#### UNITED CIGAR STORES OF AMERICA v. THE UNITED STATES1

[No. C-43.

Decided April 26, 1926]

*On the Proofs*

*Excess-profits tax; invested, capital; tangible property; stock paid in.*— For the purpose of assessing excess-profits tax the corporate stock of one company paid in for shares of another is, in the hands of the latter, tangible property within the meaning of section 207, revenue act of 1917, and therefore invested capital.

*The Reporter's*statement of the case:

*Messrs. M. Garter Hall*and *8. M. Stroock*for the plaintiff. *Mr. George P. Brauburger*and *Carlin, Garlvn <& Hall*were on the briefs.

*Mr. Preston G.*Alexander, with whom was *Mr. Assistant Attorney General Herman J.*Galloway, for the defendant. *Mr. Dwight E. Rorer*was on the briefs.

The court made special findings of fact, as follows:

I. The plaintiff, United Cigar Stores Co. of America, is a corporation organized on the 25th day of July, 1912, under *135the laws of the State of New Jersey, doing the business of a retail tobacconist in the State of New York and in other parts of the United States.

II. On May 16,1901, the United Cigar Stores Co. of New Jersey was organized under the laws of the State of New Jersey. It engaged in the business of a retail tobacconist in the State of New York and other parts of the United States, and it and its affiliated or subsidiary companies expended large sums of money in premium advertising, developing, and expanding its business and creating trademarks, trade names, and brands, and built up a very large and valuable good will.

During the whole of the year 1909 the said United Cigar Stores Co. of New Jersey had issued and outstanding 9,000 shares of common stock of a par value of $100 per share, 7,500 shares of preferred stock of a par value of $100 per share, and gold bonds of a total par or face value of $2,850,000.

III. On April 23, 1909, the Corporation of United Cigar Stores was organized under the laws of the State of New York. At a meeting of the stockholders of this corporation, held on May 27, 1909, the following resolution was adopted:

“ That in the judgment of the stockholders .of this company it is desirable that the outstanding common capital stock of the United Cigar Stores Company, incorporated under the laws of the State of New Jersey, or any part thereof, be purchased, so far as practicable, by this company, and that the directors of this company be, and they hereby are, authorized to negotiate with the holders of such common stock of the said United Cigar Stores Company, with the view of purchasing the whole or such part thereof from such of the holders thereof as the directors in their judgment may deem proper by delivering in payment therefor ten shares of the common capital stock of this company, full paid and nonassessable, for each share of the common capital stock of the said United Cigar Stores Company, full paid and nonassessable, so purchased, and the said directors be, and they hereby are, authorized to take any and all steps and proceedings proper in their judgment to carry out the purposes of this resolution and to authorize any of the officers of this company to do any and all acts, and to execute any and all papers that they may deem proper therefor, and to affix the corporate seal thereto.”

*136The above resolution was approved by the directors of the Corporation of United Cigar Stores, and by September, 1909, all of the outstanding common stock of the United Cigar Stores Co. of New Jersey (consisting of 9,000 shares) had been acquired in the manner and on the terms in said resolution provided; that is to say, 90,000 shares of common stock of the Corporation of United Cigar Stores had been exchanged for 9,000 shares of common stock of the United Cigar Stores Co. of New Jersey. In the meantime, in June, 1909, by resolutions duly and regularly passed by the board of directors, the Corporation of United Cigar Stores authorized an issue of bonds in the amount of $3,600,000, which were duly issued and used to acquire from the holders thereof all of the outstanding preferred stock and gold bonds of the United Cigar Stores Co. of New Jersey, consisting of 7,500 shares of preferred stock of a par value of $100 and gold bonds of a total par or face value of $2,850,000 by exchanging said bonds of the Corporation of United Cigar Stores for the bonds and preferred stock of the United Cigar Stores Co. of New Jersey on the basis of $100 par value of the bonds of the Corporation of United Cigar Stores for each share of preferred stock of the United Cigar Stores Co. of New Jersey and $100 of par or face value of the bonds of the Corporation of United Cigar Stores for each $100 of par value of the gold bonds of the United Cigar Stores Co. of New Jersey. From September, 1909, until its dissolution on December 31, 1912, the Corporation of United Cigar Stores continued to own all of the capital stock of United Cigar Stores Co. of New Jersey, both common and preferred, as well as all of the issued and outstanding bonds of said company.

