Steel, Wedeles Co. v. Commissioner

STEELE, WEDELES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Steel, Wedeles Co. v. Commissioner Docket No. 10215. United States Board of Tax Appeals 11 B.T.A. 279; 1928 BTA LEXIS 3837; March 28, 1928, Promulgated *3837 1. The value of the intangible property acquired by the petitioner from a partnership determined. 2. Held, the petitioner is not entitled to include in invested capital a leasehold acquired for cash at a greater amount than cost. 3. Held, that the action of the respondent in reducing the petitioner's invested capital for 1918 by the amount of 1917 taxes prorated is correct. 4. The value of a leasehold on March 1, 1913, determined. 5. Respondent's denial of petitioner's application for a determination of its tax liability under section 328 of the Revenue Act of 1918 approved for lack of evidence. 6. Time within which assessment of a deficiency for 1918 might be made held not to have expired. Donald Horne, Esq., and Charles Green Smith, Esq., for the petitioner. Arthur H. Fast, Esq., and Julian G. Gibbs, Esq., for the respondent. TRAMMELL *279 This is a proceeding for the redetermination of a deficiency of $23,108.88 in income and profits taxes for the year 1918, the allegations in the petition relating tot he year 1919 for which an overassessment was determined having been abandoned by the petitioner*3838 at the hearing. The matters in controversy in this proceeding are: *280 (1) That in his determination of petitioner's invested capital, respondent did not include any amount for good will and other intangible assets; (2) that invested capital was determined without including either as paid-in surplus or as earned surplus the excess of the fair market value of a leasehold at the time of acquisition over the actual cash paid therefor by the petitioner; (3) the reduction of invested capital by the amount of income and profits taxes for 1917 prorated; (4) the amount deductible for the exhaustion of a leasehold; (5) the respondent's refusal to determine petitioner's tax liability under the provisions of section 328 of the Revenue Act of 1918; and (6) whether the time within which the taxes in controversy may be assessed has expired. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of Illinois with its principal office at Chicago. It was incorporated on February 4, 1885, for a period of 25 years, and its charter was renewed in 1910. The authorized capital stock at the time of incorpoation was $300,000, divided into 3,000 shares of a par value of*3839 $100 each. In 1862, Bernhard Steele, Isaac Wedeles, and Max Steele associated themselves in a partnership under the firm name of Steele, Wedeles & Co. and engaged in business as importers and wholesale grocers. The original investment in the partnership was $5,085.70 and no other amount was invested in the business except a portion of the distributive shares of the profits which the partners did not withdraw. From the beginning the business was successful and by 1885 the partnership was among the best known wholesale grocery firms in Chicago. For the five years preceding the incorporation of the petitioner the total investments of the partners and the net earnings of the partnership were as follows: Total investment of partners Earnings for following year Jan. 1, 1880 $232,070.15 $36,557.87 Jan. 1, 1881 258,493.39 53,969.67 Jan. 1, 1882 302,006.47 55,703.79 Jan. 1, 1883 344,668.77 67,918.35 Jan. 1, 1884 399,409.85 56,790.13 Total 1,536,648.63 270,939.81 Average 307,329.73 54,187.96 The earnings for 1885, the first year after incorporation, were $51,258.07. For the second year after incorporation they were $36,258.88. *281 *3840 After organization in 1885 the petitioner issued its authorized capital stock of $300,000 for the partnership's entire business, stock, merchandise, cash, accounts receivable, good will, trade marks, copyrights and whatever other personal property there was, and assumed all the liabilities of the partnership. The petitioner retained the customers of the former partnership and carried on the same line of business. In 1918 it was the fourth largest wholesale grocery company in Chicago. The part value of the petitioner's stock outstanding on March 3, 1917, was $400,000. On August 1, 1907, the petitioner acquired by assignment from the original lessee, the Sibley Warehouse & Storage Co., a lease to the land upon which it erected the building it now occupies. The lease originally was from the Shreve Estate to the Sibley Warehouse & Storage Co. and was for a period of 98 years beginning April 1, 1895. The annual rental was $5,000. The lease provided that the Sibley Warehouse & Storage Co. would erect on the land within five years from April 1, 1895, a stone, metal and brick building covering at least two-thirds of the land at a cost of not less than $50,000. The lease also contained*3841 provisions under which the lessors were to purchase the buildings and improvements standing on the land at its expiration. It also provided that if the lessee defaulted in the performance of any of the terms or agreements contained therein and such default should continue for 90 days after a written notice thereof from the lessors the lessors could at their option declare the term of the lease terminated. Up to the time of the assignment of the lease to the petitioner, the Sibley Warehouse & Storage Co. had not erected the building, which it had in the lease agreed to erect. The petitioner paid $25,000 for the assignment of the lease and agreed to erect on the premises a modern fireproof warehouse building, containing not less than eight stories and basement, to cost approximately $200,000, and to have the building completed as soon as possible after the execution of the assignment, but not later than 24 months thereafter. Before the lease was assigned to the petitioner the Chicago Warehouse & Terminal Co. had agreed to lease from the petitioner a portion of the basement space and most of the first floor of the building to be erected by the petitioner. That company was a corporation*3842 which operated an underground or tunnel system of transportation whereby freight was transported from the various railroad depots to the various business houses and warehouses and from the business houses and warehouses to the railroad depots. It agreed to pay an annual rental of $7,500 per year for the portion of the building which it proposed to lease and use as a station for its freight distributing *282 tunnel railroad. On June 21, 1907, the Chicago Warehouse & Terminal Co. confirmed this agreement by letter. On September 3 following a lease embodying the agreement effective from January 1, 1908, to March 31, 1993, was executed. In addition to the rights acquired by the Chicago Warehouse & Terminal Co. under the lease as set out above, it also acquired the right to use the ground beneath the portion of the basement it had leased, for the purpose of tunneling or excavating from the basement to the tunnel level so as to enable it to make connection with the underground tunnel and to use the space so excavated in connection with its business. It also acquired the right to make two openings in the west wall on the first floor of the building to be erected by the petitioner*3843 so as to connect the building adjoining on the west with tracks. The lease also provided that any revenue or rental received for the use of the dock on the river front of the premises, after deducting the cost and expense of maintaining the dock, should be divided one-fourth to the petitioner and three-fourths to the Chicago Warehouse & Terminal Co., and that the terms of any lease or disposition of such dock should be mutually agreed upon by that company and the petitioner. Among the reasons why the Sibley Warehouse & Storage Co. assigned the lease to the petitioner for the $25,000 was that it was contemplated that its warehouse adjoining the building to be constructed by the petitioner would have a direct track connection through such building with the station of the Chicago Warehouse & Terminal Co. which was to be located in it. This track connection would save the Sibley Warehouse & Torage Co. the cartage expense of transporting goods from the railroad depots to its warehouse. Another reason for making the assignment was that the petitioner for a long time had transacted a great deal of business and had stored goods with the Sibley Warehouse & Storage Co. and it was to*3844 that company's interest to have the petitioner near by. A further reason was the expected additional storage business to be obtained from the Chicago Warehouse & Terminal Co. by reason of the direct track connection with its station. There were, however, no contracts or agreements which would give the Sibley Warehouse & Storage Co. any of the rights or privileges or advantages above set out. It had under the assignment no right except to receive the $25,000 cash consideration. When the Chicago Warehouse & Terminal Co. leased portions of the building to be constructed by the petitioner there was a "verbal understanding" that it would pay for the construction of the portions of the building it was to lease and which were to be constructed to suit its needs. In accordance with this understanding, it paid *283 $119,873.02 for the portions of the building to be occupied by it and for tunnel connections. The land covered by the lease assigned to the petitioner by the Sibley Warehouse & Storage Co. is in the center of the business district of Chicago. It is about 80.4 feet wide and about 184.5 feet in length, being bounded on the south by the Chicago River, on the east by*3845 Dearborn Street, and on the