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In re Stiening

decided: January 18, 1945.

IN RE RAE'S ESTATE. STIENING
v.
COMMISSIONER OF INTERNAL REVENUE.



Author: Schoonmaker

Before MARIS and GOODRICH, Circuit Judges, and SCHOONMAKER, District Judge.

SCHOONMAKER, District Judge.

This case is before this court on appeal from the decision of the Tax Court of the United States at Docket No. 108,736 (opinion reported as CCH Decision 13, 159M), and involves a redetermination of the income-tax liability of decedent Walter S. Rae for the calendar years 1936 and 1937.

Three questions are presented on this appeal: (1) Was decedent taxpayer entitled under Section 23(e) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 828 to loss deductions in 1936 on the Westberg patents and cement guns manufactured thereunder; (2) Were the Tax Court's findings that the amounts of $7500 and $10,000 salary deductions under Section 23 (a) for services of Walter S. Rae, Jr., performed for decedent taxpayer in 1936 and 1937, a reasonable compensation; (3) Was the transaction whereby taxpayer disposed of his interests in Wellston No. 2 Company, a compromise of a bad debt as contended by petitioner, or as the Tax Court found, the sale of capital assets as to which Section 117 of the 1936 Act is applicable.

I.

The Westberg Patents and Cement Guns Manufactured Thereunder.

The Tax Court found that there was no abandonment by taxpayer in 1936 either of his half interest in the Westberg patent or the cement guns he manufactured under the patent. Abandonment is an identifiable event and must be shown by an affirmative act of abandonment: Helvering v. Jones, 8 Cir., 120 F.2d 828, 830; Certiorari denied, 314 U.S. 661, 62 S. Ct. 115, 86 L. Ed. 529. The rule to be applied is well stated in Commissioner of Internal Revenue v. McCarthy, 7 Cir., 129 F.2d 84, 87, by Circuit Judge Sparks, as follows:

"The rule to be deduced from the 'abandonment' cases, we think, is that a deduction should be permitted where there is not merely a shrinkage of value, but instead, a complete elimination of all value, and the recognition by the owner that his property no longer has any utility or worth to him, by means of a specific act proving his abandonment of all interest in it, which act of abandonment must take place in the year in which the value has actually been extinguished."

The United States Supreme Court very recently in the case of Commissioner of Internal Revenue v. Scottish American Investment Company, 65 S. Ct. 169, 171, filed an opinion on December 4, 1944, wherein the rule to be applied to the fact findings of the Tax Court is stated as follows:

"* * * The Tax Court has the primary function of finding the facts in tax disputes, weighing the evidence, and choosing from among conflicting factual inferences and conclusions those which it considers most reasonable. The Circuit Courts of Appeal have no power to change or add to those findings of fact or to reweigh the evidence. And when the Tax Court's factual inferences and conclusions are determinative of compliance with statutory requirements, the appellate courts are limited to a determination of whether they have any substantial basis in the evidence. The judicial eye must not in the first instance rove about searching for evidence to support other conflicting inferences and conclusions which the judges or the litigants may consider more reasonable or desirable. It must be cast directly and primarily upon the evidence in support of those made by the Tax Court. If a substantial basis is lacking the appellate court may then indulge in making its own inferences and conclusions or it may remand the case to the Tax Court for further appropriate proceedings. But if such a basis is present the process of judicial review is at an end. Helvering v. National Grocery Co., 304 U.S. 282, 294, 58 S. Ct. 932, 938, 82 L. Ed. 1346; Wilmington Trust Co. v. Helvering, 316 U.S. 164, 168, 62 S. Ct. 984, 986, 86 L. Ed. 1352; Commissioner [of Internal Revenue] v. Heininger, 320 U.S. 467, 475, 64 S. Ct. 249, 254; Dobson v. Commissioner [of Internal Revenue] 320 U.S. 489, 64 S. Ct. 239."

The decedent taxpayer acquired a half interest in these patents in 1935, paying therefor $22,000, and expending $6,068.25 in acquiring and developing them.

Thereafter, in 1935, at a cost of $5,083.72, he manufactured five cement guns under the drawings and specifications of the patents. These Westberg guns did not perform to the taxpayer's satisfaction. During 1936 many experiments were made to correct the faults encountered in their use, and the taxpayer had the guns re-designed and rebuilt at a cost of $7,483.86. The taxpayer believed that the guns, although costing considerably more to manufacture, would prove superior to the Allentown gun then generally in use in the construction business. However, the Westberg guns did not perform to his satisfaction. Many difficulties were encountered in their operation, partly due to their use in work they were not best suited to do, and in part due to lack of skill of the operator. In 1936 he stated he was through with the Westberg guns, and that he was fed up with them. Nevertheless, he used some of the guns in his own business during 1936; caused a prospectus to be issued in November 1936, whereby he hoped to exploit the sale of the guns in the territory assigned to him under the agreement with Westberg; and by entries dated December 31, 1936, capitalized $5,353.09 of the cost of rebuilding the guns as "Plant and Equipment" on his books.

In March 1937, one of the rebuilt Westberg guns was sold to the Utah Construction Company for the sum of $2000; another gun was shipped in 1936 to a firm in Australia, and was returned without cost to the taxpayer. The taxpayer was not successful in establishing a market for the guns, those he manufactured being used principally in his personal construction business. He owned the four remaining Westberg guns at his death and at that time they were carried on his books of account at a net book value of $2,496.13.

The patents themselves were carried as assets on the taxpayer's books until his death and were amortized in the years 1936, 1937, 1938, and 1939. They were also shown as assets in 1936 and 1938 in financial statements which taxpayer filed for credit purposes with the Union Trust Company of Pittsburgh, being listed as costing $22,000, and their net cost after amortization prorated over their legal life of seventeen years. In original and amended ...


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