From a time prior to September, 1909, and continuously thereafter until on or after May 31, 1917, the United Cigar Stores Co. of New Jersey owned and held all of the capital stock of the United Cigar Stores Co. of Illinois, United Cigar Stores Co. of Rhode Island, United Merchants’ Realty & Improvement Co., United Cigar Stores Co. of Alabama, United Cigar Stores Agency, Broadway Corner Co., Broadway Renting Co., Bronx Realty Co., Halloran-Wise Realty *137Co., Lloyd Realty Co., United Chemists Co., United Display Advertising Co., United Stores Realty Co., United Stores Land & Improvement Co., and Van Burén and State Streets Co.

IY. In July, 1912, the plaintiff, United Cigar Stores Co. of America, was organized under the laws of the State of New Jersey with an authorized capital stock consisting of $5,000,000 preferred and $30,000,000 common.

At a meeting of the stockholders of this company, held on July 25,1912, preambles and resolutions were adopted which read in part as follows:

“ Whereas there is now issued and outstanding nine mil- ' lion fifty-four thousand dollars of the stock of the Corporation of United Cigar Stores and three million six hundred thousand dollars of the fifty-year gold bonds of the said company, bearing interest at the rate of six per cent per annum, and an opportunity has been offered to this company by the present holders of all of said bonds of said Corporation of United Cigar Stores to acquire the same by paying therefor the par value of each of said bonds with interest from June 30, 1912 (that being the last date upon which interest was paid on said bonds), and it is deemed for the best interest of this company that said bonds be so acquired at that price; and

“ Whereas it is also deemed desirable for the best interests of this company that the outstanding stock of the Corporation of United Cigar Stores, or so much thereof as the holders of record may wish to sell, shall also be acquired by this company; and

“ Whereas in order to obtain the money necessary to purchase the said outstanding six per cent gold bonds of said Corporation of United Cigar Stores, it is advisable that the seven per cent cumulative preferred stock of this company be sold upon a basis which will net this company par therefor,

“ Now, therefore, be it resolved that it is for the best, interests of this company: * * *

“ *Third.*That the outstanding stock of the Corporation of United Cigar Stores be acquired upon the terms and conditions set forth in the proposed offer to the stockholders of the Corporation of United Cigar Stores, as set forth in the circular to be sent to each stockholder, a copy of which is submitted to this meeting and spread at length upon the minutes of this meeting;

*138*“Fourth.*That the board of directors be, and they are hereby, authorized and recommended to offer to purchase all of the outstanding bonds of the Corporation of United Cigar Stores upon the terms and conditions hereinbefore set forth, and that they are authorized and recommended to offer to purchase from any and all stockholders of the Corporation of United Cigar Stores, the shares held by them, upon the terms and conditions set forth in said proposed offer to said stockholders, a copy of which has been submitted to this meeting, if in their judgment the said bonds and the said outstanding stock of the Corporation of United Cigar Stores are necessary for its business and are of the value proposed to be paid therefor.

sj: ❖ # ❖

*Sixth.*That in the judgment of the stockholders and in-corporators present at this meeting, the value of the property to be acquired upon the issuance of the common stock of this company, to wit, stock of the Corporation of United Cigar ■Stores, on the basis of three shares of the common stock of this company for one share of the stock of said Corporation of United Cigar Stores, is reasonable, fair, and equitable; the total outstanding stock of said latter company having been duly appraised at the sum of $27,162,000.”

