Court Opinion

ID: 4631911
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:10:40.155334+00
Date Added: 2024-06-11T07:57:48.411585
License: Public Domain

APPEAL OF INTERNATIONAL CONSOLIDATED CHEMICAL CO.International Consol. Chemical Co. v. CommissionerDocket No. 2506.United States Board of Tax Appeals2 B.T.A. 407; 1925 BTA LEXIS 2394; September 7, 1925, Decided Submitted May 19, 1925.  *2394  Evidence held insufficient to sustain valuation claimed for intangible assets.  Fred A. Woodis and Luther F. Speer, Esqs., for the taxpayer.  M. N. Fisher, Esq., for the Commissioner.  IVINS*408  Before IVINS, MARQUETTE, and MORRIS.  This appeal is from a determination by the Commissioner of deficiencies in income and profits taxes for the years 1919, 1920, and 1921 amounting in the aggregate to $45,426.86.  From the evidence submitted at the hearing, the Board makes the following FINDINGS OF FACT.  The taxpayer was a Delaware corporation, now liquidated and dissolved, having its principal office in New York City during the years 1919, 1920, and 1921.  It was organized on June 30, 1919, when it acquired the assets or the capital stock of nine separate businesses and issued 19,360 shares of its capital stock therefor, of par value $100 per share.  The number of shares of stock in the taxpayer issued for the assets or stock of the respective predecessor businesses were: Taxpayer's stock. 9,250shares to stockholders or owners of Dae Health Laboratories. 1,139shares to stockholders or owners of Campagnie Neal, Inc. 291shares to stockholders or owners of E. Virgil Neal. 350shares to stockholders or owners of E. Virgil Neal. 1,000shares to stockholders or owners of E. Virgil Neal. 1,400shares to stockholders or owners of Tokalon, Inc. 200shares to stockholders or owners of E. L. Kincaid. 1,000shares to stockholders or owners of Cie Pann Zenn. 5,000shares to stockholders or owners of William Baxter. 19,630 Total.*2395  The taxpayers's stock was thereafter owned in the percentages noted and by the individuals named, reference also being made to their prior proportionate interest in the respective predecessor businesses: Per cent in taxpayerFormer ownershipWilliam Baxter25.47100 per cent in William Baxter.J. Ralph Bracken.05One-tenth of 1 per cent in Dae Health Laboratories.Edgar R. Derland.661.40 per cent in Dae Health Laboratories.B. K. Firmin9.4220 per cent in Dae Health LaboratoriesSidney J. Kean7.8216.60 per cent in Dae Health Laboratories.E. L. Kincaid5.1710 per cent in Campagnie Neal, Inc.50 per cent in Tokalon, Inc.100 per cent in E. L. Kincaid.Marion B. Kincaid5.09100 per cent in Cie Pann Zenn.Francis B. Masten1.7430 per cent in Campagnie Neal, Inc.L. M. Murphy1.1620 per cent in Campagnie Neal, Inc.E. Virgil Neal11.9020 per cent in Campagnie Neal, Inc.100 per cent in E. Virgil Neal.100 per cent in E. Virgil Neal.100 per cent in E. Virgil Neal.33.35 per cent in Tokalon, Inc.J. Oppenheim9.4220 per cent in Dae Health Laboratories.Henry J. Smith1.1916.65 per cent in Tokalon, Inc.Lee L. Smith1.1620 per cent in Campagnie Neal, Inc.W. J. Ward19.7541.90 per cent in Dae Health Laboratoris.Total100.00*2396 *409  There were three separate predecessor businesses done under the name of "E. Virgil Neal." The Federal tax returns filed by Dae Health Laboratories, Inc., for the periods noted showed net income as follows: Fiscal year ended Aug. 31, 1916$274,166.90Fiscal year ended Aug. 31, 1917339,540.72Fiscal year ended Aug. 31, 1918206,783.10Period from Sept. 1, 1918, through June 30, 1919113,958.80The excess-profits-tax returns filed by that corporation showed: Capital stockCapital stock and surplusYear ended Aug. 31, 1917$10,000$34,609.07Year ended Aug. 31, 191810,00013,240.98Period ended June 30, 191910,000550,253.96The return last above referred to contained the notation "Final report as independent corporation.  Affiliated with International Consolidated Chemical Co." In its returns for the six months of 1919 and the year 1920, the taxpayer showed: Capital stock for 1919, $1,963,000; capital stock and surplus for 1920, $2,143,547.48.  The Commissioner deducted $486,365.51 therefrom in 1919 and $486,439.61 in 1920, both included in the returns as alleged good will, the value of which had not been established, *2397  and by reason of those deductions, and others as to which no question has been raised by this appeal, determined deficiencies in income and profits taxes for the six months of 1919, the year 1920, and the year 1921, in the aggregate amount of $45,426.86.  From those determinations the taxpayer appeals.  DECISION.  The determination of the Commissioner is approved.  OPINION.  IVINS: The Commissioner contended that section 331 of the Revenue Act of 1918 applied to this taxpayer.  It is unnecessary to determine this question.  The other question raised relates to the value of intangibles acquired upon the organization of the taxpayer.  Upon that issue the evidence made available for presentation by the taxpayer's representatives was very meagre.  The taxpayer was dissolved in 1921 and all of its books and records were removed to Europe.  No data whatever were presented to us affording information as to the method by which the organization of the taxpayer was effected in 1919, no balance sheets or accounting records relating to the predecessor business (with the exception of the tax returns of one *410  company), nothing as to the accounts of the taxpayer, and no information*2398  as to any of the companies that might assist in a determination of the valuation of tangible property, much less the value of intangibles.  The taxpayer alleged in its petition a valuation for intangible assets acquired on organization by the issuance of stock therefor as follows: Formulae$365,000.00Good will113,685.51Trade-marks1,680.00Mailing lists6,000.00The Commissioner denied the allegations by his answer.  The only attempt made at the hearing to prove such value was through the introduction, as evidence, of the tax returns of Dae Health Laboratories, showing therein the net income of that company as reported for the several years.  Calling the average net income of Dae Health Laboratories about $250,000, the taxpayer then attempted to prove the valuation of intangibles in the following way: It deducted the alleged value of intangibles ($486,365.51) from the par value of the taxpayer's capital stock ($1,963,000) and called the balance the value of the tangible assets.  It then figured that 10 per cent would be a fair and proper return upon tangible property, and so deducted 10 per cent of $1,476,634.49 (the difference between the par*2399  of capital stock issued, $1,963,000 and $486,365.51, the alleged value of intangibles) from the alleged average income of the Dae Health Laboratories and, getting a resultant of some $105,000, proceeded to capitalize that amount at 15 per cent, thereby arriving at a claimed value for intangibles of some $705,000, by which it justified its valuation of $486,365.51.  The very foundation of any formula or method of determining the valuation of intangible property is knowledge, exact as possible, of the cost of tangible property, associated with the intangible, in the production of income.  Its very foundation is knowledge, exact as possible, of the cost value of tangible property.  That necessary element is lacking in the present appeal.  The deduction of the alleged value of intangibles from the par value of stock constitutes the use of an assumption to prove its own verity as a fact, instead of proving that fact by the use of other facts.  The attempt involves a circuitous process of reasoning which is utterly lacking in logic.  Its only defense is that it is the best that could be done under the circumstances.  It is insufficient to convince us that the determination made by*2400  the Commissioner was incorrect.  That determination must be sustained upon the authority of Appeal of*411 ; ; ; . See also, ; and . On reference to the Board, ARUNDELL took no part in the consideration.