*3526 1. The Board has jurisdiction of a proceeding instituted as the result of a denial of a claim for abatement even though the claim relates to taxes shown on a return of the petitioner where such return was filed under protest by the petitioner and to comply with rulings by the Treasury Department, a prior return for the same year having shown a much smaller amount of tax due.
2. Deduction for exhaustion of a contract allowed.
3. Deductions for exhaustion of leases allowed.
4. Value of a lease acquired for capital stock determined and allowed for invested capital purposes.
5. Where the Commissioner, in accordance with section 331 of the Revenue Act of 1918, refused to allow for invested capital purposes any value for a contract, held that petitioner is not entitled to special assessment by reason thereof and under the circumstances shown.
*492 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended March 31, 1921, in the*3527 amount of $10,041.30, the rejected portion of a claim for abatement of $10,588.74.
The petitioner, in the petition and at the hearing, alleged errors by the respondent in (1) disallowing a deduction of $5,000 as exhaustion of a contract acquired by the issuance of stock; (2) disallowing a deduction of $1,000 as exhaustion of a lease acquired by the issuance of stock; (3) refusing to include the above lease in invested capital at a value of $20,000; (4) disallowing a deduction of $33,866.28 as exhaustion of another lease; (5) in refusing to compute the petitioner's profits taxes under the special assessment provisions; (6) reducing petitioner's invested capital for 1921 by $4,739.73, representing proration for dividends paid in 1921, and (7) reducing invested capital for 1921 by $42,579.45, balance sheet changes made by the revenue agent in report dated January 19, 1925.
At the hearing and in its brief, the petitioner apparently has abandoned the last two assignments of error. The respondent, in effect, renewed the motion, once overruled, to dismiss the proceeding for want of jurisdiction on the ground that no deficiency hs been determined against the petitioner for the year*3528 in question.
*493 FINDINGS OF FACT.
The petitioner is a New York corporation organized in 1903, with its principal office at Binghamton, N.Y.
On August 14, 1917, pursuant to an agreement entered into March 10, 1917, it issued $25,000 par value of its capital stock to Edward E. Powell upon receipt of a contract between the petitioner and the Bernicedale Coal Co., Inc., of which Edward E. Powell was president, and by which the petitioner agreed to buy and the other company agreed to sell each year of a five year period "at least 100,000 and not to exceed 150,000 gross tons" of coal, the number of tons between the two limits to be at the option of the petitioner at $2.75 per ton f.o.b. mines. Immediately after the issuance of the $25,000 par value of stock to Powell the outstanding capital stock of the petitioner was $75,000 par value.
The net earnings of the petitioner for the fiscal years ended March 31, 1913, to 1918, inclusive, as shown by its books were as follows:
| 1913 | $5,068.27 |
| 1914 | 5,070.94 |
| 1915 | 5,430.03 |
| 1916 | 7,204.60 |
| 1917 | 27,423.44 |
| 1918 | 39,718.83 |
The balance sheet of the petitioner as of March 31, 1917, was as follows:
| Assets | |
| Current assets | |
| Cash on hand and in banks | $4,684.57 |
| Accounts receivable | 34,499.15 |
| Inventory | 18,378.00 |
| Fixed assets | |
| Land and buildings | 74,833.92 |
| Machinery and equipment | 7,563.86 |
| Furniture and fixtures | 3,154.23 |
| Good will | 10,000.00 |
| Total | 153,113.73 |
| Liabilities | |
| Current liabilities | |
| Accounts payable | $33,588.45 |
| Mortgages payable | 20,000.00 |
| Reserves for depreciation | 17,426.55 |
| Capital stock | 50,000.00 |
| Surplus | 32,098.73 |
| Total | 153,113.73 |
*3529 On March 10, 1917, the fair market price of the coal covered by the contract was from $3 to $3.25 per ton. The fair market value of the contract of March 10, 1917, on that date and in August, 1917, was $25,000. The fair market value of the stock exchanged for it was equal to the par value of the stock, $25,000.
The petitioner acquired from Edward E. Powell, a lease known as the Johnson City lease for a term of 5 years from January 1, 1921. The lease covered property in the village of Johnson City running along the line of the Erie Railroad Co. upon which was located wood *494 coal pockets. For this lease the petitioner issued $20,000 of its capital stock.
By the terms of the lease, Powell was to pay the taxes on the property which amounted to about $1,300 yearly. Powell had owned that property for a few months prior to January 1, 1921. The entire property cost Powell something over $80,000 and was worth from $6,500 to $7,500 a year because it was adapted to immediate use in the coal business. The lease of the petitioner was reasonably worth not less than $20,000.
