Case Name: The Gazette Co., Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1927-04-25
Citations: 6 B.T.A. 1016
Docket Number: Docket No. 9031
Parties: The Gazette Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 6
Pages: 1016–1022

Head Matter:
The Gazette Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 9031.
Promulgated April 25, 1927.
Arnold L. Guesmer, Esq., and Clifford Yewdall, G. P. A., for the petitioner.
D. D. Shepard, Esq., for the respondent.

Opinion:
OMNION.
TRAmmell :
The petitioner contends that it is entitled to include m its invested capital for each of the years for which deficiencies have been proposed, an amount of $15,000 which it claims to have spent during the years 1884 to 1891, inclusive, in building up its circulation structure. Prior to 1892, the petitioner has no records relating to expenditures for building the circulation structure, or relating to circulation. The evidence offered was the testimony of an employee who came to the company in 1885 and from that year until 1901, was in charge of the composing room. This employee was not an officer of the company during that time, nor did he keep its accounts. The knowledge he had as to expenditures and circulation was gained from discussion with the officers and other employees of the company and from his observations around the plant.
In support of its contention the petitioner submitted evidence showing that it regularly employed two subscription solicitors, and sometimes more, during the years 1885 to 1891; that their salaries were $12 per week and that they were granted additional allowances for meals, lodging, livery stable bills, and other traveling expenses, sufficient to make the total amount $125 per month per man when not using the horse and vehicle belonging to the company. There is no evidence as to how many more, if any, than two solicitors were employed, the time for which they were employed or the salaries and expenses paid them. We do not know whether the number of additional solicitors were few or many, whether they were employed only for a few days or for several months, or whether they were allowed more salary and expense money or less than was allowed the two regular solicitors. The evidence relates to the two solicitors regularly employed and we are asked to find from the evidence that petitioner spent $15,000 from 1885 to 1891, inclusive, in building up its circulation structure. In order to make such a finding we would have to hold that only a small part (approximately one-sixth) of the total salaries and expenses of the two subscription solicitors was to be considered as an ordinary and necessary expense and that the remainder should be treated as capital expenditures. In our opinion the facts in this case do not warrant'such a holding. We can not make such a finding in the absence of evidence as to what part of the expenditures represented expenses and what part capital expenditures. The action of the respondent in refusing to allow $15,000 to'be included in -invested capital on account of such expenditures is, therefore, approved. Appeal of Carter Medicine Co., 3 B. T. A. 212.
The petitioner contends that there should be included in its invested capital certain amounts which represent expenditures made in building up its library and archives or " morgue."
During the years 1898 to 1923, we find that the petitioner kept no capital accounts on its books showing the cost of the " morgue " investment but that all disbursements made on account of the " morgue " investment were charged to operating expense. In 1923, petitioner had its records analyzed and thereafter sought to include in its invested capital as the " morgue " investment certain disbursements made during the years 1893 to 1923 which its accountant considered to be capital expenditures. The accountant was not an employee of the petitioner during that period and had no personal knowledge as to what the expenditures were for or what portion thereof represented assets having a life in excess of a year, or what was for current expenses.
Since no competent testimony was offered in support of the petitioner's contention, we have no way of knowing whether the amounts were capital expenditures or whether they were properly chargeable to expense, as was originally done by the petitioner. The respondent's action, therefore, is approved.
It was also contended by the petitioner that it should be allowed a deduction each year representing amortization on its " morgue " investment. Since it has failed to establish that it is entitled to capitalize the amounts claimed as " morgue " investment, it therefore is not entitled to a deduction for amortization thereof.
