Volume 2 — Board of Tax Appeals

Where assets have increased in value in the hands of an owner and are transferred to a corporation under circumstances rendering section 331 of the Revenue Act of 1918 applicable, and, on such reorganization, the assets are transferred for a mixed aggregate of capital stock and borrowed capital, full effect shall be given to the provisions of section 326 and section 331 so that both the increment in value shall be eliminated as provided by section 331, and the borrowed…

Where a landlord and its tenant are affiliated corporations, improvements made to the leased premises by the tenant are to be depreciated over their life, not over the life of the lease.

Under the provisions of section 214(a)(2) of the Revenue Acts of 1918 and 1921, dealers in municipal bonds are not entitled to deduct interest on indebtedness incurred in the course of their business to purchase or carry bonds, the interest upon which is wholly exempt from taxation.

1. Under chapter 20, General Statutes of Minnesota, oil inspection fees are payable at the time of inspection. 2. Where, under state law, inspection fees are payable at the time of inspection, the liability therefor accrues at such time, and a taxpayer is not entitled to deduct from its gross income for 1918 inspection fees paid in that year for inspections made in prior years. 3.

On the evidence, held, that the taxpayer was a personal service corporation. Held: that the taxpayer was a personal service corporation.

1. When taxpayer computes depreciation for 1919 and 1920 on the basis of its then book value of plant and equipment acquired prior to March 1, 1913, and such basis is adopted by the Commissioner, it… Held: that taxpayer's book value of assets for depreciation and invested capital purposes was properly reduced to the extent of the value of the assets used in constructing the new plant. 3.

1. Deductions for amortization of the cost of property acquired and used for the manufacture of war supplies will not be allowed in the absence of evidence that taxpayer actually made an investment… Held: that the loans enured solely to the benefit of the stockholders, were not in fact made to or paid by taxpayer, and taxpayer was not entitled to deductions for amortization or depreciation upon the buildings.

1. Additional compensation fixed and paid in September, 1919, for services rendered in 1918 disallowed. Additional compensation regularly fixed and paid within the year allowed. 2. Taxpayer has established its right under section 327 of the Revenue Act of 1918 to have its profits tax computed under section 328 of that Act.

Losses on sales of securities allowed.

Losses on sales of securities allowed.

On the evidence submitted, held, that the taxpayer was affiliated with the L. C. Wright Baking Co., Inc., during the calendar year 1918. Held: that the taxpayer was affiliated with the L. C. Wright Baking Co., Inc., during the calendar year 1918.

Partnership income was derived principally from commissions for negotiating charter parties, computed upon fixed percentages of the charter hire. Held: that the method of accounting employed did not clearly reflect the partnership net income, and under section 212(b) of the Revenue Act of 1918 the cash receipts and disbursements method should be applied in ascertaining the individual tax liability of the partners.

1. Expenditures for a new roof and for repairing boilers, made immediately upon the purchase of a building, being permanent in nature, are capital items and may be added to the cost of taxpayer's original investment, though not included in his return or claimed before the Commissioner. 2.

1. Representatives of taxpayers are presumed to know the rules of evidence, and where, in the trial of an appeal, it develops that taxpayer's evidence is incompetent, the Board, out of deference to the interests of appellants in pending cases, will not grant a continuance to enable taxpayer to produce necessary witnesses, but will dispose of the appeal on the allegations of the petition admitted by the Commissioner. 2.

1. The payment by a corporation of inadequate salaries to its officers for the year 1917 is not a ground for the application of the relief provided for by section 210 of the Revenue Act of 1917. 2. The efficient operation of the corporation, resulting in a turnover of its capital far in excess of the average turnover, does not result in such an abnormal condition affecting capital or income as warrants the computation of the tax under section 328 of the Revenue Act of 1918.

Where the cost of brick buildings and frame dwellings can not be separated, a combined rate for depreciation is justifiable.

An individual who kept his books of account upon the basis of a fiscal year ended May 31, but made his income-tax returns for 1917 and prior years on the basis of the calendar year, was required to… Held: that his liability to income tax upon such return should be computed in the manner outlined in section 226 of the Revenue Act of 1918.

On evidence the taxpayer is entitled to include the value of good will in the amount of $37,500 in its computation of invested capital for income and profits-tax purposes for the years 1919 and 1920.

1. A license for the use of a patent during its life is subject to exhaustion in the same manner as the patent. 2. Where such license has been acquired for stock, exhaustion should be computed upon its actual cash value, rather than upon the par value of the stock issued therefor.

The taxpayer and Bowman Bros. Co. were affiliated during the calendar year 1917, and, under the provisions of section 1331 of the Revenue Act of 1921, they are required to file a consolidated return for the calendar year 1917.

1. In allowing deductions from the gross estate in computing estate taxes, Congress did not intend that determination of the tax should await final settlement of the estate and a reduction to absolute certainty of all claims against it. 2. Deductions for executors' commission may be based upon a reasonable estimate of the amount allowable by the lex domicillii and it is not essential that such commissions be first allowed by order of court or paid. 3.

Where property is sold and the vendor receives as part of the purchase price a second mortgage payable in installments over a period of 12 years, the amount of taxable gain derived from the sale shall be computed by considering the second mortgage at its fair market value, if any, at the time when the transaction was closed.

When closing inventories of merchandise have been made without actual knowledge of marketing conditions and prices, the bona fide market prices ascertained within a reasonable time thereafter may be used in valuing such merchandise for inventory purposes.

Upon the evidence submitted, additional salaries disallowed.

Upon the evidence submitted, held: (1) That amounts expended in replacing cans, tubs, and cabinets which have a useful life of three years… Held: That amounts expended in replacing cans, tubs, and cabinets which have a useful life of three years are capital expenditures and not deductible as ordinary and necessary expenses. (2) That a depreciation rate of 20 per cent should be allowed on machinery and equipment instead of a 10 per cent rate, as allowed by the Commissioner.

Where a taxpayer, acting with sound business judgment, over a period of years has consistently charged the cost of patterns and drawings to expense, or depreciated them on its books at a high rate, and its action has met with approval of the Commissioner, it may not, six years after the last of the taxable years in question, reconstruct its capital account and theoretically deduct depreciation for such years at a lower rate.

Value of a fractional interest in real estate determined.

A taxpayer which, owing to a change in business conditions, discards certain machinery and equipment in 1918, is entitled to deduct from gross income in its tax return for that year the difference between the depreciated cost of the machinery and equipment discarded and the salvage value thereof.

The difference between the amount of money realized from the sale of capital stock and the cost of reorganization of a corporation does not constitute taxable income.

Upon the evidence, held, that, under the provisions of section 231(4) of the Revenue Act of 1921, taxpayer is exempt from taxation for the year 1921.

1. Certain contributions made by the taxpayer are not deductible as ordinary and necessary business expenses. 2. On the evidence presented, the taxpayer is not entitled to additional depreciation over that allowed by the Commissioner.

The taxpayer and the Sun Trading Co., Inc., were not affiliated for the year 1919.

The former trustee of a dissolved trust (which operated a business in such manner as to be taxable as a corporation), without authority from the persons liable to pay an additional assessment against the trust, is not a proper party to institute an appeal to this Board.

1. A determination of deficiency in income tax subsequent to June 2, 1924, must be made in accordance with section 274(a) or (d) of the Revenue Act of 1924, and an appeal to this Board must be taken in accordance with the provisions of section 274(a) or section 279. 2. An appeal will not lie under section 279 unless a claim for abatement, accompanied by a bond, has been filed and the claim for abatement has been acted upon.

A dividend declared by the Peerless Manufacturing Co. did not constitute a stock dividend.

Where the Commissioner has duly notified a taxpayer of the determination of a deficiency under section 274 of the Revenue Act of 1924, the fact that he subsequently answers a letter of protest sent him by the taxpayer will not extend the statutory period within which appeal may be taken to this Board.

