The earnings of the taxpayer for the six-month period ending August 31, 1918, and the fiscal years ending August 31, 1919 and 1920, were $267,000, $151,000, and $295,000, respectively. The actual value on March 1, 1918, of the tangible assets acquired by the taxpayer from the predecessor partnership was $357,000, divided as follows: LITTLETON: As to the question of the application of section 331 of the Revenue Act of 1918 to the computation of this taxpayer's invested capital, in respect of the assets acquired from the predecessor partnership for stock and notes, we are of the opinion that the determination of the Commissioner that this section prevents the inclusion of the assets thus acquired in invested capital at a greater amount than the cost thereof to the predecessor, less depreciation, was correct. Appeal of Baker, Hamilton & Pacific Co., 2 B. T. A. 1. No evidence was submitted, showing that the value determined by the Commissioner upon this basis was incorrect. His action, therefore, in this regard is approved. For the purpose of the deduction for exhaustion, wear and tear of the depreciable assets acquired by the taxpayer, we have determined the values thereof as of March 1, 1918, from the evidence submitted. At the hearing testimony was given by a broker engaged for about eight years in the purchase and sale of textile mills. This witness was thoroughly acquainted with the condition of the woolen industry in 1918 and with the market value of mills of the character of that acquired by the taxpayer. He testified that in March, 1918, the woolen industry was in a prosperous condition; that mills were operating to their full capacity and allotting goods; that the demand for mills of this character exceeded the supply; and that the mill acquired by the taxpayer was well located, with a good supply of water for manufacturing processes and for auxiliary power, and compared favorably with other mills of that character. He further testified that the market price for mills of this character in March, 1918, depended principally upon their production capacity, and that this plant had 14 sets of cards and was overloomed. Using the prevailing price at that time of $25,000 a set and $500 a loom for 14 extra looms, he valued the assets acquired by the taxpayer at $357,000. The market value of woolen mills advanced subsequent to 1918. The taxpayer made an inventory of the buildings, machinery, and equipment on hand at March 1, 1918, and valued the same on the basis of cost of reproduction, less depreciation, at $340,148.77. We can not accept this method of valuation in the absence of proof that the value thus determined was the actual value at March 1. 1918. The evidence submitted, however, shows that the inventory is correct, and it further establishes to the satisfaction of the Board that the actual value of the entire property, including the land and water rights, on March 1, 1918, was $357,000. The Commissioner valued the land and water rights at $25,700, and this the taxpayer accepts. The record does not disclose the value which the Commissioner placed upon the buildings, machinery, and equipment. By allocating $25,700 of the total value of $357,000 to land and water rights, and apportioning the remaining $331,300 to brick and frame buildings, and machinery and equipment, we arrive at the values for the various properties as set forth in the findings of fact, which should be used in computing the deduction for exhaustion, wear and tear. Order of redetermination will be entered on 10 days' notice, under Rule 50. APPEAL OF THE NATIONAL BANK OF BALTIMORE. H. C. Poffenberger, Esq., for the taxpayer. Before STERNHAGEN and LOVE. The Commissioner determined a deficiency of $949.61 income and profits tax for 1919 by including in gross income an amount of $6,195 received by the petitioner as the last payment on account of the principal of a loan existing in 1911, and an amount of $11,413.18 received in that year as accumulated interest on the original loan. FINDINGS OF FACT. On September 1, 1911, the petitioner had loaned to a partnership the sum of $105,000 on demand negotiable notes secured by negotiable bills of lading and warehouse receipts. Some of the bills of lading and warehouse receipts were forgeries. Some payments were made, or in some other way the account was reduced to a balance outstanding on November 3, 1911, of $71,317.78. On November 3, 1911, a national bank examiner was examining the petitioner's books, and he suggested that the petitioner immediately charge off $70,000 of the account, which the board of directors thereupon authorized on November 4, 1911. Of this $70,000 charged off, payments amounting to $13,805 were received up to June 30, 1913. Later one of the partners wanted to borrow $10,000 from the petitioner, which the petitioner would only lend with a satisfactory assurance of repayment of the $70,000. One of the partners wrote the petitioner a letter in which he said he reacknowledged the debt and intended to pay it. He gave notes for the amount, signed by him and his brother, and payments were made of $20,000 in 1917, $30,000 in 1918, and $6,195 in 1919. In 1919 interest on the account was received of $11,413.18. The deficiency should be computed by excluding $6,195 from petitioner's income for 1919. Judgment accordingly will be settled on 15 days' notice, under Rule 50. Docket No. 4184. APPEAL OF ESTATE OF P. E. O'HAIR. Submitted September 23, 1925. Decided March 30, 1926. Andrew T. Smith, Esq., Virgil Y. Moore, Esq., and H. L. McLaren, C. P. A., for the taxpayer. Thomas P. Dudley, Jr., Esq., for the Commissioner. Before MARQUETTE, MORRIS, LOVE, and GREEN. The Commissioner has asserted a deficiency in income taxes for the year 1920 in the sum of $7,827.53, all of which is involved in this appeal. The petitioner contends that certain income included