Circuit Court of City of Alexandria, having certified that the said certificate has been signed and acknowledged by said applicants in accordance with law, the State Corporation Commission having examined said certificate now declares that the said applicants have complied with the requirements of law, and have entitled themselves to a charter, and it is therefore ordered that they and their associates and successors be, and they are, hereby made and created a body politic and corporate under and by the name of

Wardman Construction Company, Incorporated

upon the terms and conditions, and for the purposes set forth in said certificate, to the same extent as if the same were now herein transcribed in full and with all the powers and privileges conferred and subject to all the conditions and restrictions imposed by law.

And said certificate, with this order, is hereby certified to the Secretary of the Commonwealth for record.

[SEAL.]

N. W. ATKINSON

First Assistant Clerk of the Commission.

WM. F. RHEA

Chairman.

COMMONWEALTH OF VIRGINIA

Office of the Secretary of the Commonwealth.

In the CITY OF RICHMOND, the 23rd day of March, 1922

The foregoing charter of Wardman Construction Company, Incorporated was this day received and duly recorded in this office and is hereby certified to the Clerk of the Corporation Court of Alexandria according to law. B. O. JAMES,

Secretary of the Commonwealth.

VIRGINIA:

In the Clerk's Office of the Corporation Court of Alexandria the 27 day of March, 1922.

The foregoing charter and certificate of the Secretary of the Commonwealth thereon was this day received, duly recorded, and certified to the Clerk of the State Corporation Commission.

Teste:

NEVELL S. GREEN AWAY

Clerk.

The initial meeting of the stockholders was held March 30, 1922, and upon motion the affairs and the management of the corporation were turned over to the officers and directors named in the articles of incorporation. The assets and liabilities of Harry Wardman were taken over as of January 1, 1922, but the itemized schedules showing such assets, which schedules were required by the laws of the State of Virginia in order to protect the incorporators from individual liability, were filed sometime in August, 1922.

The Revenue Act of 1921 was signed by the President of the United States at 3.55 p. m. on November 23, 1921, and became effective upon its passage.

Respondent held that the corporation had not been organized within the meaning of section 229 of the Revenue Act of 1921, and, therefore, taxed the petitioner's income for 1921 as an individual.

OPINION.

MORRIS: At the hearing counsel for the petitioner moved for judgment for the reason that the respondent failed to file his answer within the time limit as set by Rule 14 of the Board's rules of practice. Rule 14 provides that after service upon him of a copy of the petition, the Commissioner shall have 60 days within which to file an answer. The Board's records show that the petition was filed January 4, 1927, that a copy thereof was served on the respondent January 5, and that the answer was filed March 7, 1927, or the 61st day. The 60th day, however, being a Sunday, the answer was timely filed, and the petitioner's motion is accordingly denied. See Rule 61 of the Board's rules of practice.

The sole issue presented by the pleadings is whether the petitioner is entitled to the benefits conferred by section 229 of the Revenue Act of 1921. That section reads as follows:

That in the case of the organization as a corporation within four months after the passage of this act of any trade or business in which capital is a material income-producing factor, and which was previously owned by a partnership or individual, the net income of such trade or business from January 1, 1921, to the date of such organization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1921, and the undistributed profits or earnings of such trade or business shall not be subject to the surtaxes imposed in section 211, but amounts distributed on and after January 1, 1921, from the earnings or profits of such trade or business accumulated after December 31, 1920, shall be taxed to the recipients as dividends; and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business; Provided, That this section shall not apply to any trade or business the net income of which for the taxable year 1921 was less than 20 per centum of its invested capital for such year: Provided further, That any taxpayer who takes advantage of this section shall pay the tax imposed by section 1000 of the Revenue Act of 1918 as if such taxpayer had been a corporation on and after January 1, 1921.

One of the provisions of the above quoted section which limits its application is that net income from the trade or business for the taxable year 1921 must be 20 per cent or more of invested capital for that year. No evidence has been offered to prove either invested capital or net income for 1921, making it impossible for us to determine whether net income for 1921 is more than or less than 20 per

cent of petitioner's invested capital. In view of the failure of the petitioner to prove the essential facts which would bring him within the provisions of the section, the determination of the respondent is approved.

Judgment will be entered for the respondent.

HARRIMAN NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12313. Promulgated October 11, 1929.

The omission from invested capital of a bank of a leasehold interest, the value of which has not been proven, the existence of depositors' accounts the ratio of which to capital and surplus is higher than the average ratio of other banks, and the omission from invested capital of any amount as value of accounts acquired from a predecessor, held not to constitute an abnormal condition of capital or income under section 327 (d), Revenue Act of 1918.

George Roscoe Davis, Esq., and H. Kennedy McCook, Esq., for the petitioner.

