Court Opinion

ID: 4588629
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:42:27.29902+00
Date Added: 2024-06-11T07:50:06.927809
License: Public Domain

PORTLAND DAMASCUS MILK COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Portland Damascus Milk Co. v. CommissionerDocket Nos. 33532, 42613.United States Board of Tax Appeals22 B.T.A. 1236; 1931 BTA LEXIS 1986; April 20, 1931, Promulgated 1931 BTA LEXIS 1986">*1986  Cost of a lease determined for exhaustion purposes.  Charles E. McCulloch, Esq., for the petitioner.  L. A. Luce, Esq., for the respondent.  ARUNDELL22 B.T.A. 1236">*1236  Proceedings for the redetermination of deficiencies of $341.42, $1,398.99, $895.59, and $1,132.95 in income taxes for the fiscal years ended March 31, 1924, March 31, 1925, March 31, 1926, and March 31, 1927, respectively.  The issues are whether deductions should be allowed in the taxable years for the alleged cost of a lease and whether certain expenditures made in the fiscal years ended in 1925, 1926, and 1927 are deductible as ordinary and necessary business expenses.  FINDINGS OF FACT.  The petitioner, an Oregon corporation with its principal place of business in Portland, Ore., was organized in March, 1917, and ever since has been engaged in the wholesale and retail milk, cream and butter business.  It was formed by a merger of the Portland Pure Milk & Cream Company and the Damascus Milk Company.  After the plan of organizing petitioner had been perfected by A. M. Work, manager of the Damascus Milk Company, and Robert Ireland, manager of the Portland Pure Milk & Cream Company, E. 1931 BTA LEXIS 1986">*1987  E. Merges was consulted in regard to the acquisition of a plant for the contemplated corporation.  During February, 1917, an agreement was entered into by the Damascus Milk Company, the Portland Pure Milk & Cream Company, and Merges for the organization of a corporation with an authorized capital stock of $225,000, divided equally between common and preferred stock, to take over the business of the corporations.  According to the terms of this agreement Merges was to receive one-half of the common stock of the new corporation for services to be rendered by him in (a) perfecting the organization of the new corporation; (b) negotiating for petitioner a loan sufficient in amount to enable it to meet its obligations to the Portland Pure Milk & Cream Company, and Damascus Milk Company and finance its operations in beginning business and becoming established, and obtaining such funds as the consolidating corporations would require to liquidate their affairs; and (c) acquiring a lease on a site and building satisfactory to the corporation, including, if necessary, his expense, the remodeling of buildings 22 B.T.A. 1236">*1237  on the site or the erection of a new building.  The agreement contained1931 BTA LEXIS 1986">*1988  a further provision that in case Merges failed to furnish a lease and negotiate the loans within ninety days, the instrument was to be null and void as to him, and in case he succeeded in negotiating the loans but was unable to acquire the lease and finance the proposed building, he was to receive 25 per cent only of the corporation's common stock.  Another provision of the agreement provided that out of the common stock to be issued to the Portland Pure Milk & Cream Company and Damascus Milk Company, Ireland and Work each were to receive $5,000, par value, for their services in promoting the organization of petitioner, and Merges was to make a like contribution to them out of the stock to be issued to him.  Merges further agreed to endorse and deliver his stock to Ireland and Work to hold and vote until such time as the preferred stock was retired, but not for a longer period than twenty years.  At their first meeting held on March 7, 1917, the directors of petitioner (a) accepted the offer of the Portland Pure Milk & Cream Company and Damascus Milk Company to sell their assets to petitioner for $109,350 and $89,400, respectively, payable $15,000 cash, one-third in common stock1931 BTA LEXIS 1986">*1989  and the balance in preferred stock of petitioner; (b) adopted the agreement made by the Portland Pure Milk & Cream Company, Damascus Milk Company, and Merges; and (c) voted to issue to Merges for his services in organizing and financing petitioner, and procuring a lease on a suitable site and building, 1,125 shares of petitioner's common stock, one-half thereof to be issued when the financial arrangements for the beginning of business by petitioner were made and a loan of not less than $30,000 was paid, and the balance when the site and building was provided and a lease therefor executed.  Merges performed no service in financing petitioner and the services rendered by him in promoting it were of little or no consequence.  