*2211 1. The period for assessment having been extended by a consent in writing, deficiencies asserted within the period as so extended are not barred from assessment and collection.
2. The action of the Commissioner will not be disturbed where no error with respect thereto was asserted in the pleadings nor tried at the hearing and where it was raised for the first time in the brief filed for petitioner.
3. The presumption that the action of the Commissioner is correct is not overcome by the submission in evidence of a revenue agent's report which the Commissioner did not follow. Nor will the Board hold that the Commissioner erred in eliminating from the assets of the taxpayer certain items of machinery which were ten years old, where it is not shown that such items were in existence during the taxable years and where the parties are agreed upon a depreciation rate of 10 per cent.
4. The action of the Commissioner in holding that certain amounts paid to petitioner's preferred stockholders who were also its officers and employees are not deductible as compensation for their services is approved where such amounts were paid in precise proportion to stockholdings and where it*2212 does not appear whether such addition to their compensation would constitute reasonable compensation.
5. Section 331 of the Revenue Act of 1918 applied.
6. Commissions paid to a broker who negotiated certain leases for the term of five years each are not wholly deductible in the year paid or accrued, but should be spread over the terms of the leases.
7. A net loss suffered in the year 1919 should be first deducted from net income for 1918, even though assessment and collection of the taxes for the latter year are barred by the statute of limitations.
8. The Board may not determine the year or years in which the Commissioner should apply a credit for overpayment of taxes for a year not before it.
*1316 The Commissioner determined a deficiency in income and profits tax of petitioner for the year 1920 of $6,487.14; and for the year 1921 *1317 a deficiency in income tax of $1,042.56. The Commissioner computed tax liability upon the basis of affiliation of petitioner and the Drapery Hardware Manufacturing*2213 Co., hereafter referred to as the Drapery Co. The errors alleged and urged are:
(1) that the deficiencies determined were at the date of determination and are now barred by the statute of limitations;
(2) that the Commissioner erroneously reduced invested capital for 1920 by Federal taxes for the years 1917 and 1918 amounting to approximately $9,667.79;
(3) that the Commissioner -
(a) disallowed as a deduction to the Drapery Company depreciation on machinery and equipment for the year 1920 in the amount of $6,764.57, and for the year 1921 in the amount of $8,968.02;
(b) has deducted from invested capital for 1920 the sum of $51,494.58 for assets written off;
(c) has disallowed as a deduction to the Drapery Company depreciation in the amount of $1,515.12 for 1920 and $3,030.25 for 1921 on the ground that $30,302.54 of property alleged to have been purchased in 1910 was fully depreciated July 1, 1920;
(d) has disallowed as a deduction to the Drapery Company depreciation for 1921 in the amount of $688.31 on property valued at $13,766.33 on the ground that it was purchased in 1911 and was fully depreciated July 1, 1921;
(4) that the Commissioner has disallowed as expenses*2214 of petitioner for the year 1920 the sum of $2,450 and for the year 1921 $3,000, additional compensation to officers and employees;
(5) that the Commissioner -
(a) has eliminated from consolidated invested capital for the year 1920 $11,666 on account of patents and machinery of the value of $35,000 exchanged by Dickran M. Sarkisian for capital stock of the Drapery Company;
(b) has refused to allow depreciation for the years 1920 and 1921 on patents of the value of $25,000 transferred by Dickran M. Sarkisian to the Drapery Company on or about September 1, 1920, in exchange for stock of the value of $25,000;
(6) that the Commissioner has included in gross income of petitioner for the year 1921 the sum of $1,728 as received from one McKay which was never received and was included in income for 1921 through clerical error;
(7) that the Commissioner has refused to allow as a deduction in 1920 dues paid to a hardware association in the sum of $66.;
(8) that the Commissioner has refused to allow as a deduction in 1920 $1,000 expended by petitioner as commission in obtaining a lease;
(9) that the Commissioner has refused to allow as a deduction for 1920 a net loss for 1919 amounting*2215 to $19,941.17;
(10) that the Commissioner has refused to credit against the tax due for 1920, if any, an overassessment of $2,060.91 for 1919, but has applied $1,974.02 of said overassessment against petitioner's additional assessments for 1917, which was barred by the statute of limitations and $86.89 against the tax for 1918, and
(11) that the Commissioner has disallowed a deduction of $7,675.93 on account of a loss suffered by petitioner in 1920 on account of certain assets purchased from Nana Auto Specialty Company which turned out to be worthless and were discarded within the year.
