1929 BTA LEXIS 2156">*2156 1. Stock subscription agreements of the character and in the circumstances shown to exist in these proceedings, held to constitute such "evidences of indebtedness" as should be included in petitioner's invested capital for the taxable year in question.
2. Interest paid by such stock subscribers, should, in the circumstances of this case, be treated as taxable income earned by petitioner, for extension of credit to such subscribers.
17 B.T.A. 1251">*1251 The Commission determined a deficiency in income tax for the fiscal year ended November 30, 1922, in the amount of $313.69.
The issue is whether certain stock purchase agreements, bearing interest, were such evidences of indebtedness as should properly be included in invested capital.
FINDINGS OF FACT.
The petitioner is a New York corporation, organized October 7, 1921. It began business December 1 of the same year, with its principal office in the City of New York.
It filed an income-tax return for its fiscal year ended November 30, 1922, showing net income of $38,082.31, tax $4,907.26, and invested1929 BTA LEXIS 2156">*2157 capital of $249,939, which latter amount petitioner concedes is incorrect and now asserts it should be $240,200.
The business of petitioner is a continuation of the business theretofore carried on at the same premises by the Manhattan Trading Corporation, a Delaware corporation, which went into liquidation December 1, 1921.
When the Manhattan Trading Corporation went into liquidation, it had assets consisting of cash, accounts receivable, merchandise 17 B.T.A. 1251">*1252 and furniture of an estimated value of approximately $315,500. Its total liabilities amounted to approximately $181,000. Its excess of assets over all liabilities was approximately $134,000.
At the time the Manhattan Trading Corporation went into liquidation it owed to one E. Twyeffort about $17,000; to Knickerbocker Investors Corporation about $46,000; to E. C. Dieckerhoff and wiff, Elsa L. Dieckerhoff, about $3,600, and to A. H. Henke about $3,000.
The stockholders of the Manhattan Trading Corporation at the date of its liquidation were the Knickerbocker Investors Corporation (controlled by E. C. Dieckerhoff and wife, Elsa L. Dieckerhoff), Elsa L. Dieckerhoff and August H. Henke, all of whom became subscribers1929 BTA LEXIS 2156">*2158 to the preferred stock of the petitioner, as indicated by the following letter:
NOVEMBER 1, 1921.
DIECKERHOFF, RAFFLOER & CO., INC.
GENTLEMEN: We, the undersigned, hereby subscribe hereto our respective names, post-office address and the number of shares of preferred stock at the par value of One Hundred Dollars ($100.) each, which we respectively agree to take in your corporation, a stock corporation organized under the Business Corporations Law of the State of New York, with a capital stock of $250,000, preferred, consisting of 2,500 shares and 5,000 shares of no par value and we hereby severally agree to pay for such stock 10% thereof herewith, and the remainder at such times and in such installments as the Board of Directors of this company may, by resolution, require.
| Name | Post-office address | Amounts |
| of pre- | ||
| ferred | ||
| stock | ||
| subscribed | ||
| for | ||
| Mrs. E. C. Dieckerhoff | 27 West Twenty-third Street, | $27,100 |
| New York City | ||
| August H. Henke | do | 23,000 |
| Knickerbocker Investors Corporation | 110,000 | |
| Total | 160,100 |
We, being the owners of all the capital stock of Manhattan Trading Corporation, a Delaware corporation, which is, 1929 BTA LEXIS 2156">*2159 or presently will be, placed into liquidation, for and in consideration of the premises, hereby sell, assign and transfer all our interest in such corporation, if, as and when the same is actually placed into liquidation unto Dieckerhoff, Raffloer & Co., Inc. but only for the purpose of securing the foregoing subscriptions, and this subscription shall be regarded as authority to the trustees in liquidation of Manhattan Trading Corporation to pay to you for our account any and all dividends in liquidation, payable to us, as such security.
(Signed) ELSA L. DIECKERHOFF,
AUGUST H. HENKE,
KNICKERBOCKER INVESTORS CORPORATION,
By EWALD C. DIECKERHOFF, President.
E. Twyeffort also became a subscriber for 500 shares of the preferred stock of the petitioner, paying $10,000 thereon November 17 B.T.A. 1251">*1253 30, 1921, and $23,000 thereon December 1, 1921, the balance, $17,000, being the amount of loan due from the Manhattan Trading Corporation which was to be converted into preferred stock of petitioner and was paid December 31, 1921.
