Court Opinion

ID: 4617150
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:35:59.848109+00
Date Added: 2024-06-11T07:55:15.488587
License: Public Domain

O'SULLIVAN RUBBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.O'Sullivan Rubber Co. v. CommissionerDocket Nos. 14583, 20660.United States Board of Tax Appeals19 B.T.A. 92; 1930 BTA LEXIS 2474; February 27, 1930, Promulgated *2474 Walter S. Orr, Esq., and Henry Mannix, Esq., for the petitioner.  Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent.  PHILLIPS *92  These are proceedings under Docket No. 20660, covering the years 1918 and 1919, and Docket No. 14583, covering the years 1920 and 1921, for the redetermination of deficiencies in income and excess-profits taxes as follows: 1918$7,992.69191929,535.37192064,013.84192156,579.97No error was assigned in respect of the deficiency determined for 1919.  The error assigned with regard to each of the other years is identical, i.e., that the respondent has erroneously computed the petitioner's invested capital in that he has allowed an insufficient sum on account of capital paid in for stock.  The issues are closely related and both proceedings will be disposed of in one opinion.  The facts were stipulated by the parties.  FINDINGS OF FACT.  The O'Sullivan Rubber Co. was organized under the laws of Maine on August 28, 1899, with a total authorized capital stock of $50,000 par value, consisting of 500 shares of the par value of $100 per share, all of which stock was issued*2475  in consideration of the receipt *93  by the corporation of moulds having an actual cash value of $8,200 and of certain patents.  On December 16, 1910, the O'Sullivan Rubber Co. was organized under the laws of Delaware and issued $1,000,000 par value of common stock and $575,000 par value of preferred stock in consideration of the receipt of all the issued capital stock of O'Sullivan Rubber Co., the Maine corporation, consisting of $50,000 par value.  No other consideration was received by the Delaware corporation for the issuance of its stock and no other stock was ever issued by the Delaware corporation.  At the time the stock of the Maine corporation was acquired by the Delaware corporation the assets and liabilities of the maine corporation consisted of tangible and intangible assets, a large part of which consisted of good will.  According to the books of the Maine corporation its assets were as follows: AssetsLiabilitiesPatent rights$ 41,800.00Notes payable$ 100,000.00Moulds7,712.94Accounts payable17,468.66Furniture and fixtures854.45Reserve for freight5,072.35and discountsCash316,231.54Reserve for taxes2,000.00Notes recelvable13.35Reserve for interest216.66Accounts receivable84,044.72Capital stock50,000.00Inventory merchandise53,887.60Surplus329,786.93504,544.60504,544.60*2476  The value of the Maine corporation's stock when acquired by the Delaware corporation was $700,000, and the net worth of the assets of said Maine corporation at such time was $700,000.  Thereafter, but prior to January 1, 1917, the Delaware corporation redeemed out of its earnings the preferred stock above referred to amounting to $575,000 par value.  The issued and outstanding stock of the Delaware corporation on March 3, 1917, consisted of $1,000,000 par value common stock.  On April 30, 1917, the petitioner was organized as a corporation under the laws of New York and issued its entire authorized capital stock, consisting of $4,000,000 par value, for all the outstanding stock of the Delaware corporation, consisting of $1,000,000 par value common stock.  Prior to January 1, 1918, all of the assets of the maine and Delaware corporations had been taken over by and were carried on the books of O'Sullivan Rubber Co., a New York corporation, the petitioner herein, although said corporations had not then been formally dissolved.  *94  The net earned surplus as of January 1, 1918, without adjustment for the income and excess-profits tax for the year 1917, as prorated, amounting*2477  to $44,012.73 and without adjustment on account of good will limitation as contended for by the respondent and shown in the detailed computations hereinafter set forth, is $1,023,264.34.  The net earned surplus as of January 1, 1920, without adjustment for the income and excess-profits tax for the year 1919, as prorated, amounting to $85,001.83, and without adjustment on account of good will limitation as contended for by the respondent and shown in respondent's detailed computation hereinafter set forth, is $1,137,048.44.  The net earned surplus as of January 1, 1921, without adjustment for the income and excess-profits tax for the year 1920, as prorated, amounting to $72,127.61, and without adjustment on account of good will limitation as contended for by the respondent and shown in respondent's detailed computation hereinafter set forth, is $1,096,422.72.  