Union Terminal Elevator Co. v. Commissioner

*55 The respondent asserts deficiencies for the fiscal years ended July 31, 1919, 1920, and 1922, in the respective amounts of $12,312.15, $191.14, and $956.47. The deficiency notice contains the statement that no additional tax liability is determined for the year 1921, but the petitioner includes such year in its appeal for redeterminations.

The following assignments of error are asserted in the petition:

(1) That the Commissioner erred in excluding the amount of $95,000 from the petitioner's invested capital in each of the years covered by the notice;

(2) In reducing the rate of depreciation on the petitioner's sprinkler system which was claimed in each of such fiscal years;

(3) That the Commissioner erroneously decreased invested capital in each of the taxable*3033 years involved on account of depreciation on a March 1, 1913, value which under his own findings included substantial appreciation in the value of assets acquired prior thereto; and

(4) That the petitioner's net taxable income for each of the four fiscal years was erroneously increased by the amount of $3,591.51.

At the hearing the petitioner abandoned issues (2) and (3) and the respondent conceded the error alleged as issue (4). The parties filed a stipulation which is additional to the oral evidence adduced at the hearing and is the basis of the following

FINDINGS OF FACT.

The Minneapolis Union Elevator Co. was a Minnesota corporation, organized in 1895, and dissolved in 1907. It built and owned a grain elevator located on the right of way of the Great Northern Railway Co. in Hennepin County, Minnesota. On September 1, 1895, it executed and delivered to the Minneapolis Trust Co. as trustee a trust deed on such elevator and the equipment thereof as security for a bond issue in the amount of $175,000.

*56 On September 8, 1905, the said Minneapolis Trust Co. commenced an action to foreclose the trust deed above described. On December 1, 1905, the trial court*3034 entered its judgment and decree in favor of said Minneapolis Trust Co., as trustee, and against the Minneapolis Union Elevator Co. in the amount of $235,597.50, and ordered a sale of the grain elevator, machinery and equipment of such Minneapolis Union Elevator Co. by the sheriff of Hennepin County.

Pursuant to such order the sheriff sold the elevator property, machinery and equipment on the 16th day of January, 1906, to the Minneapolis Trust Co., as trustee, for the amount of $237,678.19, and duly filed his "Sheriff's Report of Sale" in said court on January 16, 1906. The Minneapolis Union Elevator Co. failed to redeem from such foreclosure sale within the time prescribed by law and title to the property duly vested in the Minneapolis Trust Co., as trustee, on or about January 16, 1907.

At a meeting of the directors of the petitioner, held on January 18, 1907, the following resolution was unanimously adopted:

Whereas, this corporation has been formed by the former bondholders of the Minneapolis Union Elev. Co. for the purpose of taking possession of all that certain elevator and leasehold formerly owned by the Mpls. Union Elev. Co. and which was duly sold at foreclosure*3035 sale on the 16th day of Jany 1906 to the Mpls Trust Co. as trustee for said bondholders and whereas, there has been no redemption from such foreclosure sale and title to all said property has ripened in said Trust Company as such Trustee for said bondholders in shares proportionate to the amounts of bonds so held by each of them, which said bonds amount to the principal sum of one hundred and seventy five thousand dollars ($175,000) for which sum this corporation has been capitalized.

Now, Therefore, be it resolved, that this corporation accept a conveyance and deed of all said property herein above described from said Minneapolis Trust Co. as trustee, and that stock in this corporation be issued for said property so conveyed to it to said bondholders proportionate to the amount of bonds so held by each of them to the full amount of one hundred and seventy-five thousand dollars ($175,000) which said stock shall be an the same is so fully paid up by reason of the conveyance to this corporation of said property.

The following is a true and correct excerpt from the minutes of a meeting of the directors of the Union Terminal Elevator Co., held on May 28, 1907:

The offer of Nye*3036 Jenks & Co. of eighty thousand dollars for the elevator and leasehold of the company was discussed.

On a motion by J. S. Pillsbury and seconded by C. S. Pillsbury it was unanimously voted to accept the cash offer of eighty thousand dollars of Nye Jenks & Co. for the elevator plant and buildings and all tools and appliances used in running the elevator subject to the lessors rights of the Great Northern Ry. Co., and subject to the lease of W. P. Devereux Co. of the annex. Provided minor details of the transaction could be worked out satisfactorily between this company and the Nye Jenks Co.

*57 The elevator building and equipment of the Minneapolis Union Elevator Co. was carried on its books of account at least as early as September, 1897, in the sum of $322,192.74, and was so carried until the company went out of existence in January, 1907.

The following resolution was unanimously adopted at a special stockholders' meeting of the Minneapolis Union Elevator Co. held on the 14th day of January, 1907:

WHEREAS, mortgage foreclosure proceedings have been hitherto had covering all the elevator plant, buildings, machinery and leasehold of the Minneapolis Union Elevator Company*3037 under the trust deed of said Company to secure its bonded indebtedness, and a sale of all said property under said foreclosure proceedings was duly made on January 16th, 1906, to the Minneapolis Trust Company, as Trustee, for the sum of Two Hundred and Thirty-seven Thousand Six Hundred and Seventy-eight dollars and nineteen cents ($237,678.19) and the time to redeem therefrom expires on the 16th day of January, 1907; and

WHEREAS, it appears to be and is inexpedient and impossible for said Company to redeem its said property from said sale, and in consequence thereof it will be impossible to carry on the present business of the Company after said last named date, by reason of the loss of ownership of said elevator plant, and will be necessary to close out all said business on and subsequent to last named date; and

