San Carlos Milling Co. v. Commissioner , 24 B.T.A. 1132 ( 1931 )

SAN CARLOS MILLING COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

San Carlos Milling Co. v. Commissioner

Docket No. 39525.

United States Board of Tax Appeals

24 B.T.A. 1132; 1931 BTA LEXIS 1533;

December 11, 1931, Promulgated

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1. Petitioner operated a sugar mill in the Philippine Islands under contracts with planters of sugar cane, whereby it milled the cane produced by the planters, and accepted as compensation for its milling services a percentage of the manufactured sugar. Held, the sugar so received constituted income at the time and place received to the extent of its fair market value.

2. For the three-year period ended at the close of the taxable year 1923, petitioner received more than 80 per cent of its gross income from sources within a possession of the United States, and more than 50 per cent of its gross income from the active conduct of a trade or business within a possession of the United States (section 262 of the Revenue Act of 1921).

3. The petitioner sustained a net loss in the taxable year 1921 that was deductible from the net income of the two succeeding taxable years.

George E. Cleary, Esq., and George S. Herr, Esq., for the petitioner.

John D. Foley, Esq., for the respondent.

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SMITH

The Commissioner determined a deficiency of $47,106.55 in the petitioner's income tax for the calendar year 1923. The issues for our determination are:

(1) Whether petitioner is entitled to the benefit of section 262 of the Revenue Act of 1921 in computing its tax liability for the calendar year 1923.

(2) Whether for the calendar year 1921 petitioner sustained a net loss as defined in section 204 of the Revenue Act of 1921, and whether that part of said net loss which exceeds the taxable net income for 1922 may be deducted from the taxable net income for 1923.

(3) Whether petitioner, if it is not entitled to the benefit of section 262, is entitled to credit against its United States income tax, the Philippine income tax in the amount of $12,998.56 which accrued for the year 1923.

FINDINGS OF FACT.

The petitioner is a domestic corporation organized on June 8, 1912, under the laws of the Territory of Hawaii. The principal office of the petitioner is in Honolulu, Territory of Hawaii.

At all times during the period from January 1, 1914, to December 31, 1923, the petitioner was actively engaged in business in the municipality of San Carlos, Province of Negros Occidental, Philippine Islands, under contracts entered into with certain sugar cane planters, and operated a general merchandise store in San Carols, and was also engaged in the business of selling sugar in the United States and in the Philippine Islands.

Typical of the contracts between the petitioner and the planters is the one with La Compania General de Tobacos de Filipinas, which contained, inter alia, the following "COVENANTS BY MILL":

8. That it will take delivery of all cane grown by the Planters, properly loaded on cars at such points along the line of its railway and at such times as the Manager of the Mill and the Committee of Planters may agree upon, having due regard to the crops of the other Planters and the milling quality of the cane and its state of maturity, and haul the same free of charge to the mill.

9. That it will supply the most approved modern means of weighing said sugar cane, and cause the same to be accurately weighed thereby, issuing to the owners of said cane weight certificates in due form; said weighing always to be done in such manner as to permit said owners, or their representatives to witness same when they so desire.

10. That it will crush, grind and mill such sugar cane, and by due process manufacture the available sucrose contents of such sugar cane into merchantable sugar of the grades the mill is designated to produce, to-wit, refining sugars of high grades usually described as A and B sugars; it will guarantee an average extraction by the Mill Rollers of ninety two per cent. of the sucrose content of the cane milled; and will guarantee an average polarization of ninety-six degrees in said A sugar; and will guarantee an average polarization of ninety-three degrees in said B sugar.

11. That it will furnish free of cost to the Planters containers for said sugar.

12. That it will deliver to each planter sixty per cent of the sugar so made, as computed from the weight and analysis of his cane, of the grades referred to in section ten above, or will store same at the planter's risk ninety days free of charge, making a reasonable charge for all sugar remaining in the warehouse for a longer period. Under no circumstances shall the mill be required to store sugar for a longer period than the beginning of the following grinding season. The ownership of all sugar shall be represented by official warehouse receipts issued solely under the warehouse Superintendent's official signature and seal, and countersigned by a representative of both the Mill and the Planter * * *; that it will deliver to the warehouse all sugars manufactured and receive therefor the Superintendent's memorandum receipt * * *; that it will cause the Superintendent to pile in proper division of the warehouses, each and every grade of sugar by itself; that it will cause the Superintendent to keep separate and accurate accounts with each and all parties having an interest in the sugar stored, and to keep such general and particular accounts as the warehousing may require; that it will from time to time require and cause the sugar on storage to be inventoried and the books and vouchers to be examined and their correctness certified by an expert or chartered accountant who shall be approved of by the representatives of the Planters;

13. That it will cause the said warehouse Superintendent, upon surrender by owners of the warehouse receipts and their written instructions, to deliver the corresponding sugar free of charge at the head of the above mentioned wharf and alongside vessel.

