Case Name: Appeal of Arrowhead Mills, Inc.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-11-09
Citations: 5 B.T.A. 382
Docket Number: Docket No. 3214
Parties: Appeal of Arrowhead Mills, Inc.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 5
Pages: 382–386

Head Matter:
Appeal of Arrowhead Mills, Inc.
Docket No. 3214.
Decided November 9, 1926.
Lawrence A. Baker, Esq., and J. Edward Murphy, Esq., for the petitioner.
A. H. Fast, Esq., for the Commissioner.

Opinion:
OPINION.
Tetissell:
The taxpayer claims that the sulphite mill at Battle Island had on May 10, 1916, a true value of at least $300,000, and that it is therefore entitled to have the benefit of a paid-in surplus of $250,000 under the provisions of section 326(a) (2) of the Revenue Act of 1918, which provides for the inclusion in invested capital, among other things, of
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 .
It appears from the record of this case that, the Battle Island Mill property, constructed in the year 1901, together with additions and improvements made up to July, 1914, had cost, together with the land upon which it was located, $397,794.13; that in July, 1914, its owner had become bankrupt, that on November 27,1915, the trustees in bankruptcy sold the property for $35,000, and that thereafter, on December 24, 1915, the purchaser at the trustees' sale sold the prop erty for $50,000. We have held in the Appeals of Markenheim Co., 1 B. T. A. 1240, and Pittsburgh Grinding Wheel Co., 2 B. T. A. 712, that prices received for property sold by receivers or trustees in bankruptcy or under mortgage foreclosure are not necessarily a measure of the true or fair value of such properties, and that for establishing the invested capital of a taxpayer the true values of such properties may be determined upon the basis of other evidence.
It is also shown in this record that the Battle Island Mill had been deprived of its source of power by having the same appropriated by the State of New York for public uses; that the mill had thus been forced into a state of disuse and that at the time of the bankruptcy sale it had remained idle for approximately two years, and that, deprived of its source of power, it was incapable of being used for the purposes for which it was constructed and intended. The record also shows that the last named purchasers had been able to arrange for the restoration of power and thus again to restore the property to a condition capable of its profitable uses and the taxpayer's claim for the value of $300,000 rests chiefly upon the situation created by the restoration of power privileges. We are not unconscious of the merit of this contention and we find much support for it in such authorities as Pittsburgh, &c. Ry. Co. v. Backus, 154 U. S. 421; Boom Co. v. Patterson, 98 U. S. 403; and San Diego Land & Town Co. v. Neale, 78 Cal. 63; 20 Pac. 372.
We are thus brought to a consideration of the testimony respecting the value and the uses of the property here under consideration. We know what the property had cost, that it had been in use for about 13 years, and that it had remained idle for 2 years, but concerning its condition in May, 1916, the record is silent. Whether all of the construction and machinery and equipment which had entered into the figures of its cost were present in May, 1916, we are uninformed, and the record furnishes us no information respecting the exhaustion, wear and tear which the property had suffered during the years of its use and the years of its idleness.
The taxpayer produced two witnesses who gave opinion testimony concerning the value of the property with power restored. One of these witnesses was the purchaser at the $50,000 sale and the organizer of the taxpayer corporation. The other was a member of an engineering organization engaged in designing and constructing properties of a similar character. We have no doubt that both of these witnesses are qualified, both by education and experience, to testify concerning the values of such property, but their testimony does not convince us of the value claimed. In other cases, notably Appeal of American Express Co., 2 B. T. A. 498, where the Board has accepted opinion testimony of value, the witnesses have given much detailed information and data in support of their opinions, the like of which is wholly lacking in the record of this case.
While we might have little doubt that this sulphite mill property, in May, 1916, had a value in excess of $50,000, we are unable from the testimony to determine what the amount of that excess might be, and we are, therefore, unable to find with any approximate certainty that the property had an actual cash value substantially in excess of the par value of the stock issued in exchange for it. Judgment must, therefore, be found for the Commissioner.
Order of redetermination finding deficiencies for the fiscal years ended April SO, 1919, and 1920, in the amounts of $60⅛.⅛1 and $16,10^.7^., will he entered.