toward winding up the old partnership, but continued its business operations without change, no new basis for determining gain or loss is created and the same should be computed on the basis of original cost of securities purchased by the old firm and sold by the new firm.

1. The petitioner and the Harbour-Longmire Co. of Enid were affiliated during the taxable years. 2. Where affiliated corporations filed separate income-tax returns for 1922, the tax liability became fixed and can not be altered by subsequently filing an amended consolidated return for that year. 3.

1. The petitioner's gross income was determined on the basis of bank deposits. Held: the evidence is insufficient to show that any greater deduction for business expenses should be allowed than that allowed by the respondent.

The petitioner in 1923 sold certain improved real estate which was a part of the trust of which it was trustee. In determining the profit from the sale, the respondent reduced the March 1, 1913, value of the property sold by the amount of depreciation sustained from March 1, 1913, to December 31, 1922.

Deficiencies in income taxes predicated on Commissioner's determination that taxpayer's net income was to be taken at 4 per cent of gross sales less $2,000 exemption, approved, in absence of evidence establishing correct income.

The petitioner, a furniture salesman on commission and on the road practically all the time, was constantly accompanied by his wife, who rendered some assistance to him in his business. Held: evidence insufficient to prove partnership existed between them in 1922 and 1923, and no error was committed in taxing entire income of petitioner for such years to him.

Petitioner made charitable donations to a number of individuals through the medium of a social welfare worker in his employ. Such donations are not deductible under section 214(a)(11) of the Revenue Act of 1921.

A beneficiary of a life interest in a trust estate assigned a portion thereof irrevocably and by an enforceable instrument. Held: the grantor is not taxable on the income subsequently accruing on the assigned portion of the trust estate.

Petitioner, vice president and director of a corporation, made a loan of $20,000 to the corporation, such loan being evidenced by a promissory note and secured by certain stocks and bonds which were… Held: that whether there was a gain or loss in 1919 would be determined by the difference between the fair market value in 1914 of the securities sold in 1919 and the sale price in 1919.

Petitioner returned and paid a certain amount of estate tax, and thereafter the Commissioner refunded a part of the tax. Thereafter the Commissioner determined an amount of tax in excess of the amount of tax returned, and also in excess of the amount refunded. Held that the Board has jurisdiction to redetermine the deficiency and further that this conclusion is not in conflict with the decision of the Circuit Court of Appeals for the Ninth Circuit, of which petitioner is a resident, in Kelley v. United States, 30 Fed.(2d) 193.

Petitioner and her husband acquired real estate in the State of New York as tenants by the entirety. Held: only one-half of net profit is taxable income to her.

1. An instrument signed by the taxpayer on February 25, 1926, consenting to the later collection of tax for 1917 which had been assessed in 1921, but not signed by the Commissioner, does not constitute a valid consent in writing as required by the Revenue Act of 1921 for a later collection of the tax. 2.

Amounts paid by a taxpayer engaged in the building-material business, on account of fines, court costs and attorneys' fees as the result of an indictment under a state statute which prohibited certain price-fixing agreements, are not deductible as ordinary and necessary expenses of carrying on the taxpayer's business.

1. Certain parties entered into a contract of sale of an interest in a partnership in November, 1921, and part of the consideration was paid at that time and on December 31, 1921, and vendor retired from partnership activities in November, 1921, but final papers and notes for deferred payments were not signed until January 5, 1922. Held that the sale was made in 1921. 2.

On January 15, 1917, corporation A formed corporation B with a capital stock of $100,000, and transferred to it a part of its (A's) assets having a value of $1,344,355.28, in consideration for the issuance to A corporation of the entire capital stock of B corporation, thereby creating an affiliation of the two corporations.

1. The petitioner held to have realized no profit in 1920 from the sale of a certain sawmill and timber property involved herein. 2. The respondent's action in regard to the petitioner's closing inventory for 1920 sustained.

A corporation organized and operated solely for the purpose of providing annuities for superannuated secretaries of the Y.M.C.A., which derives its funds from public contributions and from voluntary contributions by associations and employees of the Y.M.C.A., no part of the net earnings of which inures to the benefit of any private shareholder or individual, is exempt from taxation under the provisions of section 231 of the Revenue Act of 1926.

1. Money and stock received by the petitioner during marriage in payment for property sold by him before marriage, held not community property. 2. Held: such stock was not taxable income in 1920, the petitioner being on a cash receipts and disbursements basis. 3. Held, that a promissory note, neither given nor received in discharge of the debt which it evidences, and not readily convertible into cash, does not constitute taxable income.

Allowances made by the respondent for depreciation and depletion, sustained.

The evidence does not show that on March 1, 1913, the petitioner had good will of any fair market value.

Personal service classification denied.

1. An amount paid by the petitioner in 1920 to the Association of Railway Executives, of which it was a member, to cover the petitioner's share of an advertising campaign carried on by the association, held to be deductible from gross income as an ordinary and necessary business expense. 2.

LOSSES. - Petitioner's mother-in-law, solely at the instance of petitioner, purchased certain securities, at which time petitioner stated to her that should she sustain a loss by reason of such purchase he would reimburse her accordingly. Held that under the loss provisions of section 214 of the 1921 Act, the petitioner is not entitled to deduct the amount he paid his mother-in-law in 1922 for the losses she sustained in that year.

Upon the evidence, held, that the respondent's determination of the rates of depreciation of machinery at three cotton mills should be sustained with respect… Held: that the respondent's determination of the rates of depreciation of machinery at three cotton mills should be sustained with respect to two of the mills and increased to 25 per cent with respect to the third mill, the machinery at the latter mill having been purchased after its useful life was practically over.

1. Where several issues are raised by the pleadings and one of them is expressly withdrawn by petitioner at the opening of the trial and the evidence is directed to the remaining issues, the issue withdrawn will not be considered, even though the withdrawal was based upon a misunderstanding of the law. 2.

The petitioner purchased the assets of a department store business for a price payable in cash, notes, and preferred stock of a corporation organized by himself and other department heads; these… Held: since restrictions on disposition, whether or not enforceable, did in fact limit sales to exhausted market, the common stock acquired by petitioner had no readily realizable market value within the meaning of section 202, Revenue Act of 1921.

Respondent's determination of the total cost of certain lots in a subdivision sustained for want of proof.

On the record, held that the evidence fails to establish the contentions of the petitioner respecting the gift of certain stock by him to his wife in the year 1920, and the sale of certain other stock by him to his wife in the year 1921.

1. For failure on the part of the petitioner to prove that salaries, for which it claims a deduction in the computation of its net loss for 1921, were incurred within the meaning of the Act, the respondent's determination of the said net loss is approved. 2. The respondent erred in disallowing the amount of salary claimed as a deduction for 1922.

Under the provisions of section 202(a)(2) of the Revenue Act of 1921, the basis for determining any loss or gain in the sale of property acquired by gift after December 31, 1920, from a person who also obtained ownership by gift, is the cost of the property to the last preceding owner by whom it was not so acquired.

1. Within one month prior to death decedent transferred certain stock as absolute gift to sons. Held: proper deduction from gross estate.

The will of decedent devised and bequeathed her estate to her sister for the term of her natural life to use the same and the income therefrom and so much of the principal thereof as she may desire… Held: that the will did not give to the sister unlimited power to dispose of the principal of decedent's estate.

Certain amounts determined and allowed as ordinary and necessary expenses, the amounts being expenses of an individual in the operation of an automobile in connection with his business.

