The company deeded the lands and buildings to one Roland W. Frieder, who afterwards transferred his legal title therein to Cohen, who thereafter transferred his interest to Paisley for a consideration of $15,000 and the assumption of a mortgage thereon in the amount of $14,500. Subsequent to his acquisition of the property Paisley paid Cohen $7,500 on the purchase price thereof. The issued stock of the company at the date of sale consisted of approximately 920 shares, of which Cohen and Paisley each owned about 300 shares. Alban, Alexander King, and Flora King and Scamehorn owned respectively 60, 20, 20 and 20 shares of stock and in the liquidation each received $125 per share for such stock. The company duly filed its income tax returns for the year 1925 and computed a tax due thereon in the amount of $1,017.48 and at the date of such filing paid $254.37 thereon. At a later date the Commissioner abated the balance of $763.11. At a subsequent date and prior to the running of the statute of limitations he assessed additional tax, including interest, in the amount of $5,904.46. On January 17, 1929, a warrant of distraint for the collection of such additional tax was issued and later the collector reported that the deputy was unable to serve the same because "the charter of this company was cancelled by the Tax Commission of the State of Ohio on February 15, 1923, and there were no assets of the Company in existence after November 1, 1926." On February 28, 1930, the notices of liability which are the bases of these proceedings were mailed to the petitioner. OPINION. LANSDON: Within the statutory period of limitations the respondent determined and assessed a tax against the company for the year 1925. A warrant of distraint was issued and it was found that the taxpayer was no longer in existence and had owned no assets after November 1, 1926. In these circumstances we are satisfied that the respondent properly decided that the tax could not be collected from the taxpayer, and that his subsequent procedure under section 280 of the Revenue Act of 1926 was in conformity with the law. The record of these proceedings is needlessly confusing, but it is clear that the company sold certain of its assets for $100,000 and retained others which, at the time, were valued at $53,000, subject to a mortgage in the amount of $14,500. There is no question that the stock of the minority shareholders was liquidated at $125 per share. It is equally clear that, after the payments to such minority stockholders and the discharge of the debts of the company, there were left in the possession of Cohen and Paisley about $22,500 in cash and title to the real property and accounts receivable that were not included in the sale. In a settlement between themselves Paisley acquired Cohen's interest in the real estate for $15,000, of which he has paid $7,500 in cash. It is obvious, therefore, that Cohen and Paisley each received assets of the corporation in liquidation of his stock in excess of the amount of the deficiency determined against the taxpayer. We think it follows that each is liable for the unpaid taxes of the company, in conformity with the rule established in Grand Rapids National Bank, 15 B. T. A. 1166, and a long line of decisions based thereon. Each of the minority stockholders received $125 per share in the liquidation of his interest in the company, and to the extent of such receipts was a transferee of the assets of the taxpayer. Counsel for petitioners admitted at the hearing that Alban, Alexander King, Flora King and Scamehorn owned stock of the company at the date of liquidation in the respective amounts of 60, 20, 20, and 20 shares and that based on that ownership each received $125 per share in liquidation. Such stockholders, therefore, were transferees of the assets of the company in the respective amounts of $7,500, $1,200, $1,200 and $1,200, and, to the extent of the amounts received, each is liable, under section 280 of the Revenue Act of 1926, for the unpaid taxes of the company for the year 1925. Grand Rapids National Bank, supra. The record contains no competent and persuasive evidence that petitioners McLister, Wolpert and Strayer were stockholders of the company at the date of the liquidation thereof. We hold, therefore, that their liability as transferees has not been established. Petitioners adduced some fragmentary evidence for the purpose of overcoming the presumption that the respondent's determination of the deficiency against the company is correct. Most of such testimony was to the effect that the value of assets disposed of by sale exceeded the basis used by the respondent in his determination of profit derived therefrom. Even if the value alleged had been proved, it could not be material, since the basis for determining gain or loss on the sale of capital assets is the cost thereof and not their value at the time of the sale. On this issue the respondent is affirmed. 27 B. T. A. Decisions will be entered for the respondent in the proceedings at Docket Nos. 48559, 48560, 48561, 48565, 48566 and 48567, and for the petitioners at Docket Nos. 48562, 48563 and 48564. WATSON P. DAVIDSON, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 46486. Promulgated November 28, 1932. 1. Attorneys' fees paid for services in securing a lease on real estate must be capitalized and amortized over the term of the lease. 