1. Salaries allowed as a deduction to the extent of the payments made by the corporation during the taxable period and after its organization. 2. Held: not a personal service corporation.

The value, in excess of original cost, of the producing rights of plays acquired in 1918 and 1919 may not be used as the basis of a deduction for obsolescence.

The minutes of a corporation are not sufficiently established by showing that they are contained in a book believed by the witnesses to be the minute book, where the witnesses were not present at the alleged meetings, did not prepare of sign the alleged minutes, and no officer or other person present at the alleged meetings testified.

1. The taxpayer, who was the sole stockholder of a corporation dissolved on December 27, 1919, held, not to have taken over the business as a liquidating trustee. 2. Held: not to have taken over the business as a liquidating trustee. 2.

1. The taxpayer sold for $96,800 stock costing less than that amount but claimed to have been worth in excess of that amount on March 1, 1913. Held: that no gain or loss was derived from the transaction. 2. The taxpayer exchanged stock of a par value of $34,900 in connection with a reorganization for stock of a par value of $18,300. Held, that no deductible loss resulted from the transaction.

The taxpayer is not a personal service corporation.

Amounts expended by a farmer in the restoration of soil fertility preparatory to the actual production of crops, held, capital expenditures.

Upon the evidence, held, that the taxpayer was not affiliated with the Corporate Financing Co. Held: that the taxpayer was not affiliated with the Corporate Financing Co.

Sums paid to stockholders held not to be compensation for services rendered.

1. The taxpayer's income tax for the calendar year 1916 did not accrue as of the close of 1916 and may not be deducted in its entirety from invested capital for the year 1917, but may be deducted, if at all, only from the time that such tax became due and payable. 2. Under section 281(c) of the Revenue Act of 1924 only overpayments of tax resulting from a failure to take deductions may be credited after the period of limitation has expired.

Taxpayer held to be a corporation entitled to personal service classification.

Where a seat on the New York Stock Exchange is received by a partnership at an agreed valuation as the partner's capital contribution and it is sold at a loss in 1917, the partnership may deduct such loss in computing its taxable income.

Net income, as that term is used in section 236(b) of the Revenue Act of 1921, is the net defined in section 232 of that Act. In determining whether the net income is in excess of $25,000 and the credit of $2,000 is allowable, the net loss provided for in section 204(b) may not be deducted.

For many years prior to 1919 the cost of making certain repairs to depreciable assets was added to the asset account and depreciation was… Held: that the write-up in the book values of the assets for years prior to 1913 may not be included in invested capital; that the values shown by the taxpayer's books of account of depreciable assets reduced by the write-up above referred to should be accepted as reflecting sound values and that the amount claimed as a deduction from…

1. In the absence of sufficient proof to establish greater value, the taxpayer is not entitled to capitalization of good will in excess of the amount allowed by the Commissioner. 2. Under the Revenue Act of 1917, the taxpayer is not entitled to an allowance for obsolescence of good will during that part of its fiscal year ended June 30, 1918, that fell within the calendar year ended December 31, 1917. 3.

1. Where A corporation owns 99.9 per cent of the stock of B corporation, their interests are closely affiliated, and the relation between B and C corporation by contract applies to A. 2. The relation of lessor and lessee is not sufficient to establish affiliation under section 240, Revenue Act of 1918. 3.

1. A lessee railroad corporation is not affiliated with the lessor merely because of the lessee's contractual control of the lessor's properties where the lessee owns only a small proportion of the lessor's stock and there is no evidence as to the rest. 2. Where by contract the lessee in 1919 pays the Federal income tax of the lessor for 1918, the amount thereof is not income of the lessor for 1918. 3. Quaere: Whether it is income for 1919?

Upon the evidence, held, that a transaction between the taxpayer and his wife, entered into in December, 1919, upon which a claim for a deductible loss is based, was not a bona fide sale. Held: that a transaction between the taxpayer and his wife, entered into in December, 1919, upon which a claim for a deductible loss is based, was not a bona fide sale.

The taxpayer made a return of net income for the fiscal year ended August 31, 1917, and another for the fiscal period September 1 to December 31, 1917. Held: upon the facts, that the allocation of the Commissioner should not be disturbed.

In the circumstances, held, that the corporations involved were not affiliated in the years 1919 and 1920. Held: that the corporations involved were not affiliated in the years 1919 and 1920.

An exchange in 1910 of an interest in timberlands acquired during the same year for interests in other timberlands of undetermined stumpage and value does not necessarily make it impossible for the Commissioner satisfactorily to determine the taxpayer's invested capital for 1917 nor require assessment of profits tax under section 210 of the Revenue Act of 1917.

1. In the absence of proof of value the leases involved in this appeal should not be included in the invested capital of the taxpayers. 2. In the absence of proof of value the taxpayers are entitled to no allowance for exhaustion of leaseholds. 3.

Where taxpayer corporation acquired the business and assets of another corporation for stock of a par value equal to the book value of the assets transferred plus the admitted actual cash value of… Held: that the value of such good will should be excluded from taxpayer's invested capital, in accordance with section 331 of the Revenue Act of 1918.

The report of an examining revenue agent introduced in evidence by both parties, held insufficient to sustain the Commissioner's determination of a deficiency.

Amounts held not actually or constructively received.

The taxpayer overvalued inventory at the close of each of the years 1917, 1918, and 1919. Held: that such adjustments were correct.

1. Increased depreciation allowed. 2. Balances to the credit of stockholders in the accounts of a corporation which remain in the business, evidenced by notes, bearing interest, and available for use by stockholders at all times, can not be included as a part of surplus for the purpose of computing invested capital.

1. A liability accrues in the year in which demand for payment may be and is lawfully made. 2. Under the facts in this case, ownership of 68 per cent of the voting stock, unsupported by other conditions indicating control of the other stock, is not control of substantially all of the stock.

Inventory methods used consistently and uniformly for many years that reflect taxpayer's income accurately should not be disturbed by arbitrary adjustments that result in distortion of actual income.

The estimated amount of a contingent liability is not an allowable deduction from taxpayer's gross income for the year in which it was incurred.

1. An adjudication of an issue of fact by the Board is res adjudicata as to that fact in subsequent appeals by the same taxpayer. 2. A Rule 50 decision is such a final decision as to all facts adjudicated therein as will constitute a basis for a plea of res adjudicata.

1. The name by which an instrument is denominated, either on its face or on a corporation's books, is not conclusive as to its character, and its true nature will be determined by looking to its terms and legal effect. 2. A corporation, in consideration of the transfer to it of the assets and business of a partnership, issued to the partners, in amounts equal to the total actual value of the property paid in by them, shares of its common stock and debenture notes containing a clause subordinating the rights of the payees to claims of general creditors of the corporation. Held, that the notes are not to be regarded as preferred stock but represent borrowed capital, and may not be included in invested capital.

An individual who incorporated his business prior to July 1, 1919, and elected under section 330 of the Revenue Act of 1918 to have the tax on the income from the business from January 1, 1919, to date of incorporation (June 26, 1919), computed at corporation rates, is not entitled, in arriving at the net income which shall afford the basis for computing the 15 per cent limitation upon charitable contributions contained in section 214(a)(11), to include the net income from…

Claim for depreciation of patents disallowed for lack of evidence of value.

Evidence held insufficient to prove the receipt by the taxpayer of exempt income or the inclusion of that income in the net income found by the Commissioner.

Upon the evidence, held, that the taxpayer and the Inland Oil Co. were affiliated during the calendar year 1919. Held: that the taxpayer and the Inland Oil Co. were affiliated during the calendar year 1919.

1. Amounts claimed by taxpayer corporation as deductions for salaries paid its president and secretary, in excess of reasonable compensation for services rendered, disallowed. 2.

1. The taxpayer is entitled to have proved cash value of intangible assets acquired in exchange for stock included in the computation of invested capital subject to the limitations prescribed by section 326(a)(4) of the Revenue Act of 1918. 2. Without proof of cost, the unextinguished useful value of buildings and equipment demolished in making improvements is not a deductible loss.

