Giant Tire & Rubber Co. v. Commissioner

*1252OPINION.

Petitioner contends that the properties, formerly comprising the plant of the Toledo Findlay Tire Co., which it acquired from its president, Claude E. Hart, on May 15, 1917, for a consideration of $26,500 cash and $50,000 par value of common stock, had an actual cash value, at the date of acquisition, of $76,500, and that it is entitled to include these properties in its invested capital at that figure. Eespondent answers that these properties may not be included in invested capital at a greater value than $26,500, which is the price at which they were acquired by petitioner’s president at the receiver’s sale, for the following reasons: (1) That in the transaction involving the purchase of the properties in question at the receiver’s sale, for $26,500 cash, petitioner’s president was acting for and in behalf of petitioner, as its agent, and that the price paid for these properties by petitioner’s president, as agent, constitutes the cost thereof to the petitioner; (2) that the price paid for these properties by petitioner’s president shortly before he paid them in to the petitioner fixes the actual cash value thereof, at the date paid in to petitioner, at $26,500; and (3) that if the Board finds that Claude E. Hart was acting for himself, at the receiver’s sale, and not as petitioner’s president and agent, then the provisions of section 331 of the Eevenue Act of 1918 are applicable, and petitioner may not *1253include the properties in question in invested capital at a greater value than the cost thereof to Hart.

The evidence relating to the actual cash value of the properties in question at the date they were acquired by the petitioner conclusively establishes that value to have been not less than $76,500. Three witnesses qualified by past experience to give opinion evidence as to the value of these properties were called in petitioner’s behalf. Two of them were entirely disinterested parties. They related in detail the methods followed by them in arriving at their conclusions of value. Their testimony is convincing and stands uncontroverted, and it is supported by appraisals made immediately after the fire in May, 1918, which were made the basis for the adjustment of the fire loss and which include only sound insurable values, exclusive of excavations and foundations for buildings and other noninsurable items, in excess of the value claimed by the petitioner.

Respondent contends that the price paid for these properties at the receiver’s sale by petitioner’s president conclusively establishes their actual cash value. We do not so regard it. It is merely a fact upon which we must rely until we are convinced by evidence of other facts that the sale is not significant of value. The preponderance of evidence is that the actual cash value of the properties in question was greater than the price paid therefor at the receiver’s sale, and this is the value which is includable in invested capital under the plain provisions of section 326 of the Revenue Act of 1918. See Appeal of Markenheim Co., 1 B. T. A. 1240.

Respondent’s contention that Hart, in purchasing the properties in question at the receiver’s sale, was acting in his official capacity of petitioner’s president and agent, is based upon the facts that the funds for the purchase by Hart were advanced by petitioner, and that Hart distributed the common stock alleged to have been issued to him as a part of the consideration for the properties to the other common stockholders, in proportion to their holdings. But the evidence is that Hart was acting for himself and none other; that the funds advanced to him by petitioner were charged on the books against his account; and that he sold the properties in question to the petitioner for $26,500 cash and $50,000 par value of capital stock. The distribution of the common stock, which he received as part consideration for the properties, among the other common stockholders, Hart explains as a reward for their past services in building up the company, and an assurance of their continued efforts in behalf of the company of which he was president. The proven facts do not support respondent’s contention.

*1254Just prior to the purchase of the properties under consideration, petitioner had outstanding common stock of a par value of $25,000, and a very small amount of preferred stock. To assist in financing the purchase of the properties in question, the common stock was increased from $25,000 to $100,000 par value; and of the total increase of $75,000 par value, $50,000 was issued to Claude E. Hart as part consideration for the properties he transferred to petitioner, $12,500 was issued as a bonus to the purchasers of the preferred stock and $12,500 was unissued. Either before, at the time of, or after the purchase of the properties in question, $50,000 par value of preferred stock was sold for cash. In his answer to the petition respondent submitted as a proposition of law that section 331 of the Revenue Act of 1918 was applicable to the facts of this case, and limited the value at which the properties in question could be taken into petitioner’s invested capital to the cost of the properties to Hart, the previous owner. Petitioner, therefore, was made aware that respondent’s action in including the properties in question in invested capital at a value of only $26,500 was premised in part upon the provisions of section 331, and that it must sustain the burden of proof that this premise for respondent’s action is, under all the circumstances, erroneous. Section 331 of the Revenue Act of 1918, provides:

In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided,, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1; 1913, in computing the net ineonie of such previous owner for purposes of taxation.

Hart categorically denied on the witness stand that he owned as much as 50 per cent of petitioner’s capital stock, at any time after he transferred the properties in question to petitioner. If that be true, and the record shows nothing to the contrary, he apparently did not retain an interest of 50 per cent or more in the properties which he transferred to the petitioner. But the proof does not go far enough, since the limitations of section 331 are applicable if Hart *1255retained a control of 50 per cent or more in the properties after transfer to the petitioner, and the record fails to disclose whether Hart did or did not retain such a control. Just prior to the transfer of these properties to the petitioner, Hart owned from 30 to 33% per cent of petitioner’s $25,000 par value of common stock. The common stock was increased to $100,000 par value, Hart receiving $50,000 par value as part consideration for the properties. There were no strings attached to the issuance of this $50,000 of common stock to Hart, and when he distributed it among the other common stockholders he did so of his own volition. Hart, then, did immediately after the transfer of the properties in question to petitioner, own more than 50 per cent of petitioner’s common stock. When was the preferred stock issued ? Who were the purchasers of the preferred stock ? Did the holders of the preferred stock have any voice in the management or control of petitioner’s business? These questions remain unanswered. ' Were we to hold that section 331 was not applicable, we would have to assume, at least, that the rights of the preferred stockholders were on a parity with those of the common stockholders, and this we are unwilling to do. Petitioner has failed to prove that the provisions of section 331 are not applicable in including the properties in question in invested capital. Under the circumstances there is no ground for disturbing respondent’s action in including the properties in invested capital at their cost to Hart, the previous owner, to wit, $26,500.

For reasons hereinbefore stated, we find the cost of the properties in question to have been $76,500, and that figure is the basis for the determination of the loss resulting from the destruction of those properties by fire in 1918. The basis of $26,500 used by the respondent, as the result of which he determined a profit in excess of $6,000, is erroneous.

Petitioner alleges error in respondent’s rejection of the comparatives which it suggested for the purpose of determining the profits taxes under section 328 of the Revenue Act of 1918.. Petitioner did not prove the allegation; nor did it show what comparatives were used by respondent, or that the comparatives used were not such as contemplated by the statute; nor has it succeeded in proving that the comparatives which it suggested are proper.

Judgment will be entered on 15 days’ notice, under Rule 50.