by the Commissioner in the gross income of P. E. O'Hair, deceased, was in fact income of P. E. O'Hair & Co., a partnership in which the deceased had no interest. FINDINGS OF FACT. P. E. O'Hair, a resident of San Francisco, Calif., died intestate on October 9, 1923. He was survived by his wife, Cora A. O'Hair, and their five children, Donald, Neil, Ethel, Patrice, and Cora J. For some time prior to the earthquake and fire which destroyed a portion of the City of San Francisco in 1906, the deceased had been conducting a small plumbing supply business. In this he was assisted by his sons, Donald and Neil, who were of the ages of 21 and 18, respectively. The deceased had been in poor health for some time, and just prior to the fire, upon the advice of his physician, he determined to abandon his business and go to Chico, Calif., hoping there to recover his health and strength. The business was turned 104881-27-69 over to the two sons, who were associated with him, and was to have been conducted by them. The store and its contents were entirely destroyed by the fire, with the result that O'Hair had liabilities in excess of his assets. Shortly after that O'Hair and his wife and daughters proceeded to Chico, the two sons remaining in San Francisco. About a month after the fire Donald O'Hair, having at that time some $600 of his own money, established, with his brother, a small plumbing supply business under the name of O'Hair & Proctor. Proctor, a journeyman plumber, had no actual interest in the business other than commissions, and his name was carried only for the purpose of representing to the public and the unions that there was in the firm a qualified plumber. Several months later the deceased returned to San Francisco, and, without contributing any capital to the business, took an active part in its conduct. About 1908 the name was changed to P. E. O'Hair & Co. The father and the mother and each of the five children devoted practically their entire time to the business, and it was at that time generally understood between them that each had an interest in the business. The family all lived together for the purpose of reducing living expenses, and each drew from the business only so much as was necessary for his or her living expenses, and as a result of the joint efforts and economies of all the members of the family the business grew and prospered. In 1915 the deceased sought to obtain from the business funds sufficient to enable him to engage in another enterprise. The sons pointed out to him that he had contributed no capital to the business and that they did not wish to contribute any money to the new venture. The father conceded the fairness of their position, and it was at this time that the parties agreed upon the interest of the respective partners. Under this arrangement the business of P. E. O'Hair & Co., a partnership, was to be owned 50 per cent by Cora A. O'Hair and 10 per cent by each of the five children. Thereafter the partnership was operated under this arrangement until May 1, 1919. The statutes of California require the filing of a certificate of ownership by businesses operating under a fictitious name, and there was filed for the business of P. E. O'Hair & Co. a certificate setting forth that P. E. O'Hair was the owner thereof. This appears to have been done because of the prominence of the deceased, his reputation for fair dealing, the fact that he was the head of the family, and that his name appeared in the firm name. In 1919 Donald O'Hair consulted an attorney and was advised by him that it was inadvisable to continue the operation of the business in this rather loose and confusing manner. Pursuant to this advice the father executed several assignments, assigning to the wife and chil dren any interest he might have in the business. In November, 1919, a partnership agreement was prepared setting forth the interests of the mother and the five children. This agreement was executed by all of the partners except two of the daughters. During the year 1920 the business conducted under the name of P. E. O'Hair & Co. was owned by the mother and the five children as copartners. P. E. O'Hair, deceased, had no interest in the business or in the income therefrom. Order of determination will be entered accordingly. APPEAL OF UTAH ORPHEUM CO. Docket No. 3693. Submitted October 2, 1925. Decided March 30, 1926. 1. Deduction for exhaustion of leasehold denied for want of proof of value on March 1, 1913. 2. Where taxpayer is on a cash receipts and disbursements Jacob Mortens, Jr., Esq., for the taxpayer. Before MARQUETTE, MORRIS, LOVE, and GREEN. This appeal is from a deficiency in income and profits taxes for the year 1919 in the sum of $8,666.04. The petition alleges that the Commissioner erred in disallowing three deductions claimed by the taxpayer: First, $5,000 depreciation on equipment; second, $5,000 annual allowance for the exhaustion of the leasehold; third, interest in the sum of $9,260.59. FINDINGS OF FACT. The taxpayer is a California corporation, organized in 1912 and dissolved by decree of the Superior Court of the State of California in 1922. It was organized for the purpose of leasing and operating a theatre in Salt Lake City, Utah. Sometime in 1912 it leased from the Orpheum Theatre & Realty Co. (the builder and owner of the theatre building), for an annual rental of $15,000, the portion thereof constructed for theatre purposes, and proceeded immediately thereafter to furnish and operate a theatre therein. These operations were carried on at a loss up to the year 1919. Sometime after the date of the lease it was found that the theatre was too large, and it was remodeled with considerable reduction in its seating capacity. The taxpayer, during the several years prior to the taxable year, became indebted to the Orpheum Theatre & Realty Co. This in |