Court Opinion

ID: 4591133
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:05:08.334851+00
Date Added: 2024-06-11T09:25:04.967514
License: Public Domain

SUGAR RUN COAL MINING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sugar Run Coal Mining Co. v. CommissionerDocket No. 9236.United States Board of Tax Appeals11 B.T.A. 587; 1928 BTA LEXIS 3758; April 16, 1928, Promulgated *3758  1.  Where the Commissioner made an additional assessment of taxes for the year 1917 in 1920, and the taxpayer and the Commissioner executed a written consent on December 19, 1925, extending the period within which assessment of additional taxes for the year 1917 might be made to December 31, 1926, and where the Commissioner finally determined the deficiency on September 25, 1925, and where an appeal was lodged with the Board within sixty days thereafter, held, that the assessment and collection of a deficiency determined for 1917 are not barred by the statute of limitations.  2.  The petitioner in 1917 paid $1,000 to each of four directors, who were stockholders, for services performed in 1917.  The $4,000 paid to directors was claimed as a deduction from gross income in the petitioner's tax return for 1917.  This deduction was disallowed by the respondent in determining the deficiency.  Held, upon the evidence, that the amount was not a legal deduction from gross income.  3.  In 1919 the petitioner sold certain assets, receiving therefor $7,500 in cash and $25,000 in notes of the vendees.  In determining a deficiency for 1919 the Commissioner held that the total sale*3759  price was $65,000 and that the petitioner derived a profit of $35,821.91 from the sale.  Held, that the taxable profit was only $3,321.91.  4.  The Commissioner not having determined any deficiency for the year 1918, and the alleged net loss for 1919 not equaling the reported net income for 1918, the Board has no jurisdiction to determine whether a net loss for the year 1919 is a legal deduction from the gross income of 1918.  R. P. Smith, Esq., for the petitioner.  C. T. Brown, Esq., for the respondent.  SMITH *588  This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1917, 1919, and 1920, in the respective amounts of $31,026.77, $6,990.95, and $99.90.  The petitioner alleges the following errors on the part of the respondent in determining the deficiencies: (1) The total amount of additional tax in dispute for 1917 was assessed in the June, 1920, Commissioner's list.  The Commissioner having failed to institute suit or proceedings in court within the five-year period from the date the return was due or filed, the petitioner is no longer liable for any part of the tax.  (2) The Commissioner*3760  has failed to allow as a deduction an amount of $4,000 representing salaries paid to officers for services rendered during the year 1917.  (3) The Commissioner has erroneously and improperly included as a part of the income for 1919 an item of $35,821.91 representing profit on the sale of the "E" vein coal.  (4) The Commissioner has erroneously and improperly failed to allow as a deduction in determining the income for 1918 the net loss determined for the year 1919 in accordance with section 204 of the Revenue Act of 1918.  The deficinecy in tax for 1920 is not disputed.  FINDINGS OF FACT.  The petitioner is a corporation organized and incorporated under the laws of the Commonwealth of Pennsylvania.  The petitioner's income-tax return for 1917 was filed on May 1, 1918.  The return was not false or fraudulent.  It showed a tax due *589  of $2,916.23.  The return was revised by the Commissioner in accordance with an examination made by a revenue agent under date of December 11, 1918, and a tax was assessed against petitioner on the June, 1920, list in the amount of $44,580.90.  A claim for the abatement of $21,500.59 of the assessment was filed by the petitioner which*3761  was allowed in the amount of $15,045.38 and rejected for $6,455.21 The deficiency notice showing the adjudication of the abatement claim was mailed to the petitioner by the respondent on September 25, 1925, and an appeal to this Board was duly taken therefrom on November 10, 1925, which was later amended on December 21, 1926.  On December 19, 1925, the petitioner and the respondent executed the following written consent: In pursuance of the provisions of existing Internal Revenue Laws Sugar Run Coal Mining Company, a taxpayer of Altoona, Pa., and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1919-1917-1918-1920 under existing revenue acts, or under prior revenue acts.  This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then*3762  said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.  The item of $4,000 disallowed by the Commissioner as deduction from the gross income of 1917 was paid $1,000 each to John W. Clark, B. D. Wilmoth, W. D. Clark, and Ralph Wright, who were directors and stockholders of the petitioner.  