1. Gain derived from the sale of real estate in the year 1920 held to be the difference between the net selling price and, in this appeal, the March 1, 1913, value determined from facts concerning sale transactions of other properties and expert opinion evidence. 2.

1. A corporation the principal stockholder of which is a corporation not itself a personal service corporation, held not entitled to classification as a personal service corporation. 2. The activities of a corporation are necessarily vicarious, and not individual in the sense intended by section 200 of the Revenue Act of 1918.

Salary deduction allowed by the Commissioner held to be reasonable.

1. The taxpayer was not a personal service corporation. 2. Salary deductions, as allowed by the Commissioner, approved.

1. Accelerated depreciation allowed. 2. Reserve for unaccrued liability disallowed.

1. When any of the conditions specified in paragraphs (a), (c) and (d) of section 327 of the Revenue Act of 1918 have been found by the Commissioner to exist, his duty to compute the tax under section 328 is mandatory. 2.

Evidence held insufficient to support taxpayers' contention that their taxable income was otherwise than as determined by the Commissioner.

Where the lessee and the lessor, during the term of a lease, agree on the extension of the lease upon the condition or agreement that the lessee incur the expense of all necessary improvements, the cost to the lessee of such improvements thereafter made should be depreciated or amortized over the period of the lease as extended and not over the term of the original lease.

The taxpayer, the New England Fibre Co., and the Nutfield Retaining Co. were affiliated from April 1 to December 31, 1919.

A mere agreement by the sole minority stockholder owning 35 per cent of the stock in a corporation to sell on request his interest to the majority stockholder, owning 65 per cent of the stock, held insufficient proof of affiliation within the meaning of Revenue act of 1918, section 240.

On the evidence, held that the taxpayer did not receive in 1920 a taxable profit on the sale of certain property.

The taxpayer bought up all the stock of a competitor at the market price. Held: that, in the circumstances, it may not depreciate the payment so attributed to such agreement, the difference between book value and purchase price representing good will of the company, the stock of which was purchased.

A current merchandise account is not worthless merely because a slowing down of business in a particular line of trade makes collections slow or temporarily uncertain.

On the evidence, held that taxpayer corporation and two other corporations are affiliated.

Expenditures for alternation and improvement of leased premises, by the lesses, held to be capital expenditures rather than current expense, and depreciable over the remaining life of the lease. Appeal of National City Bank of Seattle,1 B.T.A. 139.

Affirmative evidence on the part of the taxpayer as to values of assets is necessary to authorize the Board to appraise such assets differently from values placed on them by the Commissioner.

Upon the pleadings, held, that the taxpayer may not deduct a loss in 1921 from net income in 1922. Held: that the taxpayer may not deduct a loss in 1921 from net income in 1922.

Where taxpayer's books are kept and its returns rendered on an accrual basis, interest which accrued prior to the fiscal year 1917 can not be taken as a deduction in that year nor in the fiscal year when it was paid.

1. An inventory value obtained by striking an arbitrary percentage off costs in each department of a dry goods store, such percentage representing estimated deterioration of the merchandise, is not… Held: on the evidence, to be liabilities incurred and accrued during the taxable period and, therefore, proper deductions.

On the evidence, held, that taxpayer has not established values of property paid in for stock in excess of those allowed by the Commissioner in computing invested capital.

1. Taxpayer sought to take as a deduction from gross income a loss claimed to be due to the exhaustion of a valuable contract at the alleged expiration date thereof. Held: That the contract in question constituted a capital asset which must be exhausted over the life thereof and deduction for such exhaustion prorated accordingly; (b) that the cost of the contract to the taxpayer was not established and hence no basis appears for computing such deduction. 2.

Evidence held insufficient to prove value of good will for purposes of invested capital.

Evidence held insufficient to prove the claimed value of patents transferred to the taxpayer for its capital stock upon organization. Where the Commissioner by his answer alleges an affirmative defense, the burden is upon him to prove the facts alleged.

On the evidence, held, that the deductions claimed for depreciation on special tools and patterns in the taxpayer's amended returns for 1917 and 1918 were reasonable. Held: that the deductions claimed for depreciation on special tools and patterns in the taxpayer's amended returns for 1917 and 1918 were reasonable.

Additional salaries for 1919 and 1920, voted to officers and employees of taxpayer in 1921, held not proper deductions from 1920 income.

Evidence held insufficient to sustain valuation claimed for intangible assets.

On the evidence, held, that the taxpayer has not established the right to greater credit for good will in invested capital than that allowed by the Commissioner. Held: that the taxpayer has not established the right to greater credit for good will in invested capital than that allowed by the Commissioner.

Reasonable salaries to officers of a corporation, agreed to by all of the members of the board of directors and all of the stockholders during 1919, are allowable deductions in determining taxable income for 1919, although no minutes were made showing such action and no entries made on the books until the early part of 1920, on account of failure to follow instructions on the part of a bookkeeper.

Classification as a personal service corporation denied.

Bad debts determined upon the evidence.

Value of patents determined for purposes of inclusion in invested capital and for purpose of depreciation.

Accounts charged off taxpayer's books as bad debts at December 31, 1920, were not then ascertained to be worthless and were not, therefore, proper deductions.

A reasonable allowance for exhaustion, wear and tear, including a reasonable allowance for obsolescence, determined with reference to two office buildings in the business district of Chicago.

Upon the facts herein, held, that the taxpayer did not file a false and fraudulent return with intent to evade the tax, within the meaning of the law.

Depreciation on cotton mill machinery and buildings determined.

An amount paid by the taxpayer to its lessor as consideration for the cancellation of a lease, held, an ordinary and necessary business expense. Held: an ordinary and necessary business expense.

Playing bridge for stakes is illegal under the laws of New York; therefore, the loss sustained by the taxpayer is not deductible. Appeal of Mitchell M. Frey, Jr., et al., Executors, William B. Scaife Estate,1 B.T.A. 338.

Evidence of the value of property owned by the decedent must be of the date of the decedent's death for the purpose of the estate tax. Held on the evidence that the value determined by the Commissioner of certain shares of stock in the Farmers & Merchants Bank of Sharpsburg, Pa., as of the date of the decedent's death is correct. The amount of a charitable bequest deductible under the Federal estate tax law can not be reduced by a tax paid to the Commonwealth of Pennsylvania.

Failure by taxpayer to claim a deduction for depreciation of patents in his original return does not preclude the claiming of such deduction later. Value of patents as of March 1, 1913, determined.

Value of taxpayer's closing inventory, based on market, sustained.

Bad debt disallowed as not having been ascertained to be worthless and charged off within the taxable year.

The taxpayer herein held to be a personal service corporation.

Salaries deduction, allowed by the Commissioner, approved.

The taxpayer is not entitled to an allowance for exhaustion, wear and tear of property in excess of that allowed by the Commissioner. The Commissioner's computation of taxpayer's profits tax for the year 1918 under section 328 of the Revenue Act of 1918 approved.

Evidence held insufficient to justify special assessment under sections 327 and 328 of the Revenue Act of 1918.

On the evidence, held, that the taxpayer has not established that salary accruals for 1918 were not deducted from 1919 income. Held: that the taxpayer has not established that salary accruals for 1918 were not deducted from 1919 income. On the evidence, held, that payments of extra salaries or bonuses to stockholding officers and employees were in fact dividends.

An assessment paid on bank stock during 1922 is not a deductible loss in that year.

Determination of the Commissioner approved in the absence of any evidence showing error.

The taxpayers were affiliated with the George E. Merrill Co. and the National Park Lumber Co. during the years 1919 and 1920.

Moneys received by a cemetery association and held by it in trust for the perpetual care of plots and graves do not constitute income under section 233(a) of the Revenue Act of 1918.