north by the tracks of the Chicago & Northwestern Railroad with which it has switching facilities. Its south frontage is on the river, which is about 200 feet wide at this point. This affords unobstructed light and air. The property is about six blocks from the Federal Building, two blocks from the City Hall, about six blocks east from the Chicago & Northwestern passenger station, about fourteen blocks from the Union passenger station, and three blocks from Michigan Avenue. The stations of the elevated street railway are two or three blocks away. The property is well provided with transportation facilities and is accessible from all parts of the city by thoroughfares. Street cars pass the property. Real estate in Chicago experienced a considerable rise in values from 1907 to March, 1913. As a result of the station of the Chicago Warehouse & Terminal Co. being located in its building, the petitioner could receive freight into its building through the station and ship freight through the station without cost of drayage, which meant a material saving in drayage. The petitioner's merchandise purchases were as follows for the years indicated: — 1902 — $935,804.90 — 1903 — 1,031,470.16 — 1904 — 1,175,851.37 — 1905 — 1,347,815.48 — 1906 — 1,233,884.60 — 1907 — 1,470,845.54 — 1908 — 1,396,451.49 — 1909 — $1,383,637.67 — 1910 — 1,550,684.05 — 1911 — 1,880,040.30 — 1912 — 1,747,228.76 — 1913 — 1,534,413.95 — 1914 — 1,719,956.87 *3846 In determining the income upon which the deficiency herein involved is based, the respondent allowed a deduction of $290.67, representing the amortization of petitioner's leasehold. The respondent also reduced the petitioner's invested capital for 1918 by $51,557.07, representing the prorated amount from June 15, 1918, of the petitioner's 1917 tax of $94,091.66. At the time of the trial of this case the petitioner had pending before the Bureau of Internal Revenue a claim for the refund of a portion of the tax paid for the year 1917. The respondent denied the petitioner's application for a determination of its profits tax liability under the provisions of section 328 of the Revenue Act of 1918. *284 For the year 1918 the petitioner filed an income and profits tax return on June 16, 1919. Prior to October 26, 1925, the date the deficiency notice was mailed, the petitioner filed a "waiver" extending the time for assessing 1918 tax until December 31, 1925. On December 23, 1925, the petitioner filed its petition with the Board. OPINION. TRAMMELL: Errors alleged in the petition and not abandoned at the hearing are as follows: (1) That the petitioner's invested*3847 capital for 1918 was calculated without including any amount representing the value of its good will and other intangible assets; (2) the petitioner's invested capital for 1918 was calculated without including as paid-in surplus the excess of the fair market value of the leasehold interest acquired for stock in 1910 over the actual cash paid for the leasehold interest by petitioner's predecessor in 1907; (3) the petitioner's invested capital for 1918 was reduced by the amount of its income and war excess profits taxes for the year 1917 prorated, that is, total tax, $94,091.66, prorated from June 15, 1918, is $51,557.07, which amount was deducted by the respondent from the petitioner's invested capital for 1918; (4) the petitioner was allowed a deduction from gross income for 1918 for amortization of leasehold interest based on actual cost to petitioner's predecessor, $25,000, instead of on the fair market value of said leasehold interest on March 1, 1913, $120,000. Amortization of said leasehold interest was calculated on the basis of its full life from 1907 instead of on its remaining life from March 1, 1913; (5) petitioner's application for assessment under the provisions of sections*3848 327 and 328 of the Revenue Act of 1918 for the taxable year 1918 was denied; (6) the time within which the law permitted the respondent to assess additional income and/or profits taxes against the petitioner for the year 1918 has expired. With respect to the first allegation of error, the petitioner contends that its invested capital should be increased on account of the intangible property, including good will, acquired from its predecessor partnership in 1885. From a consideration of all the evidence in the case we are of the opinion that the intangible property acquired for stock had an actual cash value of at least $140,000 at the time acquired by the petitioner in 1885. The $300,000 par value of stock issued for the assets both tangible and intangible should be allocated to each class of assets in accordance with the method set out in St. Louis Screw Co.,2 B.T.A. 649. The petitioner is entitled to include in invested capital subject *285 to the statutory limitations the amount determined as applicable