*2190 1. A corporation organized to acquire the real and personal property of a shipbuilding corporation and to liquidate the personal property as salvage, and to also dispose of the real property, is not entitled to defer the return of income from its operations for purposes of taxation until such time as the liquidation is completed. The Federal taxing statutes are designed to levy taxes upon the gains and profits of annual periods.
2. The respondent's computation of the "cost of goods sold" by the proportion method where there are no inventories, approved upon petitioner's failure to establish that the proportion used by the respondent is incorrect or that the proportion suggested by the petitioner is the correct one.
3. Claim for deduction of attorneys' fees as a business expense denied where it appears that such fees were not paid during the taxable year, it does not appear that they were accrued, and the Board is not advised of the amount of the deduction claimed.
4. The Board will not disallow the respondent's assertion of a 5 per cent penalty for negligence when the petitioner's objection thereto is raised for the first time on brief.
*188 This proceeding is for the redetermination of deficiencies in income taxes for the years 1923 and 1925, in the amounts of $6,805.15 and $1,262.98, respectively. The deficiency letter indicates an overassessment for the year 1924 in the amount of $1,961.69, and it also proposes penalties of 5 per cent for negligence, the amounts of such penalties being for the year 1923, $340.26, and for the year 1925, $63.15.
The petitioner asserts that the respondent committed errors described as follows: first, in computing the cost of goods sold; second, in the valuation of a closing inventory; third, in failing to recognize that the petitioner was organized to liquidate certain properties and that no profits can accrue on its operation until the liquidation is complete; fourth, failure to allow a deduction of alleged expense representing attorneys' fees; and fifth, in the overstatement of sales.
*189 FINDINGS OF FACT.
The petitioner, a Georgia corporation with its principal place of business at Atlanta, was organized in 1923.
Sometime prior to the petitioner's organization, certain*2192 persons who were stockholders of either the American Mills Co. or the Georgia Wool Stock Co., became convinced that they could derive a considerable profit by the purchase and resale, as salvage, of certain personal property then owned by the Terry Shipbuilding Corporation, hereafter termed the Terry Corporation, a New York corporation, then or formerly engaged in the operation of a shipbuilding yard situated on the Savannah River, in the vicinity of Savannah, Ga.
The United States Shipping Board - Emergency Fleet Corporation, hereafter termed the Shipping Board, claimed a lien of some kind upon the above described property of the Terry Corporation, and also upon the real property upon which the shipbuilding plant was situated. The persons mentioned above as being interested in the purchase of the Terry Corporation's property were obliged to conduct their negotiations for the purchase of such property with representatives of the Shipping Board at Washington. Other interests were bidding for the property. The Shipping Board refused to approve a sale of the personalty alone, insisting that the purchaser should also buy the real property on which the plant of the Terry Corporation*2193 was situated.
On December 28, 1922, an agreement for purchase of the property was reached. The petitioner had not yet been incorporated. It was, therefore, agreed that title to the property would be taken in the names of the American Mills Co. and the Georgia Wool Stock Co. pending the organization of a corporation to conduct the business contemplated by the persons interested in the transaction. Accordingly, the property was transferred to the two companies last named by a conveyance dated December 28, 1922. The petitioner was thereafter organized and it acquired from the American Mills Co. and the Georgia Wool Stock Co. all such items of real and personal property as those companies had acquired from the Terry Corporation by the conveyance above mentioned.
The consideration recited in the above described conveyance of December 28, 1922, was "the sum of Ten Dollars ($10.00) and other valuable considerations." The price paid, in fact, was $506,000 in cash. It was not considered advisable for the American Mills Co. and the Georgia Wool Stock Co. to furnish the purchase money. The transaction was, therefore, financed in the following described way. Ben E. May of New York, *2194 a brother of the president of the American Mills Co., advanced $306,000 and the Citizens Southern *190 Bank of Atlanta granted a credit in the amount of $200,000. A first mortgage covering the entire property involved was taken by the bank.
