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of the law is to allow, as far as possible, the creditors themselves, before the referee, and acting by their trustee, to conduct the administration of the estate, subject, of course, to the power of this court at all times to correct errors and protect rights of parties when duly brought before the court by way of a proceeding to review or to confirm.

It would seem, therefore, best from now on for referees in this district to observe the following practice: Prior to the election and qualification of a trustee applications in turn-over or reclamation proceedings shall be presented, in the first instance, to the court. It will then refer the matter, if it deems best, for findings of fact, etc., before finally deciding same; the opinion of the special commissioner, when desired, being simply advisory. After the election and qualification of a trustee, applications in turn-over or reclamation proceedings shall be made, in the first instance, to the referee, and his decision may then be reviewed by this court in proper proceedings. Motion granted. Submit order.

PHILIP HENRICI CO. v. REINECKE, Internal Revenue Collector.

(District Court, N. D. Illinois, E. D. December 19, 1924.)

No. 34966.

Internal revenue 7-Depreciation In value of leasehold through lessening of term held proper deduction.

Under Revenue Act 1918, § 234 (a), being Comp. St. Ann. Supp. 1919, § 6336pp, pro viding for deduction, in computing net income of corporation subject to income tax imposed by section 230 (Comp. St. Ann. Supp. 1919, § 6336% nn) of "a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence," depreciation in value of leasehold as of March 1, 1913, date prescribed for fixing value of property theretofore acquired, through lessening of term, held proper deduction.

At Law. Action by the Philip Henrici Company against Mabel G. Reinecke, Col

lector of Internal Revenue for the First District of Illinois. On demurrer to declaration. Overruled.

Winston, Strawn & Shaw, of Chicago, Ill. (Silas H. Strawn, James H. Winston, and Richard Hollen, all of Chicago, Ill., of counsel), for plaintiff.

Edwin A. Olson, U. S. Atty., of Chicago, Ill., and Nelson T. Hartson, Sol. of Inter

nal Revenue, and Edward C. Lake, both of Washington, D. C., for defendant.

ALSCHULER, Circuit Judge. The issue is on demurrer to the declaration, which alleges that plaintiff was and is occupying in and for carrying on its business the premises in Chicago demised to it by lease of December 1, 1902, to expire April 30, 1928, at a rental of $24,000 per annum to April 30, 1921, and $26,000 per annum to expiration; that on March 1, 1913, the lease had a fair market value of not less than $370,000; that for each of the taxable years 1918, 1919, and 1920 plaintiff claimed in its return for federal income tax, and was allowed, deduction for depreciation of such leasehold value of $25,276.48, and that upon an audit of plaintiff's returns for those years by the Treasury Department, made in August, 1922, the said deductions were again found proper and approved; that afterwards, on October 22, 1923, upon re-audit by the Treasury Department of plaintiff's income tax return for the said years, the said deductions for depreciation of the leasehold estate, theretofore granted and approved by the Treasury Department, were disallowed, and in consequence thereof an additional income tax against plaintiff for the said years in the aggregate of $36,017.87, being the amount resulting wholly from the disallowance for depreciation in value of said leasehold, was assessed against plaintiff, and by it under protest paid to defendant as collector of internal revenue; that such refusal of the Treasury Department to permit such deduction for depreciation from plaintiff's gross income for said years was wrongful and in violation of the Constitution and laws of the United States; and that plaintiff has made due demand for refund of same, this action being brought for its recovery. Defendant's demurrer challenges plaintiff's asserted right to deduct from gross income reduced value of the leasehold estate through the lessening of its term.

Section 234 (a) of the Revenue Act of 1918 (Comp. St. Ann. Supp. 1919, § 6336spp) provides that "in computing the net income of a corporation subject to the tax imposed by section 230 there shall be

allowed as deductions:

(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence." If hereunder the claimed deduction may not be made, there is no statutory warrant for it. That the question is not without doubt is apparent from the varying attitudes thereon of the

3 F.(2d) 34

Treasury Department itself. As stated in the declaration, prior to August 23, 1922, the Treasury Department had promulgated its ruling, known as Office Decision 720, as follows:

"In the case of a lease held by the original lessee, who acquired it prior to March 1, 1913, without any payment other than a stipulated annual rent, the presumption is that the lease had no value as at March 1, 1913. Under this presumption there is no basis for a depreciation deduction. This presumption can be overcome only by evidence showing conclusively that the lease had a value as of March 1, 1913, for depreciation purposes. There is no prescribed method by which the value of a lease as of March 1, 1913, in excess of its presumptive value as at that date may be established. The burden is upon the taxpayer to establish the basis for depreciation to the satisfaction of the Bureau."

