There is language in each of these cases from which one might infer, as petitioner does, that, had it been possible to determine from the record the proper allocation to capital and current expenditures, the capital investment would have been depreciable and the deduction allowed. The actual decisions in those cases do not, however, go so far, and we do not think they can be regarded as authority for that proposition, in spite of the language used therein.

The question before us goes one step further than the cases cited. It concerns not only the question whether the items were capital expenditures, but also, if they were, whether petitioner has a right to deduct, in a later year, a portion of such expenditures. An expenditure may be capital in character (such as an amount paid for good will) so as to be included in invested capital, but it would not follow that any amount would be allowed as a deduction by way of amortization of the expenditure or depreciation of the assets acquired by the expenditure. If we were to admit here petitioner's theory that, because it anticipated no current return on some portion of its expenditures, but expected benefits therefrom in later years, that portion has the quality of a capital investment, and if we were further to admit that petitioner has succeeded, where so many others have failed, in establishing by proof the proper proportion which the capital items bore to the total expenditures, we would still be required to find statutory authority for the deductions in some later years, since deductions are a matter of legislative grace. Assuming, for the moment, that both the fact and the amount of a capital investment had been established, as urged by petitioner, it would be necessary to determine whether the asset so acquired is depreciable under the terms of the Internal Revenue Code.

Petitioner does not name or particularly describe the property or asset which it claims to have acquired by its expenditures, except that it refers to the development of a mechanism, or method, or system of doing business through established distributors. No contention is made that petitioner acquired any tangible property except some plates used in the preparation of advertising circulars, and there is no showing that it acquired any contract rights of any kind as a result of the expenditures. There is evidence that some of the expenditures in question were made "in connection with" certain contracts, but beyond this the record gives us no further information. We are of the opinion that, except for the plates mentioned above, the cost and useful life of which we do not know, the only asset which might in any sense have resulted from the expenditures is something in the nature of good will. Good will is not subject to depreciation allowances. Bills Bros. Memorial Corporation, 7 B. T. A. 1182; R. Bryson Jones, 17 B. T. A. 1217; U. S. Industrial Alcohol Co., 42 B. T. A. 1323, 1346; affirmed on

this issue, 137 Fed. (2d) 511. See also Regulations 111, sec. 29.23 (1)–3, which provides that "No deduction for depreciation, including obsolescence, is allowable in respect of good will." Newspaper subscription lists have likewise been held not to be subject to the allowance for depreciation, on the theory that they have no definite useful life, Toledo Newspaper Co., 2 T. C. 794, 809, although they are held to be capital assets. Rose C. Pickering, 5 B. T. A. 670.

Since the basic theory of the allowance for depreciation is the recovery by annual allowances during the life of exhaustible property of its cost or other basis, it is impossible to see any statutory basis for subjecting to the allowance property of a kind which does not exhaust itself or become less valuable with use. It is obvious from the record that the usefulness of what the petitioner acquired by the expenditures in question was not only not consumed during the five-year period, but that it will continue to serve petitioner as long as petitioner continues to do business by the method so established. This is the reason depreciation allowances have generally been denied for property such as good will, trade names and trade-marks, and the same reason justifies respondent's action in the instant case. Certainly, if assets acquired by expenditures are not depreciable, an equivalent result will not be permitted by the method of amortizing the expenditures for such

assets.

The same basic reasoning prevents us from applying to the facts of this case section 43 of the code, since it can not be said that to permit, in effect, the depreciation over a period of five years of capital assets which are not shown to have depreciated at all, will "clearly reflect the income" of petitioner.

Decision will be entered for the respondent.

M. FRIEDMAN, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT.

Docket No. 6206. Promulgated June 10, 1946.

Grantor of trusts of which the corpus was invested in stock of family corporations, of which children were beneficiaries, and of which he was trustee, with broad powers of management and with discretionary powers as to accumulation of income and invasion of corpus, held, taxable on income of the trusts under section 22 (a), I. R. C.

Matt Wahrhaftig, Esq., for the petitioner.