Subsequent to its organization the petitioner either assumed the obligations or substituted itself as obligor in the agreements incident to the borrowing of the purchase money as above described. On March 18, 1923, the petitioner gave May its unendorsed demand promissory note in the amount of $306,000, with interest payable at the rate of 6 per cent per annum from date. By a "Loan Deed" bearing the same date the petitioner conveyed to May all the real property acquired from the Terry Corporation as security for payment of the note. The said deed was recorded in the Clerk's Office, Superior Court, Chatham County, Georgia, on July 19, 1923, and it had not been canceled at the time this proceeding was heard. This loan deed was inferior to the security given the Citizens Southern Bank.
The land acquired from the Terry Corporation consisted of two parcels containing 120.62 acres and 41.7505 acres, respectively, each abutting on the*2195 Savannah River and carrying riparian rights and certain easements.
The personal and mixed property was described in the conveyance of December 28, 1922, as follows:
* * * The following described personal property, used and unused, situated, and located upon the property above described or in the Savannah River adjacent thereto:
Machinery of all kinds;
Steel Plates;
Four uncompleted hulls;
Supplies of all kinds;
Scrap iron of all kinds;
Ship supplies and parts of all kinds;
Steel and metals of all kinds;
Electric and locomotive cranes;
Derricks;
Paint and varnish supplies of all kinds;
Water piping and tower;
Lumber; docks;
Engines, boilers, dynamos; motors;
Transformers;
Electric wires and connections;
Locomotive;
Flat cars;
Steel rails;
Auto truck;
Catalogues, inventories, vaults, safes;
Letter files and contents;
Office furniture and fixtures;
Typewriters;
Contents of a building on Parcel 1 described above, known as the Port Hotel.
*191 TOGETHER WITH all other personal property, used or unused, situate and being upon the above described parcels of land or in the water adjacent thereto.
It is the intention of the parties*2196 hereto that by this instrument, party of the first part is conveying and transferring unto second parties all property, real, personal and mixed, situated and being on the land and in the buildings on said land and in the waters adjacent thereto, including all forms of personal and mixed property now situated upon the land herein described and the Savannah River adjacent thereto, except such steel rails as belong to the Savannah and Atlanta Railroad and which are indicated by separate instrument from first party unto second parties executed of even date herewith.
* * * The furniture and furnishings in Cherokee Lodge Port Wentworth, Georgia, together with such fixtures in the Cherokee Lodge as belong to party of the first part, the said Cherokee Lodge being situated upon land at Port Wentworth, Georgia, belonging to Port Wentworth Terminal Corporation.
And the party of the first part * * * does grant, etc. * * * all its right, title and interest in and to the store building, and does grant, bargain and sell the contents of the store building situated upon Lot 18 in Block 4, Bonny Bridge Subdivision, Port Wentworth, Georgia, the dimensions of said lot being 150 X 72' 6"; and*2197 by these presents does transfer and convey unto second parties, their successors and assigns, such right as first party may have to purchase said lot in Block 4, Bonny Bridge Subdivision, Port Wentworth, Georgia, from the receivers of Port Wentworth Terminal Corporation.
And the party of the first part * * * does grant, etc. * * * all personal property in and about the store building situated upon the lot above described, consisting of water piping, soil piping, and any other personal property adjacent said lot not specifically mentioned herein belonging to first party.
* * *
The personal property mentioned above consisted of thousands of items. The Terry Corporation had no inventories of their property and the petitioner made no attempt to compile one, partly because it would have been very expensive. The property was entered on the petitioner's books at cost, without any attempt at allocation between items of real or personal property.
Of the petitioner's stock, 75 per cent was issued to certain officers of the American Mills Co. and 25 per cent to certain officers of the Georgia Wool Stock Co. The petitioner's stockholders paid nothing for their stock and they have*2198 received nothing from the petitioner by way of dividends or officers' salaries. They made expenditures on the petitioner's behalf for traveling expenses, etc., for which they have not been reimbursed.
