*2141 The value of real estate and improvements thereon paid in to a corporation in 1913 for the purpose of computing invested capital and allowable depreciation deductions determined.
*1345 This proceeding involves the determination of deficiencies in income and profits tax as follows:
| Docket No. | Year | Deficiency |
| 12741 | 1920 | $3,121.41 |
| 23894 | 1922 | 1,139.70 |
| 35148 | 1923 | 1,706.31 |
| 1924 | $1,006.33 | |
| 37930 | 1925 | 1,409.43 |
| 1926 | 867.32 |
For the year 1920, three errors are assigned - (1) the failure of the respondent to compute petitioner's invested capital by denying to it a paid-in surplus arising out of the acquisition of assets by the issuance of stock; (2) the denial by the respondent of a proper deduction for depreciation by reason of his use of an improper basis; and (3) the denial by the respondent of a loss sustained by the abandonment during that year of obsolete machinery.
For the year 1922 error is assigned in the denial by the respondent of a proper deduction for depreciation and the disallowance*2142 of the deduction of an alleged net loss sustained for the year 1921.
For the year 1923 error is assigned in the denial of a proper deduction for depreciation and the disallowance as a deduction of the *1346 balance of the alleged 1921 net loss after applying against it the proper net income for 1922.
For the years 1924, 1925, and 1926 the sole error assigned is the denial by the respondent of proper deductions for depreciation.
For the years 1920 and 1922 the respondent has moved to increase the deficiencies determined by him upon the ground that in the determination of the deficiencies "he considered the cost of the petitioner's assets in August, 1913, for both the purposes of computing invested capital and depreciation * * * to be $116,513.99, whereas, said cost was the sum of $70,812.52."
FINDINGS OF FACT.
The petitioner is a Georgia corporation doing a general lumber and millwork business in the City of Augusta. It was organized August 16, 1913, and has been in continuous existence since that date.
Prior to July 9, 1912, there was a company doing business of the same character as that conducted by the petitioner in the City of Augusta known as the Perkins*2143 Manufacturing Co., which owned a complete lumber and millwork plant located in Augusta. Although the former company was organized as early as 1858, it was forced to replace a large part of its plant and equipment in 1908 due to the fact that a large part of it was destroyed by fire during that year. On or about July 9, 1912, pursuant to a petition filed with the District Court of the United States for the Northeastern Division of the Southern District of Georgia, the Perkins Manufacturing Co. was placed in the hands of receivers, who were J. P. Mulherin and George F. White, and on July 25, 1912, an order was entered adjudicating the Perkins Manufacturing Co. a bankrupt. Thereafter, on August 9, 1912, J. P. Mulherin, George F. White, and George E. Toale were elected trustees of the bankrupt concern.
When the Perkins Manufacturing Co. went into bankruptcy there were outstanding against the real estate, plant and equipment of the company (exclusive of stock in trade, live stock, wagons, harness, furniture and fixtures), two bond issues secured by mortgage, the first being in the sum of $70,000 ($5,000 of the principal amount of $75,000 having been paid off prior to July 9, 1912), *2144 and the second in the amount of $50,000. The bonds of the first issue were held by numerous individuals who had purchased them for investment; the entire second issue had been deposited as collateral security with the Georgia Railroad Bank of Augusta (the cashier of that bank being trustee under the mortgage), for loans theretofore made to the company, the balance due at the date of the appointment of the receivers being approximately $75,000. During the course of the bankruptcy proceedings and by reason of the sale or retention by the *1347 Georgia Railroad Bank of collateral held by it other than the second mortgage bonds of the Perkins Manufacturing Co., the indebtedness due the bank was reduced to the approximate amount of $45,000, in connection with which the bank continued to hold as collateral the second mortgage bonds.