The two remaining issues relate to the respondent's action in reducing petitioner's invested capital for the years 1919, 1920, and 1921, by the prorated amount of income and profits taxes for the years 1918, 1919, and 1920, respectively, and also by the amounts of additional taxes found due for certain years prior to 1918. The petitioner contends that article 845, Regulations 45 and 62, and section 1207 of the Revenue Act of 1926, which have to do with the adjustment of invested capital on account of prior-year taxes, do not apply to it inasmuch as it keeps its books and files its returns on the cash receipts and disbursements basis. The petitioner also contends that since it was on the cash basis and had, on the date it made payment of its tax for the preceding year, current earnings in excess of such payments, the reduction of its invested capital on account of taxes for prior years is unwarranted. The petitioner makes no complaint, however, that the adjustment of its invested capital as made by the respondent is not in accordance with article 845 of Regulations 45 and 62.
. Article 845 of Regulations 45 and 62 is as follows:
Ror the purpose of computing invested capital federal income and war profits and excess profits taxes are deemed to have been paid out of the net income of the taxable year for which they are levied. It is immaterial, therefore, whether reserves for the payment of such taxes for the preceding year have been set up or not, or if set up whether such taxes when paid have actually been charged against such reserves. Amounts payable on account of such taxes for the preceding year may be included in the computation of invested capital only until such taxes become due and payable. A deduction from the invested capital as of the beginning of the taxable year must therefore be made for such taxes or any installments thereof, averaged for the proportionate part of the taxable year after the date when the tax or the installment is due and payable. Where as a result of an audit by the Commissioner, or the acceptance of an amended return, or for any other reason, the amount of any such tax for the preceding year is subsequently changed, a corresponding adjustment will be made in the invested capital for the taxable year upon the same basis as if the corrected amount of the tax for the preceding year had been used in the original computation of the invested capital for the taxable year.
Section 1207 of the Revenue Act of 1926 provides as follows:
The computation of invested capital for any taxable year under the Revenue Act of 1917, the Revenue Act of 1918, and the Revenue Act of 1921, shall be considered as having been correctly made, so .far as relating to the inclusion in invested capital for such year of income, war-profits, or excess-profits taxes for the preceding year, if made in accordance with tho regulations in force in respect of such taxable year applicable to the relationship between invested capital of one year and taxes for the preceding year.
The above section of the statute validated the regulations of the Treasury Department above quoted and gave that article the force and effect of law.
From a careful consideration of the article in connection with the section of the Act quoted, we see nothing that would justify petitioner's contention that it does not apply to cases where the boobs are kept and the returns filed on a cash receipts and disbursements basis but is applicable only where the accrual method of accounting is employed. The language of article 845 does not differentiate in any way between the two methods of accounting. In fact to our minds it is sufficiently comprehensive and specific to include those cases where the cash receipts and disbursements method of accounting is employed as well as those employing the accrual method.
If any doubt remained in our minds that Congress intended section 1201 of the Revenue Act of 1926 and article 845 of the Regulations 45 and 62 to apply only to those cases where the accrual method of accounting is employed, it would be removed by the legislative history of section 1207. This section was added by the Senate as an amendment to the bill as originally reported from the House. The amendment as added by the Senate reads as follows:
The computation of invested capital for any taxable year under the Revenue Act of 1917, the Revenue Act of 1918, and the Revenue Act of 1921, in the case of a ta-aipaycr whose books of account were kept on the accrual basis, shall be considered as having been correctly made, so far as relating to the inclusion in invested capital for such year of income, war-profits, or excess-profits taxes for the preceding year, if made in accordance with the regulations in force in respect of such taxable year applicable to the relationship between invested capital of one year and taxes for the preceding year.
The following was eliminated from the section in conference:
In the case of a taxpayer whose books of account were kept on the accrual basis.
The bill, as finally passed by both the House and the Senate, contained section 1207 as reported from conference. Since Congress eliminated from the section that portion of it which might warrant the application contended for by the petitioner, we find no error in the action taken by the respondent. Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168; Appeal of B. F. Boyer Co., 4 B. T. A. 180; Appeal of Randall Brothers, Inc., 4 B. T. A. 291; Appeal of Hutchins Lumber & Storage Co., 4 B. T. A. 705; Appeal of Manville Jenckes Co., 4 B. T. A. 765.
Judgment will be entered on 10 days' notice, v/nder Rule 50.