*2882 1. JURISDICTION. - For the calendar year 1920, the Commissioner determined an overassessment, which represented the difference between the amount of tax shown on the original return and the amount of the tax liability as determined by the Commissioner for said year. The Board has no jurisdiction to redetermine the tax liability for 1920 and for that year the appeal is dismissed. See Revenue Act of 1926, section 274(g); Cornelius Cotton Mills,4 B.T.A. 255">4 B.T.A. 255.
2. CONSOLIDATED INVESTED CAPITAL. - In the absence of evidence to show that the determination of the respondent is erroneous in amount, we must approve his determination, although it is shown that it is based on an erroneous principle.
3. SPECIAL ASSESSMENT. - Where the value of an asset is excluded from the computation of consolidated invested capital, and it is shown that the asset so excluded produced less than 5 per cent of the consolidated taxable income, such exclusion does not constitute an abnormal condition within the meaning of section 327(d) of the Revenue Act of 1921.
*264 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921 in the amount of $62,452.12. The sole issue presented involves the correct method of computing the consolidated invested capital of the petitioner and its subsidiary corporation, except that the petitioner alleges that it is entitled to have its profits tax computed under the provisions of sections 327 and 328 of the Revenue Act of 1921, in the event the action of the respondent in reducing the consolidated invested capital should be approved.
FINDINGS OF FACT.
The petitioner is a Maine corporation and its subsidiaries are Illinois corporations, with principal offices at 127 North Dearborn Street, Chicago.
*265 The petitioner corporation filed a consolidated income and profits-tax return for the year 1921 with the Unity Safe Deposit Co. (name changed to the American Trust & Safe Deposit Co. on February 26, 1921), Longacre Engineering & Construction Co., and Royal Safe Deposit Vaults, as affiliated companies. This return was filed and the income computed upon the accrual basis of accounting. Said return*2884 was filed with the collector of internal revenue for the first district of Illinois, at Chicago.
The Unity Safe Deposit Co. in December, 1910, acquired by purchase the leasehold estate and office building located 127 North Dearborn Street, Chicago, Ill. The consideration paid by the Unity Safe Deposit Co. for said leasehold estate and building was its entire capital stock of the aggregate par value of $650,000, each share having a par value of $100.
Said leasehold estate and building had at the time of acquisition in December, 1910, a value of not less than $650,000. The capital stock of the Unity Safe Deposit Co. issued in December, 1910, in the amount of $650,000, was fully paid at the date of such issue.
On April 29, 1919, $250,000 par value of the capital stock of the Unity Safe Deposit Co. was surrendered by the stockholders and canceled without payment therefor being made by the company to the stockholders, which transaction reduced the outstanding and authorized capital stock of said company to $400,000, consisting of 4,000 shares of the par value of $100 each.
In May, 1919, Hattie K. Moore, wife of the president of the American Bond & Mortgage Co., purchased the*2885 entire outstanding capital stock of the Unity Safe Deposit Co., consisting of 4,000 shares of the par value of $100 per share, for which she paid $50,000 cash.
In May, 1919, at the time Mrs. Moore purchased the stock of the Unity Safe Deposit Co., she and other members of the Moore family owned a total of 498 shares out of a total of 1,000 shares of the outstanding common voting stock of the American Bond & Mortgage Co. Mrs. Moore and the other members of the her family continued to hold and own these shares of stock in the American Bond & Mortgage Co. until August 30, 1919.
On August 15, 1919, Mrs. Moore sent to the American Bond & Mortgage Co., its officers and directors, the following offer:
CHICAGO, ILLINOIS, August 15, 1919.
TO THE AMERICAN BOND AND MORTGAGE CO., ITS OFFICERS AND DIRECTORS:
I am the owner of Four Thousand Shares (4000) of the fully paid up capital stock of the UNITY SAFE DEPOSIT COMPANY, BEING the entire capital stock outstanding and issued of said Company, of which thirty-nine hundred and seventy (3970) shares are of record on the books of said company in my name, and thirty (30) shares of which are in the name of its present three directors, *2886 ten shares of which are in the name of each director; the certificates of which are *266 endorsed in blank and are in my possession, and I am the owner of the same. Said Unity Safe Deposit Company is the owner of a 99-year leasehold with about 70 years unexpired and of the Unity Building in Chicago, Illinois, which is a sixteen story and office building centrally located in the business part of said city.
