Court Opinion

ID: 4600267
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:25:09.724175+00
Date Added: 2024-06-11T07:52:16.521760
License: Public Domain

MAURY MILLING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Maury Milling Co. v. CommissionerDocket No. 10853.United States Board of Tax Appeals10 B.T.A. 1189; 1928 BTA LEXIS 3929; March 7, 1928, Promulgated *3929  Cash value and cost of assets determined for purposes of invested capital.  L. H. Hammond, Esq., for the petitioner.  J. D. Foley, Esq., for the respondent.  LITTLETON*1189  The Commissioner determined a deficiency in income and profits tax of $475.54 for the fiscal year ending May 31, 1920.  Petitioner contends that the Commissioner erred in refusing to allow the value claimed in respect of certain assets for invested capital purposes and in refusing to include in invested capital for the taxable year $6,762.59, representing the cost in 1916 of reconstructing certain buildings destroyed by fire, in excess of the insurance received.  Petitioner also claims that the Commissioner erred in failing to consider, *1190  in determining its invested capital, the expenditure of $3,500 made in 1916 in remodeling a building so as to make it serviceable for a warehouse.  The petitioner further alleged that the deficiency is barred by the statute of limitations, but this claim was not urged at the hearing or in the brief filed.  FINDINGS OF FACT.  Petitioner is a Tennessee corporation engaged in the milling business, with office at Mt. Pleasant. *3930  May 31 was the close of its fiscal year and its income and profits-tax return for the fiscal year ending May 31, 1920, was filed July 12, 1920.  The original plant acquired by petitioner was constructed in 1905 at a cost of approximately $20,000.  The mill was operated by its owners at a loss for several years and, due to financial difficulties, the entire plant was sold in 1908 to an individual for $8,500, of which $3,000 was paid in cash and a mortgage given thereon to secure the balance of $5,500.  In the same year the purchaser of this mill incorporated under the name of the Maury Milling Co., the petitioner herein, with a capital stock of $3,000 par value.  The entire plant theretofore acquired by this individual was paid in to the petitioner for $3,000 par value of capital stock.  The petitioner assumed the mortgage of $5,500, which it subsequently paid.  In 1910 the petitioner acquired the business and assets of another mill corporation known as the Webster-Locke Milling Co., at a valuation of $8,500.  Without changing its authorized capital stock of $3,000, petitioner reissued $1,500 par value of its stock to the stockholders of the Webster-Locke Milling Co. upon the acquisition*3931  by it of the business and assets of that company.  The plant of the Webster-Locke Milling Co. was constructed in 1905 at a cost of approximately $20,000.  Because of insufficient milling business in Mt. Pleasant and surrounding communities, neither the petitioner nor the Webster-Locke Milling Co. prior to 1910 earned any profits, but on the contrary sustained a loss each year.  The actual cash value of the plant acquired by petitioner in 1908 for $3,000 par value of capital stock and the assumption of a mortgage for $5,500, was $8,500.  The actual cash value of the assets of the Webster-Locke Milling Co. acquired by petitioner in 1910 for $1,500 par value of its capital stock, was $8,500.  The Commissioner determined that the plants acquired by petitioner each had a cash value of $8,500 at the time acquired.  For the more successful operation of the business, the petitioner, shortly after it acquired the property of the Webster-Locke Milling Co., converted this plant into a warehouse for use in its business at a capital cost of $3,500.  In September, 1916, certain of the buildings *1191  acquired by petitioner at the date of its incorporation in 1908 were destroyed by fire. *3932  Petitioner received $9,000 insurance and forthwith constructed new buildings to replace those destroyed, at a total cost of $15,762.59, which cost was charged against surplus.  The Commissioner declined to consider the expenditure of $6,762.59, or the excess of the cost of the new buildings over the insurance received, in his determination of petitioner's invested capital for the taxable year.  OPINION.  LITTLETON: For four years prior to the time when petitioner acquired its first plant in 1908, the owner of that mill had sustained operating losses.  The property was sold for $8,500 and in the same year petitioner acquired it at the same value.  Thereafter, at least until 1910, petitioner operated at a loss each year.  From 1905 to 1910 there were two companies engaged in the milling business at Mt. Pleasant.  The milling business was not sufficient to enable these two companies to operate profitably.  Petitioner believed that by eliminating competition it might operate at a profit, whereupon, in 1910, it acquired the plant and business of the Webster-Locke Milling Co., which it took over at a valuation of $8,500.  The petitioner's mill and that of the other company were constructed*3933  in the same year at about the same cost.  Petitioner claims that the plant acquired by it in 1908 had an actual cash value at the time of $20,000 and that the plant of the Webster-Locke Milling Co. acquired in 1910 likewise had a cash value at that time of $20,000.  The evidence submitted does not sustain this claim of value.  The testimony of the witnesses on behalf of petitioner as to value appears to have been based upon the original cost of the properties in 1905, which in view of the other facts and circumstances, is not sufficient to establish that the two mills each had a cash value of $20,000 when acquired by the petitioner.  The fact that the first property sold for $8,500 and was acquired by the petitioner in the same year at that price; that in 1910 the Webster-Locke Milling Co. was acquired by the petitioner from a competitor at a valuation of $8,500 seems to more nearly indicate the actual value of the properties at the time acquired by petitioner than does the original cost of construction.  We are of the opinion that the actual cash value of each mill was not in excess of $8,500 when acquired by petitioner.  The Commissioner's refusal to consider the cost in 1910 of*3934  converting the Webster-Locke mill building into a warehouse for use in connection with petitioner's business, in his determination of invested capital, was apparently upon the ground that the petitioner had not submitted sufficient evidence relative to such cost.  The evidence shows that capital expenditures totaling $3,500 were made by *1192  petitioner in this connection and this amount should be considered in computing invested capital for the taxable year.  Petitioner's claim in respect of the item of $6,762.59 in connection with the construction of buildings shortly after the fire in September, 1916, is sustained by the evidence and this amount should be considered in the computation of petitioner's invested capital for the taxable year.  Judgment will be entered on 15 days' notice, under Rule 50.