*1795 1. The decedent was manager of an insurance "Exchange" and through powers of attorney issued to him by subscribers thereof he was authorized to deduct 30 per cent of all moneys received by said Exchange in consideration of his defraying, with certain exceptions, all expenses incident to conducting the Exchange. Because of the reserve requirements of the State insurance departments, the practice of paying dividends to its subscribers and certain agreements entered into with the advisory committee of said Exchange and understandings had with and instructions from the insurance department of the State of Pennsylvania, he received only 15 per cent in 1918 and 20 per cent in the succeeding years. Held, although 30 per cent of premiums was set aside in each of the taxable years, the undrawn amounts did not constitute income to the decedent, either actually or constructively, during the years in controversy.
2. The statute of limitations has not run against assessment and collection of the proposed deficiencies for the years 1918 and 1919.
3. The respondent erred in failing to allow the loss sustained, and claimed as deduction in the computation of net income for 1923, because*1796 of the substantial worthlessness of German marks.
4. Amounts received by the decedent during the taxable years to reimburse him for advances made to the Exchange do not constitute taxable income.
5. The respondent's action in including in the decedent's net income in the computation of the deficiency for 1920 the sum of $25,000 which he received, but failed to include in his taxable income for that year, is approved.
*758 These proceedings, consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes of $64,916.91, $70,874.37, and $70,783.84 proposed against Bruce Dodson during his lifetime for the years 1918, 1919, and 1920, respectively, and deficiencies of $22,627.15, $988.88, and $23,151.26 for the years 1921, 1922, and 1923, respectively, proposed against the estate of Dodson subsequent to his death.
The deficiency notice covering the years 1918, 1919, and 1920 was mailed to Bruce Dodson on July 27, 1925, and the petition on appeal to this Board was filed in his name. *1797 The deficiency notice covering the years 1921 to 1923, inclusive, was mailed to the "Estate of Bruce Dodson" on December 22, 1926. At the hearing of this proceeding counsel for the petitioner suggested the death of Dodson on August 22, 1926, and moved to consolidate the two causes for hearing and decision. Having suggested the death of Dodson and having appeared as administrator in his stead, we have substituted as petitioner Charles M. Howell, administrator of the estate of Bruce Dodson, as indicated by the title of this consolidated proceeding.
The errors urged by the petitioner alleged to have been committed by the respondent and affirmative allegations set forth by the respondent are:
1. The respondent's action in adding to the gross income of the petitioner $100,326.68, $101,125, $113,685.75, $44,392.35, and $12,751.03 for the years 1918, 1919, 1920, 1921, and 1923, respectively, representing commissions that Dodson would have been entitled to receive from his principals in payment for services if the principals had possessed funds out of which the same could be paid but which for lack of funds were not paid either actually or constructively, and thereby disregarding*1798 contracts entered into and rulings of State administrative officers prior to the taxable year;
2. That the statute of limitations had run against the assessment and collection of the alleged deficiency for the years 1918 and 1919;
3. That the alleged deficiencies are not assessed or attempted to be assessed upon a return for the years in question, or any of the *759 same made by the petitioner or by the respondent or any collector or any deputy collector as required by section 3176, Revised Statutes, as amended and adopted in the Revenue Act of 1918, and in force under the Acts of 1924 and 1926;
4. That neither the estate nor heirs of Bruce Dodson are assessable for alleged deficiencies in the taxes owed or assessable against Dodson if living, if any;
5. In deducting the sum of $11,931.77 from the net income reported by Dodson in 1922 because said sum was actually received by Dodson in that year;
6. Failure of respondent to allow as a deduction for 1923 the sum of $12,239.98 as a loss from German marks purchased in the years 1921 and 1922, which German marks in and for the year 1923 were worthless; and
7. That section 280 of the Revenue Act of 1926, under which*1799 the respondent is acting, is in conflict with the Constitution and, therefore, void because it deprives the petitioners of the right of trial by jury and because in conflict with section 1 of Article III of the Constitution in that it undertakes to rest judicial power in the respondent and results in denying the petitioners due process of law within the meaning of the Fifth Amendment to the Constitution.
And the respondent by way of affirmative allegations in his answer alleges:
8. That in the years 1920 and 1921 Dodson deducted from the moneys received by him for credit to the subscriber's account 5 per cent thereof in accordance with the provision relative thereto set forth in the subscribers' powers of attorney, but that of this 5 per cent the sums of $28,590.06 and $33,045.94 were not expended by him to provide by insurance or guaranty for the payment of excess losses, but were paid by him as attorney in fact to himself individually out of funds of the Exchange on or about May 20, 1920, and April 22, 1921, respectively, and that said sums of $28,590.06 and $33,045.94 were taxable income to Dodson in the years 1920 and 1921; and
9. That in 1920 Dodson as attorney in fact*1800 paid to himself or for his use individually out of the funds of the Exchange on or about January 1, 1920, the sum of $25,000, which said amount was not returned by Dodson as income during that year nor included by the respondent in the amount of the deficiency stated in the sixty-day letter covering said year, and that the amount constitutes taxable income to Dodson for that year.
FINDINGS OF FACT.
Dodson prior to his death on August 22, 1926, was a resident of Kansas City, Mo., and was manager of the Casualty Reciprocal Exchange (hereinafter referred to as the Exchange), an organization engaged in the insurance business in the city aforesaid. Charles M. *760 Howell was duly appointed administrator of his estate on March 2, 1927.
The Exchange was under the active management of Dodson himself, who received from each subscriber, of which there were from 500 to 1,000 during the period here in controversy, a power of attorney in the following or substantially the following terms:
The offices of Bruce Dodson, Kansas City, Mo., having been selected as a place at which to reciprocally exchange indemnity, such offices being designated Reciprocal Exchange, the undersigned, *1801 as a subscriber at said Reciprocal Exchange hereby appoints said Bruce Dodson, attorney for us and in our name, place and stead to exchange indemnity with subscribers at said "Reciprocal Exchange":
To make, issue, change, modify, re-insure or cancel contracts therefor containing such terms, clauses, conditions, warranties and agreements as he shall deem best; to subscribe such contracts with and in our name, provided, however, that the amount exchanged for us shall in no case exceed the amount hereinafter subscribed by us; to demand, collect, receive and receipt for all moneys due us or for credit to our account as a subscriber; to give, waive or receive all notices or proofs of loss; to adjust and settle all losses and claims under such contracts or other evidences of indemnity; to perform or waive all agreements or stipulations of any such contracts; to accept service of process and appear for us in any suits, actions or proceedings and being, prosecute, defend, compromise, settle or adjust same; to perform every act not herein specially mentioned that we could ourselves do in relation to any contract hereby authorized; with power of substitution by said attorney, substitute selected*1802 to be approved by the Advisory Committee (hereinafter provided for).
The intent and purpose of this instrument is to clothe our said attorney with the power necessary to enable us, through him, to exchange indemnity with other subscribers; Provided, however, that said attorney shall have no power to make us jointly liable with any other subscriber; and every liability of whatever nature which he is authorized to incur for us hereunder is to be in every case several and not joint.
There shall be no joint funds, but a separate individual account shall be kept by our attorney with us and with each subscriber; said account to be open to our inspection.