The sole question involved in these proceedings is the correct amount of invested capital to which the petitioner is entitled for the years 1918, 1920, and 1921.  An interest and/or control of over 50 per cent of the trade or business of the Delaware corporation remained in the same persons after the reorganization on*2478  April 30, 1917.  Good will was carried on the books of the New York corporation as of January 1 of each of the years 1918, 1920, and 1921, in the amount of $4,000,000.  Good will amounting to $575,000 had previously been written off and charged against surplus by the predecessor (Delaware) corporation.  The New York corporation continued the same set of books as was used by the Delaware corporation.  The intercompany duplications arising by reason of the Delaware corporation's ownership of the stock of the Maine corporation have been adjusted in the surplus account shown in the computations with regard to 1918 hereinafter set forth.  The computation of invested capital for the year 1918 as contended for by the respondent is as follows: *95 O'Sullivan Rubber Co. of New York, parent.  O'Sullivan Rubber Co. of Delaware, subsidiary and subparent.  O'Sullivan Rubber Co. of Maine, subsidiary.  Calendar year1918Capital stock$4,000,000.00Surplus and surplus reserves (including restoration of $ 575,000)1,023,264.34Total net worth before good will adjustment (per books)5,023,264.34Deduction: Proration of 1917 taxes44,012.73Invested capital before good willadjustment (per books)4,979,251.61Good will adjustment: Good will onbooks of New York corporation Jan. 1, 1918$4,000,000.00Addition: Restoration of amount charged against surplus by predecessor (Delaware) corporation.  (The New York corporation continued to use the same set of books.)575.000.00Total book value of good will, Jan. 1, 19184,575,000.00Limitation of good will allowableunder sec. 326(a)(5) of revenueact of 1918: 25 per cent of parvalue of capital stock out-standing ($4,000,000) at Jan. 1, 1918$1,000,000.00(Not necessary to determine cash value at this point as further reduction must be made by reason of the limitations of sec. 331 of the revenue act of 1918.)Under sec. 331 the amount of the good will allowable to the New York corporation is limited to the amount allowable to the Delaware corporation computed as follows:Good will on books of Delawarecorporation Apr. 30, 19171,000,000.00Restoration of amount charged against surplus575,000.00Total1,575,000.00Good will allowable: 25 per cent of par value of capital stock outstanding (1,000,000) as at Mar. 3, 1917.  (Sec. 326(a)(4) of revenue act of 1918.)250,000.00Good will not allowable as shown in letter dated Oct. 9, 19244,325,000.00Adjusted invested capital as reflected in def. letter dated Aug. 21, 1926654.251.61*2479   The computation of invested capital which the petitioner contends is correct for the year 1918 is as follows: Invested capital 1918(a) Capital stock of petitioner$4,000,000Capital stock of Delaware corporation1,000,000Stock of Delaware corporation issued for stock of Maine corporation worth $700,000; invested capital allowable on account of stock issued$700,000.00(b) Surplus and surplus reserves1,023,264.34Total1,723,264.34Adjustment for 1917 tax proration44,012.73Total invested capital1,679,251.61If it be determined as a matter of law that the stock of the Maine corporation, in consideration of the receipt of which the stock of the Delaware corporation was issued, should not be regarded as *96  tangible property for invested capital purposes, then the petitioner contends invested capital should be computed for the year 1918 as follows: Invested capital 1918(a) Capital stock of petitioner$4,000,000Capital stock of Delaware corporation$1,000,000Stock of Delaware Corporation issuedfor stock of Maine corporation worth $700,000; invested capital on account of this stock issue limited to 25 per cent of capital stock of $1,000,000 outstandingMar. 3, 1917$250,000.00(b) Surplus and surplus reserves1,023,264.34Total1,273,264.34Adjustment for 1917 tax proration44,012.73Total invested capital1,229,251.61*2480  The computation of invested capital for the years 1920 and 1921 as contended for by the respondent is as follows: O'Sullivan Rubber Company of New York, parent.  O'Sullivan Rubber Company of Delaware, subsidiary and subparent.  O'Sullivan Rubber Company of Maine, subsidiary.  