When the petitioner acquired the above described assets of the Terry Corporation, it immediately began to liquidate the personal property as salvage. In advancing the $200,000, credit above described the Citizens Southern Bank had insisted that it be reimbursed within six months. When the six-month period expired the petitioner did not have sufficient funds available to pay off the bank in full. The petitioner's stockholders, therefore, advanced such funds as were necessary and thereafter were repaid from the proceeds of sales. It had been agreed that Ben E. May would be repaid his *192 $306,000 loan from the proceeds of sales before the petitioner made any distributions of profits to its stockholders and after the indebtedness to the bank had been paid such proceeds were devoted to paying off May's loan.
Shortly after the petitioner began the sale of its property, various Government departments, particularly the Navy Department, began the disposal of huge quantities*2199 of similar property. The petitioner was forced to compete with the Government sales, and to do this much of its property was sold at public auction. The four hulls acquired from the Terry Corporation were cut up by acetylene torches and sold as sheet steel, yielding approximately 20,000 tons of such steel.
In 1924 the petitioner sold to the Savannah Steel Co. a portion of the land acquired from the Terry Corporation, including that on which the buildings were located. The land so sold consisted of 39 1/2 acres with a waterfront of about 1,000 or 1,200 feet and the price was $75,000, of which $5,000 was paid in cash, notes being taken for the balance. A charge on the petitioner's ledger indicates that the notes were assigned to Ben E. May on November 3, 1924, and a credit to the same account indicates that May turned them back to the petitioner on January 31, 1925. The amount of these notes was included in the petitioner's sales for 1924. The purchaser failed to make further payments on the property and in 1926 the petitioner repurchased the same at a sheriff's sale on its bid of $10,000.
At the close of 1925 the petitioner held approximately 121 acres of the land herein*2200 involved. This was all "back land" in the sense that it did not abut the water. A small portion of this land described as "store property" was sold during 1925 for $1,000. In 1925 the petitioner was hopeful that the Florida real estate "boom" would affect the value of the land mentioned, and in response to an inquiry it placed the sale price of the 121 acres at about $125,000. During 1925 the petitioner received some bids for this land, but they were not acceptable.
Sometime in 1926 a revenue agent made an investigation of the petitioner's tax return. At that time the agent and the secretary of the petitioner considered the value of the personal property and concluded that it was worth about $4,175 on December 31, 1925.
On December 31, 1925, the petitioner owed Ben E. May the amount of $6,540.76 of principal of his loan or loans, and $30,680.62 as interest. On December 31, 1927, the amount owed on the principal was $1,299.94, and as interest $29,067.63. There have been no further payments or interest computations made since the date last mentioned.
*193 The petitioner's return for the year 1923 reported the following:
| GROSS INCOME | ||
| Item | ||
| 1. Gross sales | $471,613.74 | |
| 2. Less cost of goods sold: | ||
| (a) Inventory at beginning of year. | ||
| (b) Merchandise bought for sale | $575,559.41 | |
| (c) Cost of mfg. or otherwise producing goods. | ||
| (d) Total of lines (a), (b) & (c) | 575,559.41 | |
| (e) Less inventory at end of yr | 200,000.00 | |
| $375,559.41 | ||
| 3. Gross profit from trading | $96,054.33 | |
*2201 * * *
| 11. Total income in items 3 to 10 | 96,054.33 | |
| DEDUCTIONS | ||
| 14. Total deductions in items 12 to 23 | 106,419.31 | |
| 25. Net income (Item 11 minus item 24) "loss" | $ 10,364.98 | |
| BALANCE SHEETS | ||||
| Beginning of tax- | Ending of taxable period | |||
| able period | ||||
| Items | Amount | Total | Amount | Total |
| ASSETS | ||||
| 1. Cash | $14,814.03 | |||
| * * * | ||||
| Less reserve for bad debts | 35,949.50 | |||
| 4. Inventories: | ||||
| * * * | ||||
| * * * | 200,000.00 | |||
| 6. Loans (describe fully) | $115.00 | 115.00 | ||
| 7. Deferred charges: | ||||
| * * * | ||||
| * * * | "Loss." | 10,364.98 | ||
| 10. Good will: | ||||
| * * * | 50,000.00 | |||
| 12. Total assets | 298,243.51 | |||
| LIABILITIES | ||||
| 13. Notes payable | 25,500.00 | |||
| 14. Accounts payable | 222,743.51 | |||
| * * * | ||||
| Common stock (less stock | ||||
| in treasury) | 50,000 | 50,000.00 | ||
| * * * | ||||
| 20. Total liabilities | 298,243.51 | |||
Attached to the petitioner's income-tax return for the year 1923 is a letter reading as follows:
Treasury Department COMMISSIONER OF INTERNAL REVENUE
Address reply to
Commissioner of Internal Revenue
And return to IT:E:RR VHW
AMERICAN INDUSTRIAL CORPORATION,
P.O. Box 1553, Savannah,*2202 Ga.