In consideration of his defraying all expenses incident to conducting the exchange of indemnity herein authorized, except taxes, legal, preventive and Advisory Committee expense, and including compensation for his services, our said attorney is hereby authorized to deduct thirty per cent of all moneys received by him for credit to our account.
AN ADVISORY COMMITTEE, consisting of five or more subscribers, who to act shall be and continue in good standing, shall be selected by the subscribers. In choosing said Committee our attorney*1803 is authorized to ask subscribers whom they desire to serve as such Committee, and the requisite number selected by the largest number of subscribers shall constitute such Committee; said Committee shall have power to fill vacancies and shall serve until their successors are chosen.
Said Committee may adopt such rules and regulations, not inconsistent herewith, for the conduct of Reciprocal Exchange and our said attorney as they shall deem best. The funds of subscribers shall be deposited in banks or invested in securities, approved by the Advisory Committee. Disbursements from funds of subscribers shall be by check, signed by our attorney and countersigned *761 by a member of the Advisory Committee, or by a bank or Trust Company approved by said Committee. After the adjustment or compromise of any loss or claim by our attorney, as above provided, the Advisory Committee and attorney are hereby empowered and instructed to pay our portion of such loss or claim.
The Advisory Committee shall reserve not to exceed one-half of our average savings as net surplus until such surplus shall equal the sum of our annual deposits, all other savings to be returned to us annually in*1804 cash.
We hereby subscribe, subject to the call of the Advisory Committee, a sum equal to our annual deposits to pay excess losses incurred under this contract. Our said attorney is authorized to provide by insurance or guaranty for the payment of said excess losses, and in payment for such insurance or guaranty to deduct five per cent of all moneys received by him for credit to our account.
This power of attorney is strictly limited to the use and purposes herein expressed and to no other purpose, and may be terminated at any time by the undersigned or by the attorney, by either giving to the other ten days' notice in writing; and thereupon our attorney shall liquidate our account and return to us our net surplus.
Although the foregoing power of attorney provides that the advisory committee reserve not to exceed one-half of the average savings as net surplus, that amount was never reserved, since 20 per cent was practically all of the savings earned, and notwithstanding the said power of attorney provides that the subscribers, subject to the call of the advisory committee, subscribe to a sum equal to their annual deposits to pay excess losses, no such call was ever made by*1805 the advisory committee.
The advisory committee referred to in the foregoing power of attorney was composed of five members during the years in question. Although Dodson himself was not a member thereof, meetings of the said committee were called by him at least once each year except that during the years 1918 to 1923 meetings were held more frequently; however, no records were kept of the business conducted thereat. Premium rates and rates of return savings on expired contracts were discussed and fixed at the committee meetings. Dodson was bonded for $50,000 in 1918 and $100,000 in later years in favor of the advisory committee as trustee for the subscribers at the Exchange.
The Exchange, mutual in character, and usually referred to as a participating company, sold workmen's compensation and liability insurance to its subscribers and it was licensed to do business in California, Colorado, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia, Wisconsin, Alabama, Arkansas, South Carolina and in the District of Columbia, to each of which it made an annual report.
The premiums paid*1806 by subscribers were divided into three parts: the subscriber was charged with the entire premium in the books of account and 65 per cent thereof was credited to the underwriting account, 5 per cent to an account entitled "Reserve No. 1," and 30 per *762 cent to an account entitled "Reserve No. 2." At the time the policy was written an account was set up in the books for each subscriber in which he was charged with the full amount of the premium. At the same time a credit was made on the underwriting or reverse side of the subscriber's account with 65 per cent of the premium, and the remaining 35 per cent was credited 5 per cent to Reserve No. 1 and 30 per cent to Reserve No. 2. In other words, the subscriber's ledger had two accounts, one with the subscriber, showing the underwriting result, and one account showing the amounts owing and paid by him. Some subscribers paid their premiums immediately upon receipt of invoice therefor, while others took thirty days within which to remit. Excess reserves Nos. 1 and 2 are analogous to the premium account of regular stock companies.
The amounts of premiums written during the years 1918 to 1923. inclusive, were:
| 1918 | $636,049.30 |
| 1919 | 828,385.15 |
| 1920 | 936,324.22 |
| 1921 | 901,914.59 |
| 1922 | 847,354.07 |
| 1923 | 857,668.03 |
*1807 Prior to 1919, at which time a change was effected, excess reserve account No. 2 bore the name of Dodson. The credits to that account represent 30 per cent of the premium deposits by subscribers and the debits thereto represent cash payments to Dodson, the attorney in fact, pursuant to the terms of powers of attorney granted by each subscriber of the Exchange. Interest upon bank deposits and security investments was also credited to that account in pro rata amounts based upon the balances in the underwriting and reserve accounts. The interest credits were not flat rates upon account balances. During the years 1912 to 1915, inclusive, Dodson drew the stipulated sum of 30 per cent provided for in said powers of attorney annually, but because of circumstances, hereinafter related, during the years 1917 to 1921, the Exchange did not pay him the entire 30 per cent, but only approximately 15 per cent in 1918, and 20 per cent in the succeeding years.
The following are the amounts of debits to or withdrawals from and credits to reserve account No. 2 for the years 1918 to 1923, inclusive:
| Year | Debits or withdrawals | Credits |
| 1918 | $96,718.59 | $197,045.27 |
| 1919 | 114,865.72 | 215,891.23 |
| 1920 | 231,142.45 | 319,828.20 |
| 1921 | 307,853.03 | 352,245.38 |
| 1922 | 350,684.14 | 338,752.37 |
| 1923 | 307,684.66 | 320,435.69 |
*1808 *763 The following are the balances appearing in excess reserve No. 2 account at January 1 of each of the years 1918 to 1924, inclusive:
| 1918 | $75,690.50 |
| 1919 | 176,017.18 |
| 1920 | 277,042.69 |
| 1921 | 365,728.44 |
| 1922 | 410,120.79 |
| 1923 | 398,189.02 |
| 1924 | 410,940.05 |
The subscribers authorized the attorney in fact to provide by insurance or guaranty for the payment of excess losses and in payment therefor to deduct 5 per cent of all moneys received by him for credit to their account. The excess reserve No. 1 account, which has been hereinbefore referred to, was credited with the said 5 per cent, representing a reserve for reinsurance, and was charged with excess losses.
Dodson carried an account in his personal ledger entitled "Casualty Reciprocal Exchange, Excess Reserve No. 2," which was debited with the amounts credited by the Exchange in its excess reserve No. 2 account and the balances appearing in his personal account agree with the balances appearing on the books of the Exchange at January 1 of each of the years 1918 to 1924 hereinabove listed. There was also carried in Dodson's personal ledger an account entitled "Casualty Reciprocal Exchange (maximum*1809 commission if earned)." The amounts payable to Dodson from the Exchange were debited by journal entry to his personal excess reserve No. 2 account and the maximum commission if earned account was credited with like amounts. As payments were made to Dodson by the Exchange they were credited upon Dodson's excess reserve No. 2 account, and a debit for a like amount was made to the maximum commission if earned account. The entries appearing in the maximum commission if earned account differed from the excess reserve No. 2 account only in the amounts of interest charged in the latter account, but were not carried to the former. Neither of those accounts was passed into Dodson's income or net worth account - they were finally closed on December 31, 1923, by charging one account against the other, and thereafter no such accounts were kept.