In 1919 the petitioner entered into an agreement to sell to E. L. Study, Joseph Thorp, and B. F. MacCartney all its right, title, and interest in the leases and physical property at Mines Nos. 1 and 2, located in Allegheny Township, Blair County, near Gallitzin, Pa., for a consideration of $32,500: IN CONSIDERATION WHEREOF and of the further convenants of this agreement, the second parties agree to pay to the first party [petitioner] the sum of Thirty-two Thousand Five Hundred ($32,500) Dollars, Seven Thousand Five Hundred ($7,500) thereof cash on the signing of this agreement, the balance in twelve equal quarterly payments evidenced by bankable notes, with interest due and payable on the whole amount at*3763  the date of each maturing note, such interest payments to be evidenced by separate bankable notes representing the interest accruing on the said principal sums.  Possession of the property agreed to be conveyed was given to the second parties upon the signing of the contract.  The contract further provided: ,SHOULD THE SECOND PARTIES fail, after 30 days notice of default, to perform any of the covenants of this agreement, or to make any of the payments on *590  account of principal or interest herein contracted to be made, the second parties hereby authorize any attorney of any Court of Record to appear for them and upon filing statement setting forth wherein the second parties have failed to perform the covenants of this agreement, or any of them, to confess judgment against the second parties for the property and leases covered by this agreement, and to issue a writ of Habere Facias Possessionem upon which the Sheriff of Blair County shall evict the second parties and deliver possession of the property and leases, and all thereof, to the first party, or its properly authorized officer or agent.  SHOULD THE SECOND PARTIES fail to make any payment of principal or interest*3764  by them agreed in this agreement to be paid, the second parties hereby authorize any attorney of any Court of Record to appear for them and confess judgment against them and in favor of the first party for all of the principal sum and interest remaining unpaid upon filing statement specifying the payments for which default has been made, with affidavit, and thereupon a writ of Fi. Fa. may issue for the purpose of collecting the entire balance of principal and interest unpaid, and the second parties do hereby expressly waive all benefit of exemption, inquisition and stay of execution.  On the same date, H. E. Clark and B. F. MacCartney, two of the principal owners of the Sugar Run Coal Mining Co., executed an agreement agreeing to sell all their right, title and interest in a leasehold on coal property located in Allegheny Township, Blair County, near Gallitzin, Pa., covering 57 acres of coal land for a consideration of $32,500.  The terms of payment were the same as those evidenced in the above-stated agreement between the petitioner and E. L. Study, Joseph Thorp, and B. F. MacCartney.  The lastnamed individual, president of the petitioner, owned a one-fifth interest in the lease*3765  referred to in the second agreement.  In the determination of the deficiency for 1919 the respondent assumed that the petitioner sold assets for $65,000, receiving $15,000 cash and the balance notes equal to their par of face value, and, upon such computation, he determined that the profit from the sale was $35,821.91, whereas the sale price of assets sold by the petitioner was $32,500 and no cost was ascribed to the lease.  The respondent determined no deficiency for the year 1918 but an overpayment in the amount of $1,253.51.  OPINION.  SMITH: 1.  The first allegation of error is that the collection of any additional tax for the year 1917 is barred by the statute of limitations inasmuch as more than five years elapsed from the date the return was filed to the date of the determination of any deficiency for the year 1917.  It is submitted that there was no proceeding, administrative or judicial, started against the petitioner within the original five-year period that would protect the rights of the Government against the running of the statute of limitations.  *591  The Board has previously held that a waiver which consents to an extension of the time for the making*3766  of an assessment also extends the time for collection even though collection is not mentioned in the consent filed. . We have also held that the fact that five years expired from the date of the filing of the return to the date of the signing of a consent in no way affects the liability of a taxpayer to pay a tax.  . In , we held that where the Commissioner made a jeopardy assessment in March, 1925, and at a time when both the assessment and collection of the tax were barred by the statute of limitations, and where in February, 1926, the taxpayer and the Commissioner executed a consent extending the period within which assessment might be made to December 31, 1926, and where the Commissioner finally determined the deficiency in October, 1926, and where an appeal was lodged with the Board within sixty days thereafter, the assessment and collection of the tax were not barred by the statute of limitations.  That case is parallel with the case at bar except that in the present case the petition was filed prior to the execution of the*3767  consent.  This, however, in no way distinguishes the cases and the reasoning of the Board to the effect that a subsequent assessment would have been useless applies with equal force to the filing of a subsequent petition.  On the authority of the Aiken decision it must be held that the collection of the deficiency for the year 1917 is not barred by the statute of limitations.  2.  The petitioner alleges that the respondent erroneously disallowed the deduction from gross income of $4,000 paid in 1917 to stockholder directors as compensation for services rendered.  The taxing statute permits the deduction from gross income of: All the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity.  (Sec. 12(a) First, Revenue Act of 1916.) The respondent has disallowed the deduction of the $4,000 in question on the ground that it did not constitute ordinary and necessary expenses.  It was paid to stockholder directors. *3768  The testimony in regard to the payment is a deposition of B. F. MacCartney, reading as follows: Q.  7.  Do you know of your own knowledge what services these men rendered to the Sugar Run Coal Mining Co., in 1917?  Ans. W. D. Clark, B. D. Wilmoth and Ralph Wright lived at Glen Campbell, Penna., where the Sugar Run Coal Mining Co., owned the track of timber land, which they operated and furnished us with mine timber.  John W. Clark lived in Philadelphia, where most of our coal was sold, and in connection with *592  his duties in Clark Bros. Coal Mining Company office, looked after our interests there.  Q.  8.  Could you state about how much time these men devoted to the business of the company?  Ans.  I could not state that definitely, inasmuch as they were engaged in other business, but would say that they would give considerable of their time, more or less possibly, every day.  Q.  9.  Do you consider that the salary paid them was reasonable compensation for the services rendered, and not excessive?  Ans.  I would say that the payment of $1,000.00 each was very reasonable, and certainly not excessive.  We can not determine from the foregoing that the amounts paid*3769  were anything more than a distribution of profits to the stockholders.  The petitioner has failed to produce evidence that the payments constituted ordinary and necessary expenses of operation.  Upon the evidence the disallowance by the respondent is sustained.  3.  The respondent determined that the petitioner realized a profit of $35,821.91 from the sale of assets in 1919.  This was clearly in error.  All that the petitioner was to receive for the assets which it sold was $32,500.  The respondent assumed that the petitioner was to receive $65,000 from the sale of the assets.  This was clearly $32,500 more than the actual profit even if it be assumed that the notes received in payment had a value equal to their face value.  The petitioner has sought to prove that the notes did not have such value and has submitted the deposition of B. F. MacCartney, the president of the petitioner corporation, to the effect that the makers of the notes would never have been able to pay them if they had been called upon to do so.  It appears, however, that the notes received by the petitioner were secured by the property of the petitioner and also that a lease held by B. F. MacCartney was also security*3770  for the notes since the lease was paid into the Bennington Coal Co. and the coal company assumed the obligations of the makers of the notes.  Upon the record we are of the opinion that the consideration received by the petitioner in 1919 had a cash value as of the date of receipt of $32,500, and that the petitioner realized a profit of $3,321.91 from the sale.  The petitioner had, however, a net loss for the year 1919.  4.  The Commissioner not having determined any deficiency in tax for the year 1918, and the alleged net loss for 1919 not equaling the reported net income for 1918, the Board is without jurisdiction to determine that there was any overpayment of tax for 1918 by reason of the application against the net income of 1918 of a net loss for 1919.  See section 274(g), Revenue Act of 1926.  Judgment will be entered on 15 days' notice, under Rule 50.