basis, and knitters or operators thereof worked in two 12-hour shifts. Whenever possible, repairs to such machines were made by operators, but the petitioner employed fixers whose duty it was to keep all machinery in good workable condition. The cost of repairing, including new parts to replace breakage and worn parts, was charged to expense on the books of the petitioners and all such charges were allowed by the respondent as deductions from income. In each of the taxable years the petitioners deducted 30 per cent of the cost of the legging machines from the gross income reported on its Federal income tax returns. Upon audit of such returns the respondent disallowed one-half of such deduction for 1928 and two-thirds of such deduction for 1929 and determined 15 per cent of cost as a reasonable allowance for depreciation for 1928, and 10 per cent of cost as a reasonable allowance for depreciation for 1929. At the hearing he moved to increase the deficiencies and alleged that 15 per cent of cost was excessive and unreasonable annual depreciation for the machines in controversy. OPINION. LANSDON: The respondent had determined to the extent of $20,000 the salaries paid to officers of the petitioner in the year 1928. The amount of such disallowance represents stock issued to such officers as bonuses, in addition to cash paid for the services of Samuel Tait, John Tait and Ernest Tither, in the amounts of $17,709.25, $6,776.14 and $14,269.59, respectively. In addition to such amounts the petitioner paid a cash salary to Walter Tither, who became an officer and stockholder to the extent of 100 shares on May 1, 1928, in the amount of $10,438.28. On the record we are of the opinion that the cash salaries paid the officers of the petitioner in 1928 were reasonable compensation for services rendered. The distribution of stock of the par value of $20,000 to Samuel Tait, John Tait and Ernest Tither, as an alleged bonus or additional salary, was in exact proportion to their respective holdings. Petitioners contend that the purpose of such allocation of the stock bonus was to preserve the relative original shareholdings of the officers. This is not a proper measure of the value of services, which must be based in work done rather than interest in the business. In Twin City Tile & Marble Co., 6 B. T. A. 1238; affd., 32 Fed. (2d) 229, this Board said: The value of services of an individual is not dependent upon the amount of stock owned. The value of services and the amount of stock owned have no necessary relationship to each other. The measure used in determining the increases in this case was stock ownership, regardless of the fact that certain stockholders may have been entitled to a greater or lesser amount if the value of their services were solely considered. In order to be compensation for services, the value of the services must measure the amount and not stock ownership. Conceding for the sake of argument that the services of individuals in this case were fairly worth the amounts they received, this fact alone is not sufficient to constitute the amounts compensation. They must have been intended and paid as such. The rule in the opinion above cited has been followed in substance by the Board and the Federal courts in many subsequent decisions. C. S. Ferry & Son, Inc., 18 B. T. A. 1261; Gould-Mersereau Co., 21 B. T. A. 1316; and Marble & Shattuck Chair Co., 13 B. T. A. 657; affd., 39 Fed. (2d) 393. In conformity with the evidence and the above cited authorities, the determination of the respondent on this issue is affirmed. As its second cause of action the petitioner contends that it has been allowed insufficient depreciation on the legging machines in each of the taxable years. Under the provisions of section 23 (a) of the Revenue Act of 1928, taxpayers are entitled to "a reasonable allowance for exhaustion, wear and tear for property used in trade or business." To determine such reasonable allowance it is necessary to know the cost of such property, the useful life and the salvage value at the termination of usefulness. In the Hailey-Ola Coal Co., 24 B. T. A. 895, we said: In this record there is no evidence whatever as to the remaining useful life or the salvage value of petitioner's depreciable assets, which are necessary elements for a computation of deductions for depreciation on either a unit-ofproduction basis or by the straight method. Kehota Mining Co., 3 B. T. A. 885; Grand River Gravel Co., 22 B. T. A. 1124. The respondent's determination must be approved. Bishoff v. Commissioner, 27 Fed. (2d) 91; Rouse v. Bowers, 30 Fed. (2d) 628; certiorari denied 49 Sup. Ct. 348; Reick v. Heiner, 25 Fed. (2d) 453; Atlanta Casket Co. v. Rose, 22 Fed. (2d) 800. [Italics supplied.] In the instant proceeding there is no controversy over the cost of the machines involved in the question of depreciation. The petitioner contends that the useful life of such equipment is not more than three and one-third years and asks for an allowance from income on that basis. The evidence in support of this contention is not convincing. The record discloses that at the date of the hearing the oldest of these machines had been in service almost exactly five years and was still in use. No evidence was adduced to show at what date its use would no longer be profitable to its owner. Officers of the petitioner testified that in their opinion none of the machines had a fair market value in excess of $2,000 at the close of the last taxable year here involved. If this was intended to establish salvage values at the termination of useful life, it falls far short of that purpose, since the record discloses that all of such machines were in regular use at least three years subsequent to such date. In our opinion salvage value is an element that appears only when property can no longer be used profitably in a trade or business and has no relation whatever to the market value of a secondhand machine still in profitable use by its owner, which is the situation here. If the testimony as to market value of the legging machines involved was adduced for the purpose of proving actual depreciation determined by a survey of the property in question, in our opinion it also fails for that purpose. It is no more than the opinion of stockholders of the petitioner which is not supported by sufficient evidence to indicate that one-third of the value of each such machine was exhausted each year. Here again is the fact that at the date of the hearing one of the machines had been in use for