March 1, 1913, values of lands and buildings established by the testimony of expert witnesses. An amount accrued and set up on the books of a corporation computed on the basis of a percentage of the regular pay roll during a taxable period for the purpose of being disbursed at or near the end of that period for additional compensation of employees is an allowable deduction for the period, although the payments of small parts of the funds so accrued are not recorded until the following year.

1. The Board may consider any matter which is a proper defense to an asserted deficiency and to determine whether or not any deficiency is due. Such determination if in favor of the taxpayer does not have the effect of ordering the Commissioner to pay a refund. 2. The net income derived from a residuary estate and paid by trustees to a life tenant thereof, pursuant to the will, constitutes taxable income of the life tenant. Irwin v. Gavit,268 U.S. 161.

The time within which deficiencies of tax under the 1918 Act must be assessed runs from the date of filing the original return, if such return is not false or fraudulent. Filing an amended return does not extend such time.

During the year 1919 the United Metal Spinning Co., Inc., owned 66 2/3 per cent of the stock of the B. & L. Auto Lamp Co.Held, that the United Metal Spinning Co., Inc., was not affiliated with the B.… Held: that the United Metal Spinning Co., Inc., was not affiliated with the B. & L. Auto Lamp Co. during the year 1919.

Under the Revenue Act of 1918, losses resulting from sale of assets acquired prior to March 1, 1913, can not be determined unless cost, March 1, 1913, value, and sale price are proven. Contribution by corporation held to be deductible as a business expense.

Personal service classification denied.

Value of leasehold determined for purpose of invested capital and exhaustion.

March 1, 1913, value of leasehold determined.

Value of stock and bonds received on sale of corporate assets determined for purpose of computing profit or loss on sale or such assets.

Salary credited to the taxpayer on the books of the corporation in the year 1920, but not available for his use, is not taxable to him for that year.

Salary credited to the taxpayer on the books of the corporation in the year 1920, but not available for his use, is not taxable to him for that year. The receipt by an individual in 1921 of stock of a corporation, not having a readily realizable market value, in consideration for amounts credited on the books of the corporation for unpaid salary does not result in taxable income.

Prior to the taking effect of the Revenue Act of 1921 the taxpayer sold three blocks of securities at less than cost and immediately repurchased them. Held: that two of them constituted bona fide sales and resulted in deductible losses, but the third did not.

Where the taxpayer kept its accounts on a cash receipts and disbursements basis and sustained a cash loss in 1920, resulting from trading in grain futures, held, that the 1920 loss in that… Held: that the 1920 loss in that transaction can not be carried over into 1921 as an offset to a gain resulting from a separate and distinct cash grain sale which was completed in 1921, even though the buyer in that transaction might have elected performance in 1920.

1. Upon the evidence herein, held, that the taxpayer was not a personal service corporation. 2. Held: that the taxpayer was not a personal service corporation. 2. Special relief under section 328 of the Revenue Act of 1918 will not be granted where the evidence fails to establish the right thereto.

Upon the evidence, held, that the taxpayer falsely and fraudulently understated its income, with intent to evade the tax.

A loss sustained on shares of stock which became worthless during 1919 was properly deducted in that year.

Section 234(a)(8) of the Revenue Act of 1918 was intended to afford relief only to manufacturers or producers who construced or acquired additional facilities for war-time purposes and not to taxpayers who acquired buildings for rental or investment purposes.

Reserves for worthless debts should be excluded in computing pre-war income.

Where a bank keeps its books of account and makes its returns on the basis of cash receipts and disbursements, discount on time loans does not constitute income until the amount thereof is actually received.

Upon the evidence submitted, held: (1) That the taxpayer is entitled to paid-in surplus of $50,000 in respect of property paid in on January… Held: That the taxpayer is entitled to paid-in surplus of $50,000 in respect of property paid in on January 27, 1914, for $200,000 par value of stock; and (2) that promissory notes amounting to $48,000 paid in for stock of the Volunteer Coal Co., a subsidiary of the taxpayer, on October 23, 1917, constituted invested capital of the…

Certain promissory notes given by its tenant and accepted by the taxpayer on or about December 31, 1921, for past due rent and later, under an adjustment between the taxpayer and its tenant made on or about May 1, 1922, under which adjustment said notes were canceled and destroyed, held not to have been bad debts deductible from gross income for the year 1921.

Income received for the taxpayer by her agent in the year 1920 should be included in her income-tax return for that year, although it did not come into her actual possession until 1922.

1. In the absence of competent testimony that an allowance by the Commissioner for exhaustion, wear and tear of steel and brick buildings is insufficient, his determination will not be disturbed. 2. Held: that the taxpayer owned and controlled the stock of the Stuyvesant Glass Co., Inc., during the years 1918, 1919, and 1920, and that the corporations were affiliated within the meaning of section 240 of the Revenue Act of 1918.

1. The taxpayer changed from a cash to an accrual basis of accounting and claimed some $12,000 of accounts receivable at the opening of the books on the accrual basis. Held: that the evidence does not sustain the taxpayer in the amount claimed. 2. Traveling expenses clearly shown to have been paid by a taxpayer in connection with his business are deductible.

1. A taxpayer claiming that the ratio of average profits tax to net income as assessed and paid by representative corporations was lower than that adopted by the Commissioner in computing its profits tax under section 328 of the Revenue Act of 1918, must produce affirmative evidence in support of its contention. 2.

The Revenue Act of 1918, approved February 24, 1919, required taxpayers having a fiscal year beginning in 1917 and ending in 1918, who have consistently filed returns on a fiscal year basis, to file a return under its provisions and to pay the tax computed under the provisions of section 205, and the period within which the Commissioner might assess the tax so computed should be reckoned from the date such return was filed.

Evidence held insufficient to form the basis of a decision.

1. Where no sufficient depreciation, based upon the probable useful life of depreciable assets, has been taken by the taxpayer for years prior to the taxable year in question there is no presumption that the earned surplus shown on taxpayer's books of account is correct for the purpose of computing invested capital.

Expenses incurred for alteration and improvement of leased properties are properly chargeable to capital account and should be exhausted over the life of the leases.

1. Taxpayer was not, during the years 1919 to 1922, inclusive, a personal service corporation. 2. Held: that the amounts so paid constitute capital expenditures and may not be deducted under section 234 (a) as an ordinary and necessary business expense.

The taxpayer was a stockholder in a corporation which claimed personal service classification for the years 1919 and 1920. Held: that the corporation was not a personal service corporation and that the taxpayer was not in receipt of income in the years in question in excess of the actual salary withdrawals.

Upon the evidence, held, that payments made by the taxpayer to its principal stockholders on account of alleged royalties for the use of a pretended secret process were distributions of profits and… Held: that payments made by the taxpayer to its principal stockholders on account of alleged royalties for the use of a pretended secret process were distributions of profits and not deductible from taxable income.

Where partners, who invested separate property in a mercantile business, have agreed upon salaries which are reasonable in amount, held, under the laws of the State of Washington, that the… Held: under the laws of the State of Washington, that the distributive share of the partnership profits, in excess of such salaries, is not community property.

1. Fees paid to a State on account of the increase of the capital stock of a corporation are capital expenditures and are not deductible in computing net income. 2.

A corporation in 1911 issued its entire capital stock as a part consideration for the assets of a going business, including tangibles,… Held: that under the Revenue Act of 1917 that portion of the total consideration consisting of the liabilities assumed by the corporation should be applied against the tangible assets, and the capital stock should be allocated to the remaining tangibles, patents and good will acquired according to the cash value of each class of assets at…

The March 1, 1913, value of land involved in this appeal, determined upon the basis of evidence of selling transactions of comparable properties and expert opinion testimony. Following Appeals of American Express Co.,2 B.T.A. 498, and Esther Firestone,2 B.T.A. 309. The March 1, 1913, value of land being in excess of cost, the taxable gain derived from a sale in 1920 is the difference between that value and the net amount received from the sale.

A reserve set up out of income as self-insurance is not deductible as an ordinary and necessary business expense.

