F. Kieser & Son Co. v. Commissioner , 15 B.T.A. 359 ( 1929 )

F. KIESER & SON CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

KASCO MILLS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

F. Kieser & Son Co. v. Commissioner

Docket Nos. 10990, 22355.

United States Board of Tax Appeals

15 B.T.A. 359; 1929 BTA LEXIS 2874;

February 12, 1929, Promulgated

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1. Kasco Mills, Inc., is the transferee of the assets of F. Kieser & Son Co., Inc. In 1923, the Commissioner determined a deficiency against the latter of $11,724.85 for the calendar year 1917 and held it liable for a 100 per cent penalty in the amount of $12,149.57 for filing a false and fraudulent return. It paid all but $286.98 of this amount in 1923. The Commissioner seeks to collect he unpaid balance from Kasco Mills, Inc., as transferee. Errors were made in the computation of the tax due for 1917, the correction of which reduces the correct amount of the tax below the amount already paid by the transferor. Held, that the transferee is not liable for the unpaid balance.

2. The income-tax return filed by F. Kieser & Son Co., Inc., for 1917 was not false or fraudulent and its invested capital for 1920 should not be reduced by the amount of the fraud penalty paid in 1923.

3. The fair market value of tangible property paid in for stock of the transferor determined for invested capital purposes and for the purpose of computing allowances for depreciation.

4. Proper depreciation rates for depreciable property determined.

5. The Commissioner's action liability for 1917 approved capital for 1920 by the amount of the tax liability for 1917 approved, subject to the redetermination of the 1917 tax liability. Special assessment for the years 1917 and 1920 for the purpose of determining correct tax liability denied.

John E. Hughes, Esq., and Wm. Cogger, Esq., for the petitioners.

Benton Baker, Esq., for the respondent.

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SMITH

The appeal of F. Kieser & Son Co., Docket No. 10990, involves an alleged deficiency of $11,299.56 for the calendar year 1920. The appeal of Kasco Mills, Inc., Docket No. 22355, is for the redetermination of a liability as transferee of the assets of F. Kieser & Son Co., for an unpaid balance of tax and penalty of $286.98 for 1917, and for a deficiency in tax due from the transferor for 1920 in the amount of $11,299.56. The two appeals have been consolidated for the purpose of hearing and decision.

The issues involved in the case of F. Kieser & Son Co. are that the Commissioner erred:

(1) In failing to allow the deduction from gross income of reasonable compensation for officers and in failing to allow a sufficient amount for depreciation of physical properties;

(2) In reducing invested capital by an amount in excess of the true tax liability for 1917;

(3) In assessing the tax for 1920 under section 302 of the Revenue Act of 1918 instead of under section 301 of the Act;

(4) In failing to assess profits tax for 1920 under section 328 of the Revenue Act of 1918;

(5) In failing to credit against the alleged deficiency for 1920 an overassessment of profits tax and a penalty for the year 1917 as section 281 of the Revenue Act of 1924 required him to do.

The allegations of error in the case of Kasco Mills, Inc., are that the Commissioner erred:

(1) In assessing a penalty of 100 per cent cent against Kasco Mills, Inc., transferor, for the year 1917;

(2) In computing the net income of the transferor for 1917 by failing to allow the deduction of compensation for officers in the amount of $18,000 and by failing to compute a reasonable allowance for depreciation of physical properties;

(3) In not allowing Kasco Mills, Inc., transferor, a deduction of 8 per cent of the invested capital for the year 1917 plus $3,000;

(4) In failing to compute the tax liability for 1917 under section 210 of the Revenue Act of 1917;

(5) In reducing the transferor's invested capital for 1920 by additional taxes and penalty for 1917 and 1918 assessed in 1923 and paid under protest;

(6) In failing to compute the transferor's liability for tax for 1920 under section 328 of the Revenue Act of 1918.

At the hearing counsel for the petitioners moved that the Board enter an order disallowing the determination of the Commissioner and finding overpayments of tax in the amounts shown by the evidence and overpayment of penalty.

FINDINGS OF FACT.

