Maguire v. Commissioner , 17 B.T.A. 394 ( 1929 )

JOHN A. MAGUIRE ESTATE, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Maguire v. Commissioner

Docket No. 10390.

United States Board of Tax Appeals

17 B.T.A. 394; 1929 BTA LEXIS 2300;

September 23, 1929, Promulgated

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1. The fair market value of certain leaseholds determined from the evidence for invested capital and exhaustion purposes.

2. The cost of an automobile, found to have been erroneously charged to expense, restored to the capital account for invested capital and exhaustion purposes.

3. The capital accounts of "carts and wagons" and "fences and improvements" as determined by the respondent for invested capital purposes sustained in the absence of proof showing such determination to be erroneous.

4. The respondent's determination regarding certain adjustments to invested capital on account of Federal income and profits taxes for prior years sustained in part and reversed in part.

5. The respondent's determination that no allowance should be made for exhaustion, wear and tear of "carts and wagons" and "fences and improvements" for 1917, reversed as to the former items but sustained as to the latter on account of insufficient proof.

6. The petitioner's surplus as of December 31, 1916, as determined by the respondent, found to be understated as to an inventory item of $10,725 and an account receivable item of $4,228.99.

7. The respondent's affirmative allegation that the income for 1917 should be increased by the amount of $10,725 denied for want of proof.

8. The respondent's determination of the deduction allowable under section 203(a) of the Act of October 3, 1917, sustained in the absence of evidence showing it to be erroneous.

U. E. Wild, Esq., and E. R. Cameron, C.P.A., for the petitioner.

J. F. Greaney, Esq., for the respondent.

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GREEN

In this proceeding, the petitioner seeks a redetermination of its income and excess-profits taxes for the years 1917 and 1919, for which years the respondent has determined deficiencies in the amounts of $5,152.51 and $2,011.65, respectively.

The pleadings raise the following issues, which may be considered common as to both years:

(1) Whether the respondent erred in not allowing in petitioner's invested capital as paid-in surplus the excess of the fair market value over and above the amount set up on the petitioner's books of certain leaseholds paid in to the petitioner at and after its organization by its sole stockholder partly in exchange for $480 par value of capital stock and partly in exchange for the assumption of the payment of the rental specified in the leases.

(2) Whether the respondent erred in not allowing annually, as deduction from gross income, an amount representing the annual exhaustion of the fair market value at the date of acquisition of the leaseholds paid in to the petitioner at and after its organization by its sole stockholder.

(3) Whether the respondent erred in not adjusting petitioner's invested capital to correctly reflect the amounts alleged by the petitioner to represent capital expenditures charged to expense and excessive and insufficient depreciation, respectively, written off in previous years.

(4) Whether the respondent erred in excluding from the petitioner's invested capital for the year 1917, a proportion of the Federal income tax for 1916, paid during 1917; and from its invested capital for the year 1919, a proportion of the Federal income and profits taxes for 1918 paid during 1919; and also from its invested capital for the year 1919, an amount of $6,747.08 alleged to represent the "additional tax for 1916 and 1917," but which does not in fact represent the additional taxes for those years.

(5) Whether the respondent erred in denying petitioner's application for a determination of its excess-profits taxes for the years 1917 and 1919, under the provisions of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918, respectively.

The issues raised by the pleadings which relate to the taxable year 1917 are af follows:

(6) Whether the respondent erred in not deducting from petitioner's gross income for the year 1917, certain amounts alleged by the petitioner to represent depreciation upon assets used in its business throughout the year 1917.

(7) Whether the respondent erred in excluding from petitioner's invested capital an item of $10,725, alleged by petitioner to represent an erroneous understatement by the respondent of the earned surplus reflected by its books on December 31, 1916.

(8) Whether the respondent erred in excluding from petitioner's invested capital an item of $4,228.99 alleged by the petitioner to represent income accrued to it in 1916, but not recorded on its books during that year.

(9) Whether the respondent made a clerical error in reducing invested capital on account of dividends paid during the year 1917 in excess of the current earnings available therefor.

(10) Whether the respondent erred in computing the deduction allowable under section 203(a) of the Act of October 3, 1917, in that he used 7 per cent of the petitioner's invested capital for 1917, instead of 9 per cent.

With respect to issue No. 7 above, the respondent has affirmatively alleged that the income for 1917 should be increased by $10,725.

