American Bag Co. v. Commissioner

*128 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1924, in the amount of $7,113.70, all of which is in controversy. The only error assigned is that the respondent "* * * erroneously refused to allow as a deduction, obsolescence of plates in the amount of $125,632.78." Petitioner now concedes that if it is entitled to any deduction for obsolescence of plates, the deduction shall not be greater than the amount of *129 $64,954.34. The respondent has refused to allow any such deduction as claimed, for the reason that in the year following the taxable year, petitioner (as respondent contends) transferred such plates to a new corporation in pursuance of a plan of reorganization.

FINDINGS OF FACT.

Petitioner is a corporation organized in 1906 under the laws of the State of Maine, *1917 with its principal office at Memphis, Tenn. Its business up until the close of the year 1924 was that of manufacturing cotton bags.

During the years 1907 to 1924, inclusive, petitioner acquired, at a total cost of $153,015.41, certain metal plates which it used in its business. Prior to the taxable year 1924 petitioner charged off on its books, at various times, amounts totaling $88,061.07, as representing the cost of such metal plates.

On October 29, 1924, petitioner and three other corporations entered into a written contract wherein the contracting parties mutually agreed to organize a new corporation under the laws of the State of Delaware, for the purpose of acquiring from each of the four contracting parties in exchange for all the stock of the new corporation, "all assets, property, rights and interests, business, good will, patents, trade marks, trade names, copyrights, processes, company books, records, all contracts, bills and accounts receivable, causes of action, and demands of every kind and nature whatsoever, all type, plates, electrodes, engravings, metal plates * * *." The contract provided that "there shall be excepted from the foregoing any claims for refund*1918 of taxes paid prior to January 1, 1925," and provided further that:

Price,Waterhouse & Company shall prepare for each corporation a statement as of December 31, 1924; the inventory item shall be adjusted at a figure not more than market and not less than ninety-five (95) per cent of market as of December 31, 1924, as may be determined by agreement of the undersigned; * * * The percentage of stock to be received by each corporation shall be based upon such statement * * *. For the purpose of said statement the appraisal of fixed assets made by the American Appraisal Company of Milwaukee shall be accepted subject to allowance for any additions, alterations, replacements, or deductions since July 1, 1924.

On November 10, 1924, the same parties entered into a supplemental agreement modifying the October 29, 1924, agreement as to certain stock provisions, which modifications are not material in this proceeding.

The above-mentioned contracts dated October 29, 1924, and November 10, 1924, were ratified and approved by the board of directors of petitioner at a meeting held on November 13, 1924, and by the *130 stockholders of petitioner at meetings held on November 27 and*1919 November 28, 1924, respectively.

On December 6, 1924, the board of directors of petitioner met and authorized and instructed its president to execute and present a proposal to the Chase Bag Co. of Delaware (the new company) "as soon as the organization of that company shall have been perfected," wherein:

* * * THE AMERICAN BAG COMPANY hereby offers to grant, convey, sell, transfer and assign to CHASE BAG COMPANY OF DELAWARE, for the consideration hereinafter expressed, all the assets, property, business and good will of AMERICAN BAG COMPANY, and all its property, real and personal, wheresoever the same may be situate, which it may own or possess, or to which it may be entitled, and every right, title, and interest therein, including * * * all material pertaining to engraving or printing department, including type, plates, electrodes, engravings, metal plates, excepting however any claim for refund of taxes paid by or on behalf of AMERICAN BAG COMPANY prior to January 1, 1925;

* * *

The AMERICAN BAG COMPANY * * * does hereby covenant and agree that it will do nothing to hinder the said CHASE BAG COMPANY OF DELAWARE in the possession, use or enjoyment of any of the said assets.

*1920 On December 22, 1924, the board of directors of the petitioner met and as a result of its president, L. D. Falls, "having just arrived from a trip to New York City in connection with the merger," a resolution was unanimously adopted in which Falls was "authorized to execute and deliver to Chase Bag Company of Delaware, a written offer for the sale of the entire assets of AMERICAN BAG COMPANY in substantial conformity with the said agreements," namely, the agreements of October 29, 1924, and November 10, 1924. This "offer for the sale of the entire assets," was, as far as it is material in this proceeding, substantially the same as the "proposal" authorized on December 6, 1924. The parts of the "proposal" which we have quoted above, were also contained in the "offer for the sale of the entire assets" authorized on December 22, 1924. The "offer," however, contained the two following provisions not contained in the "proposal." First, following the clause in the "proposal" which read "excepting however any claim for refund of taxes paid * * * prior to January 1, 1925," the "offer" further provided as follows:

* * * And excepting such other items as may be specified in the statement*1921 to be submitted by Price, Waterhouse & Co., as of December 31, 1924, and as such items may be agreed upon between L. D. Falls, on behalf of AMERICAN BAG COMPANY and the President of Chase Bag Company of Delaware.