Merges acquired a lease on property of the Gambrinus Brewing Company, and thereafter in April, 1917, he sublet the property to petitioner for a period of fifteen years commencing May 1, 1917, at an increased rental.  Thereafter petitioner issued 1,125 shares of its common stock to Merges.  The stock and the lease then had a market value of $56,250, a figure equal to the par value of the stock.  After the issuance of the stock to him, Merges remodeled the building1931 BTA LEXIS 1986">*1990  on the leased premises at a cost of from $20,000 to $25,000.  During the summer of 1918 petitioner found it necessary to obtain outside assistance in financing its business due to certain conditions which had arisen in the milk trade.  On June 26, 1918, petitioner's directors accepted an offer of the Pacific Export Lumber Company 22 B.T.A. 1236">*1238  to obtain a reduction in the amount of rent payable under the lease with Merges and to place it on a sound financial basis, in consideration of the issuance to it of 60 per cent of petitioner's capital stock.  Thereafter in 1918 the Lumber Company caused the rent to be reduced to the amount payable by Merges to the Brewing Company and the petitioner issued its stock to the Lumber Company in accordance with its agreement.  The stock issued to the Lumber Company had been donated to petitioner by its stockholders in proportion to their respective interests.  Under this arrangement Merges gave up all of his holdings except 137 shares.  In the taxable year 1925 the petitioner paid the sum of $700 for expenses of A. M. Work, its president and treasurer, in attending a convention of milk dealers and ice cream manufacturers in Oakland, Calif., and1931 BTA LEXIS 1986">*1991  inspecting milk plants in Oakland, San Francisco, and Los Angeles.  It was the custom of milk and cream dealers in Portland to give cigars in connection with the solicitation of business.  During the fiscal year 1925 petitioner expended $96, and in 1926, $48, for cigars for such distribution.  In the fiscal years ended in 1926 and 1927 petitioner contributed the sums of $280 and $480, respectively, to the Oregon Development Fund created by the Portland Chamber of Commerce for use in persuading people to settle in Portland and the surrounding country.  Petitioner received a direct benefit from the expenditures.  During the fiscal year ended March 31, 1926, petitioner contributed the sum of $100 to a convention of milk dealers in Portland in order to secure the advice of an accountant employed by the International Association of Milk Dealers to demonstrate a uniform system of accounting for milk dealers.  Petitioner received a direct benefit from the expenditures.  OPINION.  ARUNDELL: The major difference between the parties revolves around the basis for allowing depreciation on the leasehold.  Cost is the basis, but as stock was issued rather than cash paid, the value of the1931 BTA LEXIS 1986">*1992  stock at the time must be determined.  The only witness testifying on this matter was produced by the petitioner and he was emphatic that the stock was worth par and that the leasehold was of a value at least equal to the par value of the stock, viz, $56,250.  This testimony was not weakened on cross-examination and must prevail unless for other reasons the cost must be placed at a different figure.  The respondent contends that the contract described in the findings of fact provided that the stock was to be issued not only for the securing of a leasehold, but also for services to be rendered by Merges in connection with the organization and financing of the 22 B.T.A. 1236">*1239  petitioner.  The testimony, however, is that Merges performed no service of any consequence, and, in fact, was not expected to perform any, but the stock was essentially for the securing of the leasehold of a suitable plant for the conduct of the consolidated business.  In any event the stock was issued in consideration for the securing of the leasehold and any claim that there may have been on Merges for services was released or waived.  Nor does the fact that Merges, along with other stockholders, released a portion1931 BTA LEXIS 1986">*1993  of the stock to assist in new financing of the corporation in 1918, necessitated by entirely new circumstances, change the effect of what happened in 1917.  On the record the petitioner has established the cost of the leasehold to be $56,250 and depreciation should be allowed on that basis spread over a period of fifteen years, the life of the leasehold.  The amounts shown in our findings of fact to have been spent for traveling and other expenses are deductible as ordinary and necessary business expenses in the years expended.  No evidence was offered on other expense items claimed as deductions.  The respondent's disallowance of such items is sustained.  Decision will be entered under Rule 50.