Court Opinion

ID: 4619019
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:39:48.068984+00
Date Added: 2024-06-11T07:55:33.973597
License: Public Domain

ATLAS TACK CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Atlas Tack Co. v. CommissionerDocket No. 4725.United States Board of Tax Appeals9 B.T.A. 1322; 1928 BTA LEXIS 4248; January 16, 1928, Promulgated 1928 BTA LEXIS 4248">*4248  1.  Petitioner issued its stock for the tangible and intangible assets of a predecessor business which had been unprofitable.  Held, that the evidence does not establish that the intangible assets had any value for invested capital purposes in excess of that which has already been ascribed to them by including tangibles in invested capital at their value to a successfully operating concern.  2.  Deductible allowance for exhaustion of power plant and machinery determined.  W. E. Hayes, Esq., and Myron Heller, Esq., for the petitioner.  F. O. Graves, Esq., for the respondent.  PHILLIPS 9 B.T.A. 1322">*1323  The Commissioner determined a deficiency of $13,836.39 in income and profits taxes for 1919.  The petitioner instituted this proceeding alleging in its petition that the respondent committed error: (a) In failing to allow any amount for intangible property acquired for capital stock at the organization of the petitioner; and (b) In failing to allow adequate depreciation and obsolescence upon its power plant and upon its machinery and equipment.  The parties are in accord as to the values or cost upon which such depreciation is to be computed, 1928 BTA LEXIS 4248">*4249  their only difference being as to the rate of depreciation to be allowed.  FINDINGS OF FACT.  The petitioner is a New Jersey corporation.  It was organized in July, 1900, with an authorized capital stock of $700,000, all of which was issued to a nominee of one H. H. Rogers in exahange for certain real estate, buildings, machinery, equipment, stock in trade, cash, book accounts and other assets, including patents, patent rights, licenses, and labels, of the Atlas Tack Co., a Maine corporation (hereinafter sometimes referred to as the old company).  These assets were subject to certain liens and charges which were assumed by the petitioner.  The opening balance sheet of the petitioner as of July 1, 1900, showed the assets taken over from the old company, the liabilities assumed and the stock issued therefor as follows: AssetsLand and buildings$145,310.00Unused land and buildings40,900.00Machinery and equipment149,827.00Unused machinery and equipment6,924.00Furniture and fixtures3,226.12Sinking fundUninvested1,180.47Invested in bonds14,000.00Interest1,680.00Cash40,927.37Accounts receivable92,347.92Notes receivable13,002.25Inventories:Raw materials131,645.13In process11,883.24Finished goods173,942.07Union Shank Co. stock6,608.50Prepaid accounts796.02Labels, trade-marks, and good will194, 207.99Total1,028,408.081928 BTA LEXIS 4248">*4250 LiabilitiesCapital stock$700,000.00Bonds - First mortgage232,000.00Matured bond interest3,620.00Unpaid taxes1,155.39Accounts payable5,046.10Accrued pay roll2,904.78Notes payable80,000.00Reserve for discount and freight3,681.81Total1,028,408.08The old company was engaged in the manufacture and sale of tacks and of nails used in the making and repairing of shoes.  It was a consolidation of various small companies and a substantial portion of its products were marketed under the labels and trade-marks of these companies.  These labels and trade-marks, through their continued use, had become known to the trade and some of them had an international reputation for quality.  Among these were the A. Fields & Sons (organized in 1827) brand, the Loring and Parks 9 B.T.A. 1322">*1324  (organized in 1886) brand of rivets, the Taunton Tack Co. (organized in 1854) brand, the Dunbar, Hobart, & Whidden Co. (organized in 1865) brand, and the B. Hobart & Sons (organized in 1848) brand.  Of these brands the A. Field & Sons brand was the most generally known, because it covered a wider variety of products and was1928 BTA LEXIS 4248">*4251  used generally throughout the United States and in foreign countries in the shoe-repairing industry.  As a result of the reputation of the Field brand it was possible for petitioner to obtain a somewhat higher price from the shoe-repairing industry for goods sold under that label than its competitors could obtain for similar goods.  During 1898 the old company had a loss of $62,348.80, during 1899 profits of $52,079.78, and for the six months ending June 30, 1900, profits of $13,864.39.  It had been in the hands of a receiver prior to 1897, in which year the receiver was discharged.  Subsequently its assets had been acquired by Rogers.  The real property taken over by the petitioner was valued at $346,187.12 at acquisition, subject to a mortgage of $232,000.  During 1902 the mortgage upon this property was foreclosed, the petitioner suffering the loss of its plants.  During this time, however, a new plant had been built at Fairhaven, Mass., which started active operation late in 1902 or early in 1903.  The entire cost of the new plant was paid by the company with funds advanced by Rogers, the owner of all the stock of the corporation.  