Court Opinion

ID: 4487092
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:00:33.716053+00
Date Added: 2024-06-11T08:49:16.976829
License: Public Domain

*1020OPINION.
James :
The sole issue between the taxpayer and the Commissioner relates to the computation of invested capital resulting from the treatment of the so-called “ McKinley Stamp Business ” account carried on the books of the taxpayer. The position of the Commissioner is adequately set forth in a ruling by the Solicitor, the material portion of which is set forth below:
At the time of incorporation in 1914, capital stock in tlie amount of $10,000 was issued to J. H. Kenny and R. B. Kenny who formed the predecessor company, a partnership, for an intangible asset known as the “McKinley Stamp Account ”. On February 28, 1915, the stock was turned over to the corporation and an entry was made on the books charging unissued stock and crediting surplus. This entry did not eliminate the item as an asset but merely transferred the corresponding credit from the capital stock account to surplus. The Revenue Agent in his examination, it appears, eliminated the item as an asset having no value, but further reduced the capital stock account instead of reducing surplus. The taxpayer apparently raises no question as to the elimination of this item due to lack of value but seems to be under the impression that the agent’s adjustment results in a double deduction from invested capital and should, therefore, be reversed.
It is evident that the capital stock account has been reduced by $20,000 instead of $10,000 due to the Revenue Agent’s action. The item was already eliminated from the capital stock account by the entry made by the taxpayer in 1915 and the agent’s adjustment should therefore have been made to sur*1021plus. The effect on invested capital would be the same, however, since the item of $10,000 was eliminated from the asset account but once which, in the opinion of this office, was proper in so far as the determination of invested capital is concerned since the capital stock issued for the stamp account was returned to the corporation and there is no evidence of value.
The taxpayer does not appear to claim a paid-in surplus on account of the value of the McKinley Stamp Business, but contents itself with a claim that invested capital should not be reduced on account of that asset. However, $15,000 par value of the stock originally issued for all of the assets of the Kenny Brothers Company, including the “ Stamp Business ” account, was retransferred to the corporation and the books balanced in connection with other entries by a credit to surplus which, in effect, offset the “McKinley Stamp Business” account by a surplus account. The taxpayer contends that, inasmuch as the examining revenue agent shows a deficit both at January 31, 1918, and January 31, 1919, in excess of $10,000, the elimination of the “ McKinley Business ” account from capital stock is erroneous, whether or not that business was actually worth $10,000 when paid in for stock in the corporation.
The contention of the taxpayer is clearly correct. The ruling of the Solicitor ignores the fact that the taxpayer’s invested capital is made up entirely of stock issued for property or cash, concededly, so far as property is concerned, of a value in excess of $97,200, to which amount the common stock originally issued was reduced by the $15,000 returned by the Kennys. Had the taxpayer possessed a surplus from which $10,000 could be deducted at the beginning of either of the years ended January 31, 1919, or December 31, 1919, the deduction of the $10,000 item in question would be obviously proper, unless the business had a value of $10,000 when paid in. It is equally clear that since there was no such surplus, but, on the contrary, a deficit in excess of $10,000 on each of the above dates, the deduction of a further sum of $10,000 from the capital stock account was improper. The partnership turned in tangible property for stock in at least the sum, so far as the record shows, of $102,200, and received therefor and for the stamp business stock of a par value of $112,200, thereafter returning $15,000. The taxpayer is clearly entitled to an invested capital for the respective years of $157,700 and $170,700 instead of $147,700 and $160,700, as allowed by the Commissioner.
The tax will be recomputed in accordance with the foregoing and settled as set forth in the decision.