SIRS: Receipt is acknowledged of your letter dated November 26, 1923, with reference to your income tax return for 1923.
You state that the American Industrial Corporation was organized on January 1, 1923, to liquidate all the assets formerly owned by the Terry Shipbuilding *194 Corporation of Savannah, Georgia, but that it is impossible to calculate the inventory value or the cost price of any article which has been sold by the taxpayer as its assets were purchased for a lump sum, and that the profit or loss on the purchase can be determined only when the plant has been sold out. You say that the original purchase price will not be recovered by December 31, 1923, and that you wish to know whether there is any special provision of the Income Tax Laws which will enable you to postpone filing the return until the end of the liquidating process, or in any event until the end of 1924.
You refer to Section 327 and 328 of the Revenue Act of 1921, as not being applicable to your case, and ask whether the Bureau can make any determination of your tax liability for you, as you wish to abide strictly by all provisions of the law.
In reply you are advised that the provisions*2203 of the Revenue Act of 1921 which requires an annual return by all taxable corporations are mandatory, and that there is no provision of that Act which permits you to postpone filing your return until the end of 1924, or until the end of the liquidating process. As you apparently keep your books upon a calendar year basis your first return must cover the period from the organization of your company in 1923 until December 31, 1923, inclusive.
With respect to the determination of income for 1923, you are advised that the American Industrial Corporation should make an equitable apportionment of cost among the various assets or classes of assets which it purchased from the Terry Shipbuilding Corporation, and should return as gain or loss for 1923, and subsequent years, the difference between the selling price of any of these assets sold during the taxable year, and the portion of the cost which is allocated to such assets. If it is impossible to apportion the cost of the various small items they may be grouped and the cost apportioned to the group, or if necessary, all the property sold during any one taxable year may be grouped for the purpose of apportioning the cost. This method*2204 of valuation, under the conditions which exist in this case, will be accepted in lieu of inventory or actual appraisal, but the entire apportioned cost must not exceed the aggregate purchase price.
Respectfully,
(Signed) J. G. BRIGHT,
Deputy Commissioner.
The respondent's determination of the petitioner's net income for the year 1923 was arrived at, as indicated by the deficiency letter, as follows:
| 1923 | ||
| Net loss returned | $10,364.98 | |
| Net income determined as follows: | ||
| Net sales | 465,929.97 | |
| Less: | ||
| Purchase, 1923 | $64,030.24 | |
| (Proportion of original purchase applicable to 1923.) | ||
| $506,000 divided by 465,929.97/978,100.50 | 241,039.20 | |
| Cost of merchandise sales | 305,069.44 | |
| Gross income | 160,860.53 | |
| Less: Expenses | 106,419.31 | |
| Corrected net income | 54,441.22 | |
*195 The petitioner's return for the year 1924 reported the following:
| Gross income | ||
| Item: | ||
| Gross sales | $789,264.75 | |
| Less inventory at end of year | 593,151.20 | |
| Gross profit | 196,113.55 | |
| Total income | $196,113.55 | |
| Total deductions | 178,419.99 | |
| Net income | 17,693.56 | |
| BALANCE SHEETS | ||||
| Beginning of taxable | ||||
| year | End of taxable year | |||
| Items | Amount | Total | Amount | Total |
| ASSETS | ||||
| 1. Cash | O/D | [$9,291.75] | ||
| 2. Notes receivable | $70,000.00 | |||
| 3. Accts. receivable | 52,488.28 | |||
| Less reserve for bad debts | 15,000.00 | 107,488.28 | ||
| Sundry accounts | ||||
| 4. Inventories: | ||||
| Raw materials; work in process; | ||||
| finished goods; supplies: Im- | ||||