These resolutions were approved by the directors, and a further resolution passed, which read in part as follows:

“ Whereas in the judgment of the board of directors the said outstanding bonds of the Corporation of United Cigar Stores are reasonably worth to this company the face value of said bonds, together with interest thereon from June 30, 1912, and are necessary to the business of the company; and

“Whereas in the judgment of the board of directors each share of the stock of the Corporation of United Cigar Stores is of the fair value of three hundred dollars, the value of all of said shares of stock of said Corporation of United Cigar Stores issued and outstanding having been duly appraised at the sum of $27,162,000, and it is desirable in the judgment of this board that all of the shares of said stock or as many thereof as the holders thereof may elect to sell on the terms and conditions set forth in said circular, should be acquired by this company, the same being, in the opinion of this board, necessary to the business of this company.

“ Now, therefore, be it resolved:

“ *First.*That three million six hundred thousand dollars of the fifty-year gold bonds of the Corporation of United Cigar Stores, bearing interest at the rate of six per cent per annum, be purchased by this company by paying therefor *139the face amount of said bonds, together with accrued interest said bonds from June 30, 1912, to the date of payment.

*“ Second.*That all of the outstanding stock of the Corporation of United Cigar Stores, or so much thereof as the holders of said stock are willing to sell to this company, to be acquired by this company issuing and delivering to each holder of said stock of the Corporation of United Cigar Stores three shares of the full paid nonassessable stock of this company for every one share of said stock of the Corporation of United Cigar Stores, and that this company issue for that purpose twenty-seven million one hundred and sixty-two thousand dollars ($21,162,000) of the common stock of this company.”

V. As of December 31, 1912, the United Cigar Stores Co. of America had issued and outstanding fully paid preferred stock of a par value of $4,527,000, all of which was issued for cash at par, and fully paid common stock of a par value of $27,162,000, or a total of $31,689,000, with which common stock it had purchased the capital stock of the Corporation of United Cigar Stores of a par value of $9,054,400 on the terms and in the manner in the above resolutions provided, and with which cash derived from the sale of its preferred stock it had purchased on the terms and in the manner provided in said resolutions all outstanding 50-year gold bonds of said corporation of a par value of $3,600,000.

YI. During the time between July 25, 1912, and December 31, 1912, when the United Cigar Stores Co. of America acquired the capital stock and bonds of the Corporation of United Cigar Stores pursuant to the above resolutions, said stock of the Corporation of United Cigar Stores had an actual cash value of $300 per share.

YU. On December 31, 1912, Corporation of United Cigar Stores was dissolved pursuant to action duly taken by its directors and stockholders, its stock was canceled and its bonds retired, and its entire assets transferred to the United Cigar Stores Co. of America as its sole stockholder. The United Cigar Stores Co. of America then entered upon its books the assets of the Corporation of United Cigar Stores, which, in addition to cash, bills receivable, and dividends accrued, consisted solely of the stocks and bonds of the. United Cigar Stores Co. of New Jersey.

*140On January 1, 1914, the common stock of the United Cigar Stores Co. of New Jersey had an actual cash value of $27,162,000.

Upon the dissolution of the Corporation of United Cigar Stores, and continuously thereafter until on or after May 31, 1917, this plaintiff owned and held all the capital stock and all the bonds of the United Cigar Stores Co. of New Jersey.

The par value of the total share of capital stock of the plaintiff issued and outstanding on March 3, 1917, was $30,951,493, none of which was owned or held by any member of the consolidated or affiliated group referred to in Finding VIII herein.

VIII. On or about April 25, 1918, plaintiff filed with the United States collector of internal revenue for the third district of New York its income-tax return for the calendar year 1917 under the revenue act of 1916, as amended, and on the same date the plaintiff and its affiliated companies, United Cigar Stores Co. of New Jersey, United Cigar Stores Co. of Illinois, United Cigar Stores Co. of Rhode Island, United Cigar Stores Co. of Alabama, United Cigar Stores Agency, Broadway Corner Co., Broadway Renting Co., Bronx Realty Co., Halloran-Wise Realty Co., Lloyd Realty Co., United Chemists Co., United Display Advertising Co., United Stores Realty Co., United Stores Land & Improvement Co., and Van Burén and State Streets Co., corporations affiliated with it within the meaning of the revenue act of 1917, as amended, and the regulations prescribed by the Commissioner of Internal Revenue filed with the said collector their consolidated excess-profits tax return for the calendar year 1917 under said revenue act of 1917. The net income subject to income tax and the amount of income tax due as shown on said income-tax return of the plaintiff were as follows:

