James H. Channon Mfg. Co. v. Commissioner

*962OPINION.

The first assignment of error urged by the petitioner is refusal of the respondent to allow any greater value than $47,339.19 for invested capital and depreciation purposes in the taxable year 1917. The petitioner contends that its assets had a value at the date of acquisition for invested capital and depreciation purposes equal to the par value of the stock issued therefor.

The facts are that Norvin Nussbaumer, E. J. Hoag, and Donald Morrill organized the petitioning corporation in January, 1917, to engage in substantially the same business as that theretofore engaged in by the Elevator Company, at which time James H. Channon, owner of all of the capital stock of the said Elevator Company, offered to sell the assets of that company to the petitioner for 998 shares of capital stock of the petitioner, which offer was duly accepted and the sale was so consummated. At or about the same time, Nussbaumer, Hoag, and Morrill, proceeding under the laws of the *963State of Illinois, appraised the assets of the Elevator Company at a figure of $95,000.

Hoag and Morrill appeared personally at the taking of depositions in this case and testified at length as to their services with the petitioner and its predecessor and the nature of their experience therewith, which experience, in our opinion, qualified them to place a value on these assets. They testified that the inventory of materials was taken by actual count and that the cost or market, whichever was lower, was used; that the machinery was priced at what it would bring second hand; that the patterns were lumped and priced as a lot. The testimony disclosed that it was the practice of the petitioner’s predecessor to charge a number of patterns to its profit and loss account and to special jobs which accounts for the considerable increase in the value of patterns placed upon the petitioner’s books.

In 1922, petitioner employed a consulting engineer to make an appraisal of its assets as of January, 1917, when the sale here in question took place, which appraisal was made and a lengthy detailed report rendered thereon. This appraiser appeared personally at the taking of depositions in this case and he testified at great length as to his qualifications to make such an appraisal. He testified that he took all of the assets in the plant by actual count and listed them and that he deducted therefrom the purchases and added thereto the sales as shown by the books of account between the period January, 1917, to the time of making his appraisal in 1922. He then determined the current market price of similar machinery and equipment and applied depreciation on each item for the period of time it had been in use, thereby arriving at the cost of reproduction in January, 1917, of $92,102.07, which figure greatly exceeds the values placed on machinery and equipment by Nussbaumer and Hoag at the time of the organization of the petitioner.

This witness further testified that a committee was appointed consisting of Hoag and Nussbaumer at the time of making his appraisal in 1922 and that they took each pattern separately, examined it carefully, if it was metal they weighed it and if it was wood they calculated the amount of material, etc., entering into the cost thereof and in this manner determined the cost of each pattern.

We are not called upon to accept the testimony of witnesses, Nuss-baumer and Hoag, as conclusively establishing the cash value of these assets at January, 1917, nor are we asked to accept an appraisal report made by a disinterested appraiser in 1922 to substantiate these values. We have the combined testimony of the witnesses who made the appraisal in 1917 and the witness who made the appraisal in 1922 which we believe satisfactorily establishes the value contended *964for by the petitioner. We, therefore, hold that the assets, exclusive of any good will which may have existed, received by the petitioner in 1917 in exchange for stock had a cash value equal to the par value of the stock issued therefor, and that those values should be used for invested capital and depreciation purposes.

The assets in question having been sold and transferred prior to March 3, 1917, the provisions of section 208 of the Revenue Act of 1917 are not applicable. Appeal of Henderson Overland Co., 4 B. T. A. 1088.

The second assignment of error relates to certain items of expense, amounting to $1,789.36, alleged by the petitioner to have been capitalized in 1917 in error. A detailed list of these expenditures was made a part of the petition filed with the Board. At the time of taking depositions in this case, counsel for the petitioner did not have the original list of these items and realizing that exhibits attached to the petition are not evidence before the Board until offered as such, he attempted to stipulate with respondent’s counsel that the list filed with the petition be accepted in evidence, which respondent’s counsel did not do. After some discussion on the subject, respondent’s counsel agreed that if the original was attached to the petition and was properly admissible, he would not object on the ground that it was not properly identified. He further said, however—

If I care to make any objection to the merits at the time you offer it [meaning at the time of the hearing] I reserve the right to do so, but not because it isn’t properly identified.

This detailed list was not offered in evidence at the time of the hearing, consequently counsel for the respondent was not afforded the privilege of cross-examination nor an opportunity to object to the merits of this issue. We are, therefore, of the opinion that this issue has not been properly evidenced and that we can not, therefore, allow the sum of $1,789.36 as a deduction.

Judgment will be entered on 15 days’ notice, u/nder Rule 50.