The petitioner operated a large farm and trucking business. Serious labor troubles occurred which made it necessary for him to engage private detectives to guard his property. Held: that the amount of $60,194.07 paid out for detective hire in 1921 is deductible as a business expense.

Transaction involved here in held to be an exchange of property for property, and the property received having no readily realizable market value, no loss can be recognized under the provisions of section 202 of the Revenue Act of 1921.

Certain individuals purchased the assets of a corporation for $100,000, which they transferred to the petitioner for its entire capital stock, par value of $100,000. Held: the value element at the date of the exchange of assets for capital stock of the petitioner was vital and for failure to offer proof thereof the respondent's determination must be sustained.

ESTATE TAX. - Held that under section 402(e) of the Revenue Act of 1921 certain property should be included in the decedent's gross estate as property passing under a general power of appointment exercised by the decedent; that section 402(e) was constitutional; and that no question of retroactivity was involved.

1. Cost of a contract and an exhaustion allowance based thereon determined. 2. Ira L. Henry Co. followed in regard to the year in which Wisconsin taxes may be deducted.

A corporation was organized to take over the business of another corporation, and taxpayers prior to the taxable year received preferred stock of the former in exchange for bonds of the latter. Held: Since the evidence did not show that all of the stockholders did not likewise surrender their stock, the value inherent in the stock surrendered was absorbed by the stock retained, and there was no more loss than there is a gain in the case of a stock dividend.

1. INCOME - LEASED PROPERTY - TAXES PAID BY LESSEE. - The amount of petitioner's Federal income and profits taxes for 1920, due and payable in 1921 and paid for its account in that year by the lessee of all of its property and business as one of the considerations for the use of the property, held to be income to petitioner for 1921. Providence & Worcester Railroad Co.,5 B.T.A. 1186. 2. Id. - BOND PREMIUMS. - Petitioner received prior to 1905 premiums on sales of certain of its bonds due and payable subsequent to the taxable year 1921. Held that no portion of such premiums represented income to petitioner in 1921. Old Colony Railroad Co.,6 B.T.A. 1025. 3. Id. - LESSEE'S TRANSACTIONS IN LEASED PROPERTIES. - Under the terms of a 99-year lease of all of its property, petitioner granted to the lessee the right to dispose of items of the leased property no longer necessary, in the opinion of the lessee, to the use of the property, the lessee being obligated, in the case of such disposals, to replace such property before or at the expiration of the lease with other property of an equal value. The proceeds of such sales were received and retained by the lessee, and the latter made the replacements as provided. Held that from such sales during the taxable year 1921 petitioner derived no income, their effect as to it being merely an unrealized appreciation in value of its reversion in the leased property as a whole. 4. AFFILLIATION. - All of petitioner's property and business was used and operated during the taxable year 1921 by its lessee under a 99-year lease, such lessee also being the owner of 44 per cent of its capital stock and an additional 18.56 per cent of such stock being owned or controlled by stockholders of the lessee. Approximately 38 per cent of petitioner's voting stock was owned during that year by stockholders having no connection or community of interest with the lessee, but who made no effort to contest the latter's control of petitioner's business and policies and such of them as participated in the stockholders' meeting of that year voluntarily gave their proxies to the lessee. Held that the lessee did not own or control substantially all of petitioner's stock during the taxable year in question.

1. The respondent mailed to the petitioner a notice of deficiency for the years 1922 and 1923. Held: that the second deficiency notices are valid. 2. The petitioner, as the beneficiary of the trust involved herein, is not entitled to any deduction from gross income for depletion of the trust property.

1. The respondent mailed to the petitioner a notice of deficiency for the year 1922. Before the expiration of the 60-day period within which a petition could have been filed with the United States Board of Tax Appeals the petitioner waived the right to file such petition and none was filed. The additional tax asserted in said deficiency notice was assessed. Subsequently the respondent mailed to the petitioner a second deficiency notice for the year 1922 asserting a further deficiency. Held that the second deficiency notice was valid. 2. The petitioner as the beneficiary of the trust involved herein is not entitled to any deduction from gross income for depletion of the trust property.

1. Petitioner owned all the stock of an affiliated corporation. Affiliation was terminated by the sale of all such stock. Held, that such a transaction may result in taxable gain or deductible loss. Held: that such a transaction may result in taxable gain or deductible loss. Remington Rand, Inc. v. Commissioner, 33 Fed.(2d) 77; 280 U.S. 69 A. 2.

Collection of deficiency held to be barred by statute.

Party in interest permitted to file intervening petition in proceeding properly instituted before the Board by the taxpayer.

1. On March 7, 1921, the stock of the taxpayer corporation was acquired by the petitioner corporation. Petitioner caused the taxpayer to be dissolved on that day and took over its assets. Held: that the taxpayer and the petitioner were separate taxable entities and each is required to file a return reporting its income from the business. A return by petitioner of income earned by the taxpayer prior to March 7, 1921, is not a proper return. 2.

Petitioner held not entitled to computation of its tax under section 328 of the Revenue Act of 1918.

Petitioner held not to have been an officer or employee of a State or a political subdivision thereof and not entitled to the benefits of section 1211 of the Revenue Act of 1926.

Sale by a corporation of stock of another corporation affiliated with it, to outside interests, terminating the affiliation, may result in taxable gain or loss.

Where a corporation organized on January 1, 1923, pays a dividend on May 22, 1923, in excess of the amount of its earnings to that date, to the extent of the excess the stockholders have not received dividends within the meaning of section 201(a) of the Revenue Act of 1921, and this excess should be applied in accordance with section 201(c). This is so regardless of the fact that the corporation resulted from the consolidation of two predecessor corporations thereafter dissolved, which had earnings accumulated since February 28, 1913, more than sufficient to pay this balance of the dividend.

Petitioner and other directors of a national bank voluntarily removed certain worthless notes from the assets thereof and replaced the same with cash and Liberty bonds. Held: that the evidence fails to establish a deductible loss within the meaning of section 214(a)(4) or (5) of the Revenue Act of 1921.

The petitioners did not sustain a deductible loss from the transaction involved herein.

The filing of a petition for redetermination of a deficiency in estate taxes suspends the running of the statute of limitations until the decision of the Board has become final and for sixty days thereafter.

1. A deficiency, notice of which was sent to taxpayer, and which deficiency is in part due to an erroneous refund, will not be increased by an amount equal to the interest paid by Commissioner at time of making refund, though motion to do same is timely made. 2.

Within two years and four months prior to his death, the decedent transferred certain land to his sons. Thereafter, and within two years prior to his death he placed in trust for the benefit of his daughter certain Liberty bonds. Held that the transfers of the land and Liberty bonds were made in contemplation of death.

Held, respondent did not err in including in the income of a partnership commissions accrued on its books as earned on transactions conducted by a corporation in which the members of the partnership owned all of the stock.

1. The collection of taxes for 1917, assessed before the effective date of the Revenue Act of 1924, is barred unless proceedings therefor are instituted within five years from the filing of the return. Russell v. United States,278 U.S. 181. 2.

1. The petitioner issues certain life insurance policies known as guaranteed premium reduction policies. To such policies are attached coupons.

1. Petitioner held to be transferees of the assets of Schwartz & Jaffee, Inc., within the meaning of section 280 of the Revenue Act of 1926. 2. Henry Cappellini et al.,14 B.T.A. 1269, followed.

1. Where, incident to the dissolution of one company, its stockholders are granted rights to purchase stock in another company created by transfers of part of first company's property, and a… Held: further, that the sale of stock acquired may give rise to a taxable gain or a deductible loss.

Transfers held not to have been made in contemplation of death.