The receivers, during their tenure, and the trustees, until the sale of the property under order of the court, continued to operate the business formerly conducted by the bankrupt company and the result of those operations showed a profit for the nine months ending March 31, 1913, of $1,995.08 and for the entire period of bankruptcy of approximately*2145 $8,000 or $9,000. Bankruptcy was not caused by the ordinary operations of the company but its relationship with other companies operating sawmills to which it loaned large sums of money which it was unable to collect. During the course of the bankruptcy and resulting from conferences between Wm. E. Bush, acting as attorney and agent for holders of the first mortgage bonds, Jacob Phinizy, president of the Georgia Railroad Bank, and J. P. Mulherin, a director of the bank and now president of the petitioner, an agreement was reached whereby the Georgia Railroad Bank was to be permitted to protect itself in the event of loss in case the property did not bring at the bankruptcy sale a sum sufficient to pay off the indebtedness of the bank secured by the second mortgage bonds. That agreement contemplated the acquisition by Bush of the property covered by the mortgages, acquisition by Phinizy of the property not covered by the mortgages, the formation of a new corporation to acquire the assets from Bush and Phinizy, financing of the new corporation to the extent of working capital by the Georgia Railroad Bank, issuance of the stock of the new corporation to the Georgia Railroad Bank, and*2146 operation of the new corporation by Mulherin. The oral agreement resulting from the conferences was reduced to writing on July 29, 1913, the agreement having been signed by Wm. E. Bush, J. P. Mulherin, and the Planters Loan & Savings Bank of Augusta, Ga., trustee under the first mortgage bonds.
The property of the Perkins Manufacturing Co. was sold at public outcry pursuant to order of the court free and clear of all liens on July 1, 1913, the order providing that bondholders could turn in their bonds in payment of the purchase price to the extent thereof, and at the sale the properties covered by the mortgages were bid in by Bush at a price of $66,318.19, which was less than the principal of the first mortgage bonds outstanding and interest which had accrued thereon, and the properties not covered by the mortgages were bid in by Jacob Phinizy for $8,915. Bush was the only bidder for the property covered by the mortgages.
*1348 The agreement above referred to entered into July 29, 1913, provided in part as follows:
THIS AGREEMENT made and entered into in duplicate this 29th day of July, nineteen hundred and thirteen, between The Planters Loan & Savings Bank, of Augusta, *2147 Georgia, as Trustee, and William E. Bush, of Baltimore, Maryland, as Attorney in fact, for the owners of the property hereinafter fully described, as parties of the first part, hereinafter called Vendors, and John P. Mulherin, of Augusta, Georgia, as party of the second part, hereinafter called Vendee, WITNESSETH:
1. The said Vendors have agreed to sell and the said Vendee has agreed to buy the property hereinafter described at the price and upon the terms and conditions hereinafter fully set forth. [Then follows the description of property covered by the first mortgage].
Said property is the same purchased by the said William E. Bush, acting as attorney for all the holders of bonds of the Perkins Manufacturing Company dated October 1, 1910, and secured by the mortgage from the said Perkins Manufacturing Company to said The Planters Loan & Savings Bank, dated October 1, 1910, from the Trustees in Bankruptcy of the said Perkins Manufacturing Company at a sale had on the first day of July, nineteen hundred and thirteen, which sale was confirmed by an order of Honorable Emory Speer, Judge of the District Court of the United States for the Southern District of Georgia, on the*2148 fifteenth day of July, nineteen hundred and thirteen.