The stock subscribed for was issued to the subscribers and all subscriptions to the stock of petitioner were ultimately paid. After the subscription1929 BTA LEXIS 2156">*2160 letter of November 1, 1921, was written, it was decided by the petitioner to charge interest on the unpaid subscriptions from December 1, 1921.
Accrued interest on subscriptions to preferred stock entered on petitioner's ledger under date of August 31, 1922, and amounting to $6,175.13, was reported as income in petitioner's tax return for such year. Other interest entered under date of November 30 of the same year, amounting to $768.05, was also reported.
The authorized capital stock of petitioner was 2,500 shares of preferred stock, par value of $100 each and 5,000 shares of common, without any par value, and the date of issuance of all the shares or certificates about which any question now arises, was on or before December 1, 1921, the date when petitioner began business. None of the owners of such shares paid in full for same at the date of their issuance or delivery.
The reason for forming the petitioner was that a firm by the name of Dieckerhoff, Raffloer & Co. had been very well known in the United States among the wholesale trade and department stores when it was, in 1918, taken over and partially liquidated by the Alien Property Custodian. The Manhattan Trading1929 BTA LEXIS 2156">*2161 Corporation's name meant nothing to the old or former trade, and it was thought advisable to liquidate it and again use the name of Dieckerhoff, Raffloer & Co., and permission to do so having been granted by the Alien Property Custodian, petitioner was formed.
The assets of the Manhattan Trading Corporation were taken over by petitioner without payment therefor at the time, the shareholders of each being the same. The merchandise of the Manhattan Trading Corporation which was on the floor on November 30, 1921, remained there on December 1, 1921, the same premises being leased by petitioner. The petitioner sold the assets of the Manhattan Trading Corporation as agent and charged a commission therefor. The total amount received in liquidation was $143,782, said corporation not, however, being finally liquidated until 1926.
The final payment on the stock of petitioner subscribed for by Elsa L. Dieckerhoff was made November 28, 1922. The final payment by August H. Henke on his subscription was November 30, 1923, on which date final payment on subscription to petitioner's stock was also made by Knickerbocker Investors Corporation, and by E. Twyeffort December 31, 1921.
17 B.T.A. 1251">*1254 1929 BTA LEXIS 2156">*2162 On July 19, 1922, the board of directors of petitioner passed, among others, the following resolutions:
RESOLVED, that no dividends be declared on either class of stock at present, it being the judgment of this Board that this is the time to conserve assets rather than to disburse assets, particularly cash.
The Treasurer calls attention to an item in the statement of assets and liabilities, showing an indebtedness to Manhattan Trading Corporation on current account of $99,245.66 and advises that the corporation was in a position, now, to pay the same. Reference is made to the agreement between this corporation and Mrs. E. C. Dieckerhoff, Mr. A. H. Henke and Knickerbocker Investors Corporation, dated November 1st, 1921, by virtue of which the last named persons subscribed to preferred stock of this corporation in the aggregate amount of $160,000, and, to secure such subscriptions, transferred to this corporation their respective interests in all dividends in liquidation up to the amount of their respective subscriptions.
It was thereupon duly moved, seconded and adopted that the Treasurer fix a round sum between $90,000 and $99,000 and pay the same on account of said current1929 BTA LEXIS 2156">*2163 account to Manhattan Trading Corporation; one-half to be paid as of March 1st and the other one-half as of June 1st, 1922, with interest at six per cent (6%).
That in pursuance of said agreement of November 1st, 1921, the trustees in dissolution of Manhattan Trading Corporation be requested forthwith to distribute said payment as a dividend in dissolution and to furnish this corporation a statement of what portion of such payment accrues to Mrs. Dieckerhoff, Mr. Henke and Knickerbocker Investors Corporation, respectively.
FURTHER RESOLVED, that the amount so reported as belonging to each of the persons aforesaid be thereupon credited upon the books of this corporation to such person on account of his subscription to preferred stock, aforesaid.
FURTHER RESOLVED, that the subscription account of each of such persons be debited with interest at the rate of six per cent (6%) per annum on unpaid subscriptions.