*1318 FINDINGS OF FACT.
The Gould-Mersereau Co., hereafter referred to as Gould Co., was a corporation organized in 1891 under the laws of the State of New Jersey. This company was reincorporated under the laws of the State of New York, under the name of Gould-Mersereau Co., Inc., the petitioner herein, and acquired the assets and assumed the liabilities of the Gould Co. as of January 1, 1920. During the years 1920 and 1921, D. M. Sarkisian owned from 75 to 98 per cent of the stock of petitioner. From January 1, 1920, to September 1, 1920, the Drapery Co. had outstanding capital*2216 stock in the amount of $25,000, all of which was owned by petitioner. On September 1, 1920, its capital stock was increased to $100,000, the additional stock being issued to D. M. Sarkisian, who then owned three-fourths of said company's stock. Respondent has determined that petitioner and the Drapery Co. were affiliated during the years 1920 and 1921. Both companies kept their books of account upon an accrual basis, and both were dominated by Sarkisian. The corporate affairs of these companies were carried on in an informal manner.
(1) Petitioner filed its income and profits tax return for 1920 on March 15, 1921, and its income and profits tax return for 1921 on March 15, 1922. It reported net income for 1920 in the amount of $41,188.34, and for 1921 in the amount of $11,783.81. On or about February 16, 1926, petitioner executed an instrument in writing which was also executed by respondent, which reads:
New York, N.Y., Feb. 16th, 1926.
In pursuance of the provisions of existing Internal Revenue Laws Gould Mersereau Company, Inc., a taxpayer of New York, N.Y. and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of*2217 the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1920 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 31, 1926, and shall then expire except that if a notice of a deficiency in tax 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 GOULD MERSEREAU CO., INC.,
Taxpayer.
By (Signed) D. M. SARKISIAN, Pres.
D. H. BLAIR, Commissioner.
On or about February 16, 1926, petitioner executed an instrument in writing which was also executed by respondent which reads:
*1319 New York, N.Y., Feb. 16th, 1926.
In pursuance of the provisions of existing Internal Revenue Laws Gould Mersereau Company, Inc., a taxpayer of New York, N.Y., and the Commissioner of Internal Revenue hereby waive*2218 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 year (or years) 1921 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 31, 1926, 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 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 GOULD MERSEREAU CO., INC.,
Taxpayer.
By (Signed) D. M. SARKISIAN, Pres.
D. H. BLAIR, Commissioner.
On May 6, 1926, the Commissioner mailed to the petitioner notice of the determination of the deficiencies here involved. For 1920 the Commissioner determined that the net income of the petitioner was $51,523.48 and of the Drapery Co. was $13,376.96; *2219 that the consolidated net income was $64,900.44; that the income and profits taxes upon such consolidated income were $15,339.66; that there had previously been assessed $7,019.73 against petitioner and $1,832.79 against the Drapery Co. and that there was a deficiency to be assessed of $6,487.14, all of which was asserted against petitioner. For 1921 the Commissioner determined that the net income of petitioner was $14,728.06 and of the Drapery Co. $12,428.71; that the consolidated net income was $27,156.77; that there was no profits tax; that the income tax upon such consolidated net income was $2,715.68; that there had previously been assessed against petitioner $978.38 and against the Drapery Co. $694.74; and that there was a deficiency to be assessed of $1,042.56, all of which was asserted against petitioner.
(2) On March 25, 1918, the Gould Co. filed its income tax return for 1917 and on the same date filed its excess-profits tax return for the same year. Subsequent to June 21, 1921, the same company filed amended income and excess-profits-tax returns for the same year. On March 28, 1918, the Drapery Co. filed its income tax return for 1917 and on the same day filed its*2220 excess-profits tax return. Subsequent to May 18, 1921, the same company filed an amended income-tax return for the same year. On May 13, 1919, the Gould Co. and the Drapery Co. filed a consolidated income and profits tax return for the year 1918. In computing excess-profits tax for 1920, the Commissioner reduced invested capital for that year by $9,667.79 for alleged unpaid income and profits taxes for 1917 and 1918.
