*3017 1. Claim for deduction of cost-price of alcohol liquor distributed among petitioner's customers, disallowed.
2. The profits from the Lincoln Market lease for the years 1919 to 1922, inclusive, were not income to the petitioner.
*139 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amounts of $8,235.79 for the year 1918, $11,300.88 for the year 1919, $2,728.44 for the year 1920, $5,678.45 for the year 1921, and $2,858.55 for the year 1922. The petitioner alleges that the respondent erred: (1) In refusing to allow the petitioner to deduct from gross income as a loss sustained in 1919 the value of certain liquor it was required to remove from its premises in accordance with the national prohibition law, (2) in reducing the petitioner's invested capital for 1919, 1920, and 1921, on account of income and profits taxes paid in those years for prior taxable years, and (3) in including in the petitioner's income for each*3018 of the years 1919 to 1922, inclusive, the profits from a certain lease known as the Lincoln Market lease. The petition in proceeding No. 13725 alleges that the petitioner's income and profits taxes for the years 1911, 1912, 1916, and 1917 are also in controversy.
FINDINGS OF FACT.
The petitioner is a California corporation with its principal office and place of business at San Francisco, and it is and has been since the year 1910 engaged in the general market business, which consists *140 of selling at wholesale and retail meats, poultry, fish, vegetables, creamery products, tobacco and general grocery lines. During the year 1919 and prior thereto it was also engaged in selling alcoholic liquor.
In the latter part of December, 1919, the petitioner had on hand a stock of liquors, the inventory value of which was $15,873.13. The date on which the national prohibition law would become effective was near, and the petitioner was confronted with the necessity of removing from its premises all of its liquor, as required by that law. The petitioner's officers made inquiry of Internal Revenue officers whether its liquors could be put in bond and kept on its premises, and*3019 were informed that such action could not be taken. The petitioner's officers then inquired what they might do with the liquor and were told that they could "either dump it in the sewer or give it away." The petitioner between that date and December 31, 1919, distributed said liquor among its customers without any consideration being paid to it therefor. In its income and profits-tax return for 1919 it deducted the value of said liquor as a loss. The respondent disallowed the deduction.
The petitioner was organized early in the year 1910 by A. M. Lesser and J. H. Lesser, who were and had been for some time engaged in business as partners operating the Lincoln Market at 877 Market Street, San Francisco. On February 1, 1910, they made a written offer to the petitioner to transfer to it "all of the business, assets, counters, fixtures, scales, ice-boxes, cash registers, merchandise, and other property now situate and contained in that market known as "Lincoln Market" at No. 877 Market Street, in the City and County of San Francisco, together with the lease of the premises wherein the said business is being conducted, in consideration of the issuance to A. M. Lesser and J. H. Lesser*3020 of 4,986 shares of the capital stock of Lesser Brothers Co., fully paid up, and in the following proportions for each of said persons, to wit: 2,992 shares to said A. M. Lesser and 1,994 shares to J. H. Lesser. The offer was accepted by the petitioner on February 1, 1910, and the shares of the petitioner's capital stock were issued to A. M. Lesser and J. H. Lesser in the amounts stated.
Among the assets of the business conducted by A. M. and J. H. Lesser which they offered to convey to the petitioner as aforesaid was a lease on the Lincoln Market premises which had been entered into by the Lincoln Realty Co. as lessors, and A. M. and J. H. Lesser as lessees, on August 27, 1909, for a term of nine years and eight months, beginning on October 8, 1909, and ending June 7, 1919. The lease also contained the following provision:
The parties of the second part do hereby covenant and agree with the party of the first part that they will not assign this lease nor any interest therein, *141 without the consent in writing of the lessor first being had and obtained; but said lessor hereby agrees that the lessees may hereafter at any time sublet the demised premises or any part thereof*3021 unto a corporation in which the lessees shall hold at least half of the stock; and, neither this lease nor any interest therein shall be assignable by the lessees or their assigns, without the consent in writing of the lessor first had and obtained, and that neither this lease nor any interest therein shall be assignable or transferable in proceeding in execution against the lessees or either of them of in voluntary or involuntary proceedings, in bankruptcy or insolvency, taken by or against the lessees, or either of them, nor in any other manner whatsoever by operation of the law, without such written consent of the lessor.
