Amalgamated Products Co. v. Commissioner

AMALGAMATED PRODUCTS CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Amalgamated Products Co. v. Commissioner Docket No. 11545. United States Board of Tax Appeals 12 B.T.A. 659; 1928 BTA LEXIS 3491; June 15, 1928, Promulgated *3491 (1) The ability, skill and experience of certain incorporators of a corporation which had no predecessor, held not to constitute good will. (2) Certain services and contracts held not to have been paid in for capital stock. (3) Respondent's action in reducing invested capital by the amount of taxes for previous years prorated from the due date of each installment approved. Russel Wheel & Foundry Co.,3 B.T.A. 1168. (4) Refusal to compute profits taxes under sections 327 and 328 of the Revenue Act of 1918 approved. Newton K. Fox, Esq., for the petitioner. John D. Foley, Esq., for the respondent. MILLIKEN *659 This proceeding as originally brought involved an overassessment in income and profits taxes for the year 1919 of $97.59 and a deficiency in such taxes for the year 1920 in the amount of $8,471.92. At the hearing, this proceeding was dismissed in so far as it involved the year 1919. Petitioner alleges the following errors with respect to the deficiency for 1920: (1) Respondent erred in refusing to allow as invested capital, common stock in the sum of $76,000 issued by petitioner for tangible and intangible*3492 assets; (2) respondent erred in reducing invested capital by the prorated amount of income and profits taxes for the years 1918 and 1919; (3) respondent erred in refusing to compute petitioner's profits taxes under the provisions of sections 327 and 328 of the Revenue Act of 1918; (4) respondent erred in refusing to find that abnormal conditions affected the capital and income of petitioner for the year 1920; (5) respondent erred in denying that the abnormal conditions produced exceptional hardship, as shown by the gross disproportion between the tax computed without the benefit of section 327 and the tax computed by reference to representative corporations specified in section 328; (6) respondent erred in refusing to find that a mixed aggregate of tangible and intangible property had been paid in for stock of petitioner and that he was unable satisfactorily to determine the respective values of the several classes of property at the time of payment; and (7) respondent erred in computing petitioner's profits tax for the year 1920 under the provisions of section 302 of the Revenue Act of 1918. FINDINGS OF FACT. Petitioner was organized under the laws of the State of New York on*3493 June 7, 1917, and has its principal office at 25 Broadway, *660 New York, N.Y. Since the date of its incorporation, petitioner has been engaged in buying and selling goods, wares and merchandise, and acting as agent, factor or broker. Its method of business during the years involved was to negotiate between producers and purchasers of metal products and when the negotiations had reached the point of final agreement, to execute in its name a contract of purchase from the producer and then to execute in its name a contract of sale to the purchaser. Against the contract of purchase the purchaser in each case was required to and did furnish an irrevocable letter of credit which was either equal to or in excess of the total purchase price. On each delivery immediate adjustments and payments were made to the purchaser from the letter of credit. The authorized capital stock of petitioner was $100,000, consisting of 200 shares of preferred stock and 800 shares of common stock, all shares having a par value of $100. In the spring of 1917, A. M. McCormack, New York sales manager for the Vulcan Steel Products Co., decided to organize a corporation and to associate with him in*3494 that company men familiar with securing and placing orders for steel and other metals. He associated himself with W. W. Weller, who had had considerable experience in the steel industry as assistant manager of the Boston office of the A. M. Byers Co. of Pittsburgh, Pa., manufacturers of wrought iron pipe; W. M. Maule, an expert accountant familiar with export bank transactions, and who had formerly been employed by the Cambria Steel Co., and was then with the Vulcan Steel Products Co., as treasurer, George T. Baird, who was in the export business, and James V. Converse, who had had connection with the steel mills and was well acquainted with marine insurance. The result was the organization of petitioner. Under date of June 9, 1917, A. M. McCormack addressed a letter to petitioner in which he made the following offers: For the benefit of your Company, I have arranged for a lease of offices of Rooms No. 1332-3, at No. 165 Broadway, City, for 10 months from July 1, 1917, at $170,00 per month, and arranged for the stationery, telephone and furniture therefor, have had Mr. Maule open an account in the Battery Park National Bank, by a deposit of $1500.00 from which disbursements*3495 of about $250.00 have been made for your benefit and have arranged sales contracts for 400 tons of wire rods, 2000 boxes of tern plates, 300 tons of tank plates, 400 cases tin plate and 300 tons of black galvanized iron sheets on which the profits should be respectively about $800., $4,000., $600., $800., and $600. As your company is now formed and ready to do business, I make you the following proposition on behalf of myself and said associates in payment to you for your 800 shares of common stock: (1) To turn over to you all my interest in said lease and arrangements for said office and the sales contracts above-mentioned. (2) To act as your general manager for a period of one year at a salary of $250 monthly, commencing June 15th, 1917, the salary for the first two months of such employment to *661 be applied in payment at par for five shares of your preferred stock. (3) To have Messrs. Baird, Weller, and Maule, agree to enter your employ commencing on the termination of their present positions and in the meantime to give your affairs as much of their time and favor it in orders and business as much as they can without prejudice to the companies with which they are*3496 now connected, they to serve your company for a period of one year after entering your employ on salaries of $250 monthly. (4) To have Mr. Converse to agree to use his influence to secure favorable terms for your company from several of the steel mills and attend to the details of any marine insurance it finds necessary. (5) To have the balance in the Battery Park Bank transferred to your account, you to assume and approve the disbursements made therefrom as made for your benefit, such disbursements and said balance being accepted by you in payment for the fifteen shares of your preferred stock which included the five shares subscribed for in your certificate of incorporation, and which fifteen shares are to be issued, five shares each to Messrs. Maule, Baird and Weller. Said common stock is to be issued 160 shares each to Messrs. Baird, Weller, Maule and myself, and the remaining 160 shares are to be held by your treasurer to be delivered to Mr. Converse when your directors shall decide he is entitled thereto. It is also understood that said monthly salaries above mentioned may be increased if and when same is advisable in the opinion of your directors but that none of such salaries*3497 shall be made the basis of a claim or suit against the company unless there are profits available in its treasury sufficient to pay same. The balance of your preferred stock is to be disposed of only for the purposes of the company and for cash and at par and not for property, unless otherwise agreed to by more than three-fourths of your issued and outstanding stock. Respectfully submitted. (Signed) ALPHONSUS M. MCCORMACK. AMALGAMATED PRODUCTS CO., INC. WE, the undersigned, hereby join in and approve the foregoing offer to you and agree to enter your employ and carry out the conditions therein stated as if said offer had been made by us severally direct to you. (Signed) W. W. WELLER. (Signed) W. M. MAULE. (Signed) GEORGE T. BAIRD. (Signed) JAMES V. CONVERSE. In the meeting of the incorporators held on June 25, 1917, the offer of McCormack was referred to the board of directors for action. At a meeting of the directors held on the same day, the following proceedings, among others, were had: The offer of A. M. McCormack, dated June 9th, 1917, referred to in the minutes of the Meeting of Incorporators and Subscribers, held previously, the same day, was then*3498 presented by the Secretary. Mr. Topping stated that he was familiar with the connections and standing and experience of Mr. McCormack, and the other parties mentioned in said proposition and believed their experience and connections and knowledge of trade conditions were such as to practically insure the success of the Company and give it an advantage over competing companies, and that, in his opinion, the value of the rights and services offered to the company by said offer, were in excess of $80,000, the par value of the total authorized common stock of the Company and that the said offer should be accepted. Mr. Palmer stated that he had been over the statements of said offer with Mr. Topping, and Mr. Converse, etc., and that his *662 views agreed with those of Mr. Topping. The matter was discussed by the directors at length and on motion duly made and carried (Mr. McCormack not voting thereon), it was RESOLVED, that in the opinion of this Board the value of the rights offered the Company by Mr. McCormack in his offer dated June , 1917, is much greater than $80,000, the par value of the authorized common stock of this Company; that said offer be and hereby is accepted*3499 and that the Company accept the rights and obligations as therein mentioned, in full payment for its total authorized common stock; that on receipt by the Company of such assignments and other instruments and papers, as in the opinion of its President