*2205 No error shown in Commissioner's computation of invested capital.
*990 The Commissioner determined an overassessment in the petitioner's income and profits-tax liability for the year 1918 in the amount of $911.98, by allowing a claim in abatement for this amount and rejecting it for an additional amount, and a deficiency of $1,738.96 for 1919, a deficiency of $1,760.12 for 1920, and a deficiency of $2,630.54 for 1921. The petitioner alleges that the Commissioner erred (1) in failing or refusing to allow the amount of $110,000 as invested capital paid in to petitioner corporation in property in July, 1914, in pursuance of an agreement dated July 23, 1914; (2) in failing or refusing to allow in the computation of invested capital, intangible *991 and other assets of a cash value of $50,000 purchased and acquired by the petitioner corporation from Robert Woodside on October 5, 1914, for a mortgage of $50,000; (3) in determining that the invested capital of the petitioner was respectively $25,000 for the years 1918 and 1919, $36,906.73 for the year*2206 1920, and $36,644.98 for the year 1921, in determining that the overassessment for 1918 does not exceed $911.98, and that a deficiency exists for the years 1919, 1920, and 1921, and not determining that overassessments exist for the years 1919, 1920, and 1921.
FINDINGS OF FACT.
The petitioner was incorporated on July 17, 1914, under the laws of the State of Delaware, with an authorized capital stock of $200,000 divided into 2,000 shares of the par value of $100 each. The petitioner's principal office is at Homestead, Pa.
In 1897 Robert Woodside and two others formed an association or limited partnership under the name of "Homestead Ice Company, Limited," with a contemplated life of 10 years, for the manufacture, purchase and sale of ice and generally to buy and sell ice in the Borough of Homestead, Allegheny County, Pa. By 1905 Robert Woodside had acquired all of the capital stock of the Homestead Ice Co., Ltd.
About 1898 he acquired an ice delivery business and shortly thereafter he acquired an ice-manufacturing plant theretofore known as the Homestead Ice & Cold Storage Co. He then continued the business of manufacturing and delivering ice until some time in 1914.
*2207 In 1914 Robert Woodside had the petitioner incorporated in Delaware, with a board of directors consisting of himself, his daughter, Grace E. Woodside, his son-in-law, Charles H. Dyer, and S. D. Townsend, Jr. The first meeting of the board of directors was held on July 23, 1914, at which were present Robert Woodside, Grace E. Woodside, and C. H. Dyer. At this meeting it was decided to accept the offer of Robert Woodside to sell to the company certain property, consisting of an ice-manufacturing business, in consideration of the issue of stock of the company of the par value of $110,000.
On July 23, 1914, the petitioner, therein called the company, and Robert Woodside, therein called the vendor, entered into an agreement which was in part as follows:
NOW, THEREFORE, This agreement witnesseth:
I. That the vendor has sold, assigned, transferred and set over, and does hereby sell, assign, transfer and set over unto the company, its successors and assigns all right, title and interest in and to the following described property, to wit:All that certain ice manufacturing business as now carried on by him at 7th Ave. & Hay St., Homestead, Pa., including the real estate (175' *2208 more or *992 less on Seventh Ave. extending back to a depth of 260' more or less to 6th Ave., on which street there is a frontage of 225' more or less), manufacturing plant, office building, machinery, tools, materials, stock on hand, horses, wagons, automobile truck, and the entire existing good will of said business as of this day and date.
Also that certain parcel of real estate as described in Plan of subdivision of Lot No. 790 and part of 789 (Homestead Bank & Life Insurance Company Plan) bounded by Sarah & Hay St., Homestead, Pa., including all the lots in said plan except Nos. 1 and 2.
II. The company hereby agrees, in consideration of said sale and upon the delivery of said property to it, to issue to the vendor and his nominees as hereinafter provided, and to such other nominees as the vendor shall in writing hereafter direct, at such times and in such amounts as they shall respectively direct, certificates of stock of the company to the aggregate amount of Eleven Hundred shares, and said shares shall be deemed to be and are hereby declared to be full-paid shares and not liable to any further call, and the holders of such stock shall not be liable to any further*2209 payment thereon.
