Cremin v. Commissioner

OPINION.

Marquette:

The petitioner alleges that he is entitled to relief in the following respects: (1) That his net income as determined by the Commissioner for the year 1919 should be reduced by the amount of $4,500 paid to him in that year by the Eastern Torpedo Co. as salary for the year 1918. (2) That his income for the year 1920 should be reduced by the amount of $10,000 paid to him in that year by the Eastern Torpedo Co. as salary for the year 1919, and that said amount of $10,000 should be included in his income for 1919. (3) That the amount included in income for the year 1920, as liquidating dividends received from the Eastern Torpedo Co., should be reduced by the amount of income and profits taxes which be subsequently paid on behalf of the company. (4) That the partnerships of Cremin and Rockwell and Cremin and Jameson, of which petitioner was a member, should be permitted to take deductions for depreciation of drilling equipment for the years 1919, 1920, and 1921, computed at.the rate of 25 per cent, and the petitioner’s distributive share of the income of the partnerships for those years adjusted accordingly.

The record herein discloses that the Commissioner has not determined a deficiency in tax against the petitioner for the year 1919, but that, on the contrary, he has determined that there is an over-assessment for that year. There is nothing in the record to indicate that the overassessment arises from the allowance in part of any claim for abatement of any additional assessment. Therefore, 'under the Revenue Act of 1926, we have no jurisdiction of this proceeding in so far as it relates to the petitioner’s tax liability for the year 1919. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The first questión presented, as to the deficiency for the year 1920, is whether or not the amount of $10,000 paid to the petitioner by the Eastern Torpedo Co. on January 1, 1920, under the circumstances set forth in the findings of fact, should be included in his income for that year. The record discloses that in the year 1919 the corporation apparently attempted to keep its books on the cash receipts and disbursements basis, and that the petitioner’s salary for. the year 1919 was neither accrued on the corporation’s books nor paid to him in that year, although, the corporation had ample funds available for that purpose. The corporation was subsequently permitted by the Commissioner to rewrite its books for the year 1919 on the accrual basis and to file an amended return. On the books as rewritten, the petitioner’s salary for the year 1919 was accrued as of that year and was deducted from gross income in the amended return.

Notwithstanding the fact that the corporation was permitted to rewrite its books on the accrual basis and to accrue and deduct from gross income for the year 1919 the salary in question, we are of the opinion that amounts so accrued and deducted constituted income to the petitioner for the year 1920. We would be impelled to the same conclusion even if the corporation’s books had been originally kept on the accrual basis and the petitioner’s salary for the year 1919 accrued on the books in that year. The petitioner was on the cash receipts and disbursements basis and there is nothing in the record to show that the salary paid to him in 1920 was available to or could have been drawn by him in 1919, although the corporation had ample funds from which payment could have been made. The situation here presented is very similar to that in the Appeal of J. M. Edmunds, 1 B. T. A. 998. The facts in that appeal were that the taxpayer was, during the year 1918, a stockholder and employee in the International Planter’s Corporation. Sometime in December, 1918, the directors of the corporation adopted a resolution authorizing the payment of $20,000 to the taxpayer, as additional compensation for services rendered during the years 1917 and 1918. On December 31, 1918, at its offices in New York, the corporation issued its check in the amount of $20,000 to the taxpayer and charged the same to him on its books of account as of that date. At that time the corporation was solvent and had ample funds in the bank for the payment of checks so issued and charged. The taxpayer kept his books on the cash receipts and disbursements basis. He received the check in January, 1919, and in making his income-tax return for 1919 he included the amount of the check in his gross income for that year. Upon audit of the taxpayer’s income-tax returns for 1918 and 1919, the Commissioner held that the check for $20,000 issued to the taxpayer on December 81, 1918, was constructively received by him on that date. Accordingly, the Commissioner deducted the amount of $20,000 from the taxpayer’s gross income for 1919 and increased his gross income for 1918 in the same amount. The taxpayer appealed to this Board and contended that the amount of $20,000 in question was income to him for the year 1919. His contention was sustained. Upon the authority of our decision in that appeal, we hold that the amount of $10,000 paid to the petitioner herein by the Eastern Torpedo Co. on January 1,1920, as salary for the year 1919, was income for the year 1920.

The second question presented is whether or not the petitioner is entitled to reduce the amount included in his income for the year 1920 as liquidating dividends received by him in that year from the Eastern Torpedo Co. by the amount of additional taxes he subsequently paid for that company. The identical question here presented was before the Board in the Appeal of O. B. Barker, 3 B. T. A. 1180. The facts in that appeal were that the taxpayers were stockholders in the Barker-Jennings Hardware Co. The corporation was dissolved in the year 1917 and its assets distributed to the stockholders. Subsequently, in the year 1923, the stockholders paid additional income and profits taxes, which were assessed against the corporation by the Commissioner. The Board, in holding that each stockholder was entitled to set off against the amount received by him in liquidation of the corporation the portion thereof which he was subsequently required to refund by way of payment of taxes of the corporation, said (p. 1186) :

The payment made by Barker in 1923 on account of the corporate taxes was not an obligation incurred or a loss sustained by him in 1023, but was a repayment by him of corporate assets paid to him to which he had no equitable title. It was in the nature of a repayment of money received under a mistake of fact upon which a trust had been impressed and, to the extent to which the amount received was subject to the trust, was not income. Appeal of Carey Van Fleet, 2 B. T. A. 825. The amounts received by him in liquidation of the corporation should be reduced by the amount returned in payment of taxes of the corporation, the amount so returned being set off against the latest distributions received by the taxpayer.

It follows, from what we have said, that the amount heretofore included in the petitioner’s income for the year 1920, as liquidating dividends received from the Eastern Torpedo Co., should be reduced by the amount of income and profits taxes which he was subsequently required to pay on behalf of the company.

With reference to the amount of the allowances for depreciation of oil-well drilling equipment to which the partnerships of Cremin and Rockwell and Cremin and Jameson are entitled for the years 1920 and 1921, we are satisfied from the evidence that tbe equipment in question fiad a useful life of not to exceed 5 years and that the allowances for depreciation thereof should be computed at the rate of 20 per cent. At the hearing it was agreed by the parties to this proceeding that the bases upon which the depreciation should be computed are the costs shown by reports made by revenue agents, which reports were introduced in evidence at the hearing as Commissioner’s Exhibits A and B.

Judgment will he entered on 15 days’ notice, under Rule 50.