*1320 The Commissioner determined the tax liability of the Gould Co. for taxes for 1917 and 1918 as follows:
| 1917 | ||
| The Drapery Co. | Gould Co. | |
| Shown on return | $458.22 | $560.01 |
| Assessed April, 1920 | 5,355.81 | |
| Assessed June, 1920 | 6,075.55 | |
| Abated May, 1921 | 5,543.30 | |
| Abated August, 1921 | 249.37 | |
| Balances | 990.47 | 5,866.45 |
| Assessed March, 1923 | 6,502.60 | |
| Assessed April, 1923 | 10,825.11 | |
| Abated: | ||
| Schedule 17809 | 8,777.56 | |
| Schedule 17846 | 4,963.73 | |
| Tax liabilities | 2,529.34 | 7,914.00 |
| Tax shown on return | 458.22 | 560.01 |
| Additional tax | 2,071.12 | 7,353.99 |
| 1918 - Consolidated basis | ||
| Tax, per return | $1,581.36 | |
| Assessed February, 1924 | 85,541.77 | |
| Abated April, 1924 | 35,483.84 | |
| Abated January, 1926 | 49,777.32 | |
| Tax liability | 1,862.97 | |
| Tax, per return | 1,581.36 | |
| Additional tax | 281.61 |
*2221 No part of the above taxes has been collected nor has any warrant of distraint been issued therefor, nor has any action to collect same been begun.
(4) In 1914 the directors of the Gould Co., providing for sale of its preferred stock to employees, adopted a resolution reading:
The corporation shall agree to pay the pro-rata share of 10 per cent of the net earnings of the corporation as same may be from time to time determined by the officials of the corporation, to the employees or officers holding shares of preferred stock. Upon the resignation or discharge of any employee, the company shall have the right and option to purchase, at par, any and all shares of stock owned by such employee.
During 1920 petitioner had outstanding 245 shares of preferred stock carrying dividends of 7 per cent and in 1921 it had outstanding 250 shares of the same stock. This stock was owned by officers and employees of the company. During these years D. M. Sarkisian, who was president of petitioner and owner of over 75 per cent of its common stock, owned 145 shares of the preferred stock. At the direction of the president the holders of these shares were paid in 1920 an additional 10 per*2222 cent, or $2.450, and in 1921 an additional 12 per cent or $3,000. A similar policy had been pursued by the Gould Co. since 1914 in pursuance of the above quoted resolution. The payments were not at all times based upon 10 per cent of the *1321 net earnings. Such payments were made in some years when there were no earnings. Some years as little as 2 per cent was paid. During all the years the preferred stock of both the Gould Co. and petitioner regularly paid the fixed dividend of 7 per cent.
(5) Prior to September 1, 1920, D. M. Sarkisian owned over 75 per cent of the common stock of petitioner. Petitioner owned all of the stock of the Drapery Co. On September 1, 1920, the Drapery Co. accepted a proposition to issue to Sarkisian 500 shares of its capital stock of the par value of $100 each in exchange for the sale to it of all right, title and interest of Sarkisian to certain machinery and letters patent and the discharge of $15,000 on account of certain commissions due Sarkisian. Upon the consummation of this transaction Sarkisian was the owner of 50 per cent or more of the capital stock of the Drapery Co. The machinery in question had cost Sarkisian $20,000. It*2223 had been used by the Drapery Co. since 1914 without payment therefor. At the date of transfer the machinery had a fair market value of $10,000. In 1905 or 1906, Sarkisian had purchased, for $1,000, Patent No. 763,780, issued June 28, 1904. About 1907 or 1908 he acquired for $1,000 Patent No. 771,944, which was issued October 11, 1904. On July 10, 1906, there was issued to Sarkisian Patent No. 825,762. Litigation ensued over this patent, which cost Sarkisian between $500 and $750. On the following dates the following patents were issued to Sarkisian:
| Date of issue | Patent No. |
| Nov. 19, 1907 | 871,362 |
| Sept. 26, 1905 | 800,245 |
| Nov. 17, 1908 | 904,091 |
| Dec. 3, 1907 | 872,689 |
| May 5, 1914 | 1,095,526 |
The patents issued to Sarkisian cost him $750from to $1,000. The total cost of all the above patents, including the amounts paid for the first two and the cost of litigation over the third amounted to $3,500. In 1908 the directors of the Gould Co. adopted a resolution authorizing the company to pay royalties, based on number of articles produced, to Sarkisian on the patents he then held. During the years 1908 to 1913, inclusive, Sarkisian received royalties from the*2224 Gould Co. of about $2,000 per year. Prior to that date he had received royalties from a partnership of which he was a member, of between $1,000 and $1,500 per year. After the year 1913, Sarkisian received no royalties on any of his patents although royalties were credited to him on the books of his companies. During at least a part of this time the Drapery Co. had the benefit of these patents. On September 1, 1920, he transferred these patents, except No. 1,095,526, to the Drapery Co., pursuant to the agreement of that date. *1322 Patents Nos. 771,944, 825,762 and 1,095,526 were the most valuable of those enumerated. The item of $15,000, mentioned in the proposition from Sarkisian to the Drapery Co., was to be charged against an amount which appeared on the books of the Drapery Co. as due Sarkisian for royalties.
