*2599 1. STATUTE OF LIMITATIONS. - Waivers executed under authority of the Revenue Act of 1924, extending the period of limitations applicable to the taxable years 1919, 1920, and 1921, held to be valid, and it is further held, that the assessment and collection of any taxes due for those years is not barred by the statute of limitations.
2. DEDUCTIONS FROM GROSS INCOME. - Exhaustion of leasehold should be computed upon the basis of its value of $120,000 as determined herein.
3. ID. - Petitioner's liquor license and privileges acquired in 1914 became worthless upon the advent of prohibition. Held, that upon failure to prove the cost thereof, the amount of loss, if any, is not determinable.
4. ID. - The War Prohibition Act prohibited the sale of distilled spirits after June 30, 1919, for beverage purposes, and shortly after that date petitioner gave away all of its liquors purchased for resale in its bar. Held that the said Act, in and of itself, did not make petitioner's liquor totally worthless and there are no facts of record to establish the amount of loss sustained, if any, due to the changed market conditions brought about by prohibition.
5. INVESTED*2600 CAPITAL. - Leasehold should be included in invested capital at its actual cash value of $120,000 on date paid in for stock.
6. ID. - Petitioner not entitled to include in invested capital as a paid-in surplus the value of hotel equipment in excess of the purchase price.
7. ID. - Paid-in surplus for liquor licenses and privileges, and good will disallowed upon failure to establish how the property was acquired, or the cost or value thereof.
8. ID. - Proration of prior years' taxes approved, pursuant to section 1207 of the Revenue Act of 1926.
9. ID. - Held, respondent erred in reducing invested capital by applying a tentative tax to current earnings available for dividends. L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135.
10. SPECIAL ASSESSMENT. - Held that computation should be made under section 328 and under sections 230 and 301, and the one which results in the lesser amount of tax should be adopted in determining petitioner's tax liability for 1919.
*335 Respondent has determined deficiencies in petitioner's income and profits*2601 taxes in the amounts of $2,406.02 for the year 1918; $37,033 for 1919; $23,417.44 for 1920, and $6,146.53 for 1921, and petitioner's three appeals from said determinations have been consolidated for the purposes of a hearing and decision by this Board.
In its three petitions as amended at the hearing, the petitioner assigns the following errors by respondent:
(1) The assertion of any deficiencies for the years 1919, 1920, and 1921, it being alleged that the statute of limitations has run and no further assessments may be legally made.
(2) The increase of income due to the disallowance of deductions for (a) sufficient depreciation in 1918, 1919, 1920, and 1921 on the value of petitioner's leasehold; (b) loss sustained in 1918, 1919, and 1920 due to liquor and license rights and privileges and good will becoming worthless and obsolete; and (c) loss sustained in 1919 due to liquor on hand for sale becoming worthless
(3) The reduction of petitioner's invested capital by not including therein for the years 1919, 1920, and 1921, alleged paid-in surplus created by (a) the value of the leasehold in excess of the capital stock issued therefor; (b) the cash value of hotel equipment*2602 in excess of the consideration paid therefor; (c) the value of liquor license rights and privileges and good will in excess of capital stock issued therefor; and the further adjustments made, (d) in reducing invested capital for 1919, 1920, and 1921 by prorated Federal income taxes; and (e) in reducing invested capital for 1921 by applying a tentative tax to current earnings available for dividend payments in that year.
(4) The computation of petitioner's tax for the year 1919 under the provisions of section 328 of the Revenue Act of 1918, it being alleged that the tax computed under sections 230(a)(2) and 301(b) of said Act would be a lesser amount had the foregoing errors assigned as to the year 1919, not been committed by respondent in his computation under said latter sections.
*336 FINDINGS OF FACT.
Petitioner is a Wisconsin corporation with its principal office at 172-180 Third Street, Milwaukee.