R. W. Wilson, Esq., for the respondent.

The first issue in this proceeding was disposed of under Rule 62 in Harriman National Bank, 14 B. T. A. 743, in conjunction with Docket No. 29615, which has been completely decided thereby. The present issue is confined to Docket No. 12313, and is whether for 1918, 1919, and 1920 petitioner comes within section 327 (d) to entitle it to the special assessment provided by section 328.

FINDINGS OF FACT.

Petitioner is a corporation existing under the laws of the State of New York, with principal place of business at 527 Fifth Avenue, New York City, and is engaged in the banking business. It was organized March 20, 1911, as a national bank, taking over the assets and liabilities of the Night and Day National Bank, a state bank. Among the assets acquired from the predecessor bank was a lease on its place of business, the basement and first floor of an eleven story limestone building at 527 Fifth Avenue, New York. The lease ran, with renewals, from 1906 to 1953, at an annual rent of $25,000 for the first year, $30,000 for the second, and $40,000 from May, 1908, to May, 1932; thereafter, if renewed, the annual rent was to be fixed at not less than $50,000. This lease was never entered on the corporate books as an asset. It was surrendered in 1927, when the Harriman Realty Co. purchased the premises.

The report of the Comptroller of the Currency, page 597, showed the petitioner's capital, as of August 31, 1918, to be $1,000,000, surplus and undivided profits $1,041,783, demand deposits $21,072,510, and time deposits $703,038. This page of the report contained information as to forty-two banks, of which the total capital was $125,350,000, total surplus and undivided profits $270,883,131, total demand deposits $1,810,036,997, and total time deposits $96,415,293.

The report of the Comptroller of the Currency, pages 609 and 611, showed petitioner's capital, as of September 12, 1919, to be $1,000,000, surplus and undivided profits $1,268,824, demand deposits $26,857,566, and time deposits $540,156. These pages of the report contained information as to one hundred eighteen banks, of which the total capital was $142,780,000, total surplus and undivided profits $280,674,068, total demand deposits $2,138,643,007, and total time deposits $183,983,205.

The report of the Comptroller of the Currency, page 621, showed petitioner's capital, as of September 8, 1920, to be $1,000,000, surplus and undivided profits $1,767,421, demand deposits $23,914,993, and time deposits $678,832. This page of the report contained information as to fifty-two banks, of which the total capital was $231,000,000, total surplus and undivided profits $305,465,341, total demand deposits $1,936,101,536, and total time deposits $169,355,701. Petitioner's stock on various dates was quoted as follows:

At the time of its dissolution in 1911, the Night and Day Bank had 3,852 accounts; at the end of 1911 petitioner had 4,214, and at the end of 1912, 4,455. For securing new accounts petitioner established a New Account Bureau, which was shown by the books to have spent between March 20 and December 31, 1911, $5,869.71. During the same period $6,287.22 was shown by the books to have been spent in advertising, and $865.11 to solicitors. For the calendar year 1912 the books show expenditures by the New Account Bureau, for ad

vertising and for solicitors, of the sum of $37,078.84, $12,439.89, and $1,306.62, respectively.

OPINION.

STERNHAGEN: The petitioner seeks, by its petition, to bring itself within section 327 (d), Revenue Act of 1918. In our opinion, however, the evidence fails to establish any such abnormal condition of capital or income as the statute prescribes.

Three factors are relied upon. First, that the leasehold interest acquired by petitioner in 1911 was a valuable asset, the omission of which from invested capital is evidence of abnormality. But the evidence consists only of the opinions of two witnesses whose hypotheses were so inadequate as to leave their valuation utterly unconvincing. But even assuming that the value were satisfactorily established, it would not demonstrate the necessary applicability of section 327, but perhaps only that invested capital under section 326 may have been inadequately computed. Second, that the ratio of deposits to capital and surplus was higher than the average ratio of certain other banks. We see no reason to suppose that Congress intended to treat such average as a standard of normality, even if it were to be confined to banks of approximately the same reported capital and surplus. With differences in degree, every bank uses depositors' accounts in its business. Under no circumstances is it conceivable that they should be treated as invested capital; being rather an indication of successful current banking. Leaving aside the weakness of purely mathematical computations with no evidence of the deeper substance, we think such a computation, even if more elaborate, is not sufficient evidence of such an abnormality as is contemplated by the statute. Third, that the acquisition of 3,852 accounts from the predecessor without any asset value on account thereof being included in invested capital brings it within section 327. The proof of asset value is again unsatisfactory. It is predicated upon a statistical average of the subsequent cost of a new account department, without showing that such average cost should reasonably be applied to the accounts of its predecessor, or that if so, such cost is equivalent to value when so acquired. Had actual value of such acquired accounts been shown, it would serve rather to affect invested capital under section 326 than to prove an abnormal condition.

Judgment will be entered under Rule 50.