The petitioner owned substantially all of the stock of a corporation of which he was president. During the years 1922 and 1923 the corporation paid the premiums on certain life insurance policies issued on the life of the petitioner, in which the corporation was not named as beneficiary. Held that the premiums paid by the corporation on such policies constituted taxable income to the petitioner for the years involved.

DEDUCTIONS. - The use and benefit of dredging petitioner's water front lasts for a period of three years. Held that the actual cost thereof should be spread over the three-year period in computing the deductions on account of such improvements.

The provisions of Title XII of the Revenue Act of 1924 do not authorize a 25 per cent reduction of tax on calendar year 1924 income reported in 1925 but taxable in part at 1923 rates under section 207(b) of the Revenue Act of 1924. Charles Colip,5 B.T.A. 123 followed.

Amounts paid by trustees of a trust to attorneys for services in prosecuting a claim for refund of taxes held properly deductible in computing the net income of the trust. Florence Grandin et al.,16 B.T.A. 515, followed.

1. DEDUCTIONS FROM INCOME. - Outstanding liabilities for freight charges on shipments of lumber were accrued upon the books at the end of each year with substantial accuracy and are held to be deductible. 2. ID. - Liability for interest on outstanding indebtedness accrued upon the books at the end of the year held to be deductible.

1. Held that certain amounts constructively received as rental by the petitioner as lessor from its president as lessee pursuant to the terms of a written lease entered into between them constituted rent to the petitioner. 2. Upon the facts, the accounts of two businesses should not be consolidated.

1. The filing of a separate return by a taxpayer corporation constitutes a binding election under section 240(a), Revenue Act of 1921, and its tax must be computed upon the basis of that return. 2. The discretion of the Commissioner to permit a change in such basis to be used consistently in the future does not include a discretion to change the tax once properly established by retroactively permitting an amended return.

1. A foreign corporation was engaged in borrowing money abroad and lending it, through a branch office in the United States, on farm land mortgages, the average term of which was five years.

Where a taxpayer corporation transfers certain assets to an affiliated corporation in exchange for stock, held, such exchange constitutes an intercompany transaction which does not raise the… Held: such exchange constitutes an intercompany transaction which does not raise the depreciable cost of the assets so transferred to the group as a whole.

Property in California held by a decedent and his wife in joint tenancy since before the estate tax is not included in decedent's gross estate.

Property in California held by a decedent and his wife in joint tenancy since before the estate tax is not included in decedent's gross estate.

Held, whether or not a loss is sustained by the taxpayer in any particular year as the result of the demolition of the whole or part of a building must be decided in the light of the facts in any given case, and any presumption arising from the act of the taxpayer in proceeding to raze the building and erect a new one, that taxpayer sustained no deductible loss, is rebutted by showing that the purpose of taxpayer in so purchasing the building was with a view of its actual use for a fixed and definite purpose, and that he did not thus use it because of latent defects which were not discovered at the time of purchase and had to demolish a good part of same on that account.

Under the Revenue Act of 1918, losses resulting from the sale of assets acquired prior to March 1, 1913, can not be determined unless cost, March 1, 1913, value and sale price are proved.

Where property is purchased with funds owned jointly by husband and wife, in the circumstances proved in this proceeding, the income from such property is the income of the husband only to the extent of his ratable interest in the investment.

Evidence does not show that debts were ascertained to be worthless.

The petitioner was affiliated with the Brownsville Brewing Co. in the year 1922, and having filed a separate return for that year, the Commissioner did not err in determining its tax liability on the same basis for the taxable year.

The value of a certain parcel of real estate determined for estate-tax purposes.

Held, that the evidence is not sufficient to establish petitioner's claim that its tax for 1920 should be computed under the provisions of section 328 of the Revenue Act of 1918. Held: that the evidence is not sufficient to establish petitioner's claim that its tax for 1920 should be computed under the provisions of section 328 of the Revenue Act of 1918.

The charge of filing false and fraudulent tax returns is not sufficiently proven by the showing that petitioner was an admitted bootlegger; that after pleading guilty he served a term in the Federal prison; and for the two preceding years filed delinquent returns.

Amounts paid by a member of a brokerage firm for the purpose of securing evidence with which to suppress bucket shops are deductible as an ordinary and necessary business expense.

The evidence fails to show that petitioner and another corporation were deprived of their right to file consolidated returns for the year 1922. The fact that prior to the making of their returns for 1923 the Commissioner determined that said corporations were affiliated during the years 1918 to 1920 can not be held to be a grant of permission to them to change the basis of their returns for 1922 and 1923 from separate to consolidated.

1. Value of good will on date of organization, on March 1, 1913, and during the latter part of 1917, determined from the evidence. 2. Value of good will on date of organization allowed as a part of invested capital subject to the limitations prescribed by section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918. 3. Deductions from gross income for obsolescence of good will due to national prohibition denied.

1. Upon the evidence, held that the petitioner entered into two separate sets of contracts for the purchase of cotton from which losses were sustained in two different years. 2. Forgiveness of indebtedness, held not to constitute income. Meyer Jewelry Co.,3 B.T.A. 1319, followed.

1. Respondent's method of computing petitioner's normal and surtaxes for the calendar year 1922 held to be correct and in accordance with sections 205(c), 210, 211(a), and 218(a) of the Revenue Act of 1921, where petitioner reported on a calendar year basis and was a member of a partnership which reported on a fiscal year basis. Theodore Schilling,3 B.T.A. 936, followed. 2.

Held, the transfer of the deposit accounts of one banking institution to another and of sufficient assets to cover the deposit liabilities… Held: the transfer of the deposit accounts of one banking institution to another and of sufficient assets to cover the deposit liabilities thus assumed by the transferee bank and the payment by it of a consideration for such transfer was in the nature of a purchase of valuable custom or good will and did not constitute an ordinary and…

The petitioner in 1922, in accordance with a plan of the bankers to manage the company in which he was a stockholder, surrendered 131 shares of stock. The stock was given to the new manager. Held the petitioner is entitled to deduct from gross income for 1922 the cost of the stock surrendered.

1. Claim for paid-in surplus based on the alleged value of certain water-power rights acquired from nonstockholder corporations denied. 2. Held: upon the evidence, that the reduction was in error. 3. March 1, 1913, value of certain water-power rights determined for depreciation purposes. 4. Reasonable allowance for depreciation of physical assets determined for the purpose of computing the net income in the taxable years 1917, 1918, 1920, and 1921.

1. For the years 1920, 1921, and 1922, the petition filed with the Board being by one other than the one to whom was mailed the deficiency notice, the Board is without jurisdiction to adjudicate the issues involved. 2. The petitioner having qualified under the holdings of the Commissioner for the year 1923, and met the requirements of section 704 of the Revenue Act of 1928, is held to be entitled to be taxed as a trust for that year.

1. Value of certain contract determined for exhaustion purposes. 2. Held: the petitioner is entitled to exhaustion on said contract based on the value of $30,000. 3. The respondent erred in disallowing salaries for consultation services and amounts paid under a covenant to refrain from competition.

Petitioner held not affiliated with the Soper Lumber Co. in 1920.

1. In the absence of evidence of facts, inferences will not be drawn to support petitioner's contention when contrary inferences are equally consistent with the evidence. 2. No deduction under section 234(a)(5), Revenue Act of 1918, may be allowed where petitioner voluntarily releases a solvent debtor from its liability.

Where a taxpayer is notified by unregistered letter prior to the Revenue Act of 1926 that a jeopardy assessment has been made under the Revenue Act of 1924, but the assessment is not actually made until after the passage of the Act of 1926 and the taxpayer is not notified within 60 days, after assessment, as provided by section 279, the Board is without jurisdiction.

