solved on November 8, 1917, plus the corporation's one-half interest in the license of the Canadian patent, all of which patent rights became property of the partnership composed of Anton and Stoneback and which were turned in to the corporation, had a value at January 1, 1918, of $38,232.05. No evidence has been adduced before us which proves that the cash value was in excess of that amount. With respect to the computation of the exhaustion allowance based upon a value of $38,232.05, the taxpayer alleges that the correct amount of that exhaustion deduction is $3,823.20. This is based upon the assumption that the patents from which the rights issued had a life of 10 years from January 1, 1918. The facts are, however, that the United States patent had a life of 10 years, 2 months, and 7 days from that date and the Canadian patent an even longer life. No evidence is before us which proves that the Commissioner's computation of the exhaustion allowance with respect to the patent rights acquired from the predecessor partnership is in error. The Commissioner admits that he made no deduction from gross income of the year 1919 of any amount representing an exhaustion of any part of the $2,500 paid by the taxpayer on May 9, 1918, for Anton's one-half interest in the shop right in the Canadian patent. He also admits that the taxpayer may be entitled to a deduction for the exhaustion of this interest in the patent. The appeal of the taxpayer upon this point is therefore sustained. 4. By the agreement between Anton and the taxpayer, dated April 8, 1918, Anton waived his right to receive a royalty of 50 cents on each lateral arm sold by the taxpayer. Had it not been for this agreement, the taxpayer would have paid Anton royalties of $3,529.50 for the year 1919 and even larger amounts for subsequent years. The taxpayer contends that Anton's right to receive royalties, if the value of the right may not be included in invested capital for the year 1919, is revived and that the taxpayer under its contract with Anton owes him the $3,529.50 in question, and that such amount is a legal deduction from the taxpayer's gross income for the year 1919. We are of the opinion that there is no merit in this contention. The language of the agreement of April 8, 1918, is ambiguous. Even though the corporation be liable to Anton for the payment of any royalties in respect of lateral arms sold during the year 1919, such liability accrued not during the year 1919 but at some later date, when it was determined by the taxing authorities that the claim of the taxpayer with respect to the inclusion in invested capital of the value of the so-called gift to the taxpayer should be denied. Our conclusion is that the taxpayer is not entitled to deduct or exclude from the gross income of 1919 any amount in respect of royalties for that year. 5. The taxpayer claimed that, by reason of abnormalities in income and invested capital for the year 1919, it is entitled to special consideration under the provisions of section 328 of the Revenue Act of 1918. In our opinion, there were abnormalities, both of income and of invested capital, which entitle the taxpayer to such consideration. The taxpayer has not submitted any evidence as to comparatives. By reason of such failure, the determination of the Commissioner under the provisions of section 328 will be final. Appeal of H. T. Cushman Manufacturing Co., 2 B. T. A. 39. 6. The taxpayer has alleged error on the part of the Commissioner in rejecting a claim for credit of $119.63, originally claimed for 1919, It has, however, offered no evidence in support of its claim. APPEAL OF ANDERSON & GUSTAFSON. Docket No. 1556. Submitted October 26, 1925. Decided January 30, 1926. A partnership which purchases an undivided one-half interest in an invention and writes it off as a loss during the year 1917, but which subsequently sells its interest in the invention, is not entitled, under the circumstances herein stated, to deduct from the gross income reported in its income-tax return for 1917 the amount of the investment in the invention. Fayette B. Dow and Willis Crane, Esqs., for the taxpayer. B. G. Simpich, Esq., for the Commissioner. Before SMITH, LITTLETON, and TRUSSELL. This appeal is from the determination of a deficiency in profits tax for the year 1917 in the amount of $16,260.31. FINDINGS OF FACT. In 1917, John A. Anderson and C. A. Gustafson were members of a copartnership with principal office at Chicago, Ill. In March, 1916, Ivan Engstrom solicited the taxpayers' financial assistance in developing, patenting, and preparing for market a check-writer and adding machine. Engstrom estimated that the expense would be about $2,500 or $3,500 and that the machine could be prepared for market in from four to six months. The taxpayer entered into an arrangement whereby it purchased tools, dies, and other materials necessary to make a working model and draw plans, paid attorneys' fees for applications for patents, and, in addition, advanced Engstrom $30 weekly for his living expenses while the work was in its experimental stages. In the early part of 1917, the two members of the taxpayer partnership had advanced the total amount which Engstrom estimated would be necessary, but on further conference with Engstrom were advised that, on account of the peculiar conditions existing in the labor market, his first estimate would have to be raised considerably, and, due to inability to have tools and dies made promptly a working model of the machine could not be completed before another three or four months had expired. After the advances made by the taxpayers had grown to several times the amount originally estimated, Anderson and Gustafson made a thorough investigation of the device which Engstrom was working upon. They consulted with some of the manufacturers of check protector devices, and a representative of one of the most successful concerns, after an examination of the device, stated to the taxpayers that "he would not give five cents for the device." As a result of their investigations, Anderson and Gustafson reached the conclusion that the practicability of marketing the machine was very