It was an established policy of the Exchange, and it was so represented to subscribers, to declare and pay, or credit, to its subscribers an amount commonly known as return savings. During the earlier years of its existence those savings amounted to 25 per cent of premiums but at some time prior to 1918 the amount was reduced to 20 per cent, at which*1810 figure it remained during the years here in question. When the policy of a subscriber expired the subscriber automatically received 20 per cent, either in cash or credit upon the renewal premiums thereafter payable. If the policyholder closed *764 the account a check was sent to him for any savings shown therein at the time he ceased to be a policyholder either by expiration of the policy date or cancellation under the terms of the power of attorney and policy contract. As losses occurred the subscribers' accounts were charged with a pro rata portion thereof up to a maximum of 45 per cent.
In or about 1917, and during the years thereafter, the question of administration expenses to be paid to the attorney in fact was raised at meetings of the advisory committee in connection with the discussion of the requirements by the various States, at which it was shown to the said committee that the amount of deposits less the 20 per cent savings to subscribers would not be sufficient to meet reserve requirements, especially after having received a certain notice, hereinafter discussed, from the Pennsylvania Insurance Department that the expenses be limited to certain amounts. At*1811 those meetings it was agreed that Dodson, as attorney in fact, would not take his full commission but would take only that part necessary to pay the actual expenses of the Exchange, and that a portion would be left on deposit for a period of three years, and that after the said period of three years had elapsed, if none of the amount remaining on deposit was required to maintain the reserves, it could be withdrawn by Dodson. As a result of these said agreements Dodson withdrew approximately 15 per cent of premiums in 1918 and 20 per cent in the succeeding years.
On October 3, 1916, the Pennsylvania Insurance Department requested certain information of the Exchange with respect to total medical costs of compensation accidents, number and total medical costs of noncompensation accidents, particularly as those data related to expenses under the Pennsylvania Workmen's Compensation Act of 1915, and on November 25, 1916, that department invited the Exchange to meet its representative to discuss the relationship between rates and dividends proposed to be paid by the Exchange to policyholders in the State of Pennsylvania. The insurance department said in its invitation to the Exchange*1812 that:
* * * The position of the Department is that an adequate rate for a participating carrier, the greater part of whose business is written in other states, must be a rate sufficient to cover the average pure premium in this State, plus the expense loading of that carrier, plus whatever dividend it pays to policyholders. Inasmuch as participating carriers doing a business in more than one state commonly desire to maintain a level rate of dividends in all states, it is evident that their basis rate in Pennsylvania must be adjusted to such rate of dividend.
On January 3, 1917, the Exchange received a communication from the Pennsylvania Insurance Department, entitled Compensation Circular MF-6, reading, in so far as applicable here, as follows:
*765 Act 341 contemplates compensation insurance rates which are adequate to meet compensation benefits after the payment of all management and acquisition costs, and in the case of participating insurers, after the payment of dividends to policyholders. In respect to participating insurers which operate in several states and of whose total compensation premiums Pennsylvania furnishes but a minor fraction, an adequate rate must*1813 be taken to comprise the following elements:
(a) The average pure premium ratio upon which Pennsylvania basis rates are calculated, to wit, 57 1/2% of premium.
(b) The management expense ratio developed by the particular participating insurer concerned upon its whole business over a sufficient period of time to give a fair indication of probable expense ratio.
(c) The dividends actually paid or to be paid on Pennsylvania compensation policies.
Inasmuch as the outstanding liabilities included in the present pure premiums are estimated at gross rather than discounted values, and inasmuch as the investment income from claim and unearned premium reserves affords the only loading for stock company profits in the present basis rates, it is proper to deduct investment income from these two sources from the management expenses of participating carriers admitted from other states. This would place these carriers upon the same footing as participating carriers organized under Act 342. Total claim and unearned premium reserves should normally in the long run amount to about 100% of one annual premium income, and 3% may be taken as a conservative investment income thereon. Any allowance*1814 for investment income from this source will of course be discontinued whenever reserves are put on a discount basis.
From these general principles it follows that the dividend rates of participating compensation insurance carriers admitted from other states will not be uniform upon the same basis rate.
* * *
The Insurance Commissioner takes judicial notice that the management expenses of the Casualty Reciprocal Exchange, the Employers' Indemnity Corporation, the Employers' Indemnity Exchange and the Utilities Indemnity Exchange, are 30% of premium income, exclusive of claim adjustment cost. Assuming that the investment income will substantially off-set the claim adjustment expenses of these insurers, it appears from the assumptions herein-before set forth that the insurers above mentioned will have available for the payment of dividends not more than 12 1/2% of premium income in this State. It is directed, therefore, that the dividends of any of these insurers on Pennsylvania compensation policies, the effective date of which is on or after January 1st 1917, and which are issued at the rates approved by the Insurance Commissioner for all compensation insurers, shall not exceed*1815 12 1/2%.
Under date of January 27, 1917, Dodson subscribed and swore to the following, which was filed with the Pennsylvania Insurance Department at or about that time:
I, Bruce Dodson, Attorney-in-Fact for Subscribers at CASUALTY RECIPROCAL EXCHANGE, Kansas City, Missouri, do hereby assert that not more than fifteen percent (15%) of the deposit premiums received will be used for expenses during the year 1917, and the financial statement, books and records of the Exchange, as of January 1st, 1918, will verify this statement.
*766 Under date of February 28, 1917, the Pennsylvania Insurance Department communicated the following to the Exchange:
When Compensation Circular MF-6 was issued on January 3d, 1917, the information in the possession of the Insurance Department indicated that the expense loading of the Casualty Reciprocal Exchange, by virtue of the contract between the Exchange and the Attorney-in-Fact, was 30%.
Under date of January 27th a sworn statement was filed in this office to the effect that the contract between the Exchange and the Attorney-in-Fact limits the management expenses for the year 1917 to 15% of premium.
In view of this modified contract, *1816 and of the limitation upon management expenses contained therein, so much of Compensation Circular MF-6 as relates to the Casualty Reciprocal Exchange is hereby withdrawn, and it is directed that the dividends of the Casualty Reciprocal Exchange upon policies the effective date of which is on or after January 1st, 1917, and which are issued at the rates approved by the Insurance Commissioner for all compensation insurers, shall not exceed 25%.
On October 8, 1917, the Pennsylvania Insurance Department requested all participating insurance companies licensed to write workmen's compensation insurance in the State of Pennsylvania to meet its representative for the purpose of considering rules governing the payment of dividends under Acts 341 and 342 of the laws of 1915.
Under date of November 2, 1917, the Pennsylvania Insurance Department communicated the following to the Exchange by means of Compensation Circular MF-8:
RE: RATES AND DIVIDENDS OF PARTICIPATING INSURERS UNDER THE WORKMEN'S COMPENSATION ACT, 1915.
After public hearing in the city of Philadelphia on October 19th, the Insurance Department has reached the following conclusions on the above captioned matter: Any insurance*1817 corporation, mutual association or company which desires a modification of the action herein set forth, should file request for hearing not later than November 15th, 1917.
* * *
(7) Casualty Reciprocal Exchange.
