Consolidated Marble Co. v. Commissioner

CONSOLIDATED MARBLE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Consolidated Marble Co. v. Commissioner Docket No. 14712. United States Board of Tax Appeals 15 B.T.A. 193; 1929 BTA LEXIS 2899; February 5, 1929, Promulgated *2899 1. Expenditures by a corporation to repay money loaned or advanced are not deductible as ordinary and necessary expenses. 2. The value of a leasehold determined from the evidence. H. H. Shelton, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. TRAMMELL *193 This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $3,833.30. The errors assigned are, first, the action of the respondent in disallowing as a deduction an amount contributed by the petitioner to a railroad company for the purpose of constructing a spur track of railroad which would serve petitioner's plant; second, the action of the respondent in reducing invested capital by the sum of $60,000, the value of a lease claimed by the petitioner to have been acquired for stock. FINDINGS OF FACT. The petitioner is a Tennessee corporation, having its principal office at Knoxville. It is engaged in the business of operating marble quarries near that city. One of the petitioner's properties was located at Newbert Springs, Knox County, Tenn., about seven miles from Knoxville, and about*2900 four or four and one-half miles east of the Knoxville & Augusta Railroad, between Maryville and Knoxville. The Knoxville & Augusta Railroad is a branch line of the Southern Railroad. The quarry had no railroad facilities and a proposition was made to the petitioner to join in with others and make a contribution for the purpose of inducing the railroad company to put in a spur track which would come near the petitioner's property and also afford *194 railroad facilities to the other quarries in that vicinity. The petitioner agreed to the proposition. It was then understood that the petitioner's pro rata share of the contribution would be $7,000. It was later ascertained, however, that the petitioner would have to contribute $14,000. The spur track did not entirely reach the petitioner's property and the petitioner constructed a narrow gauge railway from its quarry in order to make connection with the spur track railroad. The spur track was completed some time in 1919, and the petitioner did some operating in 1919 and shipments were made in 1920 and subsequent years. The money on behalf of the petitioner was contributed by Jones, one of its stockholders in 1915, and*2901 1916, and the last debit to the railroad account was on February 21, 1916. The petitioner became indebted to Jones, its stockholder, for these advances and obligated itself to repay them. The total amount paid out by Jones for and on behalf of the petitioner from December 2, 1915, until February 21, 1916, inclusive, amounted to $14,000. On January 1, 1920, the amount of $14,000 was charged to profit and loss. The spur track when completed was for the use of the general public. While all of the $14,000 contributed for the construction of the spur railroad track was advanced by Jones personally, it was to be repaid to him by the petitioner out of profits of the company from operation. It did not begin its actual operations of shipping marble from the quarry until 1920, although shipments were made into the quarry of supplies and equipment in 1919. Of the money advanced by Jones on behalf of the corporation, $3,000 was repaid to him on November 4, 1919, $669.61 was paid him on December 22, 1920, and the balance of $14,000 was fully paid to him at some time later. The petitioner acquired a lease on a marble quarry on May 14, 1915, in consideration of the issuance of $60,000*2902 par value of the petitioner's capital stock. The lease had been acquired by J. B. Jones, as trustee for the petitioner corporation, from J. M. Leek and R. L. Bowman for the consideration of $1,900 cash and one-sixth of the stock of the corporation to be organized to Leek and one-sixth to Bowman, and the further consideration in the way of royalties as set out in the lease and in the sublease which was made to Jones. Leek and Bowman did business as a copartnership under the name of J. M. Leek & Co., and they had previously acquired the lease on the premises. The entire capital stock of $60,000 thereof was issued to Jones, Leek, and Bowman, one-sixth each being issued to Leek and Bowman, and the balance to Jones. Subsequent operations of the quarry disclosed that the marble was worthless for commercial purposes on account of iron spots appearing therein. The value of the lease was not in excess of $1,900. *195 The respondent disallowed in invested capital any amount with respect to the leasehold acquired and disallowed the deduction of $14,000 claimed by the petitioner with respect to the contribution of the construction of the spur track railroad, the respondent treating*2903 the payments in respect to the railroad as capital expenditures. The books and accounts of the petitioner were kept on the accrual basis. OPINION. TRAMMELL: With respect to the payment of $14,000 by the petitioner in