Where one member of a group of corporations, affiliated for income-tax purposes, purchases certain bonds from another member of the same group during the period in which consolidated returns are filed by the group, and, after the termination of such period under the provisions of section 240(a) of the Revenue Act of 1921, sells to the public the bonds so purchased, the basis for computing gain or loss from such sale is the cost of the bonds to the corporation which sells to…

1. INVENTORIES. - Value of opening inventory determined upon the evidence. Value of inventory at the end of 1918 left undetermined for lack of evidence. 2. GROSS INCOME. - In the absence of the value of the intermediate inventory at the end of 1918, a method of allocating gross profit ratably according to sales is approved.

1. Held that a waiver signed by the petitioner as the Fidelity Storage Co., to which was affixed the corporate seal of the petitioner, extended the period for assessment for the year 1918, and that the defect in the deficiency letter was not so material as to deprive the Board of jurisdiction. 2.

In its income-tax returns for 1920 and 1921 the petitioner deducted from gross income certain amounts for obsolescence of patents acquired at a nominal consideration of $1. Held: the evidence does not warrant the deductions claimed.

The only net losses, computed under the Revenue Act of 1921, allowable as deductions in computing net income for the taxable year 1924 are those sustained during the taxable years 1922 and 1923 and, therefore, the petitioner's net loss sustained in 1921 may not be applied in each of the years 1922 and 1923 and the resultng loss in the latter year applied to the 1924 income in determining the amount of taxable net income for that year.

Where two corporations are affiliated the consolidated net income is to be computed as for one corporation and the sale by one of such corporations of some of its stockholdings in the other, affiliation continuing, should be treated, for the purpose of the income tax, as a sale by the affiliated group of its capital stock and as a capital transaction, giving rise to neither a taxable gain nor a deductible loss.

Where jurisdiction of the Board has been duly challenged, the Board will not take jurisdiction in the absence of clear proof to show that it in fact has jurisdiction.

A net loss is available to a corporation in an affiliation as a deduction from its income where the said loss was sustained by it.

An instrument authorizing a depository bank to pay to decedent's wife income from certain stocks of decedent which were to be transferred to her upon the happening of contingencies not shown to have occurred held insufficient to require the exclusion of said stocks from decedent's gross estate.

GAIN - EXCHANGE OF ASSETS. - The basis determined upon which to compute taxable gain upon an exchange of assets for stock and note of a corporation.

1. NET LOSS. - Upon the evidence petitioner is held to have sustained for the calendar year 1923 a net loss, as defined by section 204 of the Revenue Act of 1921, in the regular carrying on of his business of organizing, incorporating, capitalizing and actively conducting and operating hotel properties, and to be entitled, under section 206 of the Revenue Act of 1924, to deduct the amount thereof in computing net income for the calendar years 1924 and 1925. 2.

Petitioner reported its income on the basis of a calendar year. Commissioner erred in computing its tax liability on another basis.

Where liabilities incurred by the taxpayer, in the ordinary course of the operation of a partnership of which he was an active member, are paid by him two years after its dissolution during the liquidation of its affairs, any losses sustained thereby are losses resulting from the operation of a business regularly carried on within the meaning of section 204(a) of the Revenue Act of 1921, the benefits of the section not being limited to losses resulting from the operation of…

On the record, held that the evidence fails to establish the contention of the petitioner that his taxable net income for the calendar years 1922 and 1923 should be computed by a method other than that employed by the respondent. Held, further, that the evidence shows the amount of commissions which are allowable as deductions for the years 1922 and 1923.

1. INCOME. - On April 9, 1920, each of the petitioners executed a trust deed transferring 37 1/2 shares of certain stock to themselves as trustees for certain named donees. The old stock was canceled and a new certificate issued to petitioners as trustees. The trust deed was recorded in the probate court of their county and State.

A taxpayer, residing in Missouri, in 1916 conveyed all his property by a duly recorded trust deed to trustees for the payment of his debts and the use and benefit of his children after his death,… Held: in the circumstances of this case, the trustees are not liable for the proposed assessment either as transferees or as fiduciaries.

Petitioner entered into an agreement to lease certain property in which he and his wife owned a three-fourths interest for a term of 99 years, with option to renew, and to sell to the lessee the… Held: further, that, upon the evidence, $75,000 of the $100,000 received from the lessee in 1923 is taxable income to the petitioner and his wife in that year.

Where petitioner and his father speculated in stocks on joint account, resulting in a loss to petitioner of $24,794.25, such loss is deductible.

1. DEATH OF APPELLANT. - In a cause of action which survives against the estate, there is no abatement of the appeal upon the death of the appellant after the perfecting of such appeal. Green v. Watkins,6 Wheat 260. 2. SALE OF CAPITAL ASSETS. - A corporation, through its general manager, agreed verbally to sell all of its capital assets at a fixed price. After the completion of all details which insured the final consummation of the deal, the stockholders, with intent to avoid the incurring of a tax on the part of the corporation in carrying out the contract, caused a transfer of these assets to be made, without consideration, to the president of the corporation, who, in turn, conveyed to the purchaser and collected the contract sales price. Held that the president in such connection could act only for and in behalf of the corporation; and that, under the attending circumstances of this case, the transaction, as carried out, was a sale of capital assets, made by the corporation in accordance with its prior verbal agreement. 3. JURISDICTION OF THE BOARD. - Objections which challenge the jurisdiction of the Board of Tax Appeals to review assessments made under section 280 of the Revenue Act of 1926 overruled on authority of the decision in Henry Cappellini et al.,15 B.T.A. 1269.

1. INVESTED CAPITAL - PAID-IN SURPLUS. - On July 1, 1918, there were paid in to petitioner various tangible assets, having an actual cash value of $1,810,901.20 on that date, for $950,000… Held: petitioner is entitled to include in its invested capital for 1920 the amount of $860,901.20 as paid-in surplus. 2. DEPRECIATION. - The amount of the deduction for depreciation on those assets to paid in should be computed upon the basis of the value thereof on the date paid in. 3.

1. March 1, 1913, value of leasehold owned by petitioner determined. 2. Market value of bonds received by petitioner in part payment on the sale of its assets determined. 3. A return for the period January 1 to April 30, 1918, is not a return for the calendar year 1918 and is insufficient to start the running of the statute of limitations against that part of the year not included in the return.

Certain amounts, representing salary earned, were credited to the petitioner during the taxable years on the books of a corporation, of which he was… Held: that said amount so credited to the petitioner and said promissory notes do not constitute taxable income in excess of the aggregate amount actually paid to and received by the petitioner in cash in said years, since the unpaid balances were not available to him because of the financial condition of the corporations.

Held that the assignment by the petitioner to its stockholders of the right to receive proceeds from insurance policies on a vessel which had sunk does not constitute a distribution of the vessel in kind, and such proceeds, to the extent that they exceed the depreciated cost of the vessel, constitute taxable income to the petitioner.

Held that the evidence does not sustain the petitioner's contention that the closing inventory for 1920 as originally taken and included in its return should be reduced.

The evidence is insufficient to establish that the nonparticipating insurance take over by petitioner from a stock company constituted a trust and was operated solely for the benefit of stockholders of the stock company and it is held that the income from such insurance should be included in petitioner's income.

1. Faulty construction methods caused damage to petitioner's residence, the repair of which during the years 1922 and 1923 cost petitioner the amounts of $42,692.26 and $28,655.05, respectively. Held that such damage did not arise from fires, storms, shipwreck, or other casualty within the meaning of section 214(a)(6) of the Revenue Act of 1921. 2.