For the taxable years 1919, 1920, and 1921, petitioner filed its returns on March 15, 1920, March 16, 1921, and May 23, 1922, respectively. As to any taxes due for the year 1919 a waiver was duly executed on January 24, 1925, extending the time for making any assessment*2603 until December 31, 1925. On December 10, 1925, respondent mailed to petitioner the required deficiency notice of his final determination as to petitioner's tax liability for the year 1919 and on February 8, 1926, petitioner filed its appeal therefrom, which appeal was docketed as No. 11755. As to any taxes due for the years 1920 and 1921, separate waivers for each of those years were duly executed on December 18, 1925, extending the time for making any assessment until December 31, 1926. On November 3, 1926, respondent mailed to petitioner the required deficiency notice of his final determination as to petitioner's tax liability for the years 1920 and 1921, and on December 30, 1926, petitioner filed its appeal therefrom, which appeal was docketed as No. 22221. All three of the said waivers were duly executed upon the usual accepted form "Income and Profits Tax Waiver" and filed with the respondent.
On or about August 1, 1912, the Hotel Wisconsin Co. acquired a lease for a term of 99 years for certain property including a 100-foot frontage on Third Street and a depth of 150 feet. The property was bounded on the north and east by an alley, so that it had good light protection, *2604 and it was 90 feet from the corner of Third Street and Grand Avenue, which was the main business corner of and the most valuable property in Milwaukee in 1914. The property was an exceptionally desirable site for a hotel. The Hotel Wisconsin Co. erected on that site the Hotel Wisconsin, but upon completion of the building in the latter part of 1913 there remained unpaid claims, totaling $350,792, of about 43 contractors and others, who at that time secured liens against the property. The Hotel Wisconsin Co. had assets consisting of the hotel building, valued at $1,152,000, and the long-term lease on the ground upon which the hotel had been erected. There were outstanding first and second mortgage bonds totaling $800,000. The said 43 contractors and other creditors took over the said assets subject to the said liabilities and then held many meetings to determine what course they should pursue and also the value of the lease. After having appraisals made and investigating property values, they determined upon a cash value of $120,000 in February, 1914, for the ground lease. They also knew that the liquor license granted by the City of Milwaukee, permitting the operation of a bar*2605 in the hotel, would be a factor in *337 bringing guests to the hotel. The contractors agreed to organize a new corporation which would take over all the assets and liabilities of the Hotel Wisconsin Co. and which would issue its capital stock to the said contractors.
The Hotel Wisconsin Realty Co., the petitioner herein, was organized and incorporated by the said contractors in or about February, 1914, with an authorized capital stock of 4,000 shares of the par value of $100 each. The said assets, that is, the Hotel Wisconsin and the leasehold, were paid in by the said contractors to petitioner, which issued $351,200 par value of its capital stock to the said contractors in proportion to their respective claims, plus small amounts of cash totaling $408. Petitioner retained $48,800 par value of stock as treasury stock. Petitioner assumed the liabilities of the Hotel Wisconsin Co., and on February 17, 1914, the opening entry on petitioner's books was as follows:
| Assets | Liabilities | |
| Hotel Wisconsin building | $1,152,000 | |
| Ground lease | 120,000 | |
| First-mortgage bonds | $500,000 | |
| Second-mortgage bonds | 300,000 | |
| Accounts payable | 350,792 | |
| Proprietary equity | 121,208 | |
| 1,272,000 | 1,272,000 |
*2606 In February, 1914, the long-term lease for the ground upon which the Hotel Wisconsin had been erected and which was paid in to petitioner for stock, had an actual cash value of $120,000. The respondent has allowed a value of only $25,000 for the said leasehold for the purposes of invested capital and depreciation.
Prior to February, 1914, the Hotel Wisconsin had been operating for a period of about 4 months and a bar had been operated in the hotel under a license obtained from the City of Milwaukee. That license had a considerable value, due to the location of the hotel bar in the center of the business district and, also, because there was a limited number of licenses granted by the city. Such licenses were issued yearly, but it was customary to renew them as a matter of course in instances where the bars were operated properly and orderly. Petitioner acquired a license to operate the bar in the Hotel Wisconsin and during the years 1915 to 1918, inclusive, its average yearly net income amounted to $32,000 from that source. The bar not only produced good profits from the sale of liquor, but it also brought a great many guests to the hotel. Respondent has excluded from petitioner's*2607 invested capital any value for the liquor license and privileges and good will, and has disallowed any deduction on account of said intangibles becoming worthless due to prohibition.