3. The price to be paid for said property is the sum of Seventy thousand eight hundred ten & 52/100 Dollars ($70,810.52) of which amount the sum of Ten thousand eight hundred ten & 52/100 Dollars ($10,810.52) has been paid in cash, the receipt of which is hereby acknowledged, and the sum of Sixty Thousand Dollars ($60,000) is to be paid in the manner following:
Said Vendee is to organize a corporation under the laws of the State of Georgia, with its principal office in Augusta, Georgia, fully authorized to carry on the business of the manufacture of lumber and to issue and sell bonds and secure the same by mortgage, with a paid in capital of not less than Fifty Thousand Dollars ($50,000), and to such corporation, when chartered and organized, said Vendee will assign this agreement and all of his rights hereunder. Said corporation will then execute and issue to the said Vendors bonds aggregating the principal sum of Sixty Thousand Dollars ($60,000) in such denominations as said Vendors may request * * *
IN WITNESS WHEREOF said The Planters Loan & Savings Bank has caused these presents to be signed by its President, the said*2149 William E. Bush has hereunto set his hand and seal as such attorney in fact, and the said John P. Mulherin has hereunto set his hand and seal, all in duplicate, the day and year first above written.
Pursuant to the sale the trustees in bankruptcy delivered a deed of the mortgaged property of the Planters Loan & Savings Bank on July 30, 1913.
Pursuant to the agreement of July 29, 1913, the petitioner corporation was organized on August 16, 1913, by John P. Mulherin, Jacob Phinizy, and George E. Toale with a total authorized capital stock of $200,000 par value and on September 1, 1913, the Planters Loan & Savings Bank conveyed the property covered by the first mortgage to the petitioner for a stated consideration of $10,810.52 *1349 in cash and $60,000 in bonds secured by a first mortgage, the sum of such amounts constituting the outstanding first mortgage bonds of the bankrupt with interest. The properties purchased at the sale by Phinizy, consisting of such property of the bankrupt company as was not covered by the mortgages, were not covered into the petitioer corporation by a deed or bill of sale from Phinizy but were simply left on the premises and used thereafter*2150 by the petitioner.
Upon organization of the petitioner its directors and officers consisted of the directors and officers of the Georgia Railroad Bank. The bank had advanced $8,915 to Phinizy to enable him to make payment to the trustees in bankruptcy for the personal property of the bankrupt which he had bid in at the sale, and $10,810.52 to the petitioner to enable it to make the cash payment of that amount to the Planters Loan & Savings Bank. It had also advanced other monies to Mulherin to enable him to continue the business. On November 29, 1913, the new corporation was indebted to the bank in the amount of $36,908.46 for advances made to it or in its behalf, and on that date there was a general clearance of accounts upon the following basis: The bank gave its check to the new corporation in the amount of $53,796.53, and the petitioner gave its check to the bank in the amount of $36,908.46 and issued its $100,000 capital stock to the bank. In dealing with Wm. E. Bush and in signing the agreement of July 29, 1913, and in organizing the petitioner, J. B. Mulherin acted as agent for the Georgia Railroad Bank and assumed the position of president and executive head of the petitioner*2151 on November 29, 1913, at the request of the bank and Jacob Phinizy.
On November 12, 1913, Phinizy had made the following proposition to Mulherin:
Following up the action of the Board of Directors on yesterday in regard to the Perkins Manufacturing Company, I wish to write and re-state the tentative proposition made you several days ago, and ask, if it meets with your approval, that you give me a formal acceptance by letter.
To form a Company of the name of The Perkins Manufacturing Company, with a capital stock of $100,000. The Georgia Railroad & Banking Company to own all the stock. That you be made President and Treasurer of the Company at a salary of $2500. and 25% of the net profits, and that you are to have your office at Perkins Mfg. Co. plant and give all the time that is necessary to a careful supervision of the business.
The net profits are to be ascertained after all fixed charges of every kind have been paid, which includes interest on bonds, $4200. and $6,000. annual retirement of bonds, which amounts to $10,200. This amount, $10,200, is to be a fixed annual deduction before net profits are arrived at. In the event of the sale of the property, a refusal is*2152 to be given you, the bank reserving the right to sell at any time, paying you pro rata as to salary and profits. You are to have the privilege of buying the capital stock, at any time at par, *1350 during this agreement, plus interest paid on bonds and bond retirement, and any other indebtedness due said Georgia Railroad Bank, by Perkins Mfg. Co. This arrangement is to be for one year in the event of no sale.