The lease also provided that upon its expiration the lessees would be entitled to renew it for a period of five years if they so desired.
Upon the acceptance by the petitioner of the offer made to it by A. M. Lesser and J. H. Lesser as above set forth, they transferred to the petitioner all of the assets of their business known as the Lincoln Market, but no formal assignment was ever made of the lease mentioned.
In the latter part of the year 1918, J. H. Lesser sold his share of the petitioner's capital stock to A. M. Lesser, and from that time on A. M. *3022 Lesser owned 4,897 shares of a total of 5,000 shares outstanding. The sale of J. H. Lesser's stock was considered by him and A. M. Lesser as disposing of any interest J. H. Lesser might have in the Lincoln Market lease.
Upon the expiration of the original Lincoln Market lease on June 7, 1919, negotiations were entered into with the Lincoln Realty Co. with a view to having a new lease or a renewal of the old one entered into with the petitioner as lessee. The Lincoln Realty Co. refused to lease the premises to the petitioner, but did renew or extend the original lease for a term of five years, beginning June 8, 1919, A. M. Lesser and J. H. Lesser being the lessees named in the renewal or extension.
The petitioner conducted a market business on the premises known as the Lincoln Market, using such portions thereof as were necessary for that purpose, and the remainder of the premises was sublet to outsiders. The petitioner paid to the lessor of the premises, the Lincoln Realty Co., the rental under the lease between that company and A. M. Lesser and J. H. Lesser, and also paid all incidental expenses, such as light, insurance, etc., and collected the rentals for the portions of*3023 the premises that were sublet.
Between January 1, 1919, and June 8, 1919, the date the original lease was renewed, and during the years prior to 1919, the profits from the Lincoln Market lease were handled on the petitioner's books as follows: They were credited to profit and loss and then closed out to the general surplus.
*142 The profits from the Lincoln Market lease for the years 1919 to 1922, inclusive, were as follows:
| 1919 | $2,564.78 |
| 1920 | 11,605.50 |
| 1921 | 14,690.54 |
| 1922 | 17,682.57 |
The record does not disclose the manner in which the profits for 1919, 1920, and 1921 were handled on petitioner's books, but it does show that they were reported by A. M. Lesser as income in his personal returns for those years. The profit for 1922 was credited on the petitioner's books as follows:
| Surplus | $7,000.00 |
| A. M. Lesser's personal account | 10,862.57 |
The amount credited to A. M. Lesser's personal account was reported by him in his personal income-tax return for 1922.
The minutes of the annual meeting of the petitioner's board of directors, held on February 21, 1923, showed the following:
The financial statement of the company was*3024 presented and considered by the directors and the same was ordered placed on file.
Mr. A. M. Lesser then stated that, as the financial statement disclosed, the year 1922 had proved very unfavorable for the corporation. This he stated was largely due to unstable prices of commidities and the high wages commanded by labor. He also stated that due to illness he had not been able to devote as much of his time and attention to the business as in previous years, and in view of the foregoing facts he offered to waive any salary from the corporation for the year 1922 and also to reduce the rental to the premises known as the "Lincoln Market" which he rents to the corporation by the amount of Seven Thousand Dollars, ($7,000.00).
On motion duly made, seconded, and carried, the above offer made by Mr. A. M. Lesser was accepted and the treasurer of the corporation was directed to make settlement accordingly.
A. M. Lesser maintained no personal books of account, all of his personal business being handled on the books of the corporation by appropriate charges and credits to his personal account.