I hereby propose to sell you one thousand (1000) shares of the said capital stock of said UNITY SAFE DEPOSIT COMPANY for the price of FIFTY THOUSAND ($50,000) DOLLARS, to be paid to me in manner as is hereinafter set forth:
In view of the fact that I am one of the largest single owners your stock and for the purpose of aiding and assisting the company to acquire a permanent and adequate office and place of business I hereby also agree to and do hereby donate and give the American Bond and Mortgage Company, three thousand (3000) shares fully paid up of the said Unity Safe Deposit Company to be held and owned by said American Bond and Mortgage Company as its sole and exclusive property.
The payment of said FIFTY THOUSAND ($50,000) DOLLARS purchase price for said One*2887 Thousand (1000) shares of the capital stock of said Unity Safe Deposit Company which I propose to sell to the American Bond and Mortgage Company as aforesaid shall be paid to me as follows: Ten Thousand Dollars in cash on the acceptance of this proposal, and the balance of said purchase price, Forth Thousand Dollars to be paid in two installments, - one installment of Thirty Thousand Dollars on or before fifteen months from August 21, 1919, and one installment of Ten Thousand Dollars on or before two years from August 21, 1919, and deferred installments of said purchase price are to be evidenced and secured as follows: * * * (here follows details of manner of securing payment).
If the above proposal is accepted by you and said notes executed and delivered to me upon proper and lawful authority of said company that the same shall be binding legal obligations of your company, I will deliver as my donation and gift to your company outright as aforesaid without any compensation, three thousand (3000) shares of the capital stock of said company, Unity Safe Deposit Company, to the end that your company shall become the owner of all the said capital stock, and that it shall have the ownership*2888 of the leasehold and building known as the Unity Building in Chicago, Illinois.
You will please cause this proposal to be submitted to your Board of Directors and have the same either accepted or rejected within twenty days, and if the same is accepted, please have the requisite resolutions adopted by your directors to carry the same into effect, and have the notes properly made and executed and delivery authorized.
Yours, etc.
(Signed) HATTIE MOORE.
On August 30, 1919, at a regularly constituted board of directors' meeting of the American Bond & Mortgage Co. the directors of said company accepted the offer of Mrs. Moore and duly passed the following resolution:
WHEREAS, Hattie Moore of Chicago, Illinois, who has become and is the owner of Four Thousand (4000) shares of the capital stock of the Unity Safe Deposit Company, a corporation organized and existing under the laws of the State of Illinois, and being the entire authorized and issued and paid up capital stock of said company, and which is the sole owner of a certain 99-year leasehold, and 16-story and basement office building located at 127 North Dearborn Street, in *267 the City of Chicago, Cook County, *2889 Illinois, and has made a proposal in writing to this company, which is in these words: (Here follows the offer of Mrs. Moore dated August 15, 1919 as set forth above).
AND WHEREAS, said proposal has been considered by the Board of Directors of the American Bond & Mortgage Company, and it is considered advantageous to the said corporation to accept said proposal, and that on account of the fact of the ownership of all of said capital stock carries with it the ownership of a 99-year leasehold and also the ownership of the 16-story office building and basement known as the Unity Building in the City of Chicago, Cook County, Illinois, and will provide a means of securing a permanent quarters and office building for this company, the said directors are desirous of accepting said proposal and acquiring said stock.
THEREFORE BE IT RESOLVED by the Board of Directors of the American Bond & Mortgage Company, a corporation organized and existing under the laws of Maine, and having authority under its charter to purchase and acquire the shares of capital stock of other corporations, that it hereby accepts the proposal heretofore made in writing by Hattie Moore and hereinbefore recited in*2890 the preambles hereto, and agree to pay her, the said Hattie Moore, the sum of Fifty Thousand ($50,000.00) Dollars for 1000 shares of the capital stock of said company, Unity Safe Deposit Company, in manner and form as set forth in her said proposal, and also to accept her donation and gift to the company of three thousand (3000) shares of the said capital stock of said Unity Safe Deposit Company. (There follows authorization to the officers to make the necessary payment and execute the necessary notes to Mrs. Moore.)