1. The Board has jurisdiction of an appeal, even though the only controverted point relates to a year for which no deficiency has been proposed. 2. Held: that the taxpayer was legally obligated to pay an employee $5,00 extra compensation during 1918 and that the payment was made in that year. 3. A taxpayer is not precluded from a valid deduction by reason of a mistake in the treatment of the item on its books.

Upon the evidence, held that the taxpayer was entitled to a deduction, in an amount stated for exhaustion of the value of a leasehold, and was not entitled to an allowance for exhaustion of the value of restaurant equipment.

1. The March 1, 1913, value of a patent is a proper basis for computing the allowance for the exhaustion of the patent where that value is greater than cost. 2. Held: that its value on March 1, 1913, was $850,000.

1. Taxpayer is not entitled to additional deductions from gross income on account of ordinary and necessary expenses. 2. Distributive share of capital contribution returned on dissolution and liquidation of a partnership is not taxable income. 3. Losses on stock sales not deductible from gross taxable income unless transactions are bona fide.

During the year 1918 certain of the taxpayer's planers were equipped with a device invented by the president of the corporation, which increased the output of the machines to a considerable extent. Held: that the evidence does not prove such an abnormality of income as requires the determination of tax liability under section 328 of the Revenue Act of 1918.

Value of fractional interests in real estate determined.

Evidence held insufficient to allow deduction for depreciation.

In 1893 the taxpayer acquired a lot and built a residence thereon which he occupied continuously from 1893 to the date of sale in 1919; the loss sustained by the taxpayer upon the sale computed upon… Held: that the loss, if any, sustained upon the sale is not a legal deduction from gross income in the taxpayer's return for 1919.

A creditor who enters into an arrangement with other creditors, under which the debtor's property is placed in the hands of a trustee with the understanding that each creditor is to participate proportionately in the operation or final disposition of the debtor's property, is not, under the Revenue Act of 1918, entitled to write off the claim as a bad debt until the security has been exhausted.

1. Determinations of the Commissioner involving inventories which have compensating effects upon succeeding taxable years will not be disturbed in the absence of convincing evidence of error. 2. The Board will not consider issues of fact not raised by the pleadings and set up for the first time in briefs filed after hearing.

1. The prices at which properties are knocked down at a sale conducted by a trustee in bankruptcy are not conclusive of the actual cash value of such assets when transferred by the purchasers to a corporation in exchange for corporate stock, and the true actual value of such properties may be proven by competent evidence. 2.

The Board will not accept the unsubstantiated assertions of taxpayers' representatives as proof of material facts.

1. The annual exhaustion of a lease is to be computed by dividing the actual March 1, 1913, value thereof by the number of years remaining at that date of the unexpired term. 2.

Attorneys' fees and other expenses incurred by a taxpayer in defending an indictment for conspiracy to defraud the United States may not be deducted as business expenses in the absence of evidence showing the extent to which the alleged illegal acts of the taxpayer were connected with his business.

Expenses incurred by taxpayer in moving his family and household effects from one city to another because he had accepted employment in the other city, are not deductible as ordinary and necessary business expenses or as traveling expenses incurred in pursuit of a trade or business.

1. Worthlessness of debts not proven. 2. A stock dividend capitalized earned surplus in 1917. Thereafter the taxpayer had losses. Held, invested capital is reduced by the amount of such losses. Held: invested capital is reduced by the amount of such losses.

Promissory notes executed by the owners of all of the common stock of a corporation and by them paid in to it in satisfaction of a duly authorized assessment upon such stock, upon which no cash… Held: in the light of the evidence concerning the financial standing of the makers, not to have been bona fide paid in, either for the stock or on account of an assessment constituting a paid-in surplus. Appeal of Hewitt Rubber Co.,1 B.T.A. 424, distinguished.

1. Reserves set up by a taxpayer at the close of the taxable year in amounts equal to a certain percentage of its then outstanding accounts receivable, for discounts anticipated in connection with… Held: not a bona fide sale upon which taxpayer was entitled to claim a deductible loss.

1. The taxpayer made contributions to the Y.M.C.A. for the purpose of maintaing welfare workers on its plantation in order that its employees might be made more contented and its business operations… Held: that such payments were an allowable deduction from gross income. 2. The taxpayer, during the year 1918, paid bonuses to employees based upon a resolution of its directors adopted in that year and measured by compensation to employees for the year 1917.

The taxpayer and three other corporations held to be affiliated for the calendar year 1919.

A debt may be charged off as worthless under the Revenue Act of 1918 when the security therefor has been liquidated and the actual amount of the bad debt ascertained.

1. Taxpayer, an attorney, who kept his books and made his tax returns upon a cash receipts and disbursements basis, received in 1918 payment for services rendered in 1917. Held: that such receipts were income in 1918. 2. Where work performed for the benefit of a proposed reclamation district did not create a debt against such district when formed, held, that no deduction for a bad debt could be taken in a subsequent year on account of expenditures for such work. 3.

Decision in Appeals of W. C. Schroth and John G. Scroth,2 B.T.A. 169, affirmed.

1. Upon concessions by the taxpayer that certain credits on the books of a corporation were dividends and by the Commissioner that interest should not have been accrued upon dividend credits, held,… Held: that income should not be increased on account of income alleged to have accrued on such credits. 2. Other claims of the taxpayer disallowed for lack of evidence.

1. Appreciation of assets, claimed by taxpayer to represent restoration of excessive amounts written off in prior years and plant additions charged in prior years to expense, held, to have been… Held: to have been properly disallowed by the Commissioner in computing invested capital, in the absence of any proof upon which proper depreciation could be determined. 2.

Contracts entered into by the taxpayer with the United States Shipping Board Emergency Fleet Corporation constitute Government contracts within the meaning of section 1 of the Revenue Act of 1918, and income derived from such contracts is taxable under the provisions of section 301 of that Act.

Held: (1) That the existence of good will was not proven; (2) That no ground for relief under sections 327 and 328 was proven; and (3) That final determination of tax will not be delayed because… Held: That the existence of good will was not proven; (2) That no ground for relief under sections 327 and 328 was proven; and (3) That final determination of tax will not be delayed because invested capital may be affected by the as yet undetermined tax for a previous year.

In the financial reorganization of a business, all of the assets and property of a corporation were transferred for a cash consideration to a new corporation of another State, organized for the… Held: under the Revenue Act of 1916, that the taxpayer is subject to surtaxes on the amount of the dividends, and to normal and surtaxes on the gain or profit realized on the shares transferred.

1. Personal qualifications or characteristics of an individual do not constitute good will. 2. No evidence adduced which would bring the taxpayer within the terms of section 327, Revenue Act of 1918, so as to entitle it to special assessment under section 328.

Reasonableness of salaries determined.

Upon organization in 1917 the taxpayer acquired by assignment certain contracts and agreements upon which it claimed a deduction for exhaustion in its income-tax return for 1918. held, upon the evidence, that the taxpayer is not entitled to the deduction claimed.

At March 1, 1913, the taxpayer had a lease which expired December 31, 1923. The taxpayer had made extensive improvements upon the leased property prior to March 1, 1913. Held: that the fair value of the lease at March 1, 1913, was $70,000, and that the unextinguished cost of the lease at January 1, 1919, was $36,762.82.

1. Evidence held insufficient to establish March 1, 1913, value. 2. Where taxpayer keeps his books on the accrual basis and supplies, etc., are ordered before, but delivered after, the close of the fiscal year, accounts payable should be credited therefor and there should be an offsetting debit to inventory.

Upon the evidence, held, that the taxpayer did not have taxable net income in excess of that originally returned for the taxable years 1919 and 1920. Held: that the taxpayer did not have taxable net income in excess of that originally returned for the taxable years 1919 and 1920.

Held, under the evidence, that a fee for legal services received in 1922 was not taxable income in that year. Held: under the evidence, that a fee for legal services received in 1922 was not taxable income in that year.

