Mobile Register Co. v. Commissioner

MOBILE REGISTER, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Mobile Register Co. v. Commissioner Docket No. 18712. United States Board of Tax Appeals 18 B.T.A. 682; 1930 BTA LEXIS 2614; January 7, 1930, Promulgated *2614 1. EXPENSE - REPAIRS. - Certain amounts totaling $7,150.67 expended by petitioner in the calendar year 1920 for repairs to its property held to be expenses subject to deduction in arriving at net income for that year. 2. INVESTED CAPITAL - INTANGIBLES. - Cash value of certain intangibles when paid in for petitioner's stock determined and allowed, in computing consolidated invested capital, to the extent of 25 per cent of the total of issued and outstanding stock of the affiliated companies on March 3, 1917. 3. Id. - EARNED SURPLUS. - The respondent's action in offsetting an operating deficit of one of the associated companies against the earned surplus of the other in computing invested capital is sustained upon the authority of W. S. Bogle & Co.,5 B.T.A. 541, and 26 fed.(2d) 771. George E. H. Goodner, Esq., and Walter K. Smith, Esq., for the petitioner. A. S. Lisenby, Esq., for the respondent. TRUSSELL *683 This proceeding results from the determination of deficiencies in income and profits taxes amounting as follows: 1920, $4,459.98, and for 1921, $627.05. Petitioner alleges error (1) in that an amount*2615 of $7,150.67 has not been allowed as a deduction in 1920 for the cost of repairs; (2) with reference to both years there has been a failure to allow any value whatever for intangibles paid in for capital stock; (3) in computing the consolidated invested capital for both years the earned surplus of one affiliated company has been reduced by the operating deficit of the other affiliated company. FINDINGS OF FACT. The petitioner is an Alabama corporation organized in April, 1909, with an authorized capital stock of $100,000 par value, and is engaged in the business of owning and publishing a daily newspaper known as the Mobile Register, with principal place of business at Mobile. The capital stock of the petitioner and also the capital stock of the Mobile Item Co., another corporation, was all owned by the same individual during the taxable years, and the two corporations were affiliated for income and profits-tax purposes. Consolidated returns were filed. The petitioner was organized for the purpose of taking over all of the assets and assuming the liabilities of a predecessor corporation when the charter of the latter expired in 1909. The petitioner continued the business*2616 of publishing the Mobile Register. The stockholders of the petitioner were the same at organization as of the predecessor corporation. Capital stock of $78,600 par value was issued to nine individuals for the net book values of the assets acquired. Included in the assets thus acquired for stock by the petitioner were the following: Assets described upon the books as "Name and Good Will," book value $49,625, and "Associated Press Franchise," book value $25,000. In opening the books of the petitioner *684 these values were entered thereon and there was no substantial change in the amount of them from the book values of the predecessor corporation. At least $50,000 par value of the capital stock of the petitioner was issued for the "Name and Good Will" and "Associated Press Franchise." The Mobile Register had been published since 1821. As far back as October, 1878, it made use of the Associated Press Telegraph Service. The asset value designated as "Name and Good Will" included the circulation structure of the former corporation acquired by petitioner. The "Name and Good Will" and "Associated Press Franchise" paid in to the petitioner for capital stock had cash values*2617 when paid in of $49,625 and $25,000, respectively. In the beginning of 1920 real estate adjoining on the rear of the property of the petitioner in Mobile, Ala., was purchased by the petitioner in order to prevent acquisition of the property by another party, and also to insure the petitioner a convenient outlet in the event of expansion of its business. Upon a part of the land purchased was a series of buildings occupied by a tenant who subsequently vacated the property upon refusal of the petitioner to make repairs demanded. The property was then in a run-down condition and petitioner decided to repair and improve the buildings and fit them for sue as an annex, housing its mechanical plant. An architect was engaged, plans drawn, the construction work decided upon was contracted for on a cost-plus basis, and the work was started subsequent to July 20, 1920. It was completed before December 31, 1920. The work done included the following: new floors below ground, new floors on the second story, repair and/or reconstruction of the roof rafters, new roofing was put on, a number of the windows were repaired or replaced, the brick walls were repaired or replaced. The total amount*2618 expended in reconstruction and repair was $20,389.49. Of this amount $7,150.67 represented cost of repair and $13,212.94 represented cost of permanent additions or betterments. The outstanding capital stock of the affiliated companies on March 3, 1917, amounted as follows: petitioner, $100,000 par value; Mobile Item Co., $89,300 par value. At the beginning of 1920 the earned surplus of the petitioner amounted to $35,966.87 and the Mobile Item Co. had an operating deficit of $88,950.87. At the beginning of 1921 the earned surplus of the petitioner amounted to $52,925.74, after deducting repairs during 1920 in the amount of $7,150.67, and the Mobile Item Co. had an operating deficit of $90,265.50. In computing invested capital of the consolidated group for both taxable years the respondent has excluded the earned surplus of the petitioner on the ground that *685 the operating deficit of the affiliated company exceeded it. In computing the deficiencies invested capital allowed by the respondent amounted to $114,300 in each year. OPINION. TRUSSELL: The first issue relative to the repairs is purely a fact question, and deciding it from the record, as we must, we conclude*2619 that the amount of $7,150.67 expended during 1920 for repairs and charged off on the books to profit and loss should be allowed as a deduction from income. In the second issue we are required to determine the amount, if any, allowable in invested capital in the taxable years for certain intangibles usually referred to as "Circulation Structure, Trade Name, Good Will and Associated Press Franchise." Sections 326(a)(4) of the Revenue Acts of 1918 and 1921 provide that the value allowed for intangibles paid in for stock prior to March 3, 1917, shall not exceed the least of (a) the cash value when paid in; (b) the par value of the stock issued therefor, and (c) in the aggregate 25 per cent of the par value of the stock of the corporation outstanding on March 3, 1917. We have previously decided that in the case of a consolidated return the 25 per cent limitation should be computed upon the aggregate of the outstanding stock of all of the affiliated companies. . After careful consideration of the evidence we are satisfied that the intangibles had an aggregate value of $74,625 when paid in for capital stock in 1909, and consequently there*2620 should be included in invested capital of the consolidated companies on that account a sum equivalent to 25 per cent of the total of $189,300 issued and outstanding stock of the affiliated companies on March 3, 1917, or $47,325. The third issue is a question of law. In consolidating the two affiliated corporations the respondent has offset the relatively large operating deficit of the affiliated company against the smaller amount of earned surplus of the petitioner, with the result that no amount of surplus whatever has been allowed in invested capital. It is the contention of the petitioner that its earned surplus should be allowed in invested capital notwithstanding the operating deficit of the affiliated company. We have had occasion to consider this question a number of times, and under conditions similar to those existing here have held that the deficit shall be deducted in ascertaining the net earned surplus. ;; ; *2621 ; . The case of , has been reviewed and affirmed by the . We *686 must, therefore, regard the above cited cases as controlling in the matter of treatment of surplus and deficit in the instant case. We are, therefore, of the opinion that the value paid in for the capital stock as allowed by the respondent, with adjustment upward as herein directed for the intangibles paid in, will represent the maximum invested capital allowable to the petitioner for the taxable years. Judgment will be entered pursuant to Rule 50.