F. Kieser & Son Co. is a New York corporation with its principal office at Waverly. It was incorporated on or about January 1, 1916, with a capital stock of $10,000, consisting of 100 shares par value $100 each, which were issued, 25 shares to F. J. Kieser; 25 shares to his wife; and 25 shares each to his son, C. F. Kieser, and his daughter, Irene K. Kieser. At the time of incorporation it took over the going business of F. J. Kieser & Co., a copartnership which had been engaged since 1884 in doing grist work for farmers, manufacturing and selling a prepared feed, and in retailing hay, grain, and other like commodities.

For the $10,000 capital stock issued there was paid in to the corporation all of the assets of the predecessor business, which had a fair market value at the date paid in, less liabilities, of $67,164.82. These assets included depreciable assets as follows:

Buildings at Haverstraw, N.Y	$21,000
Buildings at Sloatsburg, N.Y	7,500
Automobile truck	1,500
Horses and wagons	1,475
Machinery and equipment	3,500
Furniture and fixtures	400
Spur track	1,000
Total	36,375

F. Kieser & Son Co. filed an income-tax return for 1917 on March 27, 1918, which showed a taxable net income of $6,067.63 and a tax liability of $424.72. Data for the preparation of this return were secured by Irene K. Kieser, the secretary and bookkeeper, by visiting the three plants of the petitioner at Haverstraw, Sloatsburg, and Waverly. The bookkeeper took these data to the home of C. F. Kieser at Waverly. From such data C. F. Kieser prepared the return, which was duly filed with the collector. A subsequent examination of the petitioner's books and records made by a revenue agent on behalf of the Commissioner disclosed that the gross income for the year 1917 was understated in the return filed in the amount of approximately $230,000, and that proper deductions from gross income were understated in the amount of approximately $207,000.

The Commissioner in 1923 determined that there was a further tax due from F. Kieser & Son Co., for 1917 in the amount of $11,724.85. He therefore assessed against that company the additional tax found due and also a penalty for filing a false and fraudulent return in the amount of $12,149.57. The statement attached to the letter setting forth the Commissioner's determination reads as follows:

1917
Net income as disclosed by books		$28,614.49
Additions:
1916 Federal income tax	$64.25
Excessive depreciation	578.54
Additions to Reserve for Bad Debts	203.00
		945.79
Net income as adjusted		29,560.28
Invested Capital
Capital stock		10,000.00
Surplus		42,632.51
		52,632.51
1916 Federal income tax		64.25
Invested capital as adjusted		52,568.26
Excess profits deductions (7% of $52,568.26 plus $3,000.00)		6,679.78
Excess profits tax	$11,038.25
Tax at 2%	370.44
Tax at 4%	740.88
Total tax assessable		12,149.57
Tax previously assessed		424.72
Additional tax due		11,724.85
Penalty for filing a false and fraudulent return		12,149.57
Total tax and penalty due		23,874.42

In 1923 F. Kieser & Son Co. paid to the collector $23,587.44 of the amount of the additional tax and penalty claimed to be due.

In the determination of the deficiency in tax and of the penalty claimed to be due the Commissioner disallowed the deduction of $578.54 of the $2,721.01 claimed as an allowance for depreciation. In computing the allowance for depreciation the Commissioner used the following per annum rates:

	Per cent
Buildings	3
Machinery and equipment	10
Furniture and fixtures	10
Horses and wagons	12
Autos	30

Depreciation was sustained at the above rates. The basic figures on January 1, 1916, upon which depreciation should have been computed for 1917 are shown above.

In computing invested capital for 1917 the Commissioner allowed a paid-in surplus of $42,632.51. The correct amount of the paid-in surplus was $57,164.82.

The company kept its books of account on the accrual basis. The amount of the salaries paid to its officers in 1917 was $7,740. This is the amount shown by the company's books of account as the salaries payable for the year and the amount allowed by the Commissioner as a deduction from gross income in computing the deficiency. The amount shown as a deduction on the return was $7,203.

The return filed for 1917 was not false or fraudulent.