Employers' Indemnity Corporation.
The compensation insurance rates approved for stock companies will be approved for these companies and exchanges; provided that no dividend is paid upon any Pennsylvania workmen's compensation policy expiring subsequent to December 31st, 1917, until further audit. The Insurance Department will make further determination after receipt of Schedule W for 1917, and of the Annual Statements for 1917.
Under date of November 27, 1917, Dodson subscribed and swore to the following, which was filed with the Pennsylvania Insurance Department at or about that time:
I, Bruce Dodson, Attorney-in-Fact for Subscribers at Casualty Reciprocal Exchange, Kansas City, Missouri, do hereby assert that not more than twenty per cent (20%) of the deposit premiums received on Workmen's Compensation *767 contracts will be used for expenses during the year 1918, and the financial statement, books and records of the exchange, as of January 1st, 1919, *1818 will verify this statement.
Under date of December 3, 1917, the Pennsylvania Insurance Department wrote Dodson, as attorney in fact for the Exchange, the following.
Referring to Compensation Circular MF-8, issued by this Department November 2d, 1917 Bruce Dodson, Attorney-in-Fact for the Casualty Reciprocal Exchange, has filed a sworn statement that not more than 20 per cent of the premium received on workmen's compensation contracts in Pennsylvania in 1918 will be used for expenses.
A dividend to policyholders of not to exceed 20 per cent of premiums will therefore be approved upon compensation policies effective in 1918.
On October 30, 1919, the Pennsylvania Insurance Department, by Compensation Circular MF-9, directed a communication to all participating insurance carriers on the subject of "rates and dividends of participating insurers under the Workmen's Compensation Act for the year 1920," in which it stated in part:
Manual rates are approved, providing that no dividend in excess of 20% of earned premium shall be paid upon any policy expiring on or before December 31st, 1920, and provided further that the agreement of the attorney-in-fact with the subscribers, governing*1819 the expenses chargeable to the Exchange, which agreement was dated November 27th, 1917, and is on file with the Insurance Department of Pennsylvania, shall remain in full force and effect.
On March 8, 1922, the Pennsylvania Insurance Department, referring to Compensation Circular MF-9, hereinabove discussed, advised the Exchange that under the insurance laws of Pennsylvania no mutual or participating insurance carrier under the Workmen's Compensation Act should pay any dividends or make any distribution of surplus to the policyholders without written approval of the insurance commissioner upon application made by the Exchange, and the said communication stated:
You are therefore directed to make application to the Insurance Commissioner for approval of any dividends which you may desire to pay on Pennsylvania Workmen's Compensation policies issued in the year 1921. Such approval must be obtained before any dividend can be paid.
On March 23, 1922, the Exchange, through Dodson, wrote the Pennsylvania Insurance Department the following communication:
This office, a Reciprocal Exchange, respectfully requests that the conditions named in Circular MF-9, dated October 30, 1919, be*1820 continued with respect to return of unused premiums by it, to-wit:
CASUALTY RECIPROCAL EXCHANGE
Manual rates are approved, providing that no dividend in excess of 20% of earned premium shall be paid upon any policy expiring on or before December 31, 1920, and providing further that the agreement of the *768 Attorney in Fact with the subscribers, governing the expenses chargeable to the Exchange, which agreement was dated November 27th, 1917 and is on file with the Insurance Department of Pennsylvania, shall remain in full force and effect.
The Manager of the Casualty Reciprocal Exchange hereby certifies that the agreement dated November 27th, 1917, as on file with the Insurance Department of Pennsylvania, is and shall remain in full force and effect.
On April 3, 1922, the Pennsylvania Insurance Department wrote to Charles M. Howell advising that the agreement made with the Exchange was still in effect and that a dividend of 20 per cent of premiums might continue to be paid without further specific approval, and stating further that circular letter MF-10 was intended to call the attention of companies who had failed to do so to the need of obtaining specific approval*1821 for the payment of dividends.
On June 17, 1924, the Pennsylvania Insurance Department called attention of the Exchange to the fact that no application had been filed by it for approval of dividends on policies issued during 1922 and 1923, and requested that it make no distribution of dividends for those years until such a statement had been filed and approved by the insurance commissioner.
The Exchange made annual reports to each of the States in which it was licensed to do business. It made detailed reports to the State of Wisconsin for each of the years ending December 31, 1918, 1919, 1920, 1921, 1922, and 1923, which included, among other things, a statement of income and disbursements, assets and liabilities, analysis of surplus, schedule of bonds and stocks acquired during the year, and the required schedule "P" showing in detail the computation of reserve for unpaid liability and compensation losses as of December 31 of each year. All of those reports were filed under oath of the manager in behalf of the Exchange. The schedule P reserve just referred to was required by State laws and was determined from records of the Exchange to be an amount sufficient to retire outstanding*1822 loss claims. The amount so determined was carried as a liability in the company's books. Prior to 1918 the reserve was calculated by taking 60 per cent; in 1918, 62 1/2 per cent, and in the years subsequent thereto, 65 per cent of the earned premiums for the three years immediately preceding the date of the report, which was December 31 of each year. The amount so determined was augmented by reserves calculated upon the actual case basis for all unsettled claims arising in the previous years. By the operation of this plan of reserve the fourth year succeeding the reporting date was placed upon a case basis, that is, instead of using the percentage hereinabove referred to, the outstanding cases or unsettled claims would be set up at the actual estimated cost at the time the report was prepared, which might or might not release some of the reserve carried for a particular year on the percentage *769 basis during the three-year period. It so happened that the operation of the said reserve did release considerable amounts each year. When the reserve for 1917 was released in 1921 there were sufficient funds to permit Dodson to be paid the 15 per cent of the 1917 premiums which*1823 had been withheld from him because of the circumstances hereinbefore related. In 1922 the 1918 reserve was released and the premiums withheld from Dodson in that year were then paid, and also in 1923 the release of the 1919 reserves permitted the payment to him of the 10 per cent withheld in 1919. In addition to the said schedule P reserve the Exchange carried an account among its liabilities equal to 100 per cent of unearned premiums, which was also a requirement of the State of Wisconsin. It also carried surplus of $200,000 as required by the State of Virginia.
The following statements show the admitted assets, loss reserve requirements, amount appropriated for payment of accrued savings to subscribers for each of the years 1918 to 1923, inclusive, and the resulting deficit which would have occurred had Dodson withdrawn from excess reserve No. 2 the total amount of administration expenses authorized by powers of attorney issued to him by subscribers of the Exchange:
| 1918 | 1919 | 1920 | |
| Admitted assets | $676,736.40 | $931,303.31 | $1,093,380.08 |
| Less other | |||
| liabilities | 4,075.84 | ||
| 672,660.56 | 931,903.31 | 1,093,380.08 | |
| Statutory | |||
| requirements: | |||
| Loss reserve | 370,797.00 | 555,770.00 | 620,771.00 |
| Unearned premium | |||
| reserve | 145,846.11 | 156,096.74 | 147,735.66 |
| Surplus requirement | |||
| Total | 516,643.11 | 711,866.74 | 768,506.66 |
| 156,017.45 | 220,036.57 | 324,873.42 | |
| Reserve necessary | |||
| to pay accrued | |||
| savings | 149,826.31 | 179,643.79 | 197,690.66 |
| Available for | |||
| other purposes | 6,191.14 | 40,392.78 | 127,182.76 |
| Deduct excess | |||
| reserve No. 2 | 176,017.18 | 277,042.69 | 365,728.44 |
| Deficit | 169,826.04 | 236,649.91 | 238,545.68 |
*1824 In preparing his return for 1918 substantially 15 per cent of premiums written in that year, and substantially 20 per cent in the years 1919 to 1922, inclusive, and in 1923, 20 per cent of the premiums collected were included in gross income. The amounts received by Dodson because of the release of the reserves were reported by him in the years in which received.