The respondent upon audit of the petitioner's income and profits-tax returns for the years*3025 1919 to 1922, inclusive, added to income the amount of the profits derived from the Lincoln Market lease as follows:
| 1919 | $2,564.78 |
| 1920 | 11,605.50 |
| 1921 | 14,690.54 |
| 1922 | 10,682.57 |
disallowed the deduction of $15,873.13 claimed for 1919 as heretofore set forth, reduced the petitioner's invested capital for 1919, 1920, and 1921 on account of income and profits taxes paid in those years for prior years, prorated to the due dates thereof, and determined *143 deficiencies in tax in the amounts of $11,300.88 for the year 1919, $2,858.55 for the year 1920, $5,678.45 for the year 1921, and $2,858.55 for the year 1922.
OPINION.
MARQUETTE: The petitioner alleges in the petition filed in proceeding No. 13725, that its tax liability for the years 1911, 1912, 1916, 1917, 1918, 1919, and 1920, are in controversy. The two other proceedings involve the petitioner's tax liability for 1921 and 1922.
This Board has no jurisdiction to determine the petitioner's tax liability for the years 1911 and 1912. Section 283(a) and (b), Revenue Act of 1926. See also, *3026 . Proceeding No. 13725, in so far as it relates to those years, is dismissed. The record shows that for the years 1916 and 1917 the respondent has determined overassessments, and they do not appear to be due to the disallowance in whole or in part of a claim for abatement. We therefore have no jurisdiction as to those years. . The respondent has determined a deficiency for the year 1918, but the petitioner has alleged no error with respect thereto and the respondent's determination is therefore sustained.
The first issue is whether the respondent erred in reducing the petitioner's invested capital for the years 1919, 1920, and 1921, on account of income and profits taxes paid in those years for prior taxable years. The respondent's action in this respect is in conformity to law and the regulations promulgated thereunder and must be approved. Section 1207, Revenue Act of 1926; .
The second issue raised by the pleadings is whether the petitioner, in computing his net income for the year 1919, is entitled*3027 to deduct as a loss the cost of the liquor it disposed of under the circumstances set forth in the findings of fact. In the case of , the facts were that the taxpayer in June, 1919, distributed among his friends alcoholic liquors from his bar which had cost him $6,001.27, his reason for doing so being that because of the prohibition law he could not sell them. He claimed the cost price of the liquor so distributed as a deduction from income for either the year 1919 or 1920. The Commissioner refused to allow the deduction, and on appeal to this Board the action of the Commissioner was sustained. The facts of that case are almost identical with the facts of this one, and we consider the decision therein decisive and controlling here. The petitioner's claim to the deduction in question is therefore denied.
*144 The only other question presented by the record is whether the profits of the Lincoln Market lease for the years 1919 to 1921, inclusive, were income to the petitioner or to A. M. Lesser. Under the evidence we are of opinion that the lease in question belonged to A. M. Lesser or to him and J. H. Lesser, jointly, *3028 and that neither the income nor the profits therefrom belonged to the petitioner.
The evidence as to this issue shows that J. H. and A. M. Lesser entered into the lease in 1909 and that it provided that it could not be assigned without the consent of the lessor; that J. H. and A. M. Lesser offered to convey all the assets of their business, including the lease, to the petitioner in consideration of the issuance to them of the petitioner's capital stock; that the business was conveyed to the petitioner, except the lease, and that apparently the petitioner acquiesced in the failure to transfer the lease and issued its stock notwithstanding such failure. When that lease expired the lessor refused to make a new lease or to renew the old one with the petitioner as lessee, but did renew or extend the old lease to J. H. and A. M. Lesser. It appears that A. M. Lesser considered the lease as his property and that he reported the profits therefrom in 1919, 1920, and 1921, as his personal income and at least a part of the profits in 1922. The lease was never assigned to the petitioner and was at all times on its face the property of the Lessers, and it appears from the minutes of the corporation*3029 set forth in the findings of fact that the petitioner's officers considered that the petitioner was a sublessee and not the owner of the lease. We therefore hold that no part of the profits arising therefrom in the years 1919 to 1922, inclusive, should be included in the petitioner's income for those years.
As to whether A. M. Lesser reported the full amount of the profits from the lease in 1922, or whether he could waive any part of the profits for that year in favor of the petitioner, we decline to express any opinion, as that matter is not before us.
Judgment will be entered under Rule 50.