Kanawha City Co. v. Commissioner ( 1928 )

KANAWHA CITY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kanawha City Co. v. Commissioner

Docket No. 14630.

United States Board of Tax Appeals

13 B.T.A. 912; 1928 BTA LEXIS 3161;

October 10, 1928, Promulgated

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1. Action of the respondent in reducing petitioner's invested capital for 1921 on account of prior year taxes approved.

2. Actual cash value of property on date acquired in exchange for petitioner's entire capital stock determined.

3. Petitioner is entitled to include in invested capital for 1920 and 1921 the excess of the actual cash value of property acquired in exchange for its capital stock over the par value of capital stock issued therefor.

4. Basis for computing gain from the sale in 1920 and 1921 of property acquired for stock determined.

Edgar J. Goodrich, Esq., for the petitioner.

L. C. Mitchell, Esq., for the respondent.

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TRAMMELL

This is a proceeding for the redetermination of deficiencies in income tax of $131.71 for 1920 and of income and profits taxes of $10,262.03 for 1921. The matters involved in this proceeding are the value on July 2, 1914, of certain property acquired by the petitioner of that date in exchange for its entire capital stock and the correctness of the respondent's action in reducing the petitioner's invested capital for 1921 on account of taxes for prior years.

FINDINGS OF FACT.

The petitioner was incorporated on April 4, 1914. On July 2, 1914, it acquired in exchange for its entire capital stock of the par value of $300,000 a large tract of bottom land subdivided into building lots and a large acreage of hill land in Kanawha City, W. Va., located just across the Kanawha River from the eastern portion of the City of Charleston, W. Va.

The subdivided bottom land acquired by the petitioner consisted of about 2,880 building lots having frontages varying from 25 to 50 feet, and depths of 120 and 150 feet. The hill lands adjoined the bottom lands and consisted of four tracts containing a total of 2,644 acres divided into what was designated as the following:

	Acres
Front Hill	573
Middle Hill	1,327
Lot C	397.7
Lot E	346.3

The lands acquired by the petitioner extended over an area about 2 1/2 miles long and about the same distance in width. The bottom land was approximately 2 miles in length and three-fourths of a mile in width. The hill lands, including Lots C and E, in addition to their surface value for residential and other purposes were also valuable for the workable quantities of coal, oil and gas contained in them as well as for the timber that was on them.

The petitioner's bottom land, because of its comparatively level surface and proximity to the City of Charleston, made the petitioner's property the most desirable of the lands available for subdivision purposes about the City of Charleston.

In 1890 the greater part of the lands acquired by the petitioner on July 2, 1914, were purchased by a Kanawha City Co. (not the petitioner in this proceeding) for $400,000. The old Kanawha City Co. had the lands surveyed and platted, spending about $150,000 in this work and in grading streets, laying sewers and making other improvements, which brought the total investment in the properties to more than $500,000. The plan of the Kanawha City subdivision to-day is about the same as it was when originally laid out in 1890.

In 1890 and 1891, when the City of Charleston had a population of about 6,000, some of the building lots were sold by the old company at prices ranging from $15 to $20 per front foot. The first Kanawha City Co. was not very successful. With one exception, all of the organizers of the company soon died. Its affairs were neglected and it suffered reverses during a business depression in the kanawha Valley which began about 1893 and lasted for several years thereafter. About 1897 the company's properties were sold under foreclosure proceedings and the company was dissolved. The surviving organizer of the old company, together with others whom he had interested in the property, purchased the property and held it until 1914, when it was deeded to the petitioner.

About 1910 business conditions in the Kanawha Valley began to improve and by 1914 had reached a prosperous state. The population of the City of Charleston in July, 1914, was approximately 35,000.

At the time the petitioner acquired the above-mentioned properties no attempt was made to ascertain their actual cash value or to fix such value for the purpose of the exchange, nor was it intended that the capitalization of the petitioner should be an indication of such value. The petitioner was and is a close corporation. Its stock was issued to the transferors of the property in proportion to their respective interests therein and as no stock was sold to outsiders the amount of stock issued in exchange for such property was immaterial. The governing factor in determining the capitalization of the petitioner was the question of the annual license tax payable to the State of West Virginia, and a larger capitalization was not used for the reason that it would have required the payment of a greater license tax annually by the petitioner.

It was publicly known prior to July 2, 1914, that a bridge would be constructed over the Kanawha River which would connect the properties here in question with the City of Charleston, and that the city street car system would be extended through and beyond the properties. In 1913, the street car lines had been extended to a bridge site, where about 2 years before tests for the substructure for the bridge had been made.

At a meeting of the board of directors of the petitioner on May 21, 1914, the engineer's plans for the bridge and the bids of the contractors for the various parts of the construction work were accepted. At another meeting of the directors held on June 24, 1914, trackage rights across the bridge and into Kanawha City were granted the street car company. Construction of the bridge and the car line was begun shortly thereafter and pushed to completion. The effect of these projects was to bring about immediately a decided enhancement in value of the real estate in Kanawha City.

In determining the deficiencies involved in these proceedings the respondent has included in the petitioner's invested capital for each year all the properties acquired by petitioner on July 2, 1914, at a value of $300,000, representing the par value of the petitioner's capital stock issued in exchange therefor. He has also used the amount of $300,000 as a basis for determining the gain derived from the sales of the property during the taxable years involved herein.

The respondent reduced the petitioner's invested capital for 1921 by $283.57, representing an additional tax for 1919, and by $1,238.19, representing the prorated portion of 1920 taxes.

The actual cash value of the petitioner's bottom lands on July 2, 1914, was $944,025, while the actual cash value of its hill lands on the same date was $284,500, making a total actual cash value of $1,228,675.

OPINION.

TRAMMELL: The errors assigned are: (1) That the respondent erred in reducing petitioner's invested capital for 1921 on account of prior-years' taxes, (2) that the respondent failed to include in petitioner's invested capital for 1920 and 1921 the excess of the actual cash value of the real estate acquired by it on July 2, 1914, above the amount of $300,000, representing the par value of its entire capital stock issued therefor, and (3) that the respondent failed to use as the basis for computing the gains derived from subsequent sales of real estate the fair market value thereof on July 2, 1914.

With respect to the first assignment of error, we are of the opinion that the action of the respondent is correct, and is approved subject to such adjustment in the amount of tax liability for 1920 as may result from our decision with respect to the remaining errors assigned by the petitioner. ; ; .

With respect to the other errors assigned by the petitioner, we are of the opinion, after a careful consideration of all the evidence, that the properties acquired on July 2, 1914, had actual cash values of at least the amounts set out in our findings of fact. The petitioner is accordingly entitled to have its invested capital for 1920 and 1921 increased by $928,675, representing the difference between $300,000, the amount of the par value of stock issued for the properties, and their total actual cash value on July 2, 1914, or $1,228,675.

Having found that the value of the properties acquired by the petitioner for its entire capital stock was $1,228,675 at the time of acquisition, we think, in the absence of any other evidence, that the value of the stock which represented the cost of the properties was equivalent to the value of the properties. ; .

Judgment will be entered under Rule 50.