14. It is mutually understood and agreed that sugar on free or paid storage is not insured by the mill against fire or other damage.

15. That it will deliver each week to the representatives of the Planters a statement for each plantation of the cane received and milled therefor during the preceding week, said statements to have entered thereon the cane weight certificates issued, and weights of cane, and also the chemist's sucrose and purity tests of said cane, and also a computation of the amount of sugar due each plantation as determined under provisions of section 12 above for which warehouse receipts are to be issued; these statements shall be verified or corrected by said representatives, and one copy be sent to each plantation, one copy to the Mill, one copy to the Superintendent of warehouses, and one copy be retained; the succeeding week warehouse receipts will be handed said representatives for countersigning and delivery to owners; at the end of the crop season an adjustment shall be made that the agreements as to percent ages may be truly and faithfully executed; that it will upon reasonable notice permit the representatives of the Planters to examine the manufacturing and laboratory records of the mill.

* * *

18. That it will deliver to each Planter upon his application therefor within one week of the date of the manufacture thereof his proper percentage according to computation of the Waste molasses. Under no circumstances will the Mill be required to store for account of the planters more than one week's production of molasses, and all molasses not taken within that time by the planters shall be held to be abandoned by them. All bagasse shall be used by the Mill free of charge.

* * *

20. The Mill also agrees, when so requested, to act as agents for the Planters in the shipment and marketing of their sugars, receiving for such service, and for any other extra service rendered by the Mill to the Planters a reasonable compensation.

21. That except as herein otherwise specifically agreed, the Mill will charge and accept as full compensation for the services rendered and agreed to be rendered hereunder 40% of the sugar and waste molasses manufactured as aforesaid, or at the option of the Mill, 40% of the net-proceeds of sale of sugar manufactured, and of the waste molasses.

The same contract contained, inter alia, the following "PLANTERS' COVENANTS":

1. That each will for a period of thirty (30) years from the date said Mill notifies him that it is ready to take delivery, deliver to said Mill all cane grown by him on his lands in said San Carlos, and Vallehermosa districts, Province of Negros Occidental, Philippine Islands * * *.

Such delivery shall be made upon cars on side-tracks of said Mill at such places and at such times as the Manager of said Mill may agree upon with the agents of the Planters.

* * *

5. That they will accept the provisions of covenants * * * of the Mill and deliver the cane as there arranged.

6. That they will accept the provisions set forth hereinbefore in the covenants of the Mill as to weighing and delivery of certified weight certificates as there provided.

7. That they will accept the provisions for milling cane and manufacturing sugar, as provided hereinbefore in the covenants of the Mill.

8. That they will accept the provisions for the appointment and bonding of superintendent of warehouses for the receipt of sugars, for the storage of sugars, for issue and redemption of warehouse receipts, for the keeping of accounts, for auditing of books and vouchers, for inventory of sugars, for the delivery of sugar, and for the final adjustment of percentages as hereinbefore provided in the covenants of the Mill.

9. That they will accept the provisions for the delivery of by products, as provided hereinbefore in the covenants of the Mill.

* * *

16. That he will allow the Mill, and it may and shall retain, as its share or proportion of the sugar, and as full compensation for its services rendered hereunder, except as otherwise herein specifically set forth, forty per cent. (40%) of all the sugar and molasses produced from the cane hereunder furnished, and all the bagasse from all the cane ground, or at its option, forty per cent (40%) of the net proceeds of sales of sugar plus forty per cent of the molasses, and all the bagasse from all the cane ground.

Pursuant to other terms of these contracts the petitioner operated a sugar mill or "central" and the utilities customarily operated in connection therewith, such as warehouses, wharf, ice plant, machine shop, railroad, etc. It had practically no property outside of the Philippine Islands.

