*3751 Under the evidence, held, that the petitioner is not entitled to include in its invested capital for the years 1919 and 1920 any amount as paid-in surplus.
*694 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amounts of $4,588.32 for the year 1919 and $4,483.16 for the year 1920. The petitioner alleges thirteen errors on the part of the respondent in determining its income and invested capital for the years mentioned, but at the hearing all of these errors were waived except that relative to paid-in surplus.
FINDINGS OF FACT.
The facts are stipulated by the parties as follows:
The Bloomer Ice and Cold Storage Company was incorporated on January 6, 1907.
Its authorized capital stock was $125,000, of which $118,900 was fully paid in.
On or about September 30, 1910, the bank loans due by the company were called in and as a result the company was threatened with bankruptcy.
On December 10, 1910, at a meeting of the stockholders it was proposed and agreed*3752 to that each stockholder would surrender his stock; that a new company to be known as the Bloomer Cold Storage Company would be organized and that each of the stockholders of the old company would be allowed on his purchase of stock in the new company, a credit of 25 per cent. of the par value of the old stock which he surrendered, that is to say, he would be entitled to one share of the capital stock of the new company for one share of the old stock, plus $75 paid by him in cash.
*695 The new company, known as the Bloomer Cold Storage Company, was incorporated on January 1, 1911.
All the stockholders of the old company surrendered their stock and, in addition, contributed in cash $89,175 for capital stock in the new company.
In addition to the old stockholders, five new stockholders who had no connection with the old company, purchased 221 1/4 shares of the capital stock of the new company for $22,125 in cash.
Attached and marked as Exhibit A, is a statement of the stockholders of the old company and the new company showing their respective stockholdings.
Attached hereto and marked Exhibit B is a statement showing in column 1 a true copy of the balance sheet*3753 of the old company prepared for the company on September 30, 1910, by J. H. Greenhalgh & Company, Public Accountants, Chicago, Ill., in column 7 a true copy of the balance sheet as shown on the books of the new company on January 1, 1911; in column 4 is a reconstructed balance sheet of the old company as of December 31, 1910. This reconstructed balance sheet was constructed in the absence of the books from the items appearing on the balance sheet of September 30, 1910, which appears in column 1 and the balance sheet of January 1, 1911, which appears in column 7 of the exhibit, so as to reconcile column 1 with column 7 and to indicate what the balance sheet of the old company as shown by its books, probably was immediately prior to the organization of the new company.
It will be noted on reference to column 7 of Exhibit B that the plant was shown on the books of the new corporation at $100,000 whereas it stood on the books of the old company at $152.046.67.
The taxpayer claims that the write-down of the plant by $52,046.67 was arbitrary and that the net value of the plant was $152,046.67 on January 1, 1911; that if this write-down had not taken place the surplus and surplus reserve*3754 as of January 1, 1911, would have amounted to $77,016.82, which amount would also reflect an operating deficit of $12,158.18, and that these two amounts added together make $89,175, which the petitioner claims as paid in surplus. The Commissioner has denied this claim.
It is stipulated that in the year 1919 the Bloomer Cold Storage Company restored to the plant account $55,796.67, which amount included the $52,046.67 referred to herein. At the same time the reserve for depreciation was increased by $55,796.67. The plant account was carried on the books at $100,000 plus additions from January 1, 1911, to 1919, when the $52,046.67, originally written off on January 1, 1911, was restored.
The name of the Bloomer Cold Storage Company was changed in 1922 to that of the Hurd Creamery Company, the petitioner herein.
All other questions raised by the petitioner in its petition except the question of paid-in surplus are hereby waived by the petitioner.
The Board may hear and determine this case on the foregoing stipulation.