doubtful. Accordingly, they advised Engstrom that they would discontinue their arrangement. On September 30, 1917, they ceased advancing money for the enterprise and thereafter endeavored to dispose of their interest in the device, but without success. At the end of the calendar year 1917, they charged off the amounts advanced as a total loss. Engstrom was still confident that he had a machine of merit and immediately tried to interest new capital. On May 12, 1918, he came to the taxpayers with four or five individuals, whom he said he had succeeded in interesting in his machine provided they could get the taxpayers' one-half interest on notes. They would not pay the taxpayers anything in cash but agreed to furnish cash to Engstrom to complete another model. The taxpayers then sold their onehalf interest in the patent application for $10,000 in notes, running from four months to a year (which notes were subsequently paid), and a royalty of 25 cents on each machine which might thereafter be manufactured and sold. The purchasers financed Engstrom to the extent of building 54 machines which were put in banks and other establishments on trial. None were ever sold and the taxpayers never received any royalties thereon. In 1917, the taxpayer partnership contributed $100 to the American Red Cross and claimed the amount paid as a deduction from gross income in the excess profits tax return filed. The deduction of this amount and of the claimed loss of $15,955 upon advances to Engstrom were disallowed by the Commissioner. DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days' notice, in accordance with Rule 50. OPINION. SMITH: The taxpayers claim the right to deduct from gross income, in a partnership tax return filed for the year 1917, $15,955, representing the cost to the partnership of a one-half interest in an invention and patent application made by one Engstrom; also the right to a deduction of $100 contributed to the American Red Cross. In their petition the taxpayers do not specify the provision of the statute which entitles them to claim a deduction of a loss of $15,955. It was not contended at the hearing that it was an ordinary and necessary expense, but it was contended that the amount which had been spent was upon an invention which the taxpayers determined was worthless at the close of 1917. No contention was made that Engstrom was in any way obligated to pay them back the amount expended by them, either in advances to himself for labor performed or for the cost of constructing the check writer and adding machine. The Board finds no basis for the allowance of the amount as a debt ascertained to have been worthless and charged off within the year. The losses which a partnership may deduct from gross income are those “* * actually sustained during the year, incurred in his business or trade, are not compensated for by insurance or otherwise." Section 5 (a), Revenue Act of 1916. We think that the evidence in this case does not show that the taxpayers actually sustained a loss during the year 1917 in respect of the investment made in Engstrom's invention. Engstrom succeeded in May, 1918, and eventually the taxpayers realized $10,000 cash from their interest in the invention. Whatever loss was sustained from the investment was in the year 1918 and not in 1917. * * when such losses In the income-tax return for the year 1917 the taxpayer claimed the deduction of $100 as a contribution to the American Red Cross, which deduction was disallowed by the Commissioner. The partnership return was made under the provisions of the Revenue Act of 1917. In section 206 of that Act, Congress has specifically allowed to a partnership, in computing its net income for excess-profits tax purposes, the same deductions to which an individual is entitled in computing his net income for income tax purposes under the Revenue Act of 1916, as amended by the Revenue Act of 1917. Under the Revenue Act of 1916, as amended, an individual is entitled to deduct, in computing his net income, contributions or gifts actually made within the year to corporations or associations organized and operated exclusively for charitable purposes. The American Red Cross is such an organization. Therefore, the taxpayer was entitled to deduct from gross income for the year 1917 the $100 in question. APPEAL OF HIGHLAND AMUSEMENT CO. Docket No. 5316. Submitted December 3, 1925. Decided January 30, 1926. Benjamin H. McKindless, Esq., for the taxpayer. Before PHILLIPS and TRAMMELL. Taxpayer appeals from the determination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921, in the sum of $2,644.03, arising, in part, from the disallowance by the Commissioner of the total amount claimed by the taxpayer as deductions for payments of salaries to its four officers for services performed. FINDINGS OF FACT. The taxpayer is a Maryland corporation, with its office at Baltimore, and during the years in question was engaged in the operation of a vaudeville and moving-picture theatre in Baltimore. It had capital stock of 400 shares, held equally by four individuals, who were also officers and directors of the taxpayer. During the years in question each of such persons was active in the conduct of the theatre and rendered services in connection with its operation and management which required him to devote an average of from three to five hours each day to this work. In 1921 one of such officers and stockholders died, whereupon the work about the theatre was reassigned in order to provide employment for his widow, who thereafter rendered services to the taxpayer daily. Each of such persons was paid $25 per week, and during each of the years in question taxpayer paid to such officers and stockholders $5,200. The services performed by such stockholders were necessary to the efficient operation of the theatre and the amounts paid were reasonable compensation for the services rendered. DECISION. The deficiencies, if any, should be computed by allowing as deductions, in each of the years involved, $5,200 as compensation for services rendered taxpayer by its officers and stockholders. Final determination will be settled on 10 days' notice, under Rule 50. |