The question involved is whether petitioner is entitled to include the anticipated and unreported profits from installment transactions outstanding on its books as at January 1, 1941, 1942, and 1943, as part of its surplus or "accumulated earnings and profits" in arriving at its equity invested capital within the meaning of section 718 (a) (4) of the Internal Revenue Code. FINDINGS OF FACT. This case was submitted on the following agreed statement of facts: 1. South Texas Lumber Company, hereinafter referred to as petitioner, is a corporation organized on September 17, 1902, under the laws of the State of Texas, with its principal place of business as a retail dealer in lumber and building materials located in Houston, within the First Collection District of Texas. 2. Petitioner keeps its books and files its income and excess profits tax returns on the calendar year and accrual basis. 3. During the course of its business life petitioner acquired title to certain real estate situated in the State of Texas. Beginning with the taxable year 1937, petitioner has made sales of portions of such real estate and, in accordance with section 44 (b) of the Internal Revenue Code, has elected to compute and report the profit thereon on the installment basis. In each of the transactions where petitioner made such real estate installment sales, deeds were given to purchasers, and the deferred payments were evidenced by promissory notes executed by the purchaser, payable to the order of petitioner as therein shown, and were secured by vendor's lien and mortgage lien against the land. Petitioner, being on the accrual basis of accounting, carried on its books as receivables all of the said installment obligations so received by it from such sales. 4. The books disclose the following with reference to such sales: 5. At the time provided by law petitioner filed corporation income tax (Form 1120) and corporation excess profits tax (Form 1121) returns for the calendar years 1941, 1942 and 1943, disclosing net income and income taxes due thereon for the three years and excess profits tax for the calendar year 1943. In arriving at the net income for the said three years, petitioner reported the following realized profits on the installment sales previously referred to above: 6. The balance sheets attached to and made a part of the income tax returns disclosed the following unreported income from installment sales classified as "Unrealized Profit Installment Sales": 7. In its corporation excess profits tax return, Form 1121, for the calendar year 1943, petitioner claimed the unreported income from installment sales, $4,638.49, as a part of surplus and undivided profits in arriving at its equity invested capital. It also claimed the unreported income from installment sales, $10,984.03, as at December 31, 1940, and $8,107.20 as at December 31, 1941, in arriving at its equity invested capital for the calendar years 1941 and 1942, respectively, for the purpose of its unused excess profits credit carry-over from the calendar years 1941 and 1942 to the calendar year 1943. 8. The capital stock, surplus and undivided profits and reserve for depletion, as disclosed by the balance sheets as at December 31, 1940, December 31, 1941, December 31, 1942, and December 31, 1943, attached and made a part of petitioner's corporation income tax returns, Form 1120, for said years, were as follows: Included in the capital stock of $1,400,000.00 was the original stock issued, $50,000.00, and $1,350,000.00 stock dividends subsequently issued. 9. The tax in controversy in this case is the excess profits tax for the calendar year 1943. The Commissioner, as disclosed by the statutory notice of deficiency dated November 5, 1945, reduced petitioner's equity invested capital for the calendar years 1941, 1942 and 1943 by the amounts of unreported profits from installment sales previously referred to in paragraphs 6 and 7 above in the respective amounts of $10,984.03, $8,107.20 and $4,638.49. OPINION. HARLAN, Judge: Since the hearing of this case and since the filing of petitioner's brief a case, undistinguishable on its relevant facts from the case at bar, has been decided by this Court. On July 11, 1946, this Court decided, in Kimbrell's Home Furnishings, Inc., 7 T. C. 339, that a corporation engaged in the sale of furniture at retail on the installment basis could not, in the computation of its equity invested capital, include unrealized profits as represented by unpaid installment notes received from the purchasers at the time of the sale. All of the questions raised by both the petitioner and the respondent herein are fully discussed in the decision in the Kimbrell's Home Furnishings, Inc., case. Petitioner, in his reply brief, seeks to distinguish the Kimbrell case from the one at bar, due to the fact that in the former case the taxpayer computed its net income on the installment basis as provided by section 44 (a) and its excess profits net income on the accrual basis, whereas in the case at bar the taxpayer filed its income and excess profits tax returns on the accrual basis, but "elected to compute and report the profit" from its installment sales under section 44 (a). The claimed distinction impresses us as being without substance. In both cases the taxpayers included anticipated and unreported profits from installment sales in equity invested capital as "accumulated earnings and profits." Approval of this treatment of anticipated and unreported profits from installment sales would be equiv alent to an admission that a different rule applies in the computation of accumulated earnings and profits for excess profits purposes than in the computation of earnings and profits for income tax purposes. In Federal Union Insurance Co., 5 T. C. 374, we held to the contrary. Judgment will be entered for the respondent. HARRY DUNITZ, PETITIONER, v. COMMISSIONER OF INTERNAL MAX DUNITZ, PETITIONER, v. COMMISSIONER OF INTERNAL J Docket Nos. 5752, 5755. Promulgated August 30, 1946. 