Dodson filed his individual income-tax return for the calendar year 1918 on or about May 5, 1919, and his 1919 individual income-tax return on or about April 15, 1920.
*770 Under date of January 4, 1924, Dodson and the respondent entered into the following consent in writing, which was approved by the latter on January 31, 1924:
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921 J. Bruce Dodson of Kansas City, Mo., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Bruce Dodson for the year of 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under*1825 Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations.
Under date of March 3, 1924, Dodson and the respondent entered into the following consent in writing, which was approved by the latter on March 6, 1924:
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return, made by or on behalf of the said for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation*1826 as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned.
Under date of January 26, 1925, Dodson and the respondent entered into the following consent in writing, which was approved by the latter on February 6, 1925:
In pursuance of the provisions of existing Internal Revenue Laws Mr. Bruce Dodson, a taxpayer, of Kansas City, Missouri, and Commissioner of Internal Revenue, hereby waive the time prescribed by law for making any assessment of the amount of income, excess profits, or war profits, taxes due under any return made by or on behalf of said taxpayer for the years 1918 and 1919 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31st, 1925, and shall then expire "except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom within the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the*1827 number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board."
The notice of deficiency with respect to the years 1918 and 1919 was mailed to the petitioner under date of July 27, 1925, and the petitioner *771 duly appealed from the determination set forth therein by the filing of a petition with this Board on September 22, 1925.
On February 11, 1920, Dodson purchased 1,100,000 German marks at a cost to him of $11,440 and upon various dates prior thereto he purchased 34,782 marks at a cost to him of $799.98, or a total cost of $12,239.98, all of which marks he owned in 1923. In computing his net income for 1923 he claimed as a deduction a loss of $12,239.98 which the respondent disallowed in accordance with IT 2141. The value of those marks in 1923 was $.000000132008.
The Exchange paid Dodson $28,590.06 on May 20, 1920, and the further sum of $33,045.94 on April 22, 1921, which said sums were entered in Dodson's excess reserve No. 1 account. Those amounts represented withdrawals by Dodson for advances made by him to the Exchange during the years 1912, 1913, 1914, and possibly 1915, and were not reported by Dodson*1828 in the computation of his net income for the years 1920 and 1921. It was not until 1920 and 1921 that the excess reserve No. 1 permitted the reimbursement of those advances to Dodson.
In January, 1920, the Exchange paid Dodson $25,000 for expenses which said sum was charged to excess reserve No. 2 account on January 20, 1920. That amount, through error, was not returned as income for tax purposes in 1920, but being a part of excess reserve No. 2 has already been included in the deficiency.
Dodson kept his books and prepared and filed his income-tax returns upon the cash receipts and disbursement basis.
The deficiency letter in cause No. 24,464 was mailed to the Estate of Bruce Dodson under date of December 22, 1926.
OPINION.
MORRIS: The first allegation of error pertaining to the respondent's action in adding to gross income for the serveral years in question various amounts, representing commissions alleged to have been received and, therefore, taxable to Dodson, raises the question whether Dodson actually or constructively received the entire 30 per cent which he was authorized to deduct from the total premiums deposited by subscribers or whether he only received, *1829 for tax purposes, 15 per cent in 1918 and 20 per cent in the succeeding years. The respondent contends that the entire 30 per cent was either actually, or at least constructively, dodson's income in the years when paid by the subscribers. The petitioner contends that Dodson received, for tax purposes, only approximately 15 per cent of premiums in 1918 and 20 per cent in the succeeding years, and that the remaining 15 per cent for 1918 and 10 per cent for the years thereafter were neither actually nor constructively received by Dodson, because *772 of the state of the reserves of the Exchange in those years, requirements of the State insurance commissioners in which the Exchange was licensed, and because of Dodson's agreement to withdraw only certain amounts in those years. A brief review of the evidence offered in support of the contentions urged by the petitioner will be very helpful.
The Exchange was engaged in the insurance business, mutual in character. It sold workmen's compensation and liability insurance to its subscribers and it was licensed to do business in a great many States throughout the United States, including the District of Columbia. Dodson, as its*1830 manager, received from each subscriber of the Exchange a power of attorney authorizing him to exchange indemnity with other subscribers, and in consideration of Dodson defraying all expenses incident to conducting the Exchange, "except taxes, legal, preventive and advisory committee expense, and including compensation for his services," he was to receive "thirty per cent of all moneys received by him for credit to our [subscriber's] account." The entire premium was charged to the subscriber in the books of account and was divided, for accounting purposes, into three separate parts, 65 per cent of which was credited to the socalled underwriting account, which was the reverse side of the subscriber's account, 5 per cent to excess reserve No. 1 account and 30 per cent to an account entitled excess reserve No. 2. It is this latter amount which is in issue here.
During the years 1912 to 1915, inclusive, Dodson drew the entire 30 per cent provided for in subscriber's powers of attorney annually, but because of the state of the reserve accounts and the requirements of the State insurance departments and an agreement of Dodson with the advisory committee he was paid only approximately*1831 15 per cent in 1918 and 20 per cent in the succeeding years. It is the difference between 15 per cent and 30 per cent for 1918, and 20 per cent and 30 per cent for the succeeding years, or 15 per cent for 1918 and 10 per cent for the succeeding years, which the respondent contends is taxable in the years in which the premiums were received by the Exchange. Let us examine the facts, therefore, respecting the failure or inability of the Exchange to pay the entire 30 per cent of premiums to Dodson in the years in which they were received.
To begin with it was an established policy of the Exchange to declare and pay or credit to its subscribers an amount of savings which, during the earlier years of its existence, amounted to 25 per cent of premiums in 1918 and later years 20 per cent. Upon the expiration of a subscriber's policy the said subscriber automatically received 20 per cent, either in cash or by way of credit upon the renewal premiums thereafter due. If the policyholder closed his account a check was sent to him for his savings at that time.
*773 In or about 1917, and during the years subsequent thereto, the question of administration expenses to be paid to Dodson*1832 was raised at meetings of the advisory committee in their discussion of the requirements of various States, at which it was shown to the committee that the deposits, less 20 per cent savings heretofore referred to, would not be sufficient to meet reserve requirements. Thereupon, Dodson agreed that he would not take his full commission but would limit himself to that part necessary to pay the actual expenses of the Exchange and that the remainder would be left on deposit for a period of three years, after which if none of the amount so remaining was required to maintain the reserves it would be withdrawn.