F. Kieser & Son Co. filed a tax return for the calendar year 1920, which showed no taxable net income. From gross income was deducted $11,460 for officers' salaries, which is the entire amount shown by the books of account as being accrued during the year. Under date of November 21, 1925, the Commissioner mailed to the company a deficiency notice which showed a tax due of $11,299.56.

In the computation of this deficiency the Commissioner allowed the deduction for officers' salaries shown on the return and computed an allowance for depreciation at the rates above indicated for 1917.

In the computation of invested capital for 1920 the Commissioner reduced the invested capital by an excessive amount on account of the tax liability determined by him for 1917 and also by $12,149.57, representing the 100 per cent penalty paid in 1923 for the filing of a false and fraudulent return for 1917.

On November 9, 1926, the Commissioner mailed to Kasco Mills, Inc., a notice of liability as transferee for the taxes of F. Kieser & Son Co., for the years 1917 and 1920, which reads in part as follows:

As provided under section 280 of the Revenue Act of 1926, there is proposed for assessment against you an amount of $11,586.54, constituting your liability as a transferee of the assets of F. Kieser & Son Co., Inc., Waverly, N.Y., for unpaid income and profits taxes in the amount of $286.98 for the year 1917, and a proposed assessment of $11,299.56 for the year 1920, plus any accrued penalty or interest for the calendar years 1917 and 1920 as per the attached statement.

The attached statement reads in part as follows:

In re: F. Kieser and Son Co., Inc., Waverly, New York.
Year	Deficiency in tax
1917 Balance due	$286.98
1920	11,299.56
Total tax due	11,586.54

There remains unpaid for the year 1917 a balance of $286.98, representing additional assessments for that year.

1920
Net income as shown in Bureau letter of April 26, 1924	$34,199.04
Less:
Expenses in connection with Kasco Mills allowed	200.00
Net income as corrected	33,999.04
Invested capital as shown in Bureau letter of April 26, 1924	70,987.01
Excess profits credit (8% of invested capital) plus $3,000.00	8,678.96
Excess profits tax under Section 301	9,024.35
Excess profits tax under Section 302	8,999.62
Income tax of 10%	2,299.94
Total tax as corrected	11,299.56
Tax previously assessed	None
Tax due	11,299.56

OPINION.

SMITH: Considering, first, the proceeding instituted by F. Kieser & Son Co., Docket No. 10990, it is to be noted that F. Kieser & Son Co., is the taxpayer in these proceedings and that the deficiency appealed from is for the calendar year 1920 only.

In the first place, the taxpayer contends that the true net income for 1920 has been overstated by the respondent by reason of his failure to allow compensation for officers in the amount of $18,000, and also in failing to allow a reasonable amount for depreciation of depreciable assets. It is contended on behalf of the petitioner that the board of directors of the corporation on January 20, 1917, passed a resolution making the salary of the president $7,500 per year, of the vice president and treasurer $7,000 per year, and of the secretary $3,500 per year, total $18,000; that on January 19, 1918, the board of directors passed a second resolution to the effect that the unpaid salaries of the officers should remain in the business for working capital and be paid at some future date. The minutes of the board of directors' meetings of the taxpayer, which were kept in a loose-leaf binder, bore much evidence of having been written at a later date than the dates borne by them. The books of account of the taxpayer show no evidence of the accrual of salaries in excess of the amounts actually paid to officers. Upon its return for 1920 the taxpayer claimed the deduction from gross income of $11,460 for officers' salaries. This is the amount allowed by the respondent in computing the net income of 1920. We are of the opinion that these salaries constitute reasonable compensation for officers' services and that no salaries in excess of this amount constituted true items of expense.

The allowance for depreciation was computed by the respondent at rates shown in the findings of fact. The taxpayer contends that depreciation was sustained at higher rates. We are convinced from a careful examination of the evidence of record that depreciation was not sustained at greater per annum rates. The evidence shows, however, that the cost of depreciable assets at the basic date, namely, January 1, 1916, was understated by the respondent. The correct cost of depreciable assets at the basic date is shown in the findings of fact. The allowance for depreciation for 1920 should be recomputed accordingly and at the rates used by the respondent.