Net income-$2, 708, G90. 73

Income tax_ 142, 772.12

The consolidated net income subject to excess-profits tax as shown on said consolidated excess-profits tax return was *141$3,781,158.97, the consolidated invested capital as shown thereon, $21,541,415.50, the deduction provided for in section 208 (a) of the revenue act of 1917, 9 per cent of the consolidated invested capital and the amount of the excess-profits tax due, $395,533.65.

In accordance with article 78 of Regulations 41, duly promulgated by the Commissioner of Internal Revenue and approved by the Secretary of the Treasury, it was agreed among the plaintiff and the corporations affiliated with it at the time of filing said original return that the total excess-profits tax of the consolidated group should be computed as a unit upon the basis of the consolidated return and assessed upon the respective affiliated corporations in such proportions that the plaintiff should pay 70.072 per cent thereof.

Pursuant to and in accordance with said returns plaintiff was assessed by the Commissioner of Internal Revenue for the calendar year 1917 an income tax of $142,772.12, and an excess-profits tax of $276,861.69, or a total of income and excess-profits tax of $419,633.81.

IX. Thereafter the collector of internal revenue of the United States for the third district of New York, pursuant to the Revised Statutes of the United States in such cases made and provided, gave notice to plaintiff of said assessments and demanded the payment thereof.

X. As required by said notice and demand the plaintiff, on the 15th day of June, 1918, paid to said collector the said assessment of $419,633.81, said payment being made under protest and under threat of penalty and distraint, involuntarily and under duress of law.

XI. Upon investigation and audit of the said income and excess-profits tax returns and based upon adjustments of net income and invested capital, the Commissioner of Internal Revenue, in February, 1920, assessed against the plaintiff additional income and excess-profits taxes for the yean 1917 in the amount of $46,929.95. Thereafter the aforesaid collector notified the plaintiff of said additional assessment and demanded the payment thereof with interest thereon of $15,252.23.

*142XII. As required by said notice and demand the plaintiff, on the 29th day of February, 1924, paid to said collector the said additional assessment of $46,929.95, and interest amounting to $15,252.23, or a total of $62,182.18, said payment of tax and interest being made under protest and under threat of penalty and distraint, involuntarily and under duress of law.

Upon investigation and reexamination and reaudit of the aforesaid returns and based upon further adjustments of income and invested capital, the Commissioner of Internal Revenue, in September, 1923, assessed against the plaintiff -additional income and excess-profits tax for the year 1917 amounting to $18,825.43.

Thereafter, the said collector for the second district of New York notified the plaintiff of said additional assessment and demanded the payment thereof within 10 days from the date of said notice.

XIII. As required by said notice and demand the plaintiff, on the 11th day of December, 1923, paid to said collector $15,683.24, and on June 16, 1924, $3,189.32, the amount of said additional assessment of $18,825.43 and interest of $47.13, said payment of tax being made under protest and under threat of penalty and distraint, involuntarily and under duress of law.

XIV. The consolidated net income subject to excess-profits tax as finally computed by the Commissioner of Internal Revenue, the correctness of which is conceded by the plaintiff, was $3,833,833.52. The total income tax due from plaintiff for 1917 as finally determined and assessed by the said commissioner and paid by plaintiff, the correctness of which is conceded, was $183,006.32.

The consolidated invested capital as finally determined by said commissioner, the correctness of which is an issue in this case, was $20,675,208.76, and the total excess-profits tax of the consolidated group as finally determined and assessed by the said commissioner was $430,640.58. Plaintiff’s proportionate part of said consolidated excess-profits tax was fixed by agreement among the members of the con*143solidated group in accordance with article 75 of Regulations 41 at 70.27 per cent thereof. There was assessed against and paid by plaintiff on this account the sum of $302,382.87, the correctness of which is in issue in this case.

