Mossman, Yarnelle & Co. v. Commissioner , 9 B.T.A. 45 ( 1927 )

MOSSMAN, YARNELLE & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mossman, Yarnelle & Co. v. Commissioner

Docket Nos. 3269, 11076.

United States Board of Tax Appeals

9 B.T.A. 45; 1927 BTA LEXIS 2675;

November 11, 1927, Promulgated

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">*2675 1. An informal discussion by the officers of a corporation of increased salaries for the current year 1918, which salaries are not authorized or fixed in amount by formal corporate action until the following year, are not entered in the accounts or communicated to the employees and are never paid, is not sufficient to establish such salaries as deductible in 1918.

2. There are no well known and uniformly accepted rules either for the determination of the existence of good will or for its valuation, and it is only by looking at the circumstances of the business as a whole in the light of its history up to the time of the date under consideration that the question can be decided.

3. While the problem of valuation is not to be confined to the application of mathematical formulae or governed by a slavish adherence to a rule, nevertheless it may not as a matter of law be disposed of by the categorical opinions of witnesses unless their training and experience and their intelligent appreciation of the nature of the valuation problem give substance to their opinions.

4. The value of intangible property paid in for stock determined and invested capital held determinable by the">*2676 formula of St. Louis Screw Co.,2 B.T.A. 649">2 B.T.A. 649.

5. The value of intangible property on March 1, 1913, as a factor in the computation of gain or loss on subsequent disposition determined.

Frank H. Bryan, Esq., W. J. Vesey, Esq., and J. M. Chenoweth, Esq., for the petitioner.

C. H. Curl, Esq., for the respondent.

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STERNHAGEN

">*46 Deficiencies of $38,765.45, $10,373.50, and $787.86, income and profits taxes for the fiscal years ended October 31, 1918, 1919, and 1921, respectively. The petitioner asserts the respondent made the following errors in determining these deficiencies:

For 1918. - (1) Disallowance of additional salaries.

(2) Deduction of a tentative income and profits tax in determining the amount of earnings available for dividends.

(3) Failure to include the alleged cost of good will in invested capital.

(4) Failure to determine a net loss for 1919 and to deduct it from 1918 income.

For 1919. - (1) Failure to take into account the alleged March 1, 1913, value of good will in determining gain or loss on sale of business.

(2) Failure to allow the depreciated cost of furniture and fixtures as">*2677 a deduction in computing gain or loss on sale of business.

(3) Overstating the amount of income tax for 1918 restored to income.

(4) Failure to include the alleged cost of good will in invested capital.

(5) Deduction of a tentative income and profits tax in determining the amount of earnings available for dividends.

(6) Failure to include the alleged cost of intangibles in determining deduction for inadmissibles.

(7) Inclusion in income of amount received for a lease on petitioner's property, without allowing part of cost or value of petitioner's fee simple title as a deduction, and without eliminating that ">*47 portion of the amount which allegedly represented advance payment of rental.

For 1921. - (1) Reduction of invested capital on account of income and profits taxes for years 1918 and 1919 remaining unpaid at beginning of year by an amount in excess of true liability.

FINDINGS OF FACT.

The petitioner is an Indiana corporation with its principal office at Fort Wayne, Ind. During the taxable years 1918 and 1919, and throughout its entire prior existence, it was engaged in business at Fort Wayne, as a jobber and wholesale dealer in carriage and">*2678 buggy supplies and materials, blacksmith's supplies, iron, steel, and heavy hardware. The nearest places where similar businesses were conducted were Detroit, Chicago, and Indianapolis.

The business was started in 1882 as a partnership under the firm name of Alderman and Yarnelle, by Edward F. Yarnelle and Frank Alderman, as equal partners, with a total capital contribution of $9,000. In 1885, W. E. Mossman purchased Alderman's entire one-half interest in the business for $25,000; and at that time the firm name was changed to Mossman, Yarnelle & Co. B. Paul Mossman, who is a son of W. E. Mossman, became a partner in the firm of Mossman, Yarnelle & Co. in 1893. In 1902, E. R. Yarnelle, a son of E. F. Yarnelle, became a partner. About 1887, one W. S. Sponhauer, by the contribution of a small amount of capital, acquired a small interest in the partnership which he held until about the year 1890 when he withdrew his share. Thereafter he had no connection with the business.

