Court Opinion

ID: 4488414
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:01:17.643805+00
Date Added: 2024-06-11T14:54:08.681675
License: Public Domain

OPINION.
Green :
When the Grand Rapids Dry Goods Co., on August 1, 1919, purchased the stock of the Corl-Knot Realty Co., these two corporations became affiliated within the meaning of section 240 of the Revenue Act of 1918. Under the provisions of subdivision (a) of that section, corporations are required to make a consolidated return of net income and invested capital. Section 326 of the same Act *697prescribes the items which may be included in invested capital. The material parts of that section are as follows:
(a) That as used in this title the term “invested capital” for any year means (except as provided in subdivisions (b) and (c) of this section) :
(1) Actual cash bona fide paid in for stock or shares;
(2) 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: * * *.
There is no dispute between the parties as to the facts. The issue presented by the pleadings is purely one of law. The respondent in computing the consolidated invested capital allowed the purchase price of the stock, $15,000. The petitioner says that it is entitled to $60,000 by reason of the purchase. In other words, the parties appear to be in accord as to the method of computing and the amount of the consolidated invested capital save and except the amount to be added thereto by reason of the acquisition for $15,000 in cash of the stock of the subsidiary whose separate invested capital the respondent concedes would be $60,000. In this respect the situation is comparable to one in which the parties are agreed upon the cost of the building and present to us only the question of the life of the building so that they may apply the proper rate of depreciation to the agreed cost. This practice of narrowing the issues to the real controversies materially reduces the work of the Board.
In Middlesex Ice Co. v. Commissioner, 9 B. T. A. 156, we had a question involving the determination of the consolidated invested capital where the Middlesex acquired 99 per cent of the capital stock of another corporation. In the course of the opinion we said:
Each member of the affiliated group enters the consolidation with its invested capital as defined by section 326 of the Revenue Acts of 1918 and 1921. From this preliminary exhibit there is then eliminated such items or amounts as are shown to be duplications either of investment or of earned surplus and undivided profits.
Since the Corl-Knot Co. paid no dividends prior to December 31, 1919, its operating deficit would in no way impair its paid in capital in computing the statutory invested capital for 1919. Appeal of Kenny Brothers Co., 1 B. T. A. 1019. Cf. Willcuts v. Milton Dairy Co., 275 U. S. 215.
It is the contention of the petitioner, first, that the provisions of section 240, quoted above, do not justify the disregard of corporate entities in determining the invested capital of affiliated corporations, and, second, that under section 326(a)(1) “actual cash bona fide paid in for stock or shares,” is unqualifiedly made a part of invested *698capital and no subsequent reduction of this amount is contemplated by the Act.
The first of these contentions was very definitely disposed of in the Appeal of Farmers Deposit National Bank and Affiliated Banks, 5 B. T. A. 520, wherein we said:
* * * On tlie otlier hand, it said, plainly enough we think, in section 240(a) of the Revenue Act of 1918, that the generally recognized principle of corporate identity was to be overridden for the purpose of the income and profits taxes; that the separate existences of the affiliated companies ceased for tax purposes. It created out of two or more affiliated companies, otherwise having separate identities, a new tax status; and when it did so Congress intended that the group should have the attributes of a single taxpayer. And where, in other sections of the statute, Congress speaks of corporations as individual taxpayers, it means as to the sections dealing with consolidated units to treat the consolidated unit as a single corporation.
See also Appeal of American La Dentelle, Inc., 1 B. T. A. 575; Appeal of Frank G. Shattuck Co., 2 B. T. A. 7; Appeal of Gould Coupler Co., 5 B. T. A. 499; and Appeal of H. S. Crocker Co., 5 B. T. A. 537.
Since under the law two or more affiliated corporations are to be treated for tax purposes as a single corporation, the second contention of the taxpayer is sound only as it is applicable in the case of a single corporation. In Appeal of H. S. Crocker Co., supra, we said:
* * * Under the affiliation provisions of the statute, the acquisition by one company of the stock of another, thereby creating affiliation, creates no additional investment in the affiliated group. By the act which creates the affiliation the group acquires a part of its own capital stock.
In the Appeal of Farmers Deposit National Bank, supra, we find the further statement:
When the Farmers Deposit Trust Co. purchased .the shares of capital stock of the Farmers Deposit National Bank, which we have under consideration, assuming that they were purchased from others than members of the affiliated group, the transaction constituted in substance a partial retirement of the outstanding capital stock of the consolidation, a repurchase by a corporate taxpayer of its own capital stock, a withdrawal of a part of the capital o'f the consolidated group, and a return to the stockholders of their investment in the consolidation. The effect of the purchase of this stock upon the consolidated invested capital was the same as though the transaction was that of a single corporation repurchasing its own capital stock.
The situation in the instant case is somewhat analogous to a purchase by a corporation of its own stock. This question has been before, the Board in a number of cases and is no longer an open matter. Appeal of Steinbach Co., 3 B. T. A. 348; Appeal of Hutchins Lumber & Storage Co., 4 B. T. A. 705; and Appeal of Clearfield Lumber Co., 3 B. T. A. 1282, which treats of this question as follows:
It must be clear that the provisions of section S26 are not to be read literally in the sense that invested capital at all times includes all property values *699theretofore paid in to a corporation for stock without regard to the later history of that stock. Such a construction would defeat the manifest purpose of the provision, for capital which has been contributed and then withdrawn certainly may not after its withdrawal be said to be “ invested.” In LaBelle Iron Works v. United States, 256 U. S. 377, the court, defining invested capital, says (p. 388):
“ The word ‘ invested ’ in itself imports a restrictive qualification. When speaking of the capital of a business corporation or partnership, such as the act deals with, ‘ to invest ’ imports a laying out of money, or money’s worth, either by an individual in acquiring an interest in the concern with a view to obtaining income or profit from the conduct of its business, or by the concern itself in acquiring something of permanent use in the business; in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains.”
Where capital has been withdrawn from the corporation, it certainly is no longer a possible source of future gains in that venture. From the standpoint of the stockholder, the capital is no longer at the risk of the enterprise, but has been reconverted to his undisputed control and use. Appeal of Minneapolis Sash & Door Co., 2 B. T. A. 505.
After considering the opinions cited above, we are of the opinion that cash paid in for stock retains its character as such only so long as it is invested in the business, but when the amount so paid in or any part thereof is withdrawn from the business and returned to the stockholders for stock, it can be no longer classified as “cash bona fide paid in for stock ” within the meaning of section 326. Accordingly, the cash paid into the Corl-Knot Realty Co. for stock should be reduced by $15,000, the amount returned to the stockholders, in computing the invested capital of the affiliated group. Since the subsidiary had an operating deficit, the amount thereof must be applied in the reduction of the earned surplus, if any, of the parent company.
Reviewed by the Board.
Judgment will he entered after 15 days' notice, under Bule 50.