Archer-Strauss Rubber Co. v. Commissioner

ARCHER-STRAUSS RUBBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Archer-Strauss Rubber Co. v. Commissioner

Docket Nos. 17194, 25188.

United States Board of Tax Appeals

9 B.T.A. 809; 1927 BTA LEXIS 2516;

December 22, 1927, Promulgated

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The actual cash value of property paid in for shares of stock of a corporation determined; also value of depreciable property at the date paid in determined.

Frederick W. Otto, Esq., and Myer L. Orlov, Esq., for the petitioner.

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

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SMITH

These proceedings are for the redetermination of deficiencies in income and profits tax for the years 1918, 1922, and 1923, as follows:

1918	$8,316.68
1922	678.49
1923	357.39

They were consolidated for purpose of hearing and decision. The questions in issue with respect to the year 1918 are (1) the value of assets paid in to a corporation in exchange for shares of stock on January 2, 1917, and (2) the value of depreciable assets at the date paid in upon which the petitioner is entitled to an allowance for depreciation. The only issue with respect to the years 1922 and 1923 is the value of depreciable assets acquired for stock upon organization of the corporation.

FINDINGS OF FACT.

The petitioner is a Massachusetts corporation organized January 2, 1917, by Calvin B. Archer, Aaron L. Strauss, and Albert Gutterman to succeed to the rubber-manufacturing business carried on since 1910 by the A & A Rubber Co.

The A & A Rubber Co. was a corporation substantially all of whose stock was owned by Calvin B. Archer, who had organized and equipped it in 1910 and thereafter operated it until 1917. The business was conducted from 1910 to 1916, inclusive, at a good profit, a large part of which was employed in making extensions to the plant. Archer had had over 25 years' experience in the rubber-manufacturing business, including the organization, equipping, operation, and management of rubber-manufacturing businesses.

Late in 1916, Archer realized that his company, the A & A Rubber Co. was confronted with the dire necessity of acquiring financial and physical assistance in the business. While business conditions were normal the company had been able to operate at a profit. But with the great advances in prices of rubber in 1916, the operating results were unsatisfactory. The company was suffering from lack of proper management and sufficient capital. Because of Archer's advancing age, lack of financial connections, the increased prices of raw material and labor, the overextension of his company's resources, the pressing of its creditors and the threats of immediate attachment, Archer was forced either to liquidate or sell quickly. Only two prospective purchasers could be found. Of the two, Archer thought Strauss the most desirable as an associate. He accordingly completed a deal with Strauss in November, after negotiations of a new weeks to the following effect:

The petitioner was to be formed to take over the business of the A & A Rubber Co. Strauss and Gutterman were to pay $30,000 in to the corporation. Archer was to pay in to it all the assets of the A & A Rubber Co. subject to its liability at the net value of the assets. Strauss agreed to furnish whatever other financial assistance was needed and to furnish the outside assistance necessary in the proper management of the company. Archer was to act as inside man and attend to the manufacturing. Archer agreed that Strauss and Gutterman were to have one share more than one-half of the stock of the new corporation.

The organizers were in agreement that the net value of the assets of the A & A Rubber Co. was at least $70,000. Counsel was instructed and did prepare necessary papers for the organization of the petitioner with a capital stock of $100,000 divided into 1,000 shares of $100 par value each. Strauss and Gutterman subscribed for $30,000 of the stock to be paid for in cash. Archer subscribed for $70,000 of the stock to be paid for by the assets of the A & A Rubber Co.

The assets of the A & A Rubber Co., other than the real estate, plant, machinery, and fixtures, were just sufficient to take care of the liabilities of the corporation, including a mortgage on the real estate of $10,000, leaving the equity in the A & A Rubber Co. represented by the real estate, plant, machinery, and fixtures.

The directors of the petitioner voted to issue $70,000 stock for the assets of the A & A Rubber Co. They subsequently, on January 2, 1917, filed the articles of organization under oath showing the issuance of the $100,000 capital stock, namely:

Cash - 300 shares	$30,000
Real estate (equity above mortgage) - 200 shares	20,000
Machinery - 400 shares	40,000
Merchandise - 100 shares	10,000

At the same time, Archer in writing instructed the new corporation to issue 201 shares of the stock subscribed for by him to Strauss and Gutterman.

The real estate, plant, machinery, and fixtures on January 2, 1917, were valued on the books of the A & A Rubber Co. as follows:

Plant	$22,371.16
Machinery	31,023.62
Total	53,394.78

The actual cash value of the real estate, plant, machinery, and fixtures turned over to the Archer-Strauss Rubber Co. on January 2, 1917, was at least $70,000, made up as follows:

Real estate	$2,400.00
Machinery and equipment	37,669.57
Furniture and fixtures	1,230.43
Power plant	4,700.00
Buildings (including electric wiring, plumbing, etc.)	24,000.00
	70,000.00

The shares of stock in the Archer-Strauss Rubber Co. were subject to a "close corporation" clause which prevented their being sold to outsiders without first being offered to the corporation at a price to be fixed by a board of arbitration. There was no ready market for the stock. During the latter part of 1917, Archer being desirous of retiring from business and of obtaining an income reasonably secure, arranged for a transfer on February 1, 1918, of his minority interest for the petitioner's 7 per cent preferred stock in the amount of $35,000 plus $5,000 in cash and the agreement of the corporation to retain him in the capacity of "General Assistant" at a salary of $1,600 per year for the remainder of his life. The written contract evidencing the agreement provided that Archer should receive the $1,600 per annum compensation for a period of only 5 years. But after the expiration of the 5-year period the $1,600 per annum has been paid.

OPINION.

SMITH: In view of the fact that Calvin B. Archer, who owned all of the stock of the A & A Rubber Co. received only 499 shares of stock of the petitioner and 501 shares of stock were issued to Aaron L. Strauss and Albert Gutterman for $30,000 cash, the respondent has determined that the assets of the A & A Rubber Co. paid in to the petitioner for shares of stock had a cash value of slightly less than $30.000. The evidence shows, however, that the assets of the A & A Rubber Co. were worth very much more than $30,000. Archer was glad to have Strauss associated with him. He had the reputation of being a successful business man and manufacturer. With his assistance Archer knew that the business would be a success and was willing to turn over the assets of the A & A Rubber Co. to a new corporation in which he should hold substantially 50 per cent of the stock. These assets were not turned in to the corporation, however, for 499 shares of stock but for 700 shares of stock. By a collateral undertaking Archer agreed to turn over to Strauss 201 shares of the capital stock which would be issued to him for the assets of the A & A Rubber Co. The evidence warrants a finding that the fair cash value of those assets was at least $70,000 and they should be held to have that value in computing invested capital.

There is no question before the Board as to the correctness of the rates used by the respondent in computing depreciation. The cash values of the depreciable assets paid in to the petitioner upon organization on January 2, 1917, are set forth in the findings of fact.

Judgment will be entered on 15 days' notice, under Rule 50.

Considered by TRUSSELL, LOVE, and LITTLETON.