*2961 1. A joint adventure is not a taxable entity under the Revenue Act of 1918 and the members thereof derive income therefrom in the year in which the income is realized by the joint adventure.
2. In 1917, the petitioner, in consideration of an agreement on the part of the Ontario Realty Co., of which the petitioner owned substantially all of its capital stock, to pay to him $335,507.28, and to pay two-thirds of the gross income from the lands to the petitioner's wife, two daughters, and a son in equal shares so long as they should live, transferred to the company 2,962.95 acres of clay lands connected with 15 clay manufacturing plants individually owned and operated by the petitioner. Subsequent thereto the petitioner orally agreed to pay to the Realty Co. $1 per ton burned weight for clay removed from the lands and used in his clay products manufacturing plants, such payment being greatly in excess of the ordinary royalties payable for clay. In his individual books petitioner at the end of each 3-month period credited to his wife and three children 66 2/3 cents per ton burned weight of clay removed from the clay lands and held the same for his wife and three children subject*2962 to their demands. The Commissioner allowed the deduction from gross income on the petitioner's individual tax returns, the amounts paid to the Ontario Realty Co. of 33 1/3 cents per ton burned weight of clay taken from the land thus conveyed, but disallowed the deduction of the amounts credited to the petitioner's wife and three children upon his individual books of account. Held, that the petitioner is entitled to deduct from his gross income as ordinary and necessary expenses for the clay removed only a reasonable amount for the clay and that the amounts deducted on the petitioner's income-tax returns in excess of 33 1/3 cents per ton burned weight credited and paid to the Ontario Realty Co. was not an ordinary and necessary expense of operation and was not a legal deduction from gross income.
3. The investments of the petitioner in printing presses and machinery for the years 1921, 1922, and 1923 upon which the petitioner is entitled to deduct depreciation at the rate of 10 per centum per annum determined.
4. In his income-tax returns for 1922 and 1923 the petitioner did not deduct from gross income certain amounts of operating expenses connected with the publishing*2963 of certain newspapers, a portion of which represented ordinary operating expenses and a portion of which represented amounts spent for increating circulation. Held, that the petitioner is entitled to deduct the full amount of operating expenses but is not entitled to deduct amounts expended to build up a circulation structure.
5. In 1923 the petitioner was sued for malicious prosecution and arrest by a person found in possession of his automobile stolen in 1922. He paid in 1923, $3,078.10 in defense of the suit. Held, that the amount is not a legal deduction from the petitioner's gross income of 1923.
*1296 This is a proceeding for the redetermination of deficiency in income tax for the years 1920 to 1923, inclusive, as follows:
| 1920 | $238,946.30 |
| 1921 | 105,941.37 |
| 1922 | 122,422.60 |
| 1923 | 51,639.40 |
| Total | 518,949.67 |
The petition filed in this proceeding makes numerous assignments of error; one of which has been waived; another of which has been conceded by the respondent; and five of which*2964 were settled by stipulation read into the record. The assignments of error not thus disposed of are as follows:
1. The Commissioner erred in adding the sum of $100,000 to petitioner's income for the year 1920 in block "D" on account of alleged profits on liquidation of a so-called stock syndicate.
2. The Commissioner erred in adding to the petitioner's income for the years 1920, 1921, 1922, and 1923, $223,621.97, $156,768.11, $161,215.74, and $120,965.79, respectively, alleged to have been received as royalties from Ontario Realty Co.
3. The Commissioner erred in failing to allow in his computation proper depreciation on newspaper machinery and equipment owned and used by the petitioner for the years 1921, 1922, and 1923.
4. The Commissioner erred in his computation of the taxes due for 1922 and 1923 in failing to allow ordinary and necessary business expenses incurred in petitioner's newspaper publishing business in the amount of $43,631.47 for 1922 and of $37,115.36 for 1923.
5. The Commissioner erred in disallowing as an ordinary and necessary business expense the expense of litigation resulting from the theft of an automobile used in the petitioner's business*2965 in the amount of $3,078.10.
FINDINGS OF FACT.
The petitioner is a resident of Kansas City, Mo., who in March, 1912, with the Theodore Gary Investment Co., a corporation, and the American Trust Co. of Oklahoma City, a corporation, formed a syndicate for the purpose of acquiring control of the Kansas City Home Telephone Co., of conducting a general refinancing and promotion operation of the company, and for the resale thereof at a profit.