*338 On July 1, 1919, petitioner had on hand a quantity of liquor which had been purchased, at a cost of $12,093.85, for the purpose of resale in the bar. The War Prohibition Act prohibited the sale by petitioner of its liquor for beverage purposes after June 30, 1919. Petitioner's directors were afraid to keep the liquor on the hotel premises and immediately disposed of all of it by giving it to any individuals who would carry it off the hotel premises. Petitioner received no cash consideration in return for its liquor thus disposed of. Respondent disallowed the claimed deduction in the amount of $12,093.85 as a loss sustained upon the said disposition of the liquor purchased for sale in petitioner's bar.
From the time the Hotel Wisconsin opened its doors to the public until the latter part of 1914, it was operated by the Hotel Wisconsin Operating Co., which became bankrupt at the latter date. The said operating company had purchased the entire hotel equipment on the installment basis. *2608 At the bankruptcy sale petitioner purchased the entire hotel equipment for a small amount of cash paid to the bankruptcy court and the assumption of liability for the unpaid balance of the purchase price. Over a period of time petitioner paid the balance due on the equipment, amounting to a total of $132,915.32, which amount, together with the small sum paid to the bankruptcy court, has been included in petitioner's invested capital by respondent. In 1920 the following entry was made on petitioner's books:
December 31, 1920, Equipment A/C, Dr., $92,039.18; To Surplus, Cr. $92,039.18; to bring equipment in 1914 up to $225,000, original value.
The appraised value of the hotel equipment was $225,000 on the date it was acquired in 1914, and petitioner in 1920 set up as a paid-in surplus the difference between the actual cost and the appraised value. Respondent disallowed the claimed paid-in surplus on account of said transaction.
Respondent computed petitioner's tax liability for the year 1919 under the provisions of section 328 of the Revenue Act of 1918. He reduced petitioner's invested capital for the years 1919, 1920, and 1921 by amounts of prorated Federal income taxes*2609 which became due and payable during each of the said years, and for the year 1921 he reduced petitioner's invested capital by applying a tentative tax against current earnings available for dividend payments during 1921.
OPINION.
TRUSSELL: As to the first issue, petitioner contends that assessment is now barred by the statute of limitations, because the waivers purporting to extend the time for assessment are void and of no effect for the reasons that the Revenue Act of 1918 does not authorize an extension of the statute of limitations by agreement of the parties *339 and that the agreements or waivers are void for lack of consideration. The waivers executed by the parties, on the dates as set forth in the findings of fact, were submitted in evidence, but we deem it not necessary to quote the three waivers in our findings. The waivers were executed pursuant to the provisions of section 278(c) of the Revenue Act of 1924, which authorizes the taxpayer and the Commissioner to consent in writing to an extension of the period of limitations applicable to the taxable years here in controversy. The Commissioner postponed the making of assessments and the enforcement of collections*2610 for the taxable years, due to the agreed extension of time within which such action might be taken, and such delay on the part of the Commissioner is just the consideration authorized by the statute of limitations and that which petitioner desired. We must hold that the waivers are valid and that the assessment and collection of the taxes in controversy are not barred. Cf. .
Upon its organization in February, 1914, petitioner acquired for stock a leasehold, the cash value of which we have found to have been $120,000 on the date of acquisition. That value was established by the testimony of several qualified witnesses as to the values of the surrounding property and of leases thereof. The respondent determined that the said leasehold had a value of only $25,000, and computed the allowable deduction for exhaustion of the leasehold interest upon that basis, which was erroneous. In each of the years 1918, 1919, 1920, and 1921 petitioner should be allowed a deduction for exhaustion of the leasehold under section 234(a)(7) of the Revenue Acts of 1918 and 1921, upon the basis of a cost of $120,000 prorated over the life of the leasehold*2611 from February, 1914. ; .
