1927 BTA LEXIS 2634">*2634 1. Value of a certain pulp stone deposit determined for invested capital and depletion purposes.
2. From evidence presented certain notes given in payment of capital stock should be included in invested capital.
9 B.T.A. 242">*242 In this proceeding the petitioner seeks a redetermination of its income and profits tax for the calendar year 1919. The errors alleged are as follows:
(1) The value placed on a certain deposit of pulp stone at Littleton, W. Va., which was acquired by the petitioner in 1915 in exchange for all of its capital stock ($40,000 par value). On this valuation depends both the amount that should be included in invested capital and also the amount of depletion that is deductible from income in the taxable year. The respondent determined this value to be $40,000 and the petitioner contends that it was at least $250,000.
(2) The failure of the respondent to include in invested capital two demand notes of the value of $50,000 which were given to the petitioner in 1918, in return for capital stock.
(3) The depletion allowed on the1927 BTA LEXIS 2634">*2635 pulp stone quarry for the year 1919. The depletion allowance is dependent on the amount of acquisition value placed on the pulp stone quarry. The respondent determined a deficiency for the year in question in the amount of $6,495.43.
9 B.T.A. 242">*243 FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of West Virginia with its principal place of business at Wheeling in that State.
C. E. Wemple, who from 1900 to 1915 had been associated with the Smallwood Stone Co. of Empire, Ohio, most of the time as treasurer, withdrew from this corporation and in June, 1915, purchased for $17,300 a building stone quarry, equipment and land (adjoining) at Littleton, W. Va. At the time this property was acquired, Wemple intended to engage in the production of building stone. Soon after coming into possession of the property, he was convinced that the stone was suitable for pulp stones, which are used in the mechanical grinding of wood pulp in the production of news and other papers. Wemple forwarded for inspection samples of the stone to Greely & Co. of Portland, Me., who were one of the largest importers of pulp stones from England. Later Greely & Co. 1927 BTA LEXIS 2634">*2636 finished several test pulp stones from the quarry at Littleton and had them placed on test in some of the larger pulp paper mills. These tests proved so satisfactory that Greely and his associate, Hall, of the firm of Greely & Co., made a visit in August, 1915, to the quarry for a personal inspection of the quantity and quality of its content. Wemple, Greely, and Hall, upon inspection made at that time, found that the ledge of stone available for pulp stone purposes was 700 feet long, 60 feet wide and 30 feet thick. Quarry experiences demonstrated that it required 50 cubic feet to produce a stone 54 inches in diameter and 27 inches in thickness. Stones of this dimension were the most commonly used in the pulp paper industries and weighed 2 1/2 tons. This size pulp stone is accepted as the unit of computation in the instant case. Allowing 30 per cent for waste in quarrying, there were 17,000 pulp stones contained in the quarry on the date of acquisition by the petitioner. The operations of the quarry at Littleton, W. Va., in the year 1915, during which 66 stones were removed, showed a net profit of $50 per stone. Greely & Co., in importing from England, paid $60 f.o.b. quarry, 1927 BTA LEXIS 2634">*2637 $20 freight, and $15 for fabrication, selling the finished product at about $147.50. It is found that the net profit per stone was $50.
On November 8, 1915, the petitioner was incorporated with a capital stock of $40,000. The petitioner's capital stock was kept at a low amount in order to avoid state taxation and was no indication of the value of assets acquired. The entire amount of capital stock was issued to Wemple in return for the quarry. Wemple induced Greely and Hall to become associated with him in the venture and gave to them one-half of the capital stock. Greely and Hall moved their machinery from Portland, Me., to the petitioner's 9 B.T.A. 242">*244 quarry, so that by January 1, 1917, the petitioner was equipped to deliver completely fabricated pulp stones.
The mechanical grinding of wood pulp in the production of news and other papers was first introduced into the United States prior to 1880. From that date up to 1915 the principal source of pulp stones was in England. A stone of peculiar texture and abrasive qualities was required, but by 1915 five quarries, including that of the petitioner, had been discovered in the United States which contained pulp stones suitable1927 BTA LEXIS 2634">*2638 to the requirements of the trade. The paper mills in the United States consumed about 2,500 stones annually. Both the market and the price were well established.