| possible to take inventory as | ||||
| this is junk liquidating bus- | ||||
| iness. Total profit will be | ||||
| shown when final liquidation | ||||
| is completed. | ||||
| * * * | ||||
| 12. Total assets | 98,196.53 | |||
| LIABILITIES | ||||
| 13. Notes payable | 80,202.97 | |||
| 14. Accounts payable | 300.00 | |||
| * * * | ||||
| 19. Undivided profits | 17,693.56 | |||
| 20. Total liabilities | 98,196.53 | |||
*2205 The respondent's determination of the petitioner's net income (net loss) for the year 1924 was arrived at, as indicated by the deficiency letter, as follows:
| 1924 | ||
| Net income returned | $17,693.56 | |
| Net income determined as follows: | ||
| Net sales | 295,430.65 | |
| Less: Purchases | 22,663.04 | |
| Proportion of original purchase applicable to 1924, | ||
| $506,000 divided by $295,430.65/978,100.50 equals | ||
| 152,834.99 | ||
| Discount allowed by corp | 5,364.48 | |
| 180,862.51 | ||
| Gross income from sales | 114,568.14 | |
| Profit on sale of real estate, 1/15 of gross profit | ||
| of $36,200.26 | 2,413.35 | |
| Total gross profit | 116,981.49 | |
| Less: Expense | 117,768.78 | |
| Net Loss | 787.29 | |
*196 The petitioner's return for the year 1925 reported the following:
| Gross income | ||
| Items: | ||
| 1. Gross sales | 44,183.27 | |
| Less inventory at end of year | 393.57 | |
| Gross profit | 43,789.70 | |
| Interest on bank deposits, etc | 2,905.19 | |
| Other income | ||
| (a) Refund on insurance | 1,059.19 | |
| (b) American Mills Co | 163.87 | |
| (c) Recoveries of bad debts previously charged off | 4.32 | |
| Total income | 47,922.27 | |
| Total deductions | 50,782.10 | |
| Net income | (Loss) | 2,859.83 |
| BALANCE SHEETS | ||
| Beginning of taxable | ||
| year | ||
| Items | Amount | Total |
| ASSETS | ||
| 1. Cash | OD | $9,291.75 |
| 2. Notes receivable | ||
| 3. Accounts receivable | $46,182.13 | |
| Less reserve for bad debts | 15,000.00 | 31,182.13 |
| SUNDRY ACCOUNTS | ||
| 4. Inventories; raw materials; work in process; | ||
| finished goods; supplies: Impossible to take | ||
| inventory, as this is a junk liquidating | ||
| business. | ||
| * * * | ||
| 12. Total assets | 28,196.53 | |
| LIABILITIES | ||
| 13. Notes payable | 10,202.97 | |
| 14. Accounts payable | 300.00 | |
| * * * | ||
| 19. Undivided profits | 17,693.56 | |
| 20. Total liabilities | 28,196.53 | |
| BALANCE SHEETS | ||
| End of taxable year | ||
| Items | Amount | Total |
| ASSETS | ||
| 1. Cash | $251.59 | |
| 2. Notes receivable | 35,000.00 | |
| 3. Accounts receivable | $24,001.01 | |
| Less reserve for bad debts | 0 | 24,001.01 |
| SUNDRY ACCOUNTS | ||
| 4. Inventories; raw materials; work in process; | ||
| finished goods; supplies: Impossible to take | ||
| inventory, as this is a junk liquidating | ||
| business. | ||
| * * * | ||
| 12. Total assets | 59,252.60 | |
| LIABILITIES | ||
| 13. Notes payable | 15,699.94 | |
| 14. Accounts payable | 30,680.62 | |
| * * * | ||
| 19. Undivided profits | 12,872.04 | |
| 20. Total liabilities | 59,252.60 | |
The respondent's determination of the petitioner's net income for the year 1925, as indicated by the deficiency letter, is as follows:
| 1925 | ||
| Net loss, returned | $2,859.83 | |
| Net income determined as follows: | ||
| Net sales | 82,777.38 | |
| Less: | ||
| Proportion of original purchase applicable to 1924 | ||
| [should be 1925] $506,000 divided by | $82,777.38 | |
| 42,823.18 | ||
| 978,100.50 | ||
| Gross profit | 39,954.20 | |
| Less: Expenses | 30,356.85 | |
| Net income from operations | 9,597.35 | |
| Add: Interest rec'd. as deposits: Notes, | ||
| mortgages, etc | 2,905.19 | |
| Corrected net income | 12,502.54 | |
| Less: Exemption | 2,000.00 | |
| Net loss, sec. 204, 1924 | 787.29 | |
| 2,787.29 | ||
| Net taxable income | 9,715.25 | |
*2207 *197 The petitioner's return for the year 1923 stated that it was made on the "accrual basis" while the returns for 1924 and 1925 stated that they were "made on the basis of actual receipts and disbursements."