In 1916 the Pennsylvania Insurance Department commenced a series of supervisory communications touching upon rates, dividends to subscribers, and management expenses. On January 3, 1917, the Exchange received a communication from that department stating that the insurance commissioner recognized that the management expenses of the Exchange amounted to 30 per cent of premium income, exclusive of claim adjustment cost, and at the same time the said commissioner "directed" that the dividends of the Exchange "shall not exceed 12 1/2 per cent." Thereafter, on January 27, 1917, Dodson*1833 subscribed and swore to a communication which was filed with the Pennsylvania Insurance Department stating "* * * that not more than fifteen per cent (15%) of the deposit premiums received will be used for expenses during the year 1917 * * *." Whereupon, the Pennsylvania Insurance Department advised the Exchange on February 28, 1917, that a sworn statement having been filed to the effect that the "contract" between the Exchange and the attorney in fact limited the management expenses for 1917 to 15 per cent of premiums, and in view of said "modified contract" the amount of dividends paid to subscribers "shall not exceed 25 per cent" instead of 12 1/2 per cent as theretofore directed. Again, on November 2, 1917, the Pennsylvania Insurance Department, having held a public hearing on October 19, advised the Exchange that the compensation insurance rates approved for stock companies would be approved for the Exchange, provided that no dividend should be paid upon Pennsylvania Workmen's Compensation policies expiring after December 31, 1917, "until further audit." Thereafter, on November 27, 1917, Dodson filed a sworn statement with the Pennsylvania Insurance Department stating "* * * *1834 that not more than twenty per cent (20%) of the deposit premiums received on workmen's compensation contracts will be used for expenses during the year 1918, * * *." Thereafter, on December 3, 1917, the Pennsylvania Insurance Department, referring to the sworn statement just quoted from, advised the Exchange that "a dividend to policyholders of not to exceed 20 per cent of premiums *774 will therefore be approved upon compensation policies effective in 1918." On October 30, 1919, the Pennsylvania Insurance Department approved the renewal rates of the Exchange, provided that no dividend in excess of 20 per cent of earned premiums should be paid upon any policy expiring on or before December 31, 1920, and provided further "that the agreement of the attorney in fact with the subscribers, governing the expenses chargeable to the Exchange, which agreement was dated November 27, 1917, and is on file with the Insurance Department of Pennsylvania, shall remain in full force and effect." On March 8, 1922, the Insurance Department of Pennsylvania directed the Exchange to pay no dividends nor make any distribution of surplus to the policyholders without written approval of the insurance*1835 commissioner. On March 23, 1922, Dodson advised the Pennsylvania Insurance Department that "the manager of the Casualty Recriprocal Exchange hereby certifies that the agreement dated November 27, 1917, as on file with the Insurance Department of Pennsylvania, is and shall remain in full force and effect."
The record shows that taking the admitted assets and deducting therefrom statutory requirements for loss and unearned premium reserves and reserve necessary to pay accrued savings, etc., and also the amount of excess reserve No. 2, or Dodon's full 30 per cent of premiums, would have resulted in a deficit of $169,826.04, $236,649.91, $238,545.68, $369,834.89, $314,157.30, and $316,362.20 for the years 1918 to 1923, respectively.
Did the receipt of premiums and the setting aside of 30 per cent thereof in the books of account of the Exchange constitute an actual receipt of said 30 per cent by Dodson? This question we believe should be answered in the negative. The power of attorney issued to Dodson allowed him great latitude and discretion in the administration of the Exchange in so far as the arrangement and cancellation of contracts, the settlement of losses, and receipt of*1836 moneys were concerned, but beyond there he was practically powerless to act except under the direct supervision of the advisory committee provided for in the same power of attorney. The advisory committee was selected by the subscribers and its members were empowered by the subscribers to adopt such rules and regulations, not inconsistent with the powers already delegated to Dodson, "for the conduct of Reciprocal Exchange and our said attorney as they shall deem best." The power of attorney provided that the funds of subscribers should be deposited in banks or invested in securities approved by the advisory committee, and, furthermore, that disbursements from said funds should be by check, signed by the attorney, and countersigned by a member of the advisory committee or by a bank or trust company approved by said committee. Thus it will be seen that the handling *775 of funds of the Exchange and disbursement thereof were under the rigid supervision and control of the advisory committee. It the advisory committee, therefore, with its supervisory power over the funds of the Exchange and the conduct of Dodson as attorney for the subscribers, considered that the best interests*1837 of the subscribers demanded that the funds of the Exchange be held intact and should not be distributed, it is clear that a payment of premiums to the Exchange could not possibly have constituted a payment of 30 per cent thereof to Dodson. The power of attorney provided unqualifiedly that Dodson was authorized to deduct 30 per cent of all moneys received by him for credit to the subscriber's account, but a mere power to deduct the percentage provided for does not necessarily empower him to withdraw the funds and convert them to his own account where the business of the Exchange and the interests of the subscribers may be thereby jeopardized. Therefore, we do not believe that a payment of premiums to the Exchange ipso facto became an actual payment of 30 per cent thereof to Dodson.
If payment of premiums to the Exchange did not constitute an actual receipt of 30 per cent thereof by Dodson, did it constitute a constructive receipt within the meaning of the decided cases, that is, bearing in mind that Dodson was on a cash receipts and disbursements basis, could he, had he wished to, have withdrawn the entire 30 per cent of premiums during the taxable years?
*1838 As we said in John A. Brander,3 B.T.A. 231">3 B.T.A. 231, in speaking of the doctrine of constructive receipt:
* * * This doctrine, as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his bona fide selection of this method by "construing" that to be received of which in truth he has not had the use and enjoyment. Constructive receipt is an artificial concept which must be sparingly applied, lest it become a means for taxing something other than income and thus violating the Constitution itself. Doubtless, however, there are clear cases of constructive receipt, such, for example, as that of the bond owner who chooses not to cash his coupon but to permit it to remain uncut in the possession of another. * * *
In H. C. Couch,1 B.T.A. 103">1 B.T.A. 103, the taxpayer was the president of a corporation, the board of directors of which authorized payment to him, as its president, of a salary of $7,500 for 1920, and there*1839 was credited to him in the books of account of the company the full amount so authorized. The taxpayer actually received as salary during 1920 the sum of $4,125. In December of 1920, before the books of the corporation were finally closed for that year, the company, being in straitened financial circumstances, the taxpayer agreed not to withdraw the sum of $3,375, the balance of the authorized *776 salary which had not been paid to him. The company charged to its operating expenses the entire $7,500 in 1920, but in December of the same year, before its books were closed, an adjustment was made to the extent of $3,375, and operating expenses were credited on the books of the corporation. The company filed an information return on Form 1099, showing that it had paid the taxpayer a salary of $7,500. The taxpayer's individual return showed that he received the sum of $3,475 as salary for that year. The Board there, in finding that the taxpayer's salary for services rendered in 1920 was the sum of $4,125 instead of $7,500, said in part as follows:
This Arkansas Light & Power Co. was a small corporation whose stock was held by comparatively few persons, and this taxpayer was*1840 the dominating influence in the management of its affairs. He appears to have carried upon himself at all times the responsibility for the successful conduct of the corporation's business and to have had such an interest in the corporation making a good financial showing that he was willing to and did forego his right to such salary compensation as had been once agreed that he should receive in order that the financial statements of the company might make a better showing.
