Consolidated Inv. Co. v. Commissioner ( 1928 )

CONSOLIDATED INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Consolidated Inv. Co. v. Commissioner

Docket No. 13603.

United States Board of Tax Appeals

13 B.T.A. 1252; 1928 BTA LEXIS 3082;

October 26, 1928, Promulgated

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">*3082 1. The value of leaseholds and of other property paid into the petitioner corporation in exchange for shares of stock determined for the purpose of computing invested capital.

2. The value of the same assets at March 1, 1913, determined for the purpose of computing an allowance for exhaustion and depreciation.

H. A. Mihills, C.P.A., for the petitioner.

S. S. Faulkner, Esq., for the respondent.

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SMITH

">*1252 This is a proceeding for the redetermination of a deficiency in income and profits tax for 1921 in the amount of $12,680.02, practically all of which is in controversy. The assignments of error stated in the petition are, (1) the respondent has erroneously increased the taxable net income originally reported for the calendar year 1921, by the amount of $23,780.06, representing disallowance of depreciation alleged to be taken on appreciated values of the company's investment in leaseholds and improvements; and (2) the respondent has erroneously reduced invested capital in the amount of $1,250,000, alleging that the common stock of the petitioner was issued to the stockholders as a bonus in connection with the preferred stock.

FINDINGS">*3083 OF FACT.

The petitioner is a Missouri corporation which was organized on June 14, 1906. It is engaged in the operation of office buildings with its principal office in St. Louis.

On or about June 15, 1906, the petitioner entered into an agreement with the Syndicate Trust Co., a Missouri corporation, organized earlier in 1906, under which agreement the Trust Company agreed to convey to the taxpayer all of unexpired parts of certain leasehold estates in property in the City of St. Louis which had theretofore been acquired by the Trust Company. The Trust Company also ">*1253 agreed to cause the Hanover Investment Co., a Missouri corporation, to enter into a lease with the petitioner for 90 years from April 1, 1906, at a certain stated rental; to cause to be erected upon the property in question a 16-story office building; and to cause certain other persons to become lessees under the petitioner in the premises in question. In consideration of the foregoing agreement on the part of the Trust Company the petitioner agreed to make certain subleases negotiated for it by the Trust Company as above mentioned, and to pay to the Trust Company in consideration of the foregoing $1,250,000">*3084 of its preferred stock and $1,250,000 of its common stock, and, in addition, to deliver to the Trust Company $2,500,000 of 30-year 5 per cent gold bonds secured by a deed of trust or mortgage on all the property so to be acquired.

The leases which had been acquired by the Syndicate Trust Co. were 6 in number. Each was for a term of 99 years. In the case of 2 of the leases the term began prior to 1900. The other 4 of the leases were entered into between 1900 and 1906.

The property acquired by the petitioner under the terms of the agreement of June 15, 1906, consisted of a tract of land known as Block 273 of the City of St. Louis, Mo., which was the entire city block bounded, south by Olive Street, north by Locust Street, east by Ninth Street and west by Tenth Street, including improvements thereon. The Century Building, a 10-story office building, was located on the east half of City Block 273. The Syndicate Trust Co. was to build a 16-story office building on the west half of City Block 273.

In 1906 the Syndicate Trust Co. acquired the Century Building at a cost of $1,710,285.73. It built the Syndicate Building on the west half of City Block 273 at a cost of $2,279,222.60. ">*3085 The actual investment of the Trust Company in the acquisition of the Century Building and in the construction of the Syndicate Building was, therefore, $3,989,518.33.

The cost to the Syndicate Trust Co. of acquiring the several leases referred to above is not shown by the record. The rentals to be paid under the leases could not be increased during the terms of the leases. The fair market value of the leases at the time they were assigned by the Trust Company to the petitioner was $700,000.

There was a considerable appreciation in the value of the Century Building and of the Syndicate Building from 1906 to March 1, 1913. There was a more marked increase in the value of the leasehold estates. The fair market value of the Century and Syndicate Buildings on March 1, 1913, was $4,000,000 and the fair market value of the leasehold estates was $997,000.

">*1254 OPINION.

SMITH: The questions before the Board in this case are, (1) the fair market value of property paid into the petitioner in exchange for $2,500,000 of its bonds and $1,250,000 preferred stock and $1,250,000 common stock; and (2) the value on March 1, 1913, of such assets for the purpose of determining">*3086 an allowance for exhaustion and depreciation for the year 1921. This same question was in issue before the Board in , for the years 1918 and 1920. In that proceeding the petitioner did not attempt to prove the value of the assets paid in for shares of stock further than to show that the bonds and shares of stock had been issued for such assets. It relied upon the proposition that the judgment of the directors that the assets were worth the par value of the stock should be held to be sufficient proof of such value. This Board held that the evidence was insufficient to establish the values contended for.

In the instant proceeding an abundance of evidence has been offered to prove the values contended for. The petitioner was able to locate records of the Syndicate Trust Co. which showed the cost to it of the erection of the Syndicate Building and counsel for the petitioner and the respondent are in agreement as to the cost to the Syndicate Trust Co. of the acquisition of the Century Building. The proof is clear that the investment of the Syndicate Trust Co. in these two buildings was $3,989,518.33.

The Syndicate Trust">*3087 Co. was created as a holding corporation. It acquired a number of leases upon the property in City Block 273 upon which the Century Building was located and the Syndicate Building was erected. The record does not show the investment of the Trust Company in such leaseholds. Competent witnesses, however, have testified as to the fair market value of these leases in 1906. One witness gave his estimate of the value as $700,000, another as $796,457.50. There appears to be no question that the leases being all assembled in one owner had a much greater value than they would have had if owned separately. The evidence warrants a finding that the value of the leases in 1906 was $700,000. We, therefore, think that the petitioner is entitled to include in invested capital the cost of the buildings to the Trust Company plus the value of the leaseholds, totaling $4,689,518.33, less $2,500,000 bonds issued therefor.

The evidence shows a marked appreciation in the value of both the buildings and the leases between 1906 and March 1, 1913. This evidence proves that the fair market value of the buildings on March 1, 1913, was $4,000,000 and that the fair market value of the leaseholds ">*1255 ">*3088 on that date was $997,000. The depreciation and exhaustion for the taxable years should be computed accordingly.

Judgment will be entered under Rule 50.