are reasonably sufficient to vest in the Company the rights specified in said offer, the President of the Company and its other proper officers, be and hereby are authorized to issue the Capital Stock of the Company to the amounts and to the parties entitled thereto, or as they shall respectfully request in writing, in accordance with said offer. Petitioner purchased the articles sold under the contract mentioned in McCormack's letter of June 9, 1917, delivered them to the purchasers, and made a profit thereon of $8,564.91. Neither George T. Baird nor James V. Converse complied with their agreements of January 9, 1917, and did not associate themselves with petitioner. In July or August 1917, McCormack met Sterling J. Joyner, who was an engineer connected with the Degnon Construction Co. of New York and who had friends and acquaintances in the Mitsui, which was a large Japanese importer and exporter, and in the local purchasing*3500 office of the Imperial Japanese Navy and who had had dealings with these persons. Joyner assured McCormack that if petitioner could procure the materials he could place with it contracts with the Japanese officials which would net them large profits and that petitioner could get continued business through him. McCormack having become assured that Joyner had the ability to secure such contracts, Joyner was elected a director and vice president of petitioner on August 15, 1917. At a meeting of the board of directors held on October 22, 1917, the following proceedings were had: Mr. McCormack stated that, as treasurer, he had received $500. from Mr. Weller in payment for five shares of the company's preferred stock; $500 from Mr. Baird for the same amount of like stock; $500 from Mr. Maule in payment for the five shares of like stock subscribed for in the Company's certificate of incorporation, which stock had been transferred by the subscribers to Mr. Maule; and that he had acted as general-manager for the two months ending August 15th, 1917, in payment for a like amount of said preferred stock; that Mr. Weller, by memorandum dated July 5th, 1917, had transferred all his stock interest*3501 in the Company to him; and that Mr. Baird, by memorandum dated September 5th, 1917, had also transferred all his stock interest to him. Copies of said memorandums were directed annexed to the minutes. Mr. McCormack and Mr. Maule stated that Mr. Converse had not co-operated in the work of the Company as contemplated by his proposition to the Company dated June 9th, 1917, and on motion duly made and carried, it was decided that the 160 shares of common stock mentioned in said proposition to be held *663 by the treasurer for Mr. Converse be deemed the property of the Company and held for its purposes. Mr. Maule stated that conditions indicated that the Company would shortly close a line of very profitable business largely as a result of the work of Mr. Joyner who had been extremely active on its behalf; that Mr. Weller had terminated his connection with the Vulcan Steel Products Company, had entered the employ of the Company and was willing to act as its vice-president, at a salary at the rate of $12,000 per year, payable monthly, commencing Nov. 1st; that Mr. Joyner was willing to become its President and devote his time to its affairs per arrangement with him by Mr. Weller, *3502 at a salary at the rate of $15,000 per year, payable monthly, commencing Nov. 1st, providing that Mr. McCormack's salary be increased on Nov. 1st to the same amount and on the same basis as the salary of Mr. Weller and that the stock holdings of the principal parties interested in the Company be equalized as follows: (1) That Mr. Joyner share equally with Messrs. Weller, Maule & McCormack in the agreed arrangement for the stock of the Company, viz: that Mr. Joyner should receive from the Company 120 shares of common stock, and 60 shares of common stock and 5 shares of preferred stock from Mr. McCormack in part payment for his services as president; that Mr. McCormack should cause 40 shares of his common stock to be issued to Mr. Donan, 5 shares of his preferred stock and 180 shares of his common stock to Mr. Weller, and 20 shares of his common stock to Mr. Maule, thus making the stock holding of Messrs. Joyner, Weller, Maule and McCormack equal and that such parties should have equal rights in buying each other's stock in the Company in accordance with a proposed agreement of even date between the Company and themselves. (2) That if the profits of the Company should not be sufficient*3503 to pay said salaries in full, same shall be paid to said parties proportionately and that said salaries or any part of same not so paid should not be made the basis of any claim or suit against the Company. Said agreement was submitted and directed annexed to the minutes, Mr. McCormack stating that he was willing to transfer the stock as mentioned and advised the acceptance of the proposition, Mr. Maule agreeing with Mr. McCormack and on motion