In accordance with the above offer of Mrs. Moore, and in accordance with the action of the board of directors set forth above the American Bond & Mortgage Co. became the owner on August 30, 1919, of the entire capital stock of the Unity Safe Deposit Co., consisting of 4,000 shares of the par value of $100 per share.
On August 30, 1919, the authorized and outstanding common capital stock of the American Bond & Mortgage Co. was held as follows, the preferred stock of said company being without voting rights:
| Hattie K. Moore | 619 shares |
| W. J. Moore | 182 shares |
| C. B. Moore | 150 shares |
| C. C. Moore | 24 shares |
| H. A. Moore | 10 shares |
| Miscellaneous holdings | 15 shares |
| Total | 1,000 shares |
*2891 On August 30, 1919, the value of the leasehold estate and building located at 127 North Dearborn Street, Chicago, Ill., which constituted the sole asset of the Unity Safe Deposit Co., was not less than $740,000, and the value of the assets owned by the Unity Safe Deposit Co. as at August 30, 1919, was not less than $400,000 in excess of its total liabilities at that date.
On August 30, 1919, the value of the entire capital stock of the Unity Safe Deposit Co. (4,000 shares of the par value of $100 per share) was not less than $400,000.
*268 The respondent reduced the invested capital of the petitioner corporation and affiliated group for the years 1920 and 1921 in the sum of $348,290, which amount represents the difference between $400,000, being the par value of the stock of the Unity Safe Deposit Co., and $51,710, being the cash cost of said stock to the American Bond & Mortgage Co.
In its consolidated income and profits-tax return for 1921, the petitioner included in the computation of invested capital the said amount of $348,290 as paid-in surplus, which amount was eliminated or disallowed by the respondent.
The deficiency letter herein discloses that the consolidated*2892 net income for 1921, as computed by the respondent, was $395,079, and that part of the consolidated net income produced by the Deposit Company was $19,715.60.
OPINION.
TRAMMELL: The petition filed herein purports to constitute an appeal from the determination by the respondent of the petitioner's tax liability for the calendar years 1920 and 1921, and states that the taxes in controversy are income and profits taxes for said years. It appears from the deficiency letter, as well as from the allegations of the petition, that the respondent determined an overassessment in the amount of $42,615.85 for the year 1920, and a deficiency in the amount of $62,452.12 for the year 1921, said overassessment representing the difference between the tax shown on the original return for 1920 and the amount of the tax liability as determined by the respondent for said year. In this situation we have no jurisdiction to redetermine the tax liability for the calendar year 1920, and the appeal, in so far as it involves said year, is hereby dismissed. See Revenue Act of 1926, section 274(g); *2893 .
The facts material in this proceeding have been stipulated by the parties, and the sole issue of law raised by the pleadings relates to the correct method of computing the consolidated invested capital of a group of class A affiliated corporations, except that the petitioner alleges that it is entitled to special assessment of its profits tax in the event the respondent's action in reducing its invested capital should be sustained.
Section 326 of the Revenue Act of 1921 defines invested capital as including the "actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment."
Section 240(a) of the Revenue Act of 1918, made applicable to the calendar year 1921 by section 240(e) of the 1921 Act, provides in part material here, as follows:
*269 That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the tax thereunder shall be computed*2894 and determined upon the basis of such return.
In December, 1910, a certain leasehold estate and office building located at 127 North Dearborn Street, in the City of Chicago, were paid into the Unity Safe Deposit Co., hereinafter referred to as the deposit company, for its entire capital stock of the aggregate par value of $650,000. The tangible property so paid in for stock, had a value, at the time of such payment, of not less than $650,000, and the stock so issued therefor was fully paid at the time of issue.
In April, 1919, capital stock of the deposit company, of the par value of $250,000, was surrendered by the stockholders and canceled without any payment therefor being made by the company to the stockholders. The outstanding capital stock of the company was thus reduced to $400,000, consisting of 4,000 shares of the par value of $100 each.
In May, 1919, Mrs. Hattie K. Moore, wife of the president of the American Bond & Mortgage Co., petitioner herein, purchased the entire outstanding capital stock of the deposit company, of the par value of $400,000, for $50,000 chsh.