The petitioner and each of the other members of the syndicate contributed $60,000, making a total of $180,000 as the cash capital *1297 of the syndicate. The Theodore Gary Investment Co. was made the manager of the syndicate and its banker. The syndicate organized a corporation known as the Telephone Securities Co., a Virginia corporation with a paid-up capital of $100,000, all of which capital was furnished by the syndicate and all of whose stock was held by the syndicate until the dissolution of the corporation in 1919. The Telephone Securities Co. was used as the syndicate's financial vehicle for the financing of the venture.
By March 1, 1913, through funds arising from the sale of preferred stock and bonds of the Telephone*2966 Securities Co., the syndicate had acquired 28,341 out of the total of 30,000 shares of the capital stock of the Kansas City Home Telephone Co. and was in active control and had charge of the Telephone Company's operations. These shares were acquired at a cost of $3,471,037.50, an average price of $122.474 per share. In the acquisition of this stock the syndicate set an arbitrary price of $122.50 per share for the stock and acquired no stock at a greater price up to March 1, 1913. Subsequently, the remaining shares of the Kansas City Home Telephone Co. were acquired by the Telephone Securities Co. and by 1918 the entire 30,000 shares of stock of the Kansas City Home Telephone Co. had been acquired.
The cash investment of the members of the syndicate never exceeded $180,000. A consolidated balance sheet of the Telephone Securities Co., and Syndicate "G" (the designation of the syndicate on the books of the Theodore Gary Investment Co.) as of February 28, 1913, made by the petitioner's accountant, shows syndicate capital $180,000 and syndicate adjusted surplus $91,874.43, making a total book value of the syndicate interests on that date of $271,874.43. The fair market value of*2967 the petitioner's interest in the syndicate on March 1, 1913, was one-third of this amount or $90,624.81.
The preferred stock and bonds of the Telephone Securities Co. were retired by the syndicate in 1919 or prior thereto and the Telephone Securities Co. was dissolved in that year. About the middle of 1919 the syndicate sold all of its stock in the Kansas City Home Telephone Co. for $750,000 bonds of a new corporation called the Kansas City Telephone Co. After July 1, 1919, H. L. Gary was made the agent of the members of the syndicate for the purpose of liquidating and reducing to cash the assets of the syndicate, which consisted principally of the $750,000 par value bonds above referred to. These bonds were sold by H. L. Gary in the month of July, 1919, at par plus accrued interest, and immediately thereafter H. L. Gary paid to each of the members of the syndicate $153,854.88, representing a portion of the assets distributed. Gary did not distribute the balance due the members of the syndicate immediately *1298 and the balance standing to the credit of the syndicate at the end of 1919 was $300,090.70. On January 2, 1920, each of the members of the syndicate, including*2968 the petitioner, received a check for $100,000, representing his balance at the date of payment. After H. L. Gary was made the agent of the syndicate for the purpose of liquidation thereof, the syndicate account on the books of the Theodore Gary Investment Co., the name of which had by that time been changed to Theodore Gary & Co., was changed to "H. L. Gary, agent for K. C. H. Stockholders." This account was not fully closed out until December 31, 1922. This amount shows a credit from the cash book of $9,250 under date of August 4, 1920, and a credit from the journal of $71,250 under date of September 10, 1920, and of $41,525.97 on March 10, 1921. The credit balance in the account at December 31, 1921, was $122,025.97. There was a further credit entry from the cash book under date of January 3, 1922, of $5,533.46, and the account was closed by journal entry under date of December 31, 1922, in the amount of $127,559.43. Distributions were made by the agent of the syndicate to the petitioner as follows:
| March 12, 1913 | $3,600.00 |
| June 18, 1914 | 60,000.00 |
| Nov. 23, 1915 | 25,000.00 |
| Feb. 16, 1917 | 10,000.00 |
| March 13, 1917 | 5,000.00 |
| June 14, 1917 | 10,000.00 |
| July 19, 1917 | $5,000.00 |
| July 16, 1919 | 153,854.88 |
| January 2, 1920 | 100,000.00 |
| Total | 372,454.88 |
*2969 The petitioner accounted for no profit on this transaction in his return for the year 1920 or in his return for any prior year, and made no disclosure thereof on any income-tax return. The Commissioner has added to the income reported by the petitioner for 1920 the amount of $100,000 received by him on January 2, 1920.