| EXHIBIT A. | ||
| HURD CREAMERY COMPANY v. COMMISSIONER OF INTERNAL REVENUE | ||
| List of stockholders. | ||
| Bloomer Ice & Cold | Bloomer Cold Stor- | |
| Storage Co. (the | age Co. (the new | |
| old company) as of | company as of Jan. | |
| Dec. 31, 1910. | 1, 1911. | |
| Shares. | Shares. | |
| Frank Ainsworth | 5 | 5 |
| D. F. Anderson | 5 | 5 |
| H. M. Binder | 5 | 5 |
| Caroline E. Bowman | 10 | 2 1/2 |
| C. H. M. Brown | 8 | 2 |
| F. W. Balluff | 16 | 4 |
| A. L. Bloomer | 10 | 4 |
| R. W. Bloomer | 7 | 2 |
| R. H. Bloomer | 426 | 105 |
| Dr. A. C. Brown | 2 | 2 |
| Dr. J. H. Cole | 20 | 20 |
| M. C. Children | 11 | 2 3/4 |
| George F. Camp | 10 | 2 1/2 |
| F. R. Children | 16 | 16 |
| Charlotte Dryden | 3 | 3 |
| F. M. Dean | 10 | 15 |
| Allen Dudley & Company | 16 | 4 |
| W. C. Dickey | 5 | 1 1/4 |
| F. W. Graham | 10 | 2 1/2 |
| D. C. Flack | 2 | 1/2 |
| Charles M. Harl Estate | 5 | |
| F. L. Husz | 55 | 100 |
| Dr. A. P. Hanchett | 10 | 10 |
| Dr. W. P. Humbach | 5 | 1 1/4 |
| George H. Mayme | 3 | 3/4 |
| L. Hammer | 10 | 2 1/2 |
| Eleanor Harl-King | 2 1/2 | 1 |
| Ruth Harl | 2 1/2 | 1 |
| George E. , haskell | 50 | 212 1/2 |
| J. C. Jensen | 16 | 10 |
| W. H. Kimball | 21 | 21 |
| E. H. Lougee | 5 | 1 1/4 |
| J. Katlman | 5 | 1 1/4 |
| J. H. Pace | 3 | 3/4 |
| W. L. Patterson | 6 | 1 1/2 |
| C. E. Price | 10 | 10 |
| C. G. Saunders | 5 | 5 |
| Mrs. Stella Patterson | 3 | 3/4 |
| Joe Smith | 10 | 10 |
| Henry Spetman | 21 | 21 |
| E. C. Smith | 60 | 75 |
| Drs. Snyder & Snyder | 10 | 2 1/2 |
| Chris Straub | 8 | 58 |
| L. Simon | 1 | 1/4 |
| Walter I. Smith | 10 | 2 1/2 |
| E. E. Shugart | 20 | 20 |
| Mrs. Anna Toller | 5 | 5 |
| George B. Tyler | 150 | 112 1/2 |
| E. A. Wickham | 20 | 20 |
| J. G. Wadsworth | 10 | 10 |
| J. J. Tiarks | 35 | 35 |
| Emmet Tinley | 5 | 10 |
| Charles E. Woodbury | 10 | 15 |
| W. H. Dudley | 7 1/2 | |
| Hattie T. Harl | 8 3/4 | |
| W. J. Hines | 100 | |
| F. N. Prophet | 100 | |
| Mrs. B. C. Melhop | 5 | |
| Treasury Stock | 47 1/2 | |
| Total | 1,189 | 1,250 |
*3755 NOTE: On January 1, 1911, $113,675 of the stock of the new company was subscribed for and the balance was subscribed for between Jan. 1, 1911, and Dec 31, 1912. The par value of the stock in each company was $100 per share.
EXHIBIT B.
Bloomer Cold Storage Co. (now Hurd Creamery Co.), Council Bluffs, Iowa.[Reconstructing balance sheet as of Dec. 31, 1910, using balance sheets as of Sept. 30, 1910, and Nov. 1, 1911, as a basis. To reconcile balace sheets as of Sept. 30, 1910, and Nov. 1, 1911.
ASSETS.
Cash on hand and in bank
Advance
Accounts receivable and coupons receivable
Accounts receivable, Bloomer Ice & Cold Storage Co
Notes receivable
Inventories
Accrued storage earnings
Unexpired insurance
Plant
Stock subscriptions
Adjustment
Totals
LIABILITIES AND CAPITAL.
