Tyler & Hippach, Inc. v. Commissioner , 6 B.T.A. 636 ( 1927 )

OPINION.

Steenhagen:

Intangibles faid in for stools or shares. The respondent in computing the petitioner’s invested capital has excluded any value for intangible property paid in for stock or shares at the time of the incorporation in 1898. At that time, the evidence shows, there was a net worth of tangibles amounting to $289,671.86,. which was the accumulation of earnings from the beginning of the business. Some of this consisted of inventories. The books of the partnership took no account of good will or other intangible property. When the corporation was organized, capital stock of a par value of $100,000 was issued in exchange for all the property of the business, which, as shown by the bill of sale in evidence, consisted of good will and other intangibles as well as tangible property. The petitioner at the hearing and in its brief contended that at the time of incorporation there was in fact paid in for stock or shares good will of a value not less than $33,333.38. As evidence of this, petitioner introduced the balance sheets of the partnership and a statement of the annual earnings during the period of its existence. Using these figures as a base, it computes a good will mathematically by assuming a return on the value of tangibles and capitalizing the remaining earnings upon an assumed rate to arrive at the value of intangibles. There is no evidence to indicate what, during the period in question, was a proper rate of return upon tangibles, nor is there any evidence in support of any rate for the capitalization of intangibles. However, the petitioner’s rate of capitalization of intangibles is so high that it is beyond attack as to its fairness; and since, after all, the valuation of good will presents a problem that can not be solved with certainty or precision, we have, after a full consideration of such facts as are in evidence upon which the valuation can be predicated, found that the value of good will paid in to the corporation at the time of its organization is, as claimed by the petitioner, $33,333.33.

The petitioner next contends that it is entitled to the full statutory maximum value of $25,000 for such good will, since this represents 25 per cent of the capital stock outstanding on March 3, 1917. It also relies upon the Board’s decision in St. Louis Screw Co., 2 B. T. A. 649, in support of this contention. In this the petitioner is inconsistent. Under the St. Louis Screw Co. decision the petitioner is entitled to have the aggregate of its capital stock, viz, $100,000, apportioned to tangibles and intangibles ratably with the value of each class of properk/ paid in for such capital stock. By this method and in accordance Avitli our findings, it will be seen that $100,000 of capital stock was issued in exchange for an aggregate value of $323,005.19, consisting of $289,671.86 tangibles and $33,-333.33 intangibles. By the apportionment approved in the St. Louis Screw Co. case, supra, the $100,000 of capital stock was thus presumably issued for $10,319.75, value of intangibles, and $89,680.25., value of tangibles. Since the $10,319.75 of intangibles is less than 25 per cent of the capital stock outstanding on March 3, 1917, it may be included in its entirety. In addition to the tangibles thus regarded as paid in for stock or shares, there is, after deducting this from the total tangibles of $289,671.86 paid in at the time of organization, a remainder of $199,991.61, which may properly be included in invested capital as paid-in surplus. The net result of this will probably be merely to increase the petitioner’s invested capital by the amount of $10,319.75, intangibles paid in for stock or shares, and this is less than contemplated by the petitioner in presenting its case. But this is the result of the petitioner’s error in its construction of the method laid down in. the St. Louis Screw Co. appeal and its valuation of good will at $33,333.33, the evidence being inadequate to support a greater value other than by mere mathematics.

Contractual compensation- to officers. Under the contracts made in 1918 by the petitioner with Norris and Herrmann, the compensation to be paid to these individuals was expressly stated to be a percentage annually of the amount of annual net profits computed in a prescribed manner. The amount of such compensation was definitely calculable and was a fixed legal obligation. It was an obligation related directly and solely to the business of the particular year for which the compensation was contracted to be paid. It is a situation which in all essential respects is within the principles recognized by the Board in Josiah Wedgwood & Sons, Ltd., 3 B. T. A. 355; Block & Kohner Mercantile Co., 4 B. T. A. 673; and Canton Art Metal Co., 6 B. T. A. 446. In accordance with these decisions the petitioner may properly deduct as accrued expenses the amount resulting from the application of the contract percentage to the net profits of the year to which it is related.

Depredation of automobiles. The respondent has computed depreciation upon the petitioner’s trucks and passenger automobiles at 20 per cent. The petitioner claims 10 per cent on trucks and 27 peí-cent on passenger automobiles. The latter were Ford coupes used by its salesmen. The trucks were used in hauling plate glass and were therefore carefully driven. They were also kept in very good repair in the petitioner’s own shop. The evidence upon this question of fact establishes that the probable useful life of the trucks was ten years, and of the Ford coupes was three years and nine months, and we therefore hold that the proper rate of depreciation upon the trucks is 10 per cent, and upon the Ford coupes is 27 per cent. The decision on this point will affect both income and invested capital.

Basis for depredation of brick budding. The petitioner, on June 29, 1920, paid $125,000 for a lot on Ohio Street, upon which stood a two-story brick building. The respondent in computing depreciation of the building has used as a base the amount of $15,000 Avhich is treated as the amount of the purchase price properly allocable to the building. The petitioner’s evidence as to the proportionate cost of the building varies from $35,000 to $45,000, the lower figure being that of one of the officers of the corporation and the higher figure being that of the real estate dealer who negotiated the transaction. None of the evidence conclusively demonstrates any definite allocation, but from such evidence as the record contains we find the cost of the building to have been $40,000.

Depredation and obsolescence of garage. The respondent has allowed 2% per cent depreciation and obsolescence upon the garage built in 1919 or 1920. The petitioner claims a rate of 10 per cent and seeks to support this by testimony that the garage building is not suitable for the land by reason of the land’s rapid increase in value. The evidence, however, is too slight and conjectural. We sustain the Commissioner.

Jurisdiction as to 1918 determination. The evidence shows that an assessment for 1918 was made and that claim for abatement thereof was by determination of August 21, 1924, allowed in part and rejected in part. This brings the matter within section 283 (f), Revenue Act of 1926, and the Board has jurisdiction. Elizabeth W. Stranahan, 4 B. T. A. 1141.

Judgment will be entered on %0 days’ notice, under Rule 50.