Washington Post Co. v. Commissioner

WASHINGTON POST CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Washington Post Co. v. Commissioner Docket No. 8085. United States Board of Tax Appeals 10 B.T.A. 1077; 1928 BTA LEXIS 3964; February 29, 1928, Promulgated *3964 Upon an admission by respondent that $300,000 par value of stock was issued and the presumption that the petitioner has kept within the law requiring that capital stock may be issued only for money, petitioner has made out a prima facie case, and in the absence of evidence in rebuttal, is entitled to this amount as paid-in invested capital. Wilton J. Lambert, Esq., and George B. Fraser, Esq., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. LOVE *1077 This is a proceeding for the redetermination of a deficiency of $13,370.99 in income and profits tax for the year 1919, only a part of which is in controversy. The only issue is what amount the petitioner may include in its invested capital. FINDINGS OF FACT. The petitioner is a corporation of the District of Columbia, and has its principal office at Washington. It prints and publishes The Washington Post, a newspaper. The newspaper, including the plant and good will, was purchased in 1889 from prior owners by Beriah Wilkins, Frank Hatton, and others, and transferred to petitioner, which has since continued the *1078 business. The petitioner was originally*3965 incorporated in 1889, with an authorized capital stock of $300,000, for a term of existence of 20 years, which was the maximum term then authorized by statute for this kind of corporation. On January 30, and April 4, 1889, the full amount of its authorized capital stock, consisting of 600 shares of the par value of $500 each, was issued to Frank Hatton, Beriah Wilkins, Stephen V. White, John H. Ketchum, and S. H. Mallory. In 1907, it was reincorporated under section 635 of the Code of Laws for the District of Columbia, chapter 18, subchapters 4 and 13, which were enacted March 3, 1901. Under this chapter, the term of existence may be perpetual and the certificate filed thereunder by petitioner specified a perpetual term. This certificate also contains the following paragraph: Third. The amount of the capital stock is, and shall continue to be, subject to the right of said corporation hereafter to increase or diminish the same in the manner provided in and by the said Code, three hundred thousand dollars, divided into six hundred shares, of the par value of five hundred dollars per share, all of which has been actually paid in. The person, or persons, who now control the corporation*3966 acquired all of the stock except a few shares in or about the year 1905. The first entry of the $300,000 of capital stock in the ledgers of petitioner was made in 1892, and at the same time there was entered among the asset items one of "Plant, good will, $277,431.04." These entries were made by an official of the corporation who is now dead. The part of the deficiency which is in controversy arose through the disallowance by the Commissioner of $225,000 (being 75 per cent) of the invested capital claimed by petitioner as having been paid in for stock. The Commissioner held that the $300,000 of capital stock was issued in 1889 for a mixed aggregate of tangible and intangible assets, and since no segregation was made, the limitation of 25 per cent on the amount of intangibles provided by section 326(a)(4), Revenue Act of 1918, should be applied to the total amount. OPINION. LOVE: In 1889, shortly after its incorporation, the petitioner issued $300,000 par value of stock. About the same time, it acquired a newspaper with the plant, equipment and all the other assets pertaining to the enterprise. The property was first transferred from the prior owners to a group of individuals, *3967 and then by the latter transferred to petitioner. The names of two of these individuals appear in evidence, the names of the others do not. The two persons who are named are among the five to whom the shares of stock were issued. Among the assets acquired was intangible property of an undetermined amount. The first record of a capital stock *1079 account appearing in petitioner's books was made in 1892 by an official of the corporation who is now dead. The original stockholders ceased to be stockholders more than 20 years ago. The Commissioner determined that the newspaper assets were paid in to the corporation for the shares of stock. It being impossible, in his investigation, to ascertain the respective amounts of tangible and intangible property, he limited the total amount to be included in invested capital to the maximum amount allowable for intangibles, viz, 25 per cent. (Revenue Act of 1918, sec. 326(a)(4).) This allowance is based on a total value of $300,000. The petitioner's position is that the stock was issued not for the newspaper assets, but for cash. If the petitioner is correct, it is entitled to include the total amount in invested capital. (Revenue*3968 Act of 1918, sec. 326(a)(1).) There is no question in this case of the value of property paid in for stock. It is admitted by respondent in his answer that the $300,000 of stock was issued, and it appears to be conceded that the full par value thereof was paid in to the corporation. The question is whether the payment was made in cash or in property other than cash, consisting in part of intangibles. It is a question of fact. The petitioner contends that it has made out a prima facie case on the admission that the stock was issued and a presumption in its favor that it has complied with the law then in force providing that only money shall be received as payment for stock; no evidence to rebut this presumption being offered by the respondent. The Revised Statutes relating to the District of Columbia in effect in 1889 contain the following sections: Nothing but money shall be considered as payment of any part of the capital stock. (R.S.D.C. 565.) The president and a majority of the trustees, within thirty days after the payment of the last installment of the capital stock so fixed and limited shall make a certificate stating the amount of the capital so fixed and*3969 paid in, which certificate shall be signed and sworn to by the president and a majority of the trustees and they shall within the said thirty days record the same in the office of the recorder of deeds of the District. (Section 563, R.S.D.C.) The capital stock so fixed and limited shall be paid in, one-half within one year, and the other half thereof within two years from the incorporation of the company, or such corporation shall be dissolved. (Section 564, R.S.D.C.) In the absence of evidence to contrary, we must presume that petitioner has complied with the statute. The proceedings of this Board are conducted in accordance with the rules of evidence applicable in courts of equity of the District of Columbia. There is a well recognized rule of evidence that it will be presumed that a corporation, as well as a natural person, has complied with the law. *1080 It was well stated in the case of , where the Supreme Court, speaking through Mr. Justice Story, said: By general rules of evidence, presumptions are continually made, in cases of private persons, of acts of the most solemn nature, when those acts are*3970 the natural result or necessary accompaniment of other circumstances. * * * [The law] presumes that every man, in his private and official character, does his duty, until the contrary is proved; it will presume that all things are rightly done, unless the circumstances of the case overturn this presumption * * *. The same presumptions are, we think, applicable to corporations. * * * Acts done by the corporation which presuppose the existence of other acts to make them legally operative, are presumptive proofs of the latter. That case has been cited several times since by the Supreme Court as authority for the propositions above set forth. See ; ; . In a more recent case, ; , the Court of Appeals of New York, in an opinion by Judge Cardozo, said: We must presume, indeed, until the contrary is shown, that they [rates] were only reasonable*3971 in amount, for unfair and unreasonable rates are prohibited by statute. * * * The plaintiff has the benefit of the presumption that it has kept within the law. While the determination of the Commissioner is prima facie correct, the presumption in petitioner's favor that it complied with the law, fortified by the authorized presumption that the officers of the Government performed their legal duties, first, in the issuance of the charter, and second, in their failure to dissolve the corporation, has sufficient probative force under well-recognized rules of evidence to make a prima facie case for the petitioner and thus overcome the presumption of correctness on the part of the respondent. The respondent having failed to adduce any evidence to rebut such presumption, we hold that so much of the deficiency as arose from the disallowance of the full amount of $300,000 in invested capital is disallowed. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50. STERNHAGEN and PHILLIPS dissent. TRAMMELL TRAMMELL, dissenting: I dissent upon the ground that there is no evidence to overcome the presumption of the correctness*3972 of the action of the respondent. *1081 The presumption that the corporate officers followed the law is entitled to no greater weight or consideration than the equally well recognized presumption that a public officer in the performance of his duties acted legally, that is, that the Commissioner correctly determined the deficiency. The burden of proof is on the petitioner - which, in my opinion, has not been met.