Harding Glass Co. v. Commissioner , 15 B.T.A. 621 ( 1929 )

HARDING GLASS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Harding Glass Co. v. Commissioner

Docket No. 19708.

United States Board of Tax Appeals

15 B.T.A. 621; 1929 BTA LEXIS 2820;

February 26, 1929, Promulgated

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Notes of solvent persons, worth their face amount, received in payment for an equal amount in par value of the capital stock of a West Virginia corporation, are to be included at their face value in computing the invested capital of such corporation.

South Trimble, Esq., and Louis B. Montfort, Esq., for the petitioner.

C. R. Marshall, Esq., for the respondent.

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PHILLIPS

The Commissioner asserted a deficiency of $13,359.05 in income and profits taxes for 1920, and $771.68 for 1921. The petitioner has instituted this proceeding for a redetermination of its liability. It is afleged that the respondent erred, (1) in the computation of depreciation and obsolescence for the years 1920 and 1921, and (2) in excluding from invested capital for the years 1920 and 1921 the actual cash value of certain promissory notes paid in for stock.

FINDINGS OF FACT.

The taxpayer is a corporation organized under the laws of West Virginia, with its principal place of business at Fort Smith, Ark. It is engaged in the manufacture of window glass.

Prior to July 20, 1920, its capital stock consisted of 1,000 shares of the par value of $100 per share. This stock was held as follows:

	Shares
C. H. Harding	500
W. E. Harding	200
F. L. Reese	100
J. H. Nakdimen	200

In 1920 the business of the petitioner was increasing. It was engaged in the erection of an additional plant. It needed more capital. On June 30, 1920, the stockholders adopted a resolution increasing the capital stock from $100,000 par value to $500,000 par value.

At the regular meeting of its board of directors held July 21, 1920, a resolution was adopted to "issue $250,000 more stock and the company to take each individual's notes for his share of the stock."

On July 20, 1920, petitioner issued stock to its then stockholders who were also its directors, on the basis of their holdings, as follows:

	Shares	Par value
C. H. Harding	1,250	$125,000
W. E. Harding	500	50,000
F. L. Reese	250	25,000
J. H. Nakdimen	500	50,000
	2,500	250,000

On the same date it took their interest-bearing promissory notes payable on demand for the par value of the stock issued to them. The stock was attached to the notes as collateral security and retained by petitioner. These notes were thereafter included as assets in petitioner's balance sheets, which were used for credit purposes, and were used by it as collateral security in obtaining loans.

Petitioner borrowed approximately $95,000 during the latter half of 1920. The makers of the notes were financially responsible at the time the notes were given in exchange for the stock and such notes were worth par. The notes bore interest and interest was paid on them by the makers. Petitioner's balance sheet as at December 31, 1920, and December 31, 1921, included these notes of the stockholders as assets.

The additional plant which was under construction in June, 1920, was destroyed by fire on August 6, 1920. At that time it had been nearly completed. After some delay in adjusting fire insurance, this plant was reconstructed and completed in 1921.

In 1921 the demand which had existed in 1920 for petitioner's products decreased. Sales fell from $900,000 in 1920 to $300,000 in 1921. This decrease in business made it unnecessary to operate the new plant and substantially decreased the need for capital in the business.

At a special meeting of the board of directors held February 23, 1922, the following motion was passed:

That the increased capital stock of the Harding Glass Company of $250,000.00 that was authorized July 21st 1920 and issued, be cancelled on the books of the company since such financial aid as is required by the company from time to time has been procurable through its local banking connection eliminating the further need of any increase in its capital stock.

The stock was thereafter canceled and the notes were returned to their makers.

Petitioner sustained depreciation for the years 1920 and 1921 in the amounts of $23,382.20 and $29,037.39, respectively.

OPINION.

PHILLIPS: The parties to this proceeding have stipulated that the amount of depreciation allowable for the years 1920 and 1921 is $23,382.20 and $29,037.39, respectively. The sole remaining question is whether the $250,000 of capital stock issued July 20, 1920, for interest-bearing promissory notes of the same amount should be included in invested capital for the remainder of that year and for the year 1921.

The Revenue Act of 1918, section 326, provides that invested capital for any year means "(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment * * *." Section 325 provides that "The term 'tangible property' means stocks, bonds, notes, and other evidence of indebtedness, etc."

The evidence establishes that the notes were given at a time when the business of the company was expanding and more capital was needed. An additional plant was nearing completion, involving larger operations and further need of capital to meet the expansion. This plant, however, was destroyed by fire some fifteen days after this increase in stock took place, and by the time it was rebuilt business had fallen off to the point where there was no need for the operation of the new plant and the additional capital became unnecessary. The increased stock was retired early in 1922.

In the meantime these notes had been carried on the books and included on balance sheets as assets. They had been used in obtaining credit. The makers were responsible financially and the notes when received were worth their face value. Interest was paid on them. The undisputed testimony is that at the time these notes were given it was expected that they would be paid and there is nothing which throws doubt on this testimony. We conclude that the transaction was bona fide, that the notes were worth their face amount, and that the petitioner is entitled to include them in computing its invested capital unless the transaction was void and the notes unenforcible. ; Am.Fed. Tax Rept. 5909; ; ; ; ; ; .

It seems well settled that in the absence of statutory authority the receipt of the notes of a solevent maker in payment for capital stock of a corporation is not a void transaction. See , and cases there cited. We have found nothing in the West Virginia statutes or decisions which would indicate that such notes are unenforcible. On the other hand the decisions seem to indicate that such a transaction is enforcible. .

The deficiency should be recomputed by including these notes in invested capital from the date of receipt, and by adjusting depreciation in accordance with the stipulation.

Decision will be entered under Rule 50.