OPINION.
MCMAHON: Among the errors alleged is the contention that because the petitioner "was organized to liquidate certain properties * * * no profits can accrue until the liquidation is complete." There is no amplification of this allegation in the petition but, from the hearing record and the petitioner's brief, it appears that the petitioner is contending that no profit should be computed on its operations until they are entirely concluded and that at such time an accounting should be made and a tax paid only if a taxable profit results over the span of years that the petitioner operates.
The petitioner's operations began in 1923 and had not been concluded when this proceeding was heard. Upon the petitioner's theory its tax liability can be projected indefinitely into the future and, in effect, the Government must assume the hazards of the business with no share in its management and must await collection of its revenue until it is the petitioner's pleasure*2208 to conclude is operations. Speaking of an analogous contention, the Board said, in , that it "would enable a taxpayer to postpone indefinitely the return of income which has actually been received, which result in our opinion, is inconsistent with the theory of the tax laws."
*198 In , the Board said:
* * * We cannot overlook the fact that the taxing statutes have been designed to levy income and profits taxes upon the gain and profits of business for annual periods, and that each annual period must necessarily, under the provisions of law, stand by itself * * *.
See also , and . This contention is, accordingly, denied.
The next point for consideration is covered by three assignments of error. These assignments are that the respondent erred, first, in computing the cost of goods sold; second, in "placing an excessive value on closing inventory"; and, third, in the overstatement of sales. These alleged errors are not related by the petition specifically*2209 to any of the years involved and it appears that they were intended to cover the three-year period mentioned in the deficiency letter. It will be recalled that the respondent determined an overassessment for the year 1924, and, therefore, that we have no jurisdiction as to tht year. However, the record best lends itself to discussion as if the three years, 1923 to 1925, inclusive, were all before us and we shall consider it on that basis, it being understood that we make no determination respecting the year 1924.
Upon hearing and brief the petitioner's attack is directed at the respondent's computation of the cost of goods sold, which the respondent has determined for each of the three years by dividing the amount of the original purchase price of assets from the Terry Corporation during 1923, i.e., $506,000, by the ratio of net sales for each year to a divisor of $978,100.50 and adding to the figure obtained purchases for each year other than the original purchase. As set out in the deficiency letter, these computations are as follows:
| 1923 | |||
| Net sales | $465,929.97 | ||
| Less: | |||
| Purchases, 1923 | $64,030.24 | ||
| Proportion of original purchase applicable | |||
| to 1923, $506,000, divided by | $65,929.97 | ||
| 978,100.50 | 241,039.20 | ||
| Cost of merchandise sales | 305,069.44 | ||
| 1924 | |||
| Net sales | 295,430.65 | ||
| Less: Purchases | 22,663.04 | ||
| Proportion of original purchase applicable | |||
| to 1924, $506,000 divided by | 295,430.65 | ||
| 978,100.50 | 152,834.99 | ||
| Discounts allowed by corp | 5,364.48 | ||
| 180,862.51 | |||
| 1925 | |||
| Net sales | $82,777.38 | ||
| Less: | |||
| Proportion of original purchase applicable | |||
| to 1924, $506,000 divided by | $82,777.38 | ||
| 978,100.50 | 42,823.18 | ||
*2210 *199 The respondent contends that it was necessary to determine the cost of goods sold by the proportion method because the petitioner had no inventories. The petitioner acquiesces in the respondent's use of the proportion method but objects to the proportion used, or more specifically, objects to the divisor of $978,100.50. The record is largely devoted to the petitioner's efforts to establish what the figure last mentioned represents. The petitioner contends that the figure must have been determined by adding net sales for the three years to get a total of $844,138, and to this sum adding a figure representing the closing inventory at December 31, 1925. Upon this basis the amount added as the closing inventory, i.e., the difference between $978,100.50 and $844,138, was $133,962.50.