1. EXPENSE - REPAIRS. - Certain amounts totaling $7,150.67 expended by petitioner in the calendar year 1920 for repairs to its property held to be expenses subject to deduction in arriving at net income for that year. 2. INVESTED CAPITAL - INTANGIBLES. - Cash value of certain intangibles when paid in for petitioner's stock determined and allowed, in computing consolidated invested capital, to the extent of 25 per cent of the total of issued and outstanding stock of the affiliated companies on March 3, 1917. 3. Id. - EARNED SURPLUS. - The respondent's action in offsetting an operating deficit of one of the associated companies against the earned surplus of the other in computing invested capital is sustained upon the authority of W. S. Bogle & Co.,5 B.T.A. 541, and 26 fed.(2d) 771.

BAD DEBT. - Petitioner had extended credit to a tobacco company which became bankrupt in November, 1921. The company's direct liability on loans and its indirect liability on discounted trade acceptances totaled $141,713.23. On December 30, 1921, petitioner's directors in the exercise of prudent business judgment determined $30,073.23 of the debt to be worthless and charged off that amount. Held that said $30,073.23 was a proper bad debt deduction from gross income of 1921.

The evidence being insufficient to show that respondent erred in computing deductions for exhaustion, wear and tear of property used in the petitioner's business, the determinations of the respondent are approved.

FRAUD PENALTY. - The evidence in this case proves that the petitioner's return showed an understatement of gross income resulting in a large part from his misunderstanding of what should constitute gross income for the taxable year derived from a business, the products of which are sold part in the same year produced and part in following years. The record contains no evidence of an active intent to evade taxes and it is held that there is no evidence which will warrant a presumption of fraud.

Held, that under the terms of a certain lease agreement the petitioner was obligated to pay only for the use of improvements made by lessor on leased property and that at the end of the taxable year… Held: that under the terms of a certain lease agreement the petitioner was obligated to pay only for the use of improvements made by lessor on leased property and that at the end of the taxable year no amounts for the use of such improvements were due and accruable.

Where a taxpayer ascertains in 1923 that a portion of a debt is worthless and makes proper notation on its books of account of the amount of the charge-off, such amount is a legal deduction from gross income in its return filed for 1923.

1. A 10-year lease of hotel property was obtained by individuals free of cost other than the agreed rental and the lease was transferred to a corporation for certain shares of its capital stock. Held that the lease had no bonus value for invested capital or depreciation purposes. 2. Petitioner purchased the furnishings for its hotel on the installment plan.

The petitioner was not a life insurance company within the meaning of section 242 of the Revenue Acts of 1921, 1924, and 1926.

The petitioner and the Wood Lumber Co. held to be affiliated during the taxable year.

Held, that a low rental rate for property owned by stockholders of a corporation creates no abnormality in income within the meaning of section 327 of the Revenue Act of 1918. Held: that a low rental rate for property owned by stockholders of a corporation creates no abnormality in income within the meaning of section 327 of the Revenue Act of 1918.

Cost of certain books of samples used by petitioner should not be included in the computation of invested capital for the year 1920 on the basis of a two-year useful life of such books.

INVENTORIES. - It appears from the evidence that inventories are necessary in the determination of the income of the petitioner, but the respondent failed to give effect to the stocks of raw materials, supplies, and finished products on hand at the end of 1920. Held that the petitioner's gain and loss accounts for the years 1920 and 1921 should be readjusted by giving effect to an inventory of December 31, 1920, valued at $10,604.

Compensation for legal services rendered two irrigation districts in California during 1922 and 1923 held to constitute taxable income.

A consent in writing entered into between the parties after the period of limitation had expired and subsequently to the passage of the Revenue Act of 1926 is ineffective, since section 1106 of that act extinguished both the right and the remedy.

Petitioner filed a return for its fiscal year ended February 28, 1921, on May 16, 1921, which was not false or fraudulent with intent to evade tax. By reason of the change in the Revenue Act of 1921, its tax liability for the fiscal year ended February 28, 1921, was increased and under the law and regulations it was required to file a return under the provisions of that act. This it failed to do.

The respondent's action in disallowing a deduction from income for 1920 claimed on account of an alleged loss from the transaction involved herein, sustained.

1. The petitioner, having elected for 1921 to take deductions for specific bad debts, may not change to a reserve basis for that year and subsequent years. 2. Held: any defects in the address were waived by the filing of the petition. 3. Certain cash discounts accrued by petitioner at the close of 1925, and freight allowances for the years 1923 to 1925, inclusive, disallowed for lack of evidence. 4.

During the taxable years 1924, 1925, and 1926 the petitioner, being on an accrual basis, paid certain rentals for the use of a building which it occupied in 1919 and 1920. Held that the rentals not having accrued during the taxable years are not legal deductions from gross income.

The common law rule of estates by the entirety still being in effect in Michigan, a deed to persons who were in fact husband and wife held to create an estate by the entirety and the income from such estate held properly taxable to the husband.

1. WAIVERS - DISSOLVED CORPORATIONS - POWERS OF OFFICERS AND TRUSTEES. - Where a corporation has dissolved in accordance with a state law which places its affairs in the hands of its directors, as… Held: further, that under such conditions the fact that the president of the dissolved corporation, who signed such waivers, was likewise a member of its board of directors will not give validity to his act in the absence of joint action or ratification by his cotrustees. 2.

In 1919 the decedent sold a cotton plantation and transferred title by deed to the purchaser. Profit from the transaction was reported on the installment basis. Held: further, that the utilization of the purchase money notes in reacquiring the plantation at trustee's sale constitutes a realization of profit under the installment method of reporting income of that proportion of the notes utilized which the total profit bears to the total contract price.

Held, that under the provisions of section 201 of the Revenue Acts of 1921 and 1924, the distributions here involved were taxable to the recipients as dividends, to the extent that payment was made… Held: that under the provisions of section 201 of the Revenue Acts of 1921 and 1924, the distributions here involved were taxable to the recipients as dividends, to the extent that payment was made from earnings of the corporation after the date of its organization.

On the record, held that the petitioners are transferees of the Mable Coal Co. and their liability under the provisions of section 280 of the Revenue Act of 1926 as such transferees determined.

1. The petitioner is an insurance company taxable under section 246 of the Revenue Act of 1921. Held: further, that a percentage of the policy fees paid to the petitioner during the taxable year and permanently retained by it comprised a part of its taxable income of that year.

1. TIMBER CONTRACT. - Where the owner of standing timber in Texas entered into a contract to sell it and the vendee agreed to cut, remove and pay for it as removed within a specified time, the title to the timber remained in the vendor until cut, and where the vendor died pending the performance of the contract his devisees inherited the timber subject to the contract. 2.

1. JURISDICTION - WAIVER. - An agreement executed by two of the affiliated corporations and the collector secured by a deposit by the… Held: that the income and profits taxes for the calendar year 1919 being shown to have been assessed prior to the Revenue Act of 1924 and more than five years to have elapsed from the date the corporations in question filed their returns for that year before the several deficiencies for such year were determined by respondent, the…

Held, that petitioner is entitled to deduct from his gross income for each of the taxable years an amount of $5,000, representing the extent to which a debt due him became uncollectible in each of… Held: that petitioner is entitled to deduct from his gross income for each of the taxable years an amount of $5,000, representing the extent to which a debt due him became uncollectible in each of such years.