The President then read a letter from Messrs. Wythes & Wilson, dated July 18th, 1922, and calling attention to the desirability of a sale by the trustees of Manhattan Trading Corporation to this corporation of certain items of merchandise in small or irregular quantities. 1929 BTA LEXIS 2156">*2164 This merchandise was identified by the Treasurer, whereupon the following resolution was duly made, seconded and adopted.
WHEREAS, certain of the merchandise which has been identified to the satisfaction of this Board by the Treasurer, and which is being sold by this corporation for the trustees in dissolution of Manhattan Trading Corporation, is difficult to handle by reason of the fact that many of the lots have been liquidated in part, leaving small remainders of broken sizes, colors, etc.,
RESOLVED, that this corporation, the said trustees agreeing, purchase the same, the domestic at net inventory price, the foreign at inventory price plus ten per cent (10%) as follows:
| Domestic | $4,812.52 | |
| Foreign | $21,791.87 | |
| ,10 per cent on foreign | 2,179.18 | |
| 23,971.05 | ||
| Making a total of | 28,783.57 |
being the inventory figures as of May 31st, 1922.
17 B.T.A. 1251">*1255 FURTHER RESOLVED, that the transfer shall take place as of June 1st, 1922, and that the Treasurer be authorized to pay the purchase price together with 6% interest unto the trustees in dissolution of Manhattan Trading Corporation, but on the same terms and conditions as the payment of from $90,000. 1929 BTA LEXIS 2156">*2165 to $99,000. on account of current account, as aforesaid, was authorized and paid.
On November 30, 1922, said board of directors passed the following resolutions:
The Treasurer reported that a balance was due the Manhattan Trading Corporation in liquidation amounting to $23,443 - on open account and that funds were available to this corporation to pay the same at this time.
It was thereupon duly moved, seconded and adopted that the Treasurer pay the sum of $23,443. - with interest at 6% to the Trustees of Manhattan Trading Corporation, and that in pursuance of the agreement of November 1st, 1921, under which Messrs. E. C. Dieckerhoff and August H. Henke and Knickerbocker Investors Corporation subscribed to preferred stock of this corporation and transferred to this corporation their respective interests in all dividends in liquidation of Manhattan Trading Corporation to secure such subscriptions, the Trustees in liquidation be requested forthwith to distribute said payment as a dividend in dissolution, and to furnish this corporation with a statement of what portion of such payment accrues to Messrs. E. C. Dieckerhoff and August H. Henke and Knickerbocker Investors Corporation, 1929 BTA LEXIS 2156">*2166 respectively.
FURTHER RESOLVED, that the amount so reported as belonging to each of the persons aforesaid be credited, when received, upon the books of this corporation to such person on account of his subscription to its preferred stock.
The shareholders of petitioner paid interest to petitioner on the amount due on unpaid balance of preferred stock in order that they might receive the dividends which might be due at the end of business year, from date of December 1, 1921, on which petitioner started business.
The shareholders of the Manhattan Trading Corporation elected the trustees in liquidation of that corporation.
The Manhattan Trading Corporation was liquidated in accordance with the terms of the letter of November 1, 1921. There was no other written agreement in respect to that matter.
The first liquidating dividend of the Manhattan Trading Corporation was paid July 21, 1922, the second on December 31, 1922, and the last on December 14, 1926.
The petitioner did not come into possession of the funds belonging to the Manhattan Trading Corporation, it being credited with whatever funds came into their acount from sales, and at the end of certain periods, the1929 BTA LEXIS 2156">*2167 trustees of the Manhattan Trading Corporation declared a liquidating dividend.
OPINION.
LITTLETON: It is admitted by petitioner's counsel that the Commissioner has computed invested capital by proration of cash received from the date of the credit to the subscription account, while 17 B.T.A. 1251">*1256 the petitioner contends that such subscriptions to stock were entirely paid up on November 1, 1921, when the subscription letter of that date was written. There is no dispute as to when the payments in cash were actually made. The main question in the case rests on the proper interpretation to be placed on the subscription agreement or letter of November 1, 1921, addressed to petitioner and fully set out in our findings of fact.
Is that letter such evidence of indebtedness, in the light of all the other evidence in the case, as warrants the holding that it, in fact, constituted payment in full for stock subscribed and as such should be included in invested capital?