Also the following regulations:

"Reg. 45, art. 163. Depreciation of Intangible Property. Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses, and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allow ance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the Commissioner."

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value of his lease as of March 1, 1913, if acquired prior thereto, but where a leasehold is acquired for business purposes for a specific sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run."

It does not appear that the question as to leaseholds has been adjudicated in the federal courts. Deductions claimed for depreciation of mining property through the removal of minerals has been passed on a number of times under the Corporation Tax Law of 1909, which permitted deduction of "all losses actually sustained within the year

including a reasonable allowance for depreciation of property." In Von Baumbach v. Sargent Land Co., 242 U. S. 503, 37 S. Ct. 201, 61 L. Ed. 460, the court said:

"We do not think Congress intended to cover the necessary depreciation of a mine by exhaustion of the ores in determining the income to be assessed under the statute by including such exhaustion within the allowance made for depreciation."

Under substantially like circumstances this was also held in Goldfield Consol. Mines Co. v. Scott, 247 U. S. 126, 38 S. Ct. 465, 62 L. Ed. 1022, and United States v. Biwabik Mining Co., 247 U. S. 116, 38 S. Ct. 462, 62 L. Ed. 1017. These cases, as well as some others, all applicable to mines, would be more influential in sustaining defendant's contention, were it not for what was said by the court in Doyle, Collector, v. Mitchell Brothers Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054, in which it was held that the stumpage value of timber removed and sold from lands owned by the taxpayer was deductible as depreciation under the same statute. The court said:

"Reg. 45, art. 164. Capital Sum Recover- "There is only a superficial analogy beable Through Depreciation Allowances. The tween this case and the case of an allowance capital sum to be replaced by depreciation claimed for depreciation of a mining propallowances is the cost of the property in re- erty through the removal of minerals, since spect of which the allowance is made, ex- we have held that owing to the peculiar nacept that in the case of property acquired ture of mining property its partial exhausby the taxpayer prior to March 1, 1913, the tion attributable to the removal of ores cancapital sum to be replaced is the fair market not be regarded as depreciation within the value of the property as of that date. In meaning of the act"-citing the cases above the absence of proof to the contrary, it will referred to. be assumed that such value as of March 1, 1913, is the cost of the property less depreciation up to that date."

On October 15, 1922, it promulgated its Treasury Decision 3414, which is:

"A lessee is not entitled, under the Revenue Acts of 1916, 1917, 1918, or 1921, to an allowance for depreciation based on the

It is to be noted that the Income Tax Law of 1918 and those thereafter passed do not employ the term "depreciation" as in the Corporation Tax Law, but instead the words "a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence"; also that specific

136 Stat. 112.

provision was in them made for deduction for depletion of mining property through the removal of minerals therefrom.

The question remains whether within the deductions so stated would fall a lease whose definite market value on March 1, 1913, necessarily and ratably abates as the term of its expiration approaches. I do not understand the words of the Income Tax Law in this regard to be less comprehensive than those of the Corporation Tax Act; indeed, quite the contrary. In deciding the mining cases the court concluded that the depletion of the mining property through removal of minerals did not fairly fall within the designation of "depreciation." Had the word "exhaustion" been present, I think it quite likely that the mining cases might have been otherwise decided. The subsequent specific inclusion in the statute of mining property as a subject for deduction was no doubt occasioned through the prior decisions of the Supreme Court referred to, but to my mind the term "exhaustion" Iwould have warranted it. The removal of mineral from the lands "exhausted" them to the extent of the value of the minerals while a part of the lands. While the court held the removal of the timber would warrant deduction as "depreciation," I think under the Income Tax Law it would also fall under the designation of "exhaustion." It would hardly be "wear and tear," and would surely not be classified as "obsolescence."

In the same sense a lease, which had a definite market value on March 1, 1913, the date prescribed in the Income Tax Law for fixing value of property theretofore acquired, is not less a proper subject for deduction for exhaustion occasioned wholly by the flight of time. It is "property"; intangible, it is true, but property none the less. The lease was not of such duration, and its conditions were not such as to make the lessees its practical owners, but absolutely expiring within a comparatively brief period of time. Plaintiff's capital or property value was and is necessarily exhausted from year to year, until at the end of the term it will inevitably wholly disappear. That the leasehold was used in the trade or business is very evident.

If plaintiff had owned the property, it would still have it from year to year, and there would be no exhaustion. If on March 1, 1913, plaintiff had paid the conceded then market value of $370,000 for this lease, the specific provisions of Treasury Decision. 3414 would permit him to charge this as additional rent, allocated proportionately for the term of the lease. If in some other man

ner plaintiff had at that time secured the right to use the premises rent free for the same term, the right would have been worth very much more, and this value would be a capital asset of plaintiff. Its gross income would not be reducible by rent, because it paid none; but should it not be reduced by the annual exhaustion or disappearance of the capital value of the leasehold through the maturing of the right of free occupancy?

Just as surely as time passes, the admitted $370,000 market value of this lease on March 1, 1913, will be wholly exhausted on April 30, 1928; and unless plaintiff shall have had the right of deduction from year to year of this, its capital so exhausted in the business, it will not only have consumed in its business this capital sum, but will have been obliged to pay an income tax upon it-a result which I believe the law did not intend and does not require.

Upon the proposition here involved it seems to me that Treasury Decision 720, under which these deductions were made, audited, and approved by the department, is more in consonance with the spirit of the statute and with fairness to the taxpayer than the later rule announced in Decision 3414.

The demurrer is overruled.

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1. Courts

Nos. 177, 178.

366(7)-State decision construing state statutes binding on federal court. A decision of the Supreme Court of a state

fixing the status of a foreign corporation for purposes of taxation involves a construction of the statutes of the state, and is binding on a federal court.

On Application for Rehearing.

2. Taxation 275-Foreign corporations having domicile in Louisiana are subject to local taxation.

Const. La. art. 10, § 16, providing that "rolling stock operated in this state, the owners of which have no domicile therein, shall be assessed by the Louisiana tax commission, and shall be taxed for state purposes only," has no application to a foreign corporation which has complied with the law of the state by establishing a domicile therein and subjecting itself to state jurisdiction, which thereby acquires the legal status of a domestic corporation, and un

der Act La. No. 9 of 1917 rolling stock of such a corporation is subject to local taxation at the place of its domicile.

8 F.(2d) 36

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FOSTER, District Judge. These two cases involve the same issues. The plaintiff is a corporation organized and existing under the laws of Texas with its domicile in the city of Houston. Certain local taxes are assessed against the plaintiff on tank cars operated by it in the state of Louisiana. No complaint is made as to the fairness of the method of assessment, but the plaintiff contends that its property is assessable for state purposes only because it has no domicile in the state of Louisiana. It appears, however, that plaintiff has a place of business in Shreveport and has designated an agent for the purpose of citation.

Corporations operating rolling stock in the state of Louisiana are subject to all state and local taxation, if they have a domicile within the state. If they have no domicile, they pay the general state tax, and, in addition to that, a tax of 25 mills in lieu of all local and other taxation. The Supreme Court of Louisiana has passed on the contentions here raised in the case of

Simms Oil Co. v. Flanagan, 155 La. 565, 99 So. 450, holding that the plaintiff in this case has a business domicile for the purpose of taxation in Shreveport. This case constitutes a construction of the laws of Louisiana on the subject, and I feel that I would be bound to follow it, as, in view of the provisions of the Louisiana law making all owners of rolling stock subject to taxation one way or the other, there is no question of unjust discrimination presented. I more readily follow the case above cited, as it agrees with my own views.

There will be decrees dismissing the bills and awarding attorneys' fees and interest as prayed for in the answer.

On Application for Rehearing. DAWKINS, District Judge. Plaintiff, a foreign corporation existing under the laws of Texas, owns, as a part of its property engaged in the oil business, a number of tank cars which operate in the state of Louisiana. It has complied with the law of the state of Louisiana permitting such corporations to fix a domicile in the state

and designating the city of Shreveport for that purpose and C. E. Morgan as its Louisiana agent for the service of legal process.

In this proceeding it is sought to restrain the collection of local or parochial taxes upon said rolling stock, for the reason, as plaintiff contends, that it is liable alone for state taxes under section 16, article 10, of the Constitution of 1921. That section reads as follows:

"Rolling stock operated in this state, the owners of which have no domicile therein, shall be assessed by the Louisiana tax commission and shall be taxed for state purPoses only, at a rate not to exceed 40 mills

on the dollar of assessed value.".

The argument is that the convention of 1921, in adopting this provision, was seeking to meet the decision of the Supreme Court of Louisiana in Constantin Refining Company v. Day, 147 La. 623, 85 So. 613, in which it had been held that the Legislature had no power to authorize the collection of taxes upon personal property of a nonresident corporation, for local purposes, where said property had never been within the local taxing jurisdiction; that the intention was to include both those corporations which had complied with the law of the state with reference to fixing a domicile therein, as well as those which had not; and that now none which are creatures of another state can be taxed except as provided by this constitutional provision.

