Court Opinion

ID: 4594905
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:13:54.811306+00
Date Added: 2024-06-11T07:51:20.374920
License: Public Domain

NATIONAL PACKING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.National Packing Corp. v. CommissionerDocket Nos. 31668, 33971.United States Board of Tax Appeals24 B.T.A. 952; 1931 BTA LEXIS 1561; November 27, 1931, Promulgated *1561  1.  For purposes of depreciation, value of fixed assets determined as of date of acquisition by petitioner.  2.  Values of items appearing in petitioner's opening inventory determined.  J. A. Howell, Esq., and J. H. Devine, Esq., for the petitioner.  C. H. Curl, Esq., for the respondent.  GOODRICH*952  These proceedings, which, upon motion, were consolidated, involve the redetermination of petitioner's income-tax liability for the years 1922, 1923, 1924 and 1925, for which respondent has asserted deficiencies in the amounts of $5,342.96, $937.15, $288.50 and $1,261.77, respectively.  Petitioner contends that respondent erred in his determination of (1) the value of buildings, machinery, and equipment, acquired by petitioner at the time of organization, for the purpose of computing the deduction for depreciation; (2) the rate of depreciation on machinery and equipment; and (3) the value of petitioner's opening inventory for the year 1922.  FINDINGS OF FACT.  The petitioner is a Utah corporation with its principal office at Ogden, Utah.  It is engaged in the packing and sale of fruits, vegetables and pickles.  It was organized and incorporated*1562  January 27, 1922, for the purpose of carrying on the business owned and conducted by the Fred J. Kiesel Estate, a partnership, organized *953  under the laws of the State of Utah, which had succeeded to the business of the Goddard Packing Company, a corporation.  In 1920 the Goddard Packing Company, operating plants at Ogden, Provo, and Salt Lake City, Utah, became financially involved and went into receivership, W. F. Rudiger being appointed receiver on September 8.  Thereafter, the receiver operated the plants and carried on the business, attempting, meanwhile, to dispose of the properties.  He interviewed several canners; wrote letters to outside canners; and interested the stockholders to help find a buyer, but his efforts to sell the plant were unsuccessful.  He also tried, but without success, to induce the stockholders to put more money into the business to carry it on.  At the time of the receivership the Kiesel Estate owned mortgage bonds of the Goddard Company in the amount of $100,000, secured by a deed of trust.  The trustees attempted to foreclose on the properties, but the court refused to permit the foreclosure and ordered the property sold at a receiver's*1563  sale.  At this public sale, June 25, 1921, the Kiesel Estate purchased the fixed assets of the Goddard Company, consisting of the real estate, buildings, machinery, and equipment at Ogden and Provo, and the machinery and equipment at Salt Lake City (the factory building at that place being occupied under a lease) for the amount of the mortgage, $100,000, and accrued interest, which was approximately $5,000.  There were other bidders at the sale, but no higher bids.  The manufactured goods, goods in process, materials for manufacture, and supplies were not covered by the mortgage, and these assets were purchased by W. H. Shearman for the Kiesel Estate for $3,750.  After the purchase of the assets of the Goddard Company, the Kiesel Estate entered into negotiations with Rudiger, the receiver, for the purpose of employing him to operate the business.  Fred W. Kiesel, who was one of the partners of and represented the Kiesel Estate, interviewed Rudiger, and upon being informed by Rudiger that he was considering an offer of employment from another concern, proposed to him that, if he would accept a nominal salary, the Kiesel interests would organize a corporation to take over the Goddard*1564  assets; accept a mortgage from the corporation in the amount of the bonds previously held, and give Rudiger one-half of whatever stock the Kiesel Estate might get.  In making this offer Kiesel considered certain outstanding obligations of the business which could not be paid in cash and which he expected to pay in stock.  Rudiger accepted this proposition and on July 1, 1921, took charge of the actual operation of the business for the Kiesel Estate and continued in charge until the organization of the petitioner in January, 1922.  *954  During the period July 1, 1921, to January 1, 1922, the Kiesel Estate did a substantial business.  It filed a return as an association, showing a closing inventory at December 31, 1921, of $36,763.15.  This return was made and filed by Rudiger and stated that he had no interest in the business, serving only as its manager at a salary of $350 per month.  The closing inventory was made also by Rudiger, or under his supervision, and is incorporated herein by reference.  