In January, 1917, the petitioner was the owner of a large clay manufacturing business, together with a large amount of real estate, among which were 2,962.95 acres of land containing clay pits from which clay was then being taken and proven deposits of clay adaptable for use as raw material for manufacture into clay products in 15 plants owned by the petitioner in several different states. These lands were conveniently located near and connected by proper transportation facilities with 15 clay products plants or factories which were then owned and operated and which had been owned and operated by the petitioner for some time prior thereto.
Petitioner owned all or substantially all of the stock of a number of different corporations which had been created for the purpose of holding legal title to real estate and other investments. One of these was the Ontario*2970 Realty Co. which had been created a number of years prior to 1917, with a capital stock of $2,000 divided into 20 shares, 18 of which stood in the name of the petitioner; one in *1299 the name of Fred L. Dickey, a brother; and one in the name of George H. Davis, who was secretary of the corporation. The petitioner was an officer of the corporation. Fred L. Dickey was vice president in 1917. This corporation had on January 1, 1917, extensive holding of real estate, mostly unimproved, which had a value in excess of $600,000. The minutes of a directors' meeting of the Ontario Realty Co. show in part as follows:
ONTARIO REALTY COMPANY
SPECIAL DIRECTOR'S MEETING
On this 10th day of January, 1917, there was held a special meeting of the Board of Directors of the ONTARIO REALTY COMPANY, there being present W. S. Dickey, Fred L. Dickey and Geo. H. Davis, being all of the Directors, and all of whom waived notice of the meeting, as evidenced by their signatures to these minutes.
On motion, duly seconded, the following resolution was adopted (Mr. W. S. Dickey not voting):
"WHEREAS, W. S. Dickey has proposed to sell and convey to this corporation certain clay lands at the*2971 prices hereinafter mentioned, on condition that the corporation, as a part of the consideration, agree to pay to Kate L. Dickey, Madeline A. Dickey, Catherine Dickey and William Laurence Dickey, in equal shares, two-thirds of the gross income from said clay lands during their lives, and on the death of any one or more of said persons the share going to him to be paid to said W. S. Dickey, or on his order; and,
WHEREAS, the Directors are of the opinion that it would be to the best interest of the corporation to accept the said proposal of W. S. Dickey for the purchase of said lands;
NOW, THEREFORE, BE IT RESOLVED, that the corporation purchase from W. S. Dickey the following clay lands at and for the cash considerations set opposite each tract, to-wit:
| 285-78/100 | acres in St. Clair County, Mo. | at | $57,333.06 |
| 75-1/8 | acres in Henry County, Mo. | at | 30,717.81 |
| 85-55/100 | acres in Crawford County, Kans. | at | 20,513.91 |
| 381 | acres in Morgan County, Mo. | at | 35,942.50 |
| 127-1/2 | acres in McDonough County, Ill. | at | 24,000.00 |
| 1466 | acres in | Bexar County, Tex. | at |
| 45,000.00 | |||
| 80 | acres in Jefferson County, Ala. | at | 22,500.00 |
| 243 | acres in Walker County, Ga. | at | 60,000.00 |
| 189 | acres in Miller County, Ark. | at | 22,000.00 |
| 30 | acres in Muscogee County, Ga. | at | 17,500.00 |
| Total | 335,507.28 |
*2972 and,
BE IT FURTHER RESOLVED, that as a part of the consideration for the conveyance of said lands to it, the corporation agree to pay two-thirds of the gross income from said lands to Kate L. Dickey, Madeline A. Dickey, Catherine Dickey and William Laurence Dickey in equal shares during their lifetime, and on the death of any one or more of said parties the share of such gross income payable to such deceased person or persons to be paid to W. S. Dickey, or on his order, such payments to continue until the clay deposits on said lands shall be exhausted."
*1300 There being no further business, on motion, duly made and seconded, the Director's Meeting adjourned.
(Singed) GEO, H. DAVIS,
Secy.
APPROVED:
(Signed) W. S. DICKEY.
(Signed) FRED L. DICKEY.
The price of $335,507.28 named in the minutes was an amount arrived at by taking cost or the March 1, 1913, value of the lands with adjustments so as to avoid the possibility of any taxable profit on the transfer. The fair market value of the lands at date of transfer was $335,507.28.