Bloomer Ice & Cold Storage Co
Bank overdraft
Advance on butter
Accounts payable and coupons outstanding
Notes payable
Mortgage payable
Accrued interest payable
Accrued taxes payable
Dividends payable
Capital stock outstanding
Surplus and undivided profits
Reserve for butter losses
Reserve for plant extension
Reserve for bad debts
Totals
| EXHIBIT B. | ||
| Bloomer Cold Storage Co. (now Hurd Creamery Co.), Council Bluffs, Iowa. | ||
| [Reconstructing balance sheet as of Dec. 31, 1910, using balance sheets as of | ||
| Sept 30, 1910, and Nov. 1, 1911, as a basis. To reconcile balance sheets as of | ||
| Sept. 30, 1910, and Nov. 1, 1911. | ||
| Column 1 | Column 2 | Column 3 |
| Bloomer Ice & Cold Storage Co., Sept. 30, 1910. | Transactions. | Adjustments. |
| Dr. | Cr. | |
| $5,597.45 | 1 - $3,065.87 | |
| 130.74 | 1 - 10.74 | |
| 10,665.99 | 1 - 6,427.92 | |
| 1 - $1,269.27 | ||
| 188.63 | 1 - 90.00 | |
| 21,972.80 | 1 - 10,902.91 | |
| 4,306.24 | 1 - 2,142.14 | |
| 714.93 | 1 - 70.69 | |
| 151,646.04 | 1 - 400.63 | |
| (310.44) | 1 - 310.44 | |
| 194,912.38 | ||
| 5,790.30 | 1 - 5,790.30 | |
| 1 - 15,263.50 | ||
| 7,231.60 | 1 - 1,121.64 | |
| 36,000.00 | 1 - 9,328.30 | |
| 20,000.00 | ||
| 1 - 983.37 | ||
| 1,131.57 | ||
| 429.75 | ||
| 118,900.00 | ||
| (443.06) | 1 - 11,715.12 | |
| 5,272.22 | 1 - 5,272.22 | |
| 600.00 | 1 - 600.00 | |
| 194,912.38 | 37,382.53 | 37,382.53 |
| EXHIBIT B. | |||
| Bloomer Cold Storage Co. (now Hurd Creamery Co.), Council Bluffs, Iowa. | |||
| [Reconstructing balance sheet as of Dec. 31, 1910, using balance sheets as of | |||
| Sept. 30, 1910 and Nov. 1, 1911, as a basis. To reconcile balance sheets as | |||
| of Sept. 30, 1910, and Nov. 1, 1911. | |||
| Column 4 | Column 5 | Column 6 | Column 7 |
| Bloomer Ice & Cold | Adjustments. | Bloomer Cold | |
| Storage Co., Dec. | Storage Co., Jan. | ||
| 31, 1910. | 1, 1911 | ||
| Dr. | Cr. | ||
| $2,531.58 | $2,531.58 | ||
| 120.00 | 120.00 | ||
| 4,238.07 | 4,238.07 | ||
| 1,269.27 | 1,269.27 | ||
| 98.63 | 98.63 | ||
| 32,875.71 | 32,875.71 | ||
| 2,164.10 | 2,164.10 | ||
| 644.24 | 644.24 | ||
| 152,046.67 | 2 - $52,046.67 | 100,000.00 | |
| 3 - $113,675.00 | 113,675.00 | ||
| 195,988.27 | 257,616.60 | ||
| 2 - 29,725.00 | 29,725.00 | ||
| 15,263.50 | 15,263.50 | ||
| 6,109.96 | 6,109.96 | ||
| 45,328.30 | 45,328.30 | ||
| 20,000.00 | 20,000.00 | ||
| 983.37 | 983.37 | ||
| 1,131.57 | 1,131.57 | ||
| 429.75 | 429.75 | ||
| 118,900.00 | 2 - 118,900.00 | 3 - 113,675.00 | 113,675.00 |
| (12,158.18) | 2 - 22,128.33 | 9,970.15 | |
| 2 - 5,000.00 | 5,000.00 | ||
| 2 - 10,000.00 | 10,000.00 | ||
| 195,988.27 | 232,575.00 | 232,575.00 | 257,616.60 |
*3757 *698 EXHIBIT B-1.
EXPLANATION OF ADJUSTMENTS.
(1) Changes in accounts during the period September 30, 1910, to December 31, 1910, due to operations or adjustments, or both, increasing the deficit from $443.06 to $12,158.18.
(2) Closing out the capital stock account and offsetting same by setting up a liability to the old corporation of 25 per cent of the par value of the capital stock outstanding, by reducing the plant account and by setting up surplus and surplus reserves.
(3) To show capital stock of new corporation subscribed for.
OPINION.
MARQUETTE: The only question presented for our determination by the record in this proceeding is whether the petitioner is entitled to include in its invested capital for the years 1919 and 1920 the amount of $89,175 as paid-in surplus.
The evidence herein shows that the petitioner's predecessor was, in the year 1910, on the verge of bankruptcy. In order to avert bankruptcy the petitioner was organized, and all of its capital stock, amounting to $125,000, was issued for the stock of the old company and $111,300 in cash, of which $89,175 was furnished by the stockholders of the old company, the remaining $22,125 being*3758 subscriptions by other persons for the new stock at par. Having thus acquired the capital stock of the old company, the petitioner dissolved that company and took over its assets and liabilities.
We are unable to determine from the evidence the value of the capital stock of the old company at the time it was acquired by the petitioner, or the net value of the assets of the old company at the time it was liquidated. That the stock of the old company was not worth its book value as shown by the balance sheets incorporated in the findings of fact, is very evident from the fact that the company was on the verge of bankruptcy. The respondent has determined that the petitioner is not entitled to any paid-in surplus and the burden is upon the petitioner to show that the respondent erred in that determination. The petitioner has wholly failed to meet that burden and we have before us no evidence from which we can find that the petitioner in exchange for its capital stock acquired cash and other assets of a value greater than the par value of the stock. On the record we must affirm the respondent.
Judgment will be entered for the respondent.