In accordance with their agreement, the planters devoted certain lands to the production of sugar cane, which they or their tenants raised, cut, and loaded on cars in the field. The loaded cars were then hauled by the planters over temporary track to the permanent track of the petitioner, where the petitioner took delivery of the cars and had them hauled to its mill. None of the expense of raising, cutting, or loading the cane was borne by the petitioner. The cane was weighed at the cane track at the mill before unloading and a weight receipt issued for each planter's cane. The cane was then placed on the cane carrier, which carried it into the mill, where it was crushed and a sample of the juice from each planter's cane analyzed to determine the sucrose content or value, of which a separate record was made. After a sample of the juice from each planter's cane was taken, the juices were mixed in the further processes of manufacturing the sugar, which was of the grade known to the trade as 96-degree centrifugal sugar. It would not be commercially practicable to extract the sugar from each planter's cane separately.

The sugar was then weighed, bagged, and stored in the petitioner's warehouse. Once each week the petitioner computed the amount of sugar manufactured from each planter's cane from the weight of the cane, its sucrose content, and the efficiency of the mill, deducted the amount of its compensation for milling the cane into sugar, and issued to the planter a warehouse receipt for his sugar. As translated into English, a typical warehouse receipt, evidencing the planter's ownership of the sugar, is as follows:

WAREHOUSE RECEIPT

SAN CARLOS MILLING CO., LTD.

Warehouse No. 1

San Carlos, Occidental Negros, P.I.

This certifies that there have been deposited by GAMBOA BROTHERS in the Warehouse above mentioned at the Company's place of business in San Carlos, occidental Negros, P.I., the goods as described in detail in the left margin of this receipt, which goods will be delivered to the depositor or to his order duly endorsed upon this receipt, upon the presentation of the same and the payment of the storage and further charges applicable to said goods.

Storage, at the rate of [*] 0.17 per metric ton per month, commencing from ninety days from the date hereof will constitute a lien against the goods.

Insurance, if it is desired, must be effected by the depositor or his transferee.

The usual charges applying to rebagging, polarizing or weighing the sugar, in case said services or any of them are rendered, will be included in the lien in favor of this Company on the goods deposited.

These goods constitute fungible things mixed with other things of equal class and grade.

Executed in San Carlos, P.I., this 18 day of Jan'y., 1925.

SAN CARLOS MILLING CO., LTD.,

L. T. FARNHAM

CORRECT:

On behalf of the Planters,

G. LOPEZ.

The petitioner always had on hand in its warehouse at San Carlos sufficient sugar manufactured at its mill to cover outstanding warehouse receipts. The petitioner never paid any planter cash instead of returning to him his portion of the sugar; nor did it claim the right to sell for its own account all of the sugar produced under any of its milling contracts. Petitioner has acted as selling agent for some planters, for which services it received a commission.

At all times material hereto, the milling processes were carried on under the observation of a planter's committee, and representatives of the planters checked the petitioner's weights, analyses, computations, etc.

During the years 1919 to 1923, inclusive, the petitioner sold in the United States a substantial part of the sugar it received as compensation for its milling services in the Philippine Islands. This sugar was consigned to the petitioner's agent in the United States, who sold it either prior to shipment from the Philippines or while it was in transit, on the basis of "no arrival, no sale" at a price of so many cents per pound. Petitioner paid all charges incident to shipping the sugar to the United States such as freight, marine insurance, export wharfage, and consignment taxes imposed by the Philippine Government on goods exported and consigned abroad. All such charges are proper additions to the cost of the sugar sold in the United States. Payment for the sugar sold in the United States was received in the United States and the proceeds were ultimately remitted to Honolulu, Territory of Hawaii, where the main bank account of the petitioner was kept.

There was an established market for and the petitioner sold some 96-degree centrifugal sugar in the Philippines during the years 1919 to 1923, inclusive. The quoted wholesale prices (representing actual sales) of 96-degree centrifugal sugar at Manila, Philippine Islands, in terms of pesos per picul on or near the various dates during the years 1919 to 1923, inclusive, on which a division of the sugar was made between the petitioner and the planters, are set forth in an agreed tabulation, which we incorporate herein by reference.

The Philippine picul for sugar during the years 1919 to 1923, inclusive, was 139.44 pounds avoirdupois.

The Philippine peso is the equivalent of 50 cents in United States currency at par of exchange. A schedule attached to the stipulation shows the exchange values of the peso in terms of United States currency at Manila on or about the above dates.