III. Said stock shall be issued as follows:| To | Shares |
| Robert Woodside | 1,047 |
| Grace E. Woodside | 25 |
| Charles H. Dyer | 25 |
| S. D. Townsend, Jr | 3 |
On July 23, 1914, certificate No. 1, for 1,100 shares, was issued to Robert Woodside, this being an original issue. On the same day, by certificate No. 2, 25 shares of this stock were placed in the name of Grace E. Woodside; by certificate No. 3, 25 shares of this stock were placed in the name of Charles H. Dyer; by certificate No. 4, 3 shares were placed in the name of S. D. Townsend, Jr.; and by certificate No. 5, the remaining 1,047 shares were placed in the name*2210 of Robert Woodside.
Under date of September 25, 1914, the Secretary of the Commonwealth of Pennsylvania certified that the Homestead Ice Co. had filed a power of attorney and statement required by law, and had paid the fee of $10 required therefor.
Under date of November 10, 1914, a bonus report of the Homestead Ice Co. was submitted to the Auditor General of Pennsylvania, which was received and accepted by him on December 4, 1914, for the purpose of determining a bonus of one-third of 1 per cent upon the amount of capital actually employed or to be employed wholly within the State of Pennsylvania, to be paid to the State Treasurer *993 of Pennsylvania. This report contains statements, among others, that the company began business in Pennsylvania on July 23, 1914; the amount of capital wholly employed in the State of Pennsylvania is $75,000; and the nature of the business is the manufacture and sale of ice at wholesale and retail. In paragraph 14 of this report, under the words "If Capital is employed in, by or through the ownership or interest in Real Estate or other tangible property permanently located in Pennsylvania, give name, location, assessed value for local*2211 taxation, character and actual value of each property," the following appears:
| In Borough of West Homestead, Allegheny County: - Lots Nos. 57 to 63 and parts of Nos. 54 and 56 in the Henry A. Davis Plan, West Homestead, assessed for taxation at | $12,400.00 |
| Buildings and machinery on same | 20,500.00 |
| 1 Acre 3 perches on Hays Street in the Borough of Homestead, Allegheny County, assessed for taxation at | 3,000.00 |
| Total assessed value | 35,900.00 |
| Actual value of property including personalty | 75,000.00 |
About the first of September, 1914, John T. Potts, Howard G. Mowry, William J. Stilley, Alvan M. Forsythe and Charles H. Dyer began negotiations with Woodside for the purchase of all of the capital stock of the petitioner then outstanding, being the 1,100 shares above mentioned. On or about September 15, 1914, these five individuals agreed with Woodside to purchase all of the stock of the corporation from him for $25,000, each purchaser to contribute $5,000 and to receive one-fifth of the stock. In accordance with this agreement, on September 15, 1914, from the 25 shares of stock previously in the name of Charles H. Dyer, certificate No. 6, for 5 shares, was issued*2212 to John T. Potts; certificate No. 7, for 5 shares, to Howard G. Mowry; certificate No. 8, for 5 shares, to William J. Stilley; certificate No. 9, for 5 shares, to Alvan M. Forsythe; and certificate No. 10, for 5 shares, to Charles H. Dyer. On October 5, 1914, certificate No. 11 was issued to Robert Woodside for 1,075 shares, being the stock which had just previously thereto been in the name of Grace E. Woodside, S. D. Townsend, Jr., and Robert Woodside. This stock was then on the same day transferred in equal proportions to the five men above named who were purchasing from Woodside.
As a part of the same transaction between Woodside and the five individuals for the sale of the stock, Woodside, on October 5, 1914, executed an agreement to the Homestead Ice Co. which was in part as follows:
KNOW ALL MEN BY THESE PRESENTS:
That I, Robert Woodside of the Borough of Wilkinsburg, County of Allegheny and State of Pennsylvania, for value received, do hereby sell, assign, *994 transfer and set over unto The Homestead Ice Company, a corporation created under the laws of the State of Delaware and having its place of business in the Borough of Homestead, Allegheny County, Pennsylvania, *2213 its successors and assigns, all my right, title and interest, property, claim and demand, including the full and complete trade rights and trade name, in the HOMESTEAD ICE COMPANY, LIMITED, a limited co-partnership association organized under the laws of the State of Pennsylvania, located and doing business in the Borough of Homestead aforesaid, the said interest being the whole capital stock of the said Homestead Ice Company, Limited, as will appear by reference to the Articles of Association recorded in the Recorder's Office of Allegheny County in Limited Partnership Book Vol. 10, page 471, and by assignments of the several interests therein set out to said Robert Woodside, the said assignments being with this assignment delivered to the Homestead Ice Company, together with the property, assets, earnings and profits as the owner thereof. To have and to hold the same unto the said The Homestead Ice Company, its successors and assigns forever.
