*3611 1. Petitioner's claim for inclusion of book value of fixed assets in the computation of its invested capital for the taxable years involved disallowed by reason of lack of proof of the actual value of such assets when paid in for stock or of the cost of such part thereof as may have been acquired by expending earned surplus therefor.
2. Value of a leasehold at March 1, 1913, determined for depreciation purposes.
*63 The respondent has asserted deficiencies in income and profits taxes for the fiscal years ended April 30, 1918, and April 30, 1920, in the respective amounts of $2,153.54 and $1,121.88. The petitioner contends that its invested capital was erroneously reduced in each of the taxable years (1) by arbitrary adjustments of the book value of its fixed assets as of the year 1910 and other years; (2) by improper adjustments of depreciation on buildings and other improvements used in its trade or business; and (3) by excluding the alleged value of a certain leasehold owned by it in the taxable years. As a second cause of action the petitioner alleges*3612 that the Commissioner erroneously disallowed exhaustion of a certain leasehold as an annual deduction from income. At the hearing the allegation of error in respect of depreciation was abandoned. By agreement of counsel the two proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner is a Nebraska corporation, with its principal place of business at Grand Island. It was incorporated in 1894, with an authorized capital of $100,000, evidenced by 1,000 shares of stock of the par value of $100 each. Its operations were profitable and prior to 1910 it had assets worth substantially more than the par value of its outstanding stock. About the year 1910 it increased authorized capital to $250,000, evidenced by 2,500 shares of stock of the par value of $100 each.
The tangible assets of the petitioner in the taxable years consisted of 484 1/2 acres of lands and certain improvements thereon necessary in the operation of its business. Included in the improvements were certain sheds, pens and barns used in loading, unloading and feeding livestock, which were constructed by it, and 15,000 bushel capacity *64 grain elevator. The land owned by*3613 the petitioner was acquired by purchase. About 1910 the petitioner erected a building two and one-half stories in height, with offices, dining room, lunch counter, kitchen, two bathrooms and 25 sleeping rooms, and furnished, equipped and operated the same as a hotel. Prior to the taxable years the hotel and all its furnishings and equipments were destroyed by fire. The capital cost of the land, stockyard facilities and of the hotel building and equipment can not be determined from the record.
On September 5, 1906, the petitioner leased about 4 acres of right-of-way land from the Union Pacific Railway, together with a number of loading pens and other stockyard facilities for a term of 20 years. This leasehold was acquired without cost, can not be assigned except with the consent of the lessor, may be terminated by the lessor with appropriation of improvements on six months' notice, and is subject only to a nominal rental of $25 per year.
About 1910 the petitioner opened a new set of books which showed values of "fixed assets" at that time in the following amounts: real estate, $121,006.75; improvements, $93,912.76; leases and options, $45,000; elevator, $6,000; or a total*3614 of $265,919.51. In its income and profits-tax returns for each of the taxable years, it included this total in its computation of invested capital. Upon audit of such returns the Commissioner made the following adjustments in the petitioner's balance sheet as of May 1, 1916: real estate, $72,675; improvements, $55,662.71; elevator, $15,000; thereby reducing the petitioner's fixed assets for invested capital purposes to $143,537.71.
OPINION.
LANSDON: The petitioner's chief contention here is that the Comm issioner has erroneously reduced the book value of its fixed assets for invested capital purposes in the taxable years by the amount of $122,381.80. The assets in question consist of 484 1/2 acres of land, certain extensive stockyard facilities, leases and options and a grain elevator. To sustain its position it relies on the decisions of the Board in the , and . It argues that inasmuch as its books from 1910 to and through the taxable years reflected its knowledge of the cost and its best judgment of the values of the fixed assets which it seeks to*3615 include in the computation of its invested capital, there is a presumption that such books are correct and that the costs and value reflected therein should not be disturbed unless the respondent adduces affirmative evidence sufficient to sustain his adjustments.
*65 Reference to the decisions cited convinces us that neither has any bearing on the issue here. There, in each instance, the controversy was over the reduction of invested capital resulting from alleged arbitrary increase by the Commissioner of the petitioner's reserve for depreciation and had no relation to the value of the depreciable assets in controversy at the time they became factors in the computation of invested capital. The pertinent provisions of law applicable here, as found in section 207(a) of the Revenue Act of 1917, and section 326(a) of the Revenue Act of 1918, include the following categories of tangible assets which may be included in invested capital for profits-tax purposes:
1. Actual cash bona fide paid in for stock or shares:
2. Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par*3616 value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * *
3. Paid-in or earned surplus and individed profits; not including surplus and undivided profits earned during the year * * *.
An analysis of these provisions indicates very clearly that in the determination of invested capital the Commissioner can not accept as conclusive either the par value of outstanding stock or the book values of assets as reflected by the accounts of taxpayers. Reduced to its simplest terms, statutory invested capital may include paid-in capital and earned surplus. By the very terms of the law, taxpayers must be able to show the actual cash value of the assets paid in for stock or shares and the actual amounts of net earnings remaining at risk in the business. In this proceeding we are unable to determine whether the land and improvements were acquired for cash or were paid in for stock or shares, or the actual cash value thereof*3617 if so paid in. In the absence of these essential facts the most conclusive proof of the actual value of the petitioner's fixed assets in 1910 or at any other date subsequent to incorporation or to the acquisition of such property is obviously wholly immaterial here. . No evidence has been adduced upon which we can make any findings of fact upon which to base a conclusion adverse to the determination of the Commissioner.
The petitioner's second contention is that it should be allowed a ratable annual deduction from its gross income for each of the taxable years on account of the exhaustion of the lease through which it enjoys the possession and use of certain lands and stockyards facilities owned by the Union Pacific Railway Co. To prevail on *66 this point it must prove the value of such lease at March 1, 1913. Two witnesses, both formerly connected with petitioner as stockholders and officers, of whom one is now a banker and the other the livestock agent of the Union Pacific Railway Co., testified that in their opinions the lease in question had a value at March 1, 1913, in the amount of $45,000. *3618 Upon this uncontradicted evidence we are of the opinion that the leasehold in question had a value of $45,000 at March 1, 1913, and that the petitioner is entitled to ratable deductions for the depreciation thereof in the taxable years, based on its remaining life.
Decision will be entered under Rule 50.