William B. Dana Co. v. Commissioner

*90 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920 and 1921, in the amounts of $2,547.39, $1,624.99 and $6,014.86, respectively. Two issues are presented by the pleadings (1) the amount of the petitioner's invested capital during the years in question; (2) whether the petitioner is entitled to special assessment.

*91 FINDINGS OF FACT.

William B. Dana & Co. was established as a partnership in 1865, consisting of William B. Dana, who had a three-fifths interest, and John G. Floyd, who had a two-fifths interest. The partnership was formed to publish the Commercial and Financial Chronicle, a financial magazine publishing current financial and business news and trade and price statistics through weekly issues and supplements. The publication was a success from its beginning.

In 1894 the petitioner corporation was organized under the laws of New York, with $500,000*3876 par value common stock and bonds of $175,000. All of the assets of the partnership of William B. Dana & Co. were transferred to the corporation which paid William B. Dana $25,900 and issued to him the entire capital stock of $500,000, and issued the $175,000 bonds to John G. Floyd for his two-fifths interest. The tangible assets conveyed to the corporation consisted of cash of $3,750 and machinery worth $22,250.

Between 1894 and his death in 1910, William B. Dana, in consideration for his services, received the entire income of the petitioner and agreed to, and did pay the entire bond issue of $175,000, principal and interest. Whenever the plant needed enlargement he had it made and paid for it personally. After his death such amounts were paid by the corporation.

The respondent included in invested capital of the petitioner for the years in question on account of the acquisition of the assets in 1894, a total amount of $200,900, on the ground that the cash of $25,900 and bonds of $175,000 determined the cash value of all assets acquired in that year, and ascribed $175,900 of that total to good will. The respondent also denied the petitioner's application for assessment*3877 of its profits tax under the provisions of section 328 of the Revenue Act of 1918.

OPINION.

SIEFKIN: The first issue relates to the value of the intangible assets acquired in 1894. The value of the tangibles is not in dispute, being admitted by the respondent to have been cash of $3,750 and machinery worth $22,250, a total of $26,000. The parties also apparently are not in dispute that the bonds issued were worth their face value. There is further no dispute as to the respective interests of the two partners, Dana, three-fifths, Floyd, two-fifths. With these factors it is apparent that the price paid by the corporation can be determined. Floyd had a two-fifths or 40 per cent interest in tangibles and intangibles of the partnership. For this he received $175,000. A 40 per cent interest in tangibles worth $26,000 amounted *92 to $10,400 and indicates that the petitioner paid him $164,600 for a similar per cent of the intangibles of the partnership. Based upon such amount, the intangibles acquired from Dana had a value of $246,900. Under the limitations upon intangibles acquired for stock imposed by section 326 of the Revenue Acts of 1918 and 1921, the petitioner*3878 can not, however, include in invested capital more than $125,000, since such intangibles were acquired by the issue of stock and the entire capital stock was $500,000. The total amount thus allowable in invested capital on account of intangibles is $289,600 instead of the amount of $175,900 included by the respondent. The amount of $26,000 should also be included on account of tangibles instead of $25,000 included by the respondent.

With respect to the second issue, we are without sufficient evidence to determine whether or not the respondent should have computed the petitioner's profits tax under the special assessment provisions. The mere statement that betterments were made in the early years of the corporation, the cost of which did not appear upon the books of the corporation, is not sufficient. Nor is the partial exclusion of the value of good will from invested capital, because of provisions of the taxing statute, a good ground. See . We, accordingly, approve the respondent's denial of the application for special assessment.

Judgment will be entered upon 15 days' notice, under Rule 50.