*4226 1. Sales of securities held bona fide and properly deductible as losses.
2. Nature of certain expenditures determined.
3. Respondent's disallowance of accounting fee as expense for 1920 and as invested capital at the beginning of 1920 approved.
4. Deficiencies held not barred.
*1413 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the respective amounts of $15,090.76 and $4,013.60. The contested errors alleged by the original petition and amendments thereto are that the respondent -
(1) Disallowed deductions for losses in the years involved on account of the disposition of certain stocks and bonds;
(2) Disallowed deductions of $5,411.17 and $1,836.73 for 1920 and 1921, respectively, as ordinary and necessary expenses;
(3) Disallowed as a deduction from gross income of 1920 a sum of $3,500 paid by petitioner to accountants in 1920 for auditing its records for 1919;
(4) Reducing invested*4227 capital of petitioner by $3,500, the amount of such audit fee, as at January 1, 1920; and
(5) Erred in attempting to assess or collect the entire amount because of the bar of the statute of limitations. An additional error alleged with respect to an overstatement of accrued interest receivable in 1921 was conceded by respondent's answer.
*1414 FINDINGS OF FACT.
Petitioner is a Michigan corporation engaged in the furniture business with its plant and principal office at Grand Rapids, Mich. During the years 1920 and 1921 it kept its books and made its Federal income and profits-tax returns on a calendar year basis under an accrual system of accounting.
During the years 1912 to 1914 the petitioner purchased $15,000 of stock in the Pantlind Hotel Building or Hotel Company. On December 31, 1913, the petitioner wrote off 50 per cent of the purchase price, or $7,500, and charged that amount to advertising and deducted same on its income-tax return for the year 1913. The March 1, 1913, value of the stock was equal to its par value, that is, $15,000. During the year 1920 petitioner reinstated the $7,500 written off on its books and credited the amount to surplus. The*4228 stock was then, during the year 1920, transferred to Martin J. Dregge and J. H. Hoult, officers and stockholders of petitioner, for $5,460.
The Furniture Manufacturer's Warehouse Co. was a corporation organized in March, 1920, by members of the Furniture Manufacturer's Association of Grand Rapids, in order to provide a place for consolidating shipments to various points in the country so that small shipments could be collected into carload lots and so that adequate storage facilities might be provided for furniture materials facilitating prompt delivery to the various furniture manufacturers. The petitioner subscribed for $12,000 of stock in the warehouse company, paying therefor $1,145.80 in 1917, $1,229.75 in 1918, and $9,624.45 in the year 1920. The payments of 1917 and 1918 were assessments made in those years by the Furniture Manufacturer's Association of Grand Rapids, covering the cost of acquiring land upon which the warehouse was constructed and, under the terms of the subscription agreement, credited on the amount of the subscription. The payments made in 1917 and 1918 had been charged to expenses in those years on the books of the petitioner. This stock was transferred*4229 during the year 1920 to Martin J. Dregge and J. H. Hoult, officers and stockholders of petitioner, for $4,500.
A contract was let in 1920 for the erection of a warehouse for the Furniture Manufacturer's Warehouse Co. at an agreed contract price of approximately $368,000. By the end of the year 1920 labor and building prices had declined so materially that the building could have been reconstructed for approximately $100,000 less than the contract price. In addition, the Warehouse Company had on hand only $300,000 in funds. By 1921 the financial condition of the Warehouse Company had reached a point where additional funds were necessary or failure would result. Petitioner and other furniture manufacturers subscribed to additional amounts of stock, the petitioner purchasing $6,000 additional, and at the end of the year 1921, *1415 likewise transferred this stock to Martin J. Dregge and J. H. Hoult for $3,000.
In June, 1921, petitioner purchased a $1,000 bond of the Regent Theatre Corporation at par, for which it paid cash and charged same to its investment account. This corporation planned to erect a modern theatre in the heart of the City of Grand Rapids. By the end*4230 of the year 1921 all that had been erected was a steel frame of the theatre without walls or roof. The contractor constructing the building went bankrupt because the Regent Theatre Corporation did not have funds to pay him, no other contractor could be found to take the job, and the entire plan was abandoned. At the end of the year 1921 petitioner sold this bond to Martin J. Dregge and J. H. Hoult for $500.
