Wilmington S.B. Co. v. Commissioner , 9 B.T.A. 704 ( 1927 )

WILMINGTON STEAMBOAT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Wilmington S.B. Co. v. Commissioner

Docket No. 9637.

United States Board of Tax Appeals

9 B.T.A. 704; 1927 BTA LEXIS 2527;

December 20, 1927, Promulgated

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All the stock of five different corporations was purchased by petitioner in 1916 for a lump sum in excess of the par value of the stock so purchased, and in excess of the tangible assets of the corporations whose stock was purchased. In computing gain or loss to the purchaser on account of a liquidating dividend paid to petitioner on the dissolution of one of the companies it is necessary to ascertain what portion of the entire purchase price was paid in 1916 for the stock of that company and an arbitrary allocation of the amount paid in 1916 in excess of the par value of the stock to each of the five companies in proportion to the par value of the stock is not satisfactory evidence which will enable the Board to ascertain the basis to be used.

Andrew S. Wilson, C.P.A., for the petitioner.

M. N. Fisher, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $25,246.13. A single issue is presented with respect to the right of petitioner to deduct from gross income an amount of $54,948.22 claimed as a loss sustained upon the liquidation of a subsidiary corporation.

FINDINGS OF FACT.

The petitioner is a new Jersey corporation organized in 1888, having its principal office at Wilmington, Del. On and prior to May 1, 1916, Horace Wilson and Joseph S. Wilson were the owners in equal proportions of all the stock of certain corporations. The names, dates of organization, and par value and number of shares outstanding of such corporations were:

Name	Organized	Par value	Shares
Merchants Transportation Co	Nov. 1915	$25,000	250
Christiana Ferry Co	1915	20,000	200
N.J. & Wilmington Ferry Co	1888	12,000	120
Wilmington & Pennsgrove Transportation Co	1915	10,000	100
Pennsgrove Pier Co	1855	5,000	100
		72,000	770

On or about May 1, 1916, Horace Wilson assigned his part of the above stock to Joseph S. Wilson, who thereupon offered to sell all of the stock to the Wilmington Steamboat Co. in consideration of the payment to him of 1,500 shares of the Steamboat Company's stock and the promissory notes of the said company in the sum of $111,655.63 the same to fall due in two years and bear interest at 6 per cent per annum.

The offeror agreed also to pay for the cost of an extension to the pier of the Pennsgrove Pier Co., such cost being about $40,000.

The offer set out the tangible assets of the various corporations the stock of which was being offered for sale.

The Wilmington Steamboat Co. accepted this offer and upon receipt of the stock and notes Joseph S. Wilson immediately delivered half of each to Horace Wilson. Horace Wilson was at this time a large stockholder and a director of the Wilmington Steamboat Co.

The assets and liabilities of the various corporations which thus became subsidiaries of the Wilmington Steamboat Co., according to their books, were as follows on April 30, 1916:

Merchants Transportation Co.
Assets:
Property and equipment	$26,314.52
Liabilities:
Capital stock	25,000.00
Surplus	1,314.52
	26,314.52
Wilmington Ferry Co.
Assets:
Property and equipment	$22,995.88
Liabilities:
Capital stock	20,000.00
Surplus	2,995.88
	22,995.88
Wilmington & Pennsgrove Transportation Co.
Assets:
Property and equipment	$10,165.50
Liabilities:
Capital stock	10,000.00
Surplus	165.50
	10,165.50
New Jersey & Wilmington Ferry Co.
Assets:
Buildings	$1,741.21
Ship	2,025.00
Furniture and fixtures	198.27
Equipment	$268.00
Good will	10,800.00
	15,032.48
Liabilities:
Reserve for depreciation	279.36
Capital stock	12,000.00
Surplus	2,753.12
	15,032.48
Pennsgrove Pier Co.
Assets:
Property and franchise	$18,348.61
Pier extension	2,375.34
	20,723.95
Liabilities:
Mortgage	11,901.58
Capital stock	5,000.00
Surplus	3,822.37
	20,723.95

