A. B. Humphrey Co. v. Commissioner , 15 B.T.A. 312 ( 1929 )

A. B. HUMPHREY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

A. B. Humphrey Co. v. Commissioner

Docket Nos. 15829, 18498.

United States Board of Tax Appeals

15 B.T.A. 312; 1929 BTA LEXIS 2878;

February 11, 1929, Promulgated

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Cost of property acquired by petitioner in exchange for capital stock at the time of its incorporation in 1918 determined for invested capital purposes.

Andrew T. Smith, Esq., Virgil Y. Moore, Esq., and N. L. McLaren, C.P.A., for the petitioner.

Arthur Carnduff, Esq., S. B. Anderson, Esq., and John B. O'Connell, Esq., for the respondent.

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SMITH

These proceedings are for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $2,478.06 and $1,079.89, respectively. The appeals were consolidated for hearing and decision. Petitioner alleges that the Commissioner erred in holding that its invested capital for the years involved can not be satisfactorily determined, and in computing its tax liability for each of said years in accordance with the provisions of section 328 of the Revenue Act of 1918.

FINDINGS OF FACT.

The petitioner is a California corporation. It was organized and commenced doing business January 14, 1918. All of its capital stock was issued to A. B. Humphrey and his two daughters in exchange for certain real and personal property owned by them.

Said property consisted of a ranch in Sacramento County, California, known as the Mayhews Ranch, comprising two tracts of land, one of about 340 acres and one of about 57 acres, together with certain improvements, equipment and supplies, also cash on hand; a ranch in San Joaquin County, California, known as the Escalon Ranch, together with certain improvements, supplies and equipment, and a warehouse; and a house and lot at Berkeley, Calif.

The Mayhews Ranch was the property of A. B. Humphrey. It had been acquired by him at a total cost of $83,600. He had purchased the 340-acre tract from Holcombe and Thomas in 1887 for a total consideration of $76,100, including cash and other real property given in exchange. He had purchased the 57-acre tract for a cash consideration of $7,500.

The Escalon Ranch property was inherited by Humphrey's two daughters from their grandfather, who died in 1897. It came into their possession in 1901, at which time it had a fair market value of $75 per acre, or a total value of $61,050. Prior to petitioner's incorporation the owners paid a drainage tax of $60 per acre on the entire tract and expended for irrigation and other improvements the sum of not less than $36,000. The total cost of this tract to Humphrey's daughters, including the value thereof at the time acquired by them, was not less than $145,890.

The house and lot at Berkeley, Calif., was purchased by Humphrey in 1916 for a consideration of $6,500 cash. The house was rebuilt prior to January 14, 1918, at a cost, less depreciation to that date, of not less than $1,058.68.

The warehouse attached to the Escalon Ranch was located on the property of the Santa Fe Railroad Co. It was purchased by Humphrey, acting for his two daughters, for a consideration of $2,000 cash. There was expended for repairs on the property prior to January 14, 1918, not less than $1,000. Its depreciated cost at the time of petitioner's incorporation, including equipment, was not less than $2,100.

There was paid into the treasury of the petitioner at the time of its organization cash in the amount of $35,897.41.

For several years prior to 1914, A. B. Humphrey had been considering organizing a corporation to take over and operate ranch properties owned by him and his two daughters. With this in view he and his son-in-law, Landsborough, who became secretary of the petitioner upon its incorporation, began making in their spare time a physical inventory of all the aforesaid ranch properties. The inventory was begun in 1914 and completed in December, 1917. It was made in considerable detail and included practically everything of value on both the Mayhews and the Escalon ranches.

Humphrey had been in complete charge of the Mayhews Ranch from 1889 and of the Escalon Ranch from 1901 up to date of petitioner's incorporation. He had devoted all of his time to this business. During his management he had kept complete and accurate records of all expenditures and disbursements made in connection with the operation of both the ranches. The records included the original invoices and bills for all purchases where such invoices or bills had been received, and additional memoranda showing the cost of material and labor for every separate operation. These records were systematically filed and stored in the basement of the Mayhews Ranch residence. Landsborough had been employed by Humphrey as assistant overseer and bookkeeper since 1913. He superintended the outside ranch work during the day and kept the books at night.

