Court Opinion

ID: 4604466
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:34:18.507891+00
Date Added: 2024-06-11T07:53:00.753540
License: Public Domain

WASHINGTON ELECTRIC SUPPLY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Washington Electric Supply Co. v. CommissionerDocket No. 19510.United States Board of Tax Appeals9 B.T.A. 1399; 1928 BTA LEXIS 4222; January 18, 1928, Promulgated *4222 Held, that the respondent correctly computed petitioner's invested capital.  Eustace LeMaster, C.P.A., for the petitioner.  J. E. Marshall, Esq., for the respondent.  LANSDON *1399  The respondent has asserted a deficiency in income and profits tax for the fiscal year ended August 31, 1920, in the amount of $1,355.83.  The petitioner alleges that respondent is unable to determine its true invested capital and seeks to have its tax liability determined in accordance with the provisions of section 328 of the Revenue Act of 1918.  FINDINGS OF FACT.  The petitioner is a Washington corporation, with its principal office at Spokane.  During the taxable year it was engaged in the business of wholesaling electrical equipment and supplies in the territory commonly known in the northwestern part of the United States as the Inland Empire, which is made up of parts of the States of Idaho, Washington, and Oregon, with Spokane as its principal trade center.  It was organized in 1907, and, on August 7 of that year, issued 2,198 shares of its capital stock of the par value of $219,800 to one Roger C. Kemp, who paid therefor the following described property: *4223  1.  A contract dated May 3, 1907, signed and executed by the Phillips Insulated Wire Co.; 2.  Four contracts dated, respectively, April 19, 1907, June 13, 1907, April 19, 1907, and April 18, 1907, executed by the Westinghouse Electric & Manufacturing Co.; 3.  A contract dated at or about May 20, 1907, executed by the Wesco Supply Co.; and 4.  A lease dated March 27, 1907, executed by the Spokane International Railway Co.  In addition to the stock issued to Kemp, the petitioner, on the same day, issued 300 shares to H. W. Turner and one share, each, *1400  to Lester M. Simpson and William C. Jones.  The certificate for 2,198 shares of stock issued to Kemp was by him endorsed in blank and was retained in the stock certificate book of the petitioner.  Of the stock which it represented, 500 shares were issued to A. J. Davis, 698 to H. W. Turner, and 1,000 were retained by the petitioner.  Davis and Turner were the principal incorporators.  The record does not disclose what amount, if any, was paid the petitioner for the stock so issued, transferred and reissued.  For several years prior to the incorporation of the petitioner, the Montana Electric Co. had been very profitably*4224  engaged in the business of wholesaling electric equipment and supplies in Montana, Idaho, Oregon, and Washington.  Turner, Davis, and Kemp were, respectively, vice president, treasurer, and general manager of such company, and were large owners of its stock.  Upon the incorporation of the petitioner, Turner and Davis were its principal stockholders.  Turner was president and Kemp was general manager.  As the business of the Montana Electric Co. expanded throughout the northwestern part of the United States, it became rather difficult and expensive to handle the entire volume of its trade from Butte, Mont., where its principal office was located.  Accordingly, its principal stockholders and officers decided to divide its trade territory and established a second corporation, with headquarters and principal offices at Spokane, for the purpose of taking over and, if possible, extending and enlarging the business in the Inland Empire.  For these reasons Davis, Turner, and Kemp organized and incorporated the petitioner.  The contracts which the petitioner acquired in exchange for 2,198 shares of its capital stock at the date of its organization had previously been obtained by Kemp in*4225  his own name, but acting for his associates in the Montana Company, without the payment of any consideration other than the mutual covenants therein, which are not disclosed by the record as the contracts were not offered in evidence.  Such contracts, however, granted to their owner the exclusive right to distribute the products of the several signatory companies in the Inland Empire for terms ranging from one to five years.  When it opened its books on August 10, 1907, the petitioner took into its assets good will and franchises in the total amount of $130,500.  This item was subsequently increased to $135,400, which was used as the basis for computing the value of intangible property, which it now claims it had the right to include in the computation of its invested capital in its income and profits-tax return for the taxable year.  Upon audit of such return, the respondent excluded from the petitioner's intangibles allowable as invested capital, the *1401  amount of $119,800, which represents the stock issued for contracts and good will at date of organization, and determined the deficiency here involved.  OPINION.  LANSDON: The petitioner's contention here is that at*4226  the date of its organization it acquired intangible property of great value in the form of good will and contracts in exchange for shares of its capital stock.  This alleged intangible asset it entered on its books at a value of $119,800.  It does not now insist on these figures, but contends that such property had a substantial value which can not be ascertained by the respondent or by itself and that it is, therefore, entitled to have its tax liability determined under the provisions of sections 327 and 328 of the Revenue Act of 1918.  No elements of invested capital, other than the value of the contracts and good will acquired by the issue of stock at date of organization, are in dispute.  In all other respects the petitioner accepts the determination of the respondent.  To prevail here on the issues that are before us, the petitioner must first establish some actual value for the intangibles in question on the date at which they were acquired.  For this purpose it argues and adduces evidence intended to prove that the contracts enumerated in our findings of fact were the very basis of its prosperous business and that in some way or other it acquired, and has ever since used in*4227  its operations, a portion of a valuable good will that prior to August 7, 1907, had been built up by the Montana Electric Co.There may be conditions in which a part of the good will of a going business can be separated and transferred, but, even if so, we can not see how that was done by the transaction proved by this petitioner, since no stock was issued to the Montana Company in exchange for the good will alleged to have been acquired at the date of the incorporation.  If, however, it should be conceded that the property in question was so acquired, the only evidence offered in support of the value of the contracts purchased with stock, and good will, claimed, are some balance sheets and other computations which show that from the date of its organization, the petitioner was quite prosperous and that the income of the Montana Company, for the same period, measurably declined.  All these things may be true without in any way affecting the question we must answer.  The statute is specific.  A taxpayer may take into its invested capital any assets acquired for stock only at their actual cash value, and, as to intangibles, subject to the limitations prescribed by law.  The petitioner*4228  has failed to prove that the contracts had any value, or that it acquired good will at any cost at the date of its organization.  Inasmuch as we have decided that there is no proof that the intangibles in question *1402  had any value, we are of the opinion, no other matter being in dispute, that the invested capital of the petitioner was accurately determined by the respondent.  There is, therefore, no basis upon which we can allow the petitioner's claim that it is entitled to have its tax liability computed under the provisions of sections 327 and 328 of the Revenue Act of 1918.  Judgment will be entered for the respondent.