Section 326(a) of the Revenue Act of 1921 provides that the term "invested capital" for any year means, among other things, "(1) actual cash bona fide paid in for stock or shares; (2) actual cash value of tangible property, 1929 BTA LEXIS 2156">*2168 other than cash, bona fide paid in for stock or shares, at the time of such payment * * *."
Section 325(a) defines the term "tangible property" to mean stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than the "intangible property."
The petitioner contends that the agreement of November 1, 1921, were "tangible property" and were "evidences of indebtedness" within the meaning of section 325(a) of the Revenue Act of 1921, and should be included in invested capital at their cash value at that date.
The Commissioner disputes that and insists that the agreements contained are merely subscription agreements and are not "evidences of indebtedness" accepted in payment for stock within the meaning of the Revenue Act of 1921. The evidence shows that the same interests absolutely owned or controlled the Manhattan Trading Corporation and the petitioner.
The agreements of November 1, 1921, do not, on their face, purport to be "payment" in full for stock of petitioner and expressly provide: "we hereby severally agree to pay for such stock 10% thereof herewith, and the remainder at such times and in such installments1929 BTA LEXIS 2156">*2169 as the Board of Directors of this company may, by resolution, require."
The letter or agreement further states:
We, being the owners of all the capital stock of Manhattan Trading Corporation, a Delaware corporation, which is, or presently will be, placed into liquidation, for and in consideration of the premises, hereby sell, assign and transfer all our interest in such corporation, if, as and when the same is actually placed into liquidation unto Dieckerhoff, Raffloer & Co., Inc. but only for the purpose of securing the foregoing subscriptions, and this subscription shall be regarded as authority to the trustees in liquidation of Manhattan Trading 17 B.T.A. 1251">*1257 Corporation to pay to you for our account any and all dividends in liquidation, payable to us, as such security.
The resolutions passed by the board of directors of petitioner on July 19, 1922, quoted in our findings of fact, refer to the agreement between petitioner and the persons who "subscribed to preferred stock" of petitioner and "to secure such subscriptions, transferred to this corporation their respective interests in all dividends in liquidation up to the amount of their respective subscriptions."
The resolutions1929 BTA LEXIS 2156">*2170 further provided that the amounts going to the said subscribers of petitioner's stock, as a result of distribution dividends in dissolution of Manhattan Trading Corporation, be "credited upon the books of this corporation to such person on account of his subscription to preferred stock aforesaid," and "that the subscription account of each of such persons be debited with interest at the rate of six per cent (6%) per annum on unpaid subscriptions."
Resolutions of similar purport were passed by petitioner's board of directors on November 30, 1922.
In view of the conditions imposed in the stock purchase agreements, the resolutions passed, and action taken thereunder, we are of the opinion that the agreements were tangible property, having actual cash value, paid in for stock and are such "evidences of indebtedness" as justify including them in invested capital.
The agreements in question were intended and accepted as payment for stock. Stock was actually issued and delivered to the subscribers signing the same. The signers absolutely controlled the petitioner and the Manhattan Trading Corporation, the interest of the said signers in which were assigned to secure their subscriptions1929 BTA LEXIS 2156">*2171 to petitioner's stock. The persons purchasing the stock were financially responsible and the security back of their agreements was, in itself, almost if not entirely equal to the amount agreed to be paid for the stock issued. We think therefore that the stock purchase agreements had an actual cash value on November 21, 1921, equal to the par value of the stock issued therefor and should be included in invested capital in that amount. Cf. .
We are of the opinion, therefore, that the Commissioner was in error in not treating the agreements to November 1, 1921, as proper "evidences of indebtedness" to be included in invested capital.
We are further of the opinion that the interest paid by the said stock subscribers should be treated, in the circumstances of this case, as taxable income, earned by the petitioner for extension of credit to such paying subscribers to stock, thus permitting them to delay making payments on their subscriptions until money to help pay same might be realized from assets of the Manhattan Trading Corporation, 17 B.T.A. 1251">*1258 assigned as security for such purpose. 1929 BTA LEXIS 2156">*2172 . This is what the Commissioner did.
Reviewed by the Board.
Judgment will be entered under Rule 50.