On July 9, 1919, the petitioner purchased from Edward E. Powell the assets of the Frank H. Beach*3530 Co., a corporation engaged in the distribution of coal in and around Binghamton, for $100,000 cash. It also assumed the liabilities of that company.
Included in the assets was a written lease from the Delaware & Hudson Railroad Co. for the property upon which the business was situated. This lease ran from July 1, 1919, to June 30, 1920, and covered property at 218 Chenango Street, Binghamton, N.Y. The property consisted of modern coal pockets for storage and handling of coal. Of the total consideration paid for the assets of the Frank H. Beach Co., $70,554.75 was given for the lease, with which went the exclusive agency for the sale of the Hudson Coal Co.'s coal in this territory. This agency was to last as long as sales were satisfactory to the Hudson Coal Co.
The agency agreement was oral and it was understood that the agency was to be for the life of the lease. There was no agreement to renew the agency at its expiration.
Powell did not own 50 per cent of the stock of petitioner either before or after the acquisition by the petitioner of the Johnson City lease. The stock of the petitioner owned by Powell's wife was not owned or controlled by Powell. Prior to the*3531 acquisition of the Johnson City lease, the stock of the petitioner was held as follows:
| Edward E. Powell | $30,000 par value |
| Helen Ford Powell | 25,000 par value |
| Other interests | 50,000 par value |
When Powell received the $20,000 par value stock for the lease, he then owned $50,000 par value of the total of $125,000 par value of stock of the petitioner.
In 1921, Edgar B. Parsons purchased 145 shares of stock of the petitioner at $100 par value per share. No stock of the petitioner ever sold for less than $100 par value per share.
Under date of June 14, 1921, petitioner filed a corporation income and profits-tax return with the collector of internal revenue at Syracuse, N.Y., covering the fiscal year ended March 31, 1921, showing a total tax due in the amount of $946.58.
*495 On January 16, 1922, petitioner, pursuant to the provisions of Treasury Decision 3220, filed an amended income and profits-tax return with the collector of internal revenue at Syracuse, N.Y., covering the fiscal year ended March 31, 1921, showing a total tax due of $11,505.32.
On May 15, 1922, petitioner, pursuant to the provisions of Treasury Decision 3310, filed with the collector*3532 of internal revenue its corporation income and profits-tax return under the Revenue Act of 1921 for the fiscal year ended March 31, 1921, disclosing a total tax due in the amount of $11,555.32. This return was subscribed and sworn to May 13, 1922.
On December 21, 1922, petitioner filed a claim for the abatement of income and profits taxes for the fiscal year ended March 31, 1921, in the amount of $10,558.74.
By letter dated May 5, 1925, respondent advised petitioner that an audit of its return for the fiscal year ended March 31, 1921, disclosed a total tax due of $11,007.88 and an overassessment of $547.44.
By letter dated December 19, 1925, respondent advised petitioner that upon further consideration of its return for the fiscal year ended March 31, 1921, the total tax liability of $11,007.88 and overassessment of $547.44 set forth in the letter dated May 5, 1925, were sustained and that its claim for the abatement of $10,588.74 would be rejected for $10,041.30.
On February 12, 1926, the petitioner filed a petition with the Board for a redetermination of its tax for the fiscal year ended March 31, 1921, in which the Board's jurisdiction was based upon respondent's letter*3533 dated December 19, 1925.
OPINION.
SIEFKIN: The respondent, in effect, renewed the motion once overruled, to dismiss the proceeding for want of jurisdiction on the ground that no deficiency has been determined against the petitioner for the fiscal year ended March 31, 1921, within the meaning of section 273 of the Revenue Act of 1924, and that no notice of a deficiency has been issued within the meaning of section 274(a) of that Act. Section 273 of the Revenue Act of 1924 provides, in part, that the term "deficiency" means:
(1) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return: * * *
(2) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amount previously assessed (or collected without assessment) as a deficiency; * * *
Under date of June 14, 1921, the petitioner filed a corporation income and profits-tax return for the fiscal year in question showing a total tax due in the amount of $946.58.
*496 On January 16, 1922, the petitioner filed an amended income and profits-tax return for the same period*3534 showing a total tax due of $11,505.32. With this return was sent a letter in the following terms:
We submit herewith amended returns for the years ended March 31st, 1917, to 1921, inclusive, in compliance with Treasury Decision No. 3220, but in accordance with the provisions of Section 250-D of the Revenue Act of 1921, we respectfully protest against any assessment being made until such time as an oral hearing can be had and additional data submitted in support of our application for assessment under Sections 327 and 328 of the Revenue Law of 1918.