- Amounts for additional compensation to employees, admittedly reasonable and for services actually rendered within the taxable year, are held to be deductible from income by the petitioner on the accrual basis, since they were definitely, although informally, incurred within the taxable year and constituted outstanding liabilities of the petitioner at the end of the taxable year; unforeseen losses, suffered subsequently, preventing a discharge of the liabilities and…

Loss FROM SALE OF CORPORATE STOCKS. - In 1903 the petitioners purchased both the preferred and common stock of a corporation at par. In 1923 the corporation went into voluntary bankruptcy and petitioners thereupon sold their stock, both preferred and common, at $1 per share. Upon the record it is determined that the March 1, 1913, value of the preferred stock was the same as cost, par, and that at the same date the value of the common stock was less than par. Loss deductions allowed on the basis of valuations so determined.

1. Distribution of treasury stock by closely held corporation to two officers, who were also the sole stockholders, held not to be in payment of special services rendered in taxable year. 2. Special assessment denied.

1. Held, that petitioner's decedent took title to certain shares of stock in 1920 and that any gain resulting therefrom must be taxed in that year. 2. Held: that petitioner's decedent took title to certain shares of stock in 1920 and that any gain resulting therefrom must be taxed in that year. 2. Evidence not sufficient to overcome the presumption that the Commissioner correctly determined the profit realized by the exchange in 1920 of a certain patent for shares of stock.

1. Wool dealer operating in 1918 under regulations of War Industries Board and later Bureau of Markets purporting to restrict profits is… Held: the accrual of income from any profits on a season's business may not be postponed from the end of the calendar year in question until the entire disposition of the season's business, and the fact that the calendar year's income was computed by apportionment on the basis of gross sales does not prove error in the determination of…

1. Where a decedent by her last will and testament directed that her executor hold together her residuary estate for a long period of years and gave him authority and power to sell any part of the… Held: that the value of such bequest of the income to charitable institutions is a legal deduction from the gross estate under section 303(a)(3) of the Revenue Act of 1924.

Liability under section 280 of the Revenue Act of 1926 is not established by the respondent.

1. Evidence fails to show that a general retail store conducted by some of the officers of a corporation engaged in the manufacture and sale of specialized commodities is not a business entity… Held: the petitioner and the Lux Fibre Co. were not affiliated corporations within the taxing statutes, during the year involved.

1. Royalties received under leases of coal lands are held to constitute gross income and not proceeds from the sale of coal in place. 2. Money received in compromise of a suit to recover the value of coal extracted by a trespasser, plus damages to the property held, on the record, to constitute taxable income. 3. Proper depletion rate per ton of coal mined determined.

1. Russel Wheel & Foundry Co.,3 B.T.A. 1168. 2. Plea of the statute of limitations disallowed.

1. Cost of an improvement partly on vacated streets and alleys held to be a capital expenditure. 2. A certain deposit for the purpose of guaranteeing observance of the rules of a trade organization held deductible as expense in the year in which it was forfeited.

A corporation which suffered a net loss in 1919, prior to entering an affiliated group in 1920, is entitled to have the amount of such net loss in excess of its 1918 net income allowed as a deduction in computing net income for 1920, and the resulting deficit should be reflected in the computation of the consolidated net income for 1920. Section 204(b), Revenue Act of 1918.

Declarations of trust executed by the petitioners as to future income derived from certain sources, including the partnership of which they were the sole members, did not operate to relieve them of taxes on such income.

Claim for deduction from gross income on account of bad debts not supported by evidence.

An amount paid by his associates to a retiring partner as consideration of his claim on commissions earned before his retirement held to be a capital investment.

Evidence fails to show that respondent was unable to determine petitioner's invested capital. Special assessment denied.

The Commissioner correctly included depreciated cost of certain patents in his determination of the basic cost of a mixed body of assets sold in the taxable years by an affiliated group of which the petitioner was the parent corporation.

1. A taxpayer with an established accounting year ending October 30 changed to one ending June 30 and at a timely date, without first obtaining the Commissioner, filed its income and profits-tax… Held: the first return so filed was the return required by law for the fiscal period beginning November 1, 1917, and ending June 30, 1918. 2. Evidence fails to support petitioner's claim for the assessment of its taxes under the provisions of section 328 of the Revenue Act of 1918.

1. Assessment and collection of taxes held not barred by statute of limitations. 2. The petitioners held not to be affiliated with the United Hotels Co. during 1919.

Amounts paid by petitioner to secure removal of liens standing against property purchased at receiver's sale and to perfect and clear the title thereto are capital expenditures.

1. Depletion on the basis of discovery value may not be taken as a deduction by those who acquired by gift in 1922 an interest in an oil lease on a proven tract. Melville G. Thompson,10 B.T.A. 25, followed. 2. The basis for the computation of the allowance for depletion of an oil lease acquired by gift subsequent to December 31, 1920, is, under the provisions of the Revenue Act of 1921, the fair market value of the property at the date of the gift.

Held that the deduction claimed was not an expense "incurred" during the taxable period and therefore that it is not a proper deduction for that period.

On September 26, 1911, the mother of the petitioner conveyed to him by written contract, and actually delivered to him, shares of stock in consideration of his agreement to pay to her the dividends… Held: income from such stock was taxable income of the petitioner.

The amount deducted by the petitioner for exhaustion, wear and tear of property used in its business was reasonable in amount.

Commissioner's disallowance of a deduction for officers' salaries reversed.

1. In 1924 the petitioner held stock in a corporation which cost him $5,000. The corporation's liabilities exceeded its assets in 1924 but the corporation continued in existence and was not dissolved until 1929. Held that the petitioner did not sustain a deductible loss of his investment in the stock in 1924. 2. In his return for 1924 the petitioner deducted from gross income $4,359 representing an alleged bad debt due him from the insolvent corporation above referred to.

1. GAIN - YEAR RECEIVED. - Petitioner in 1919 sold at a profit certain real estate occupied under lease by a tenant, agreeing to secure the surrender of the premises by the tenant to the purchaser on… Held: the profit represented by the entire consideration was received by petitioner in the year of sale. 2.

Personal service classification denied.

Option warrants, giving the holder the right to subscribe to common stock, which were acquired in 1911, expired in 1921. Held that the basis for determining the amount of loss in 1921 is cost or March 1, 1913, value, whichever is lower. The evidence is insufficient to establish cost.

1. The taxpayer owned a certificate of deposit payable after notice and surrender on or before one year from date which expressly provided that interest ceased at maturity. No interest was drawn. Held: since no right to interest accrued after the expiration of one year, interest after that time was not constructively received. Held, further, interest for one year from the date of the certificate was constructively received at the expiration thereof. 2.

1. An application for a patent is intangible property and regardless of its actual cash value when paid in for the stock of a corporation, Subsequent to March 3, 1917, can be included in the computation of invested capital only as subject to the limitations of section 326(a)(5) of the Revenue Acts of 1918 and 1921. 2. Appreciation of assets after acquisition may not be included in the computation of invested capital. LaBelle Iron Works v. United States,256 U.S. 377.

Expenditures made by the petitioner for replacing wooden girders with steel girders and replacing old floors with new, old front of building with a new front and for putting a window in a wall where none had been before, held to be capital expenditures and not deductible in determining taxable net income.

A decedent made his income-tax returns on the cash receipts and disbursements basis. At this death certain interest had been earned but not received by him during life. Held: such interest was properly a part of the gross estate subject to Federal estate tax and when collected by the executrix did not become income to the estate.

1. Regardless of original cost or date of acquisition patents which expired before the taxable years are not depreciable assets, since they are not used in the trade or business of the petitioner in the years in which deductions on account of depreciation thereof are claimed. 2.