(6) In 1921 petitioner sold to one McKay 4,500 shoe tree hinges at 15 cents per hinge, and 5,400 handles for shoe trees at 7 cents per handle. By error McKay was charged on the books with 13,500 of the first article and 10,800 of the second, resulting in an overcharge of $1,728. McKay kept a running account, and made payments thereon, but before settlement*2225 and in 1922 the error was corrected, the McKay account being reduced by the amount of the overcharge. The whole of the overcharge was reported as income in 1921.
(7) In 1920 petitioner paid as membership dues to a hardware association the sum of $50, and $16 as expense in connection therewith.
(8) In 1920 petitioner executed three leases upon property which it owned, the leases to take effect in February, 1921, and run for 5 years, and agreed to pay $1,000 to a broker for his services in securing the leases. This amount was accrued on petitioner's books on December 31, 1920, and of this amount $500 was paid in 1920 and $500 in 1921. One of the three tenants remained in possession for about two years, or until about February, 1923.
(9) In the year 1925 respondent determined that the consolidated income of the Gould Co. and the Drapery Co. for 1918 was $17,524.74 after deducting a net loss for 1919 of $19,941.17, of which net loss the amount of $17,673.20 was determined in 1925.
(10) Respondent on January 18, 1926, approved an allowance for an overassessment of the consolidated tax of the Gould Co. and the Drapery Co. for 1919 in the amount of $2,060.91, and applied $1,974.02*2226 to the payment of additional taxes for 1917, and the remainder of $86.89 to the payment of additional tax for 1918.
(11) At a time not shown petitioner took over the assets of the Nana Auto Specialty Co. at a cost of $10,300. A part of these was discarded as worthless in 1920 and the remainder was transferred to the Drapery Co. at a value of $1,250. On this transaction a loss of $7,675.93 was claimed and deducted in the returns, which was disallowed by respondent as an intercompany transaction. Respondent has computed the loss on this transaction as follows:
| Cost of parent company (petitioner) | $10,300.00 |
| Less depreciation allowed | 2,881.15 |
| 7,418.85 | |
| Amount originally charged to Drapery Co | 1,250.00 |
| 6,168.85 |
*1323 OPINION.
PHILLIPS: We will discuss the errors in the order in which they are numbered in our opening statement.
(1) There is no merit in petitioner's first contention in so far as it alone is concerned. In February, 1926, and within five years from the date of filing of its return for 1920 and within four years from the filing of its return for 1921, petitioner and respondent consented in writing to extend to December 31, 1926, the*2227 time within which the taxes for these years might be assessed. Before the expiration of that period respondent mailed his deficiency notice, and within sixty days thereafter petitioner filed its petition with the Board. It is clear that any deficiency due from the petitioner is not barred from assessment or collection.