The beneficiaries (petitioner's wife and children) were properly advised of the provisions which the petitioner had made for*2973 them of a source of income and thereafter drew upon the amounts credited to their accounts.
Subsequent to January 10, 1917, the petitioner orally agreed with the officers of the Ontario Realty Co. that he would purchase clay from the Ontario Realty Co. for his plants at $1 per ton burned weight. This price was greatly in excess of the prevailing royalty rates for clay, the prevailing royalty rates for clay from undeveloped clay lands being from 7 to 15 cents per ton. The language of the alleged oral agreement is set forth in block "F" of the valuation report of the Ontario Realty Co. made to the Commissioner in connection with its claim for depletion deductions and signed by the witness, Michaelson, the accountant and bookkeeper of the petitioner, as follows:
This arrangement became effective January 1st, 1917 and continues from year to year, until terminated by mutual agreement. The royalty paid is subject to change from time to time as conditions justify. The operator and lessee has the right to enter upon the company's lands for the purpose of opening up clay deposits, or make use of clay pits already open, and to extract and transport therefrom clay for the use of his*2974 plants. The operator furnishes all equipment and tools, including tracks, steam shovels, etc., and bears all the expense of stripping, overburden, excavating, loading and transporting the clay.
No cash payments were made by the Ontario Realty Co. to Dickey for the lands conveyed. The Ontario Realty Co was, however, charged upon the petitioner's books of account for the sale price of $335,507.28 and this amount was liquidated during the following three years out of credits made to it for clay taken by petitioner.
Separate books of account were kept for the Ontario Realty Co. the same as for several other corporations which had been created by the petitioner, who held all or practically all of the shares of capital stock of such corporations. No separate bank account was maintained for any of these corporations. The petitioner acted as banker for all of them. On the petitioner's personal books was kept an *1301 account with each of these corporations and against each was charged all the advances and all disbursements for the account of each and to each was credited all collections for its account. The petitioner acted in a similar manner as banker for his wife and*2975 the members of his family. He had a separate account on his individual books for each member of his family. Each made withdrawals by check on the petitioner's bank account and each was authorized to sign petitioner's name to the checks drawn. Checks drawn by each member were charged to such member's account.
For the convenience of petitioner's accounting department, withdrawals from the beneficiaries' funds on deposit with petitioner were kept in a running checking account on petitioner's books and from time to time, once or more each year, transferred in a total to the debit of the beneficiaries' ledger accounts in petitioner's books.
At the end of each quarter the petitioner's accountant computed upon the basis of reports received from the various clay properties the quarterly amount payable under the oral agreement made by the petitioner with the Ontario Realty Co., referred to above, and an entry was made crediting each beneficiary with his or her share of the income from the sale of clay to the petitioner by the Ontario Realty Co. Credits were made to the accounts of the beneficiaries during all of the years 1917 to 1923, inclusive, except in the case of petitioner's*2976 wife, who died September 13, 1920. Credits to her account ceased from the date of her death. That account was then closed out by charging against the credits the amount of the checks which had been drawn by the petitioner's wife up to the date of her death in the amount of $61,823.80. On the same date there was debited against the accounts of the other beneficiaries the amounts which had been withdrawn by them from January 1, 1917, and charged under separate accounts.
The total amounts of credits for the years 1917 to 1923 to the petitioner's wife and children plus what would have been the wife's share after death until the end of 1923 (which after September 13, 1920, were credited to petitioner), amounted to $1,454,649.68 or almost exactly twice the amount of $727,324.08, which was credited to the Ontario Realty Co., the last named amount being one-third of the cost to the petitioner of purchases of clay from the Ontario Realty Co. during the period in question. The credits to the wife and children from January 1, 1920, to December 31, 1923, were as follows:
| 1920 | $223,621.97 |
| 1921 | 175,554.90 |
| 1922 | 161,215.74 |
| 1923 | 120,965.79 |
| 681,358.40 |
*1302 *2977 The amounts credited to the wife and children upon the petitioner's books of account were reported as income by them in their individual income-tax returns as "Royalties from Ontario Realty Co.," and they have paid income taxes upon the amounts thus reported. In his income-tax returns for 1920, 1921, 1922, and 1923 the petitioner deducted from gross income all amounts credited to the Ontario Realty Co. and to his wife and children for clay taken from the lands in question. Upon the audit of the petitioner's income-tax returns for those years the respondent added to the net income reported the above amounts representing "Royalties from the Ontario Realty Co." credited directly to the petitioner's wife and three children on his books, upon the ground that they represented gifts of income by the petitioner to his wife and children in the respective years.
