*4165 The petitioner's profits tax for the year 1919 should be computed with reference to invested capital as herein determined.
*177 This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $1,349.80. The only question involved is whether or not the respondent erred in computing the petitioner's profits tax for the taxable year under the provision of section 328 of the Revenue Act of 1918 rather than with reference to invested capital.
FINDINGS OF FACT.
The petitioner was incorporated on February 3, 1906, under the laws of the State of California by Mary McGrath, Widow of William McGrath, and her six children, for the purpose of holding together the property owned by them and operating it as a unit. The authorized capital of the corporation was $60,000, divided into 60 shares of the par value of $1,000 each. The capitalization was arbitrarily fixed and bore no relation to the amount of property the incorporators expected to turn in to the corporation. Mary McGrath and her children were, *4166 on February 3, 1906, and had been for some time prior to that date, the owners as tenants in common, Mary McGrath having an undivided one-half interest and each of the children an undivided one-twelfth interest, of certain tracts of farm land in Santa Cruz County, California, aggregating 945 acres, together with all the improvements, farming equipment, live stock and other personal property thereon. On or about February 3, 1906, Mary McGrath and her children transferred to the petitioner said real estate and personal property in exchange for all of the petitioner's capital stock. The capital stock was divided as follows: Mary McGrath, 30 shares; each of the children, 5 shares. Mary McGrath died in 1916 and her shares of stock were divided equally among her children, so that each of the children now owns, and has owned since the death of Mary McGrath, 10 shares of the petitioner's capital stock. None of the shares of stock has ever been sold, and the only change in title that has ever occurred is that occasioned by the death of Mary McGrath.
The petitioner was incorporated for the purpose of holding together and operating the lands owned by the McGrath family and *178 *4167 since there were no outside stockholders and it was not intended that there should be any, it was considered by the stockholders unnecessary to keep accurate books of account and none were kept, except a current cash account which was established in later years. No capital account has ever been kept.
The land which was transferred to the petitioner on February 3, 1906, consisted of 365 acres, usually called the "Home Place," and 580 acres known as the "Lower Stock Ranch," and the greater part thereof had been owned by the McGrath family for many years. The Home Place consisted of four classes of land: (1) 127 acres of rolling land, part of which was under cultivation and part used for sheep; (2) 115 acres of rich level valley land which was in full-bearing apple trees and hop vines; (3) 60 acres of the same kind of land as that used for the growing of apples and hops which were planted in annual crop; and (4) 63 acres of flat land subject to over-flow and therefore used as pasture. The Lower Stock Ranch is about four miles east of the Home Place. It consists of low rolling valley land, only a small part of which is farmed, the remainder being used for stock range.
The actual*4168 cash value of the Home Place on February 3, 1906, was $82,400, and the actual cash value of the Lower Stock Ranch on that date was $26,100. The actual cash value of the live stock, farming implements and equipment acquired by the petitioner on February 3, 1906, was $25,000.
In November, 1906, the petitioner purchased 25 acres of land adjoining the Lower Stock Ranch for $5,000; in June, 1911, it purchased 36 2/3 acres adjoining the Home Place for $5,500, and in December, 1911, it purchased 1,845 acres of land in Santa Clara County, known as the Upper Stock Ranch, for $16,500.
The petitioner now owns and has owned at all times since it acquired them, the several tracts of land hereinbefore described.
The indebtedness of the petitioner at the close of the year 1918 was $16,000.
The petitioner in its income and profits-tax return for the year 1919 computed its invested capital at $173,000. The respondent, upon audit of the return, determined that the petitioner's invested capital could not be ascertained and he computed the profits tax under section 328 of the Revenue Act of 1918 and asserted a deficiency in tax in the amount of $1,349.80.
OPINION.
MARQUETTE: The only*4169 question presented by the record in this proceeding is whether the petitioner's profits tax for the year 1919 *179 should be computed with reference to invested capital or under section 328 of the Revenue Act of 1918. The petitioner claims that in 1919 its invested capital was at least $155,274 and the respondent contends that the invested capital is impossible of ascertainment.
The evidence establishes to our satisfaction that on February 3, 1906, the McGrath family conveyed to the petitioner in exchange for the petitioner's capital stock, 945 acres of land which had an actual cash value on that date of at least $108,500 and personal property of the actual cash value of $25,000. The value of the land is established by the testimony of four witnesses who were familiar with the land at the time the petitioner acquired it and with other land in the vicinity thereof. Their opinions as to the value of the land are substantiated and strengthened by the sale of part of the same land made shortly before February 3, 1906, and by sales of other land in the vicinity made at or about that time. The values we have adopted are those testified to by W. J. McGrath, one of the petitioner's*4170 stockholders, and they are less than the value placed on the property by the other and disinterested witnesses. As to the land purchased by the petitioner subsequent to February 3, 1906, the amounts paid therefor are clearly established by the evidence and are not disputed. That land was not paid in for stock nor does the evidence indicate that the purchase price was advanced by the stockholders, and we may assume that it was acquired out of earnings. We are also satisfied from the evidence that the live stock, farming equipment, etc., conveyed to the petitioner on February 3, 1906, had an actual cash value of $25,000.
It therefore appears that the petitioner in exchange for its capital stock acquired land and live stock and equipment of the actual cash value of $133,500, and that it subsequently purchased additional land at a cost of $27,000. All of this land was still held and was owned by the petitioner in 1919 and the evidence shows that it also had in 1919 live stock and equipment of the same kind and in approximately the same amount as that which it had acquired in 1906. While it is true that the petitioner kept no books of account showing its capital investment, we are*4171 convinced that there were either paid in to the petitioner, or purchased by it from earnings, assets of the value or cost of $160,500, which amount, less the indebtedness of $16,000 existing December 31, 1918, it is entitled to include in its invested capital for 1919.
Judgment will be entered on 15 days' notice, under Rule 50.