In its brief the petitioner urges for the first time that the total tax must be apportioned between the affiliated corporations upon the basis of the net income assignable to each. Section 240, Revenue Acts of 1918 and 1921. On this basis it is urged that the amount which may be asserted against petitioner is smaller than that determined. Whether such a claim would be well founded would depend upon whether or not there was any agreement between petitioner and the Drapery Co. as to the apportionment of the tax computed upon the consolidated income. Had the issue been raised by an assignment of error in the petitioner, as required by our rules of practice, we might have hoped for some evidence as to whether or not there was such an agreement between the corporations as to the proportion which each should bear. That separate returns were originally filed would, *2228 perhaps, indicate the absence of any such agreements. The record, however, indicates that after the first ruling was made holding these corporations to be affiliated, conferences with the Bureau were held. During the progress of these there may or may not have been some agreement reached as to the corporation against which any deficiency should be assessed. No purpose would be served by attempting to speculate upon this possibility, since the issue has not been pleaded or tried. The reasonableness of the rule that all errors relied upon must be set out so as to permit the parties an opportunity to produce their evidence is not open to question. The present case presents a good example of the possible results of a failure to raise issues so as to permit a proper defense. At the conclusion of the hearing counsel for petitioner moved to amend the petition to raise the issue of the statute of limitations, being of the opinion that the record established that the collection of the taxes involved was barred. The amendment was permitted and the case reopened to try that issue. The respondent defended by producing agreements extending the period for assessment, of which agreements*2229 counsel for *1324 petitioner apparently had no knowledge and which the respondent had no occasion to produce until the issue was raised by the pleadings. Because the pleadings do not raise the issue as to a division of the tax between the affiliated corporations, the parties have had no opportunity to produce their proofs and manifestly we should not pass upon it. The Board will not disturb the action of the Commissioner in asserting the entire deficiency against the petitioner; nor will it question his action in crediting against the tax on the consolidated income the amount of tax paid by the Drapery Co.
(2) It is alleged that the Commissioner erroneously reduced invested capital for 1920 on account of outstanding assessments of taxes for 1917 and 1918, collection of which is barred by the statute of limitations. That collection is barred is clear. New York & Albany Lighterage Co. v. Bowers,273 U.S. 346">273 U.S. 346; Russell v. United States,278 U.S. 181">278 U.S. 181. While the Board has held that invested capital is to be reduced for taxes of prior years, it has also held that alleged additional taxes for previous years, barred from collection, may*2230 not be used to reduce invested capital. Lancaster Lens Co.,10 B.T.A. 1153">10 B.T.A. 1153; National Products Co.,11 B.T.A. 511">11 B.T.A. 511; Green River Distilling Co.,16 B.T.A. 395">16 B.T.A. 395; Murtha & Schmohl Co.,17 B.T.A. 442">17 B.T.A. 442; Electric Appliance Co.,19 B.T.A. 707">19 B.T.A. 707. See also I.T. 1261, C.B. I-1, p. 370.
(3) The petitioner alleges several errors on the part of the Commissioner in computing depreciation. The record is insufficient to permit us to make any substantive findings which would aid the parties, for the petitioner attempts to raise the question largely without evidence. It is first urged that the depreciation allowed the Drapery Co. was insufficient. In support of this petitioner introduced in evidence a report made by a revenue agent who computed depreciation at the amount which petitioner urges is correct. In this report the agent took the book value of machinery and equipment at 1919, added $76,699.43 as "depreciation charged off direct," deducted an amount of $9,998.16 for tools discarded in 1917, and allowed 10 per cent of the resulting figure. The report was not accepted by the Commissioner, who reduced the base*2231 and allowed 10 per cent thereof. With respect to this adjustment the computation furnished by the Commissioner to the petitioner, and submitted in evidence by the latter, states:
(a) According to agreement in conference May 28, 1925, an adjustment was made reducing machinery and equipment account by the cost of tools, etc., worn out and discarded in prior years but not written off the books. This adjustment reduces the amount subject to depreciation in 1920. Depreciation is computed at the annual rate of 10% and assets more than 10 years old are deemed to have been fully depreciated prior to the taxable year.
There is a presumption that the action of the Commissioner is correct. Botany Worsted Mills v. United States,278 U.S. 282">278 U.S. 282. This *1325 presumption attaches to the final determination made by him and is not overcome by submitting a report of a revenue agent which he refused to follow. Since the record is devoid of any other evidence, the action of the Commissioner is sustained.
The other errors assigned with respect to depreciation arise out of the action of the Commissioner in eliminating from the machinery and equipment account all of*2232 such items as were more than 10 years old, on the theory that such assets had a life of 10 years and at the end of such period were worn out and discarded. Since the parties appear to be in agreement that 10 per cent is a reasonable rate of depreciation, the assumption of the Commissioner that such assets have a life of 10 years seems reasonable. However that may be, there is a total absence of any evidence to establish that any of such assets survived the taxable year, and on that ground alone it would be necessary to affirm the action of the Commissioner. Furthermore, it appears from evidence introduced by the petitioner and not contradicted, that these adjustments were made according to an agreement between the parties, that they benefited the Drapery Co. and the petitioner in the computation of taxes for prior years, particularly 1919, and must necessarily have been arrived at upon the basis of some evidence submitted to the Commissioner other than the revenue agent's report upon which petitioner largely relies.