The second provision not contained in the "proposal" but contained in the "offer" was as follows:

All instruments of transfer shall take effect as of January 1, 1925, at 12:01 A.M., without regard to the time of delivery or of execution of such *131 instruments, and possession of all assets of AMERICAN BAG COMPANY shall be for and on behalf of Chase Bag Company of Delaware from and after 12:01 A.M., January 1, 1925.

The appraisal of petitioner's assets made by the American Appraisal Co. of Milwaukee on July 1, 1924, and referred to in the above mentioned agreement of October 29, 1924, did not include among such assets appraised, the metal plates here in question. Neither did Price, Waterhouse & Co., include such metal plates among the assets of petitioner in the statement as of December 31, 1924, which statement was used as a basis for the percentage of stock issued to petitioner by the new company. The Chase Bag Co. of Delaware refused to pay petitioner any*1922 consideration for the plates.

The metal plates in question numbered about 8,000. The plates contained whatever impressions the customer desired, including in practically every case the name of "American Bag Company."

On December 31, 1924, the metal plates in question, numbering approximately 8,000, were stored in a factory building owned by petitioner in New South Memphis. The building was among the assets which petitioner transferred to the Chase Bag Co. of Delaware, effective 12.01 a.m., January 1, 1925. The plates were not removed from the building prior to the transfer of the building.

On January 1, 1925, the Chase Bag Co. of Delaware, in setting up on its books acquired from petitioner, included as an asset an item of "plates" at a value of $1, accompanied with the following description thereof:

To represent all plates formerly owned by the Amer. Bag Co. Transferred to new company.

During the year 1925 the Chase Bag Co. of Delaware used in its business about 3 per cent of the plates left on the premises by the petitioner.

On December 31, 1925, the Chase Bag Co. of Delaware charged off its books the "plates" account originally set up at a value of $1.

The*1923 metal plates in question became worthless at the time petitioner discontinued the manufacture of bags in 1924. They were of no value to petitioner or to anyone else. They had no salvage value. Petitioner determined them to be worthless, abandoned them, and charged the balance of the cost of $64,954.34 off its books on December 31, 1924.

Petitioner deducted on its return for the calendar year 1924 an amount of $157,687.09 on account of its determination that its plates had become worthless. This amount, however, included appreciation written up on petitioner's books at various times from 1912 to 1924. The respondent did not allow petitioner any deduction on account of its plates becoming worthless during the taxable year.

*132 OPINION.

LOVE: The only question in this case is whether petitioner is entitled to any deduction from its gross income for the year 1924 on account of the plates which became worthless during that year. On its return, petitioner claimed as a deduction an amount of $157,687.09. In its petition, petitioner only claimed an amount of $125,632.78. It now concedes that, if it is entitled to any deduction, the amount thereof should not exceed*1924 the remaining undepreciated cost of the plates on December 31, 1924, in the amount of $64,954.34.

Respondent contends that section 203(b)(3) of the Revenue Act of 1924 precludes the allowance of the deduction as claimed. This section reads as follows:

No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

We do not think that the above quoted section has any application to the question presented in the instant case, for the reason that petitioner did not agree to exchange, nor did it exchange, any metal plats for stock or securities in another corporation. The final offer of sale made by petitioner to the new corporation specifically excluded the plates from the transaction in the following language:

* * * And excepting such other items as may be specified in the statement to be submitted by Price, Waterhouse & Co., as of December 31, 1924, and as such items may be agreed upon between L. D. Falls on behalf of AMERICAN BAG COMPANY and the President of Chase Bag Company of Delaware.

The statement*1925 submitted by Price, Waterhouse & Co., as of December 31, 1924, excluded from the assets of petitioner the plates in question. The Chase Bag Co. of Delaware refused to pay petitioner any consideration for the plates. No stock or securities of the new corporation were issued to petitioner for the plates. Such circumstances show that the plates were specifically excluded from the transaction.

We think the evidence clearly supports a finding that the plates became worthless during the year 1924, by reason of the fact that on December 31, 1924, petitioner ceased manufacturing bags; that the plates were then of no value to petitioner or to anyone else; that the plates had no salvage value; and that petitioner was entirely justified in determining them to be worthless and in charging them off its books. The plates had become entirely obsolete. It follows that the respondent was in error in refusing to allow as a deduction from gross income under section 234(a)(7) of the Revenue Act of *133 1924, for the year 1924, the remaining undepreciated cost of the plates in the amount of $64,954.34. See *1926 .

Reviewed by the Board.

Judgment will be entered under Rule 50.