The purchase of the stocks was recorded by the taxpayer on its books by treating the stock and notes paid as worth full value or a total of $261,655.63. The first entry made on the books was:

May 1, 1916, debit marketable securities, New Jersey and Wilmington Ferry Company 120 shares $12,000; Christiana Ferry Company, 200 shares, $20,000; Wilmington and Pennsgrove Transportation Company 100 shares $10,000; Merchants Transportation Company, 250 shares, $25,000; Pennsgrove Pier Company, 50 shares, $5,000; Intangible assets, $189,655.63. Credit to capital stock $150,000 a long term debt, funed debt, plain bonds, debentures and notes $111,655.63.

Upon inquiry to the Interstate Commerce Commission, the taxpayer was informed that the intangible assets should be properly allocated to the various stocks bought. Thereupon the following entry was made:

June 30th, 1916, correctness entered to conform with I.C.C., per letter 7-18-1916, No. 191729, debit Wilmington and New Jersey Ferry Company $31,609.27; Christiana Ferry Company $52,682.12; Wilmington and Pennsgrove Ferry Company $26,341.66; Merchants Transportation Company, $65,852.65; Pennsgrove Pier Company $13,170.53, credit intangible assets $189,655.63.

In June, 1916, at which time there were outstanding 4,000 shares with a par value of $100 each 587 shares of stock in the petitioner were sold for $100,000 cash.

The five corporations continued to operate as before and kept separate books of account showing the results of operation. During the year 1919 the Merchants Transportation Co. abandoned its business, sold its assets, paid a single liquidating dividend of $35,904.43 to petitioner as its sole stockholder, and surrendered its charter. In its income and profits-tax return for 1919, petitioner deducted from gross income, as a loss, an amount of $54,948.22 measured by the difference between $90,852.65 and the amount of $35,904.43, the liquidating dividend. The entire amount was disallowed by respondent.

OPINION.

SIEFKIN: The evidence in this case does not satisfy us that a loss has been sustained. Petitioner purchased the stocks of five corporations for a consideration consisting of notes of a face value of $111,655.63 and stock of a par value of $150,000. At first petitioner allocated $72,000 of the purchase price on its books, such sum being the par value of the stocks purchased, to the various stocks Later, on advice of the Interstate Commerce Commission that an allocation of $189,655.63 additional was necessary, that amount was allocated to the various capital stocks in proportion to their par value. Upon that basis the sum of $90,852.65 was entered on the books as the cost of the stock of the Merchants Transportation Co., of which $25,000 was to cover the par value of the stock and $65,852.65 for an element of intangible value. The only asset of the Merchants Transportation Co. was a steamer which, according to a balance sheet at April 30, 1916, cost not more than $26,314.52. The corporation was organized in November, 1915, to transport workmen to a munitions plant. There is a strong inference from these facts, and from the absence of any showing as to earnings of that company, that any intangible values attaching to the purchase of the stock of the five corporations must have been attributable, not to the Merchants Transportation Co., but to the stock of some other company or companies included in the purchase. It is improper for us to surmise and unnecessary for us to decide where such value should be allocated if we find, as we do, that there is no justification, except an arbitrary book entry, for the allocation of any part to the Merchants Transportation Co.

Even if the petitioner were able to ascertain the cost of the stock sold, there would be no deductible loss on the liquidation since the petitioner and the Merchants Transportation Co. were affiliated until the latter was dissolved. The Merchants Transportation Co. sold its assets and the gain or loss on such sale was reflected in the consolidated net income. After the sale, affiliation continued although the assets of the Merchants Transportation Co. consisted of cash. Under such circumstances, no deductible loss results. See . Cf. .

Judgment will be entered for the respondent.

Considered by MORRIS, MURDOCK, and LITTLETON.