Substantial sums were withdrawn annually by the partners from the profits of the business. Profits earned by the partnership to October 31, 1907, in excess of the profits withdrawn by the partners, amounted">*2679 to $480,356.34. The net worth of the partnership, exclusive of any intangibles, as shown by its books at that date, which is the last date on which the partnership books were closed prior to incorporation of the business, was $489,356.34, consisting of the capital of $9,000 originally paid in and the accumulated operating profits of $480,356.34.

On or about February 5, 1908, the partners of Mossman, Yarnelle & Co. organized the petitioner corporation under the same name. Upon organization the petitioner acquired all the assets, both tangible and intangible, and assumed all the liabilities of the predecessor partnership. In payment therefor its entire authorized capital stock of $100,000 was issued to the partners in the approximate ratios of their interests in the partnership.

The general ledger and other books of account of the partnership in use at the time the business was incorporated were continued ">*48 thereafter as the books of the petitioner. The accounts on the partnership ledger were continued as the accounts of the petitioner and the following entries made to give effect to the incorporation of the business:

	Debit	Credit
W. E. Mossman, partner	$257,290.59
E. F. Yarnelle, partner	181,195.99
B. P. Mossman, partner	42,160.13
E. R. Yarnelle, partner	8,709.63
Merchandise	10,643.66
Capital stock		$100,000.00
Surplus		400,000.00
	500,000.00	500,000.00

">*2680 The books were not closed as of the date of incorporation. The last closing of the partnership books prior to incorporation was as of October 31, 1907, and the first closing of the petitioner's books, after incorporation, was as of October 31, 1908. The closing as of October 31, 1908, covered a period which included the partnership's operations from November 1, 1907, to February 4, 1908, inclusive, and the petitioner's operations from February 5 to October 31, 1908, inclusive.

At the date the business was transferred to the petitioner in 1908, no amount was carried on the partnership's books for the value of good will or other intangible property, and no amount was ever entered on the petitioner's books for the value of any good will or other intangible property acquired by the corporation from the partnership in 1908.

A balance sheet taken from the petitioner's books as of October 31, 1908, after closing for that date is as follows:

ASSETS
Cash	$14,206.96
Merchandise	271,569.38
Accounts receivable	213,922.24
Bills receivable	52,600.70
Securities	8,800.00
Real estate and improvements	111,700.95
Furniture and fixtures	2,764.37
Total	675,564.60
LIABILITIES
Accounts payable	57,274.33
Bills payable	86,642.89
Profit and loss	31,647.38
Surplus	400,000.00
Capital stock	100,000.00
Total	675,564.60

">*2681 ">*49 The partners' capital accounts as recorded on the books of the partnership as of October 31, 1907, were as follows:

W. E. Mossman	$257,290.59
B. P. Mossman	42,160.13
E. F. Yarnelle	181,195.99
E. R. Yarnelle	8,709.63
Total	489,356.34

The capital, surplus, and profit and loss accounts on the books of the petitioner as of October 31, 1908, were as follows:

Capital stock	$100,000.00
Surplus	400,000.00
Profit and loss	31,647.38
Total	531,647.38

The difference of $42,291.04 between the totals of these figures represents an increase in the book value of the net worth of the business from October 31, 1907, to October 31, 1908.

The interests of the partners and the partnership earnings from January 1, 1901, to the date of incorporation were as follows:

Period	Investment at beginning of period	Earnings
January 1, 1901, to December 31, 1901	$180,926.43	$38,837.97
January 1, 1902, to December 31, 1902	211,995.40	57,340.75
January 1, 1903, to December 31, 1903	257,270.02	51,668.93
January 1, 1904, to December 31, 1904	303,704.29	27,028.49
January 1, 1905, to October 31, 1905	310,963.30	44,762.12
November 1, 1905, to October 31, 1906	341,637.33	91.140.81
November 1. 1906, to October 31, 1907	420,993.79	81,146.56
November 1, 1907, to February 5, 1908	489,356.34	8,288.60

">*2682 The capital and earnings of the petitioner for the five-year period ended March 1, 1913, were as follows:

Period	1 Capital	Earnings
March 1, 1908, to October 31, 1908	$503,453.35	$28,194.03
November 1, 1908, to October 31, 1909	501,647.38	68,975.34
November 1, 1909, to October 31, 1910	530,622.72	104,522.17
November 1, 1910, to October 31, 1911	535,144.89	66,130.39
November 1, 1911, to October 31, 1912	551,275.18	66,175.10
November 1, 1912, to February 28, 1913	567,450.28	24,915.94