XV. In computing its invested capital as shown in its original consolidated excess-profits tax return plaintiff excluded therefrom $15,062,200, which it now claims it was entitled to include as part of its invested capital.

On March 17, 1919, plaintiff filed an amended consolidated excess-profits tax return for the year 1917 and then computed its invested capital at the sum of $36,603,615.50 by including therein the actual cash value of the common stock of the Corporation of United Cigar Stores as of December 31, 1912.

On March 17, 1919, within the time prescribed by law, and by regulations of the Commissioner of Internal Revenue then in effect, plaintiff filed with the said commissioner claim for refund of excess-profits taxes alleged to have been erroneously assessed against and collected from it for the year 1917 on account of alleged erroneous computation of the invested capital of said consolidated group in the sum of $217,696.89, which claim was finally denied and rejected by said commissioner prior to the commencement of this suit.

On the date when plaintiff’s petition was filed five years had not elapsed from the date when any of said taxes were paid and collected.

XVI. The entire assets of the Corporation of United Cigar Stores in 1912, when its stock was finally acquired by the United Cigar Stores Co. of America, by purchase with the latter’s stock, consisted of all of the stock and bonds of the United Cigar Stores Co. of New Jersey, namely, bonds of the par or face value of $2,850,000; preferred stock of the par value of $750,000; common stock of the par value of $900,000.

In 1912, at the time the stock of the Corporation of United Cigar Stores was purchased by the United Cigar Stores Co. of America with the stock of the latter, and also on January 1, 1914, the actual cash value of the entire net assets of *144said New Jersey company, after deducting from its gross assets its liabilities* including its bonds and preferred stock, was as follows:

Tangible property, including cash, bills, accounts and notes receivable, real estate, leases on real estate, merchandise, etc_$5, 762, 000

Intangible property consisting of good will, trade-marks, trade names, trade brands_ 21,400, 000

Total_ 27,162,000

XVII. In making his final computation of the consolidated invested capital of the plaintiff and its subsidiaries for 1911 the Commissioner of Internal Kevenue excluded therefrom the value of all intangible property of the United Cigar Stores Co. of New Jersey which the latter corporation owned in 1912 at the time of the acquisition by the plaintiff of the stock of the Corporation of United Cigar Stores in excess of 20 per cent of the total shares of the entire capital stock of the plaintiff issued and outstanding on March 3, 1911; that is to say, the said commissioner included in the plaintiff’s consolidated invested capital on account of the acquisition by it in 1912 of the stock of the Corporation of United Cigar Stores by purchase with plaintiff’s own stock only the sum of $11,952,298.60, arriving at that figure by adding the actual cash value of the tangible property of the United Cigar Stores Co. of New Jersey as of January 1, 1914, namely, $5,162,000, and such part of the actual cash value ($21,400,000) as of the date of the aforesaid acquisition by plaintiff in 1912 of the stock of the Corporation of United Cigar Stores of the intangible property or assets of the United Cigar Stores Co. of New Jersey as did not exceed 20 per cent of the total shares of capital stock of the plaintiff issued and outstanding on March 3, 1917, namely, $6,190,298.60. The par value of the total shares of capital stock of plaintiff issued and outstanding on March 3, 1917, was $30,951,493.

It is the contention of the plaintiff that all of its capital stock was issued either for cash or for tangible property of the value on January 1, 1914, of $31,689,000, and that *145the plaintiff’s invested capital should be computed by adding to its entire outstanding capital stock as of March 3, 1917, to wit, $30,951,493, the consolidated surplus shown on its consolidated balance sheet as of January 1, 1917, to wit, $4,933,417.16.