Issue No. 9, above, was conceded by the respondent in his answer.

FINDINGS OF FACT.

The petitioner was incorporated March 28, 1913, under the laws of the Territory of Hawaii, for the purpose of acquiring and conducting a cattle ranch previously owned and conducted by John A. Maguire. Petitioner's entire capital stock, consisting of 500 shares, total par value $50,000, was, with the exception of four qualifying directors' shares, issued to Maguire in exchange for assets as to which the following entries were made on the petitioner's books:

Leases:
Bishop estate lease No. 763a of the land of Kaupulehu, North Kona, Hawaii, for 21 years from December 1, 1909		$100
Lease of the land of Mahaiula, North Kona, Hawaii, from Kamakahaikuli, for 25 years from 1899		280
Lease of the land of Keopu I from Kamakee for 30 years from 1899		100
Fences and other improvements.
Livestock:
1 imported bull	$150
2,600 herd cattle, at $15	39,000
55 Hawaiian horses, broken, at $50	2,750
50 herd horses, at $30	1,500
40 brood (Hawaiian) mares, at $30	1,200
2 brood (foreign) mares, at $100	200
25 mules (Hawaiian), at $50	1,250
		46,050
Carts, wagons, harness, and saddles		470
		50,000

The leases included in the assets acquired by the corporation at organization were as follows:

Property	Acreage	Original date and term of lease	Unexpired
			term,	Annual
			April,	rental
			1913
Kaupulehu	23,545	May 14, 1907 - 21 years from Dec.	17 2/3
	17 2/	1, 1909	years	$1,050
Mahaiula	80	25 years from Mar. 1, 1899	11 years	35
Keopu	49	30 years from Jan. 1, 1899	16 years	40
Total	23,674			1,125

On or about April 22, 1913, and subsequent to petitioner's organization, Maguire leased to the corporation, for a yearly rental of $2,000 and no other consideration, certain ranch properties comprising 12,571.07 acres for a period of 21 years from April 1, 1913, such lease containing a clause requiring the lessee to surrender possession upon three months notice of any part or parts of the leased property desired by the lessor for cultivation by himself or any other person.

On or about July 11, 1913, and subsequent to petitioner's organization, Maguire assigned to it for no consideration other than assumption of rental payments, the following leases:

Property	Acreage	Original date and term of lease
Makaula	22	10 years from January, 1910
Kaumalumalu	1,000	Expired 1919
Honuaula	646	Nov. 4, 1907 - 21 years from Nov. 4, 1907
Haleohiu	82	Nov. 4, 1907 - 20 years from Sept. 12, 1907.
Kalaoa Ooma Mauka	1,044.8	Aug. 25, 1906 - 21 years from Sept. 12, 1906.
Ooma Mauka	115.2	Nov. 4, 1907 - 20 years from Sept. 12, 1907.
Puukala	112	Apr. 14, 1913 - 15 years from Mar. 1, 1913
Total	3,022

Property	Unexpired term, April, 1913	Annual rental
Makaula	7 years	$12.50
Kaumalumalu	6 years	300.00
Honuaula	15 years	76.00
Haleohiu	14 years	31.00
Kalaoa Ooma Mauka	14 years	360.00
Ooma Mauka	14 years	36.00
Puukala	15 years	50.00
Total		865.50

Four of these leases, Honuaula, Haleohiu, Kalaoa Ooma Mauka and Ooma Mauka, were government leases containing a homestead reservation clause, operative at any time, which, on account of the labor situation in that part of the country, was deemed to be an advantage.

The above-mentioned land, comprising that leased and owned prior to the incorporation of the petitioner, had been used by Maguire for the grazing of his ranch cattle.

The petitioner covenanted as to all leases acquired by it as assignee or lessee, to pay all taxes, rates, assessments, impositions, and duties.

The petitioner, as lessee from Maguire of the 12,571.07 acres later received an annual rent income of $270 for a certain fish pond located on one of the properties and also other small items of rental income approximating $360 a year.

The leasehold account was carried on petitioner's books as an asset at $480 until December, 1917, when appreciation of $50,000 was charged to the account and credited to surplus, a stock dividend of $50,000 being paid therefrom in June, 1918, thereby increasing the capital stock of the petitioner to $100,000.