WHEREAS, said Company in addition to said bonded indebtedness is owing a large amount of money incurred for and on account of operating expenses and losses in previous years, which said indebtedness is more than said company is able to pay in the regular course of business, or by a sale of all its other property not included in said foreclosure sale; and

WHEREAS, there*3038 is or may be a stockholders' liability attaching to the ownership of stock in said Company for its debts not so paid or able to be paid by said Company itself or from its assets, which said liability it is desirable to avoid;

NOW THEREFORE, BE IT RESOLVED, that it is for the best interests of this Company to sell all its said property of every kind and description not included in said foreclosure sale, but including therein all its accounts, bills receivable, contract, rights, wheat, moneys and personal property of every kind and description, and all of its said elevator business, including the good will thereof, to the purchaser or purchasers at said foreclosure sale, or whosoever else may become the owner of said elevator plant under said foreclosure proceedings, or any other person or persons, provided that such purchaser shall and will assume and pay all the debts and liabilities of this Company existing at said date of purchase, and shall and will save this Company and all the stockholders thereof, harmless from any and all loss or liability for or on account of such indebtedness;

AND BE IT RESOLVED, that the directors of this company be authorized and directed to make and*3039 enter into such sale for and in behalf and in the name of this Company, of all said personal property hereinabove described upon the terms and conditions hereinabove set forth, and execute and deliver any and all instruments for and in the name of this Company necessary to carry out and effectuate such sale hereinabove described;

AND BE IT FURTHER RESOLVED, that upon and after such sale this Company cases from doing business.

*58 The opening entries in the books of account of the Union Terminal Elevator Co. as shown in its journal on pages 100-101 and duly posted to the ledger are:

*3040 The actual cash value of the property paid in for stock at the date of the incorporation of the petitioner was not less than $175,000.

*59 In its income and profits-tax return for each of the taxable years the petitioner included in the computation of its invested capital the amount of $175,000 as the actual cash value of property paid in for stock at date of incorporation. Upon audit of each of such returns the Commissioner reduced invested capital representing property so paid in by the amount of $95,000, readjusted depreciation taken by the petitioner in each of the taxable years and for each of such years added an item of $3,591.51 to taxable income and asserted the deficiencies here in controversy.

OPINION.

LANSDON: The petitioner has abandoned its contention that the Commissioner erroneously computed the depreciation sustained by its physical assets in the taxable years. We therefore approve the action of the Commissioner as to issues (2) and (3) as set forth in our preliminary statement. The respondent through his attorney in open court confessed error as to issue (4). We therefore hold that in the recomputation of the petitioner's tax liability for each*3041 of the years before the Board the petitioner's taxable income as determined by the Commissioner should be reduced by the amount of $3,591.51.

A single question of fact remains for our consideration - the actual cash value of the property paid in at date of incorporation for shares of stock of the par value of $175,000. Section 326(a)(2) of the Revenue Act of 1918, which governs here, provides that invested capital shall include:

Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * *

In support of its contention that the property paid in at date of incorporation for shares of stock had an actual cash value equal to or in excess of $175,000, the petitioner relies on the stipulated facts and on the evidence of witnesses familiar with the cost and use of*3042 grain elevators. The cost of the tangible property was carried on the books of the predecessor at the date of the incorporation of the petitioner at $322,192.74, with no write-down or reserve for depreciation. In September, 1895, a financial concern which is now the largest bank and trust company in Minneapolis underwrote a bond issue on the tangible property of the predecessor corporation in the amount of $175,000. An officer of such institution testified that its policy has always been to loan not more than 50 per cent of the value of elevator property.

*60 D. L. Raymond, who has been in the grain business since 1895, secretary of the petitioner since its organization, and who is familiar with elevator properties, testified that in his opinion the depreciated cost of the elevator at January 18, 1907, was not less than $300,000. John F. Suhring, an appraisal engineer who has made valuations of property since 1907, testified that he made a detailed survey and appraisal of the elevator property of the petitioner in 1927 and found that the depreciated cost of such property in 1907 was $277,380. Arthur H. Lang, an elevator engineer, testified that he has been familiar with*3043 elevator properties in Minneapolis for many years, that he first inspected the property of the petitioner in 1903 or 1904, that he has inspected it twice yearly since that time, that he was familiar with the purchase and sale of such properties in 1907, and that in his opinion the tangible assets here in question had a fair market value at January 18, 1907, in the amount of $265,000.

In support of his determination of the actual value of the property paid in for stock at January 18, 1907, the respondent relies on the resolution authorizing the sale of the property, as set forth in our findings of fact. The petitioner contends that this resolution at most goes no further than to authorize a sale conditioned on certain requirements set forth therein and that as the sale was not made the resolution has no weights as evidence of the value of the property. Our attention is also called to the fact that the resolution was not adopted until some four or five months after the property was acquired by the petitioner, and that in the year 1907 there was a bank panic that began about the middle of the year and increased in gravity until the end thereof. In these circumstances we can not*3044 regard the resolution adopted by the directors of the petitioner on May 28, 1907, as conclusive evidence of the value of the property in question at January 18 of the same year.

After careful consideration of the stipulation and testimony we are of the opinion that there is a clear preponderance of evidence sufficient to establish the contention of the petitioner and we have therefore found as a fact that at January 18, 1907, the tangible property paid in to the petitioner for shares of stock had an actual cash value of not less than $175,000.

In conformity with our decision in , we hold that we have no jurisdiction over the year 1920, for which no deficiency has been asserted by the Commissioner, and accordingly dismiss the proceeding for that year.

Decision will be entered under Rule 50.