The respondent's counsel insistently declares that no inventory was used in arriving at the disputed figure and he leaves the petitioner to its proof of what the figure represents. In our view the classification of the amount added to total net sales to arrive at the figure used as the divisor in the respondent's proportion is not important. Technically, it may not represent an "inventory, *2211 " but to be properly included in the divisor it must represent either the cost or market value of such property, real and personal, as the petitioner held for sale in the regular course of its business, on December 31, 1925, plus, possibly, accounts and notes receivable not previously reflected in sales and any items included in the petitioner's purchases of merchandise or real estate for sale and then diverted to the petitioner's own uses.
For convenience we shall consider the amount which should properly be added to the total of net sales for the three years as representing "unliquidated property" of the petitioner at December 31, 1925. Since the parties agree that net sales over the three-year period aggregated $844,138, it remains for the petitioner to prove that the amount of $133,962.50 which the respondent included in the divisor as the value of "unliquidated property" at December 31, 1925, is incorrect and to establish the amount which should correctly be so included.
The petitioner contends that its "inventory," or, as we term it, its "unliquidated property," at December 31, 1925, was valued at $25,000. There was no inventory taken at that date nor does it appear that*2212 values were assigned to the items singly or collectively at that date, except retrospectively after a revenue agent began an *200 investigation of the petitioner's returns. The exact date of the investigation mentioned does not appear nor are we advised of the items of personalty involved. Louis Koplin, secretary of the petitioner, was the only witness heard. His testimony as to the value of the "unliquidated property" at December 31, 1925, is shown by excerpts from the record as follows:
Q. What property did the American Industrial Corporation own at that time?
A. It had some miscellaneous personalty, of which a list was furnished to the government with an estimate of its value.
Q. What was that value? A. I think approximately $12,000 or $15,000.* * *
Q. What was actually owned by the American Industrial Corporation at that time?
A. Real estate.The petitioner then sought to prove the assessed value of the real estate, but the evidence offered was rejected as incompetent.
Q. Mr. Koplin, are you familiar with the value of property that was owned by the American Industrial Corporation on December 31, 1925?
A. Yes.Q. You had some connection*2213 with sales made by the company during that period?
A. Oh, yes sir, during the whole time.Q. What in your opinion was the fair value of the realty and personalty owned by he American Industrial Corporation on December 31, 1925?
A. $25,000.
THE MEMBER: Right there at that point, can you segregate the realty from the rest of it?
A. * * * There was not very much in the way of personalty, and that list approximated $5,000 of the personalty. Now as to the realty I might explain why it got up to $25,000 in distinction from that tax return, which only shows $10,000.
(The witness refers to a return for city taxes.)
THE MEMBER: The $25,000 figure covers it all?
A. The entire property.THE MEMBER: So that it follows from that that your valuation on the real estate would be approximately $25,000?
A. $20,000 * * *.
* * *
Q. In answer to a question from the court you stated that an actual physical inventory had been made of the personalty?
A. Yes. Q. And on that you fixed a value of what figure?A. $5,000.
Q. Have you got it exact?A. $4,175.
Q. What other assets were owned by the American Industrial Corporation on December 31, 1925?
*2214 A. Probably a few outstanding accounts receivable, most of which are still outstanding, real estate, and at that time the proceeds of a sale made to the Savannah Steel Company which was in the process of foreclosure.