The petitioner kept its books and filed its income-tax returns for the calendar years 1919 to 1923, inclusive, on the accrual basis of accounting.

The petitioner, on its Federal income-tax returns for the calendar years 1921, 1922, and 1923, claimed that it was entitled to the benefits of section 262 of the Revenue Act of 1921. In the deficiency notice for the year 1923 the Commissioner held that the petitioner had not satisfied the requirements of section 262 for the year 1923.

The Philippine Islands is now and was at all times after January 1, 1914, a possession of the United States.

There accrued, as a liability against the petitioner for the calendar year 1923, an income tax under Philippine law of $12,998.565, which petitioner duly paid during the calendar year 1924. No part of such tax has been refunded or credited to the petitioner. The amount so paid was an income tax under Act 2926 (1920) of the Philippine laws, which imposed an income tax for the calendar year 1923 at the rate of 3 per cent on petitioner's net income derived from sources within the Philippine Islands.

Paragraphs numbered 6 to 20, inclusive, of the stipulation, setting forth (a) the petitioner's portion of the raw sugar manufactured under its contracts with the planters and the dates on which said sugar was received; (b) the items of the petitioner's gross income and its expenses; and (c) the amount of petitioner's sugar sales, purchases, and inventories for each of the years 1919 to 1923, inclusive, are incorporated herein by reference.

OPINION.

SMITH: In so far as material hereto, section 262 of the Revenue Act of 1921 provides:

(a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States -

(1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and

(2) If, in the case of such corporation, 50 per centum or more of its gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States; or

* * *

(b) Notwithstanding the provisions of subdivision (a) there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States.

The petitioner contends that the sugar received by it under its milling contracts was received in payment for services rendered in manufacturing the planters' cane into sugar, and that the sugar so received constituted income received in a possession of the United States, to the extent of the fair market value of the sugar at the time of its receipt. The respondent contends that the transaction between the planters and the petitioner amounted to a sale of the cane to the petitioner and that the cost of the sugar was the expense of operating its mill; that the petitioner did not realize income in the Philippines upon production of the sugar, but that income was realized only upon sale of the sugar.

On brief, the petitioner argues that the transaction amounted to a bailment, and the respondent argues that it "amounted to a purchase of cane by petitioner," or a sale. In Sturm v. Boker,150 U.S. 312">150 U.S. 312, 329 (cited by both parties) the Supreme Court stated that:

* * * The recognized distinction between bailment and sale is that when the identical article is to be returned in the same or in some altered form, the contract is one of bailment, and the title to the property is not changed. On the other hand, when there is no obligation to return the specific article, and the receiver is at liberty to return another thing of value, he becomes a debtor to make the return, and the title to the property is changed; the transaction is a sale. * * *

The milling contract provided that the cane was to be manufactured into sugar and 60 per cent of the product (that is, the cane in an altered form) returned to the planter. There is nothing in the contract to show that the petitioner was "at liberty to return another thing of value," and the record indicates that the planter's sugar, less the petitioner's commission, was returned to him; at no time did the petitioner sell for its own account the sugar so produced and pay the planter money instead of returning to him his share of the sugar.

In Sturm v. Boker, supra, and other cases involving the question of bailment or sale, the courts have sought to effectuate the intent of the parties as expressed in their agreements. See Powder Co. v. Burkhardt,97 U.S. 110">97 U.S. 110; Arnold v. Hatch,177 U.S. 276">177 U.S. 276; Ludvigh v. American Woolen Co.,231 U.S. 522">231 U.S. 522; In re Taylor, 46 Fed.(2d) 326; In re Renfro-Wadenstein, 47 Fed.(2d) 238.

In Arnold v. Hatch, supra, the Supreme Court said:

We do not know that it is necessary to fix an exact definition to the relations between these parties, or to determine whether the law of master and servant, landlord and tenant, or bailor and bailee, governed the transaction. The main object is to ascertain the intent of the parties with respect to the ownership of the property. * * *

* * *

It is very evident * * * that no sale of the * * * property was intended. There was no purchase price agreed upon, no time fixed for the payment. * * *

The milling contracts provided that the petitioner "will charge and accept as full compensation for the services rendered and agreed to be rendered hereunder 40% of the sugar" and that the planter "will allow the mill [petitioner], and it may and shall retain, as its share or proportion of the sugar, and as full compensation for its services rendered hereunder * * * forty per cent. (40%) of all the sugar * * * produced."