1. In 1927 petitioners purchased land on which they erected an apartment building. To finance the project they executed their coupon bonds, secured by a first mortgage of $350,000 on the property. In 1928 they executed a second mortgage to secure the payment of second mortgage notes aggregating $125,000. In 1939 and in years 1 SEC. 718 [I. R. C.]. EQUITY INVESTED CAPITAL. (a) DEFINITION.-The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts. reduced as provided in subsection (b)— (4) EARNINGS AND PROFITS AT BEGINNING OF YEAR. The accumulated earnings and profits as of the beginning of such taxable year; prior thereto petitioners acquired their own bonds at large dis- 2. Amounts paid to attorneys for legal services rendered in con- Edgar W. Pugh, Esq., for the petitioners. Lawrence R. Bloomenthal, Esq., for the respondent. The respondent determined deficiencies of $17,270.64 and $1,291.28 in the income tax liability of petitioner Harry Dunitz for the years 1939 and 1940, respectively. He also determined deficiencies of $16,212.16 and $1,255.44 in the income tax liability of petitioner Max Dunitz for the same respective years. The issues are: 1. Whether the transactions in 1939 relating to the disposition of mortgage bonds and notes by the partnership firm of Dunitz Bros., composed of the two petitioners, to Harry & Max Dunitz, Inc., resulted in ordinary net income or in capital gain. 2. Whether or not deductions of legal fees of $8,175 paid in 1940 by the partnership firm of Dunitz Bros. are properly allowable. Certain other issues were conceded or abandoned. FINDINGS OF FACT. Certain facts were stipulated. In so far as they are pertinent to the issues, they are as follows: The petitioners, Harry Dunitz and Max Dunitz, are individuals residing in the city of Detroit, Wayne County, Michigan. Individual income tax returns for the calendar years 1939 and 1940 were filed with the collector of internal revenue for the collection district of Michigan. In 1927 Harry Dunitz and Max Dunitz, individually, purchased certain property on Webb Avenue in the city of Detroit and proceeded to erect an apartment building. To finance this project, Dunitz Bros. borrowed from the Guaranty Trust Co. of Detroit approximately $350,000. On June 1, 1927, Harry Dunitz and Max Dunitz executed and delivered to the Guaranty Trust Co. of Detroit, as trustee, their first mortgage coupon bonds in the aggregate principal amount of $350,000, bearing numbers 1 to 422, inclusive. At the same time Harry and Max Dunitz, together with their wives, who joined therein for the purpose of subordinating their dower interest, executed and delivered to the Guaranty Trust Co. of Detroit, trustee, a first mortgage dated June 1, 1927, for the purpose of securing the repayment of their bonds and the interest coupons attached thereto. The mortgage bonds had serial maturities; approximately $123,000 (sic) face value of such bonds had maturities ranging from June 1, 1929, up to and including June 1, 1937, while the maturity of the balance of $225,000 was fixed on June 1, 1937. The property, located at 3711 Webb Avenue, was described variously as "Dexter Square Apartment" and sometimes as "Dexter Square Building." The 3711 Webb Avenue bonds were carried on the books of a partnership wholly owned by the petitioners and doing business under the assumed name of "Pingree Investment Company" in an account captioned "Bonds in vault 1065," which caption refers to the description of this loan on the books of the Guaranty Trust Co., namely, loan account number 1065. On June 1, 1927, the 3711 Webb Avenue property was subjected to a second mortgage lien securing a loan of $75,000. This lien was released by an instrument recorded on February 17, 1928. However, another second mortgage dated February 11, 1928, and recorded February 15, 1928, was executed and delivered by Harry and Max Dunitz and their respective wives to the Guaranty Trust Co. to secure the payment of the second mortgage notes aggregating $125,000. The 3711 Webb Avenue property was sold by the petitioners to Michael E. O'Brien by warranty deed dated February 15, 1928. The petitioners acquired the property known as 3711 Webb Avenue from Michael E. O'Brien and Lydia C., his wife, by warranty deed dated September 9, 1929. In January 1931 a corporation, known as Harry & Max Dunitz, Inc., was organized under the laws of Michigan. The stock of the corporation was owned as follows: During the month of January 1931 the petitioners and their wives acquired additional shares of stock in the corporation in exchange |