Klamer-Goebel Furniture Co. v. Commissioner

KLAMER-GOEBEL FURNITURE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. O. A. KLAMER FURNITURE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Klamer-Goebel Furniture Co. v. Commissioner Docket Nos. 10663, 13532, 13533. United States Board of Tax Appeals 11 B.T.A. 1322; 1928 BTA LEXIS 3645; May 11, 1928, Promulgated *3645 1. Property purchased by petitioners for cash should be valued for invested capital purposes at cost. 2. The computation of deductions from income for wear and tear of property involved in this proceeding should be based on cost. 3. Even if the value of services rendered upon organization of petitioners is a proper item to be included in invested capital when paid for in stock, the evidence does not show the value of such services chargeable to organization expense for which capital stock of petitioners was issued. It is therefore impossible to designate any amount of paid-in capital attributable to the services, separable from, or in addition to, earned surplus. John E. McClure, Esq., for the petitioners. D. D. Shepard, Esq., for the respondent. LOVE *1322 These proceedings result from the determination of deficiencies in income and profits taxes amounting as follows: Klamer-Goebel Furniture Co. for 1919, $205.12; for 1920, $1,593.43; O. A. Klamer Furniture Co. for 1920, $1,257.14. Petitioners allege error with reference to the following issues: (1) There has been a failure to allow, in the respective invested capital of the two*3646 petitioners, paid-in surpluses amounting, each of them, to $25,000, attributable to one-fourth interests in a building paid in to the two petitioners by a principal stockholder without consideration; (2) additional deductions from income should be allowed each of the petitioners, attributable to depreciation of said building based upon the additional value. With reference only to Klamer-Goebel Furniture Co.: (3) organization expenses amounting to $5,000 should be allowed in invested capital; (4) invested capital should not be reduced by prior year's taxes; (5) the profits taxes should be computed under sections 327 and 328 of the Revenue Act of 1918. Upon motion by petitioners duly made and granted the appeals were consolidated for purposes of hearing and decision. The fourth and fifth issues were withdrawn by petitioner at the hearing. FINDINGS OF FACT. Klamer-Goebel Furniture Co. is an Indiana corporation, organized in July, 1911, with its principal office at Evansville, Ind., and it is *1323 engaged in the manufacture and sale of furniture. Five thousand dollars par value of the capital stock of this petitioner was issued in July, 1911, to Oscar A. Klamer*3647 in consideration of his personal services in organizing this petitioner and also, prospectively for his personal services as president of this taxpayer for the four years next succeeding 1911. This $5,000 par value of stock was charged on the books of this petitioner, as follows: to building account, $2,000; to land account, $2,000; to boilers and engine account, $1,000. At this time $30,000 par value of the capital stock of this petitioner was outstanding, having been paid for in cash at par. Klamer served the four years following 1911 as president as agreed, and during that time he received no compensation other than the capital stock of $5,000 par value. O. A. Klamer Furniture Co. is an Indiana corporation with its principal office at Evansville. During the calendar year 1919, Oscar A. Klamer was a director and also president of Klamer-Goebel Furniture Co., O. A. Klamer Furniture Co., Schelosky Table Co. and Wertz-Klamer Furniture Co., hereinafter referred to as "the four corporations." At this time Klamer was the owner of $10,000 par value of the total outstanding $90,000 par value of the capital stock of the Klamer-Goebel Furniture Co. In June, 1919, land and a building*3648 thereon located at South First and Vine Streets, in what is known as the "old section" of Evansville, Ind., was owned by a corporation which was in process of voluntary liquidation. The location of the property was not favorably regarded in 1919, and property values had declined. The property had been used in the wholesale drygoods business but was unoccupied at this time. The owners offered the property for sale at public auction after a short period of advertising in the newspapers. O. A. Klamer attended the sale and engaged in the bidding. His bid of $28,000 was the highest, and the property was knocked down to him at that price, whereupon he made the first partial payment in cash required under the terms of the sale. The four-story building was of brick and timber construction, with walls 4 feet thick at the base, and was equipped with a power plant and a sprinkler system. The dimensions were as follows: of the building, 140 feet by 72 feet; of the lot, 166 feet by 72 feet. On June 9, 1919, the directors of the four corporations, being in the case of each corporation the same individuals, met in joint session and they authorized the purchase of the land and building*3649 from Klamer for cash, each corporation to purchase a one-fourth interest for a consideration of $7,000, the aggregate consideration being $28,000 and, therefore, equal to the price paid by Klamer for the property. At the direction of Klamer the property was deeded by *1324 the previous owner direct to the four corporations. The four corporations paid the cash consideration agreed upon. OPINION. LOVE: The first issue is a question of invested capital. In 1919, O. A. Klamer, then a director and the president of both petitioners and also of two other corporations, purchased at public auction certain land with a building thereon, and he immediately transferred a one-fourth interest in the same property to each of the petitioners, and the two other corporations for equal cash considerations amounting in the aggregate to the price he had paid for the property at the auction sale. Petitioners contend that the value of the property was grossly in excess of the purchase price, and they claim that the value in excess of the cash they paid should be allowed for invested capital purposes as "paid-in surplus." No question of capital stock value is involved, the consideration for*3650 the property was paid entirely in cash. Upon careful consideration of the entire record we think the excess of value contended for by petitioners is based upon the "reproductive cost" of the building. There is ample evidence that the fair market value of the property was far below the cost of the land and reproductive cost of the building. In all probability the acquisition of the property for the price paid was to some extent a bargain; certainly it was an advantageous deal for the petitioners, for they had immediate use for the building in their businesses. However, we will not go into the question of the amount of value for the property which might fairly have been paid by some other purchaser, had one appeared at this time and had the previous owner, who elected to sell out at public auction, not been so hasty. We need not go back of what in our view was the outright purchase of the property from Klamer by the four corporations. Petitioners acquired their interests in the property solely for cash. The cash paid is the cost of the property. In H. T. Cushman Manufacturing Co., 2 T.B.A. 39, we held that: "A taxpayer acquiring assets for cash is not entitled to include*3651 them for purposes of invested capital at more than their cost." See also . We are of the opinion that the cost of the property to the petitioners is the value assignable for invested capital purposes. It so happens that this cost is equal to the cost to Klamer, the previous owner, and there is, consequently, no question of the limitation provided in section 331 of the Revenue Act of 1918, even in the case of O. A. Klamer Furniture Co. wherein there is no evidence of the extent of the stock holdings of Klamer. The respondent is sustained on this point. *1325 The second issue relating to the computation of deductions from income for wear and tear is decided by our opinion in the first issue. The cost of the property is the only capital value allowable, and since the property was purchased subsequent to March 1, 1913, petitioners are entitled to no greater value for the purposes of this computation. The petitioners withdrew all remaining issues save the third which is peculiar to the Klamer-Goebel Furniture Co., and relates to an amount of $5,000 par value of capital stock issued in 1911 to O. A. Klamer*3652 for personal services. The amount was capitalized on the books by charges to various accounts representing the cost of tangible assets and has been disallowed from invested capital by respondent. Petitioner now claims the value as organization expense. Even though there may be an element of organization expense attributable to this issue of stock, it is in evidence that the services of Klamer as president of petitioner for four years were also a consideration for the same stock, yet there is no evidence of the separate values of the various services, leaving us in a position where no amount of separate value is determinable. Any recognition of value attributable to the purely operating expense of the four years' service as president would not result in an increase in the invested capital, since the value added to the capital stock would correspondingly be deducted from earned surplus. There is nothing to do but sustain respondent on this point. Judgment will be entered for respondent in all three appeals.