1. GAIN OR LOSS ON EXCHANGE OF PROPERTY. - Where petitioner's decedent was not a dealer in real estate, but an investor, and exchanged real… Held: no gain or loss should be recognized, pursuant to section 202(c)(1) of the Revenue Act of 1921. 2. Id. - Petitioner's decedent exchanged a lease for certain unimproved real estate which had no readily realizable market value. Held, no gain or loss should be recognized, pursuant to section 202(c) of the Revenue Act of 1921. 3.

1. Where a corporation was dissolved in 1920 and its entire assets were taken over in kind by its stockholders, who thereafter conducted the business as a partnership, the transaction is controlled by section 201(c) of the Revenue Act of 1918, and any gain realized was taxable to the distributees. 2. Inventories may be reduced for obsolete merchandise carried therein.

Petitioner acquired certain stock in 1915. Held: that in determining gain or loss on the sales no reduction of the cost or acquisition value in 1915 is necessary because of the creation and existence of a trust estate between the dates of acquisition and sale.

1. Where property acquired by petitioner in 1916 or 1917 was paid in to a corporation for common stock in 1919, which stock became worthless in the taxable year, it is held that in the absence of evidence to show the value of the property in 1919 when it was paid in for stock, or the value of the stock when received, no deduction can be allowed to petitioner on account of the worthless stock. 2.

- Under the laws of Florida profits derived from the sale of real estate, purchased in whole or in part with funds of the wife, constitute her separate estate to the extent of her proportionate part thereof, and, when such profits have been reported by the wife in her individual return, they may not thereafter be taxed to the husband. Jerry Galatis,8 B.T.A. 213, followed.

Held, that the petitioner is not entitled to have its profits tax determined under the provisions of section 328 of the Revenue Act of 1918. Held: that the petitioner is not entitled to have its profits tax determined under the provisions of section 328 of the Revenue Act of 1918.

Value of land determined.

1. Since the articles of copartnership of which the decedent was a member provided that the good will of the partnership should be vested in and belong exclusively, without any financial… Held: the value of the gift should not be included in the gross estate of the decedent.

The evidence failing to show that the same interests own as much as 95 per cent of the stock of two corporations for which affiliation is asserted by the petitioner, held, such corporations are not… Held: such corporations are not affiliated and the determination of the Commissioner approved.

On the facts, held that an alleged sale to a trustee by the trustor in 1923 of corporate stock, paid for out of surplus income of the trust estate, was a bona fide sale and resulted in a deductible loss.

1. A royalty interest under an oil and gas lease is an interest issuing out of the land and a part of the lessor's estate, the assignment of which must be evidenced by a writing to satisfy the statute of frauds. 2. The transfer of a part of such royalty interest to petitioners occurred on December 20, 1922, and the respondent's computation of depletion deductions based on a discovery value fixed by the first discovery thereafter on January 30, 1923, is approved.

There is no evidence to show that the amounts covered by dividend checks issued in 1922 were not unqualifiedly subject to petitioner's demand in that year, and respondent's inclusion of them in income for that year is approved.

DEDUCTIONS - NET LOSS. - Upon the evidence, held that the total of amounts paid by petitioner during the fiscal year 1925 in satisfaction of a judgment rendered against it in that year and expenses incident to the litigation represented a loss incurred as an incident of business regularly carried on, and was properly to be carried forward as a net loss and deducted from income over the years 1926 and 1927.

1. The amount of additional compensation, voted and paid to the officers of the petitioner corporation in 1919 for services performed in 1918, is not allowable as a deduction from income for 1918. 2. An increased deduction claimed by the petitioner on account of alleged accelerated depreciation of machinery in 1918 denied for lack of evidence to show that it is entitled to a greater rate than that allowed by the respondent.

1. Respondent's action disallowing deduction taken by the petitioner on account of certain bonds claimed to have become worthless and charged off in 1921 sustained. 2. Respondent's action in adding to petitioner's income for 1921 increases and balances in certain reserve funds modified.

League for Industrial Democracy held not to have been organized and operated exclusively for educational purposes and contributions to it are not deductible under section 214(a)(11)(B) of the Revenue Act of 1921.

Where the total income of a trust which is to be accumulated or held for future distribution consists partly of profit from the sale of capital assets and partly of other income, the tax is to be computed on the income as a whole and not upon the two kinds of income separately.

Walter F. Austin, as Trustee of the Herbert T. Austin Trust,18 B.T.A. 1096 followed.

1. DEPRECIATION DEDUCTION. - For the three years under consideration the petitioner is entitled to additional depreciation deduction computed at the same rates used by the respondent upon other equipment for such additions to equipment as were acquired during the years 1917 to 1921, inclusive. 2.

- On the facts, held that respondent erred in disallowing deductions taken by petitioner in the years 1923 to 1926, inclusive, for exhaustion of a patent, the application for which was acquired in 1914 in consideration of its issue of capital stock.

Petitioner, prior to March 1, 1913, delivered certain petents to a corporation with the understanding that he should be paid for the patents in an amount commensurate with their value if, and when, that value was demonstrated by the use of the machines covered by the patents in the business of the corporation.

The evidence is insufficient to establish that the contract involved had no readily realizable market value. Respondent's determination, with adjustments to reflect facts stipulated, is affirmed.

1. ESTATE TAX. - Held that under the Revenue Act of 1924 the proceeds of insurance policies taken out in 1907, 1908, and 1909, where the insured reserved the right to change the beneficiary, should be included in the gross estate. 2. Id. - Contention that the proceeds of one particular policy should not be included is denied for lack of evidence. 3.

1. Where the original petition related to deficiencies for the years 1923 and 1925 and was amended and the amended petition alleged error as to only 1925, and trial is had upon the issue joined as to the year 1925, a motion by respondent at the close of the hearing to dismiss the proceeding in so far as it related to 1923 is proper and will be granted. 2. The evidence is insufficient to show that the respondent erred in disallowing salaries as being excessive.

Additional compensation authorized to be paid to petitioner's officers for the taxable years held not to be deductible from gross income.

1. The petitioner took deductions for bad debts in its return for 1921 by the charge-off method, and thereafter, in 1922, changed to the reserve method, claiming deductions of additions to a… Held: further, that the petitioner in computing net income is entitled to deduct the total amount of debts ascertained to be worthless and charged off within each taxable year involved, notwithstanding it claimed in its returns only deductions for additions to its reserve for bad debts.

1. Expenditures made in connection with the construction of partitions, shelves, bins and racks in a leased building to adapt is to the business needs of a mercantile corporation, and which have a useful life equal to that of the lease, held not deductible as a business expense of the corporation for the year, under the facts shown. 2. Special assessment denied.

- Invested capital, within the meaning of section 326, Revenue Act of 1918, is the capital actually paid in to the corporation by the stockholders plus earned surplus and undivided profits.

Deduction on account of bad debts disallowed upon the evidence.

1. Held that the petitioner has not established error on the part of the respondent in including in income gains realized from insurance on two cotton gins destroyed by fire, the evidence being insufficient to show that petitioner complied with the requirements of section 234(a)(14) of the Revenue Act of 1921 in acquiring one gin by foreclosure and in constructing another. 2.

The petitioner is entitled to an annual deduction from gross income for the exhaustion of contract.

1. The petitioners were not considered to be taxable as a trust under the regulations in force at the time the return for 1924 was filed, or under any ruling of the Commissioner which had not been reversed or revoked. They are not, therefore, entitled to be taxed as a trust for such year under the provisions of section 704 of the Revenue Act of 1928. 2. During the taxable years the petitioners constituted an "association" taxable as a corporation within the meaning of section 2(a) of the Revenue Acts of 1924 and 1926.