On the 5th of October, the Homestead Ice Co., in consideration of the assignment by Woodside above set forth, gave Woodside its mortgage for $50,000, secured by its real estate. The principal of this was repaid to Woodside on January 8, 1920.
*2214 Statements attached to the Commissioner's deficiency notices show the following in regard to his computation of invested capital for the various years and his explanation thereof:
| 1918 | ||
| Capital Stock | $25,000 | |
| Inasmuch as there is an operating deficit the outstanding capital stock constitutes the total invested capital. | ||
| 1919 | ||
| Capital Stock | $25,000 | |
| The adjustment of depreciation on buildings results in an operating deficit, leaving as invested capital the capital stock outstanding. | ||
| 1920 | ||
| Capital Stock | $25,000.00 | |
| Surplus per books and Revenue Agent's report | $21,946.06 | |
| Less: | ||
| 1. Increase in depreciation reserve | 5,738.33 | |
| Adjusted surplus | 16,207.73 | |
| Capital stock and surplus, 12-31-19 | $41,207.73 | |
| Deduction: | ||
| 2. 1918 income tax not paid | 2,297.15 | |
| 3. 1919 income tax $4,755.22 prorated | 2,003.85 | |
| 4,301.00 | ||
| Adjusted invested capital | $36,906.73 | |
| 1921 | ||
| Capital Stock | $25,000.00 | |
| Surplus reported by Revenue Agent | $18,929.77 | |
| Less: | ||
| 1. Increase in depreciation reserve | 6,964.86 | |
| Adjusted surplus | 11,964.91 | |
| 2. Accrued Federal income as shown by Revenue Agent restored | 8,055.53 | |
| Total | $45,020.44 | |
| Deductions: | ||
| 3. 1918 income tax not paid | 2,297.15 | |
| 4. 1919 income tax not paid | 4,710.24 | |
| 5. 1920 income tax, $3,237.27 prorated | 1,368.07 | |
| 8,375.46 | ||
| Adjusted invested capital | $36,644.98 |
*2215 *995 OPINION.
MURDOCK: The petitioner offered certain evidence to prove that at its incorporation the tangible property paid in by Woodside for stock of the par value of $110,000, had an actual cash value of $110,000. It also offered evidence to prove that Woodside transferred certain good will including the trade name of "Homestead Ice Company" as consideration for the petitioner's mortgage of $50,000, and that this consideration for the mortgage was real and ample and had never previously been transferred by Woodside to the petitioner. The only effect of this latter transaction, however, upon invested capital would be that the cost of the asset would have to be considered in determining the amount of earned surplus which the corporation might have at any particular time. Except as set out in our findings of fact, we do not know how the Commissioner computed any earned surplus for the petitioner, and we certainly have not been shown that he made any improper use of this mortgage or the good will item in his computation of the petitioner's invested capital for any of the years involved.
After a careful study of the petitioner's allegations of error and the Commissioner's*2216 answer, together with a consideration of any additional information as to the issue in this case which we might get from the statements of counsel, we are of the opinion that the real issue in this case is, What was the petitioner's invested capital for the various years? If we were satisfied that the actual cash value of the assets paid in by Woodside for stock in July, 1914, was $110,000, then, as a result of that transaction, $110,000 would be the starting point for the computation of the petitioner's invested capital; but the Commissioner has determined that in the taxable years *996 the petitioner had capital stock outstanding in the amount of $25,000 only. Why or how he made this determination we do not know, but neither do we know that the capital stock outstanding in the taxable years was in excess of $25,000 par value. The issue, as drawn, would require proof of all facts necessary to the computation of invested capital by taking the original invested capital resulting from the actual cash value of the property paid in for stock as it was affected by all subsequent changes up to and including each of the years involved herein. We have not been told what happened*2217 after the events of 1914 as set forth in our findings of fact, nor what were the facts in the taxable years on which the computation of invested capital would depend. Consequently, we are unable to say what the petitioner's invested capital should be for the years here in question.
