1928 BTA LEXIS 2883">*2883 1. INVESTED CAPITAL. - The original paid-in capital of this petitioner, which was incorporated in 1874, can not now be determined, and due to successive reorganizations adjustments of such invested capital are vague and uncertain. Held, that under the provisions of sections 326 of the Revenue Acts of 1918 and 1921 petitioner's invested capital can not be determined and assessment of profits taxes should be made pursuant to section 328 of said Revenue Acts.
2. DEPRECIATION. - The respondent's computations of depreciation in respect to basis and rates appear to furnish a reasonable deduction for depreciation and are approved.
14 B.T.A. 912">*912 The deficiencies in petitioner's income and profits taxes in controversy in this proceeding are in the amounts of $10,750.07 for the year 1919, $727.32 for the year 1920, and $2,689.51 for the year 1921.
Petitioner alleges that the respondent erred in using the values as shown by an appraisal made in 1909 as the basis for computing (1) depreciation and (2) invested capital.
FINDINGS1928 BTA LEXIS 2883">*2884 OF FACTS.
Petitioner is a North Carolina corporation whose principal office is at Wilmington, N.C., and is engaged in the operation of a cotton mill.
Petitioner was incorporated in 1874 under the name of The Wilmington Cotton Mills. The mill failed and after a reorganization it was operated by a few of the original stockholders until 1893, when Hugh McRae became president and manager and the largest 14 B.T.A. 912">*913 stockholder of petitioner upon the death of his father. At the beginning of the year 1907, except for 100 shares of stock held by Matt Heyer, Hugh McRae and Donald MaRae owned all of petitioner's outstanding capital stock, which consisted of 1,495 shares of common stock of the par value of $100 each, and 869 shares of preferred stock of the par value of $100 each, or a total par value of $236,400.
On May 2, 1907, the stockholders of petitioner approved the directors' resolution that for the benefit of petitioner its outstanding common capital stock be reduced to 1,000 shares with a par value of $100 each, and its preferred capital stock be increased to 1,000 shares with a par value of $100 each. The McRae brothers surrendered the common stock, which was canceled. 1928 BTA LEXIS 2883">*2885 On the same date the stockholders also approved the action of the directors in issuing to Donald McRae 73 shares of common and 65 shares of preferred stock, and to Hugh McRae 72 shares of common and 66 shares of preferred stock, all of the par value of $100 each, in consideration of their cancellation and discharge of petitioner's indebtedness in the amount of $84,816.91 to each of them. The total amount of 145 shares of common and 131 shares of preferred stock was issued for the cancellation of a total indebtedness of $169,633.82, which amount the McRae brothers had expended in building a new weave shed and the purchase of new machinery. Prior to that expenditure the mill had been kept in good physical condition. The McRae brothers accepted the small amount of stock in consideration of the cancellation of the said indebtedness because petitioner was not able to pay interest on the debt and dividends.
In 1909 all of petitioner's outstanding capital stock, amounting to $100,000 of common and $100,000 of preferred, was sold by McRae brothers and Heyer to J. W. Williamson and John D. Bellamy. Bellamy became president and Williamson became secretary and treasurer of petitioner. 1928 BTA LEXIS 2883">*2886 Immediately after the sale of the stock the new stockholders, officers and directors of petitioner secured authority to change petitioner's name to Bellwill Cotton Mills, the old books were balanced and closed and there was set up a new set of books on which the asset values were written down. The closing balance sheet of the old books and the accounts as set up on the new books in 1909 were as follows:
| Old books | New books | |
| ASSETS | ||
| Mill machinery and equipment | $162,196.71 | |
| Fire equipment | 4,115.54 | |
| Heating plant | 1,569.56 | |
| Dye house machinery | 7,201.85 | |
| Total machinery | 175,079.66 | $112,767.60 |
| Brick buildings | 53,265.73 | |
| Wood buildings | 7,142.95 | |
| Total construction | 60,408.68 | 42,232.40 |
| Delivery equipment | $251.60 | |
| Office furniture and fixtures | 254.75 | |
| Real estate | 20,000.00 | $20,000.00 |
| Total plant | 255,994.69 | 175,000.00 |
| Inventory | 1,602.50 | |
| Total assets | 257,597.19 | 175,000.00 |
| LIABILITIES | ||
| Common stock | 100,000.00 | 100,000.00 |
| Preferred stock | 100,000.00 | |
| Surplus | 57,597.19 | |
| Bonds | 75,000.00 | |
| Total liabilities | 257,597.19 | 175,000.00 |
14 B.T.A. 912">*914 At or about the time that Williamson and Bellamy purchased all of petitioner's outstanding capital stock, 1928 BTA LEXIS 2883">*2887 they had an appraisal made of the assets, but such appraisal was not used in setting up the new book values of petitioner's assets in 1909.