About April, 1912, Robert Hind offered Maguire $200,000 for Maguire's cattle ranch, which offer was refused on the ground that Maguire wanted $225,000.

The 12,571.07 acres leased from Maguire contained a tract of 5,189 acres called "Holualoa," on which there existed a very valuable water supply. It was possible, in 1913, to have received from $1,500 to $2,000 annually for water without in any way impairing the supply needed for petitioner's purposes. The balance of the ranch was comparatively dry, which made it possible to move the cattle from moist to dry land or vice versa, depending upon weather conditions.

During 1913 a herd of 2,000 cows would produce annually about 1,600 calves, which could be sold as calves or veal at from $20 to $22.50 per head. The running expenses of a ranch the size of the petitioner's would amount to about $17,000 annually excluding rent. During 1913 the petitioner was feeding about 2,600 head of herd cattle on the ranch besides about 173 other animals.

The fair market value, on March 28, 1913, of the three leases totaling 23,674 acres assigned to the petitioner by Maguire at the time of the incorporation of the petitioner and the seven leases totaling 3,022 acres assigned to the petitioner by Maguire on or about July 11, 1913, was at least $15,000.

The fair market value on April 22, 1913, of the lease executed by the petitioner as lessee and Maguire as lessor, on that date, respecting ranch properties totaling 12,571.07 acres, was at least $35,000.

The respondent did not allow any value for leaseholds in invested capital in excess of $480, which represented the amount of stock issued for leases at the time of incorporation. Neither did the respondent allow any amount as a deduction from gross income on account of the exhaustion of leases.

The petitioner's books of account were kept on the accrual basis.

In 1916 an automobile was acquired by the petitioner. Through error, the purchase price was charged to Maguire. In December, 1916, the cost of the automobile was credited to Maguire and charged to expense. In 1919, when the automobile was sold, the respondent treated the gain on the transaction as follows:

Cost of automobile, 1916		$522.00
Depreciation accrued:
1917	$130.50
1918	130.50
		261.00
Undepreciated balance		261.00
Sold in 1919 for		375.00
Gain		114.00

The estimated useful life of the automobile, which was used in the petitioner's business, was four years.

The respondent, in his determination for the year 1917, did not include in the petitioner's invested capital for that year any amount as representing the cost of the automobile, nor did he allow the petitioner any amount as a deduction for the exhaustion thereof.

The following is a transcript of the petitioner's "carts and wagons" account, from 1913 to 1919:

	Original cost	Sales	Depreciation	Balance
May 1 -
1913	$470.00		$78.80	$391.20
1914				391.20
1915				391.20
1916		35.00	156.20	200.00
1917				200.00
1918				200.00
1919		45.00	35.02
Undepreciated balance charged to profit and loss			119.38	None.

The useful life of the carts and wagons, which were used in the petitioner's business during 1917, was ten years.

The respondent, in his determination for the year 1917, included in petitioner's invested capital for that year the amount of $200 as representing the remaining unexhausted cost of carts and wagons as shown by the petitioner's books of account. He did not, however, allow the petitioner any deduction from gross income during 1917, on account of the exhaustion of those assets.

The following is a transcript of the petitioner's "fences and other improvements" account, from 1913 to 1919:

	Original cost and additions	Credits	Depreciation	Balance
May 1 -
	$3,000.00
1913		17.42
$3,017.42
1914	513.97			3,531.39
		$82.00
1915	1,210.54	1,138.54		3,521.39
1916	1,890.47		$2,000.00	3,411.86
1917	2,472.83	24.00		5,862.69
1918	2,044.45			7,907.14
1919	4,660.85
March, 1919			454.85
December, 1919			605.65	11,507.49

Most of the fences were stone walls, but there were 15 miles of wire fence on the Kaupulehu lease.