connection with the building of the spur track, it is contended by the petitioner that this amount represents ordinary and necessary expenses and is deductible as such. On the other hand, it is contended by the respondent that the expenditure represents a capital asset and is not deductible as expense. Even if we concede for the sake of argument in this case that the expenditure does not represent a capital acquisition on the part of the petitioner, it does not follow that the amount is deductible as an ordinary and necessary expense in 1920 when it is claimed by the petitioner. The expenditure was made for the petitioner by Jones as an individual for and in behalf of the corporation over the years 1915 and 1916. The money was advanced by Jones in the way of a loan to the corporation, which the corporation became obligated to repay. The expenditures actually made by the petitioner in 1919 and 1920 were in payment of advances or loans made to it, or money*2904 expended for it and clearly the repayment of loans or money so advanced can not be considered as an ordinary and necessary expense. On the other hand, there is no clear and positive testimony that any amount was actually paid out by the corporation to Jones or to any one else in this connection in 1920 except the amount of $669.61, which appears to have been paid on December 22, 1920. Jones testified that he did not know when the balance was paid to him, but that he does know that the entire amount was repaid to him at some time. This is not sufficient evidence to warrant us in finding that the petitioner either paid or incurred an expense of $14,000 in 1920 as claimed by the petitioner, even if all the other contentions of the petitioner in this respect were conceded to be correct. But, since the petitioner was on the accrual basis, only the amounts of expense which were accrued in that year are deductible and we find no evidence ofthe accrual of any liability with respect to this railroad spur track in 1920. All of the transactions occurred in prior years except the repayment to Jones for the advances he had made. In view of the foregoing, it becomes unnecessary for us to*2905 decide whether the amount constituted a capital expenditure or an ordinary *196 and necessary expense. If it were admittedly an ordinary and necessary expense it would not be deductible in 1920. The respondent, on the other hand, has determined that it represents a capital expenditure. In either event, the expenditure is not deductible in 1920. With respect to the acquisition of the lease, the petitioner contends that the evidence establishes the fact that the lease was worth $60,000, which is the par value of the stock claimed to have been issued therefor, and that this amount should be included in invested capital. It appears, however, that Jones, acting as trustee for and in behalf of the corporation, actually acquired the lease for the the consideration of $1,900 in cash and one-third of the capital stock of the corporation, that is to say, one-sixth each to Leek and Bowman and the further consideration in the way of royalties set out in the instrument. The consideration paid by Jones as trustee, who was acting for and on behalf of the corporation, represented the payment by the corporation, and the fact that the $60,000 stock was issued to Jones and Leek and Bowman*2906 does not indicate that the entire $60,000 stock was issued for the lease. Not in excess of $20,000 par value of stock and $1,900 in cash represented the payment for the leasehold. However, this fact would not prevent the petitioner from having included in its invested capital the actual value of the lease, acquired for stock, although only $20,000 of stock and $1,900 in cash was paid therefor. The question is, What was the value of the lease so acquired? These facts might indicate, however, that it was not worth $60,000 as contended by the petitioner. There is some evidence as to the sales of stock by the persons who acquired it from the persons to whom the corporation originally issued it, but there is no evidence as to when these sales occurred or as to any circumstances connected therewith, and, in view of these facts, lsuch sales have very little if any bearing upon the value of the lease acquired. It may well be that the portion of the stock which was issued to Jones, who was acting as trustee for the corporation, might have been for services rendered or for other considerations not set out in the record. In any event, Jones, acting in behalf of the corporation in acquiring*2907 the lease for the corporation, clearly did not acquire it for himself, and when he turned it over to the corporation for the stock, the corporation already had the beneficial ownership thereof. That transaction merely amounted to the transfer from a trustee to the beneficiary. On the question of the value of the leasehold to Jones, from all the evidence we find that its value is not shown to have been in excess of $1,900. No amount in excess of that amount can therefore be included in invested capital with respect to the lease. Judgment will be entered under Rule 50.