On August 30, 1919, Mrs. Moore sold 1,000 shares and donated 3,000 shares of the capital stock*2895 of the deposit company to the petitioner corporation. In this manner the petitioner acquired all of the outstanding capital stock of the deposit company at a total cost to it of $51,710 cash, and at said date the value of said stock was not less than $400,000.
In computing the consolidated invested capital of the affiliated corporations, the petitioner included the amount of $348,290 as paid-in surplus, this being the difference between $400,000, the par value of the capital stock of the deposit company, and $51,710, the amount paid by the petitioner for said stock. The respondent eliminated or disallowed said amount, and thus reduced the consolidated invested capital to that extent, which action the petitioner has assigned as error.
The respondent in his brief contends substantially that decision of the issue presented here must be controlled by the limitation of section 331 of the Revenue Act of 1921, which provides that in the case of the change of ownership of property after March 3, 1917, if an interest or control in such property of 50 per centum or more remains in the same person and if the previous owner was not a corporation, the value of any asset so transferred or*2896 received shall, for the purpose of determining invested capital, be taken at its cost of acquisition, at the date when acquired by such previous owner.
*270 Accordingly, the respondent urges that, since the petitioner acquired the stock of the deposit company from Mrs. Moore on August 30, 1919, which was subsequent to March 3, 1917, and since Mrs. Moore, on and after August 30, 1919, retained an interest or control in sucn property of more than 50 per centum by virtue of the fact that she owned 62 per centum of the voting stock of the petitioner corporation, the case falls squarely within the provisions of section 331 supra, and the value of the stock can not be included in the invested capital at more than the amount of $50,000, the cost of its acquisition when acquired by the previous owner, Mrs. Moore.
In support of his argument that section 331 constitutes a complete bar to the allowance of the petitioner's claim, the respondent cites a number of our previous decisions, applying the provisions of said section. However, the cases cited are easily distinguishable from the present proceeding, for the reason that in no instance was the computation of consolidated*2897 invested capital of affiliated corporations involved.
If we were concerned here only with the computation of the statutory invested capital of the petitioner, American Bond & Mortgage Co., as a separate corporation, it might well be that the respondent's argument would be predicated upon a sound basis. But in the instant case the issue presented concerns the proper method of computing the consolidated invested capital of the affiliated group, and the value of the stock of the deposit company, purchased by the petitioner from Mrs. Moore, does not enter into that computation as a capital asset of the petitioner. Hence, the provisions of section 331 have no application.
We have repeatedly held that consolidated invested capital should be determined by computing separately the statutory invested capital of each corporation, as defined by section 326, and then eliminating from the combined statutory invested capital of the affiliated group, so determined, the amount of any duplications which may appear. In addition to duplications, if any, the statutory invested capital, as defined by section 326, must also be reduced by the amount of any liquidating dividend, or amount otherwise*2898 withdrawn from the original investment and returned to the stockholders.
In , we had before us a question involving the determination of consolidated invested capital, and in the course of our opinion, we said:
Each member of the affiliated group enters the consolidation with its invested capital as defined by section 326 of the Revenue Acts of 1918 and 1921. From this preliminary exhibit there is then eliminated such items or amounts as are shown to be duplications either of investment or of earned surplus and undivided profits. The law does not specifically provide for, and we are unable to find, that it in any sense contemplates any reduction or elimination of actual assets not appearing as duplications.
*271 Under the taxing statutes, two or more affiliated corporations are to be treated for tax purposes as a single corporation. . And the acquisition by one company of the stock of another, thereby creating affiliation, creates no additional investment in the affiliated group. *2899 By the act which creates the affiliation, the group acquires a part of its own capital stock. .
In , we considered substantially the same issue as is presented here; that is, the proper method of computing the consolidated invested capital of a group of class A affiliated corporations. In that case, we expressed the opinion that cash paid in for stock of the subsidiary retained its character as such only so long as it was invested in the business, and that when any part of the amount so paid in was withdrawn from the business, it could no longer be classified as "cash bona fide paid in for stock," within the meaning of section 326. Accordingly, we held that, in computing the consolidated invested capital, the cash originally paid in to the subsidiary for its stock should be reduced by the amount paid by the parent company for the stock of the subsidiary, which amount was thus returned to the stockholders and withdrawn from investment in the business, and taken outside of the consolidated group.