There were no sales of pulp stone quarries in the United States during the year 1915. In 1917, the petitioner in a proposed merger of quarries contemplated putting in its plant at $400,000. This price was acceptable to the parties interested, but for reasons not stated in the record the merger did not go through. In 1926, the Smallwood Stone Co. sold its quarry at Empire, Ohio, which was comparable in size and quality to that of the petitioner, for $1,250,000.
The parties hereto have stipulated that 1,520 stones of the 2 1/2 tons unit were removed from the quarry in 1919, and further, that if the Hoskold formula is to be used in computing present worth in 1915, 12 per cent shall be applied as the risk rate and 4 per cent as the sinking fund rate. It is found that the life of the quarry was 20 years.
In 1918, the capital stock of petitioner was increased in the amount of $50,000. This stock was issued to C. E. Wemple, Charles H. Greely, and Sanford M. Hall. On January 2, 1918, these three individuals gave to1927 BTA LEXIS 2634">*2639 the petitioner two demand notes of $25,000 each, bearing interest at the rate of 5 per cent. The makers of these notes were solvent at the time the notes were given and at all times thereafter were solvent and able to pay the same. The petitioner in two instances pledged these notes as collateral. In 1922, upon the death of Hall, the board of directors of the petitioner, as well as all the stockholders, agreed to cancel the notes and mark them satisfied. The notes were canceled but the stock was never recalled.
OPINION.
GREEN: The petitioner alleges that the respondent erred, first, in fixing for invested capital purposes a value of $40,000 on a certain pulp stone quarry. The pertinent section of the Revenue Act of 1918 reads as follows:
SEC. 326. (a) That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section):
* * *
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the 9 B.T.A. 242">*245 par value of the original stock or shares specifically issued therefor, unless the actual cash value of1927 BTA LEXIS 2634">*2640 such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * *
It appears that in June, 1915, C. E. Wemple, who for the prior 15 years had been associated with the Smallwood Stone Co. of Empire, Ohio, which at that time was one of the largest producers of pulp stone in the United States, withdrew from this company and purchased a quarry at Littleton, W. Va., for $17,300, with the intention of engaging in the building-stone business. Soon after coming into possession of this quarry, he was convinced that the content was suitable for the manufacture of pulp stones. Samples of the stone were sent to Greely & Co., importers and fabricators of pulp stone at Portland, Me. This concern was one of the largest importers of pulp stones from England and was conversant with the requirements of the trade. Greely & Co. had several of the pulp stones fabricated and placed in use in paper mills where a thorough test was made. These tests proved that the stones satisfied the requirements for pulp stone. Greely and his associate, 1927 BTA LEXIS 2634">*2641 Hall, visited the quarry at Littleton, W. Va., in August, 1915, and in conjunction with Wemple determined that the quarry contained sufficient stone, after allowing for waste in quarrying, to produce 17,000 units of 2 1/2 tons each. It has been found as a fact that the life of the quarry was 20 years and that the net profit per unit was $50.
Two credible and thoroughly qualified witnesses testified unequivocally that the assets acquired by the petitioner in exchange for its stock were worth at least $250,000 on the date of their acquisition by the corporation. Their testimony as to value is entirely consistent with the remainder of the facts proven and we conclude, therefore, that inasmuch as the corporation issued in exchange for such assets, stock of the par value of $40,000, it is entitled to a paid-in surplus of $210,000.
The petitioner also alleged that the respondent erred in his computation of depletion for the year 1919. It has been stipulated that fifteen hundred and twenty 2 1/2-ton units were produced during this year. Depletion should be computed by using the same cost as has been allowed for purposes of invested capital.
The petitioner further alleges that1927 BTA LEXIS 2634">*2642 the respondent erred in refusing to allow as invested capital notes in the amount of $50,000 paid in for capital stock. The notes in question were given in good faith by solvent makers for capital stock which was actually issued. The makers were at all times solvent and able to pay on demand. The record shows that the notes were treated by the petitioner as 9 B.T.A. 242">*246 capital assets, and on two occasions were used by it as collateral for loans. The notes are properly includable in invested capital. See , and .
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by STERNHAGEN and ARUNDELL.