to the intangible property. With respect to the allegation that the respondent erred by computing invested capital for 1918 without including as*3849 paid-in surplus the excess of the fair market value of a leasehold interest acquired for stock in 1910 over the actual cash paid for the leasehold interest by petitioner's "predecessor" in 1907, the petitioner concedes that it was incorporated in 1885 for a period of 25 years and that its charter was renewed in 1910. It does not appear from the record that any change was made in the petitioner's organization or status when its charter was renewed. In considering the question of whether an extension of a charter was the creation of a new corporation, the Supreme Court of Illinois, in Chicago, B. & Q.R. Co. v. Doyle,258 Ill. 624; 102 N.E. 260, said: The question whether an extension of the life of a corporation is the continuation of the old or the creation of a new corporation is often one of great importance, and the authorities are not all in harmony. If it is the creation of a new corporation and not the continuation of the old, then the new corporation does not possess the rights and is not subject to the liabilities of the old one; but if the effect is simply to renew or continue an old corporation, its identity remains unchanged and its*3850 liabilities unimpaired. 10 Cyc. 281, and cases cited. As long ago as People v. Marshall, 1 Gilman 672, 683, this court said: "The distinction between a new charter and the renewal of an old one is fully recognized by authority. The continuance of an old charter is not the creation of a new corporation and it is said that in pleading the latter act need not be noticed, the vitality and authority of the corporation being derived from the former one." Practically to the same effect was Williams v. Bank of Illinois,1 Gilm. 667. The doctrine laid down in those cases has never been questioned by this court. In Ohio Valley Tie Co. v. Bruner,148 Ky. 358, 146 S.W. 749, the court said: "The general authority throughout the Union upholds the right of a corporation to extend its life by amendment. * * * Such an extension is not the formation of any new or different corporation. Its affairs are not wound up or liquidated; there is no distribution of its assets; there is no change in the personnel of the stockholders or in their liability; there is no alteration or break in the continued existence of the corporation upon which the organization*3851 tax has once been paid." In Attorney General v. Perkins,73 Mich. 303, at page 316, 41 N.W. 426, at page 429, the court in discussing this question, said: "No change is contemplated in the property, rights of action, liabilities, officers, or stockholders. Certainly such results cannot follow the expiration of an existing corporation and the creation of a new one. There is nothing new about it, except the term of existence. There remains the old name, the assets, the old liabilities, the old officers, and the old stockholders," In 3 Purdy's Beach on Private Corporations, 1247, the author says: "Extension, revival, or renewal of the corporate charter for an additional period when its term of existence has expired or is about to expire may be by special act or by general law. Such an act does not create a new corporation but merely revives and continues the old one under its original charter, without any reorganization, interruption, or change, and without affecting its powers or identity as a corporation or its property or other rights or contract liabilities." The extension of a charter *286 is not the creation of a new charter. It is the same charter*3852 with a renewed lease of life, under which the organization may be kept up. In view of the foregoing, we are of the opinion that the renewal of its charter in 1910 does not entitle the petitioner to include the lease in invested capital at a greater value than if its charter had not been renewed, even if it be conceded that the lease had the value contended by the petitioner in 1910 when the charter was renewed. The evidence shows that the leasehold which was acquired from the Sibley Warehouse & Storage Co. under the assignment made on August 1, 1907, was not acquired for stock but for cash in the amount of $25,000, and the petitioner's agreement to erect on the premises within two years a building to cost approximately $200,000. The original lease provided for the purchase by the original lessors of any buildings or improvements standing on the land at the end of the lease. It not having been acquired for stock and not having been contributed or paid in by a stockholder there is no basis for a paid-in surplus with respect thereto in 1907 when acquired. We see no basis for any earned surplus as contended for by the petitioner with respect to the difference between the cost*3853 of the lease and its