The lease on Kaupulehu comprising 23,545 acres, which was assigned to the petitioner by Maguire at the date of incorporation contained the following provisions respecting fences and other improvements:

THAT he will out of his own moneys during the whole of the said term, make, build, maintain and repair all fences and roads required by law to be made, built, maintained and repaired upon or in connection with or for the use of the said premises or any part thereof:

* * *

THAT at the end of said term or other sooner determination of this lease, he will peaceably deliver up to the Lessors possession of the said demised premises, together with all erections and improvements upon or belonging to the same by whomsoever made in good repair, order and condition:

The lease from Maguire dated April 22, 1913, on the 12,571.07 acres contained the following provisions respecting fences and other improvements:

That it will out of its own moneys during the whole of the said term make, build, maintain and repair all fences and roads which may be required by law to be made, built, maintained and repaired upon adjoining or in connection with or for the use of the said premises or any part thereof;

* * *

That it will at its own expense from time to time and at all times during the said term well and substantially repair, maintain, amend and keep all buildings and improvements now or hereafter built on the land hereby demised with all necessary reparations and amendments whatsoever;

* * *

That at the end of said term or other sooner determination of this lease the Lessee will peaceably deliver up to the Lessor possession of the land hereby demised, together with all erections and improvements upon or belonging to the same by whomsoever made in good repair, order and condition;

The remaining leases acquired by the petitioner contained similar provisions regarding fences and other improvements.

The respondent, in his determination for the year 1917, included in petitioner's invested capital for that year the amount of $3,411.86 as representing the remaining unexhausted cost of fences and other improvements as shown by the petitioner's books of account. He did not allow the petitioner any deduction from gross income during 1917, on account of any exhaustion of the cost to the petitioner of fences and other improvements.

At the time of its incorporation, the petitioner received from Maguire, in exchange for its stock, assets among which were 2,600 head of herd cattle, which cattle were valued on the books of the petitioner at $15 per head or a total of $39,000. From 1913 to 1915, the petitioner continued to carry the herd cattle on its books at $15 per head, which was the value that was used by the Territorial Government for property tax purposes. During the year 1916, the valuation for territorial tax purposes was increased from $15 to $20 per head. The petitioner's closing inventory on December 31, 1916, shows "2,145 herd cattle at $20 - $42,900." On January 31, 1917, the petitioner increased its inventory of 2,145 herd cattle by $10,725 or $5 per head as of January 1, 1917, and credited the increase to the livestock sales account. On December 31, 1917, it reversed its entry made on January 31, 1917, with respect to the 2,145 herd cattle thereby leaving the inventory on such cattle remain at $20 per head.

The value of herd cattle, on January 1, 1917, was at least $20 per head. There was no increase in value during the year 1917.

The respondent included the 2,145 head of herd cattle in the petitioner's invested capital for 1917, at $15 per head, or $32,175.

During 1916 the petitioner sold his livestock through the Hawaii Meat Co., Ltd. (cooperative). The cooperative organization, on December 31, 1916, in accordance with its methods of operation, withheld and deferred the payment of $4,228.99 of the amount due the petitioner for livestock marketed in 1916, such amount being placed to the petitioner's credit on its books, but no entry was made on the books of the petitioner reflecting this item. It was the custom of the Hawaii Meat Co., Ltd., to issue stock for an amount equivalent to the percentage of the sales price thus retained and to expend the amounts thus obtained in the maintenance of its plant and equipment. On March 26, 1917, additional capital stock in the Hawaii Meat Co., Ltd., was issued to Maguire in the amount of the credit owing the petitioner and the respondent treated the same as a dividend of the petitioner to Maguire.

The respondent, in determining the invested capital of the petitioner for the year 1917, did not include as a part of such invested capital the account receivable due from the Hawaii Meat Co., Ltd., in the amount of $4,228.99.

The respondent determined the petitioner's income-tax liability for the calendar year 1916 to be $349.14 and permitted this amount to remain in invested capital for 1917, until such taxes became due and payable. This was in accordance with the respondent's regulations in force on February 26, 1926, in respect of such taxable year.

The respondent, on September 30, 1924, finally determined that the petitioner's income and profits-tax liability for 1918 was $2,611.12. In accordance with section 1207 of the Revenue Act of 1926, the amount of $1,507.66 of the $2,611.12 is permitted to remain in invested capital for the following year. The respondent, in determining the invested capital of the petitioner for the year 1919, only permitted $826.34 of the $2,611.12 to remain in the invested capital for the year 1919.

The respondent, in determining the invested capital for the year 1919, excluded therefrom an amount of $6,747.08, as representing additional taxes for 1916 and 1917.

The respondent, in determining the deduction allowable under section 203(a) of the Act of October 3, 1917, took 7 per cent of the petitioner's invested capital for the year 1917, and added thereto the amount of $3,000.

OPINION.

GREEN: The alleged errors will be discussed in the order in which they have been previously stated.