If the plaintiff’s contention as to the method of computing the invested capital of the aforesaid consolidated group for 1917 is correct, its true invested capital is $35,884,910.16, and plaintiff’s total income and excess-profits tax for 1917 under the revenue act of October 3, 1917, is $280,511.37. If the method adopted by the Commissioner of Internal Revenue in making his above-mentioned final computation of the income and excess-profits tax liability of the claimant is correct, the true invested capital of said consolidated group for 1917 under said act is $20,675,208.76, and the plaintiff’s total income and excess-profits tax for 1917 under said act is $485,389.19, which said amount has been paid by the plaintiff at the times and under the circumstances herein-before recited.

XVIII. Subsequent to all the payments herein referred to made by the plaintiff, and within the time prescribed by law and by regulations of the Commissioner of Internal Revenue then in effect, the plaintiff filed with the Commissioner of Internal Revenue a second claim for refund of excess-profits taxes alleged to have been erroneously assessed against and collected from it for the year 1917, on account of alleged erroneous computation of its invested capital, in the sum of $220,177.18, which claim was finally denied and rejected by said commissioner.

XIX. That all courts entertaining jurisdiction of this cause may take judicial notice of Regulations 41 and 45 of the Commissioner of Internal Revenue and of the formal decisions of the Commissioner of Internal Revenue, duly approved by the Secretary of the Treasury and promulgated under the designation of Treasury decisions.

The court decided that plaintiff was entitled to recover.

1

 Writ of certiorari granted.

*146Hat, Judge,

delivered the opinion of the court:

The facts in this case have been stipulated by the parties, and are not in dispute. The only question for our decision is, how is the plaintiff’s consolidated invested capital to be computed under section 207 of the revenue act of 1917.

Section 207 of said act reads as follows :

“ Seo. 207. That as used in this title, the term ‘ invested capital’ for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly.

“As used in this title £ invested capital ’ does not include stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations:

“ *(a)*In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: *Provided,*That *(a)*the actual cash value of patents and copyrights paid in for stock or shares in such corporation or partnership at the time of such payment shall be included as invested capital, but not to exceed the par value of such stock or shares at the time of such payment, and (5) the good will, trade-marks, trade brands, the franchise of a corporation or partnership or other intangible property shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property the value of such good will, trade-mark, trade brand, franchise, or intangible property not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-mark, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen *147hundred and seventeen), in an amount not to exceed on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock.”

In the case of a corporation liable for excess-profits taxes under this law the term *“*invested capital ” includes “ the actual cash value of tangible property paid in, other than cash, for stock or shares in such corporation or partnership at the time of such payment.”

Corporate stocks are tangible property within the meaning of this act and have been so classified by regulations of the Commissioner of Internal Revenue.

“ Art. 47. Construction of terms ‘ tangible property ’ and *1*intangible property’: The term *‘*other intangible property,’ as used in section 207, will be construed to mean property of a character similar to good will, trade-marks, and the other specific kinds of property enumerated in the same clause. With respect to property not clearly of such a character, rulings will be issued as occasion may demand to indicate whether it shall be regarded as tangible or intangible.

“ The following classes of property, when paid in for stock or shares in a corporation or partnership, will be regarded as tangible property so paid in:

“

“ *(d)*Bonds.

“ *(d)*Notes and other evidences of indebtedness.

Bills and accounts receivable.

“ (e) Leaseholds.”

In July, 1912, plaintiff issued its capital stock for the capital stock of Corporation of United Cigar Stores, which in 1909 had been issued for stock of the United Cigar Stores Co. of New Jersey.

Upon the facts and the law applicable thereto, it must be held, in the computation of plaintiff’s consolidated invested capital under section 207 of the revenue act of 1917, that $27,162,000, par value of its original common capital stock, was issued in 1912 in payment for tangible property consisting of capital stock of the Corporation of United *148Cigar Stores, the value of which is conceded to have been equal to the par value of plaintiff’s common stock then issued.

The plaintiff is therefore entitled to have a judgment for $296,463.29, and it is so ordered.

Graham, *Judge;*DowNey, *Judge;*Booth, *Judge;*and Campbell, *Chief*Justice, concur.