Court Opinion

ID: 4497375
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:23.710763+00
Date Added: 2024-06-11T08:00:18.551832
License: Public Domain

*339OPINION.
Teammell
: In this appeal the taxpayer contends that the leaseholds and good will of the theatres in question, acquired by it for stock, had an actual cash value in excess of the rentals stipulated to be paid, that such value should be included in invested capital, and that it is entitled to a deduction on account of the exhaustion of said leases.
We think that the contention of the taxpayer is supported by the evidence. The testimony of the principal witness for the taxpayer was corroborated by other witnesses, the qualifications of whom are such that we are disposed to attach much weight to their testimony.
In the first place, the witness George A. Giles, president and manager of the taxpayer, had long been identified with theatre projects, including the buying and selling of leaseholds. He had been in the real' estate business for twenty-five years, dealing in apartment houses, dwellings, hotels and theatres, the last twelve years being almost exclusively devoted to the theatre business in and about Boston, Framingham, Gardner and Waltham, Mass.
The witness Richard M. Drown was secretary of the Allied Theatres of Massachusetts. For the last sixteen years he had been in the theatre business, owning, buying, selling, leasing, operating and managing theatres in the New England States. He was personally familiar with the theatres in question in November, 1917, and also knew the character of the populations and the nature or rather lack of competition and the general theatrical situation in Framingham and Gardner.
The witness Harry F. Campbell was for eleven years the New England district manager for the Fox Film Corporation and in charge of selling pictures under contract to New England cities and towns. He had been in the theatrical business for twenty-five years, the last eighteen years of which was exclusively in motion pictures. For over sixteen years he had been buying and selling, leasing and operating theatres for himself and others in New England, some of which were within a few miles of the town of Framingham. In the course of his business he was familiar with the theatres in question and the theatrical situation in Framingham and Gardner in November, 1917.
The witness Joseph Lawren dealt exclusively in theatre real estate in and about the New England States. In 1919 he went to New York and thereafter dealt solely in theatre real estate. In New England alone he consummated thirty-five to forty transactions involving theatre real estate. He was also employed by the Famous Players to investigate and report on theatres, and had made a special study and collected vast data on theatrical conditions. In the course of his busi*340ness be had occasion to make a special study of the theatres situated in Framingham and Gardner for clients. He was familiar with the Stoneham Theatre and the theatrical situation there.
Based on the testimony of such witnesses, and from a consideration of all the evidence, we are convinced that the leases had a value in excess of the stipulated rentals in the amounts as set forth in our findings of fact. As to the so-called good will acquired we attribute no value. The evidence as to the good will was hazy, meagre and entirely insufficient to base a value over and above the factors included in leasehold values.
The question now presents itself as to whether section 331 of the Revenue Act of 1918 prevents the inclusion in invested capital of the taxpayer of the cash value of the leases which we have set out in our iindings of fact. Section 331 is as follows:
In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such, previous owner for purposes of taxation.
After the transfer of the assets to the corporation, Giles received less than 50 per cent of the stock issued therefor and his wife received the balance of the stock. This would appear on its face to be a case which does not come within the scope of section 331, but it requires further analysis. Giles was the owner of the leases for which the corporation issued its stock to him and his wife. His wife did not own any of the leases and had no interest therein. Her entire contribution to the corporation was her willingness and promise' to help financially. Nothing was contributed by Mrs. Giles at the time the stock was issued to her. The fact that she was willing to contribute and to assist financially was not such an asset as the corporation could set up on its books and capitalize.
Our conclusion from the evidence is that the entire capital stock which was issued for the leases owned by Giles was under his control and was issued to’ his wife at his direction. The transaction, in substance, amounted to Giles having some of his own stock issued to his wife instead of having it issued to himself; he had the right to say to whom it should be issued by virtue of his transferring the leases to *341t,he corporation. The ownership of the stock existed and was in Giles, who transferred assets for it before the certificate by which it was evidenced was issued.
Reaching the conclusion that Giles, who owned the assets which were exchanged for the stock, actually had control of the issuance of all the stock, we conclude that a situation is presented which brings the case within the scope of section 331 of the Revenue Act of 1918. The fact that the case comes within the scope of section 331, however, applies only to the invested capital feature and has no relation to the valuation of the leases for the purpose pf deductions on account of the' exhaustion thereof.
The taxpayer is entitled to take a pro rata proportion of the cost of the respective leases as a deduction in its income tax returns for the year in question. It is the cost of the leases which the taxpayer is entitled to have returned by deductions on account of the exhaustion thereof. In the absence of any other evidence in respect to the cost of such leases, the value of the leases which were paid in for stock represents the cost thereof to the corporation.
Order of redetermmation will he entered on 15 days’ notice, under Rule 50.