On April 17, 1921, the petitioner purchased newspaper machinery and equipment at a Federal receiver's sale of the Kansas City Journal and acquired depreciable assets at a cost of $111,000. Additions to this equipment were made during the year 1921 at a cost of $35,463.08. On May 17, 1922, the petitioner acquired a second newspaper*2978 plant, that of the Kansas City Post, no real estate being involved, at a cost, of $309,240. During 1922 additions to plant and equipment were made costing $30,899.57. Further additions to the plant were made during the year 1923 at a cost of $29,020.63. The petitioner's books of account show the following with respect to the depreciable property thus acquired:
| Acquired Apr. 17, 1921 | $111,000.00 |
| Additions during 1921 | 35,463.08 |
| Total cost Dec. 31, 1921 | 146,463.08 |
| Acquired May 17, 1922 | 309,240.00 |
| Additions during 1922 | 30,899.57 |
| Total cost Dec. 31, 1922 | 486,602.65 |
| Additions during 1923 | 29,020.63 |
| Total cost Dec. 31, 1923 | 515,623.28 |
Depreciation on these assets was sustained at the rate of 10 per centum per annum.
After the petitioner had acquired the assets of the Kansas City Post the properties of the Kansas City Journal and the Kansas City Post were consolidated. The Journal became the morning edition and the Post the afternoon edition and a Sunday edition was published, called "The Journal-Post." Separate books of account were kept showing the operation of the newspaper business. Controlling accounts were kept with the newspapers in the petitioner's*2979 individual books of account. From the time of the consolidation of the papers *1303 the circulation of the three newspapers published gradually declined. The petitioner made strenuous efforts to increase the circulation of all the newspapers. He purchased new modern presses, the cost of which was properly charged to capital accounts. He also resorted to billboard advertising; to advertising in trade magazines, such as "Printers Ink." He also gave prizes to solicitors obtaining the largest number of new subscriptions. The amounts thus spent were charged upon the newspaper books of account as ordinary expenses under various heads. Upon the control accounts kept in the petitioner's individual books the entire amount spent in 1922 under the heading "Gravure and Comics" ($181,212.44) and "Promotion and Publicity" ($38,792.84) and 10 per cent of numerous other operating accounts, such as fuel, water, light and power, editorial-department expense, and composing-room expense, were charged to an account entitled "Promotion Expense." The total amount charged to this account for 1922 was $431,631.48. This amount the petitioner did not deduct from gross income in his income-tax return*2980 for 1922. Similarly, for 1923, the petitioner charged to "Promotion Expense" upon his individual books the following:
| Advertising | $26,541.45 |
| Promotion and publicity | 4,186.13 |
| Sales and prizes | 6,387.78 |
| Total | 37,115.36 |
In his individual income-tax return for 1923 the petitioner did not deduct the above amount of $37,115.36 thus charged to "Promotion Expense." The petitioner filed amended income-tax returns for 1922 and 1923, in which he deducted from gross income the above amounts of $431,631.47 for 1922 and $37,115.36 for 1923. The Commissioner has rejected the amended returns as a basis for the computation of the true tax liability of the petitioner for the years 1922 and 1923, and has denied that petitioner is entitled to deduct the above amounts from gross income in computing taxable net income.
Petitioner is engaged in the operation of a number of different businesses, including clay manufacturing plants located at a distance from his principal offices, newspaper publishing plants similarly located, and a number of other ventures of considerable size, each located at a distance from the other. The petitioner had a number of automobiles which were used*2981 by him in going from his home to his office and for other purposes. One of these automobiles was a Cadillac car. This car was stolen in 1922. The petitioner offered a reward for its recovery and it was recovered in a nearby town and the man in whose possession it was found was arrested and charged with theft. Being later acquitted, he brought suit against the petitioner, *1304 charging malicious prosecution and false arrest and in the defense of that charge the petitioner incurred expenses in the amount of $3,078.10. This amount was claimed as a legal deduction from gross income in the petitioner's income-tax return for 1923, and the deficiency determined for that year is in part predicated upon such disallowance.
