Court Opinion

ID: 4628230
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:57.453543+00
Date Added: 2024-06-11T07:57:10.810241
License: Public Domain

CUYAHOGA MORTGAGE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cuyahoga Mortg. Co. v. CommissionerDocket No. 13783.United States Board of Tax Appeals14 B.T.A. 1; 1928 BTA LEXIS 3038; November 6, 1928, Promulgated *3038  A corporation upon organization issued part of its capital stock to one who was in a position to furnish business to the company, upon his written agreement to furnish such business.  This was practically the only source from which the corporation received business for several years.  The company seeks to include the par value of its stock so issued as invested capital.  The only evidence as to the value, at that time, of the contract to furnish business, was the subsequent earnings of the corporation.  Held, such subsequent earnings might be corroborative of an actually existing value, if any were shown, but could not form the sole basis for fixing such value.  Briggs G. Simpich, Esq., for the petitioner.  F. R. Shearer, Esq., for the respondent.  MARQUETTE *1  This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent for the years 1920 and 1921 and amounting to $1,460.75 for the year 1920 and $1,669.60 for the year 1921.  The deficiencies arise from the disallowance by the respondent of the sum of $101,438.75 as invested capital for the taxable years, for reasons set out in the following*3039  FINDINGS OF FACT.  One Joseph Laronge has been in the real estate and mortgage-loan business in Cleveland since 1901.  He suggested to some other men the organization of a corporation, to which Laronge agreed to turn over as much of his mortgage-loan business as the new company could handle.  As a result the petitioner was duly incorporated in 1916 under the laws of Ohio.  Its business is that of making mortgage loans and dealing in first and second mortgages.  It is located in Cleveland, Ohio, and began business May 1, 1916.  *2  The petitioner's capital stock consisted of 4,000 shares of 8 per cent preferred, of the par value of $100 per share, and 20,000 shares of common, of the par value of $10 per share.  The preferred stock was sold for cash, and the money thus received formed the working capital of the company.  The common stock was issued to Laronge in accordance with the following agreement: THE CUYAHOGA MORTGAGE CO., Cleveland, Ohio.GENTLEMEN: As a good many of your present directors know, I have been carrying on and still carry on a large and lucrative real estate mortgage business.  This business comes to me in connection with my real estate business*3040  and by virtue of such connection, I am placed in a very favorable position to obtain first class loans.  A good many of the mortgages which I make come directly through deals that are made through my office and in that way I am put in direct contact with the actual transaction and know the same much more intimately than if I did not have this association.  My business has been very profitable and conducted without the loss of a single dollar upon any mortgage during my entire experience of seventeen years.  I am willing to turn over to your company, as much of my mortgage loan business as your company is able to handle, receiving therefor common stock of your company to be issued to me fully paid up and non-assessable in the sum of $200,000.  Said stock to be issued to me or my nominees.  In further consideration of the issuance of said stock, I agree to deliver four thousand shares of said common stock of the par value of $10.00 per share as the directors of your company may designate.  Very truly yours, (Signed) JOSEPH LARONGE.  Upon motion duly made and seconded, and unanimously carried, the directors were authorized to accept said proposition.  Except for three or*3041  four loans proposed by other directors of the petitioner, all of its business has been derived from Laronge and his real estate organization.  From the beginning, the petitioner has paid 8 per cent dividends annually upon its preferred stock; for the last seven or eight years it has also paid 6 per cent annual dividends upon its common stock.  At the close of 1927 it also had an accumulated surplus of $168,223.36.  From time to time the petitioner found itself without sufficient funds to take all the desirable loans offered, and would then borrow at the bank.  The extimated average of such borrowings is $100,000 per year.  In determining invested capital for each of the taxable years, the petitioner has included the $200,000 of common stock subject to the limitations on intangibles.  The amount of such deduction for intangibles was $98,561.25.  The respondent has disallowed the inclusion of any portion of the $200,000 common stock as invested capital.  This *3  question as to invested capital is the sole issue in the present proceeding.  OPINION.  MARQUETTE: The point in controversy here is whether the petitioner may, for taxation purposes for the year 1920 and 1921, *3042  include as part of its invested capital any portion of the common stock issued to Laronge in 1916 upon his agreement to furnish mortgage-loan business to the petitioner.  The statute governing, the Revenue Act of 1918, is as follows: SEC. 325. (a) That as used in this title - The term "intangible property" means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property; * * * SEC. 326. (a) That as used in this title the term "invested capital" for any year means * * *: * * * (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest.  * * * The corresponding sections in the Act of 1921 are identical with the above.  The respondent has determined that the contract or agreement of Laronge, as to turning over business to the petitioner, had no ascertainable value at the beginning*3043  of petitioner's corporate life, at which time the stock now sought to be capitalized was issued.  The petitioner maintains that it did have a value, although admitting that the value was speculative.  In order to sustain its burden of proof, the petitioner shows the aggregate amount of its net earnings for 11 1/2 years subsequent to the issue of the stock; shows that practically all of the business, from which such earnings were derived, was furnished by or through Laronge; and argues that, because it is impossible to base any calculations upon such business for years prior to the petitioner's incorporation, we should use the subsequent years' business as a basis for fixing the value of Laronge's contract.  In support of this argument the petitioner cites several decisions of this Board and also the case of . A review of these decisions is not here necessary.  Each of them is clearly distinguishable upon the facts, from the one now before us; and we think they are insufficient to support the petitioner's contention.  The cases relied upon do state the Board's *4  decision that subsequent earnings may, *3044  under proper circumstances, corroborate a prior valuation of a contract or other intangible; but, as was said in , "While earnings subsequent to organization may sometimes constitute corroborative evidence lending support to an appraisal made by reference to facts known or reasonable expectations entertained contemporaneously with or prior to organization, they can not, of themselves, prove value at the time of organization." In the present proceeding, none of the petitioner's witnesses were willing to state even an estimated value of the contract in question, as of the date of organization.  That value is determined, and determinable, solely in the light of subsequent earnings which, while doubtless corroborative of expectations, certainly can not be used now to fix a value as of 12 years ago of something admittedly speculative.  As the evidence discloses no error in the determination of the respondent, we shall enter Judgment for the respondent.