duly made and carried, it was RESOLVED: That Mr. Joyner and Mr. Weller be employed by the Company on the basis above stated, that the salary of McCormack be increased and payable as above specified, and that the president and other proper officers of the Company be authorized and directed to enter into and execute on its behalf the said agreement as to the rights of Messrs. Joyner, Weller, Maule and McCormack to share equally in the purchase of its stock. The secretary presented a written authorization from Mr. McCormack for the said allotment of stock and his resignation as president, the resignations of Mr. Joyner as vice-president, of Mr. Maule as director and of Mr. Palmer as secretary. Said authorization and resignations were accepted*3504 and directed annexed to the minutes and on motions Mr. Joyner was elected president, Mr. Weller was elected director in place of Mr. Maule and also elected vice-president and Mr. McCormack was elected secretary, said resignations and elections to take effect as of November 1st. On October 22, 1917, Joyner, Weller, McCormack and Maule entered into a contract which provided that none of them should sell his stock until he had first offered it to the others. In September, 1917, the Imperial Japanese Navy placed with the petitioner a verbal order for 600 tons of nickel. This later developed *664 into a written contract. To fill these contracts, petitioner entered into two contracts with the United States Nickel Co. dated respectively November 14, 1917, and November 21, 1917, by which said company agreed to sell to petitioner 250 and 350 tons, respectively, of metallic nickel. Under said contracts, shipments were to be made beginning in December, 1917, up to July, 1918. Petitioner made a profit on these contracts of sale of $52,480. Petitioner entered into contracts of sale of metals with the Imperial Japanese Navy under the following dates and for the following amounts*3505 and prices: Date Quantity Price Jan. 3, 1918 500 tons $42,500.00 Jan. 18, 1918 do 42,500.00 Do 1,000 tons 85,000.00 Jan. 26, 1918 261 1/2 tons 43,053.36 Do 596 tons 98,792.96 Feb. 6, 1918 24 tons 3,978.24 Feb. 13, 1918 3,000 tons 255,000.00 Apr. 23, 1918 3 tons 1,256.64 May 1, 1918 2 tons 837.76 May 31, 1918 13,500 feet 6,368.80 June 14, 1918 5,000 steel barrels 11,625.00 Oct. 25, 1918 840,000 pounds, nickel 529,200.00 These contracts were executed by petitioner and its total profits thereon amounted to $111,116.51. Under the above contracts deliveries were to be made ranging from February, 1918, to November of the same year. The whole of the authorized issue of petitioner's capital stock had been issued in the year 1920. Petitioner set up on its books and in its return for 1920 included in its invested capital the sum of $76,000 representing intangibles. Respondent excluded this amount from invested capital. Respondent allowed petitioner as invested capital for the year 1920 the sum of $62,649.28. OPINION. MILLIKEN: The petition as amended raises three issues: (1) That the respondent erred in reducing petitioner's*3506 invested capital by the amount of $76,000, representing tangible and intangible assets; (2) that he erred in reducing invested capital by the amount of taxes for previous years prorated from the date each installment was payable, and (3) that he erred in refusing to compute petitioner's profits taxes under sections 327 and 328 of the Revenue Act of 1918. In the original petition filed in this proceeding, petitioner asserted that the respondent erred in refusing to allow as invested capital common stock issued for intangible assets and in this connection he further urged that respondent erred in deducting from its invested capital "the sum of $76,000 representing the amount of common *665 stock issued for good will." In an amended petition filed at the hearing petitioner enlarges these allegations to the extent of alleging that its common stock was issued for tangible and intangible assets consisting of the services of its members, the contracts referred to in the findings of fact, and good will, and that the value on these assets was in excess of the amount disallowed by respondent. We will first dispose of the contention with reference to the good will. Petitioner had*3507 no predecessor and therefore could have derived no good will from such a source. The only member of the group who appears to have been in business for himself was Baird and he did not enter the organization. All the other members were immediately prior to the organization of petitioner employed by large corporations. The most that can be said on this point is that the stockholders and officers of petitioner were men of ability, skill and experience, and had a large acquaintanceship with certain influential persons which they expected to capitalize in dollars and cents. Such qualifications and relationships do not constitute good will. See ; ; and . With respect to the services of the various stockholders, it is shown that