Court Opinion

ID: 4611479
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:49:04.525943+00
Date Added: 2024-06-11T07:54:15.708117
License: Public Domain

CRESCENT PANEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Crescent Panel Co. v. CommissionerDocket No. 10568.United States Board of Tax Appeals12 B.T.A. 561; 1928 BTA LEXIS 3508; June 13, 1928, Promulgated 1928 BTA LEXIS 3508">*3508  Promissory notes executed by the five stockholders of a corporation, made payable to the corporation but held by the bank as security for the bonded indebtedness of the corporation and the indebtedness of the corporation to the bank, which were returned and canceled after the corporation had become self-supporting, and upon which no payment on account of principal or interest was ever paid, held properly excluded from invested capital of the corporation.  Harry Tincher, Esq., and R. S. McGlasson, C.P.A., for the petitioner.  Harry LeRoy Jones, Esq., for the respondent.  SIEFKIN12 B.T.A. 561">*561  This is a proceeding for the redetermination of a deficiency in income and excess-profits taxes for the fiscal year ended June 30, 1920, in the amount of $14,109.89.  The error assigned is the disallowance by the respondent, as invested capital, of stockholders' notes receivable, paid in to the petitioner on May 26, 1919, as a paid-in surplus.  12 B.T.A. 561">*562  FINDINGS OF FACT.  The petitioner is a Kentucky corporation with principal offices at Louisville, Ky.  Prior to May 26, 1919, the business was operated as the Crescent Manufacturing Co.  As of May 26, 1919, the1928 BTA LEXIS 3508">*3509  petitioner was formed and took over the assets and assumed the liabilities of the old company, and incurred certain liabilities in removing the old machinery and installing new machinery.  Bonds were issued by petitioner in the amount of $100,000, and petitioner was also indebted to the American Bank & Trust Co. of New Albany, Ind.On February 4, 1920, the board of directors of the bank passed the following resolution: The stockholders of the Crescent Panel Co., of Louisville, Kentucky, are hereby requested to make notes for the principal sum of $200,000 payable to the Crescent Panel Company, dated up on May 26th, 1919, and amount of each note $8,000, one note due and payable every six months until full amount is paid, with interest at 3 1/2 per cent after date.  These notes are to further secure the payment of Bond Issue of $100,000 also to secure all notes made for purchase of plant, including all renewals of said notes, and all other loans and obligations to the American Bank & Trust Company of New Albany, Indiana, by said stockholders up to the amount mentioned namely; $200,000 as it was originally understood by the Board of Directors of the American Bank & Trust Company of1928 BTA LEXIS 3508">*3510  New Albany, Indiana.  This debt incurred was a personal obligation of each stockholder of the Crescent Panal Company of Louisville, Kentucky.  As the result of the foregoing request a series of 25 notes was executed by the 5 stockholders of the petitioner.  These notes were for $8,000 each, carried interest at 3 1/2 per cent and one note was due each and every 6 months from May 26, 1919.  The notes were actually executed on or about February 4, 1920, but were antedated to the time of organization of the petitioner, May 26, 1919.  They were made payable to the petitioner, but were held by the bank until the president of the bank returned them for cancellation.  This was after the stockholders had paid in to the petitioner $100,000 cash, petitioner had earned some profits and was thoroughly understood to be self-supporting.  At the time the notes were executed, S. E. Stout was worth about $200,000, A. O. Binford was worth about $100,000, H. M. Gerber was worth between $15,000 and $20,000, and S. J. Elsby, the other stockholder who signed the notes was considered a wealthy man.  There was no collateral condition or agreement as to the liability of the makers of the notes.  None1928 BTA LEXIS 3508">*3511  of the notes or the interest accrued thereon was ever paid, nor was any call for payment ever made.  There was no intention on the part of the makers of the notes to pay the money into the petitioner and receive capital stock therefor, but the purpose was to secure the bonded indebtedness and the indebtedness of the petitioner to the bank.  12 B.T.A. 561">*563  Some time after August 8, 1921, a retrospective entry was made on the books of petitioner, as of May 26, 1919.  This entry was as follows: Bills receivable$200,000.00Paid-in surplus$200,000.00This entry was reversed on June 30, 1922.  OPINION.  SIEFKIN: The sole question to be decided is whether, during the fiscal year ended June 30, 1920, the petitioner was entitled to include in its invested capital a value for 25 notes of $8,000 each, executed by 5 stockholders of petitioner on or about February 4, 1920, in favor of petitioner.  These notes were antedated to May 26, 1919, the date of petitioner's organization.  However, the fact that the notes were antedated would not be sufficient to allow their inclusion in invested capital of petitioner during that part of the fiscal year before February 4, 1920, the1928 BTA LEXIS 3508">*3512  date of the execution of the notes.  Section 326(a) of the Revenue Act of 1918 provides: 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: Provided, That the Commissioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the1928 BTA LEXIS 3508">*3513  stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus.  The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257; (3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year; * * *.  In the instant proceeding the notes were not paid in for stock or shares and the only provision of section 326 of the Revenue Act of 1918 which is applicable is subdivision (a) (3).  No consideration was paid by the corporation for the notes and there is no evidence that the intention of the stockholders was to make a voluntary contribution to the corporation, the evidence showing 12 B.T.A. 561">*564  that their intention was to rovide security according to the request of the bank to which the petitioner was indebted.  No part of the principal or interest of the notes was ever paid nor was any request made for such payment.  The bank held the notes until the petitioner was self-supporting and then returned them to the petitioner1928 BTA LEXIS 3508">*3514  and they were canceled.  In , a promissory note written by one of the principal stockholders in favor of the taxpayer corporation and carried in its safe from the date of organization in 1906 until February, 1916, was held not to have been a paid-in surplus for the purpose of prewar invested capital.  It was not shown why the note was deposited with the corporation.  In , promissory notes executed by the owners of all the common stock of a corporation and by them paid in to it in satisfaction of a duly authorized assessment upon said stock, upon which no cash payments were ever made, and which were not discounted by the corporation but were canceled at maturity, the amount of each note being charged to the personal account of the maker, held not to have been bona fide paid in, either for the stock or on account of an assessment constituting a paid-in surplus.  Another factor in determining this case was the financial standing of the makers of the notes.  In 1928 BTA LEXIS 3508">*3515 , a promissory note payable to the Secretary of War, executed by three owners of the corporation in their individual capacity, and securities individually owned or borrowed by such owners which notes and securities were turned over to the corporation, and by it put up as security for the repayment of an advance made to it by the United States in aid of the performance of a supply contract between the corporation and the United States and returned to said owners upon the termination of said supply contract, were held not to be part of the invested capital of the corporation.  In the instant proceeding, it was shown that the makers of the notes were financially able to meet the obligations of the notes, and that no collateral agreement was entered into which would relieve them from liability if the petitioner had failed, but the intention clearly shown, was that the notes were simply to be held as security for the payment of the bonded indebtedness and the petitioner's indebtedness to the bank.  No payments of principal or interest were ever made, and as soon as the petitioner became self-supporting the bank returned1928 BTA LEXIS 3508">*3516  the notes to the petitioner and they were canceled.  We are of the opinion that the notes did not constitute invested capital.  Judgment will be entered for the respondent.