We also claim that insufficient depreciation has been taken on the returns submitted herewith but on account of the time limit fixed by Treasury Decision mentioned above, we are unable at this time to make the necessary corrections. Additional data in support of this claim will also be submitted at the time when the hearing of this case is held in Washington.
On May 15, 1922, the petitioner, pursuant to the provisions of Treasury Decision 3310, filed another amended income and profits-tax return for the same period disclosing a total tax due in the amount of $11,555.32.
On December 21, 1922, the petitioner filed a claim for*3535 the abatement of income and profits taxes for the year in question in the amount of $10,558.74.
The respondent, by letter dated May 5, 1925, advised the petitioner that an audit of its return disclosed a total tax due of $11,007.88 and an overassessment of $547.44.
A letter of December 19, 1925, from the respondent sustained the decision in the letter of May 5 and rejected the petitioner's claim for abatement of $10,588.74. It was upon this letter that the appeal to the Board was based.
The respondent contends that since the total tax liability for the fiscal year ended March 31, 1921, has been fixed at $11,007.88, and since upon its amended return of May 15, 1922, the petitioner has shown a tax due in the amount of $11,555.32, there has been no determination of a deficiency by the respondent. The respondent insists that the return of the petitioner filed on June 14, 1921, does not constitute the original return of the petitioner.
In E. L. Harris,5 B.T.A. 1026">5 B.T.A. 1026, we stated:
* * * We have heretofore held that the original return is the return required by law and that there is no statutory authority for the making or acceptance of an amended return. *3536 Appeal of National Refining Co.,1 B.T.A. 236">1 B.T.A. 236; Appeal of Mabel Elevator Co.,2 B.T.A. 517">2 B.T.A. 517. The return referred to in section 273 of the Revenue Act of 1924 is the original return - the return which starts the tolling of the statute.
In that case the facts were as follows: The petitioner filed his return for the year 1923. Later he filed an amended return on which was shown an amount of tax in excess of the amount shown on the *497 original return. The Commissioner determined a deficiency in the amount of the excess and the petitioner appealed. The Commissioner moved to dismiss upon the ground that he had not determined a deficiency and that, therefore, the Board had no jurisdiction. It was held that inasmuch as the Commissioner had determined a total liability in excess of the amount shown on the original return to be due, there was a deficiency and that the Board had jurisdiction.
We are, therefore, of the opinion that the return filed by the petitioner on June 14, 1921, was the original return of the petitioner, and since the respondent has determined a tax liability greater than the amount shown thereon, a deficiency has been determined. *3537 However, even if either of the amended returns were considered the return, we are of the opinion that the respondent has determined a deficiency.
In John Moir,3 B.T.A. 21">3 B.T.A. 21, we stated:
The Commissioner in his answer pleaded that the Board is without jurisdiction to hear and determine these appeals for the reason that he has not, since the passage of the Revenue Act of 1924, determined a deficiency in tax in respect to these taxpayers. The Commissioner's position in this plea is that the taxpayers have been assessed on the basis of the tax shown upon the taxpayers' returns, and that a deficiency is only an amount of tax determined by him to be due in excess of that shown on the taxpayers' return. This is true in the ordinary case, but in cases in which the taxpayer shows an amount of tax upon his return but does not admit that that amount of tax is due and collectible, it is the amount which he admits to be due and not the amount which appears upon the face of his return which is deemed the starting point in the computation of a deficiency. *3538 Appeal of Continental Accounting & Audit Co.,2 B.T.A. 761">2 B.T.A. 761.
In the instant proceeding we find that in accordance with Treasury Decision 3320, the petitioner filed an amended return showing a tax due in the amount of $11,505.32, but in a letter accompanying the return, the petitioner denied that this amount of tax was due.
On May 15, the petitioner, pursuant to the provisions of Treasury Decision 3310, filed another amended return showing a total tax due in the amount of $11,555.32. Apparently no protest was attached to this return but on December 21, 1922, the petitioner filed a claim for abatement of income and profits taxes in the amount of $10,558.74. The Commissioner rejected this claim for abatement in his letter dated December 19, 1925.
We are of the opinion that the respondent has determined a deficiency in tax for the fiscal year ended March 31, 1921, and that we have jurisdiction of the appeal covering that year.