In October, 1921, a promoter of the Ramona Amusement Co. solicited subscriptions for the stock of that corporation, which was about to be organized with the idea of acquiring and developing amusement facilities at a park just outside of the city limits of Grand Rapids. The petitioner, on the representations of the promoter, purchased $5,000 in stock in the company and paid cash therefor late in December, 1921. A few days afterwards officers of the petitioner discovered that the moneys received from it were practically the only funds collected by the Ramona Amusement Co. and that they had already been spent and that the project was abandoned. In December, 1921, this $5,000 par value stock was sold to John Berghuis, a decorator of the petitioner, for $50.
The settled policy*4231 of the petitioner in 1920 and 1921 was to determine by a conference the state of petitioner's investments at the end of the year and to dispose of such investments as were not good. In accordance with such custom the stocks and bonds above named were sold to officers of petitioner or its employees. The amount paid to petitioner in each case was fair and ample consideration and represented at least the fair market value of such securities on the date of transfer.
During the years 1920 and 1921 petitioner incurred the following amounts for the purposes as shown below, which amounts were charged to expenses on its books and taken as a deduction in its returns and were disallowed by the respondent as deductions. The totals of the expenditures are as follows:
| Description | 1920 | 1921 |
| Changing and moving blow piping | $1,407.60 | $1,261.73 |
| Belting | 2,520.52 | |
| Painting and decorating showroom | 833.05 | |
| Moving shavings bin and repairing windows | 650.00 | |
| Canvas for protecting carpet | 445.00 | |
| Spindle extension heads | 130.00 | |
| Totals | 5,411.17 | 1,836.73 |
*1416 During the World War the petitioner was engaged in war work, making airplane parts which required an*4232 arrangement of machinery set up so as to make it possible to work with lumber stock longer than ordinarily used in the furniture industry. After the war and in the years 1920 and 1921 it was necessary to change back the machinery so that it might be used for furniture production. In changing the position of the machines the blower system, whereby the dust and shavings were carried to the engine room and boilers, was necessarily changed because of the relocation of the machinery. No new piping was added by this operation, the cost of $1,407.60 in 1920 and $1,261.73 in 1921 being applicable to labor, elbows, angles, fittings, etc., necessary to put the old blow piping in its new position. The relocation did not improve the blow piping, add to its value or prolong its useful life. The amounts were spent entirely to bring the plant back to a condition where petitioner could continue its furniture business after it was out of war work.
During the year 1920 petitioner purchased 122 feet of belting at a cost of $2,520.52, which it charged to expense. This particular belting was found defective a short time after it was acquired, the plies becoming loose and its general condition*4233 being unsatisfactory and dangerous. It was pieced a year or two afterwards and is still in use in the factory of the petitioner.
In 1920 the petitioner expended $833.05 in painting and decorating its showroom located on the second floor of its factory and used as a storeroom when not in use as a showroom during the markets of January and July. Because of this situation it was necessary to paint and decorate each year. In 1920 petitioner employed a general contractor to do some work on its boilers and had such contractor elevate its shavings bin so that it would feed into the boiler. The location of the bin was not changed nor was its size increased. Some of the windows in the wall of the boiler room were also bricked up so as to provide for the installation of a blower from the dust arrester system. The cost of these two items was $650.
Early in the year 1921 petitioner purchased 990 1/2 yards of canvas at 50 cents a yard, intending to use it to protect the showroom carpet between seasons when the showroom was used for storage purposes. It was found, however, that the canvas was not practical and within six months it had been so torn that it was useless and was scrapped*4234 in the year 1921.
The latter part of the year 1921 petitioner bought two spindle extension heads at a cost of $130. These spindle heads took the place of others that had been broken in the process of operating boring machines. Similar spindle heads had a life of four years.