In making the aforesaid inventory, Humphrey and Landsborough entered the separate items at their depreciated cost as of December 31, 1917. For this purpose they took the actual cost, as shown in the records above referred to, of each item appearing on their physical inventory, less depreciation thereon to December 31, 1917. The depreciation rates used by them were based upon their knowledge of the usage of the separate items and of their actual condition at December 31, 1917. In 1922 the Mayhews residence and all of the original invoices and records above described were completely destroyed by fire.

The cost, less reasonable depreciation, of the property transferred to the petitioner in exchange for its capital stock, exclusive of 1917 additions, was as follows:

Property	Cost
Mayhews - 340 acres	$76,100.00
57 acres	7,500.00
Escalon	145,890.00
Cash	35,987.41
Mayhews: Buildings	44,950.00
Machinery and equipment	7,080.00
Pumps and equipment	21,840.00
Power lines	444.00
Fencing	4,550.00
Concrete pipe	9,293.60
Vines and trees	33,374.00
Livestock	3,250.00
Supplies	1,463.49
Escalon: Fencing	$5,558.00
Vineyard equipment	12,004.00
Machinery and equipment	9,820.00
Buildings	24,220.00
Vines and trees	15,300.00
Livestock	18,995.00
Warehouse	2,000.00
Warehouse equipment	100.00
Berkeley - house and lot	7,558.68
Total	487,278.18

Machinery and equipment	$4,045.92
Pipe lines	756.75
Live stock	2,014.05
Pumps and equipment	2,257.65
Fencing	537.89
Buildings	38.81
Total	9,651.07

There were approximately 80 buildings on the combined ranches, including dwellings, barns, dairy cottages, chicken houses, sheds and many others. Most of them were built or rebuilt by Humphrey and accurate records kept of the cost.

On each of the ranches there were approximately 70 items of machinery and tools, including gas engines, boilers, wagons, almondhulling machinery and numerous other farm and ranch implements, of which Humphrey and Landsborough had the actual cost records or knowledge of the cost.

There were approximately 40 items of pumps and pumping equipment on the Mayhews Ranch, including wells, pumps, concrete and steel pipes, water tanks, etc.

On the Mayhews Ranch there were 50,000 bearing grape vines covering 110 acres, and approximately 3,300 bearing fruit trees covering 44 acres. There were also several hundred other trees of varying ages. On the Escalon Ranch there were 35,000 vines and 3,500 olive trees. The figures showing the cost of production of these vines and trees were among the original records used by Humphrey and Landsborough in making the inventory.

Petitioner's corporate assets were increased by capital outlays in its books of account from the time of incorporation to December 31, 1918, by the sum of $11,739.64, and to December 31, 1919, by the sum of $25,120.83.

Petitioner's liabilities, including a reserve for depreciation, as of December 31, 1918, and December 31, 1919, were $55,175.76 and $46,379.18, respectively.

The authorized and issued capital stock of the petitioner during the taxable years 1918 and 1919 was $100,000.

OPINION.

SMITH: The respondent contends that petitioner's invested capital for the taxable years before us can not be satisfactorily determined and that petitioner's tax liability must, therefore, be computed under the provisions of section 328 of the 1918 Act by comparison with taxes paid by representative corporations.

It is agreed by the parties that since the petitioner was organized after March 3, 1917, and since the interest or control of 50 per cent or more of the property conveyed to it at the time of its organization remained in the same persons, the provisions of section 331 of the Revenue Act of 1918 are applicable, limiting the value at which such property may be included in petitioner's invested capital to the cost thereof to such persons, with a reasonable allowance for depreciation to the date of petitioner's incorporation.

The petitioner contends that the cost of the property conveyed to it by the incorporators, less a reasonable allowance for depreciation to the date of incorporation, is capable of sufficiently definite ascertainment to satisfy the statute.

The evidence before us fairly substantiates the depreciated cost of the property to the incorporators as set out in the above findings of fact. The cost of the land comprising the Mayhews and Escalon ranches was established by the uncontradicted testimony of competent witnesses. The inventory above described was made by Humphrey and Landsborough preparatory to incorporation, and was based upon depreciated cost rather than value. The figures in the most instances were taken from the original invoices and bills. In respect of such items as live stock and other property produced upon the ranches, witnesses testified as to their cost of production and the depreciation sustained from their personal knowledge.

We are satisfied from the entire evidence that the cost less depreciation above shown of the property transferred to petitioner upon its incorporation is reasonably accurate, and that petitioner is entitled to have its tax liability for the years involved recomputed upon the basis of an invested capital not in excess of the amounts shown.

Judgment will be entered under Rule 50.