1929 BTA LEXIS 2575">*2575 Section 331 of the Revenue Act of 1921 held not applicable where the owner of a business received practically all the stock of the corporation but immediately transferred it in accordance with a preexisting agreement that he should sell it.
16 B.T.A. 533">*533 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $5,756.11. The only error alleged is that section 331 of the Revenue Act of 1921 should not have been used by the respondent in determining the value of the assets of the petitioner for invested capital purposes. The facts were stipulated from which we make the following findings of fact.
FINDINGS OF FACT.
The petitioner and its affiliated corporation are corporations existing under, and by virtue of, the laws of the State of Pennsylvania, with offices at 30 South Newberry Street, York, Pa.
The deficiency letter was mailed to the taxpayer on May 11, 1926, and states a deficiency of $5,756.11.
The taxes in controversy are income and excess-profits taxes for the calendar year1929 BTA LEXIS 2575">*2576 ended December 31, 1921, and are less than $10,000.
16 B.T.A. 533">*534 The taxable net income for the year ended December 31, 1921, is $75,376.24, as set forth in schedule 2 annexed to and made a part of the said deficiency letter dated May 11, 1926.
If section 331 of the Revenue Acts of 1918 and 1921 is found to apply in this case, then the correct invested capital for the purpose of determining the excess-profits tax for the year 1921 is $273,843.59, as set forth in schedule 4 of the revenue agent's report dated January 6, 1926, covering examination of the income-tax liability for the year 1921. Or, if section 331 of the Revenue Acts of 1918 and 1921 is found not to apply in this case, then the correct invested capital is $326,821.92, as follows:
| Net invested capital as determined by revenue agent's report | |
| dated Jan. 6, 1926 | $ 273,843.59 |
| Add - Deduction made by revenue agent for adjustment of invested | |
| capital on account of inadmissible assets | 663.76 |
| Net invested capital before adjustment on account of inadmissible | |
| assets as determined by Revenue Agent's report dated Jan. 6, 1926 | 274,507.35 |
| Add - Difference between value of tangible assets at Feb. 1, | |
| 1919, as per books of H. L. Neuman sole proprietorship and the | |
| value as set forth in appraisal of American Appraisal Co. in | |
| September 1917, plus cost of subsequent additions less | |
| depreciation to Feb. 1, 1919, as set forth in schedule 4, revenue | |
| agent's report dated Jan. 6, 1926, which difference was deducted | |
| by revenue agent from invested capital reflected by the books of | |
| H. L. Neuman Co. | 24,324.03 |
| Good will paid for in stock deducted by the revenue agent in | |
| arriving at his net invested capital as set forth in schedule 4 | |
| of his report dated Jan. 6, 1926 | 28,700.63 |
| Net invested capital before adjustment for inadmissible assets | 327,532.01 |
| Deduction for adjustment on account of inadmissible assets | 710.09 |
| Net invested capital if section 331 of the Revenue Act of 1918 | |
| and 1921 is found not to apply | 326,821.92 |
1929 BTA LEXIS 2575">*2577 H. L. Neuman, who had conducted an ice, milk and milk products business since 1872, decided in the year 1917 to retire from active business and sell out to his two sons, E. W. and J. W. Neuman, who had been working for him since they were boys at nominal salaries. In order to determine the value of the business the American Appraisal Co. was engaged to make an appraisal of the properties of H. L. Neuman in September, 1917. After the value of the properties had been determined H. L. Neuman and his two sons placed a minimum value on the assets, plus good will, of $200,000. H. L. Neuman then proceeded to fix the amount of consideration he thought should be paid him by his said two sons in cash for the business. In fixing the amount of consideration cognizance was taken by Neuman 16 B.T.A. 533">*535 of the fact that a considerable amount of the success of the business was due to the efforts of his said two sons, and after consulting with his counsel, he fixed the amount that the boys should pay him in cash at $100,000. Upon advice of counsel it was decided that he, Neuman, should incorporate the business and then transfer the capital stock issued by the corporation to his sons.
The H. 1929 BTA LEXIS 2575">*2578 L. Neuman Co. was incorporated January 9, 1919, under the laws of Pennsylvania with an authorized capital of $200,000, consisting of 2,000 shares of the par value of $100 each, to take over the assets and "going" business which had been conducted by H. L. Neuman.
The actual physical closing of H. L. Neuman's business for the fiscal year ended 1919 was not accomplished until February 17, 1919, at which time the actual transfer of the assets of the H. L. Neuman Co. was concluded.
The corporation in accordance with a resolution passed at a meeting of its stockholders held on February 17, 1919, and in accordance with a previous agreement between H. L. Neuman and his two sons, E. W. and J. W. Neuman, agreed to purchase, and H. L. Neuman agreed to sell, all of the real estate owned by H. L. Neuman situate in the ninth Ward of the City of York, together with the machinery, buildings and equipment used for the manufacture of ice, ice cream, and milk products, including all the accounts receivable outstanding, cash on hand and in bank, and the lease which H. L. Neuman had covering real estate with an ice house thereon owned by Alfred Leightner, for the sum of $199,800, payable in full-paid, 1929 BTA LEXIS 2575">*2579 nonassessable capital stock of the corporation, consisting of 1,998 shares of a par value of $100 each. Two shares, one share each, were sold by the corporation to E. W. Neuman and J. W. Neuman, for cash at $100 per share.