The petitioner was a cooperative association engaged in collecting milk and cream from producers and manufacturing various products from… Held: The authority of the Board does not extend to the point where it may apply later enactments to a period prior to their adoption by assuming that they supply earlier inadvertent omissions, particularly where the question is one of absolute exemption from tax and the administrative construction and application of the earlier statute…

- It is alleged in the petition that a corporation owned 80 per cent of the stock in the petitioner, and controlled the remaining 20 per cent, but the evidence shows that during the taxable year the 80 per cent stood in the name of an individual who voted it as his own, pledged it as collateral security to his debts, and collected or directed the disbursements of dividends. Affiliation is denied.

1. Inventory adjustment made by the respondent approved. 2. Basis for depreciation deductions for taxable period and year redetermined. 3. Evidence insufficient to determine that the respondent erred as to certain deductions claimed on account of bad debts and salaries of officers. 4. Under the laws of Washington state personal property taxes are due in the first year subsequent to the levy thereof. Held, such taxes in this controversy were deductible from petitioner's income in the years levied, though not paid until the following years. 5. In the circumstances herein the statute of limitations does not apply to the deficiency asserted for the year 1918. Wells Bros. Co. of Illinois et al.,16 B.T.A. 79.

1. In deciding whether an item is a deduction in determining taxable net income, the taxpayer's method of accounting is not controlling unless it clearly reflects income, notwithstanding the categorical statement that the taxpayer's accounts were kept and the return made on the cash basis. 2.

1. In the year 1920 the petitioner conveyed to a corporation certain assets in exchange for all of the capital stock of the corporation. Held that the transaction was one giving rise to gain or loss, and that the cost to the petitioner of the capital stock received was the fair market value of the assets conveyed to the corporation. 2. The fair market value of said assets and the amount of loss sustained by the petitioner on the sale of said capital stock determined.

1. The books of the partnership of Thompson & Black of which the petitioner was a member held to have been kept on the accrual basis, and the income of the partnership and the… Held: the amount so drawn in any fiscal year of the partnership was income to the petitioner for the calendar year in which the fiscal year ended. 3. Collection of $31,205.51 of the tax assessed on the original return of the petitioner for 1919 held to be barred by the statute of limitations.

Bad debt deduction disallowed where the debt was in part ascertained to be worthless and charged off in petitioner's books within the preceding taxable year and where there was no ascertainment of worthlessness or charge-off made in respect of the indebtedness within the taxable year.

Petitioners were equal partners prior to and until May 15, 1923, on which date a corporation was organized, to which the partnership assets were transferred in exchange for stock. Held: no taxable gain was derived by the partnership under section 202(c)(3) of the Revenue Act of 1921.

1. On the evidence respondent's determination of the original cost of property sold by the petitioner in 1923 approved. 2. Held: in determining profit or loss from the sale of the property upon which depreciation was taken no reduction should be made in the amount of depreciation on account of the fact that for some years the petitioner did not have sufficient income after proper allowances and deductions to require the payment of tax.

1. An amount of $70,000 paid by the petitioner to a competitor under a contract whereby competition by such competitor was eliminated for five years held not to be deductible as expense, but should be prorated over the life of the contract. 2. Basis of exhaustion of such contract determined.

1. The cancellation of a debt due by a corporation to its principal stockholder constitutes a gift to the corporation, or a contribution to its capital, and does not give rise to an allowable deduction for a bad debt. 2. Amount claimed as a deduction for bad debt disallowed also for the reason that it is not shown to have been worthless and charged off as such in the taxable year.

Premiums paid by employer for insurance on the life of an employee of which the beneficiary is the employee's wife are compensation of employee for services and part of his gross income.

Held that the exchange of properties here involved does not come within the exceptions set forth in section 213(b)(1) of the Revenue Act of 1924 and that gain resulted therefrom as determined by the respondent.

1. Evidence fails to establish petitioner's ownership of certain bonds alleged to have been sold in the taxable year for an amount less than cost thereof. 2. Statute of limitations had not run as pleaded in Docket Nos. 16901 and 16902.

In the circumstances herein the waiver produced by the respondent is without effect to stay the statute of limitations as to the petitioner's income-tax return for 1920.

1. Expenses, other than taxes, paid by a trustee in the operation of a farm, a part of a trust estate, in the circumstances of the instant case are not legal deductions from the gross income of the trust estate in the determination of the taxable income thereof, the evidence failing to show that such expenses were ordinary and necessary expenses paid in the carrying on of a trade or business. 2.

- The petitioner, a life insurance company, during the year 1924 sustained losses resulting from the failure and insolvency of several banks with which petitioner had cash deposits represented by certificates of deposit.

For the fiscal year ended March 31, 1918, the respondent computed petitioner's tax liability under sections 205(a) and 335(a) of the Revenue Act of 1918. In computing the proportionate part of the tax for that part of the fiscal year falling within the calendar year 1917, he failed to allow as a deduction an amount for obsolescence sustained during the period January 1, 1918, to March 31, 1918. This action of the respondent approved.

The petitioner was created by a declaration of trust made November 1, 1920. Property of the value of $100,000 was transferred to a sole trustee. Power to terminate the trust was reserved to the beneficiaries. The petitioner was actively engaged in carrying on a business during the years 1922, 1923, and 1924 and filed fiduciary returns for those years. The Lone Star Realty Co. was created by a similar declaration of trust made January 20, 1922. Property of the value of $25,000 was transferred to a sole trustee. The trust carried on an active business during the years 1922 and 1923 and filed fiduciary returns for those years. Held, under the provisions of section 704 of the Revenue Act of 1928, that the petitioner and the Lone Star Realty Co. are taxable as trusts and not as associations during the taxable years 1922 and 1923.

1. Contributions by a corporation to a hospital held not deductible as business expenses. 2. The cost of replacement of iron piping with brass piping held to be a capital expense.

A reasonable allowance for salaries of corporate officers, rendered under a contract providing for a distribution of profits determined.

In 1922 the petitioner told his sons and his wife that he intended to give or was going to give 2,000 shares of stock which he owned to his children and in the meantime would apply the dividends… Held: the petitioner did not intend to create a trust.

1. JURISDICTION. - This Board is held to have jurisdiction to hear and determine an appeal from a deficiency even though the appeal is unsatisfactory in form, if it was filed within the statutory period of 60 days after the mailing of the deficiency letter and was promptly amended to conform to the rules prior to answer by the respondent. 2.

Loss sustained in 1921 held not resulting from the operation of a trade or business regularly carried on by the taxpayer, and not deductible in 1922 as a net loss under section 204, Revenue Act of 1921.

1. Held, that certain payments by petitioner to his wife and children in the circumstances herein were not deductible from gross income for Federal tax purposes in the year in which they were made. 2. Held: that certain payments by petitioner to his wife and children in the circumstances herein were not deductible from gross income for Federal tax purposes in the year in which they were made. 2. Respondent's motion to amend answer byan affirmative allegation of fraud denied.

Where one corporation exchanges substantially all its assets for the stock of another, a merger or consolidation of the two corporations is effected within the meaning of section 203(h)(1) of the Revenue Act of 1924, and under the provisions of (b)(3) of the same section, no gain or loss results therefrom.

1. Special assessment denied for lack of evidence. 2. Action of the respondent in disallowing deduction on account of salaries paid to the petitioner's officers, reversed.