The petitioner operated the business until September 30, 1919, at which time it transferred certain of its assets to the Mossman-Yarnelle Co., a new corporation organized to take over and continue the business. The resolution passed by the board of directors of the ">*50 petitioner on September 30, 1919, authorizing this transfer is as follows:

Resolved, That the Business, Good Will, Customers Lists, Stock on Hand, $46,000.00 in Cash, and a Ten Year Lease on the present business quarters of the company, be sold to The Mossman-Yarnelle Company for">*2683 $396,000.00 of the capital stock of that company, upon the understanding that that company have a capital stock of $400,000.00, and that that company be given possession of said property and premises on October 1st, 1919, and be required to issue said $396,000.00 of its capital stock to this company on or before the 30th day of October, 1919. That while said period of time is given that company for the issuance of said capital stock, nevertheless this sale and transaction shall be considered executed and binding upon the passage of a similar resolution by the Board of Directors of that company, and notice thereof given the President of Mossman, Yarnelle & Company.

That the terms of the lease hereinbefore provided for, shall be such as are customary in leases of business quarters; the particular terms of said lease, however, to be negotiated by the officers of the two companies, provided, however, that the rental shall be $7,500.00 per annum.

That the officers of this company will have full power to carry out the above resolution, and to make any necessary agreement with regard [to] the interpretation thereof, as may be agreed upon by the officers of this company and the officers">*2684 or directors of the Mossman-Yarnelle Company.

The petitioner received in exchange for the property transferred stock of the Mossman-Yarnelle Co. having an aggregate par value of $396,000. Thereafter, in October, 1919, petitioner sold this stock for $251,700.

The petitioner also sold miscellaneous securities in 1919 on which it sustained a loss of $4,539. It claimed this loss as a deduction on its 1919 return and also a loss of $44,877.48 representing an alleged book loss on the foregoing exchange and sale of assets.

The respondent allowed $43,839 as a deductible loss on the disposition of said assets, computed as follows:

Book loss on assets sold	$49,416.48
Less book value of furniture and equipment, disallowed	5,577.48
	43,839.00

The property transferred by petitioner to the Mossman-Yarnelle Co. included its furniture and fixtures. The depreciated cost of the furniture and fixtures as it appeared on the books was $5,577.

In computing the petitioner's loss on the disposition of its business, no deduction was allowed by the respondent for the depreciated cost of furniture and fixtures sold, nor for the cost or fair market value, if any, as of March 1, 1913, of">*2685 good will or other intangible property sold.

At the date of the transfer of the petitioner's business to the Mossman-Yarnelle Co., no amount was carried on the petitioner's ">*51 books for the value of its business, good will, customers' lists, filing systems, leaseholds, contracts, or other intangible property.

The exchange of the petitioner's business in 1919 for $396,000 par value of capital stock of the Mossman-Yarnelle Co. was recorded on its books by a charge of $396,000 to stock of the Mossman-Yarnelle Co. and the following credits:

Merchandise inventory	$245,000
Furniture and fixtures	10,000
E. F. Yarnelle, trustee, cash	46,000
Leaseholds	50,000
Filing systems, etc	25,000
Property contracts, business good will	20,000

After making the above credit entries, the furniture and fixtures account showed a credit balance, or book profit from the sale, of $4,422.52, and there having been no previous debits to leaseholds, filing systems, and property contracts and business good will accounts, those accounts showed credit balances, or book profits from the sale, of $50,000, $25,000, and $20,000, respectively.

The sale in October, 1919, by petitioner">*2686 of the stock of the Mossman-Yarnelle Co. was recorded on the books by a credit to the Mossman-Yarnelle Co. stock of $251,700, and the following charges:

B. P. Mossman	$51,425
W. Page Yarnelle	51,425
Harry E. C. Miller	51,425
Ernest W. Roembke	51,425
E. F. Yarnelle, trustee	46,000

After crediting the Mossman-Yarnelle Co. stock with the proceeds of the sale, the account in which that stock was carried showed a debit balance, or book loss from the sale, of $144,300.

The credit balances, or book profits, totaling $99,422.52, in furniture and fixtures, leaseholds, filing systems, and property contracts and business good will accounts were transferred, in toto, as a credit to realization and liquidation account; and the debit balance, or book loss, of $144,300, in the Mossman-Yarnelle stock account was transferred as a debit to the realization and liquidation account. After these two entries were made, the realization and liquidation account reflected a book loss, from the sale of the properties and of the stock received therefor, of $44,877.48, which is the amount of the loss claimed by petitioner in the return.