In July, 1914, Woodside had the petitioner incorporated in Delaware. The minutes of the first meeting of the incorporators which was held in Wilmington, Del., were put in evidence. In those minutes the following appears:
Upon motion, duly made and seconded, and by the affirmative vote of all present, the following preambles and resolutions were adopted:
WHEREAS, Robert Woodside has offered to sell to this Company property as follows: [Here follows the description of the property as in the agreement of July 23, 1914, in our findings of fact] in consideration of the issue of stock of this Company to the amount of One Hundred Ten Thousand Dollars ($110,000) par value, and
WHEREAS, it appears to the stockholders that such property is necessary for the business of this Company, and that the same is of the value of One Hundred Ten Thousand Dollars ($110,000);
RESOLVED, That the Board of Directors*2218 of this Company be and they are hereby authorized and directed to purchase the property above mentioned for the said price and to issue said stock in payment therefor; Provided, that, in the judgment of the Board of Directors, the said property is of the value above stated.
These incorporators, so far as the record shows, were entirely unacquainted with either Woodside's business or the value of the property he proposed to transfer to the corporation. After holding this meeting all but one of them dropped out of the affairs of the corporation by transferring their subscriptions to Woodside, and that one, named Townsend, merely held three shares of stock as Woodside's nominee from July 23, 1914, until some time on or before October 5, 1914, when he transferred the three shares to Woodside. He was named a director but was not present on July 23, 1914, at the first meeting of the board of directors. So far as we know, he took no part in the affairs of the corporation after the meeting of the incorporators above mentioned.
*997 The minutes of the first directors' meeting which was held in Homestead, Pa., were also put in evidence. These minutes show that R. Woodside, G. *2219 E. Woodside and C. H. Dyer were the directors present and that a motion as follows was carried:
RESOLVED, That this Company accept the offer of Robert Woodside to sell to this Company the property described in the resolution of the stockholders passed July 18, 1914, authorizing the purchase, and the Board of Directors do hereby adjudge and declare that said property is of the fair value of One Hundred Ten Thousand Dollars and that the same is necessary for the business of this Company.
A so-called inventory was also put in evidence. It was a list of a number of items of real and personal property with an amount opposite each item which amounts totaled $107,187.57. Forsythe testified that Woodside turned over this inventory to the five purchasers of his stock at the time they purchased the stock or within a short time thereafter, and that in his opinion, the values shown were "fair and reasonable." The evidence above discussed was obviously introduced for the purpose of showing that the value of the property paid in to the petitioner by Woodside was substantially equal to the par value of the stock issued therefor to him. However, we see that Woodside sold all of his stock in*2220 the corporation on or about September 15, 1914, to Forsythe and his four associates for $25,000. This appears to have been an arm's length transaction between people in a position to know the values of the various elements involved. Woodside came out of this transaction with $25,000 in cash and a mortgage for $50,000, in place of the assets which he had just transferred to the petitioner and which the petitioner and some of its witnesses would have us believe were worth $160,000. Shortly after this transaction, two of the five purchasers of Woodside's stock, who were then officers of the petitioner, filed a sworn statement with the Auditor General of Pennsylvania for the purpose of fixing the bonus to be paid by the corporation for the privileges of doing business in the State, to the effect that the capital employed in Pennsylvania was $75,000.
In this state of the record we are unwilling to hold that the actual cash value of the property paid in by Woodside for stock was in excess of $25,000, because we do not know what it was worth. If, perchance, the Commissioner has determined that property of the actual cash value of $25,000 was paid in to the petitioner for the capital*2221 stock outstanding in each of the taxable years, and in the way arrived at the $25,000 of invested capital as set forth in his deficiency notices, we can not say that he was in error.
Judgment will be entered for the respondent.