The first two issues deal with the determination of the fair market value of the leaseholds turned in to the petitioner at and after incorporation by its sole stockholder, for purposes of invested capital and exhaustion.

The petitioner was organized on March 28, 1913, for the purpose of operating a cattle ranch which had been previously conducted by Maguire individually. All the land under consideration, part of which he owned in fee and the remainder which he held under leases, had been used in connection with this ranch. At the time of its incorporation, three leases, covering 23,674 acres, were transferred, together with the ranch equipment, cattle and other property, for the entire capital stock, amounting to $50,000. The leases were set up on the books of the petitioner at a value of $480. They had from 11 to 17 years to run and the petitioner assumed the annual rental of $1,125. On April 22, 1913, Maguire leased to the petitioner 12,571.07 acres, which he owned in fee, for 21 years, at an annual rental of $2,000, and on July 11, 1913, Maguire transferred leases covering the remainder of the ranch land amounting to 3,022 acres with unexpired terms varying from 6 to 15 years in consideration of the petitioner assuming annual rentals amounting to $865.50. No entries were made on the books of the petitioner reflecting the last two transactions until in December, 1917, when the value of the leaseholds was increased in the books of the petitioner by $50,000 and additional capital stock issued increasing petitioner's capital to $100,000.

The evidence as to the value of the leases in question consisted principally of the testimony of four expert witnesses from the Territory of Hawaii, who were well qualified to express opinions as to such value, being men of long experience in the cattle ranch business and well acquainted with the properties in question. These witnesses all expressed opinions as to the fair market value as at the time the leases were acquired by the petitioner, ranging from $50,000 to $60,000 for all of the leases so acquired. One of the witnesses, within a few months prior to the time the petitioner was organized, had offered Maguire $200,000 for his property and interest in the ranch as it existed at that time. This offer was rejected for the reason that Maguire wanted at least $225,000.

After consideration of all of the evidence of record, we are convinced that the fair market value on March 28, 1913, of the three leases totaling 23,674 acres assigned to the petitioner by Maguire at the time of the organization of the petitioner and the seven leases totaling 3,022 acres subsequently assigned to the petitioner by Maguire on or about July 11, 1913, was at least $15,000 and that the fair market value on April 22, 1913, of the lease executed by the petitioner as lessee and Maguire as lessor on that date representing ranch property totaling 12,571.07 acres, was at least $35,000. The unexhausted portion of such leases as of December 31, 1916, and December 31, 1918, should be included in the petitioner's invested capital for the years 1917 and 1919, respectively.

With respect to the amount of the exhaustion of leaseholds to be allowed as a deduction from gross income for each of the years 1917 and 1919, we are of the opinion that a reasonable allowance will be had by allowing 1/21 of the amount of $35,000 and 3/53 of the amount of $15,000, the latter fraction being determined from the unexpired term of the principal lease included among those valued at $15,000.

In the third issue the petitioner is contending that invested capital for the year 1917 should be increased by the amount of $522, representing the cost of an automobile charged to expense during December, 1916, and by the amounts of $62.75 and $1,263.62, as representing excessive depreciation written off on the books of the petitioner on or before December 31, 1916, on "carts and wagons" and "fences and improvements," respectively. It also contends that invested capital for 1919 should be increased on account of excessive depreciation previously written off on fences and improvements in the amount of $707.23 and that the invested capital for 1919 should be reduced by the amount of $4.75 as representing insufficient depreciation previously written off on carts and wagons.

The purchase price of the automobile was erroneously charged to expense in 1916. This item was unquestionably a capital item and the respondent in determining the gain on the sale of the automobile in 1919 so considered it. It should be restored to surplus as of December 31, 1916, and included in invested capital for 1917.

As to the other items contended for in this assignment of error, the respondent has made his determination from the corporate records. If these records are in error, the burden of proof is upon the petitioner to show the proper adjustments. The record does not show that the books are incorrect nor that the straight line method of depreciation more properly reflects the true situation. Accordingly, the respondent's determination as to these items should not be disturbed.