In September, 1918, and at other times">*2687 prior thereto, the advisability of making certain increases in salary was discussed by the directors of the petitioner. On June 5, 1919, the following resolution was passed by directors:

Directors of Mossman, Yarnelle & Co. held a meeting this fifth day of June and on motion of E. F. Yarnelle duly seconded by B. P. Mossman the following ">*52 increases in pay were allowed as increased pay for the year 1918, and payable as 1918 expenses:

To E. F. Yarnelle, President and manager of credits, and B. Paul Mossman, Vice President and General Manager, each	$15,000.00
for the reason that the salary of each should be $20,000.00, based on comparison with salaries of similar executives of concerns engaging in similar business to that of this company.
To Henry J. Miller, Secretary and Traveling Representative	4,000.00
W. A. Diffenderfer, Treasurer	2,000.00
Ernest Roembke, Manager Hardware Department	2,000.00
Harry E. C. Miller, Manager Trimming Department	2,000.00
Page Yarnelle, Manager Auto Accessory Department	2,000.00
George A. Philbrick, Chief Accountant	2,000.00
A. C. Pogue, Southern Traveling Representative	1,000.00
Ed. B. Wood, Western Traveling Representative	1,000.00

">*2688 All of the above for the reason that a spirit of discontent exists among those men, and it is feared that many of them may leave the company's employ if this increase is not granted them, as their salaries for the year 1918, as already paid them, have been very much below their real worth to the company, and because they have been held at low salaries by reason of the fact that the President and Vice President, drew correspondingly low salaries.

(There then follows a list of salesmen and employees to whom increases in salary aggregating $5,100 were granted.)

That increases in salary to all the foregoing salesmen and employees be paid for the reason that a general feeling of discontent exists among them on account of the low salaries they have received, and it is feared that if these payments are not made to them that many will soon leave the company's employ, and the company will be without experienced employees.

That all of the above increases shall apply alike to the year 1919 and thereafter unless this board sees fit to alter the said increases. The increases for the year 1919 shall not be payable before the end of the fiscal year 1919.

That in the opinion of this">*2689 board, all of the above increases are reasonable and necessary for the promotion of a greater and better spirit of cooperation among the executives and employees of the company and to prevent the loss by the company of any of the above executives and employees through failure to properly pay them for the splendid services they have rendered.

That the sum of $51,100.00, which is the total of the increases granted hereunder, shall be set aside as a liability on the books of the company for the payment of the same. The increases herein ordered shall be paid only when the Internal Revenue Department of the United States shall have approved this action and permit the above increases for 1918 to be charged to 1918 expense. In the event that said approval is refused, then this resolution to be void. This resolution carried unanimously by the board.

The increases in salary for 1918 were deducted from income in making return of income tax for that year to the Commissioner of Internal Revenue, but were never paid or entered on petitioner's books as accrued or paid. The respondent disallowed the deduction.

The petitioner continued to exist after the disposition of its business in">*2690 1919. Its property thereafter consisted principally of outstanding ">*53 accounts receivable and the real property leased to the Mossman-Yarnelle Co.

The respondent deducted a so-called tentative income and profits tax for 1918 in the amount of $32,361.76 from 1918 earnings in determining the amount of earnings available at various dates in 1918 for the payment of dividends.

The respondent deducted a so-called tentative income and profits tax for 1919 in the amount of $66,804.94 from 1919 earnings in determining the amount of earnings available at various dates in 1919 for the payment of dividends.

The respondent added to 1919 income $29,864.43 on account of income and profits taxes for 1918. The amount deducted by petitioner does not appear.

OPINION.

STERNHAGEN: The petitioner claims that for 1918 it has the right to the deduction of $36,000 set forth in the corporate resolution of June, 1919, for additional salaries to officers. The amounts were not fixed in 1918, were not carried in the accounts at any time as a liability, were not, so far as the evidence shows, communicated to any of the employees, and have never been paid. The only evidence of their existence">*2691 on the corporate records is that contained in the minutes of the meeting of June, 1919. The oral testimony of the officers goes only to the extent of saying that the matter of increased salaries had been discussed at various times, and does not disclose any action definite enough to represent a liability. In 1918 the only evidence is that such an informal discussion occurred, and in our opinion this falls short of establishing a deductible expense paid or incurred in that year. While it is true, as petitioner contends and this Board has repeatedly recognized, that corporate action may be informal and yet binding, the evidence here does not establish any effective corporate action whatever in 1918. The respondent's determination as to this item is sustained.