The taxpayer acquired certain mining property after March 3, 1917, which had cost a predecessor partnership $14,000. Held, that the taxpayer was entitled to $14,000 invested capital, but, no evidence having been submitted as to the recoverable tonnage of coal or the exhaustion for the taxable year, no allowance for depletion can be granted.

The determination of the Commissioner that the taxpayer had more than a nominal capital will not be disturbed in the absence of evidence that the taxpayer had no invested capital or not more than a nominal capital.

When a business conducted by a corporation is continued after its charter expires by limitation, the income is not taxable to the corporation, which has no existence either de jure or de facto.

Where lots were sold under a contract which provided that an oil well would be drilled when a certain number of lots had been sold, the cost of drilling such well is an additional cost of the property, and the gain derived from such sales is the difference between the selling price and the cost of the lots sold plus such additional cost.

1. Certain corporations held consolidated. 2. Under section 234(a)(8) of the Revenue Act of 1921, a corporate taxpayer is not entitled to a deduction for the calendar year 1918 for amortization of property used in the production of articles contributing to the prosecution of the war when it is shown that claim therefor was first made on April 27, 1924.

Upon the evidence submitted, held, that substantially all of the stock of the taxpayer and six other corporations was owned or controlled by the same interests. Held: that substantially all of the stock of the taxpayer and six other corporations was owned or controlled by the same interests.

1. Upon incorporation of a joint venture, a portion of the property acquired by the corporation was transferred to it at cost to the joint venturers under a written agreement which provided that the… Held: that such net profits constituted taxable income of the individuals and not of the corporation. 2. Profits arising from a sale of property, Held to have been income for the taxable year 1918.

1. Where a business had operated at a loss for a number of years, held, that it had no good will which could be capitalized by a successor corporation. 2. A taxpayer corporation may not deduct the losses of a predecessor corporation.

1. Sales by a corporation of its capital stock at less than either its par value or its actual value do not create an abnormal condition affecting invested capital under section 327 of the Revenue Act of 1918. 2. Large earnings upon a normal invested capital do not alone entitle a corporation to special assessment under section 328 of the Revenue Act of 1918. 3.

During 1920 taxpayer charged off on its accounts a debt due it from a corporation which was adjudicated a bankrupt in that year, later in the year restoring a portion of such indebtedness to its books. Evidence held sufficient to justify taxpayer in charging off the entire amount as a bad debt.

Royalties received during the taxable years involved from iron ore which had been mined, removed from the leased premises and stockpiled prior to March 1, 1913, were not taxable income, but were choses in action and due decedent prior to that date.

1. As of January 1, 1917, the taxpayer actually had on hand and used in its business certain property, the rate of depreciation on which was not shown by the evidence and which had been made by it… Held: that in the absence of evidence showing the cost and depreciation upon such property, it could not be included in invested capital. 2. The fixed assets of the taxpayer in 1911 were appraised and the appraisal showed a value in excess of the cost shown on the books.

The taxpayer keeping its accounts on an accrual basis, paid in 1918 a tax which accrued and became due and payable in the year 1917. Held, that the tax was not deductible for the year 1918. Held: that the tax was not deductible for the year 1918.

Upon the evidence held, that certain payments to stockholders during the taxable year were distributions of profits and not bonuses. Held: that certain payments to stockholders during the taxable year were distributions of profits and not bonuses.

1. Where prohibition legislation is claimed to have rendered obsolescent salon licenses acquired by taxpayer both prior and subsequent to March 1, 1913, the taxpayer must prove not only the value of such licenses on March 1, 1913, in the one case, and on the date of acquisition, in the other, but also that such licenses continued in effect and had value when the Prohibition Law was enacted. 2.

1. A contribution to a State improvement by a corporation is not deductible from gross income in its income-tax return in the absence of a showing that a benefit flows directly to the corporation… Held: that the claimed loss was not proven.

The taxpayer conducted both a wholesale and a retail business and billed goods to retail stores at wholesale cost plus 5 per cent representing cost of handling. Held: that inventories taken on the basis of cost in the retail stores should include the 5 per cent charge.

Method of determining excess-profits tax for 1917.

While net income may be proved by reconcilements of surplus alone, the correctness of that method as applied to any case depends upon the correctness of the balance sheets used in the analysis of surplus.

1. Photostat copies of book records are not the best evidence and will not be received where, upon demand of opposing counsel, the originals are not produced. 2. The taxpayer must allege and prove such facts as will support evidence of error. A mere showing that the Commissioner determined a deficiency is not enough.

Evidence held insufficient to prove value of assets.

1. A residuary legatee under a will acquired personal property within the meaning of section 213(b)(3) of the Revenue Act of 1918, when distributed by the executor or trustee, and not at the death of… Held: that taxpayer acquired the stock, the profit upon the sale of which is here in controversy, on March 13, 1918, under a distribution agreement between the beneficiaries named in the will, who were also the executors and trustees thereunder.

Evidence held insufficient to prove that a bequest claimed as a deduction was made to an educational organization.

Profits credited to the taxpayer on the books of Braun & Glazebrook are taxable to him for the years in which so credited, his books being kept on the accrual basis.

Where trustees actually exercise the discretionary power vested in them and distribute only a portion of the income of the trust, paragraph (4) of subdivision (a) of section 219, Revenue Act of 1918, is inapplicable and the tax upon the income of the trust should be paid by the trustees.

An amount paid under the facts herein held to be a capital expenditure.

Upon the evidence submitted, held, that taxpayer is entitled to a paid-in surplus of $13,967.23 in respect of cash and accounts receivable, but is not entitled to a paid-in surplus in respect of… Held: that taxpayer is entitled to a paid-in surplus of $13,967.23 in respect of cash and accounts receivable, but is not entitled to a paid-in surplus in respect of plant, equipment, and clay deposits.

1. A taxpayer keeping its books and rendering its returns upon the accrual basis may not deduct from gross income for the calendar year 1918 interest paid in that year which accrued and became a… Held: that the actual cash value of property paid in for stock of the taxpayer was not clearly and substantially in excess of the par value of the stock issued therefor.

1. Where real estate is sold subject to a first mortgage and the vendor receives 20 per cent of the purchase price in cash and 20 per cent in the form of a second mortgage, payable in quarterly installments over a period of six years, the transaction is not an installment sale. 2.

1. Where a corporation was incorporated in 1917 and acquired from a predecessor during that year assets upon which its invested capital is based, its invested capital for 1917 is to be computed under section 208 of the Revenue Act of 1917, and the computation rests not alone upon what the taxpayer's books and records show, but also upon the nature of the transactions involved in the transfer of the property acquired for stock. 2.

The taxpayer was affiliated with the Finance and Trading Corporation during the year 1920.

Value of assets determined from the evidence.

1. Taxpayer and the Greene County Railroad Co. were affiliated during the taxable year 1918. 2. The cost of a new roof upon a building used in carrying on taxpayer's business was a capital expenditure. 3. The invested capital of a corporation may not be reduced by the computation of a tentative tax in determining the extent to which a dividend is paid from current earnings of a taxable year. Appeal of L. S. Ayers & Co.,1 B.T.A. 1135.

Taxpayer leased all its property for $700,000 rental, the lessee to pay the rental direct as dividends to stockholders of lessor. Held: that in income and profits taxes paid or to be paid on account of taxpayer were not income to it for the year 1919 and that the taxpayer was in receipt of income representing the entire amount of rent stipulated in the lease.

The taxpayer was organized by a number of railroad companies to provide bridge facilities across the Ohio River, the several companies agreeing to establish rates or otherwise furnish funds in the… Held: that the payments applying on sinking funds and retirement of bonds constituted capital contributions and not income subject to taxation.

Amounts charged to salesmen's accrued commission account and advertising reserve in excess of the amounts actually paid or incurred for commissions and advertising, and an amount charged to an estimated reserve to cover an anticipated loss on merchandise shipped through the return thereof, when no loss is actually sustained within the year, do not constitute legal deductions from gross income.