Salary arrangements between corporations and their principal stockholders and managers in cases like this one, where the manager is expected by his associates to protect the interests and the future prospects of the company even at a sacrifice to himself, are and must be at all times subject to such modifications as may be made by agreement from time to time; and it appears to us that the arrangement entered into by this taxpayer and this corporation in the month of December, 1920, clearly shows an intent on the part of both sides to modify the prior existing agreements in regard to this taxpayer's compensation, and that such modification was actually made in good faith and the accounts of the company adjusted*1841 accordingly.
In A. L. Englander,1 B.T.A. 760">1 B.T.A. 760, the taxpayer's salary, as president and general manager of the Englander Motor Co., was fixed at the beginning of each year by agreement between himself and the board of directors, but it was agreed he would draw on a salary account only as funds were actually available therefor. The corporation credited the taxpayer there with the amounts of $30,000, $20,000, and $15,833.33 for the years 1919, 1920, and 1921, but the taxpayer actually drew only $15,288.85, $11,571.69, and $11,200, respectively. The amounts actually credited, however, were deducted from its gross income in the computation of its tax for those years. The corporation's books were kept on the accrual basis and those of the taxpayer upon the cash receipts and disbursements basis. In holding that the amounts credited in excess of the amounts actually received by the taxpayer were not taxable to him in the years in which credited the Board said there:
From the evidence adduced at the hearing, the Board is of the opinion that the credits to the taxpayer on the books of the corporation for undrawn salary balances were never available for his use. The*1842 taxpayer had agreed to draw only such part of his stated salary as could be paid by the corporation without *777 interfering with its operations or impairing its credit. Although not insolvent on the face of its books, the corporation had large expenses and very heavy immediate and contingent liabilities, and, at no time during the years in question, did it have funds sufficient to permit payment of the amounts due the taxpayer without serious embarrassment and danger of bankruptcy.
The rule is well established by the decisions of this Board that mere book entries crediting officers or employees with amounts of undrawn salaries do not necessarily establish the taxability of said amounts. Walter L. Hopkins,2 B.T.A. 549">2 B.T.A. 549; A. Bluthenthal,1 B.T.A. 173">1 B.T.A. 173; J. M. Edmunds,1 B.T.A. 998">1 B.T.A. 998; Nicholas J. Maisel, Jr.,2 B.T.A. 66">2 B.T.A. 66; and Thomas Bemis,2 B.T.A. 255">2 B.T.A. 255.
The Exchange was unquestionably faced with several rather difficult financial problems during the years here in controversy. The State of Pennsylvania was constantly hounding it with instructions as to the amounts of dividends it could pay to*1843 its subscribers and as to the amounts of expenses it could disburse to its manager. It was faced with the problem of continuing the payment of 30 per cent of premiums to Dodson, which would have necessitated the discontinuance of a portion or all dividends to its subscribers and, therefore, causing it to deviate from its well settled policy which, no doubt, would have reacted very unfavorably to the Exchange. Dodson had agreed with the advisory committee that he would not take his full commission, but would withdraw only enough to pay the actual expenses of the Exchange, and that the remainder would be left on deposit for a period of time, after which, it would be withdrawn if not required to maintain reserve requirements of the States. Simply because Dodson's powers granted him by the subscribers were extremely broad it can not be said that his agreement with the advisory committee could have been discarded at any time at Dodson's pleasure. The advisory committee, as we have already stated, and as can be plainly read from the power of attorney granted Dodson, held the controlling hand in all matters of finances and could call Dodson to account for his actions in such matters at*1844 any time that they felt that the interests of the subscribers and of the Exchange were threatened. The State of Pennsylvania Insurance Department was satisfied that there was an agreement restricting the amounts payable to the manager for the expenses of the Exchange, which is clearly evidenced by the fact that that department refers to the agreement between Dodson and the Exchange limiting the management expenses as a "contract."
It is very evident from the various communications received by the Exchange and Dodson from the Pennsylvania Insurance Department during the taxable years, touching upon the question of dividends to subscribers and managerial expenses to Dodson, that had instructions of the said department not been strictly adhered *778 to the Exchange's license would have been revoked in the State of Pennsylvania where a large portion of its business was done. That department dictated the amount of dividends which might be paid during the years here in controversy and the Exchange, realizing its long settled policy of paying a dividend of 20 per cent, felt that the interest of the Exchange would suffer should those dividends be reduced. Therefore, in preference*1845 to reducing the dividends, Dodson reduced the managerial expenses, thereby permitting a continuation of dividends at the rate of 20 per cent per annum.
It has been satisfactorily shown that had the Exchange set aside the statutory reserves, the reserve necessary to pay accrued savings and at the same time paid Dodson the full 30 per cent of premiums, a very considerable deficit would have occurred during the years 1918 to 1923, which we are satisfied would not have been tolerated for one moment by any of the States in which the Exchange was licensed to do business.
We are of the opinion that the amounts in excess of 15 per cent of premiums for 1918 and 20 per cent in the succeeding years were neither actually nor constructively received by Dodson and that the respondent was in error in so holding.
The second allegation of error is that the statute of limitations has run against the assessment and collection of the proposed deficiencies for the years 1918 and 1919. Dodson filed his individual income-tax return for the calendar years 1918 and 1919 on or about May 5, 1919, and April 15, 1920, respectively. In January, 1924, he entered into an unlimited consent in writing, pursuant*1846 to the provisions of section 250 of the Revenue Act of 1921, agreeing to a later determination, assessment and collection of the amount of tax due for 1918, and in March, 1924, he entered into a further consent with respect to the same year extending the time for the determination, assessment and collection of the tax for a period of one year after the expiration of the statutory period or said period as extended by any waivers already filed with the Bureau. In January, 1925, he entered into a further consent in writing waiving the period of limitations for the making of the assessment of taxes due for 1918 and 1919 until December 31, 1925, such waivers to expire upon that date "except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board."
The notice of deficiency with respect to the years 1918 and 1919 was mailed*1847 to the petitioner under date of July 27, 1925, and the *779 petitioner duly appealed from the determination set forth therein by the filing of a petition with this Board on September 22, 1925.
Dodson having filed his individual income-tax return for 1918 on May 5, 1919, and his 1919 return on April 15, 1920, the periods of limitation with respect thereto did not expire until May 5, 1924, and April 15, 1925, respectively. The two consents in writing entered into in January and March of 1924 were both prior to the expiration of the period of limitations with respect to 1918 and effected an extension of the period for the determination, assessment and collection of the tax for that year until May 5, 1925. Prior to May 5, 1925, to wit, in January, 1925, a further consent was entered into for both the taxable years 1918 and 1919 effecting an extension of the statutory period until December 31, 1925, as to both years with the exception hereinabove provided for. The notice of deficiency was mailed prior to December 31, 1925, to wit, on July 27, 1925, the extended date provided for in the final waiver hereinabove, and an appeal was duly filed.
*1848 Petitioner's counsel contends that the two waivers dated prior to the passage of the Revenue Act of 1924 terminated upon the passage of that act under the authority of Toxaway Mills v. United States,61 Ct.Cls. 363, and that, therefore, under Russell v. United States,278 U.S. 181">278 U.S. 181, the final waiver of January 26, 1925, became inoperative because given after the statute had already run.