Before ascertaining the net profits, all accounts included upon the books, must be passed upon by a committee of the Board of Directors as to their solvency.
The proposition was accepted by Mulherin under date of November 19, 1913.
In the schedule of assets filed with the bankruptcy court by the Perkins Manufacturning Co. its land and buildings were listed at an estimated value of $100,000 and its machinery at an estimated value of $85,000. On or about August 10, 1912, the referee in bankruptcy appointed Nat Kemp, Jasper Stoughton, and Wm. Martin to appraise the real estate and personal property owned by the bankrupt. They returned to the court their appraisal representing "the present value including depreciation" in the total sum of $154,002.02. The real*2153 estate, consisting of about six acres located on both sides of 13th Street, was appraised at $35,000. The buildings located on the above referred to real estate and leased land, including elevator system, heat, lighting, and sprinkler system, was appraised at $52,861.19. The machinery located in the above buildings, including tools, general supplies and track, scales, railroad sidings, wagons, lumber, trucks, harness, and office furniture were appraised at $66,140.83. Subsequent to such appraisal being made, the above named trustees in bankruptcy filed a petition with the court for authority to sell the assets of the estate covered by mortgages and subject thereto and in said petition stated that in their opinion the assets were worth more than the mortgages outstanding against them.
Thereafter, the Planters Loan & Savings Bank, as trustee under the first mortgage, answering said petition of the trustees in bankruptcy opposed the application to sell under such provisions, to wit: subject to the mortgages, and prayed the court to order a sale free of liens, stating it did not believe the properties of the bankrupt to be worth $120,000 and interest, and further prayed for the right*2154 of the bondholders to apply their holdings against the purchase price under the sale in case the property was bid in in their behalf, which prayer was granted.
In 1913 Mulherin caused an appraisal company to make an appraisal of the buildings, machinery and equipment of the bankrupt estate as of August 11, 1913. The appraisal made included buildings and equipment but did not include land, stock or supplies on hand. It purported to be of the "sound" values of the properties *1351 appraised. The appraisal company determined the sound values as follows:
| Buildings | $69,424.51 |
| Machinery and equipment | 66,797.31 |
| Horses and stable equipment | 2,297.00 |
| Total | 138,518.82 |
During the period of the trusteeship insurance was carried upon the petitioner's insurable property, including its inventory, etc., in the amount of $155,673.30.
A journal entry made in the books of account of the petitioner on December 31, 1913, shows the plant account in the amount of $116,513.99. This entry was made by the petitioner's bookkeeper who died a number of years prior to the hearing. Subsequent to December 31, 1913, the bookkeeper was instructed to set up the plant account*2155 upon the basis of the appraisal made by the appraisal company. The plant account was therefore set up on the books as of January 1, 1914, as follows:
| Plant account | $166,986.59 |
| Office fixtures and furniture | 1,564.33 |
| Live stock, wagons and harness | 4,968.00 |
In the tax returns filed by the petitioner for the taxable years under review the petitioner computed depreciation upon the basis of the appraisal made by the appraisal company. For the taxable years 1920 and 1922 the respondent disallowed the deduction of depreciation claimed upon petitioner's tax returns, made upon the basis of the appraisal figures, and substituted therefor the figures shown by the journal as of December 31, 1913, in the amount of $116,513.99.