Regarding the fourth issue, the respondent's determination is approved with respect to the adjustment he made in the 1917 invested capital on account of Federal income taxes for 1916 paid during 1917. All . In determining the invested capital for 1919, the respondent permitted a portion of the Federal income and profits taxes for 1918 which were paid during 1919 to remain in invested capital for 1919. This determination was correct in principle and in accordance with section 1207 of the Revenue Act of 1926, and our decision in , but, as we found in our facts, he made a clerical error in his proration in that he only included in the invested capital for 1919, $826.34 of the 1918 taxes, whereas, he should have included the amount of $1,507.66. With respect to the reduction of invested capital for the year 1919, by the amount of $6,747.08, as representing additional taxes for 1916 and 1917, it is apparent from our decision so far in the case that the amount of the additional taxes for 1917 will be changed and when the correct amount is determined it should be substituted for the amount used by the respondent in his deficiency letter.

No proof was offered by the petitioner regarding the fifth issue. In its petition, however, it stated that this issue could be considered as abandoned if its claim for a paid-in surplus of $50,000, with respect to the leaseholds were allowed. Since we have found as a fact that the leases had the value claimed by the petitioner, it follows that the present issue regarding special assessment disappears.

The petitioner contends, with respect to the sixth issue, that it is entitled to deductions from its gross income for the year 1917, of the following amounts as representing exhaustion, wear and tear:

Automobile	$130.50
Carts and wagons	43.50
Fences and improvements	393.13
Leasehold amortization	2,403.80

We have already disposed of the leasehold feature of this issue in our above discussion of the first two issues. The evidence supports the petitioner's contentions with respect to the allowances for exhaustion of the automobile and carts and wagons in the amounts of $130.50 and $43.50, respectively, and we have so found in our facts. With respect to the item of fences and improvements, the evidence is not sufficient to show that the respondent erred and his determination on this item is approved.

The petitioner contends in the seventh issue that the respondent erroneously understated its earned surplus as of December 31, 1916, and its invested capital for the year 1917, by an amount of $10,725, and the respondent has affirmatively alleged that the income for 1917 should be increased by the amount of $10,725. We have found that in its closing inventory for December 31, 1916, the petitioner valued 2,145 head of herd cattle at $20 per head, making a total of $42,900; that on its books this amount was increased in January, 1917, by $10,725, representing $5 per head on 2,145 cattle; and that in December, 1917, the valuation of herd cattle was again placed at $20 per head by reversing the entry made in January. No evidence was offered by either party as to the actual value of the herd cattle, which were at all times inventoried at the amount of the Territorial assessment. It is apparent, from the record, that the value of the cattle was increased on the books of the petitioner from $15 to $20 in the year 1916. We are convinced that the market value of the herd cattle, on December 31, 1916, was at least as great as the value that was used for Territorial property tax purposes and that the respondent was in error in reducing the earned surplus for 1916 and the invested capital for 1917 in the amount of $10,725. The respondent has failed to offer any proof that there was any change in the market value of herd cattle during the year 1917, and, accordingly, his allegation should be denied.

In connection with the eighth issue, the petitioner contends that its invested capital should be increased by $4,228.99 alleged to represent income that had accrued and was credited to the petitioner during 1916 on the books of the Hawaii Meat Co., Ltd., but which was not reflected on the books of the petitioner during the year 1916, and, therefore, not reflected in its surplus account on December 31, 1916.

The amount in question was due the petitioner for livestock furnished the Hawaii Meat Co., Ltd., during 1916. It represented a percentage of the year's sales of the petitioner's livestock, which the Hawaii Meat Co., Ltd., a cooperative concern, had retained for the purpose of increasing its plant and equipment under an agreement to issue additional capital stock for the amount retained. The amount in question should have been included in the 1916 sales of livestock which would result in a corresponding increase in the petitioner's invested capital for 1917. This treatment is in accord with the respondent's handling of the stock dividend of $4,228.99, which was paid directly to Maguire on March 26, 1917, by the Hawaii Meat Co., Ltd., and which the respondent treated as a dividend of the petitioner.

With respect to the last issue, the petitioner alleges that the respondent erred in determining the deduction allowable under section 203(a) of the Act of October 3, 1917, in that he used 7 per cent of the petitioner's invested capital for 1917 instead of 9 per cent as contended for by the petitioner. The petitioner has introduced no material evidence to show wherein the respondent was in error as to this issue and, consequently, his action in this respect should not be disturbed.

The deficiencies should be recomputed in accordance with the above findings and opinion giving effect to the confession of error as to the ninth issue.

Judgment will be entered under Rule 50.