In the latter part of October, 1921, an extensive fire destroyed the Salt Lake City plant, leaving only one boiler and five tanks of the machinery and fixtures.  The greater portion*1565  of the pickles owned by the Kiesel Estate was in this plant when the fire occurred.  It was necessary to move this pickle stock to Ogden in order to recondition what could be salvaged of it; and permission for its removal was obtained from the insurance adjuster.  It was transported to Ogden, largely by means of trucks and at considerable expense, inspected, and included in the closing inventory at what was then considered its value.  In valuing this stock Rudiger took into consideration the adjuster's prices, his own observation, market conditions, and removal and reconditioning expense.  On much of this stock no value was placed in the inventory of December 31, 1921, it being therein described as "Spoiled," "Salt Lake Stock - Smoked," "Smoked N.G.," "Old," "Not Good," etc.  There were also certain items of miscellaneous supplies and containers which were given no value on this inventory and designated as "Junk," "Old," "2Hd," "Out of date," etc.  In August, 1921, the Kiesel Estate had an appraisal made of the fixed assets which it had acquired at the receiver's sale.  This appraisal was made by the General Appraisal Company through one of its experienced competent engineers.  *1566  Petitioner was incorporated January 27, 1922, with 3,000 shares of capital stock of no par value.  On this date by appropriate resolution its board of directors authorized the purchase from the Kiesel Estate of all the assets acquired from the Goddard Packing Company, together with the stock of goods and all other property on hand and used in connection with the business, petitioner assuming the indebtedness on any of such goods, wares and merchandise.  As consideration for these assets petitioner agreed to issue to the vendors 2,994 shares of its capital stock, three shares of which should be issued and delivered to W. H. Shearman, and the remainder to Fred W. Kiesel, Julia Kiesel, and Wilhelmine Pauline Shearman; and, in addition, to issue to the latter parties promissory notes in the aggregate amount of $100,000, payable over a period of years and secured by a mortgage on the real estate, buildings, machinery and *955  fixtures.  Except for a slight change necessitated by the issuance to nominees of four qualifying shares, this transaction was carried out.  At the same meeting petitioner, by proper resolution, appointed Rudiger its general manager at a salary of $4,200 per*1567  year.  Thereafter, on June 13, 1922, 1,497 shares of the stock of petitioner were assigned and transferred to Rudiger by Julia Kiesel, Fred W. Kiesel and Wilhelmine Shearman.  Petitioner opened its books as of January 1, 1922.  Its opening inventory as of that date totaled $67,301.31.  It was made after January 27, 1922, by Rudiger, who made the closing inventory of the Kiesel Estate for the year ending December 31, 1921.  No physical inventory was taken.  Rudiger took the inventory of December 31, 1921, and repriced it.  This inventory included certain items which were not included in the inventory of December 31, 1921.  Other items which were designated as "Spoiled," "N.G.," "Old," "Smoked," etc., and given no value in the inventory of December 31, 1921, were included in this inventory and a value assigned to them.  The fixed assets acquired by petitioner from the Kiesel Estate were set up on its books as of January 1, 1922, as follows: Ogden Factory Site$11,700.00Ogden Bldgs46,594.67Ogden Machinery and Equipment31,667.39Ogden Off. Furn. and Fixtures1,192.95Ogden Picking Box 7?? (5,000)1,315.00Provo Factory site4,200.00Provo Bldgs32,774.04Provo Machinery and Equipment28,582.43Provo Off. Furn. and Ext656.18Provo Picking Box 7?? 394 Peas 514 Toms1,031.94Mapleton Bldg. 7??534.96Mapleton Equipment662.42Salt Lake Equipment a/c Boiler500.00and 5 tanks264.00Ogden auto Equipment2,600.00Provo auto Equipment2,595.00Salt Lake Auto Equipment720.00Total167,590.98*1568  These values were based on the appraisal of August 1, 1921, made by the General Appraisal Company.  The Commissioner determined the value of the fixed assets as of January 1, 1922, at $96,250 (the cost to the predecessor partnership, less depreciation).  In computing depreciation for the taxable year 1922 this value was divided as follows: Real estate$9,980.00Buildings48,900.00Machinery and equipment36,272.50Furniture and fixtures1,097.50Total96,250.00*956  In addition to that acquired from the Kiesel Estate, petitioner purchased various items of machinery and equipment.  Of the items purchased, at least 30 per centum were secondhand.  OPINION.  GOODRICH: The first issue in this proceeding concerns the basis for computing depreciation for all the years here in question on the depreciable assets acquired by petitioner at the time of its organization.  As of January 1, 1922, petitioner entered these assets on its books at values based on the appraisal made August 1, 1921.  