In determining the deductible depreciation for the years 1923 to 1926, inclusive, the Commissioner has used $70,810.52 as the cost of the assets, including real estate, at the organization of the corporation. He has allocated this cost to the several assets as follows:
| Per cent of total cost | Cost | |
| Buildings - mill | 40.01 | $28,331.29 |
| Machinery | 35.93 | 25,442.22 |
| Delivery equipment | 2.82 | 1,996.86 |
| Furniture and fixtures | 1.07 | 757.67 |
| Real estate (not depreciable) | 20.17 | 14,282.48 |
| Total | 100.00 | 70,810.52 |
*2156 Since acquisition of its original assets from the above-named bankrupt corporation, the petitioner has made additions thereto as follows:
| Machinery: | |
| 1914 addition | $876.44 |
| 1916 addition | 670.05 |
| 1918 addition | 180.00 |
| 1918 reduction | 25.00 |
| 1920 addition | 1,315.06 |
| 1920 reduction | 1,832.08 |
| 1921 addition | 154.75 |
| 1922 reduction | 1,133.79 |
| 1923 addition | 408.17 |
| 1924 addition | 1,473.00 |
| 1924 addition | 225.00 |
| 1925 addition | 1,676.97 |
| Delivery equipment: | |
| 1915 addition | 162.50 |
| 1917 addition | 350.00 |
| 1917 reduction | 48.00 |
| 1918 addition | 750.00 |
| 1919 addition | 1,456.18 |
| 1919 reduction | 300.00 |
| 1920 addition | 2,822.74 |
| 1920 reduction | 30.00 |
| 1921 addition | 1,794.34 |
| 1921 reduction | 425.00 |
| 1922 addition | 1,037.60 |
| 1923 addition | 1,388.50 |
| 1924 addition | 503.23 |
| 1925 addition | 814.66 |
| 1926 addition | 1,272.21 |
| Heating plant: 1920 addition | $600.00 |
| Wire fencing: 1923 addition | 211.04 |
| Furniture and fixtures: | |
| 1915 addition | 58.00 |
| 1916 addition | 206.25 |
| 1918 addition | 110.00 |
| 1919 addition | 185.00 |
| 1920 addition | 68.30 |
| 1922 addition | 26.65 |
| 1923 addition | 1,171.05 |
| 1924 addition | 180.00 |
| 1926 addition | 75,00 |
| Sawmill and machinery: | |
| 1923 addition | 15,532.08 |
| 1924 addition | 4,634.11 |
| 1925 addition | 23.13 |
| Wooden buildings: | |
| 1920 addition | 574.72 |
| 1922 addition | 259.85 |
| 1923 addition | 313.25 |
| 1924 addition | 148.59 |
| Buildings outside of plant: | |
| 1923 additions | 15,253.05 |
| 1923 additions | 192.00 |
| 1924 additions | 199.55 |
| 1926 reduction | 70.00 |
*2157 *1352 In computing the deficiencies for the taxable years in question the Commissioner has allowed the deduction from gross income of the following amounts for depreciation:
| 1920 | $7,878.42 |
| 1922 | 8,615.54 |
| 1923 | 5,861.21 |
| 1924 | $6,698.30 |
| 1925 | 6,709.72 |
| 1926 | 6,676.52 |
In computing the deficiency in the 60-day notice the Commissioner has disallowed a deduction taken in the return of $524.77 for abandoned machinery resulting from his determination that such machinery had a cost basis of only $1,832.08. The machines were in fact abandoned in 1920 and the parties stipulate that "if the petitioner sustains in this proceeding its claim of a depreciation basis for machinery of an amount greater than $46,965.05 used by respondent in computing deficiency in said letter," then it is entitled to an increase in the loss allowed to be determined on final settlement.
For the year 1921 the petitioner has determined a net income of $1,987.26, allowing a depreciation on the same basis as allowed in 1920 in the deficiency notice.
*1353 OPINION.