OPINION.
SMITH: The first question presented is whether petitioner derived any taxable income in 1920 from the syndicate transaction or joint adventure in which the petitioner invested $60,000 in 1912. Petitioner contends that he did not, first, for the reason that the total amount received from the syndicate was less than the fair market value of his interest in the syndicate on March 1, 1913, and, secondly, for the reason that if any taxable income was*2982 realized from the transaction it was realized by him prior to 1920.
The petitioner received from the syndicate up to January 2, 1920, inclusive, $372,454.88. He claims that the March 1, 1913, fair market value of his interest was $388,016.37. In support of this contention he has submitted voluminous evidence in the form of balance sheets of "Syndicate G" and the Telephone Securities Co., a consolidated balance sheet of these two, and a comparative table of earnings of the Home Telephone Co. From a careful study of this evidence we are of the opinion that it does not establish a "fair market value" of the petitioner's interest in the syndicate at March 1, 1913, of $388,016.37. The syndicate acquired its stock in the Kansas City Home Telephone Co. at a fair price and apparently in order to acquire control of the company paid a comparatively high price for the stock. The consolidated balance sheet of the Telephone Securities Co. and "Syndicate G" at February 28, 1913, shows an adjusted surplus for the syndicate of only $91,874.43. The book value of the combined interests of the members of the syndicate at February 28, 1913, was $271,874.43. The petitioner has adduced no evidence*2983 that the assets of the syndicate at March 1, 1913, could have been sold in excess of their book value. We have found, therefore, that the fair market value of the petitioner's interest in the syndicate on March 1, 1913, was $90,624.81, or one-third of the total.
The evidence establishes that it was the hope of the syndicate that the outstanding shares of stock of the K. C. Home Telephone Co. could be acquired at a reasonable price; that economies could be effected in the operations of the company; that the business of the company could be greatly expanded; and that the company could eventually be sold to the Bell interests at a good profit. These anticipations of the syndicate were realized.
*1305 On July 16, 1919, petitioner received $153,854.88 from the syndicate and on January 2, 1920, an additional amount of $100,000. In his income-tax returns the petitioner reported no income from the receipt of these payments in either of the years 1919 or 1920. The respondent has added to the net income reported by the petitioner for 1920 the $100,000 paid to him on January 2, 1920. The petitioner contends that if this $100,000 received by him on January 2, 1920, was income*2984 at all, it was income of the year 1919 and not of the year 1920. This claim is predicated upon the proposition that the syndicate was not a taxable entity; that the syndicate manager or agent received the income in 1919 and that the receipt of the income by the syndicate manager in 1919 constituted a receipt by the petitioner. The petitioner alleges that his books of account were kept upon the accrual basis. We consider, however, that this question is immaterial. The record does not show whether the petitioner took up on his books of account the $100,000 received on January 2, 1920, in 1919 or in 1920. The Revenue Act of 1918 taxes as entities corporations or associations and individuals. The members of a partnership are required to include in their individual returns the distributable profits of a partnership regardless of whether such profits are actually paid to them by the partnership in the taxable year. Petitioner argues that the syndicate should be considered and treated the same as a partnership. In support of this contention the petitioner cites the decision of the Board in *2985 . The facts in that case show a joint adventure in connection with the ownership of two steam schooners, the petitioner owning an undivided two one-hundreths interest in each. There were several coowners, one of which was the manager. In the course of that opinion we stated:
The petitioner contends that it should include in gross income for the taxable year only amounts of the distributive net earnings of the vessels of which it is one of several co-owners that it actually received. The Commissioner has held that the entire annual distributive earnings of such vessels should be included in the gross income of the individual co-owners, even though a part of such earnings is retained by the managing owner as a reserve for use in future operations.
We are of the opinion that the managing owner of a vessel jointly owned by several co-owners is the agent of such co-owners and that net earnings received by him must be regarded as received by the several co-owners in the proportion of their interests in such vessel. While the co-ownership of a vessel does not constitute a partnership or a joint stock association, it does result in the*2986 creation of an operating entity that earns income by the use of capital. Such income is taxable.