We have read the opinion of the Court of Claims, cited by counsel for the petitioner as authority for the premise which he adopts, and fail to find any support for the contention made. On similar statements of fact in Sunshine Cloak & Suit Co.,10 B.T.A. 971">10 B.T.A. 971; Alliance Machine Co.,12 B.T.A. 1156">12 B.T.A. 1156, and Albertina Baur,14 B.T.A. 933">14 B.T.A. 933, we have held that the statutory period had not run, and we must so hold here. If the petitioner's contention as to the first two consents were sound, the consent of January 26, 1925, is effective. wells brothers Co.,16 B.T.A. 79">16 B.T.A. 79.
With respect to the third and fourth issues herein, the petitioner complains that the attempted assessment is not assessment at*1849 all, that there is no such person or entity as "The Estate of Bruce Dodson," that until an administrator had been appointed there was no representative of the deceased against whom an assessment could be made, that there was no administrator when the deficiency notice was mailed, and that there must be a valid assessment as a prerequisite to tax liability. As we understand it, the petitioner's complaint is directed to the fact that the deficiency notice in cause numbered 24464 was addressed to the "Estate of Bruce Dodson" after the death of Dodson and before the appointment of an administrator, to wit, on December 22, 1926, Dodson having died August 22, 1926, *780 and Howell not having been appointed administrator of his estate until March 1, 1927.
Section 281 of the Revenue Act of 1926 provides in part as follows:
SEC. 281. (a) Upon notice to the Commissioner that any person is acting in a fiduciary capacity such fiduciary shall assume the powers, rights, duties, and privileges of the taxpayer in respect of a tax imposed by this title or by prior income, excess-profits, or war-profits tax Act (except as otherwise specifically provided and except that the tax shall be*1850 collected from the estate of the taxpayer), until notice is given that the fiduciary capacity has terminated.
* * *
(c) Notice under subdivision (a) or (b) shall be given in accordance with regulations prescribed by the Commissioner with the approval of the Secretary.
(d) In the absence of any notice to the Commissioner under subdivision (a) or (b), notice under this title of a deficiency or other liability, if mailed to the taxpayer or other person subject to liability at his last known address, shall be sufficient for the purposes of this title even if such taxpayer or other person is deceased, or is under a legal disability, or, in the case of a corporation, has terminated its existence.
The petitioner contends that the aforementioned provisions of the Act are inapplicable because "the deficiency notice was not addressed to the 'taxpayer or other person subject to liability at his last known address', etc."
It will be observed that section 281 above merely requires that the notice of deficiency by "mailed to the taxpayer or other person" etc., and it provides that such a notice so mailed "shall be sufficient * * * even if such taxpayer or other person is*1851 deceased." In other words, a notice addressed to a taxpayer or a legal representative thereof and duly mailed to the "last known address" would suffice even though the said taxpayer or legal representative should then be deceased and some other person or persons substituted therefor.
As far as we are informed the notice here was apparently mailed to the last known address of the taxpayer, at least there is no evidence to the contrary. If the notice had been addressed to Dodson himself without prefixing the word "Estate" and properly mailed, there can be no doubt that such a notice would have satisfied the statutory requirements and we perceive no reason why the use of that word should alter the situation, particularly in view of the fact that the representatives of the estate assume the powers, rights, duties and privileges of the taxpayer and have invoked the jurisdiction of this Board to hear and consider the merits in contesting this deficiency.
In allegation of error numbered five herein the petitioner avers that the respondent erred in deducting the sum of $11,931.77 from the income reported by Dodson for 1922, because said sum was actually received in that year. The respondent's*1852 answer admits that *781 such a deduction was made, but denies that error was committed. If the amount in question represents a release to Dodson of part of the prior years' reserve to make up the difference in commission of the amount actually received in such prior year and the 30 per cent, it is income to him in the year collected in view of the holding on the first issue hereinabove discussed.
The sixth allegation of error is with respect to the failure of the respondent to allow $12,239.98 as a deduction for 1923 on account of a loss sustained in the purchase of German marks. The petitioner purchased 1,134,782 German marks at a total cost of $12,239.98, all of which he owned and had not disposed of in 1923. He claimed a deduction of that amount in the computation of his net income for 1923 because of the substantial worthlessness thereof which the respondent disallowed. The facts here are practically identical with those in Louis Stern,5 B.T.A. 870">5 B.T.A. 870, and Carl Stern,5 B.T.A. 871">5 B.T.A. 871, and, therefore, our decision here as there must be for the petitioner.
The seventh allegation of error herein is that section 280 of the Revenue Act of*1853 1926 under which the respondent is acting is in conflict with the Constitution and, therefore, void. It is only necessary to say on this issue that the respondent is not acting under section 280, and if he were, the petitioner may not invoke it and at the same time question its validity. Henry Cappellini et al.,14 B.T.A. 1269">14 B.T.A. 1269.
The eighth, an affirmative allegation of error urged by the respondent, is with respect to the sums of $28,590.06 and $33,045.94 received by Dodson from the Exchange in the years 1920 and 1921, which the respondent contends are income and, therefore, taxable in those years. The record discloses that the Exchange paid Dodson those two amounts on May 20, 1920, and April 22, 1921, respectively, which were charged to Dodson's excess reserve No. 2 account, and that they represented withdrawals by Dodson for advances made by him to the Exchange during the years 1912, 1913, 1914, and 1915. It was not until 1920 and 1921 that the excess reserve No. 1 account contained a sufficient balance to permit the reimbursement of those advances to Dodson. Those amounts did not constitute income to Dodson, but reimbursement of capital and are, therefore, *1854 not taxable as alleged by the respondent.
The ninth, another affirmative allegation urged by the respondent, is that in 1920 Dodson paid to himself out of the funds of the Exchange the sum of $25,000 which he failed to include in his taxable income for that year. It appears from the record that the Exchange did in fact pay Dodson $25,000 for expenses and that said sum was charged to excess reserve No. 2 account on January 20, 1920; that through error the said amount was not returned as income for tax *782 purposes in 1920 but, however, it being a part of the excess reserve No. 2 account, the amount has already been included in the respondent's deficiency. Therefore, it appearing clearly that error was committed by Dodson and that it has been rectified by the inclusion of the amount in the deficiency notice herein, the respondent's action in so doing is sustained.
Reviewed by the Board.
Decision will be entered under Rule 50.
PHILLIPS and VAN FOSSAN concur in the result only.
ARUNDELL, dissenting: As I understand the facts, Dodson held a separate power of attorney from each subscriber to the so-called reciprocal exchange, authorizing him*1855 under certain specified conditions to exchange indemnity with other subscribers. In consideration of Dodson defraying certain expenses incident to conducting the business including compensation for his services, he was authorized by the powers of attorney to deduct 30 per cent of all monies received by him from the subscribers. This provision for compensation was never abrogated, but appeared in all the powers of attorney issued during the successive years before us for consideration. The fact that Dodson saw fit to leave a portion of his compensation in the business, which business was essentially his own, can not alter the fact that the 30 per cent received by him was his own at all times and constituted an item of gross income to be returned for taxation. When one receives income, his election to dispose of it one way or another or leave it in his business does not make it other than taxable income.
LANSDON, STERNHAGEN, and BLACK agree with this dissent.