2. Certain payments on account of attorneys' fees and traveling expenses allowed as deductions in the taxable year. 3. In the circumstances herein, held that a part of the cost of a certain drainage ditch was a loss sustained by the petitioner in the taxable year. W. H. Oppenheimer, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. The respondent has asserted a deficiency in income tax for the year 1927 in the amount of $3,102.02. For his causes of action the petitioner alleges that respondent has erroneously disallowed as deductions from his income in the taxable year certain amounts representing attorneys' fees, traveling expenses and a loss resulting from excessive cost of a drainage ditch. FINDINGS OF FACT. The petitioner is an individual, residing in St. Paul, Minnesota. In the year 1927, petitioner acquired 20-year leases from the Canadian Government and the Providence of Manitoba on three adjacent tracts of peat bog yards, covering a total of 11,631 acres. Each of the leases provided for drainage works to be approved by the lessor and paid for by the lessee. Concurrently with the negotiations for the leases secured, the petitioner was endeavoring to secure leases on about 500,000 acres of similar land south, east and north of the tracts acquired and adjacent thereto. In 1927 he had assurance that such additional leases would be approved and tentative agreements were entered into covering the additional acreage, and the Legislature of Manitoba and the Dominion Parliament passed acts authorizing the proposed contracts. Late in the year 1927, petitioner learned that leases on such additional acreage would not be approved, and early in 1928 the Canadian Parliament enacted a law limiting the acreage of public domain that might be leased to one person to not more than four townships. During the year 1927 and at a time when he was assured that his leases of additional acreage would be approved, petitioner constructed about eleven miles of drainage ditches at a cost of $14,709.84. The ditches so constructed averaged 19 feet in width and 5 feet in depth and were much larger than necessary to drain the land already under lease to petitioner. The excess ditch capacity was constructed for the purpose of draining the additional acreage for which the petitioner was negotiating. The cost of a ditch adequate to drain. the lands actually under lease would not have been in excess of $4,000. On May 4, 1927, petitioner paid attorneys' fees in the amount of $1,686.90, for services in securing the leases on the 11,631 acres. On June 22 and December 22, 1927, he paid the same attorneys the amounts of $1,000 and $1,000 as retainers for services in connection with his efforts to secure leases on the additional acreage which he failed to secure. During the summer of 1927 petitioner made trips to Winnipeg and Toronto in connection with his efforts to lease acreage in addition to the 11,631 acres which he had already obtained. On such trips he expended the amounts of $300 and $350 for traveling expenses, entertaining members of the Manitoba Legislature, and other matters directly related to the purpose of his trips. OPINION. LANSDON: The evidence is clear that the payment of attorneys' fees in the amount of $1,686.90 on May 4, 1927, was an expense incurred in securing three leases on real estate. This was a capital expenditure, amortizable ratably over the life of the leases. Columbia Theatre Co., 3 B. T. A. 622; Mary C. Young, 20 B. T. A. 692; affd., 59 Fed. (2d) 691; M. & F. Holding Corp., 26 B. T. A. 504. The amounts of $2,000 and $650 paid by the petitioner as attorneys' fees and traveling expenses in 1927 in connection with his unsuccessful efforts to secure leases on additional acreage adjacent to the lands already acquired were ordinary and necessary business expenses, and are deductible as such from petitioner's income for the taxable year. Immediately following his acquisition of the tract of 11,631 acres covered by the first three leases and at a time when he was assured that he would secure a much larger adjacent tract on the same condition, the petitioner constructed a drainage ditch with capacity sufficient to serve the tracts already under lease and a considerable portion of the additional acreage which he then expected to secure. The ditch was completed at a cost of $14,709.84, all of which was paid in the taxable year. The evidence shows that a ditch large enough to drain the original tract could have been constructed at a cost not in excess of $4,000. The petitioner contends that the difference between the amount actually expended and the cost of a ditch adequate to drain the lands already under lease was a loss in the taxable year. The evidence is clear that the excess ditch capacity was useless and of no value to the petitioner and that its cost was incurred in the confident expectation that the additional acreage would be secured. Changes in the policies and laws of the proposed lessors over which the petitioner had no control deprived the greater part of the drainage ditch of any value. In these circumstances we think the petitioner sustained a loss in 1927 in the amount of $10,709.84. This conclusion seems to be well supported by Commissioner's Regulations 74, article 173,1 as well as by the conclusion in Kilby Car & Foundry Co., 4 B. T. A. 1294; Multibestos Co., 6 B. T. A. 1060; Fraser Brick Co., 10 B. T. A. 1252; and Ingle v. Gage, 52 Fed. (2d) 738. Decision will be entered under Rule 50. AUTOMATIC SPRINKLER COMPANY OF America, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 60887. Promulgated November 28, 1932. The payment of D corporation to the Government of a lump sum in compromise of the liability of N corporation, its predecessor, for taxes, interest and penalties of earlier years, the amount of which is equal to 25 per cent of the assessment plus interest, is not deductible by D as a payment of interest to the extent of 25 per cent of the interest assessed, because (1) no part of the payment is identifiable, (2) the whole payment was consideration for D's purchase of N's assets, and was neither D's taxes nor interest. F. O. Graves, Esq., for the petitioner. 1 ART. 173. Loss of useful value.-When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference between the basis (adjusted as provided in section 111 and article 561) and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be fully explained in the return of income. |