The record supports the intent of the parties, as expressed in the contract, to compensate the petitioner for milling the cane into sugar by allowing the petitioner to retain 40 per cent of the sugar produced. During all of the years with which we are concerned the petitioner and the planters so construed their contracts and acted accordingly. As the petitioner points out on brief, "It is significant that nowhere in the contracts are the terms 'sale,' 'purchase,' 'selling price' or 'purchase price' used, and that many of the provisions are inconsistent with an agreement of sale" of the cane to the petitioner as contended by the respondent. The provisions for weighing and crushing the planter's cane, the computation and delivery of the percentage of sugar manufactured from his cane, and the storage of such sugar at the planter's risk, all negative the idea of a sale of the cane to the petitioner. The plain language of the contracts and the action of the parties show that these were milling contracts for the manufacture of sugar by the petitioner from the planter's cane and that the petitioner was to have a toll or share of the sugar manufactured as compensation for its services. Such provisions would have been wholly unnecessary had the parties to those contracts contemplated a sale of the cane to the petitioner.

Although we do not consider it necessary to decide the legal relationship between the petitioner and the planters, we believe that the transaction contained elements of bailment and lacked elements of sale. See In re Renfro-Wadenstein, supra. The respondent makes much of the fact that the juices from each planter's cane were commingled with other juices, and that the sugar produced was in a common mass. Such facts, in some circumstances, might support a sale of the raw material or the goods commingled, but where the commingling was by the consent of the owner, as in the instant case, such owner "becomes the owner as tenant in common of an interest in the mass proportionate to his contribution." Intermingled Cotton Cases,92 U.S. 651">92 U.S. 651, 653. See also Williston on Sales, vol. 1, secs. 153 and 154, wherein the commingling of grain in the Elevator Cases is discussed.

The manner in which the planters or their representatives followed the process through which the petitioner produced the sugar from the planters' cane, the handling of the manufactured sugar in the petitioner's warehouse, the issuance of warehouse receipts for the planters' share of the sugar, and the fact that petitioner always had on hand sufficient sugar to cover outstanding warehouse receipts, show that title to the cane and its produce remained in the planters. By agreement the planters consented to the commingling of the juices from their cane - a necessary incident to the commercial milling of sugar, and further consented to the storage of the manufactured sugar en masse in the petitioner's warehouse, their ownership of their proportionate share thereof being evidenced by warehouse receipts. As pointed out above, this commingling was not fatal to the planters' ownership of a proportionate part of the sugar. Thus, the practical interpretation of the agreement by the parties thereto, as evidenced by their actions thereunder, supports the petitioner's contention that the sugar it received was compensation for its milling services rendered in the Phillippine Islands, a possession of the United States. The petitioner realized income at the time and place the sugar was received to the extent of its fair market value. (Section 213(a) of the Revenue Act of 1921 and article 33 of Regulations 62.)

The amount of sugar received by the petitioner being stipulated, there remains the question of its fair market value on the several dates when received. There was an established market for 96-degree centrifugal sugar in the Philippine Islands and the record shows that petitioner sold some of its sugar there. We have before us quotations of prices on actual sales of sugar on or about the dates that petitioner received the sugar for its milling services. In the circumstances, we hold that the average quoted price on a given date is the fair market value of the sugar received by the petitioner on or about that date. Cf. Ralph Andrew Applegate, Executor,10 B.T.A. 705">10 B.T.A. 705; Western Bank & Trust Co.,19 B.T.A. 401">19 B.T.A. 401.

Upon the sale of sugar in the United States the petitioner received income from sources within the United States, even though the sugar was manufactured in the Philippine Islands. See Porto Rico Consolidated Fruit Co.,16 B.T.A. 778">16 B.T.A. 778, and cases there cited. The amount of that income is the gain derived upon the sale, and not the total amount of the sale price received for the sugar. The cost basis of the sugar received as compensation for services rendered in the Philippine Islands and sold within the United States is the fair market value of that sugar at the time received (cf. W. R. Jacques,5 B.T.A. 56">5 B.T.A. 56; J. Heninger,9 B.T.A. 1318">9 B.T.A. 1318; William T. Bivin,21 B.T.A. 1051">21 B.T.A. 1051), to which should be added the expenses incurred by the petitioner in forwarding the sugar to the United States, since the sales were made upon the basis of a price in the United States.