* * *
*201 Q. That is all, unless you have something further?
A. * * * Now, since 1925, we have had, well I should say, ten or fifteen different prospects for the sale of that land, ranging anywhere from a nominal figure of $25,000 up to a figure of $150,000. I think the government sent somebody to buy it for $150,000 myself. We have never been able to sell an acre of that land. * * *
With respect to the land, which embraced approximately 121 acres, the witness further testified that during 1925 the petitioner sold for $1,000 "a little piece of store property" and in response to inquiries the petitioner asked $125,000 and again $110,000 for the whole tract, during that year.
In attacking the respondent's valuation of its "unliquidated property" at December 31, 1925, the petitioner had the burden of proving not only that such valuation was incorrect, but what the correct valuation was. *2215 ; . With respect to the personalty, we have not even been advised what property was involved. It may have been locomotives, or it may have been nuts and bolts. An appraisal, and presumably an inventory of this property, was made in 1926 when a revenue agent was investigating the petitioner's tax returns, but the only evidence we have is that the agent and the petitioners' secretary valued the personalty at $4,175. Neither the respondent nor the Board are bound by the conclusions mentioned. Clearly the Board is unable to determine the value of personalty included in the petitioner's "unliquidated property."
We now turn to a discussion of the value of the 121 acres of "back land" included in the "unliquidated property" at December 31, 1925. The petitioner originally acquired approximately 165 acres of land. In 1924 a tract of about 40 acres was sold for $75,000. This 40-acre tract included all the water frontage owned by the petitioner, but we have had no evidence to the effect, and we can not make an assumption, that it was more valuable than the so-called "back*2216 land" retained by the petitioner.
The petitioner now asserts that the 121 acres included in the "unliquidated property" had a value of $20,000 on December 31, 1925. In 1925 a portion of the "back land," described as "a small piece of store property," the exact area and the extent of its improvements, if any, not being shown, was sold for $1,000. This "store property" is not identified as the store building and lot mentioned in the conveyance of December 28, 1922. Sometime during 1925 the petitioner, in response to inquiries, placed a price of $125,000 on the 121 acres of "back land." Florida was then experiencing a real estate "boom" and the petitioner, as well as the persons inquiring about the property, considered it possible that the "boom" might spread and involve the petitioner's property. The petitioner had a "lot of *202 bids" for the property at this time, but we are not advised of the amounts offered.
In our opinion the petitioner's evidence respecting the value of the real property, like that respecting the personal property, has been too general and indefinite to warrant our predication of a finding of value upon it. The result is that the petitioner has*2217 failed to establish error in the respondent's determination, i.e., has failed to establish that the divisor used in the proportion by which the respondent computed its net income, was incorrect. We hold, therefore, that the petitioner has not overcome the prima facie correctness of the respondent's determination in this respect, and, accordingly, that determination is approved.
The only allegation of error remaining for discussion is that the respondent failed "to allow expense deduction for attorneys' fees." This deduction is claimed under sections 234 of the Revenue Acts of 1921 and 1924, each providing:
SEC. 234. (a) In computing the net income of a corporation subject to tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *.
The evidence is that no attorneys' fees were paid during the taxable years and there is no evidence that such expenses were accrued during these periods. Furthermore, we have not been offered the slightest intimation, either by the petition or the evidence, of the amount of the deduction claimed. Again the*2218 record is too indefinite to permit our affording the petitioner any relief. To be successful the petitioner must offer the Board evidence from which findings of material facts can be made. ; .
On brief, the petitioner contends that the 5 per cent negligence penalty proposed by the respondent should be disallowed. This contention was not mentioned in the petition and is offered for the first time on brief. We have repeatedly held that issues not raised by the pleadings and set up for the first time in briefs filed after hearing will not be considered. ; ; ; ; . In any event the record in this proceeding is not such as would lead us to declare that the respondent's proposal of the 5 per cent penalty for negligence was erroneous.
Reviewed by the Board.
Judgment will be entered for the respondent.