Court Opinion

ID: 4489374
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:01:48.864603+00
Date Added: 2024-06-11T15:03:54.474983
License: Public Domain

Trammell,
dissenting: The petitioners contend that the contract including the assets which Schechter acquired from the Sonora Phonograph Corporation and transferred to the Sonora Phonograph Sales Co. for $4,800,000 par value of its capital stock had a value of more than $1,000,000 at the time paid in, which, but for the provisions of section 331 of the Revenue Act of 1918, would be included in invested capital to the extent of their actual value, but not exceeding the amount of $1,310,625, or 25 per cent of the par value of the combined outstanding capital stock of the petitioners at the beginning of the year. They also contend that, since the contract and the assets acquired thereunder were not reflected in invested capital, there resulted an abnormal condition which brings them within the purview of section 327.
The contract in question gave the Sonora Phonograph Sales Co. exclusive right to distribute the products of the Sonora Phonograph Corporation throughout the life of that corporation. Among other things, it gave to the Sonora Phonograph Sales Co. patents, trademarks, trade names, the entire selling end of the business, and provided it with an established sales organization and outlet for the products and furnished it with an established source of supply for merchandise. Unquestionably, these were valuable assets so far as the Sonora Phonograph Sales Co. was concerned.
This contract and the assets were transferred to Schechter for and in behalf of himself and others, some of whom were the stockholders of the Sonora Phonograph Corporation who acquired them with the view of forming another corporation to carry on the sales end of the business. It is not shown that all of the stockholders of the Sonora Phonograph Corporation partook in this transaction and there is nothing to show that it amounted to a distribution of dividends, either liquidating or otherwise. If the stockholders of the Sonora Phonograph Corporation had received the assets transferred in accordance with the stockholdings, it would have amounted to a distribution and a closed transaction which would have fixed a basis for valuation and inclusion in invested capital, subject to the effect of section 331. Such assets could have been included in invested capital at the value as of the time received in distribution by the stockholders. If this had been the case, doubtless this controversy would not have arisen. The corporations then would have been affiliated by virtue of, the stock ownership by the same individuals in the same proportion. But this fact is not shown by the record. All the record discloses is that some of the stockholders acquired the assets and transferred them to the sales corporation. They acquired them without cost, and consequently there is under section 331 no basis for the inclusion thereof in invested capital. The fact that the cor*1187porations were affiliated in 1918 is not material. Conditions as to stock ownership might have been materially different in 1917, when the assets were transferred. The record before us presents simply a question, as both parties to this controversy concede, of the exclusion of the value of assets from invested capital by the operation of section 331. This is not a case where one affiliated corporation transferred assets to another corporation in the group, leaving the group in the same situation as it was before.
The consolidated invested capital of the affiliated group is made up of the invested capital of the corporations separately determined, with eliminations for duplication. American Bond & Mortgage Co., 15 B. T. A. 264; Grand Rapids Dry Goods Co., 12 B. T. A. 696. Here there would be no duplication in so far as this transaction is concerned. It was not an intercompany transaction, but one between individuals and the sales company. Since we can not find that the transfer of the contract and assets by the Sonora Phonograph Corporation to the individuals constituted a distribution, that transaction does not establish a cost basis of the assets to the individuals. They were acquired by the individuals without monetary consideration, and for this reason, only, can not under section 331 be included in invested capital of the company.
Does the exclusion of the value of the contract and assets result in an abnormality within the meaning of the statute? The question to be determined in order to answer the question is, Were the assets excluded by this means of substantial value over and above the amount at which they were included in invested capital and were they a material income-producing factor?
During 1917 cash sales of Sonora Phonograph Sales Co. stock were made at $75 per share and in 1918 George E. Brightson, who was president of both companies, purchased 5,000 shares at $75 per share, making payment partly in cash and partly in notes. If these stock sales be taken as indicative of the value of the rights and assets acquired under the contract, the value thereof would be $3,600,000, which was substantially more than $1,310,625, the maximum amount that could have been included in invested capital but for the provisions of section 331.
The earnings in comparison with the tangible assets would indicate a value of the intangibles of approximately $900,000. It is not necessary here, however, to determine the exact value of the intangibles further than that they were substantial in amount as compared with the allowed invested capital.
The very purpose for which the Sonora Phonograph Sales Co. was organized was to take over the contract and assets. It had no other assets. The sales contract and the other intangible assets in-*1188eluded thereunder were the source of its income and as these assets clearly had a substantial value, which could not be included in invested capital, it is my opinion that there was such an abnormality in the capital as to entitle the petitioners to have their profits-tax liability determined under the provisions of section 328. See Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Detroit Opera Rouse, Inc., 13 B. T. A. 581.
On the other hand, if the transfer of the assets and contract to the sales corporation be entirely ignored, and it be treated as if they had not been transferred, on the theory that it was a transfer within an affiliated group of corporations, it is my opinion that the fact that patents, trade-marks and trade brands and other assets of an intangible nature, of such substantial value as the evidence discloses, built up or acquired by the phonograph corporation, were excluded entirely from invested capital, brings the case within section 327 (d).