at first McCormack, Weller, and Maule agreed to work for the company for $250 per month; that these offers were accepted by petioner; and that when Joyner came into the organization his salary was fixed at $15,000 per annum and the salaries of McCormack and Weller were raised to*3508 $12,000 per annum. In fact McCormack and Maule, instead of collecting their salaries for the first two months, left them with the company to pay for their preferred stock. So that it appears that no services were paid in for capital stock but that all such services were rendered for fixed salaries which, in so far as the record shows, constituted ample compensation. There remains for discussion only the question whether any of the contracts referred to in the findings of fact were paid in for capital stock and, if so, what was their value, if any. At this point, it should be noted that we are not dealing with earned surplus. Every valuable contract results in income which is reflected in the profit and loss account and perhaps eventually in a surplus account. Petitioner does not assert that such profits have not been properly treated by respondent. Its complaint is that respondent has eliminated from his invested capital contracts of great value. It is at once apparent that under the circumstances of this case these contracts could enter invested capital only through the door of payment for capital stock. With the exception of the contracts mentioned in the offer of McCormack*3509 *666 of June 9, 1917, there is no evidence that any contract was specifically paid in for stock. We can perceive no difference between such contracts and any ordinary contract of any ordinary corporation. To hold that any contract made by a corporation through the efforts of a stockholder should be treated as paid in for capital stock would be a novel and startling proposition. Coming to the contracts mentioned in McCormack's offer, we find no evidence in the record that they had any value except McCormack's self-serving statement that the profits therefrom "should be respectively about $800, $4,000, $600, $800 and $600" or $6,800 in all. The fact that the profits might be $6,800 does not demonstrate that the contract was worth that amount at the date it was transferred to petitioner. Services had to be rendered and expenses incurred before any net gain could be ascertained and certainly no one would pay for a contract more than the amount of such gain. The corporation did not fix any value on the contract. At the director's meeting of June 25, 1917, it resolved "that in the opinion of this Board the value of the rights offered the Company by Mr. McCormack in his offer*3510 dated June 1917 is much greater than $80,000, the par value of the authorized common stock of this Company." Taking this by and large, it can only mean that in the estimation of the directors the sum of $1,500, plus contracts which McCormack thought would result in a profit of $6,800, plus expectations, had a value of over $80,000. We must have stronger evidence than this before we gan place a value on a contract which respondent denies has any value whatever. What is even more pertinent is that it appears that all that McCormack turned over to the corporation was a contract of sale. It does not appear that petitioner possessed the materials with which to fill the contract, nor that McCormack had entered into any contract with any producer for the materials. Until this had been done, it was impossible, especially under war conditions when prices were fluctuating, to determine what was the value of the contract, if any, at the time it was assigned to petitioner. The fact that at some future date, not shown, a larger gross profit was realized on these contracts is not evidence of their value at the date they were assigned to petitioner. Especially is this true under the facts just*3511 referred to. On the facts shown by the record, we can not find that the contract had any value. On this point respondent is affirmed. Petitioner neither at the hearing nor in the brief filed in its behalf Petitioner neither at the hearing nor in the brief filed in its behalf urges contentions (2) and (3). However, we will dispose of them since it does not affirmatively appear that petitioner waives them. Contention (2) must be decided against petitioner on the authority of . *667 With respect to contention (3) it must follow from our decision relative to the exclusion from invested capital of the capital stock in question by the respondent, that we must accordingly find no error in his failure to compute the profits taxes under the provisions of sections 327 and 328 of the Revenue Act of 1918. The respondent was able to determine the invested capital under section 327(a), and, from the evidence of record, we are unable to see that the case is brought within the purview of section 327(c) and we have no evidence whatsoever relative to the requirements of section 327(d). Judgment will be entered for*3512 respondent.