This appraisal, probably made for insurance purposes, purports to be based upon costs of reproduction, new, both for the buildings and for the machinery and equipment, *1569  and from these reproduction costs a "depreciated value" was computed.  But, neither in the appraisal itself nor in the other evidence in the case, does it appear that the theoretical values set up in the appraisal are the fair market values of the various assets at that time, and therefore the appraisal is not determinative of those values.  The appraisal was made at a time when, the evidence shows, there were other idle canneries in the vicinity, and only about a month after the assets appraised had sold at public sale where there was open bidding, at $100,000.  The value of the assets when acquired by petitioner is a question of fact and can not be determined by this theoretical computation, even though the computation starts with a reproductive value based upon cost of similar property.  Market value is a definite thing and it may have no particular relation to replacement cost, and is in no wise determined by it.  See ; ; ; *1570 . On the whole record petitioner has failed to establish that the values at which the fixed assets were set up on its books were the fair market values thereof at the time it acquired them.  The respondent's determination is sustained as to this issue.  We think it is clear that immediately after the transfer of the assets here in question to petitioner in exchange for its stock, the same persons who transferred the property were in control of the corporation, and therefore this case, as to the years 1924 and 1925, falls within section 204(a)(8) of the Revenue Act of 1924, providing that the basis to the corporation shall be the same as it was to the *957  transferor.  However, since we have sustained respondent's determination that the values of the fixed assets acquired by petitioner at the time of its organization were the same as the depreciated costs thereof to its predecessor, it is unnecessary to enlarge on this phase of the question.  In computing the allowance for depreciation on machinery and equipment respondent allowed 15 per centum per annum on old or secondhand items and 10 per centum per annum on items purchased*1571  by petitioner.  There is no dispute concerning the rates of depreciation, the parties agreeing that these rates are adequate and reflect, as closely as may be, the depreciation sustained on these assets.  However, respondent has treated as new machinery and equipment all purchases made by petitioner and computed depreciation thereon at the rate of 10 per centum, whereas the fact is that of such purchases at least 30 per centum consisted of secondhand items.  The rate of 15 per centum should therefore be applied to 30 per centum of petitioner's purchases, and the rate of 10 per centum to the balance.  The remaining issue is the valuation of petitioner's inventory of January 1, 1921, which was substantially in excess of the closing inventory of the Kiesel Estate of December 31, 1921, although with some exceptions, the two inventories contained the same items.  We have before us considerable testimony by competent witnesses bearing on the market prices as of January 1, 1922, of the items inventoried, corroborated to some extent by invoices and sales records of such items at about that time, and we can not but conclude that some of the values assigned by the inventory of December 31, 1921, are*1572  erroneous, and that the values assigned by petitioner's opening inventory are the market values of such goods at that time, with the following exceptions: (1) The items of pickle stock, containers, and miscellaneous supplies which were described as "Spoiled," "Old," "Not Good," "Smoked," "N.G.," etc., in the closing inventory and there listed as without value should be held to have no value in the inventory of January 1, 1922.  The testimony as to the values of these items is unsatisfactory.  The witnesses, except Rudiger, had not seen these goods, and in testifying as to their value, presupposed the goods to be of standard quality and in good condition, which was not so.  Rudiger, who made both inventories, was familiar with this stock.  He had been examining, moving and reconditioning it and was in a better position than anyone else to determine its value.  In making the closing inventory of the estate he determined that these goods were of no value, and, as any expenses added by petitioner to recondition and move the goods can not be included in determining *958  their value on January 1, 1922, we see no reason to disturb his first valuation.  (2) Some items appear in*1573  the inventory of January 1, 1922, which were not included in the inventory of December 31, 1921.  These discrepancies have not been satisfactorily explained.  If the goods were on hand on January 1, they should have been there the day before; if they were purchased after January 1, they have no place in the inventory as of that date.  Such items should be deleted from the opening inventory.  Judgment will be entered under Rule 50.