On September 15, 1909, 1,000 shares of common stock issued under the old name were canceled and 1,000 shares of common stock were issued in equal amounts to Williamson and Bellamy under petitioner's new name. The 1,000 shares of preferred stock outstanding under the name of the Wilmington Cotton Mills were attached to the stubs in the stock certificate book and were not set up on the new set of books of accounts. However, the said preferred stock was not duly canceled. The $75,000 bonds which were issued, were given to the McRae brothers as security for the purchase price of the stock sold to Williamson and Bellamy, and those bonds were redeemed within a short time while in the hands of McRae brothers.
Petitioner's original paid-in capital can not now be determined.
OPINION.
TRUSSELL: Petitioner claims that the book values of assets as shown on the balance sheets of the old books in 1909 should be used in computing the values of fixed assets for purposes of depreciation instead of the 1909 appraisal values used by respondent. Petitioner1928 BTA LEXIS 2883">*2888 further claims that its invested capital as computed by respondent should be increased by $100,000 preferred stock alleged to be outstanding, by $169,633.82 paid-in surplus, and by the amount of $82,597.19 representing an alleged arbitrary write-down of assets in 1909.
It appears from the deficiency letter that respondent used the appraisal value of approximately $180,000 for fixed assets in 1909 in determining the value of assets for the purposes of depreciation and invested capital for the years here in question. It appears further that respondent disallowed a claimed paid-in surplus of 14 B.T.A. 912">*915 $100,000 for the reason that, "The net effect of the reorganization was to retire $100,000 preferred stock by the issue of $75,000 of bonds, but on the evidence of the appraisal it does not appear that even a paid-in surplus to the extent of $25,000 can be allowed."
We have before us a recounting of events which have transpired relative to this petitioner and statements as to what petitioner's two sets of books showed as to asset values in 1909, and we are asked to adjust the matters here in controversy upon the basis of those facts. The original books of entry were not produced1928 BTA LEXIS 2883">*2889 at the hearing.
The one fact which seems to be established in this record is that petitioner's original paid-in capital and additions thereto can not now be determined, due apparently to uncertain accounting at the times of successive reorganizations. We are of the opinion that this case, so far as invested capital is concerned, falls under the provisions of section 327 of the Revenue Acts of 1918 and 1921 as a case in which the invested capital can not be determined.
In his computation of the allowed deduction for depreciation, the respondent has used a basis of the appraised value in 1909 of depreciable assets and applied rates thereon which seem to furnish a reasonable deduction for depreciation in computing the net income of this petitioner, and we are of the opinion that the depreciation deductions allowed by the respondent in his deficiency notice should be approved.
In view of all the record we are of the opinion that the petitioner's profits taxes for each of the years here under consideration should have been and should now be computed in accordance with the provisions of section 328 of the Revenue Acts of 1918 and 1921 and that a final settlement of deficiency should1928 BTA LEXIS 2883">*2890 be made pursuant to Rule 62(c) of the Board's rules of practice, provided the amounts of the taxes so computed are less than the amount of the taxes now asserted against this petitioner.
Judgment will be entered accordingly.