Upon the evidence, held, that the transfer by taxpayer to his wife of an interest in an oil well was a bona fide gift, and that the subsequent sale did not result in taxable income to the taxpayer. Held: that the transfer by taxpayer to his wife of an interest in an oil well was a bona fide gift, and that the subsequent sale did not result in taxable income to the taxpayer.

In 1903 taxpayer purchased certain buildings located upon leased land, together with machinery installed therein, and took over the lease on the land, expiring December 31, 1910, with the right of… Held: upon the evidence submitted, that for the years 1918, 1919, and 1920 taxpayer was entitled to a deduction for exhaustion of the cost of the buildings and machinery based upon a useful life of 18 years for the buildings and 10 years for the machinery.

1. A trust created under a will in respect of the residue of the testator's estate, held not to have terminated or become a dry trust prior to the taxable years 1918 to 1920, inclusive. 2. The beneficiaries of a trust may not deduct, pro rata in their individual tax returns, a net operating loss of the trust.

In 1916 and 1917 the taxpayer sold certain turpentine rights and timber rights on property theretofore acquired by him, receiving payment partly in cash and partly in notes due in later years. Held that the gain from these sales accrued in 1916 and 1917, and no portion thereof was taxable in the year 1918 when certain of such notes were paid.

1. The taxpayer set up certain reserves which it undertook to deduct from the taxable income for the year in which they were set up. Held, that the deduction could not be allowed in such year. 2. Held: that the deduction could not be allowed in such year. 2. The taxpayer purchased certain property in 1917 which it ceased to use during the taxable year, sold a portion thereof and charged the balance to loss.

The taxpayer owned certain shares of stock in a national bank, which, in 1919, was consolidated under a modification of its own charter with… Held: that the taxpayer exchanged certificates of stock in one national bank for a larger number of shares of stock in a consolidated national bank and that the taxpayer is liable to income tax in respect of the difference between the market value of the shares of stock received in exchange and the cost or March 1, 1913, value of the…

Loss incident to the abandonment of a mining claim held to have been sustained in the year in which the claim was abandoned.

1. Members of a partnership which during the years 1919 and 1920 owned all of the stock of a corporation operated for all practical purposes as a branch or agency of such partnership, were not entitled to deduct proportionately in their individual income-tax returns for 1919 and 1920 the losses sustained by such corporation. 2.

Commissions paid to brokers by a taxpayer for obtaining leases for terms of more than one year on premises owned by it are capital expenditures which should be spread over the life of the leases.

Receipt, in 1922, by a taxpayer reporting on a cash basis, of a liquidating dividend, can not constitute the basis of a deduction from 1921 income of a loss measured by the difference between cost and the liquidating dividend.

1. Evidence held sufficient to establish value of good will paid in for capital stock. 2. A part of the taxpayer's capital assets was destroyed by fire in 1906. Held: that, in computing invested capital for 1919, the paid-in capital should be reduced by the amount of the distributions to the extent of the deficit.

1. Expense of litigation held to be a capital expenditure. 2. The expense of redrilling and deepening an oil well to put it on a productive basis is a capital expenditure. 3. Depreciation deductions on oil wells disallowed.

1. Depreciation claimed by taxpayer allowed. 2. Amounts credited to profit and loss on taxpayer's books, which represent its undistributed proportion as a stockholder in the profits of other corporations, should be excluded in computing invested capital. 3. The deduction of certain items as expenses disallowed for want of proof. 4. The amount by which capital has been impaired by the payment of dividends to be computed for the purpose of determining invested capital.

Stock issued from the treasury of a corporation to its stockholders in proportion to their previous holdings, for surplus capitalized and without any distribution of profits, is a stock dividend and is not income under section 2(a) of the Revenue Act of 1916, as amended by section 1200(a) of the Revenue Act of 1917, and section 201 of the Revenue Act of 1918.

1. The taxpayer corporations were affiliated during the taxable year in question and the Orchard Company sold its orchard property during that year. Held: that no deductible loss could be predicated upon the reduction of nursery stock and no adjustment of inventory permitted, in the absence of evidence of actual cost of production of inventory stock and the actual amounts contained in the inventory as at the beginning and end of the year.

On the evidence, held, that the income of the taxpayer should be increased by amounts representing personal withdrawals from the business which were not included in his income-tax… Held: that the income of the taxpayer should be increased by amounts representing personal withdrawals from the business which were not included in his income-tax return, and that a reasonable allowance for exhaustion, wear and tear of automobile trucks used in the business was 33 1/3 per cent.

1. During the years 1919 and 1920, the taxpayer owned directly or controlled through closely affiliated interests substantially all the stock of the Portland Foundry Co. and the Autoyre Co. and was affiliated with the latter companies. 2. In the absence of proof of value at the time paid in, or on March 1. 1913, of patents acquired for stock, disallowance by the Commissioner of a deduction for exhaustion is approved.

Depletion unit determined upon stipulation.

1. Advances made to a corporation and expenditures made in its behalf by a director during several years, allowed as deductions from the director's gross income in 1921 when the corporation ceased all activity, it having no assets at that time. 2. Deductions claimed for bad debts, allowed in part and disallowed in part.

Only the unextinguished cost of portions of a building removed or demolished in order to permit a building to be improved or remodeled, and not the March 1, 1913, replacement cost, where that exceeds the actual cost, may be taken as a deduction in determining the taxable income of a taxpayer.

Where taxpayer, in 1921, exchanged an account receivable for real estate, which real estate had a readily realizable market value which was less than the amount of a mortgage thereon, held, that a closed transaction resulted, upon which taxpayer sustained a loss deductible in 1921.

Under the circumstances in this appeal, held, that no depreciation should be deducted in computing the cost to the taxpayer of the grove of walnut trees involved in the appeal. Held: that no depreciation should be deducted in computing the cost to the taxpayer of the grove of walnut trees involved in the appeal.

1. Where a taxpayer makes his return upon a cash receipts and disbursements basis and contracts in 1919 for the sale of real estate with a payment down at the time the contract is executed and the… Held: for the purpose of determining a gain or loss, that the sale was made in 1920 and not in 1919. 2.

The taxpayer during the year 1918 was in receipt of certain dividends paid partly in cash and partly in notes. Held: that the dividends received in 1918 constituted income in that year and no adjustment of income resulted, either in the year 1918 or 1919, from the return of a portion of such dividends in the latter year.

Taxable profit determined.

Personal service classification denied and deficiency increased.

1. Where an account receivable is merely written down by a creditor to equalize the estimated value of the assets of the debtor, the amount written off is not deductible by the creditor as a bad debt. 2. Where error in the computation of a deficiency is apparent on the face of the statement attached to a deficiency letter, the Board will take cognizance of the error and direct the proper determination of the deficiency.

1. Interest is an accrued expense when it is due rather than when payable. 2. Depreciation approved as determined by the Commissioner. 3. Invested capital approved as determined by the Commissioner.

The value of the interest of a deceased partner in the good will of a partnership transferred to take effect in possession or enjoyment at or after his death, held to have been properly included as a part of the gross estate.

Amounts withdrawn by a stockholder from a corporation, held to be loans and not dividends.

The taxpayer was organized in 1907, taking over all the property of a predecessor company with identical stockholders, and issuing therefore $250,000 of bonds payable on demand and $25,000 of stock. Held: upon the evidence, that the assets paid in upon the organization of the taxpayer for $250,000 of bonds actually issued represented a paid-in surplus of the taxpayer for the purpose of computing invested capital.

Held, that a certain contract for payments of royalties inured to the benefit of a corporation of which the taxpayer was a stockholder and did not inure to his benefit, and that, under these… Held: that a certain contract for payments of royalties inured to the benefit of a corporation of which the taxpayer was a stockholder and did not inure to his benefit, and that, under these circumstances, he could not be permitted to deduct an allowance for exhaustion of such contract.