Calendar Year19201921Capital stock$4,000,000.00$4,000.000.00Surplus935,190.62920,037.11Surplus reserves201,857.82176,385.62Total net worth before good will adjusted (per books)5,137,048.445,096,422.73Deduction: Respective proration of 1919 and 1920 taxes85.001.8372,127.615,052.046.615,024,295.12Good will adjustment: Good will onbooks of New York corporation, Jan. 1, 1920, and Jan. 1, 1921$4,000,000.00Addition: Restoration of amount charged against surplus by predecessor (Delaware) corporation (the New Yorkcorporation continued the use of the same set of books)575,000.00Total book value of good will4,575,000.00Deduction: Adjustment for Delawarecorporation's acquisition of stock of Maine corporation (elimination of intercompany duplications arising from sub-consolidation)95,275.94Good will account as adjusted Jan. 1, 1920, and Jan. 1, 19214,479,724.06Limitation of good will allowableunder sec. 326(a)(5) of revenueacts of 1918 and 1921: 25 per cent of par value of capital stock outstanding ($4,000,000.00)at Jan. 1, 1920, and Jan. 1, 19211,000,000.00(Not necessary to determine cash value at this point as further reduction must be made by reasonof the limitations of sec. 331 of the revenue acts of 1918 and 1921.)*2481 *97 Under sec. 331 the amount of the good will allowable to the New York corporation is limited to the amount allowable to the Delaware corporation computed asfollows:Good will on books of Delawarecorporation Apr. 30, 1917$1,000,000.00Restoration of amount charged against surplus575,000.00Total1,575,000.00Deduction: Adjustment for acquisition of Mainecorporation's stock95,275.94Good will account as adjusted Apr. 30, 19171,479,724.06Good will allowable:Good will acquired for cash104,724.06Good will acquired for stock, 25 per cent of par value of capitalstock outstanding ($1,000,000) as at Mar. 3, 1917 (sec. 326(a)(4) of revenue acts of 1918 and 1921250,000.00Total allowable354,724.06Good will not allowable as shown indef. notice dated Feb. 12, 1926$4,125,000.00$4,125,000.00Adjusted invested capital as shownin def. letter927,046.61899,295.12 The computation of invested capital which the petitioner contends is correct for the years 1920 and 1921 is as follows: Invested capital1920192119201921(a) Capital stock of petitioner --- $4,000,000.00Capital stock of Delaware corporation --- 1,000,000.00Stock of Delawarecorporation issued for stock of Mainecorporation worth $700,000; invested capital allowable on  account of stock issued$700,000.00$700,000.00(b) Surplus$935,190.62$920,037.11Surplus reserves201,857.82176,385.621,137,048.441,096,422.73Adjustment for pre-ceding year's tax prorated85,001.8372.127.611,052,046.611,024,295.12Invested capital allowable on accountof surplus1,052,046.611,024,295.12Total invested capital1,752,046.611,724,295.12*2482  Under respondent's theory of sub-consolidation eliminations, there were intercompany duplications arising by reason of the Delaware corporation's ownership of the stock of the Maine corporation, amounting to $95,275.94.  If it be determined as a matter of law that the stock of the Maine corporation, in consideration of the receipt of which the stock of the Delaware corporation was issued, should not be regarded as tangible property for invested capital purposes, then the petitioner contends *98  invested capital should be computed for the years 1920 and 1921 as follows: Invested capital1920192119201921(a) Capital stock of petitioner --- $4,000,000.00Capital stock of   Delaware corporation --- $1,000,000.00Stock of Delawarecorporation issued for stock of Mainecorporation worth $700,000; invested capital on account of this stock issue limited to 25 per cent of capital stockoutstanding Mar. 3, 1917$250,000.00$250,000.00(b) Surplus$935,190.62$920,037.11Surplus reserves201,857.82176,385.621,137,048.441,096,422.73Adjustment for preceding year's tax prorated85,001.8372,127.611,052,046.611,024,295.12Invested capital allowable on accountof surplus1,052,046.611,024,295.12Total invested capital1,302,046.611,274,295.12*2483  The petitioner filed its income-tax returns for the calendar years 1918, 1920, and 1921 with the collector of internal revenue at New York, N.Y.OPINION.  PHILLIPS: These proceedings have been submitted upon stipulated facts.  They were first submitted upon the theory that the Board was called upon to determine the consolidated invested capital of a group of three corporations of which the petitioner was one.  Subsequently a further stipulation was filed to the effect that prior to January 1, 1917, all of the assets of the Maine and Delaware corporations had been taken over and were carried on the books of the petitioner, although such corporations had not been formally dissolved.  The stipulated facts are still insufficient to permit us to determine fully the proper invested capital which might be allowed.  They are sufficient, however, to establish that the amount allowable is not less than that contended for by petitioner in its alternative computations, viz, $1,229,251.61 for 1918, $1,302,046.61 for 1919 and $1,274,295.12 for 1920, subject to such adjustments for the tax liability of preceding years as may be caused by this decision.  They are insufficient to establish*2484  any greater amount.  Reviewed by the Board.  Decisions will be entered under Rule 50.