SMITH: The petitioner claims that it is entitled to a paid-in surplus in the computation of invested capital for*2158 1920 and 1921 in the amount of $73,518.82. The basis of this claim is that the fair value of the assets paid in to the petitioner in exchange for its capital stock of $100,000 was $173,518.82, such value being allocated as follows:
| Buildings | $69,424.51 |
| Real estate | 35,000.00 |
| Machinery and equipment | 69,094.31 |
| Total | 173,518.82 |
The amounts claimed as the values for the buildings and machinery are the "sound" values determined by the appraisal of such assets as of August 11, 1913. The respondent, on the other hand, claims that he erred in the determination of the deficiency for 1920 in that he considered the cost of petitioner's assets in August, 1913, for both the purposes of computing invested capital and depreciation for 1920 to be $116,513.99, whereas said cost was $70,810.52. He therefore contends that the true deficiency for 1920 is $5,565.86 in place of $3,121.41, the amount shown by the deficiency notice, and that the true deficiency for 1922 is the amount of $1,495.29 in place of $1,139.70, the amount shown by the deficiency notice. The amount of the deficiency determined for 1922 is predicated upon a basic cost of assets acquired by the petitioner*2159 in August, 1913, of $116,513.99. The deficiencies determined for years subsequent to 1922 were predicated upon a cost of assets to the corporation upon its organization in 1913, including real estate, of $70,810.52.
Before considering the question of the cost or values of the assets acquired by the corporation in 1913, it is necessary first to consider a question of law as to whether the properties were paid in to the petitioner in exchange for shares of stock. The petitioner contends, on the one hand, that the equitable title to the assets of the bankrupt was in the Georgia Railroad Bank at the time of the organization of the petitioner and that that bank paid in those assets together with cash for the $100,000 par value of capital stock. The respondent, on the other hand, contends that at a public sale of the bankrupt estate the property covered by the mortgages was bid in by Wm. E. Bush for the bondholders; that he was acting as agent for the trustee of such bondholders, the Planters Loan & Savings Bank; that the properties were sold to Wm. E. Bush free from liens and at his direction deeded by the trustees in bankruptcy to the *1354 Planters Loan & Savings Bank; that*2160 subsequent to that date the Planters Loan & Savings Bank sold the properties secured by mortgage to the petitioner for $10,810.52 cash and $60,000 of its first mortgage bonds. The claim of the respondent is therefore that the cost of these properties to the petitioner was $70,810.52.
The evidence shows that prior to the sale of the properties on July 1, 1913, Wm. E. Bush, acting in the interest of the first mortgage bondholders, had numerous conferences with Jacob Phinizy, president of the Georgia Railroad Bank, which had an unsatisfied claim against the bankrupt of approximately $45,000 secured by $50,000 par value of second mortgage bonds. Bush was interested in the property only for the purpose of securing the first mortgage bondholders. He entered into an arrangement with Phinizy acting for the Georgia Railroad Bank that he (Bush), would bid in the property for the first mortgage bondholders and turn it over to a new corporation to be organized in consideration of a payment to him of an amount equaling the face value of the first mortgage bonds outstanding plus accrued interest. The Georgia Railroad Bank would advance as much money as was necessary to put the new corporation*2161 upon its feet, in exchange for which it would receive the capital stock of the new corporation. The details of the agreement reached between Phinizy and Bush were not worked out until after the sale of the property at public auction. We can not doubt that this agreement existed. At the auction Bush bid in the property at an amount less than the face value of the first mortgage bonds and Phinizy bid in the property of the bankrupt not covered by the first mortgage bonds at an amount of $8,915, which he paid to the trustees in bankruptcy. The bankrupt corporation continued in business without interruption. Phinizy did not take from the plant or attempt to take from its any part of the property which he had bid in at $8,915. Pursuant to the agreement reached between Phinizy and other officers or directors of the Georgia Railroad Bank, the petitioner corporation was organized and the bank advanced to it such amounts of money as were necessary to put it on its feet. Pursuant to the agreement also, the Planters Loan & Savings Bank deeded to the petitioner corporation the property to which it had taken title in exchange for an issue of $60,000 of its first mortgage bonds and $10,810.52*2162 in cash.
