Stephens Fuel Co. v. Commissioner

STEPHENS FUEL CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Stephens Fuel Co. v. Commissioner Docket Nos. 15343. United States Board of Tax Appeals 13 B.T.A. 666; 1928 BTA LEXIS 3214; September 28, 1928, Promulgated *3214 1. Basis used by respondent for computing depreciation approved for lack of evidence. 2. Additional depreciation allowed on motors due to overtime use. 3. Depreciation on boats for 1923 allowed. 4. Amounts for attorneys' fees, appraisals, and other items spent in connection with the acquisition of property held not deductible as ordinary and necessary expenses. 5. Donations to various organizations and institutions held not deductible as ordinary and necessary expenses. 6. Good will acquired for stock valued for inclusion in invested capital. Francis J. Batchelder, Esq., for the petitioner. Frank S. Easby-Smith, Esq., for the respondent. ARUNDELL *666 In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the fiscal years ending July 31, 1920, to July 31, 1924, inclusive, for which the Commissioner has determined deficiencies as follows: Fiscal year ending July 31, 1920 $2,216.01 Fiscal year ending July 31, 1921 14,712.90 Fiscal year ending July 31, 1922 836.33 Fiscal year ending July 31, 1923 3,941.97 Fiscal year ending July 31, 1924 192.18 *667 *3215 The petitioner alleges error on the part of the Commissioner: (1) In failing to allow as a deduction from income the total depreciation claimed by the petitioner; (2) In failing to allow as deductions from income amounts written off as organization expenses; (3) In failing to allow as deductions from income certain alleged charitable contributions; and (4) In failing to include in the computation of invested capital an adequate amount on account of good will acquired for stock. FINDINGS OF FACT. Petitioner is a corporation organized under the laws of the State of New York, in May, 1919. During the month of August, 1919, petitioner acquired for stock certain machinery, equipment, land and buildings, from various owners and also acquired for stock the good will of four different coal dealers in New York City, represented by contracts wherein the dealers agreed not to engage in the coal business for a period of 10 years. Stock was issued for cash and assets as follows: 5,000 shares of first preferred stock were issued for $500,000 cash 2,500 shares of second preferred stock were issued for $250,000 cash 5,000 shares of common no par stock were issued as a bonus*3216 with some of the cash subscriptions 50 shares of common stock, no par value were issued for $500 cash 7,644 shares of second preferred stock were issued for property which was set up on the books at a value of $764,000 plus 14,618 shares of no par common stock were issued for property set up on the books at a figure of $247,524.57 33 shares of second preferred stock were issued for good will set up on the books at a value of $3,273.25 20,227 shares of common no par stock were issued for good will and set up on the books at a value of $1,034,275.43 The stock issued for good will was as follows: To Olin J. Stephens, Inc., 13,601 shares common stock valued at 697,666.46 To Marco Brothers, 1,905 shares common stock valued at 97,717.42 To G. Robitzek & Bro. 2,958 shares common stock valued at 151,731.31 To H. Meyer & Co. 1,763 shares common stock valued at 87,160.24 Total 20,277 common stock valued at $1,034,275.43 To H. Meyer & Co. 33 shares second preferred stock valued at 3,273.25 Total $1,037,548.68 Olin J. Stephens, Inc., received 66 per cent of the voting stock of the petitioner for the property transferred. In computing the invested capital*3217 of the petitioner the Commissioner applied section 331 of the Revenue Act of 1918 in the case of *668 the property turned in by Olin J. Stephens, Inc., and reduced the value of tangible property set up on the books of the petitioner to the amount shown to have been cost to Olin J. Stephens, Inc. The Commissioner disallowed from the computation of invested capital the good will set up on the books as received from Olin J. Stephens, Inc., with the exception of an amount of $22,271.04, which represented cost of good will acquired by Olin J. Stephens, Inc. The Commissioner also disallowed in the computation of invested capital the balance of the good will acquired from the other parties. For the year 1923 the Commissioner allowed depreciation on motors at a rate of 25 per cent. During that year the motors of petitioner suffered excessive depreciation due to overtime use and the severe conditions under which they operated. The amount of coal hauled during the various fiscal years was as follows: Tons Fiscal year ending July 31, 1920 457,379 Fiscal year ending July 31, 1921 515,548 