In order to satisfy the requirements of section 262, the petitioner must show, first, that 80 per cent or more of its gross income for the three-year period immediately preceding the close of the taxable year was derived from sources within a possession of the United States; and, second, that 50 per cent of its gross income for such period was derived from the active conduct of a trade or business within a possession of the United States. See John W. Haussermann,23 B.T.A. 378">23 B.T.A. 378. The petitioner actively conducted the trade or business of manufacturing and selling sugar and operating a general merchandise store or commissary in the Philippine Islands, a possession of the United States, during the period prescribed by the statute. The parties have stipulated the figures necessary to a computation of petitioner's gross income, from which, and in accordance with our holdings above, we make the following summary of the petitioner's gross income:

Year	Total	Amount received	Amount received	Amount received
		from sources	from sources	from active
		within the	within the	conduct of a
		Philippine	United	trade or
		Islands	States	business within
				Philipine
				Islands
1921	$662,003.98	$646,542.57	$15,461.41	$604,113.02
1922	722,467.415	491,073.175	231,394.24	470,007.50
1923	794,516.525	719,730.895	74,785.63	689,403.16
Total	2,178,987.92	1,857,346.64	321,641.28	1,763,523.68

Per cent of gross income received from	85.2
sources within the Philippine Islands
Per cent of gross income received from	80.9
the active conduct of a trade or
business in the Philippine Islands

The petitioner fully meets the requirements of the statute and is entitled to the benefit of section 262 in computing its income for the taxable year 1923.

The second issue makes it necessary to determine whether petitioner sustained a net loss for the taxable year 1921, a portion of which it seeks to deduct from its net income for the taxable year 1923 under section 204(b) of the Revenue Act of 1921. A summarized computation of petitioner's gross income (based on the stipulated figures) for the three-year period immediately preceding the close of the taxable year 1921, shows that it meets the requirements of section 262 for that taxable year. The computation follows:

Year	Total	Amount received from sources within the Philippine Islands	Amount received from sources within the United States	Amount received from active conduct of a trade or business within Philippine Islands
1919	$702,817.615	$643,087.265	$59,730.35	$574,749.74
1920	2,576,897.485	2,481,522.445	93,375.04	2,330,937.39
1921	662,003.98	646,542.57	15,461.41	604,113.02
Total	3,941,719.08	3,771,152.28	170,566.80	3,509,800.15

Per cent of gross income received from sources within the Philippine Islands	95.6
Per cent of gross income received from the active conduct of a trade or business in the Philippine Islands	89

As defined in section 262(a), the petitioner's gross income for the taxable year 1921 "means only gross income from sources within the United States." The amount of its gross income for that taxable year from such sources (exclusive of sales of sugar) is $15,461.41. Its net income, if any, for that year is determined in accordance with sections 232, 234(b), and 217 of the Revenue Act of 1921. From the stipulated facts and figures we find that the petitioner sustained a loss of $695,387.53 upon its sugar sales within the United States and that its expenses incident to its business within the United States amounted to $43,543.63, making total allowable deductions of $738,931.16 for the taxable year 1921. It is obvious that the petitioner sustained a net loss of $723,469.75 from the operation of its trade or business regularly carried on within the United States in the taxable year 1921 (section 204(a), Revenue Act of 1921) and that under section 204(b) the amount of this net loss is deductible from petitioner's net income for the taxable years 1922 and 1923. Since the sum of petitioner's gross income from sources within the United States for these years (1922 and 1923) is less than the amount of its net loss for 1921, it is apparent that the petitioner had no taxable net income for the taxable year 1923.

Since we have decided that the petitioner is entitled to the benefit of section 262 and that it sustained a net loss in 1921, a portion of which extinguishes its taxable net income for 1923, it is unnecessary to discuss the third issue.

From the above it is apparent that the petitioner had no tax liability for the taxable year 1923. From the record it appears that for this year an income tax in the amount of $5,628.25 was assessed by the respondent and paid by the petitioner prior to the determination of the asserted deficiency. The petitioner's claim for the refund of this amount having been rejected by the respondent, the same should now be credited or refunded to the petitioner in accordance with section 284(e) of the Revenue Act of 1926, as amended by section 507 of the Revenue Act of 1928.

Judgment will be entered of no deficiency for 1923 and of an overpayment in income tax for 1923 of $5,628.25.