In the circumstances of this case we can not doubt that the Georgia Railroad Bank prior to the organization of the petitioner had equitable title to the property which had been bid in by Bush. The Planters Loan & Savings Bank was not interested in the property which had been bid in for it by Bush except for the protection of the first mortgage bondholders. We have no doubt that if requested *1355 it would have deeded to the Georgia Railroad Bank for $70,810.52, the property in question. Then the Georgia Railroad Bank could have paid in to the petitioner corporation the assets thus acquired. In such case there could be no question that the assets would have been paid in to the petitioner corporation in exchange for capital stock. This step was unnecessary. The Georgia Railroad Bank clearly having a right to acquire the assets from the Planters Loan & Savings Bank at a price of $70,810.52, caused that bank to transfer those assets to the petitioner corporation instead of to itself. This we think was a payment in to the petitioner corporation of the assets in question in exchange for shares of capital stock.
*2163 The facts in the instant case are in substance similar to those which obtained in . In that case certain individuals had contracted to purchase property from the owner and to form the realty company to acquire the property. After its formation the realty company did acquire the property direct from the owners for cash and stock and issued all its common stock to the holders of the original contract. In its opinion the Board stated:
All the transfers occurred at the same time and as part of the same transaction and looking at the substance of the whole transaction it is apparent that in purchasing the property the petitioner turned over $75,000 in cash, $25,000 par value second preferred stock and $59,700 par value of common. In other words, regardless of the identity of the persons to whom the cash and the various kinds of stock were paid, the petitioner parted with cash and stock of the above amounts in return for which it received property having an actual cash value of $162,437.50. * * *
So, in the instant case, we have no hesitation in saying that the petitioner issued first mortgage bonds in the amount of $60,000 and its*2164 capital stock of $100,000 in exchange for certain amounts of property and cash paid in to it by the Georgia Railroad Bank. The cash paid in was in the amount of $53,796.53. The Georgia Railroad Bank had a claim against the bankrupt estate of approximately $45,000, covered by the second mortgage bonds. It was to protect this claim that the Georgia Railroad Bank was willing to assume the additional risk of the cash payment of $53,796.53.
The petitioner contends that the fair market value of the assets paid in to the petitioner corporation at the date of payment, exclusive of the cash advanced by the Georgia Railroad Bank, was $173,518.82. This was the value for the buildings and machinery determined by an appraisal company which made an appraisal of the assets of the bankrupt in August, 1913. Its appraisal did not cover the real estate. But the petitioner contends and has offered evidence in support of a valuation for the real estate of $35,000. As we understand the petitioner's contention, it is that the value of the *1356 depreciable assets plus the real estate, in August, 1913, was $173,518.82, and that this was exclusive of cash paid in by the Georgia Railroad Bank*2165 of $53,796.53. The sum of these two amounts is the value of the properties paid in, $227,315.35. It is to be noted, however, that $10,810.52 of the amount paid in by the Georgia Railroad Bank in 1913, was used to make a payment to the Planters Loan & Savings Bank. We think, therefore, that in any event the $227,315.35 claimed as the value of the assets paid in must be reduced by that cash payment. With this correction the claimed values of the properties paid in, inclusive of the cash payment of $53,796.53, was $216,504.83. The duduction from this amount of $60,000 bonds and $100,000 capital stock leaves an apparent paid-in surplus of $56,504.83.
We are of the opinion, however, that the evidence does not warrant a finding that the cash value of the properties paid in to the petitioner corporation was as great as the amount contended for by the petitioner. One of the deponents for the petitioner, M. E. Dyess, deposed, with respect to the value of the assets of the bankrupt, that he attended the public sale of the property and would have been willing to bid upon the property had it been sold at what he regarded a sacrifice price. Asked if he would have considered anything less*2166 than $100,000 a bargain price for the property answered:
A. I would not have paid $100,000, would not have offered that.
Q. And your company was not willing to make a bid comparable to the market value of the property, which you thought?
A. Not as a going property, no.He thought, however, that the value of the property at the date of sale was approximately $175,000.
