Court Opinion

ID: 4487309
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:00:41.612683+00
Date Added: 2024-06-11T14:54:08.244934
License: Public Domain

*405OPINION.
Koener:
The petition alleges that the taxes in controversy are income and profits taxes for the calendar years 1917, 1918, and 1919. The Commissioner admits that the income and profits taxes for the year 1919 are properly here in issue, but denies that the years 1917 and 1918 are properly involved in this appeal, for the reason that the additional tax for the year 1917 was assessed prior to June 2, 1924, and for the reason that the deficiency letter appealed from indicates an overassessment for the year 1918. The taxpayer contends that while it is true that a certain purported assessment was attempted to be made in connection with its tax for the year 1917, such assessment was wholly illegal and void because made without benefit to the taxpayer of section 250(d) of the Bevenue Act of 1921.
The only issue joined in his appeal, on the merits, is the amount of the taxpayer’s capital as of June 1, 1914, at the time when the taxpayer began business under the new management, as set forth in the Findings of Fact. The capital of the business as of that date is claimed by the taxpayer as its invested capital for the three years 1917, 1918, and 1919. The Commissioner concedes this to be the fact. The amount of capital as of June 1, 1914, determined by the Commissioner to be the proper invested capital for the calendar year 1919, has been applied by him throughout the three years mentioned, with the resulting deficiency from which this appeal is taken. No *406question is raised in this appeal as to the jurisdiction of this board to hear and determine the deficiency as to the year 1919. Since such deficiency is wholly predicated (in so far as this appeal is concerned) on the amount of the capital of the taxpayer as of June 1, 1914, this board is in position to consider and determine the amount of such capital as of the date mentioned without the necessity of passing on the issue of jurisdiction of this Board as to the years 1917 and 1918 under the circumstances raised by the pleadings. And since we must hold that the amount of invested capital was correctly determined by the Commissioner, no prejudice results to the taxpayer by our failure to express opinion on the jurisdictional issue. If the contention of the taxpayer were to be allowed as to taxpayer’s capital at June 1, 1914, the necessity of resolving the jurisdictional issue would be patent.
The taxpayer contends that its capital as of June 1, 1914, and at all times since that date, was as follows:
(1) 2,000 shares of original paid-in capital stock at time of organization_ $200, 000. 00
(2) Donated surplus, due to the release by the Kohler interests of its liability to them on account of their indorsements_ 139,814. 85
(3) 2,000 shares of original capital stock surrendered by former stockholders to the taxpayer at time of the liquidation of its assets and liabilities, of which 1,650 shares were subsequently sold to other interests for $165,000 and 350 shares remained in its treasury_ 200, 000. 00
Total capital as of June 1, 1914_ 539, 814. 85
The Commissioner contends that on or about June 1, 1914, there was a complete liquidation of this corporation; that every liability was liquidated and extinguished, including the liability on its capital stock; that its assets were, surrendered; that every element of corporate life was extinguished with the exception of its bare existence under its charter as a corporate entity within contemplation of law; that the payment by new interests into its treasury of $165,000 in exchange for shares of its capital stock held in its treasury constituted the whole of its capital stock from that time forward.
We are of opinion that the position of the Commissioner is the proper one. The decisions and rulings cited by the taxpayer in support of his contention all contain a significant element of fact different from that presented here. In those cases the stock in question was sold or transferred by the holders thereof to other parties in the process of reorganization. In such cases there resulted only a change in stock ownership — -in the personnel of the corporate organization. The liability of the corporation on such capital stock remained constant. The contributions made to the corporation and with which it operated its business, constituting its “ invested capital,” were not affected by the transaction. The persons concerned were entitled to have a fair return on such “ invested capital ” before the earnings in excess thereof became subject to the profits tax.
But in the instant appeal quite a different state of facts exists. There was not a transfer of stock between the several stockholders of the corporation or between stockholders and persons who had not prior to such action been stockholders. Here there was a surrender by the stockholders of their stock (the entire capital stock of the corporation) to the corporation itself.- With this stock in its treas*407ury it bad no stockholders and no liability on its stock to any person. The investment represented by the sharers theretofore issued and outstanding no longer existed. It was entirely liquidated. The corporation owed no one. It had no assets except a so-called good will. The corporation had operated for only about a year and had never realized a profit. It had in that short period become totally insolvent. Not a scintilla of evidence was offered as to the value of such good will or to show that it actually had an existence. Under the circumstances we conclude that such good will, if not indeed nonexistent, was of negative or only nominal value. The corporation had no stockholders, directors, or officers. Through the surrender to it by its stockholders of all its outstanding shares of stock, the liquidation of its assets, the payment of its entire indebtedness, which wiped out its previous operating deficit, the corporation was left without stockholders and without obligations or relationships with respect to stockholders, creditors, or any other person. All that it can be said to have had were its charter and its stock certificates unissued in its treasury. It was then in the position of a corporation which had just been chartered by the State and had not yet held an organization meeting or issued any stock to its subscribers. Under these circumstances we do not see that the taxpayer corporation had an “ invested capital.” Its past was dead, its future powerless to be born without the contribution of capital assets with which to do business. Such capital assets were contributed by new parties in the amount of $165,000 in exchange for its capital stock held by it in its treasury. It thus began life anew with a cash paid-in capital of $165,000. That is all that can be said to have been invested in the company at that time, and that amount represented its “invested capital.”
In light of what has been said we are unable to see that the 350 shares of capital stock remaining in the corporate treasury can be said to have had a value as invested capital. To us it seems that such shares of stock were in all respects similar to authorized, but unissued, shares of a newly formed corporation. If and when these shares are exchanged for capital assets, the value of such assets may become invested capital. Until such time, in our opinion, these 350 shares do not have a value for invested capital purposes.
Our opinion is that on June 1, 1914, the capital of the taxpayer was $165,000 and that this amount, with the proper adjustments thereto, constituted the invested capital of the taxpayer to be used as a basis for computing the tax here in controversy. The tax should be computed accordingly.