On February 17, 1919, the capital stock of H. L. Neuman Co. was issued as follows:
| Certificate No. 1, H. L. Neuman | 1998 shares |
| Certificate No. 2, E. W. Neuman | 1 share |
| Certificate No. 3, J. W. Neuman | 1 share |
On the same date, at the same time, certificate No. 1, issued to H. L. Neuman, was canceled, and the following certificates were issued to cover the 1,998 shares:
| Certificate No. 4, H. L. Neuman | 2 shares |
| Certificate No. 5, E. W. Neuman | 998 shares |
| Certificate No. 6, J. W. Neuman | 998 shares |
Certificate No. 1 was never removed from the stock certificate book.
In accordance with an oral agreement made prior to the incorporation of the business, and supplemented by a written agreement dated 16 B.T.A. 533">*536 February 18, 1919, H. L. Neuman agreed to sell to each of his two sons 998 shares at $50,000. The agreement further provided that each son was to give bond for $100,000 and the stock to be held by H. L. Neuman as1929 BTA LEXIS 2575">*2580 collateral.
The consideration was settled for by E. W. and J. W. Neuman giving H. L. Neuman their notes secured by a bond for double the amount.
H. L. Neuman died intestate September 18, 1920, and when the estate was finally settled in the year 1925, notes were given to the heirs equal in the aggregate to the unpaid balances that were due H. L. Neuman by E. W. and J. W. Neuman at the time of his death.
The minutes of the stockholder's meetings of the H. L. Neuman Co. do not disclose the shares of stock voted by each stockholder at the meetings. They do show, however, that during the life of H. L. Neuman the stockholders' meetings were only attended by H. L. Neuman, E. W. Neuman, and J. W. Neuman.
At the stockholders' meeting dated February 17, 1919, salaries were authorized as follows:
| H. L. Neuman, president | $1,000 per annum |
| E. W. Neuman, general manager | 7,000 per annum |
| J. W. Neuman, secretary and treasurer | 7,000 per annum |
No other reference is made to H. L. Neuman in the minutes of the company during his life, with the exception of his election as a director with the other directors at the annual meetings.
The minutes of the meetings of the1929 BTA LEXIS 2575">*2581 directors do not refer to H. L. Neuman during his life other than to record his attendance at the meetings and his election as an officer, with the exception of the meeting of April 1, 1919, where it was decided that H. L. Neuman should have the use of the Buick touring car upon giving a reasonable notice to the manager or treasurer.
OPINION.
SIEFKIN: The only question is whether section 331 of the Revenue Act of 1921 is applicable to the facts. In February, 1919, the petitioner, which had been organized in January, 1919, received from H. L. Neuman the assets of the ice, ice cream and dairy products business formerly conducted by him as an individual and issued to him $199,800 par value of its capital stock in full payment. The other two shares were sold by the corporation to E. W. Neuman and J. W. Neuman for cash at $100 per share. Immediately thereafter, on the same day, the certificate made out to H. L. Neuman was canceled and new certificates were issued, 2 shares to H. L. Neuman, and 998 shares each to E. W. Neuman and J. W. Neuman. This was done 16 B.T.A. 533">*537 to effect a prior agreement between H. L. Neuman and his sons by which they were to buy him out. They gave their1929 BTA LEXIS 2575">*2582 father their notes, secured by bonds, and the stock was held by their father as collateral.
On this state of facts the petitioner contends that 50 per centum or more of the interest or control did not remain with the same person (H. L. Neuman) who formerly owned the business. That contention is based primarily on the assumption that interest or control did not remain in H. L. Neuman, and was never, for practical purposes, in him, since it was understood that the sons were to have control.
We do not believe that section 331 requires a construction that the momentary ownership of nearly all the stock in the corporation by the owner of the predecessor business is enough to make the section applicable. It reads:
That in the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them * * *.
We do not believe the word "remains," as used by Congress, is to be construed as applying to a state of facts in which the person who receives the stock has entered into1929 BTA LEXIS 2575">*2583 a definite agreement to have such stock reissued to others and who carries out such agreement coincident with the issuance to him of the stock. In , relied on by the respondent, the interval between receipt of the stock by the former holders of the property and their disposition of such stock was nearly a year. We said:
Here, the stockholders of the old company lawfully came into possession of all the issued stock of the new, with no obligation on their part unperformed. Their subsequent disposition of stock, both as to time and amount, was entirely discretionary.
So we held section 331 applicable. But in this proceeding there was a definite obligation unperformed, i.e., the immediate transfer of the stock to others. We consider that the interest or control did not "remain" in H. L. Neuman.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN, MARQUETTE, PHILLIPS, and MURDOCK dissent, being of the opinion that the facts are within section 331. See 1929 BTA LEXIS 2575">*2584 .