(4) Respondent has disallowed the amounts of $2,450 and $3,000 paid by petitioner in 1920 and 1921, respectively, to its preferred stockholders, who were also its*2233 officers and employees, on the ground that these payments represented dividends and not compensation for services. Petitioner claims that they should be allowed as additional salaries or wages. Section 234(a)(1) of the Revenue Acts of 1918 and 1921 provides for the deduction from gross income of "all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *." Here the payments precisely equaled 10 and 12 per cent, respectively, on the preferred stock. They were made upon the strength of a corporate resolution making provision for such payment and apparently adopted before the stock was sold. Such a situation presents strong evidence that the payment was made because of the investment in the stock and this must be overcome by a sufficient showing that the payments were in fact made because of personal services actually rendered. See Woodcliff Silk Mills,1 B.T.A. 715">1 B.T.A. 715; *2234 New York Theater Program Corporation,4 B.T.A. 431">4 B.T.A. 431; Twin City Tile & Marble Co.,6 B.T.A. 1238">6 B.T.A. 1238; affd., 32 Fed.(2d) 229; General Water Heater Co.,14 B.T.A. 4">14 B.T.A. 4; Botany Worsted Mills v. United States, supra.This *1326 burden rests upon petitioner. Here we have no evidence whatever as to what were the duties performed by the preferred stockholders, the value of their services, or the amounts paid them. We do know that the president and principal common stockholder of the company owned 145 shares of preferred stock and received $1,450 out of the total of $2,450 paid in 1920 and $1,740 of the total payment of $3,000 in 1921. In the absence of evidence as to the amount or reasonableness of the salaries paid, we are compelled to affirm respondent on this issue.
(5) Prior to September 1, 1920, D. M. Sarkisian owned from 75 to 98 per cent of the stock of petitioner and petitioner owned all the stock of the Drapery Co. On that date Sarkisian sold to the Drapery Co. certain machinery and patents, as enumerated in the findings, and received therefor capital stock of the company. The evidence is to*2235 the effect that after the transfer Sarkisian owned 75 per cent of the stock of the Drapery Co. How he acquired 25 per cent of this does not appear, but it is certain that he owned at least 50 per cent. This brings the transaction squarely within the provisions of section 331 of the Revenue Act of 1918. The machinery and patents should be included in invested capital at their depreciated cost to Sarkisian.
Section 331 deals only with invested capital and the limitation which it imposes does not apply to depreciation, which should be computed on these assets at their cost to the Drapery Co. when they were paid in for stock. Ben T. Wright, Inc.,12 B.T.A. 1149">12 B.T.A. 1149, George A. Giles Co.,4 B.T.A. 335">4 B.T.A. 335. The evidence is sufficient to establish a market value of $10,000 for the machinery, but fails to establish any substantial value for patents. The only witness on this issue is Sarkisian, who in his testimony disclosed that he had no real conception of the meaning of the term "fair market value." After the term had been explained to him and after stating that he could not value the patents separately, he placed the fair market value of them as a whole*2236 at $50,000. On further examination it appeared that this value included the amount due him for unpaid royalties and the value of one patent which he owned but did not transfer. It was also developed that this value was estimated on a royalty basis. That this valuation is excessive is shown by the fact that the highest amount actually paid to Sarkisian in one year as royalties was the sum of $2,000 and the greatest amount due in any year (but not paid) was estimated by him at $3,000, which he said included about $1,000 on the patent which was not transferred. The latest of the patents transferred had only about four years of life. All that Sarkisian could have expected in royalties for the remaining years would have been $8,500 at a most liberal estimate, for the two which he said were the most valuable of those transferred had a very short life *1327 remaining before they expired. In order to account for his valuation of the patents this witness testified that their use had resulted in large benefits to his corporations and then, to explain why royalties were not paid, he testified that the financial condition of the corporations did not justify their payment. This valuation*2237 of $50,000 was the only value for the patents which was sought to be established. This amount is obviously so excessive that we must disregard it. It would, appear, however, that these patents were in daily use and did have some market value, which we are of opinion was not less than their cost to Sarkisian, less ratable exhaustion thereof to September 1, 1930. This should be the basis for the computation of a deduction for their subsequent exhaustion.
