Sanitary Co. of America v. Commissioner

SANITARY COMPANY OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sanitary Co. of America v. Commissioner

Docket No. 10671.

United States Board of Tax Appeals

10 B.T.A. 944; 1928 BTA LEXIS 3990;

February 23, 1928, Promulgated

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1. Russel Wheel & Foundry Co.,3 B.T.A. 1168">3 B.T.A. 1168, followed.

2. A loss alleged to have been sustained upon the sale of a portion of assets purchased as a whole for cash, bonds and stocks disallowed because of lack of satisfactory evidence as to the cost of the assets sold.

3. Respondent's refusal to include an amount of $118,843.75 in invested capital for good will and patents approved because of lack of satisfactory evidence as to their value at the time acquired by the petitioner.

S. Leo Ruslander, Esq., for the petitioner.

John D. Foley, 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 fiscal year ended November 30, 1919, in the amount of $13,457.64.

The following errors are assigned:

1. Exclusion by the respondent from invested capital for the taxable year of income and profits taxes for the year ended November 30, 1918.

2. Disallowance by the respondent as a deduction from income of a loss incurred by petitioner in the purchase and sale of machinery and equipment purchased in order to secure possession of a plant.

3. Exclusion by the respondent from invested capital for the taxable year of good will and patents acquired in 1910 in payment for capital stock.

FINDINGS OF FACT.

The petitioner is a Delaware corporation with its principal office at Linfield, Pa.

On January 10, 1910, the board of directors of the petitioner authorized the purchase of all the outstanding capital stock, applications and claims for patents, and other assets of the Mitchell & Van Meter Co., for the full paid preferred capital stock of petitioner to the amount of $115,125, and the full paid common stock to the amount of $500,000. The assets were taken over as authorized. The $115,125 of preferred stock was issued for plant values, and the $500,000 common stock was issued for good will and patents.

The Mitchell & Van Meter Co. started in business in 1904 and was engaged in the manufacture of cast-iron soil pipes, fittings and plumbers' specialties and, at the time its assets were acquired by the petitioner, owned three manufacturing plants, located at Linfield, Pottstown and Zelienople. (Little evidence is given concerning two of them, but the iron plant at Linfield never lost money while operated by the Mitchell & Van Meter Co.) The petitioner restricted its operations to the Linfield plant and disposed of the brass foundry at Pottstown and the plant at Zelienople after 1912. Petitioner continued to manufacture cast-iron pipes, fittings and plumbers' specialties. The good will and patents which were purchased were confined to the Linfield plant. Quite a number of the specialties which were manufactured by the Linfield plant prior to acquisition by the petitioner were protected by patents. These products had been stamped with the letters M. and V.M. Company, the trade name of the Mitchell & Van Meter Co. products, well known in the trade. In addition to other assets the petitioner also obtained sales connections and a number of applications for patents.

The original entry on the books of the petitioner on January 1, 1912, showed a value assigned to good will and patents of $500,000. In 1917 a separation of the items was made and the books showed a value assigned to good will of $60,118.75, and to patents of $121,725. Some of the patents were the Ideal Closet Connection and the Improved Brooklyn Running Trap, and there were also acquired applications for patents on a Mitchell & Van Meter boiler stand.

The petitioner continued to use the name of M. and V.M. Company on its products, and the products were advertised as being the M. and V.M. Company articles, or articles formerly manufactured by the Mitchell & Van Meter Co., one reason being the expense of replacing the cuts and patterns.

The records of the Mitchell & Van Meter Co. are not available. None of the persons who held stock of the petitioner at the time of the transaction are now stockholders of petitioner.

The gross earnings of the three plants from 1910 to 1912, inclusive, were not segregated on the books of the company.

The total amount paid for direct labor for the three plants was $237,046.79, of which $62,635.74 was attributed to the Linfield plant in 1910 and 1911, and $68,864.45 was attributed to this plant in 1912.

Following is a statement of income of petitioner as shown by its books:

	Net income	Number of months
1913	$16,529.32	10
1914	3,847.91	13
1915	31,040.55	11
1916	53,930.06	12
1917	42,037.05	12

The tangible assets allocable to the three plants in 1911 as shown by its books were as follows:

Linfield	$118,607.92
Pottstown	40,761.95
Zelienople	89,130.57

The tangible assets not identified with a particular plant December 31, 1911, were $18,134.64.

The Linfield plant investment was as follows:

	Number of months	Amount
January, 1913	10	$146,266.81
October, 1913	13	116,649.08
January, 1915	11	123,188.86
November, 1915	12	151,601.71
November, 1916	12	207,260.77

No evidence was introduced as to the length of life of the patents.

On November 1, 1918, the petitioner paid $5,000 cash, $15,000 in its first mortgage bonds, $14,200 of its preferred stock, and $7,100 of its common stock for the plant, machinery, boilers, engines, and all materials, tools, equipment and fixtures of the Keystone Motor Manufacturing Co. The stock and bonds were considered by both parties to be worth their par value. Prior to this transaction on July 18, 1918, the petitioner had caused an inventory to be made of the property to be purchased and it was valued at $30,507.34. When it was depreciated at 10 per cent, it had a value of $27,456.61. The Keystone Manufacturing Co. asked $50,000 for the property, and the petitioner offered $27,456.01, but finally gave the above consideration in cash, bonds and stock.

Part of the property so acquired was used in the plants of the petitioner, part was resold, and a part of it was on hand at the end of the taxable year and was not in use.

Such property on hand and in use was placed upon the books of the petitioner to represent its true value. Some items were placed upon the books at higher figures than the purchase price and some at lower figures, but the result showed an increase in asset value of $887.95 over the purchase price.

The par value of the capital stock of the petitioner outstanding December 31, 1918, was $315,483.75, and the par value of its capital stock outstanding on March 3, 1917, was $300,593.75.

OPINION.

SIEFKIN: 1. The contention of the petitioner that the respondent erred in excluding from invested capital for the fiscal year ended November 30, 1919, income and profits taxes for the year ended November 30, 1918, has been decided adversely to the petitioner in , and we must decide that issue for the respondent. See section 1207 of the Revenue Act of 1926.

2. On November 1, 1918, the petitioner acquired the plant, machinery, boilers, engines, materials, tools, equipment and fixtures of the Keystone Motor Manufacturing Co. and paid therefor $5,000 cash, $15,000 of its first mortgage bonds, $14,200 of its preferred stock and $7,100 of its common stock. Part of such property was resold, part was transferred to the plants of the petitioner for petitioner's use, and part of it was neither sold nor used. On July 18, 1918, the petitioner had made an inventory of all the property to be purchased, and the total value was stated at $30,593.75. A witness testified that no individual value was placed upon the items included in the sale, but that the purchase price of each item was calculated by increasing its inventory value in the proportion that the total inventory value bore to the total cost. The items which were on hand and which the petitioner transferred to its plants for its own use were placed upon the books at what were considered their true values, some higher, and some lower than the calculated cost, but the result of such valuation showed an increase in asset value of $887.95 over the calculated cost. On the books of the petitioner, among other assets acquired, were some items totaling about $6,000, which were acquired after November 1, 1918. The summary of a statement submitted in evidence with regard to loss on sales is as follows:

Amount at original inventory price	$30,507.34
Purchase price calculated	47,431.77
Transfers to petitioners plants	21,104.48
Sales	15,876.57
Inventory	639.13
Profit or loss	10,699.54
Increase in asset value of items transferred and on inventory	887.95

The calculated price includes freight and other expenses, and, when the items transferred and on hand are included at calculated cost, the statement shows a net loss on sales of $10,699.54. The method employed in arriving at the cost of each item is not satisfactory as some items may have increased in value between the time the inventory was taken and the purchase was made while others may not have increased. In the absence of evidence that each of the items increased in value proportionately, we are of the opinion that the inventory taken on July 18, 1918, is of no value in determining whether a loss was sustained, and the respondent's disallowance of this deduction is approved.

3. The petitioner contends that the respondent erred in excluding from invested capital for the taxable year ended November 30, 1919, an amount of $181,843.75 for good will and patents acquired for stock in 1910. On January 10, 1910, the petitioner issued $115,125 preferred stock for the plant value of the Mitchell & Van Meter Co., and $500,000 common stock for its good will and patents.

In 1917 the books showed a value assigned to good will of $60,118.75, and to patents of $121,725. No evidence was submitted as to the number and descriptions of the patents. Two or three of the patents and applications were stated by name, but no evidence was introduced as to their expiration dates. There was testimony that, among other assets, the petitioner obtained valuable sales connections from the Mitchell & Van Meter Co., and that after acquisition of these assets, customers sometimes called for M. and V.M. products. The petitioner continued to mark some of the products with the M. and V.M. Company name, and to advertise them as such. Some of the evidence indicates that the reason for such marking and advertising was partly because changing the cuts and patterns would have been expensive. None of the records of the Mitchell & Van Meter Co. were produced, and no evidence was submitted as to the earnings of this company. Thus the only evidence of the value of good will and patents concerns subsequent earnings. We have previously held that the value of assets acquired by a corporation for stock should be determined on the basis of facts known at the time of the acquisition, or facts reasonably anticipated, and subsequent events or earnings, when reasonably anticipated, may be shown for the purpose of demonstration or corroboration of actually existing values. ; . Subsequent earnings can not, of themselves, prove value of good will at time of acquisition. .

The respondent's disallowance of values for invested capital purposes, for good will and patents, is approved.

Judgment will be entered for the respondent.