The taxpayer further contends that the Commissioner erred in reducing invested capital for 1920 by a tax and penalty paid for 1917 in excess of the taxpayer's true tax liability for 1917. It is, therefore, necessary to consider the tax liability for 1917 for the purpose of determining this issue.

The basis for the determination by the respondent that the taxpayer was liable for a fraud penalty in the amount of $12,149.57 is not apparent. The imposition of the penalty was not recommended by the revenue agent who examined the taxpayer's books of account. The return filed for 1917 was admittedly inaccurate. The gross income from sales was understated, as likewise were the deductions from gross income. The taxpayer's books of account were inaccurately kept. The return was filed early in the year 1918 and the taxpayer's bookkeeper, who gathered the date for the making of the return, got them from books kept at three plants located far apart from each other. We are convinced from all of the evidence in the case that the errors were unintentional and that the return filed was not false or fraudulent. The respondent therefore erred in reducing the invested capital for 1920 by the fraud penalty assessed and paid for 1917, since it was not a liability for that year.

The taxpayer also alleges that the respondent erred in computing the net income for 1917 by failing to allow the deduction from gross income of a reasonable amount for compensation of officers, by a reasonable allowance for depreciation of depreciable assets and, further, that he erred in computing tax liability by allowing an excess-profits credit at the rate of 7 per cent of the invested capital instead of 8 per cent, the amount claimed, and, further, that the tax liability should have been computed under section 210 of the Revenue Act of 1917, upon the ground that there were abnormalties in invested capital.

The evidence shows that the Commissioner allowed the deduction for the year 1917 of salaries actually paid to officers. These are the only amounts shown to have been accrued upon the taxpayer's books of account. We have commented above upon the purported minutes of the board of directors for 1917 and subsequent years. From a consideration of the entire record we are of the opinion that there was no accrual of salaries for officers for 1917 in excess of $7,740, the amount allowed by the respondent. With respect to the computation of the allowance for depreciation, we are of the opinion that the allowance should be recomputed at the rates used by the respondent, but upon the basic figures at January 1, 1916, shown by the findings of fact.

It is contended that the excess-profits credit under section 203 of the Revenue Act of 1917 should be at the rate of 8 per cent for 1917, instead of at the rate of 7 per cent of the invested capital allowed by the respondent. The pertinent parts of sections 203 and 204 of the Revenue Act of 1917 provide as follows:

SEC. 203. That for the purposes of this title the deduction shall be as follows, except as otherwise in this title provided -

(a) In the case of a domestic corporation, the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $3,000.

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SEC. 204. That if a corporation or partnership was not in existence, or an individual was not engaged in the trade or business, during the whole of any one calendar year during the prewar period, the deduction shall be an amount equal to eight per centum of the invested capital for the taxable year, plus in the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000.

A trade or business carried on by a corporation, partnership, or individual, although formally organized or reorganized on or after January second, nineteen hundred and thirteen, which is substantially a continuation of a trade or business carried on prior to that date, shall, for the purposes of this title, be deemed to have been in existence prior to that date, and the net income and invested capital of its predecessor prior to that date shall be deemed to have been its net income and invested capital.

The evidence shows that the taxpayer here was incorporated in 1916 and succeeded to a business which had been carried on for several years theretofore. It follows that the provisions of the second paragraph of section 204 above apply. Since there is no evidence before us as to the annual net income of the business during the prewar period, the determination of the Commissioner in respect of the deduction at the rate of 7 per cent of the invested capital must be and is sustained.

It is further contended that the tax liability for 1917 should have been computed under section 210 of the Revenue Act of 1917, upon the ground that there was an abnormality in invested capital for that year. It is contended that a valuable good will was paid in to the business of the corporation at January 1, 1916, which is not reflected in invested capital. We have carefully considered the evidence upon this point and are of the opinion that there was no such abnormality in invested capital as warrants the computation of the tax liability under section 210 of the Revenue Act of 1917.

