Fidelity Storage & Warehouse Co. v. Commissioner

OEINION.

Ivins:

When the taxpayer started business it took over for stock, bonds, and the assumption of liabilities, certain assets of the predecessor company. In its opening balance sheet it put the 1811-13 Market Street property in at $475,000; good will, $125,000; plant account, $59,988.50, and safe-deposit vaults and boxes, $80,000. In 1906, it increased the item of property, 1811-13 Market Street, to $675,000, simultaneously striking out good will and reducing the plant account by $55,000 and the safe-deposit account by $20,000. We are not concerned with the effect of the changes from plant account and safe-deposit account to property account, but wholly with the matter of $125,000 originally charged to good will and later transferred to property, i. e., real estate. The Commissioner originally reduced the taxpayer’s invested capital by $125,000 upon the ground that he had not been shown that good will to the fair market value of $125,000 had been paid in for stock. The taxpayer took the position that the original charge to good will was a mistake, that it had been corrected in 1906, that the land and building originally charged as an asset at $475,000 were worth at the time of acquisition at least $600,000, and so constituted tangibles paid in for stock to a market value equivalent to the par value of the stock issued therefor.

The sole problem we are confronted with is whether the Market Street property was worth $600,000 on June 2, 1899.

The fact that the property in question was originally taken into the taxpayer’s books at $475,000 is a rather strong indication that its market value at that time was not greater than that amount. The difference between the value of the tangibles and receivables and the par value of the stock plus the bonds and liabilities assumed ivas balanced by the inclusion among the assets of an item for good will of $125,000. It has always been a practice in corporate financing to balance the “ water ” in a stock issue by the inclusion of an item for good will among the assets. All the officers and managers of the taxpayer who have had to do with the transactions in 1899 have died. The only witness who could attempt to tell us anything about them was a man who was the stenographer at the time these transactions took placo and he admitted he knew nothing about them of his own knowledge. We feel that, prima fade, in the light of the taxpayer’s own records, we can not attribute a greater value than $475,000 to the Market Street property.

The taxpayer has attempted to prove by extrinsic evidence that the value of the Market Street property was at least $600,000 on June 2, 1899. It offered several old documents found by a witness in the desk of a deceased manager, one of which is a receipt for $300 given in payment for 3 shares of the taxpayer’s stock; one is a receipt, dated October 24, 1900, for $4,900 for 50 shares of the taxpayer’s stock at par (with certain adjustments) ; one is a letter, dated September 27, 1900, to the effect that the writer had drawn upon the -addressee for $400 for 4 shares of the taxpayer’s stock; and one is an option, dated September 24, 1900, granted to a named person to purchase 6 shares of such stock at par. These documents were received as exhibits, over the objection of the Commissioner, for what they were worth. Technically, of course, they are not competent evidence because we have no means of knowing whether they represent real transactions, but, even if they were to be accepted as evidence that 65 shares of the taxpayer’s stock were sold (in four lots) at par in the latter part of 1900, we do not think this constitutes proof that the land and warehouse in Market Street were worth $600,000 on June 2, 1899. If we could find that all the stock of the taxpayer had a market value equal to par immediately after the transactions on June 2, 1899, we might be in a position to say that presumably it had assets, either tangible or intangible, sufficient to balance all its liabilities and represent payment in full at par of its stock for purposes of invested capital, but even then we would not be able to allocate the values of good will and real estate, respectively. But the sale of a few shares toward the end of 1900 would not to our minds constitute proof of value in the middle of 1899, even were it demonstrated by competent evidence.

The taxpayer also relied upon the testimony of an expert witness who gave his opinion that the land and building in Market Street were worth $650,000 in June, 1899, but the conclusions of this witness were based upon such processes of reasoning, and his testimony was so self-contradictory, that he wholly failed to convince us that his judgment with respect to the value of this particular property in 1899 was based on anything substantial or was reasoned correctly from the premises upon which it was based. To our minds, he wholly failed to overcome the prima fade effect of the original entries in the taxpayer’s books, and we must hold that the taxpayer has failed to prove that the property in question was worth more than $475,000 in June, 1899, or that the going • business had good will of any value at that time.