The amount of these advances by Rogers was $613,974.28. 1928 BTA LEXIS 4248">*4252  In cancellation of this account Rogers accepted $300,000 in stock.  The excess of the amount paid in over the stock issued was used to reduce the good will account and eliminate the deficit caused by the foreclosure of the mortgage.  The sales of petitioner for the years 1900 to 1903, inclusive, were as follows: Six months ended Dec. 31, 1900$357,678.95Year ended Dec. 31, 1901776,930.30Year ended Dec. 31, 1902893,634.92Year ended Dec. 31, 1903990,471.60The sales continued to increase in subsequent years.  Approximately 40 per cent of the sales were made under the trade-marks or labels acquired at the organization of the petitioner.  The net earnings and dividends paid from 1900 to 1909, inclusive, were as follows: PeriodEarningsDividends paid6 months ended Dec. 31 19001 $48,226.29Year ended Dec. 31:190167,887.46190211,169.91190340,012.321904178,405.911905$200,397.35$100,000.001906244,265.08100,000.001907122,835.85200,000.001908167,309.72100,000.001909222,449.74100,000.009 B.T.A. 1322">*1325  In determining the actual cash value of property paid in for stock at1928 BTA LEXIS 4248">*4253  organization for the purpose of computing invested capital, the Commissioner refused to allow any separate value for the intangible assets.  On March 1, 1913, the petitioner owned a power plant which was in use in its business in 1919.  The March 1, 1913, value of such power plant was $57,078.06.  Additions were made thereto from March 1, 1913, to December 31, 1919, at a cost of $8,995.57.  In computing net income subject to tax, the Commissioner allowed depreciation for such power plant upon a total amount of $66,073.63 at the rate of 7 1/2 per cent, representing a normal rate of depreciation of 5 per cent plus an additional 2 1/2 per cent allowed for overtime operation in 1919.  A reasonable allowance for depreciation upon such power plant for the year 1919 was $6,607.36.  The March 1, 1913, value of the machinery and equipment of the petitioner was $329,062.03, subject to a reserve for depreciation at that date of $119,487.43.  Additions were made to such machinery and equipment from March 1, 1913, to December 31, 1919, at a cost of $118,303.77.  In determining net income subject to tax, the Commissioner computed the net value of the machinery and equipment as of March 1, 1913, to1928 BTA LEXIS 4248">*4254  be $209,574.60 and added thereto additions made after that date, giving a basis for depreciation of $327,878.37.  Upon this basis he allowed depreciation at a rate of 9 3/8 per cent, representing a normal rate of 6 1/4 per cent, plus 3 1/8 per cent allowed for overtime operation in the taxable year.  The depreciation so allowed represents a reasonable allowance for the depreciation of such assets.  OPINION.  PHILLIPS: The petitioner assigns as its first error the refusal of the Commissioner, in computing the actual cash value of property acquired for stock at organization for invested capital purposes, to allow any separate value for the intangible assets.  The books of account of the predecessor corporation were no longer in existence at the time of the hearing and because of this and the lapse of time, the evidence as to what happened is necessarily incomplete.  It appears that the predecessor corporation, the Atlas Tack Co. of Maine, was a consolidation of several companies manufacturing tacks and nails used in the shoe-manufacturing and shoe-repairing industry, as well as other articles.  It had acquired from these companies labels and trade-names which had been in use for1928 BTA LEXIS 4248">*4255  many years and which had an established reputation and market.  Some time prior to 1897 this predecessor company had been in the hands of a receiver but was discharged from receivership in 1897.  From that date to the organization of the petitioner on July 1, 1900, the earnings of the company had barely exceeded its losses.  9 B.T.A. 1322">*1326  The record further discloses that the assets were acquired by the petitioner from one H. H. Rogers through a nominee.  They had been acquired by Rogers, presumably, through a sale in foreclosure.  The price paid by Rogers is not shown.  There is in the record a closing balance sheet of the old company which discloses a second mortgage of $100,000, and since the assets were acquired by the petitioner subject only to a first mortgage, the reasonable presumption is that the company was unable to care for either the principal or interest upon its second mortgage and that it was under this mortgage that a foreclosure sale took place.  The record discloses that during the first six months after its organization the petitioner had substantial sales which continued to increase from year to year.  It further appears that approximately 40 per cent of the sales1928 BTA LEXIS 4248">*4256  were made under the trade-names and labels acquired at organization and that by reason of the reputation and market for such labeled goods the petitioner was able to obtain a somewhat better price than that at which its competitors could sell similar goods.  