After the adoption of the Constitution of 1921, the Supreme Court (October 30, 1922), in the case of Gulf Refining Company v. Tillinghast, 152 La. 847, 94 So. 418, again had occasion to consider the same

question decided in the Constantin Refining Case, supra, and expressly overruled the doctrine of the latter, holding that the Legislature, in the absence of the declaration of a Louisiana domicile, by foreign corporations, might fix the situs of such property for the purpose of local taxation.

It will also be noted, as pointed out by Mr. Justice Land in a concurring opinion. in the last-mentioned case, the court had, in Union Tank Line Company v. Day, Sheriff, et al., 143 La. 771, 79 So. 334 (which was not referred to in the Constantin Refining Company Case), declared that the Legislature might fix a domicile for a foreign corporation for said purposes of taxation.

The plaintiff in the case of Constantin Refining Company v. Day, Sheriff, was a foreign corporation, and it was not pretended that it had complied with the laws of the state with reference to fixing a domicile. In other words, it was a foreign corporation

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in the strictest sense of the word. If it be conceded that the convention intended to remedy this defect in the law, I do not believe the court would be justified in holding that the purpose was to go beyond the necessities of the case. The Legislature had already, by Act 267 of 1914, § 23, declared that all corporations which complied with the law for establishing a Louisiana domicile should be "entitled to a certificate from the secretary of state, authorizing it to exercise the same powers, rights and privileges as are accorded to similar domestic corporations organized under this act,

and the Supreme Court of this state has applied and construed this provision to mean just that; i. e., that such corporations are on a parity, for all practical purposes, with those created under our own laws. Burgin Bros. & McCane v. Barker Baking Company, 152 La. 1075, 95 So. 227. This decision, however, was also after the adoption of the Constitution of 1921. I am impressed, therefore, that the convention meant to reach only that class of corporations and persons which had not subjected themselves to the laws of this state. It will be observed also that the language of the provision is that "rolling stock operated in this state, the owners of which have no domicile therein, shall be assessed as therein provided. The provision, of course, has no application to the property of domestic corporations and persons domiciled in the state. But when the owners (whether individuals or corporations) have submitted themselves to the jurisdiction of the state, they become subject to all of the liabilities and enjoy all of the privileges of its own citizens by express provision of law. Metropolitan Life Insurance Company v. New Orleans, 205 U. S. 399, 27 S. Ct. 499, 51 L. Ed. 853; Gulf Refining Company v. Tillinghast, 152 La. 847, 94 So. 418; White Oil Company v. Flanagan, 153 La. 837, 96 So. 675.

The assessment in this case was made under authority of Act No. 9 of the extra session of the Louisiana Legislature of 1917, which provides that the rolling stock of such corporations shall be assessed for local purposes at the places which they have fixed as their Louisiana domiciles, and this statute has been upheld by the Supreme Court of Louisiana in the two cases last above cited. I am of the opinion, therefore, that, although the precise question involved here was not decided in any of those cases, since all of the assessments were made under laws which governed prior to the adoption of section 16, article 10, of the Constitution of 1921, yet they are applicable and controll

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1. Bankruptcy 57-Corrupt motive not essential to fraudulent transfer of property.

It is not necessary that actual fraud, in who are acting, be shown to render a transfer the sense of a corrupt motive to profit those of property to one creditor an act of bankruptcy, under Bankruptcy Act, § 3a, subd. 1 (Comp. St. § 9587), but it is sufficient if the effect of the transfer is to give the one creditor such an unreasonable advantage over others that no reasonable explanation appears other than actual or constructive fraud.

2. Bankruptcy57-Transfer to creditor of property in excess of debt not necessarily fraudulent.

Transfer to a creditor of property of value in excess of the debt is not necessarily fraudulent and an act of bankruptcy under Bankruptcy Act, § 3a, subd. 1 (Comp. St. 9587). 3. Bankruptcy 57-Transfer of property by corporation to a creditor held not an act of bankruptcy.

Transfer by a corporation of practically all of its property to a mortgagee in satisfaction of the debt held not fraudulent, and an act of bankruptcy, under Bankruptcy Act, § 3a, subd. 1 (Comp. St. § 9587), where the value of the property was little, if any, above the amount of the debt, and if sold under foreclosure, which was threatened, it probably would not have realized that amount, and where the directors who authorized the transfer were themselves unsecured creditors of the corporation.

In Bankruptcy. Involuntary petition in bankruptcy by Mente & Co. and others against the Old River Company. Petition dismissed.

Roodman Cosby, St. John Garwood, and Baker, Botts, Parker & Garwood, all of Houston, Tex., for petitioners.

Morris, Sewall & Morris, of Houston, Tex., for respondents.

HUTCHESON, District Judge. This is a petition in bankruptcy, brought upon the allegation that the defendant, Old River Company, conveyed and transferred its

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