Court Opinion

ID: 4494831
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:01.628602+00
Date Added: 2024-06-11T14:54:12.089008
License: Public Domain

*306OPINION.
Smith
: The taxpayer’s sole allegation of error is that the Commissioner erred in denying the taxpayer’s appeal for relief under the *307provisions of section 328 for the calendar year 1918 and for the two-month period ended February 29, 1920. The alleged facts upon which the taxpayer relies as the basis of its appeal are as follows:
(a) Due to the fact that the officers owned a large percentage of stock, the salaries paid them were abnormally low.
(5) The taxpayer owned and used in its business a water power carried on its books at $50,000,but worth between $300,000 and $400,000.
(c) The president and principal stockholder of the corporation, one D. A. Tompkins, was a manufacturer of textile machinery, and a large part of the machinery used in the cotton mill was built in the machinery factory at a reduced cost, or, in many cases, at no cost whatever to the corporation.
(d) The mill was operated double time and in this way one investment was made to produce approximately double the net income.
In addition to the foregoing, the taxpayer alleges that its true invested capital can not be satisfactorily determined.
With respect to the first allegation of error, the taxpayer has not submitted any evidence as to the salaries paid to executive officers of other corporations and the Board is not in possession of information which enables it to determine whether the salaries paid to its executive officers were abnormally low in comparison with the salaries paid to officers of other similar corporations.
The greater portion of the evidence presented by the taxpayer is directed toward the proof that a water power which cost approximately $50,000 was worth between $300,000 and $400,000 during the taxable periods herein considered. The evidence shows that, through the expenditure of approximately $50,000 for the construction of the dam and appurtenances for. water power, the taxpayer has harnessed the waters of a stream on the site of its mill and from that source is receiving the year round power for the partial operation of its mill, some departments of which are operating 24 hours per day 300 days in the year. The total power received from this source was 700 horsepower. During the year and period under review hydroelectric power was available in the vicinity of the taxpayer’s mill at $22.50 per horsepower on a 12-hour run. Thus, a very considerable saving resulted from the availability and use of this water power. The purchasers of the capital stock in 1920 figured that the water power had a value of $350,000.
It is to be noted, however, that invested capital under the statute is to be computed upon the basis of the capital embarked by the stockholders in the corporation and upon the surplus earned subsequent to organization. Tangible property paid in for shares of capital stock is to be included in invested capital only to the extent of the value of the tangible property “ at the time of such payment.” Section 326 (a) (2), Revenue Act of 1918. The in*308crease in the value of the property paid in to the corporation or acquired by it may not be included in invested capital under the statute. No evidence is before the Board in this appeal that the water power cost the taxpayer in excess of $50,000 at the time it was acquired. The proof that it had a much greater value in 1918 and 1920, standing alone, is insufficient to establish the right of the taxpayer to relief under the provisions of section 328 of the Eevenue Act of 1918.
The third contention of an abnormality in invested capital is that one D. A. Tompkins, president and principal stockholder of the corporation, during the early period of its existence, contributed textile machinery at no cost whatever to the taxpayer and also sold machinery to it at less than the actual market value. This allegation is supported by the evidence of one witness, the superintendent of the mill for many years, who gives his testimony from memory. He testified that Tompkins had contributed 1 spinning frame, 4 spoolers, 6 reels, 1 starch kettle, 1 banding machine, and 1 baling press. The value of this equipment is not in evidence. It is stated that these machines were in the mill in 1918, but the extent to which they had depreciated is not known. The witness had never kept and apparently never had access to the books of the corporation to know whether the fact of the gift of this equipment to the corporation had been taken into account in determining the amount of depreciation which had been sustained up to the year 1918. There is no proof that Tompkins ever sold machinery to the taxpayer at less than market value. In the light of the meager information upon this point we do not think that the taxpayer has sustained the burden of proof in supporting its allegation that an abnormality of invested capital is attributable to the contribution of this equipment.
The fact that the mill was operated double time during the taxable periods under review does not prove an abnormality either of income or of invested capital.
From a consideration of the entire record the Board is of the opinion that the evidence does not show such an abnormality of net income or invested capital for the calendar year 1918 and for the two-month period ended February 29, 1920, as warrants a determination of tax liability under section 328 of the Eevenue Act of 1918.
On reference to the Board: