Richards v. Commissioner

ANNA S. RICHARDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Richards v. Commissioner

Docket No. 13869.

United States Board of Tax Appeals

13 B.T.A. 1279; 1928 BTA LEXIS 3070;

October 30, 1928, Promulgated

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1. Held that the deficiency notice sent by the Commissioner was not a notice of mathematical error sent pursuant to section 274(f) of the Revenue Act of 1926, and that the Board as jurisdiction to determine the appeal in this case, even though the petitioner's total tax, as determined by the Commissioner, was the same as the total amount would have been on the petitioner's amended return, except for a mathematical error in the computation thereof.

2. Evidence held insufficient to show the incorrectness of the Commissioner's determination of March 1, 1913, fair market value of certain stock acquired prior thereto and the fair market value of certain stock at the date of acquisition as a distributee of a decedent's estate subsequent to March 1, 1913, where such stock had no recognized market and the Commissioner's determination was corroborated by isolated sales and by an appraisal for Federal estate-tax purposes.

Walter E. Barton, Esq., for the petitioner.

J. E. Marshall, Esq., for the respondent.

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MURDOCK

This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1920 in the amount of $1,821.68. The errors alleged in the petition and pressed at the hearing were that the Commissioner erred (1) in determining that the petitioner realized a profit of $100 a share on the sale of certain stock in the taxable year and (2) in refusing to allow a deduction for interest paid during the year in the amount of $1,414.34. The petition also alleged that the petitioner was entitled to a refund for 1920 in the amount of $2,592.24. At the hearing of the case the respondent raised a question as to the jurisdiction of the Board to determine the appeal.

FINDINGS OF FACT.

The petitioner is an individual residing at Ironton, Ohio. For some time prior to the year 1920 she had been the owner of certain shares of common and preferred stock of the Ironton Portland Cement Co., hereinafter referred to as the company. Shortly after the merger of the company with the LaSalle Portland Cement Co. on February 14, 1920, the petitioner sold the common stock at a price of $200 a share.

The company was organized in September, 1901, and up until the time of its merger with the LaSalle Portland Cement Co. was engaged in the business of manufacturing cement. At the time of its organization common stock was issued in the amount of $110,000, all of which was paid for at its par value of $100 a share. Subsequently, at various times additional common stock and some preferred stock was issued and paid for in cash at par until on February 14, 1920, at the time of the merger there was $353,200 par value common stock and $101,000 par value preferred stock issued and outstanding. The preferred stock was redeemable at par.

The petitioner purchased from the company at par or $100 a share the following common stock:

	Shares
Oct. 23, 1905	34
June 5, 1906	16
May 17, 1919	138
Aug. 26, 1919	10

On December 4, 1918, she received as a distributee of her father's estate 118 shares of the common stock. These shares were appraised for Federal estate-tax purposes at $100 a share. In addition to her common stockholdings the petitioner owned 33 shares of preferred stock.

The balance sheets of the company for December 31, 1912, and December 31, 1918, were as follows:

Balance Sheet
DECEMBER 31, 1912.
Assets		Liabilities
Plant	$298,624.68	Capital stock	$300,000.00
Real estate	26,562.56	Bills payable	90,000.00
Mine	2,994.47	Accounts payable	10,875.95
Dwellings	6,037.39	Amount paid on new issue of
		preferred stock	7,900.00
Mill improvements	1,098.23	Profit and loss	71,891.43
Inventory	92,680.27
Bills receivable	859.19
Accounts receivable	34,394.82
Shaft account	8,085.57
Cash	9,329.90
	480,667.38		480,667.39
DECEMBER 31, 1918.
Assets		Liabilities
Cash	$16,000.00	Pay roll (due 1/10-19)	$5,446.50
Bills receivable	6,167.59	Bills payable	152,640.50
Accounts receivable	49,111.24	Accounts payable	23,804.40
Inventories	89,235.63	Reserves	73,605.90
Deferred items	2,046.31	Capital liabilities -
		capital stock	351,000.00
Packages	15,410.76	Undivided profits	240,095.69
Capital assets	668,620.90
	846,592.99		846,592.99

These balance sheets did not include the values of a certain right of way, certain gas wells and certain limestone deposits which are hereinafter referred to.

At the time of its organization the company acquired a right of way 13 feet wide running from its plant to the Ohio River, a distance of about one mile, connecting the plant with the Norfolk & Western Railroad. This right of way was over level bottom land.

Prior to 1913 the limestone used by the company for manufacturing cement was secured from a drift mine situated about a mile from the plant. The limestone in this deposit averaged about 5 feet in thickness and due to an iron content of about 10 per cent the cement manufactured therefrom was of a dark color and not as readily marketable as lighter colored cement although the selling price was about the same.

In 1911 the company drilled three gas wells upon its property, which comprised at that time about 700 acres. In drilling the first well a deposit of limestone was discovered 434 feet below the surface of the ground. An analysis of this deposit disclosed the fact that from 40 to 50 feet of its total thickness of 97 feet was suitable for making cement. Ten other gas wells were sunk at different times subsequently, all of which reached the limestone deposit. The sinking of shafts to mine the limestone was begun in 1912 and completed in 1913, and in the fall of the latter year the limestone procured from the shaft was used to manufacture the company's cement.

The limestone from the shaft mine had a very slight iron content and made a light colored cement, the marketability of which compared favorably with standard brands of cement. The shaft mine was within 200 feet of the company's manufacturing plant and due to this fact, and to the saving in materials and mining crews, resulting from the shaft system of mining, the limestone could be mined about 50 cents per ton cheaper than in the old drift mine.

Prior to the year 1911 the company bought the gas used in its manufacturing operations from outside companies. After the wells were sunk in 1911 the gas therefrom was used in its operations. The amounts so used decreased from 600,000 cubic feet of gas per day in 1913 to 200,000 cubic feet per day in 1918, due to the gradual exhaustion of the wells. Immediately prior to 1913 gas for commercial uses sold at 10 cents per thousand cubic feet.

The policy of the company from the time of its organization was to put the greater part of its earnings back into the business in developing it. The company's stock had no recognized market and the isolated sales of stock from 1913 to 1918 were at par or below.

The petitioner in filing her original return for the year 1920 did not report the sale of any of the company's stock. In her amended return filed in September, 1921, she reported a sale of stock to LaSalle Portland Cement Co. in the amount of $78,400, a cost or March 1, 1913, market value thereof of $39,200 and a net profit of $39,200.

OPINION.

MURDOCK: Counsel for the respondent at the hearing of the case, before any testimony was introduced by the petitioner, offered in evidence the petitioner's original and amended returns for the year 1920 and without making any formal motion to dismiss the case argued that the Board had no jurisdiction of the proceeding since the notice contained in the Commissioner's deficiency letter was one authorized by section 274(f) of the Revenue Act of 1926, which states, in part, as follows:

* * * If the taxpayer is notified that, on account of a mathematical error appearing upon the face of the return, an amount of tax in excess of that shown upon the return is due, and that an assessment of the tax has been or will be made on the basis of what would have been the correct amount of tax but for the mathematical error, such notice shall not be considered, for the purposes of this subdivision or of subdivision (a) of this section, or of subdivision (d) of section 284, as a notice of a deficiency, and the taxpayer shall have no right to file a petition with the Board based on such notice, nor shall such assessment or collection be prohibited by the provisions of subdivision (a) of this section.

An examination of the petitioner's amended return for the taxable year shows a mathematical error in the computation of the net income which, if corrected, would show the total tax due to be the same amount as that determined by the Commissioner.

Section 274(a) of the Act of 1926 provides that no assessment shall be made until 60 days after the notice of deficiency is mailed, while subdivision (f), quoted above, provides for a special notice, distinguished from the deficiency notice, which may be sent where there is merely a mathematical error and provides further that if such a notice is sent it shall not be considered a notice of deficiency and the taxpayer shall have no right to appeal therefrom. A careful consideration of this provision convinces us that it was intended to cover only a certain kind of notice, namely one which expressly advises the taxpayer that there is merely a mathematical error in his computation so that this notice can be distinguished from the general deficiency notice.

The notice which was sent in this case does not contain such advice and differs in no respect from the usual deficiency notice. It states in part:

* * * It is necessary at this time in order to protect the interests of the Government, either to make an immediate assessment under the provisions of Section 274(d) of the Revenue Act of 1924 or to issue a formal notice of deficiency. Therefore the Bureau has elected to issue this notice of deficiency believing it will be more satisfactory than an immediate assessment.

Indeed the notice was sent before the Act of 1926 was approved, and, therefore, in addition to its being a notice not sent under the provisions of the Act, the Commissioner could presumably at that time have had no knowledge that such a special or unusual notice could or should be mailed. Further, it is alleged and admitted in the pleadings that the notice in question was sent pursuant to section 274(a) of the Revenue Act of 1924, which, if true, precludes the possibility of its having been sent under the provisions of section 274(f) of the Revenue Act of 1926 and precludes the possibility of its being a notice contemplated by the latter subdivision. We therefore find that the Board has jurisdiction to determine the appeal in this case.

The petitioner has not introduced sufficient evidence concerning interest paid during the year and disallowed by the Commissioner to convince us of error on the part of the Commissioner in this respect.

The Commissioner has determined that the petitioner realized a profit of $100 a share on the sale of the common stock of the Ironton Portland Cement Co. in 1920 at a price of $200 a share. His determination in this respect is of course prima facie correct. The petitioner contends that a portion of this stock amounting to 50 shares which she acquired by purchase prior to March 1, 1913, at $100 a share had a market value as of March 1, 1913, of $200, and that another portion of 118 shares which she acquired from the estate of her father on December 4, 1918, had a market value as of that date of the same amount, and that, therefore, as to these 168 shares she received no profit upon their sale. To meet the burden of proving this value she has offered in evidence copies of the corporate balance sheets showing a surplus as of December 31, 1912, and December 31, 1918, together with testimony that these balance sheets did not contain any values for a right of way, certain gas wells discovered in 1911, and certain limestone deposits, discovered in 1912 and mined in 1913 and succeeding years, of a more marketable character than the limestone previously used. She has computed certain values for these items which she adds to surplus, and allocating all such surplus to the common stock, since the preferred stock was redeemable at par, by this method finds a value for the common stock of $218.75 a share as of March 1, 1913, and $276.04 as of December 4, 1913.

We are here concerned not with book value but with market value. The two are not synonomous. See . Whether or not the right of way, gas wells and limestone deposits were worth the value ascribed to them by the petitioner, an addition of such values to the balance sheets of the corporation does not effectively dispose of the question of market value.

The petitioner has not told us the amount of the company's yearly earnings at any time, the amounts of dividends paid upon the common stock, or whether dividends were paid at any time. There is no testimony as to the value of accounts receivable and other assets contained in the copies of the balance sheets. Proof of these facts, together with any others which might influence a prospective buyer and seller in arriving at a price, would have aided us in making an intelligent appraisal of the market value of stock such as this, which is not subject to market quotations. On the other side we have the Commissioner's determination strengthened first by evidence of small sales of the common stock at different times never above par and at a figure as low as $75 a share, and further strengthened as to the 118 shares which the petitioner acquired from her father's estate by the fact that these very shares which the petitioner now contends had a value of at least $200 a share were at the time of acquisition appraised for Federal estate-tax purposes at $100 a share, the value determined by the Commissioner.

While isolated sales do not of themselves establish market value, in this case they corroborate the value determined by the Commissioner, and we are of the opinion that the evidence offered by the petitioner is insufficient to overcome the Commissioner's determination.

Judgment will be entered for the respondent.