1. The taxpayer, a Canadian corporation, was engaged in selling silk products for a partnership located in the United States, to which it made advances from… Held: that a taxpayer not a dealer in exchange is not entitled to place a valuation on its losses on account of exchange standing on its books at the close of the year and take a deduction therefor, since that process would amount to an inventory valuation of an account receivable by a taxpayer not a dealer in exchange.

1. A corporation which in 1909 purchased stock of another corporation and immediately sold it at cost, on condition that if the stock should not prove to be a good investment it would return the purchase price and take back the stock, is not entitled upon the repurchase in 1918 of the stock of such corporation, which at that time was still in existence, to deduct as a loss under section 234(a) the amount refunded to the purchasers under the conditional sale. 2. Operating deficits during the pre-war period may not be deducted from paid-in capital in determining the average pre-war invested capital for the purpose of computing the war-profits credit. 3. Surplus at the beginning of any taxable year may not be reduced in computing invested capital on account of taxes payable within the year upon the income of the preceding taxable year. 4. Upon the evidence in this appeal, held, that taxpayer is entitled to have its profits taxes for the calendar years 1918 and 1919 computed under the provisions of section 328 of the Revenue Act of 1918.

With proof of the life of only a part of the depreciable assets, it is impossible for the Board to determine error on the part of the Commissioner in that respect.

An association formed under a declaration of trust and owning all but qualifying shares of the capital stock of three affiliated corporations which had large amounts of capital invested in income-producing equipment, held not entitled to personal-service classification for the year 1919.

Expenditures made by a corporation for the purpose of inducing a relative of the president and principal stockholder to cease activities which were damaging to the financial affairs of the president and incidentally endangered the business of the corporation, held not deductible by the corporation as ordinary and necessary expenses or as losses.

On the evidence, held, that partnership income was to be distributed equally among the partners. Held: that partnership income was to be distributed equally among the partners.

Under an agreement with the Board of Trade of South Haven, Michigan, the taxpayer received a manufacturing plant in consideration of its agreement to expend a certain amount in pay roll over a… Held: that the portion of the pay roll allocated to the discharge of the obligation under the contract was a capital expenditure by the taxpayer and not deductible in determining net income.

On the evidence, held, that the taxpayer is not a personal-service corporation. Held: that the taxpayer is not a personal-service corporation.

1. During 1919 taxpayer exchanged stock of one corporation having a par value of $40,000 for stock of another corporation having a par value of $17,000. Held: that the evidence is insufficient to show that he sustained a deductible loss on the exchange. 2.

Where the taxpayer caused four reclamation districts to be organized to include only its lands, and used the warrants issued by such districts to pay off mortgages and indebtedness constituting valid… Held: that the transaction resulted in the substitution of one debt for another, without realized gain to the taxpayer.

Deductions for obsolescence of tangible and intangible property disallowed.

Method of computing inventory cost of beer determined.

Bad debts are allowable deductions only in the year in which the debt was ascertained to be worthless and charged off. A partial charge off in a preceding year may not be deducted.

Taxpayer has not shown that the actual cash value of property paid in for shares of its capital stock on June 25, 1918, was in excess of the amount for which such property was acquired by the contributors June 21, 1918.

1. The Commissioner's determination of invested capital through the application of section 326(a)(4) of the Revenue Act of 1918 will not be disturbed in the absence of proof that the provisions of that section should not have been applied. 2. Where the preponderance of evidence shows that the tenancy of the lessee is for an indefinite period, the allowance for exhaustion of the cost of capital additions to the leased premises should be based upon their physical life.

Evidence held insufficient to show error in the Commissioner's determination.

Advances by a stockholder to a corporation, which are treated as accounts payable, upon which interest is credited, and which account is later exchanged for stock, may be included in invested capital only from the time the stock is issued therefor.

Withdrawals by stockholders, held to be distributions of profits.

1. The taxpayer acquired land, constructed buildings and acquired other facilities for the production of articles contributing to the prosecution of the war, and, less than three years after the… Held: that the amortization of war facilities allocable to the year 1918 is the difference between the cost of such facilities and the sale price thereof, assigning under the evidence to the land sold the same sales price as its cost.

1. The taxpayer held notes and other obligations of an individual who became bankrupt in 1919 and who just prior thereto delivered certain insurance policies as additional security. Held: that the taxpayer sustained a deductible loss in 1920 of the difference between its claim and the sum of the amounts of the dividend in bankruptcy and the cash-surrender value of the insurance policies at the time they were surrendered. 2.

Consent of the parties can not confer jurisdiction on the Board where it does not exist by statute.

Additional salary for 1919, voted in 1920, held to be deductible as an expense in 1920.

1. A breeding farm held a business entered into for profit. 2. Decedent, associated with other individuals, received securities which, because of litigation surrounding their issue, could not be readily sold. In computing the profit from the transaction with which these bonds were received, a value of 80 per cent of par held reasonable.

In the year 1919 the taxpayer was authorized to and did draw a total salary of $88,000, and received on account of back salary $3,933.34. Held: that the return of the taxpayer for the year 1919 was intentionally false and fraudulent.

Policies of life insurance taken out by the decedent, a resident of Tennessee, and made payable to his estate, were not receivable by the executor within the meaning of section 402(f) of the Revenue Act of 1921.

Taxpayer received by deed certain real estate. Held: that a part of same was received by her as a gift and that the remainder was received impressed with a trust and that she received no taxable income as the result of the conveyance.

The taxpayer alleges certain abnormalities affecting net income and invested capital for the years 1918 and 1919 which, it claims, entitle it to relief under section 328 of the Revenue Act of 1918. Held: that the evidence adduced does not prove such abnormalities in net income and capital as entitle it to such relief.

The value of the taxpayer's interest in a parcel of land as of March 1, 1913, determined.

Evidence held insufficient to establish that the actual cash value of property at the time paid in for stock was clearly and substantially in excess of the par value of the stock issued therefor and that the Commissioner erred in his computation of the profits tax under section 328 of the Revenue Act of 1918.

1. Expense of operating an automobile and depreciation thereon disallowed for want of proof. 2. Held: to constitute a declaration of a dividend, which became income to the stockholders when paid to them by the trustee.

In the absence of evidence of a purchase, a sale of the property purchased, or its cost or value as of March 1, 1913, the Board can not determine the fact of a gain or loss.

During the year 1919 the taxpayer charged off its books many accounts claimed to have been ascertained to be worthless during the year. Held: that a portion of the amount charged off is a legal deduction from gross income.

A corporation, which, on January 1, 1917, had a paid-in capital of $5,250 and an accumulated surplus of $95,378.93, which amounts do not appear to have been either reduced or impaired during the year, is not a corporation having no invested capital or not more than a nominal capital, within the meaning of section 209 of the Revenue Act of 1917.

A bank closed its doors and went into liquidation on April 25, 1921. Upon the evidence contained in the record of this appeal, it is held that 50 per cent of the face value of deposit accounts in this bank should be allowed as a bad debt deduction, under section 214(a)(7) of the Revenue Act of 1921, to a taxpayer in computing his individual income-tax liability for the calendar year 1921.

Where a church employed a minister and, in addition to a stipulated salary, furnished him a dwelling house which it rented directly from the owner, and the rent, as it became due, was paid to the… Held: that the rent was received by the minister as agent for the church and not as increased salary, and hence it was unnecessary to consider whether it was income exempt from taxation under section 213(b)(11) of the Revenue Act of 1921.

1. The taxpayer herein held affiliated with the Genesee Construction Co. and Friederich Bros. Realty Co. in the year 1918. 2. Pre-war income as determined by the Commissioner approved. 3. Alleged value of good will acquired by the taxpayer from its predecessor disallowed for invested capital purposes.

A transfer by decedent to his wife, held not to have been made in contemplation of death.

Deficiency to be computed in accordance with admission in the Commissioner's answer.