For 1918 and 1919, the respondent erroneously reduced invested capital by subtracting from earnings available for dividends tentatively estimated tax amounting in 1918 to $32,361.76, and in 1919 to $66,804.94. This was contrary to , and numerous later decisions, and the respondent is reversed.

The petitioner next argues that at the time of its organization in February, ">*2692 1908, it acquired in exchange for its capital stock of a par value of $100,000 not only the cash and tangible assets of the business theretofore conducted by the partnership, aggregating $489,356.34, but also a substantial additional value representing the good will or other intangible assets of the business. This intangible value is claimed by the petitioner to amount to $200,000.

">*54 The Revenue Act of 1918, section 326, in setting forth the factors which may be included in invested capital, includes the cash and the full value of tangible property paid in for stock up to the par value of the stock issued therefor. There is a proviso, however, that the excess of the value of the property actually paid in if clearly shown may be included as paid-in surplus. Invested capital may further include the actual cash value of intangible property bona fide paid in for stock or shares not exceeding the lowest of (a) the value of the property, (b) the par value of the stock, (c) 25 per cent of the par value of the stock outstanding on March 3, 1917. In ">*2693 , followed in , the Board held that where a mixed aggregate of tangible and intangible property was paid in to a corporation in exchange for its capital stock, and the aggregate value of the property exceeded the par value of the stock issued therefor, a proportionate allocation might properly be made by which a portion of the par value of the stock was to be regarded as issued for tangibles and a portion for intangibles, and the excess of the value of tangibles over the par value of the stock proportionately issued therefor might properly be included within invested capital as paid-in surplus, although as to intangible property such paid-in surplus was clearly prohibited by the statute. See . Thus it will be seen that if the petitioner is able to prove a value of intangibles paid in for stock or shares, its invested capital is increased by an amount equivalent to the portion of par value of stock attributable to intangible property.

There is no question that the value of the business paid in for stock or shares included cash and">*2694 tangible property aggregating $489,356.34, and that the par value of the total stock issued for the business as a whole was $100,000. Thus far the Commissioner has included the full amount within invested capital. The taxpayer contends that this should be increased by the alleged intangible value. This requires the determination by this Board of two questions - (1) whether in fact at the time of the corporate organization there was any intangible property in the business, and (2) if so, the determination of its value.

There are no well known and uniformly accepted rules either for the determination of the existence of good will or for its valuation, and it is only by looking at the circumstances of the business as a whole in the light of its history up to the time of the transfer date under consideration that the question can be decided. The evidence discloses that the business conducted by the partnership was successful from the time of its inauguration in 1898 until its incorporation in 1908; that its reputation was well and favorably established; that its investment out of earnings increased from year to year; and that ">*55 its earnings showed a steadily upward trend">*2695 except for the year 1904, when there was a slight decline. The statement of two witnesses, both substantially interested in the present proceeding, were that in their opinion the good will was worth $175,000 or $200,000. Their method, however, of reasoning to this opinion gave little, if any, indication of its basis. While the problem of valuation is not to be confined to the application of mathematical formulae or governed by a slavish adherence to a rule, nevertheless it may not as a matter of law be disposed of by the categorical opinions of witnesses unless their training and experience and their intelligent appreciation of the nature of the valuation problem give substance to their opinions. With such evidence as there is in this record in respect of the history of this business, we have reached the conclusion that the good will of the business was on February 5, 1908, worth $100,000.

For a mixed aggregate of tangible and intangible property, having a combined actual cash value of $589,356.34, there was issued $100,000 par value of capital stock; and by applying the rule laid down in ">*2696 , it is found that intangible property, of a value of $100,000, was paid in to petitioner for $16,967.66 par value of capital stock. Since the par value of the capital stock issued for the intangible property is the lowest of the three limitations prescribed by the statute, this is the amount to be included in invested capital; and invested capital shown in the deficiency notice should be increased by $16,967.66. Proper adjustment should be made under section 326(c) in respect of inadmissible assets.