In the case at bar, tangible property other than cash was originally*2900 paid in to the subsidiary for its stock, and the property so paid in had a value of not less than the par value of the stock at the time of such payment. Hence, the same principle would apply here.
It seems clear that the deposit company, when it was organized in 1910, started off with a statutory invested capital of not less than $650,000. The surrender and cancellation of $250,000 par value of its stock in April, 1919, without any payment therefor being made by the corporation, did not effect any reduction of the statutory invested capital. The amount of the outstanding capital stock was reduced to $400,000 thereby, but its statutory invested capital remained at not less than $650,000, so far as this transaction was concerned.
Thus, the statutory invested capital of the deposit company, at August 30, 1919, when it entered the affiliated group, was not less than $650,000 unless during the years from 1910 to 1919, there occurred a partial liquidation of its capital assets. Whether any liquidating dividends were paid out of capital during said years, we are not informed.
While the parties have stipulated that the value of the assets of the Unity Safe Deposit Co. at August 30, 1919, was*2901 not less than *272 $740,000, we are not advised whether such value was in excess of that amount. There is no evidence as to whether consideration was taken of proper depreciation in determining the amounts of any dividends, nor as to whether any money was borrowed and distributed.
It may well be that the value of $400,000 in excess of liabilities represented in whole or in part appreciation in value of assets. Even if the value of the assets did not exceed $740,000, this would indicate that at least $90,000 represented in the net assets was appreciation, which could not be included in invested capital.
If proper depreciation was not taken and distributions were made to stockholders, clearly the invested capital, as determined by the petitioner, was erroneous.
So far as the record discloses, the actual value of the assets may have been much greater than $740,000. It was merely stipulated that the value was at least that great. If it was greater, then the difference between $650,000 and the excess could not be included in the consolidated invested capital.
The debts, including mortgages, if any, may, so far as we are informed by the record, have exceeded the total*2902 amount of the value of the assets at the time paid in for stock, in which event the entire excess of assets over liabilities would be appreciation.
We can not make assumptions as to the facts, and in the absence of evidence to show that the determination of the respondent is erroneous in amount, we must approve his determination, although it is shown that it is based on an erroneous principle.
Having reached the conclusion on the first issue, above indicated, it becomes necessary to consider the alternative issue raised by the petitioner that the exclusion of said amount of $348,290 from the consolidated invested capital constitutes an abnormality within the meaning of section 327(d) of the Revenue Act of 1921, which entitles it to special assessment of its profits tax as provided in section 328 of said Act.
We have heretofore held that where the excluded asset was a material factor in the production of the taxable income, its exclusion might create an abnormal condition.
In , we said:
It was these intangible assets which were the principal cause of the large income which the petitioner enjoyed during the taxable*2903 years and on which the deficiencies in question are based. * * * The exclusion must be such as to create an abnormal condition. Where, as here, the asset excluded is the most substantial part of its capital and is the principal contributing factor in the production of taxable income of the petitioner, it is our opinion that such an abnormality exists.
*273 Again, In , we said:
* * * The petitioner acquired from the Brownings on January 2, 1915, the contracts involved herein, which had at that time a fair market value of $4,190,000. For the reason hereinbefore stated, the value of these contracts may not be included in the petitioner's invested capital for the year 1918. The contracts produced, however, a large part of the petitioner's income for that year. These conditions, we think, constitute an abnormality within the meaning of section 327(d) of the Revenue Act of 1918, which entitles the petitioner to have its tax liability computed under the provisions of section 328 of that Act.
In the instant case, it is not shown that the excluded assets were a material income-producing factor. However, the deficiency*2904 letter discloses that the consolidated net income for the taxable year, as computed by the respondent, was $395,079, while that part of the consolidated net income produced by the Deposit Company was only $19,715.60, or less than 5 per cent of the total. The consolidated invested capital was determined by the respondent to be $905,077.22, and the amount excluded as paid-in surplus was $348,290.
Since the excluded assets produced less than 5 per cent of the taxable net income, as determined by the respondent, and with respect to which no issue was raised by the petitioner, the situation presented in and of itself does not, in our opinion, constitute an abnormality within the meaning of section 327(d) of the Revenue Act of 1921. The petitioner can not, therefore, be sustained on this issue.
Reviewed by the Board.
Judgment will be entered for the respondent.