Fiscal year ending July 31, 1922 427,955 Fiscal year ending July 31, 1923 782,359 Fiscal year ending July 31, 1924 626,125 *3218 The depreciation on motors for the year 1923 was 30 per cent. Petitioner is entitled to depreciation on boats at a rate of 10 per cent for the fiscal year ended July 31, 1923. The Commissioner used as a basis for computing the depreciation the same amounts that he included for such assets in computing the invested capital of the petitioner. During the year 1919 petitioner set up on its books as organization expenses the following amounts: Commissions paid for sale of first preferred stock $50,000.00 Lawyers' fees 16,664.02 Accountants' fees 6,652.50 Appraisals of property bought 570.00 Stamp taxes on certificates of stock 2,911.33 Recording and other fees and expenses 1,958.27 Total 78,756.12 The petitioner deducted each year from 1920 to 1923, inclusive, one-tenth of this amount as expenses, following the provision of the by-laws which required it to write off the organization expenses during the first 10 years, and in 1924 deducted $2,362.88. The Commissioner disallowed the deduction claimed each year as expense. During the period under review the petitioner made various donations of from $1,000 to $2,000 a year to charitable and other*3219 similar organizations when approached by its customers with requests therefor. *669 The good will acquired from the various parties for stock was represented by a list of customers and the tonnage of coal required by them, together with the contracts with the parties not to engage in the coal business for a period of 10 years. It is common practice in the City of New York to buy and sell such good will on the basis of the tons of coal per year represented by the customers. The petitioner acquired from Olin J. Stephens, Inc., approximately 340,000 tons of this character, and 160,000 tons from the other firms listed. The value of the good will represented by 160,000 tons of coal a year was $112,000 and the petitioner is entitled to include this amount in the computation of invested capital. OPINION. ARUNDELL: The petitioner claims that in computing the depreciation allowable during the years under review it is entitled to use as a basis the fair market value of all the assets subject to depreciation when acquired in August, 1919, for stock, and the Commissioner erred in using as a basis the same figure that he used in computing invested capital, which had been computed*3220 under section 331 of the Revenue Act of 1918. It appears from the record that the Commissioner reduced the book value of the assets acquired from the Olin J. Stephens Co. only. Therefore, the value of the property acquired from the Olin J. Stephens Co. is the only value at issue. It apparently is conceded by the Commissioner that the basis for computing depreciation is not limited by the provisions of section 331 of the Revenue Act of 1918, but he does not admit that the depreciation allowed was inadequate. The only testimony introduced by the petitioner was to the effect that certain appraisals were made by an appraisal company of the tangible assets acquired from the various concerns and that the values thus determined were used by all of the parties and were the amounts for which the stock was issued. There is no evidence, other than this statement and the amounts placed on the books, to prove what the fair market value of the assets was in August, 1919. In our opinion the petitioner has failed to prove that the values allowed by the Commissioner as the basis for depreciation did not represent fair market values of the assets on that date. The basis for computing depreciation*3221 as used by the Commissioner must therefore be accepted. The petitioner has agreed with all of the rates of depreciation used by the Commissioner except the rate on motors for the year 1923. Petitioner has shown that during that year motors were put to excessive use and subjected to excessive wear and tear, and that the reasonable depreciation for that year was 30 per cent. We are, therefore, of the opinion that for the fiscal year ending July 31, 1923, the fair rate of depreciation on motors was 30 per cent. *670 In the 60-day letter attached to the petition covering the fiscal years ending July 31, 1922, to July 31, 1924, inclusive, a table is attached showing the computation of depreciation. In this table it is evident that no depreciation was allowed for boats for the fiscal year ending July 31, 1923, although it is shown therein that the account stood at $3,275 on July 31, 1922, and $7,275 on July 31, 1923. In our opinion the petitioner is entitled to depreciation for the fiscal year ending July 31, 1923, on boats at a rate of 10 per cent. The petitioner apparently concedes that $50,000 commissions paid for the sale of first preferred stock is not deductible*3222 as an ordinary and necessary expense, but claims that the balance of $28,756.12 was properly expense. These expenses consisted of lawyers' fees, accountants' fees, appraisals of property, and other items incurred in connection with the examination and acquisition of various properties. They were not ordinary and necessary expenses of doing business. See , and . The petitioner entered the $78,756.12 in its ledger as "organization expense," thus in effect treating it as a capital expenditure, and thereafter endeavored to write it off by annual charges. In advancing its present claim it has failed to segregate the expenditures over the years involved, although it is apparent that the major portion was incurred prior to 1920. In order for a deduction to be allowed as an ordinary and necessary expense it must be either paid or incurred during the taxable year. The record does not show what expenditures were made or incurred during the years at issue. Therefore, even if certain of the expenditures were of such a nature as to come under the head of business*3223 expenses we would be unable to make a finding thereon without knowledge of the amounts of such expenditures and the dates when incurred. The action of the Commissioner in disallowing the deduction of these expenditures as ordinary and necessary expenses is, therefore, approved. During the years involved the petitioner spent from $1,000 to $2,000 a year as donations to various organizations and claims that such expenditures were in the nature of business expenses made to retain the good will and the trade of the customers, and that, therefore, it is entitled to deduct such expenditures from income. The evidence submitted on this issue is insufficient to prove that the action of the Commissioner in disallowing these expenditures as expenses was incorrect. It is conceded by petitioner that the tonnage acquired from Olin J. Stephens, Inc. is not subject to revaluation under section 331 of the Revenue Act of 1918. It is claimed, however, that the good *671 will, represented by customers consuming approximately 160,000 tons a year, obtained from other concerns, and for which stock was issued, should be included in invested capital. Under the decision in *3224 , the petitioner may include in invested capital the fair market value of the property acquired in August, 1919, from these other concerns. Melvin G. Palliser, an attorney, who had an intimate part in the organization of the petitioner and the acquisition of its assets and who was familiar with the buying and selling of good will of this character, testified that such good will was bought and sold at a rate of $1.50 to $2 a ton on coal tonnages represented by customers' requirements. He further stated that he had negotiated the sale of good will of this character in 1920 at a rate of $1.50 a ton. Mr. Palliser's testimony convinces us that good will represented by customers and customers' requirements is susceptible of valuation and had a recognizable market value. However, he has not given us any substantiating date or transactions that would apply to the year 1919 and convince us that his judgment and recollection were not at fault. It is shown in the findings of fact that the petitioner acquired both good will and tangible assets at approximately the same time by the issuance of stock. Some of the tangible property was acquired*3225 by the issuance of 14,618 shares of no par common stock. It is reasonable to assume that all shares of common stock in August, 1919, were of equal value, and that the common stock was issued for assets in proportion to the value of such assets. Therefore, the agreed value of the tangible assets acquired for common stock would reflect a value per share of common stock which would be a limiting figure to be applied to common stock issued for intangible assets which are not susceptible of such definite determination as are tangible assets. By applying the ratio between the value of tangible assets acquired for common stock and the common stock issued for them, to the common stock issued for intangibles, a figure would be obtained which would reflect the fair market value of the good will when acquired, based upon the value of tangible assets as determined by the parties themselves. Taking into account this fact, together with all of the other evidence and testimony in the record, we are of the opinion that the value of the good will represented by customers consuming approximately 160 tons of coal a year was not in excess of $112,000, and that the petitioner is entitled to include*3226 this amount in the computation of invested capital. Judgment will be entered under Rule 50.