The petitioner alleges errors by the respondent in (1) disallowing a deduction of $5,000 as exhaustion of a contract acquired by the issuance of stock; (2) disallowing a deduction of $1,000 as exhaustion of a lease acquired by the issuance*3539 of stock; (3) refusing to include the above lease in invested capital at a value of $20,000; (4) disallowing *498 a deduction of $33,866.28 as exhaustion of another lease; (5) in refusing to compute the petitioner's profits taxes under the special assessment provisions; (6) reducing petitioner's invested capital for 1921, and (7) reducing invested capital for 1921 by $42,579.45 balance sheet changes made by the revenue agent in report dated January 19, 1925.
1. On March 10, 1917, the petitioner purchased from Edward E. Powell for $25,000 par value of its capital stock, a five-year contract by the terms of which the petitioner was to acquire not less than 100,000 tons of coal annually from the Bernicedale Coal Co. at $2.75 per ton. The market price of coal on March 10, 1917, was $3 to $3.25 per ton. The evidence shows that on March 10, 1917, the date the contract was acquired, and on August 14, 1917, the date the petitioner paid $25,000 par value of stock therefor, the stock of the petitioner was worth its par value. We have found that the contract had a value, when acquired, of $25,000, and in accordance with section 234(a)(7) of the Revenue Act of 1918, we hold that*3540 the respondent erred in failing to allow a deduction of $5,000 for the exhaustion thereof in the fiscal year in question.
2. The petitioner also acquired from Edward E. Powell for $20,000 par value of its capital stock, a lease of certain property containing wood coal pockets. The lease was to run 5 years from January 1, 1921. The evidence discloses that the lease was reasonably worth not less than $20,000 and we have so found. In Grosvenor Atterbury,1 B.T.A. 169">1 B.T.A. 169, we held that the owner of a leasehold is entitled to take deductions for exhaustion of such leasehold in the same manner as he would with any other exhaustible property.
Since the petitioner possessed the lease from January 1, 1921, for the fiscal year ended March 31, 1921, petitioner is entitled to exhaustion thereof in the amount of $1,000 for the three-month period. Section 234(a)(7) Revenue Act of 1918.
3. Section 325(a) of the Revenue Act of 1918 provides:
That as used in this title -
* * *
The term "tangible property" means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.
*3541 Section 326(a) of the Revenue Act of 1918 provides:
That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section):
* * *
(2) Actual cash value of tangible property other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the *499 satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus. * * *
The respondent relied upon section 331 of the Revenue Act of 1918, and refused to include in invested capital any value for this lease upon the grounds that Powell owned more than 50 per cent of the stock of the petitioner. However, the evidence discloses that neither before nor after the transaction did Powell own as much as 50 per cent of the stock.
We are of the opinion that the lease in question had an actual cash value of not less than $20,000, and the respondent erred in not*3542 including it in invested capital at that value, leaseholds being defined as "tangible property" by the section of the statute quoted above.
4. Among the assets of the Frank H. Beach Co. which the petitioner acquired from Edward E. Powell for $100,000 cash on July 9, 1919, was a lease by the Delaware & Hudson Railroad Co. for the property upon which the business of the Frank H. Beach Co. was located. The petitioner also assumed the liabilities of the company. The lease was for the period July 1, 1919, to June 30, 1920, and the amount which petitioner paid for the lease was $70,554.75. With this lease also went the exclusive agency for the sale of the Hudson Coal Co.'s coal in that territory. The agency agreement was oral and was for the life of the lease.
The remaining life of the lease after petitioner obtained it was 354 days. Ninety-one days of this life fell within the taxable year in controversy. We are of the opinion that the petitioner is entitled to a deduction of $18,136.95 for exhaustion of the lease. See Grosvenor Atterbury, supra.
5. The respondent, in accordance with section 331 of the Revenue Act of 1918, refused to allow for invested*3543 capital purposes any value for the contract with the Bernicedale Coal Co. for which the petitioner paid Edward E. Powell $25,000 par value of its capital stock, for the reason that immediately after the transfer Powell owned more than 50 per cent of the stock of the petitioner.
The petitioner contends that this entitles it to relief by special assessment. In our opinion the exclusion of the value of the contract, considered in connection with the considerable admitted invested capital of the petitioner, does not show a right to special assessment. We conclude that special assessment was properly denied by the respondent.
6 and 7. The petitioner has apparently abandoned the last two assignments of error, and, in the absence of evidence in regard thereto, the holding of the respondent will not be disturbed.
Reviewed by the Board.
Judgment will be entered under Rule 50.