The respondent contends that the above mentioned case is readily distinguishable from this one for the reason that - * * * there *1306 the interested parties were not found by the Board to be joint adventurers but co-owners engaged in the actual operation of a continuing business created as an operating entity that earns income from year to year by the use of capital, whereas, here we have parties engaged in a specific joint venture - the purchase and sale of a certain telephone company. * * *
We do not perceive the validity of the distinction sought to be made. The petitioner was a coowner with the other two members of the syndicate of the assets of the syndicate. The syndicate was not a taxable entity. The receipt of income by the syndicate was receipt of income by the coowners. The syndicate sold $750,000 par value of bonds in 1919 and received cash for them. The syndicate had no accounts or bills payable at the close of 1919. All of the income of the syndicate in 1919 was income of the members of the syndicate in that year and not in the year 1920. The contention*2987 of the petitioner that the $100,000 cash received by him in 1920 was not taxable income in 1920 is therefore sustained.
The petitioner contends that under date of January 10, 1917, he sold and conveyed to the Ontario Realty Co., a corporation of which he owned all or substantially all of the stock, 2,962.95 acres of land containing clay deposits for a cash consideration of $335,507.28 and an agreement on the part of the vendee to pay two-thirds of the gross income from those lands to Kate L. Dickey, his wife, and to Madeline A. Dickey, Catherine Dickey, and William Laurence Dickkey, his daughters and son, in equal shares during their lifetime and upon the death of any one or more of said parties the share of such income payable to such deceased person or persons to be paid to the petitioner or on his order, such payments to continue until the clay deposits on the lands should be exhausted; that the arrangement above outlined "was a bona fide gift of a right to receive said income, and that from and after the completion of said arrangement the taxpayer had no right, title or interest in or to said income or any part thereof."
It is the respondent's contention that the transaction*2988 could have constituted nothing more than an oral, revocable, unenforceable promise to give to petitioner's wife and children a part of his future income after he had acquired it.
Upon the point as to whether the petitioner sold the clay lands in question to the Ontario Realty Co. in 1917, the respondent submits that the evidence clearly shows that the transaction "has never been considered or treated as a sale by the interested parties." We can not doubt, however, from the pleadings, the fact of the conveyance of the clay lands in question to the Ontario Realty Co. in 1917. The answer of the respondent admits the transfer and the receipt by the petitioner of the cash consideration of $335,507.28.
*1307 The evidence indicates that at a date shortly subsequent to January 10, 1917, the petitioner orally agreed to pay to the Ontario Realty Co. for the clay that he might take from the lands $1 per ton burned weight. The petitioner was apparently the president of the Ontario Realty Co. in 1917. The income-tax return filed for that company shows Fred L. Dickey as vice president and George H. Davis as treasurer. The petitioner testified that he did not vote at the stockholders' *2989 or directors' meetings at which the Ontario Realty Co. agreed to receive the clay lands from the petitioner. We can not doubt, however, from the facts in the case that the oral agreement made by the petitioner with the Ontario Realty Co. (made virtually by the petitioner with himself) was made without any regard to the fair market price of the clay to be sold by the Ontario Realty Co. to the petitioner.
The evidence indicates that the price of $1 per ton burned weight was grossly in excess of the ordinary royalty payable for clay; that a fair royalty would have been from 7 to 15 cents per ton if the clay had been taken from undeveloped clay lands. Under the agreement the petitioner was to bear all of the expense of removing the clay from the lands of the Ontario Realty Co,, and there is no evidence of record which convinces us that a fair price for the clay was in excess of the amount allowed by the respondent.
Under the taxing statute the petitioner is entitled to deduct from gross income "all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." (Section 214(a) of the Revnue Acts of 1918 and 1921.) The respondent has*2990 allowed the petitioner to deduct from gross income 33 1/3 cents per ton for all of the clay taken from the Ontario Realty Co.'s lands, and this represents the entire amount of money paid to the Ontario Realty Co. by the petitioner for the clay removed. The balance of the orally agreed payments was credited upon the petitioner's books of account to the petitioner's wife and three children in equal shares during the lifetime of the petitioner's wife, and after the death of the petitioner's wife the balance of the payments which the Ontario Realty Co. would have paid, under the oral agreement, to the petitioner's three children was credited by petitioner upon his books of account directly to the children. We are of the opinion that the credits made by the petitioner upon his books of account to his wife and three children were not ordinary and necessary expenses deductible from gross income by the petitioner in his individual tax returns. The respondent's action in disallowing the deduction is sustained. Cf. ; *2991 ; ; ; ; certiorari denied, .