The true tax liability of F. Kieser & Son Co., for 1917 should be recomputed in accordance with the foregoing and the invested capital for 1920 recomputed accordingly.

It was also alleged that the tax liability for 1918 is less than the amount determined by the respondent and that the correction of such tax liability would serve to increase the true invested capital for 1920. The record does not show, however, the basic facts for the determination of tax liability for 1918. The claim of the taxpayer with respect to this issue is, therefore, denied for lack of evidence.

With respect to the computation of the tax for 1920, it is further alleged that the respondent erred in assessing the taxpayer under section 302 of the Revenue Act of 1918, instead of under section 301 of that Act. If such error was made it should be corrected in a recomputation of the tax liability for 1920 under Rule 50 of the Board.

It is further contended that the tax liability for 1920 should be computed under section 328 of the Revenue Act of 1918 since there was an abnormality of invested capital. We are of the opinion, however, that the evidence does not prove any abnormality of invested capital. The action of the respondent in refusing to compute the tax liability under section 328 for 1920 is sustained.

The taxpayer further alleges that it is entitled to have any deficiency in tax for 1920 offset by the overpayment of taxes and penalty paid for the year 1917. This is claimed under section 281 of the Revenue Act of 1924. The applicable portion of this section provides in subdivision (a) that where there has been an overpayment of tax for a prior year:

* * * The amount of such overpayment shall be credited against any income, war-profits, or excess-profits tax or installment thereof then due from the taxpayer, and any balance of such excess shall be refunded immediately to the taxpayer.

Subdivision (b) of the same section provides.

Except as provided in subdivisions (c) and (e) of this section, (1) no such credit or refund shall be allowed or made after four years from the time the tax was paid, unless before the expiration of such four years a claim therefor is filed by the taxpayer, nor (2) shall the amount of the credit or refund exceed the portion of the tax paid during the four years immediately preceding the filing of the claim or, if no claim was filed, then during the four years immediately preceding the allowance of the credit or refund.

We can not determine from the record whether the taxpayer has protected itself with respect to the filing of a claim for refund. Under this section the respondent is not required to credit an overpayment of tax for a given year against a deficiency for a particular year. The respondent may credit the overpayment against any tax due from the taxpayer. Upon the record the claim of the taxpayer for the credit is denied. .

The proceeding in Kasco Mills, Inc., Docket No. 22355, is from the determination of a liability of Kasco Mills, Inc., under section 280 of the Revenue Act of 1926 for an unpaid balance due from the transferor, F. Kieser & Son Co., for 1917 in the amount of $286.98, and for a redetermination of its liability as transferee of the assets of F. Kieser & Son Co., for 1920 in the amount of $11,299.56. For the purpose of this proceeding Kasco Mills, Inc., admits that it is the transferee of the assets of F. Kieser & Son Co., and is liable for any taxes legally due from it. It contends, however, that the tax due from the transferor has already been paid for 1917, and that the amount of the overpayment should be credited against any deficiency due from the transferee for 1920.

The record in these proceedings clearly shows that F. Kieser & Son Co., has paid all the income and profits tax legally due from it for 1917. Kasco Mills, Inc., the transferee, has therefore no liability for tax of the transferor with respect to the year 1917. Kasco Mills, Inc., is liable for any tax legally due from the transferor for 1920. It stands upon no better plane with respect to the credit of an overpayment of tax for 1917 by the transferor than does the transferor. From the record in this action we can not determine that the overpayment for 1917 is refundable. The statute of limitations may have operated to bar the credit claimed by the transferor. In any event the overpayment for 1917 may be credited under section 281 of the Revenue Act of 1924 against any tax liability due from the transferor.

The motion of counsel for the petitioners that the Board find overpayments of tax and of penalty for the year 1917 by the transferor is denied upon the ground that the Board has no jurisdiction to determine either an overpayment of tax or of penalty for the year 1917, F. Kieser & Son Co., the taxpayer in this proceeding, not having appealed to the Board with respect to any deficiency determined for the year 1917.

Reviewed by the Board.

Judgment will be entered under Rule 50.