Court Opinion

ID: 4601403
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:27:32.893709+00
Date Added: 2024-06-11T07:52:29.381164
License: Public Domain

L. B. MENEFEE LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.L. B. Menefee Lumber Co. v. CommissionerDocket No. 2851.United States Board of Tax Appeals9 B.T.A. 1368; 1928 BTA LEXIS 4233; January 17, 1928, Promulgated *4233  Petitioner was indebted to its principal stockholder on June 10, 1918, for money advanced.  The indebtedness was canceled on that date, as of January 1, 1918, in connection with a transaction involving the sale of outside stockholdings of the petitioner.  Held not to be invested capital prior to June 10, 1918.  Charles E. McCulloch, Esq., and Ivan D. Phipps, Esq., for the petitioner.  Warren F. Wattles, Esq., for the respondent.  ARUNDELL*1368  This appeal is from the determination of a deficiency in warprofits, excess-profits, and income taxes in the year 1918 in the amount of $7,602.12.  The petitioner alleged that the respondent erred in disallowing as invested capital from January 1, 1918, to June 10, 1918, an item of $163,886.17, representing principal and interest due its president for advances made in 1917 and paid on June 10, 1918, as of January 1, 1918.  FINDINGS OF FACT.  The petitioner is an Oregon corporation.  On April 6, 1917, its capital stock was increased from $250,000 to $750,000.  On April 18, 1917, L. B. Menefee, president of the petitioner corporation, purchased the entire additional stock of 5,000 shares at a*4234  par value of $100, paying therefor, pursuant to a resolution of the board of directors, $85,000 in cash and $415,000 in stock of various other corporations, including 1,540 shares of Baldwin Sheep Co. and 200 shares of the Northwestern National Bank of Portland, having an estimated market value of $154,000 and $26,000, respectively.  On December 31, 1917, the petitioner was indebted to L. B. Menefee in the amount of $163,523.98 for money loaned to the petitioner.  Of this amount, $155,000 was principal, evidenced by promissory notes, and the balance accumulated interest to December 31, 1917.  At June 10, 1918, the indebtedness amounted to $164,886.29, of which only $163,886.17 is in controversy here.  At a meeting of the board of directors of the petitioner on June 10, 1918, L. B. Menefee being present but not voting, the followiing offer of L. B. Menefee, dated June 7, 1918, was accepted: At the present time you are indebted to me in the sum of $163,886.17, including interest to January 1st, 1918, which you have no funds available to pay.  In order to liquidate this account I hereby offer to purchase from you 1540 shares of the capital stock of the Baldwin Sheep Company for*4235  the sum of *1369  $154,000 and 200 shares of the capital stock of the Northwestern National Bank of Portland for the sum of $26,000, the total consideration to be the sum of $180,000, the amount at which these stocks are carried on your books.  $163,886.17 of the purchase price is to be paid by the cancellation of your indebtedness to me in that amount.  This purchase and sale is to be effective January 1, 1918, and accordingly no interest on your indebtedness in the principal sum of $163,886.17 will be charged from and after January 1, 1918, and I will receive all dividends on the said stock declared and paid after January 1, 1918.  No interest was credited or paid to L. B. Menefee on the loan after December 31, 1917.  The bookkeeping entries adjusting the petitioner's account with L. B. Menefee were made in August, 1918, as of January 1, 1918.  On an audit of the petitioner's return for the calendar year 1918 the Commissioner disallowed the item of $163,886.17 as an admissible asset for invested capital purposes for the period in 1918 prior to June 10.  OPINION.  ARUNDELL: The petitioner does not question the action of the Commissioner in excluding from invested capital*4236  the value of shares of stock in the Baldwin Sheep Co. and the Northwestern National Bank of Portland on the ground that they are inadmissible assets in determining invested capital under the statutes.  Nor does the petitioner contend that borrowed money, as such, is an admissible asset for invested capital purposes.  What is questioned is the action of the Commissioner in excluding from invested capital the item of $163,886.17 prior to June 10, 1918.  As set forth in the findings of fact, petitioner was indebted to its principal stockholder, Menefee, in the sum of $163,886.17, which indebtedness was liquidated dated by turning over to him shares of stock in the Baldwin Sheep Co. and the Northwestern National Bank.  Inasmuch as the settlement between the parties was made effective as of January 1, 1918, although entered into on June 10, 1918, we are asked to accept the former rather than the latter date and to allow the item of $163,886.17 in invested capital from January 1, 1918.  We are of the opinion that the fact that interest was not charged after January 1, 1918, and that all dividends declared and paid on the stock of petitioner from that date shall inure to Menefee were considerations*4237  for the stock sale and did not have the effect of changing the indebtedness from an interest-bearing to a noninterest-bearing obligation, or in any way alter the fact that the fund was borrowed capital prior to June 10, 1918.  The real purpose of antedating the stock sale to January 1, 1918, was to provide a date from which to determine the rights and liabilities of the parties to the sale with *1370  respect to interest on the debt and dividends on the stock.  But this does not affect the fact that the indebtedness continued in existence until June 10, 1918.  Judgment will be entered for the respondent.