five years and all the others in excess of three years. The very fact that the claimed depreciation is in round numbers and is exactly the same for each of the years involved justifies our conclusion that the rate claimed by petitioner is not based on actual valuation of the machinery ascertained by expert physical survey. Nor is there any evidence that petitioner has consistently used the actual valuation method in determining the additions to depreciation reserve on its own books. We think, therefore, that the evidence here does not bring the question within the rule applied in Cleveland Home Brewing Co., 1 B. T. A. 87, and other proceedings relied on by the petitioner. We think the petitioner has failed to prove either the useful life or the salvage value of the property here involved and therefore has not overcome the presumption that the determination of the respondent is correct. We are also of the opinion that the respondent has failed to show cause for any increase in the deficiency as requested in his motion duly made at the hearing. Decision will be entered for the respondent. UMPQUA TIMBER COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 38826. Promulgated November 25, 1932. Petitioner acquired 6 per cent demand promissory notes from its stockholders in partial payment for its capital stock. Held that, on an accrual basis of accounting, interest on the notes must be included in income. John M. Campbell, Esq., and P. M. Beach, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. OPINION. LANSDON: The respondent has asserted deficiencies in income tax for 1923 and 1924 in the respective amounts of $1,050 and $437.51, which arise from his action in adding to income for each of the tax able years the amount of interest called for in certain demand promissory notes received by petitioner in partial payment for its capital stock. The petitioner is an Oregon corporation, organized in January, 1920, with an authorized capital stock of 2,500 shares having a par value of $100 each. It was incorporated by a group of individuals, most of whom lived in the vicinity of Eau Claire, Wisconsin, to acquire a certain tract of timber land for $440,000, of which $110,000 was to be paid in cash. Its stock subscriptions were paid in cash to the extent of $44 per share, the balance of $56 per share being represented by demand promissory notes drawing 6 per cent interest. At the time the notes were given it was understood among the organizers that unless the money was required by petitioner in its business the stockholders would not be held for either principal or interest. In each of the years 1922 and 1923 the petitioner paid cash dividends of 30 per cent and in the first part of 1924 it paid 9 per cent in cash. On June 2, 1924, the directors voted to pay a dividend as follows: Some discussion was had as to the disposition of the $140,000 of stockholder's notes and at the request of Mr. Moon and Mr. Bradford, attorney John D. Goss was called in and the matter thoroughly gone over with him. Whereupon Mr. A. E. Bradford offered the following resolution and moved its adoption: RESOLVED: That a dividend of $56.00 per share be declared on the outstanding stock of the Company, payable at once, and that the same be charged to the surplus account on the books of the Company. Upon motion duly made, seconded and carried, the interest on stockholder's notes held by the Treasurer was omitted and cancelled to date. Shortly after June 2, 1924, the dividend declared as set out above was discharged by the cancellation of the notes in question and the return of the same to the makers thereof. From the time the notes were given until they were canceled and returned to the makers, petitioner kept them in its possession and neither received nor demanded payments of principal or interest. On its books, which were kept on an accrual basis, it made no entries on account of the interest and no part thereof was accrued as income. The only question in this proceeding is whether the petitioner, on an accrual basis of accounting, must accrue as income the amounts of interest provided for in the demand notes of its stockholders. The petitioner contends that it never contemplated collection of the interest and is not required to include the amount thereof in its taxable income. The notes in question contained an unconditional promise to pay the face amount, with 6 per cent interest per annum. They were carried as assets by petitioner throughout the taxable years and, so far as the record shows, might have been collected at any time prior to June 2, 1924. In our opinion the petitioner was required to accrue interest on the notes until they were canceled and returned to the stockholders. Reviewed by the Board. Decision will be entered for the respondent. EMILY GALE LOWERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 57646. Promulgated November 25, 1932. When the owner of a property right assigns merely the income James F. Hubbell, Esq., for the petitioner. This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1928 in the sum of $5,370.38. The sole issue is whether the income from a life estate in property given to the petitioner by the will of her deceased husband is taxable either to her or to the assignees of such income. The case was presented on a stipulation and depositions. FINDINGS OF FACT. The will of James L. Lowery, late husband of the petitioner, was duly admitted to probate on September 9, 1895. The material portions of that will are as follows: Third. I do hereby give, bequeath and devise unto my wife Mrs. Emily Gale Lowery for and during her natural life the possession, management and the control, and the rents, profits, use and income of all the rest, residue and remainder of all my personal and real property, and proceeds of real property if sold of every name and nature and wheresoever situated which I may own at the date of my death, but my said wife is to pay out of said income to my sister Mrs. Isabelle Lowery Williams the sum of one thousand dollars ($1000.00) each year in semi-annual payments of $500.00 each from the date of my death, but no payment after my sister's death is to be paid to her legal representatives or to her estate. Fourth. Subject to the right of my said wife Mrs. Emily Gale Lowery for life as aforesaid, I do hereby give, bequeath and devise all of the principal of said rest, residue and remainder of said personal and real estate and proceeds of real estate, if sold, of which my said wife, Mrs. Emily Gale Lowery has the |