During the first six months of operation it sustained a considerable loss.  During the following three years it had modest profits.  Thereafter, its profits were substantial.  On this showing we are asked to find that the Commissioner committed error in refusing to allow any separate value for trade-marks, trade-names, and labels.  We believe that it will not be disputed that unless a business such as that which the petitioner acquired has some value as a going concern, its tangible assets such as machinery, equipment, mechandise inventory, and goods in process of manufacture can not be disposed of except at a sacrifice.  Sound business judgment dictates that if one is to purchase the assets of a business which has not shown a profit in the past and is to pay therefor an amount which represents substantially the full value of its tangible assets as an operating business, he must be reasonably certain that the business, properly1928 BTA LEXIS 4248">*4257  managed, will show profits justifying the price paid.  It appears that in the present instance the Commissioner has allowed the tangible assets acquired at organization for stock to be included in invested capital at their value to a successfully operating business.  In so doing he has given effect to that intangible value of an operating concern which marks the difference between a sale of its assets at full value and a sale at a liquidating value.  He has assumed that there went with these tangible assets sufficient intangible value to make them worth the value which he has placed upon them.  In the present instance this intangible value included an established market, and certain trade-marks, trade-names, and labels which were well known.  Viewing the record as a 9 B.T.A. 1322">*1327  whole and attempting to visualize the situation as it existed in July, 1900, we would not be justified in finding that the intangible assets acquired by the petitioner had at that time any value in excess of that allowed indirectly by the Commissioner.  By this we do not mean that these trade-names, trade-marks, and labels had no value at that time.  Undoubtedly they did have some substantial value and conceivably1928 BTA LEXIS 4248">*4258  might have been sold to a competitor for some price, but here we must look to a transaction where the petitioner acquired a very large amount of tangible assets which, without these intangibles, would have had little or no value and where the stock of the company was issued for all of the assets of an operating business, both tangible and intangible.  The record justified no separate valuation of the intangible assets and we approve the action of the Commissioner.  The petitioner alleges error in computing the depreciation upon its power plant and upon its machinery and equipment.  It appears that in 1919 the power plant was in full operation 20 hours per day.  Its plant appears also to have been to some degree obsolescent for in 1922 petitioner abandoned the operation of its power plant and purchased its power from outside sources, finding this cheaper than either continuing the operation of its plant or remodeling to meet new conditions.  Under the circumstances, we believe the petitioner is entitled to a 10 per cent rate of depreciation in the taxable year.  Upon its machinery and equipment petitioner claims a rate of 25 per cent, basing its claim upon a normal rate of 10 per1928 BTA LEXIS 4248">*4259  cent for normal years with an additional 15 per cent because of overtime operation.  It appears that beginning with the year 1916, the petitioner had operated a substantial part of its plant on a 24-hour basis.  If the petitioner's claim for 25 per cent is justified in 1919, a like rate is justified for the three preceding years.  The effect of this would be to depreciate the entire machinery account in those four years, but it also appears that substantially all of the machinery which was in the plant in 1911 was still there and in operation in 1919.  This fact appears to conclusively dispose of opinion testimony to the effect that 25 per cent was a reasonable rate of depreciation.  Considerable weight is given in the testimony of the witnesses to changes in style making a part of the machinery obsolete.  For instance, the petitioner was engaged in the manufacture of eyelet-making machines.  High shoes and corsets went out of style and such machinery became useless to a considerable extent.  This, however, constituted only a very small portion of the petitioner's business and apparently the allowance made by the Commissioner will be sufficient to care for such obsolete machinery. 1928 BTA LEXIS 4248">*4260  Considerable weight 9 B.T.A. 1322">*1328  was laid upon the rapidity with which such equipment as dies had to be replaced.  From the testimony, however, it is fair to assume that all such articles of equipment were charged to expense and therefore play no part in determining the rate of depreciation upon the machinery and equipment as a whole.  We are satisfied that the evidence would not justify us in disturbing the determination of the Commissioner.  Decision will be entered on 10 days' notice, under Rule 50.Footnotes1. Loss. ↩