During the fall of 1919 petitioner engaged accountants to make an audit of his records for the year 1919 for a fee of $3,500. The work *1417 was started in 1920 and completed in that year. The $3,500 fee for the accountants was billed and paid for in 1920 and charged to the expense account of the petitioner in that year and was deducted on its return as an ordinary and necessary expense. In the latter part of the year 1920 arrangements were made for an audit for that year at the same fee as for the year 1919. Work was begun in 1920 and the fee fixed in that year, but the audit was not completed until the year 1921. The amount of $3,500 on account of the 1920 audit was also charged to expenses during the year 1920 and deducted as an ordinary and necessary expense for that year.
In computing invested capital for 1920 the Commissioner decreased surplus at the beginning of the year 1920 by $3,500*4235 representing the audit fee for auditing the 1919 books.
Petitioner filed its income and profits-tax returns for the year 1920 not later than May 15, 1921, and for the year 1921 not later than May 15, 1922. The deficiency letter in this case was mailed to the petitioner on July 24, 1925, under the provisions of section 274 of the Revenue Act of 1924.
OPINION.
SIEFKIN: The first issue in this proceeding relates to the deduction from gross income of certain losses alleged to have been sustained during the years 1920 and 1921 on account of the sale of securities purchased by the petitioner and transferred to its officers and directors or, in one case, to an employee. The respondent contends that the transfer of all the securities were not bona fide sales and relies upon the decision of the Board in , in which we held that the transfer of securities to two stockholders who were also officers of the corporation, at a price below par and cost, was not bona fide. We believe, however, that the transactions in question here can not be so characterized. The evidence shows that investments were made by petitioner in an effort*4236 to promote civic enterprises and better business for the City of Grand Rapids, the furniture manufacturers of that city and specifically itself, and that the various sales to the officers and stockholders were at prices which at least equaled, if they did not largely exceed, the fair market value of the securities sold. Respondent's counsel calls attention to the fact that petitioner, after having sold one lot of warehouse company stock at a loss, invested further amounts in stock at par in the next year. This is understandable, however, both from the nature of the business which the warehouse company was intended to do, and from the fact that additional capital *1418 was necessary in order to permit the warehouse company to function at all. In our opinion, the losses deducted by the petitioner, consisting of $7,500 in 1920 and $3,000 in 1921 on account of the Furniture Manufacturer's Warehouse Co. stock, $2,040 in the year 1920 on account of the Pantlind Hotel Co. stock, $500 in 1921 on account of the Regent Theatre Co. bond, and $4,950 in 1921 on account of the Ramona Amusement Co. stock, were proper deductions from gross income for the years in question and should be allowed. *4237
The second issue relates to certain expenditures made by the petitioner corporation during the years 1920 and 1921 aggregating $5,411.17 and $1,836.73, respectively. The respondent has confessed error with respect to the amount of $833.05 spent for painting and decorating the showroom in 1920. Respondent also concedes the expenditure of $445 in 1921 for a canvas for protecting the showroom carpet was a proper deduction from gross income. With respect to the remaining items the evidence, in our opinion, establishes the amounts were capital expenditures and should be treated as such, and that the respondent's action in disallowing the deductions claimed was proper.
.the third and fourth issues relate to proper treatment of the sum of $3,500 paid to an accounting firm in 1920 for services in auditing the books of the petitioner for the year 1919. The evidence is that arrangements for the audit were made in the year 1919, the audit was started in 1920, the bill was rendered in 1920 and that payment was made in that year. The evidence is not clear as to exactly what was done in the year 1919 with respect to employing the accountants and there is some testimony that there was*4238 no obligation on the petitioner with respect to the 1919 audit during the year 1919 and that no liability accrued to the petitioner. This testimony is uncertain and we are unable to determine whether, in fact, any liability existed prior to 1920 and on that point we must affirm the respondent's determination. For the same reason we must also hold that his action in reducing invested capital as of the beginning of the year 1920 on account of the $3,500 fee for the 1919 audit was proper.
The fifth issue relates to the statute of limitations and must be determined adversely to the petitioner not only upon the grounds stated in , but also because of the provisions of section 283(a) and (b) of the Revenue Act of 1926 by which the running of the statute of limitations as to assessment, and necessarily collection, of the proposed deficiencies for the years 1920 and 1921 is suspended while this appeal is pending before the Board.
Judgment will be entered on 15 days' notice, under Rule 50.