The Planters Loan & Savings Bank, as trustee under the first mortgage, answering the petition of the trustees in bankruptcy for an order to sell the property at public sale, prayed the court to order a sale free of lien, stating "it did not believe the properties of the bankrupt to be worth $120,000 and interest."
As above indicated, the Georgia Railroad Bank had a claim against the bankrupt estate of approximately $45,000. It paid an additional amount of $53,796.53 for the stock of the petitioner. Its total investment in the $100,000 capital stock was therefore slightly less than $100,000. It entered into an agreement with Mulherin in November, 1913, that he should have the privilege of buying the capital stock at par, plus interest paid on bonds and bond retirement and any other indebtedness due*2167 the Georgia Railroad Bank, that arrangement to be in effect for one year.
We think this evidence disproves the claim of the petitioner to a paid-in surplus in the computation of invested capital. The value *1357 of the property paid in was not "clearly and substantially in excess of the par value" of the stock and bonds issued for it.
Many of the books of account of the predecessor corporation have been lost or destroyed. The journal of the petitioner for 1913 shows that the plant account was placed upon its books at December 31, 1913, at a value of $116,513.99. It is not in evidence whether this figure includes real estate. It apparently represented the cost of the plant to the petitioner corporation. We can not determine from the evidence that the cost or the cash value of the plant paid in to the petitioner corporation was in excess of that amount. The respondent has determined the amounts of deductible depreciation for 1920 and 1922 upon the basis of the journal entry above referred to. In the absence of satisfactory proof as to a greater cost or value for the assets than the basis used by the respondent, the use of such basis for the purpose of computing allowable*2168 depreciation is sustained.
The respondent computed depreciation for the years 1923 to 1926, inclusive, upon the basis of the cost of assets to the petitioner corporation at its organization in 1913 at $70,810.52. This is upon the theory that the cost of those assets to the petitioner at the date of organization was simply the amount paid by it to the Planters Loan & Savings Bank for the assets. But, as above indicated, we are of the opinion that that amount is not the cost or the fair market value of the assets paid in to the petitioner for its capital stock and bonds. The Georgia Railroad Bank had a claim against the bankrupt estate of $45,000 and it paid an additional amount of $53,796.53 for the $100,000 capital stock of the petitioner. We think that $116,513.99 shown as the value of the plant account on the books at December 31, 1913, represents the fair market value of the plant on that date as nearly as it can be determined. We therefore are of the opinion that the allowance for depreciation for the years 1923 to 1926, inclusive, should be based upon the fair market value of such assets in 1913 of $116,513.99.
The petitioner has alleged as an error in the determination*2169 of the deficiency for 1921 the denial by the respondent of a loss sustained during that year on obsolete machinery. The stipulation filed by counsel upon this point is to the following effect:
In computing the deficiency in the 60-day letter respondent has disallowed a deduction taken in the return of the sum of $524.77 for abandoned machinery, resulting from his determination that said machinery had a cost basis of the sum of $1,832.08. The machines were in fact abandoned in 1920 and if the petitioner sustains in this proceeding its claim of a depreciation basis for machinery of an amount greater than $46,965.05 (used by respondent in computing deficiency in said letter) then petitioner is entitled to an increase in the loss allowed to be determined on final settlement. * * *
Inasmuch as we can not determine that the basis used by the respondent in the determination of allowable depreciation for 1920 *1358 is in error, the claim of the petitioner of an error in this regard is not sustained.
The stipulation likewise shows that for the year 1921 the respondent determined a net income of $1,987.26, allowing depreciation on the same basis as allowed for 1920 in the deficiency*2170 letter. It was stipulated that, if the depreciation is to be based upon a different value for the assets received in 1913 and a net loss should result for the year 1921, such net loss should be allowed as a deduction in 1922. Since the evidence does not warrant a different basis for the determination of depreciation for 1920 and subsequent years from that used by the respondent, this claim of the petitioner must be denied.
Reviewed by the Board.
Judgment will be entered under Rule 50.