W. J. McFarland, Esq., for the respondent.

Respondent determined deficiencies in petitioner's income tax liability for the years 1940 and 1941 in the respective amounts of $352.27 and $1,344.96. Petitioner concedes the correctness of certain of re

spondent's determinations. He contests the inclusion in his income of the income of three trusts which he created for the benefit of his children. Respondent held that the income of the trusts was taxable to petitioner under section 22 (a) of the Internal Revenue Code. Petitioner filed his return in the Oakland, California, office of the collector for the first district of California.

The facts are stipulated.

FINDINGS OF FACT.

Petitioner, Maurice Friedman, was married during the taxable years, and he resided in Oakland, California. The name of his wife is Ida Friedman. There are 3 children of petitioner and Ida Friedman, who were living in the taxable years: Bruce, Donald, and Harold, whose birth dates were, respectively, April 13, 1924, January 14, 1926, and July 14, 1929. In 1940 the 3 children were respectively, 16, 14, and 11 years of age. Petitioner was 54 years of age in 1940.

Petitioner, in the taxable years, was the president of two corporations incorporated in California, M. Friedman Paint Co. and California Painting & Decorating Co. He has been president of the corporations since their organization. California Painting & Decorating Co., hereinafter called the decorating company, was organized in 1923, and M. Friedman Paint Co., hereinafter called the paint company, was organized in 1931. Both companies are engaged in the business of manufacturing, distributing, and selling paint and paint products. As of November 30, 1940, the outstanding stock of the decorating company amounted to 1,000 shares, of which petitioner and his wife held 499 shares, each, and M. Wachsman owned 2 shares.

There were two classes of stock of the paint company, class B stock and class C stock. As of November 30, 1940, there were outstanding 34,505 shares of class B stock and 4,537 shares of class C stock. The above stock of the paint company was held as follows:

The facts have been stipulated. There is no reference therein to any other class of stock, as for example, class A stock.

On November 30, 1940, petitioner executed three trust agreements under which a separate trust was created for the benefit of each of his sons. The trust agreements were identical in terms, except for the differences in names. Each trust provided that Ida Friedman could convey property to the trusts. Petitioner named himself the sole trustee of each trust. The trust agreement, which is part of the evidence, is incorporated herein by reference in its entirety. The terms thereof will be described hereinafter.

On November 30, 1940, petitioner transferred to himself, as trustee, under each trust, the entire 2,500 shares of the class C stock of the paint company. On the same date he transferred to himself, as trustee, for the equal benefit of the three beneficiaries, the land and the building at 568 14th Street, Oakland, California, where the wholesale and retail store of the paint company was located. The net cost of the property to the petitioner was $16,628.34.

On November 30, 1940, Ida Friedman transferred stock in the decorating company to petitioner, as trustee of each trust.

The property held in trust in each of the trusts during the years 1940 and 1941 was as follows:

After the above transfers to petitioner, as trustee, the stock of the two companies was held as follows during 1940 and 1941:

During 1940 the trusts received net income from rents in the amount of $422.14 and $2,000 in dividends, total $2,422.14; and during 1941, net income from rents in the amount of $3,952.33 and net income from dividends in the amount of $1,122.86, total $5,075.19.2 No distributions of income were made to the beneficiaries of the trusts during 1940, 1941, or in any subsequent year, except the sums required to pay the income tax of the trusts.

During 1940 and 1941 petitioner received salary from the decorating company in the respective amounts of $510 and $1,200; and salary from the paint company in the amounts of $9,404 and $14,895, respectively. The salary he received from the paint company in the period 1936 to 1939, inclusive, was about $9,000 each year, more or less.

During each of the years 1942, 1943, and 1944 petitioner, as trustee of the trusts, made purchases of the class C stock of the paint company from Wachsman, Colbert, and other employees of the company out of the funds of the trusts. He purchased a total of 1,086 shares for a total amount of $4,796.50.

On November 16, 1942, petitioner transferred to himself, as trustee, 2,622 shares of the class B stock of the paint company, each trust receiving 874 shares.

After the above acquisitions of stock by the trusts, the stock of the paint company was held as follows:

'Exhibit 2 shows trust income as set forth above. Respondent added $1,906.61 and $3,994.97 of the income of the trusts to petitioner's income in 1940 and 1941, respectively. Respondent has not explained the amounts in question. It is presumed that the amounts constitute net income derived from the property which petitioner transferred to the trusts.

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