market value either in 1907 or in 1910. The petitioner did not realize any gain or profit or derive any earnings from the acquisition. In its brief the petitioner raises the contention for the first time that it is entitled to include in its earned surplus an amount of $119,000 representing the expenditures made by the Chicago Warehouse & Terminal Co. in the construction of those portions of the building which it leased. This however was not an issue in the case, and the pleadings were not amended or offered to be amended to raise it. We therefore have not considered this question. With reference to the petitioner's allegations that the respondent erred in reducing its invested capital for 1918 by the prorated amount of income and profits taxes for 1917, it appears that the respondent's action is in accordance with the provisions of section 1207 of the Revenue Act of 1926 and his action is therefore approved. In the recomputation of the deficiency for 1918, it becomes necessary to determine the amount of the 1917 tax liability in order to determine the amount to be deducted from 1918 invested capital with respect thereto. The tax liability for 1917 should*3854 be determined by giving effect in the invested capital to good will acquired in 1885 and the value of the lease on March 1, 1913, for depreciation purposes as herein determined. With respect to the allegation that the respondent erred in allowing a deduction from income for amortization of leasehold based on the actual cost of $25,000 and the remaining life of the lease from 1907, instead of on the fair market value of the lease on March 1, 1913, and its remaining life from that date, it is our opinion that the *287 petitioner is entitled to an exhaustion allowance based upon the value of the leasehold on March 1, 1913, spread over the remaining life of the lease, which expires on March 31, 1993. In support of its contention that the leasehold interest acquired by assignment from the Sibley Warehouse & Storage Co. had a value of $120,000 on March 1, 1913, the petitioner introduced the testimony of a witness who for over 40 years has been engaged in the real estate business, dealing almost exclusively with property located in the central business district of Chicago. This witness has bought and sold, as well as appraised, many millions of dollars worth of property. He*3855 was president of the Chicago Real Estate Board in 1912, has served on the appraisals committee of that board, and had a knowledge of real estate values in that vicinity. This witness was familiar with the premises not only in 1913, but also prior to the time the petitioner acquired a lease thereon. From a consideration of his testimony in connection with the other facts in the case, we are of the opinion that the value of the leasehold on March 1, 1913, was at least $120,000 in excess of the rentals payable thereunder. The petitioner introduced no evidence directed to the question of whether the respondent erred in denying its application for a determination of its profits tax under the provisions of section 328 of the Revenue Act of 1918, and made no reference thereto in its brief. The action of the respondent is therefore approved. The remaining contention of the petitioner is that the time within which the law permitted the respondent to assess additional income and profits tax against it for the year 1918 has expired. While no testimony was introduced with respect to the so-called "waiver," the pleadings set forth that a "waiver" was filed which purported to extend*3856 the period of limitations until December 31, 1925. It was alleged in the petition that the "waiver" was ineffectual because "the taxpayer is without authority to extend the time provided by statute within which the Commissioner may assess a tax. Congress alone can extend the time and has not done so." In its brief it is contended that the limitation was not extended because the "waiver purported to waive only the statute as to tax imposed under existing provisions of law, and did not waive the effect of new provisions of a new statute, affecting the computation, assessment and collection of such amount of tax." We are not impressed with the reasons assigned by the petitioner. The statute specifically provides for the extension of the period of limitations within which taxes might be assessed and collected by consents in writing. It is not alleged or shown that the statute was not followed in the execution of the so-called "waiver." In this case the petitioner has not shown that the period of limitation had expired. *288 The period within which assessment could be made had not expired when the notice of the deficiency was mailed to the petitioner. The period for assessment*3857 and collection is therefore not barred. Judgment will be entered on 15 days' notice, under Rule 50.