*1308 The third point involved is the cost to the petitioner of two newspaper publishing businesses acquired by him in 1921 and 1922, and the cost of additions made during 1921, 1922, and 1923. The respondent disallowed any deduction for depreciation upon the ground of lack of evidence as to the cost. At the hearing it was stipulated that any depreciation allowable was at the rate of 10 per cent per annum upon depreciable properties. The petitioner and the respondent are now in agreement as to the bases for the computation of the depreciation and said amounts are shown in the findings of fact.
In his income-tax returns for 1922 and 1923 the petitioner failed to deduct from gross income $431,631.47 and $37,115.36, charged upon his individual books of account as "Promotion Expense," but upon the newspapers' books of account as ordinary and necessary expenses of operation. Items composing these expenditures are shown in*2992 our findings. The largest single item for 1922 represents the cost of gravure supplements and comic supplements purchased from publishers of the same. The cost of like supplements for 1923 was charged to expense and deducted as such on the petitioner's books of account. This item and all of the items charged to "Promotion Expense" in 1922, with the exception of the account "Promotion and Publicity," $38,792.84, appear to be ordinary operating expenses of the petitioner's newspaper business. The evidence indicates that the petitioner did not deduct these amounts upon his income-tax returns in order not to disclose to persons who would see the income-tax returns the disappointing results of his newspaper publishing business in the years 1922 and 1923. We are of the opinion that the petitioner was entitled to deduct from gross income of 1922 the entire amount charged to "Promotion Expense" except the $38,792.84 charged to "Promotion and Publicity." The character of this account is not fully explained. The petitioner resorted to billboard advertising and conducted contests for the purpose of increasing circulation. The petitioner offered no evidence as to whether he merely rented*2993 the billboards or whether he constructed them, and therefore the Board is unable to determine whether the $38,792.84 in question is a capital item or an expense item. Likewise, monies expended for premiums and prizes in a circulation contest are of a capital nature. . Upon the evidence the disallowance of the deduction from gross income by the respondent of $38,792.84 for "Promotion and Publicity" for 1922 is sustained and likewise the disallowance of the $37,115.36 as a deduction from gross income for 1923.
The last point involved is the right of the petitioner to deduct from gross income $3,078.10 in connection with litigation over an *1309 automobile which had been stolen from petitioner. Petitioner recovered the car and the person in whose possession the car was found was charged with the theft. The accused was acquitted and he brought suit against the petitioner for damages for malicious prosecution and false arrest. The $3,078.10 in question was paid by the petitioner in defending the action. It is claimed as a deduction from gross income on the ground either that it was a loss arising from the*2994 theft or a deductible expense in connection with petitioner's business. The facts outlined appear to bring this case within the principles announced by the Board in . In that case Backer paid money to prevent a strike among employees working on buildings being erected by him. He later testified before a state committee that he had not paid the money but before leaving the witness stand changed his testimony. He was charged with perjury but the jury disagreed and the case was dismissed. He claimed the right to deduct on his income-tax return the expense of his trial. The Board said:
We are dealing here with the age-old question of proximate cause. If the charge of perjury proximately resulted from the business carried on by George Backer, it may be conceded that the expense of defense against that charge was an ordinary and necessary expense of carrying on his business. If, on the other hand, the business of contracting was not proximately related to the charge of perjury, then the cost of defense was not a business expense and may not be deducted as such in the taxpayer's income-tax return.
*2995 To the same effect see , wherein the court stated:
In the , the Board of Tax Appeals held that a legal expenditure made in defending a suit for an accounting and damages resulting from an alleged patent infringement was deductible as a business expense.
The basis of these holdings seems to be that where a suit or action against a taxpayer is directly connected with, or, as otherwise stated (, proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214(a), subd. 1, of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case.
The petitioner's claim that the expense incurred in the litigation herein involved was a loss arising from the theft is far-fetched. All that was stolen from the petitioner was his automobile and that was later recovered. The claim that the amount paid is a business expense is likewise far-fetched. The facts indicate that the automobile was used to some extent in connection*2996 with the petitioner's business but the charge made by the petitioner against the person in whose possession the automobile was found that he was guilty of the theft had no near relationship to the petitioner's business. *1310 Upon the record, the disallowance of the deduction by the respondent must be and is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.
LANSDON dissents.