Pursuing further the subject of intangible value, the question is raised as to such value on March 1, 1913, as a factor in the computation of gain or loss on the disposition of the business in 1919 to the newly created Mossman-Yarnelle corporation. The facts indicate that the good will had substantially increased in the five years between the creation of the corporation in 1908 and 1913. The capital and the earnings steadily grew. In view of all the evidence, we are of opinion that the fair market value of the good will and other intangible property of the petitioner on March 1, 1913, was $150,000. Since, however, this is higher">*2697 than the cost in 1908 as heretofore found, it may not be considered in computing any loss which may have been sustained in its disposition in 1919. ; 5 Am.Fed. Tax Rep. 5376; ; 5 Am.Fed. Tax Rep. 5373. The basis of determining such loss is the lower figure as between cost and value on March 1, 1913, which in this instance is $100,000.

For 1919 the parties are in dispute in respect of the measure of the loss ultimately sustained as the result of the two transactions in October, one whereby the petitioner exchanged its business, good will, ">*56 cash, stock in trade, contracts, and filing systems, for stock of the new corporation having an aggregate par value of $396,000, and shortly thereafter sold the said stock for $251,700. The precise situation is greatly confused by several counteracting book entries which were made to reflect it, and it is apparently as the result of this confusion that the Commissioner's determination is likewise not clearly set forth. It is only by a diligent search of the records and a careful analysis that">*2698 the true situation in respect of its tax significance is disclosed. Throughout the period of its history until the transfer to its successor corporation, the petitioner carried no entry upon its books showing as an asset any of the items of good will, leasehold value, contracts, or filing systems. Whatever it owned of such items was not, therefore, represented, so far as the accounts show, by either cost or 1913 value. The book value of the merchandise account and that of furniture and fixtures were the only two items transferred which were shown on the books. The merchandise account was shown at $245,000, and this item is not disputed by the Commissioner as representing the cost basis to be used for this item in the transaction. This leaves only the remaining four items. As to these, since the cost or March 1, 1913, value was taken as zero, clearly there can be no charge of excessive valuation, and taking the entire stock as having in fact a fair value of $251,700 as represented by the almost concurrent sale thereof, it is readily seen that the loss on the entire transaction can be no less than the $44,877.48 claimed by the petitioner. We have, however, heretofore found that">*2699 the good will had in fact cost $100,000, and this should therefore be substituted for the zero used by the petitioner on its books as the basis for the inclusion of that item in the group conveyed. Thus the loss becomes $144,877.48 instead of the $44,877.48 taken by the petitioner.

Respondent, in the deficiency notice, has confused the entries in the furniture and fixtures account; and of the total book loss from the sale of the properties and of the stock received therefor he has disallowed the sum of $5,577.48, as the loss alleged to have been claimed by petitioner on the disposition of the furniture and fixtures. His action is premised on the grounds that the furniture and fixtures were entered on the books at a depreciated cost of $4,422.52, and that petitioner, in computing the net loss on the exchange of the properties for stock, assigned to the furniture and fixtures a cost of $10,000. At the time of the transfer, the furniture and fixtures were carried on petitioner's books at a depreciated cost of $5,577.48, and at the same time, of the total par value of the stock received for all the properties, $10,000 was credited to furniture and fixtures account, reflecting a book">*2700 profit of $4,422.52. This profit, together with the book profits in the other property accounts, all of which resulted from treating the stock received in exchange for the properties as worth par, and ">*57 which amounted in the aggregate to $99,422.52, was offset against the loss of $144,300 from the sale of the stock received for the properties, showing a net book loss from the two transactions of $44,877.48, which is the amount which petitioner claimed as a loss in the return. Comparing the actual facts with those assumed by respondent, his confusion is disclosed. The total loss should not have been reduced by $5,577.48, and as to this, respondent is in error.

We have found, therefore, that as a result of the entire conversion in 1919 of these assets into cash through the acquisition of the stock and its cash sale, there was a loss amounting to $144,877.48, and this amount should be used in the computation of the petitioner's net income for that year. The result is a matter of computation, and since it does not produce a net loss it will not affect petitioner's taxable net income for 1918.

The evidence does not establish any error of the respondent in respect of the">*2701 inclusion in income of the amount of $50,000 allocated to the lease, and since the point is not pressed by petitioner the respondent is sustained.

In computing the deficiency in accordance herewith proper adjustment should be made for the correct taxes in computing the invested capital.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.

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Footnotes

• 1. The capital in this tabulation consists of the capital stock of the company plus the surplus. ↩