(6) The overcharge to McKay was a clerical error. Petitioner being on the accrual basis, accrued this overcharge and included it in gross income in its return for 1921. The overcharge should be excluded from gross income for that year.
(7) Respondent erred in disallowing as a deduction the dues and additional expenses paid to a trade organization.
(8) Respondent did not err in refusing to permit petitioner to deduct from its gross income in 1920 the whole of the commission paid to secure leases which ran for five years, no one of which was surrendered in either of the years before us. This was a capital expenditure which should be prorated over the terms of the leases. This respondent has done. *2238 Bonwit Teller & Co.,17 B.T.A. 1019">17 B.T.A. 1019; Julia Stow Lovejoy,18 B.T.A. 1179">18 B.T.A. 1179; James M. Butler,19 B.T.A. 718">19 B.T.A. 718. Cf. Duffy v. Central Railroad Co.,268 U.S. 55">268 U.S. 55.
(9) Petitioner contends that a net loss for 1918 was determined after the Revenue Act of 1924 became effective and therefore should be applied in accordance with the provisions of that act and deducted from its net income for 1920. The answer to this is, first, that the Revenue Act of 1924 does not purport to impose taxes for the years 1919 and 1920; second, that a net loss as defined in section 204 of the Revenue Act of 1918 is quite a different deduction from that defined in section 206 of the Revenue Act of 1924; and, third, that section 1400 of the Revenue Act of 1921 and section 1100 of the Revenue Act of 1924 in effect provide that the Revenue Act of 1918 shall remain in force for the collection and assessment of all taxes imposed by that act. In this connection petitioner points out that taxes for 1918 were barred when the net loss, or at least a part of the net loss, for 1919 was determined. Section 204(b) of the Revenue Act of 1918 provides:
If for*2239 any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with *1328 the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year.
Under the above provision it was mandatory upon respondent to deduct the entire net loss for 1919 from the net income for 1918, unless the net loss was in excess of such net income, in which case*2240 the excess was to be used as a deduction in computing the net income for the succeeding taxable year. Here the succeeding taxable year was 1920. Since the whole of the deduction was exhausted in computing the tax for 1918, there remained nothing to be used as a deduction in 1920. The fact that the collection of the taxes for 1918 was barred by the statute of limitations does not affect this conclusion. To hold that the net loss for 1919 should not be deducted from the net income for 1918 because the tax for the latter year is barred would be to introduce into section 204 a provision not found there. Further, the tax that is barred is not a tax greater or less than the true tax, but is the tax for the year properly computed. In such computation all proper additions and deductions should be made. Respondent has properly applied the net loss for 1919.
(10) With respect to error (10) it is sufficient to point out that we have held that the Board does not possess jurisdiction to determine the year or years in which respondent should apply a credit for the overpayment of tax for a year not before it. *2241 Dickerman & Englis, Inc.,5 B.T.A. 633">5 B.T.A. 633; Lester H. Cranston et al., Executors,5 B.T.A. 993">5 B.T.A. 993; John W. Anderson,12 B.T.A. 1111">12 B.T.A. 1111; B. T. Couch Glue Co.,12 B.T.A. 1321">12 B.T.A. 1321. The deficiency which the Board is to redetermine is defined by statute as the difference between the proper tax and the amount previously assessed. The Board has nothing to do with respect to such administrative matters as collection, payment, or credit. We are powerless to disturb the application of the overpayment made by respondent.
(11) Respondent erred in holding that the loss incurred by the consolidated group with respect to the assets acquired from the Nana Auto Specialty Co. resulted from an intercompany transaction. It resulted from a loss of a part of the assets which had become worthless, and this irrespective of the transfer of part of the assets from *1329 petitioner to the Drapery Co. There appears to be no dispute that the amount of the loss was properly computed by respondent, except that petitioner makes an indefinite complaint to the effect that proper depreciation has not been computed on these assets. The complaint finds*2242 no support in the records.
Decision will be entered under Rule 50.