Petitioner claims that it sustained a loss due to its liquor license and privileges and good will becoming worthless upon the advent of prohibition. It appears that petitioner acquired a liquor license at some time during 1914, but the record does not show whether it was acquired for stock in February, 1914, or from the Hotel Wisconsin Operating Co. in the latter part of 1914 by purchase or otherwise; or whether petitioner applied for and obtained a license when it took over the operation of the hotel in the latter part of 1914. The license having been acquired subsequent to March 1, 1913, the amount of the loss, if any, must be measured by the cost of the property to petitioner. See ; . There is no doubt but that petitioner's liquor license and privileges and the good will attached thereto, were valuable, but inasmuch as there are no facts of record to establish *340 the cost of the property we are unable to find that petitioner actually sustained*2612 a loss. We must sustain respondent's disallowance of the claimed deduction on account of such alleged loss.
Petitioner contends that its stock of liquor on hand on July 1, 1919, became worthless due to national prohibition and that it sustained a deductible loss in that year in the amount of $12,093.85, the cost of the liquor on hand purchased for resale in its bar, but disposed of by gift in 1919. The War Prohibition Act of November 21, 1918, prohibited the sale of distilled spirits for beverage purposes after June 30, 1919, and until the conclusion of the World War and the termination of demobilization. That act further provides that the Commissioner of Internal Revenue prescribe rules and regulations in regard to the manufacture, sale and removal of distilled spirits held in bond, for other than beverage purposes. The regulations prescribed provided for the issuance of permits to sell liquor for certain purposes other than for beverage. We are of the opinion that the said prohibition act, in and of itself, did not make petitioner's liquor totally worthless on July 1, 1919. It is well known that prohibition legislation caused a material change in the market for distilled*2613 spirits, because legal sales and purchases were limited, and it may have been that petitioner's liquor became worthless to it on July 1, 1919, due to the cost of legally selling it or the nonexistence of a market, or other facts peculiar to this petitioner. We have no facts of record in regard to any attempt by petitioner to legally sell its liquor, or as to the then market conditions or any other facts affecting petitioner's disposition of its liquor for other than beverage purposes. We are of the opinion that petitioner has failed to establish a loss in the amount of $12,093.85, or in any other amount on account of liquor disposed of by gift to individuals shortly after June 30, 1919.
Upon its organization in February, 1914, petitioner acquired for stock certain assets, among which was a leasehold, the actual cash value of which we have found to have been $120,000 on the date of acquisition. The respondent in his computation for the years in question has included in petitioner's invested capital $25,000 as the value of the leasehold. The term "tangible property" as defined in the Revenue Acts of 1918 and 1921 includes leaseholds and the leasehold acquired by petitioner for*2614 stock should be included in petitioner's invested capital for the years in question at its actual cash value of $120,000 as provided by section 236(a)(2) of the Revenue Acts of 1918 and 1921.
Petitioner claims a paid-in surplus for the years 1919, 1920, and 1921, in the amount of $92,039.18, representing the alleged value in 1914 of hotel equipment in excess of the cost thereof. In 1914 petitioner *341 purchased the equipment and over a period of time paid there for a total of $132,915.32, representing the unpaid balance of the original purchase price plus a small additional amount paid to the bankruptcy court. Respondent has included in petitioner's invested capital for the years in question the total cost and has disallowed the claimed paid-in surplus. The equipment was purchased by petitioner and under the provisions of section 326 of the Revenue Acts of 1918 and 1921, petitioner is not entitled to include in its invested capital as a paid-in surplus the value of the equipment in excess of the cost thereof. Respondent sustained.
Petitioner also claims a paid-in surplus on account of the value of the good will and license rights and privileges alleged to have been*2615 acquired in 1914 for capital stock. With reference to this issue we have heretofore set forth that petitioner has failed to establish how the property was acquired, whether by purchase, or for stock, or otherwise. Also, petitioner has failed to establish the cost or value of the property at the date of acquisition and accordingly this claim for a paid-in surplus must be denied.
Pursuant to the provisions of section 1207 of the Revenue Act of 1926, we must approve the respondent's reduction of petitioner's invested capital for the years 1919, 1920, and 1921 by amounts of prorated Federal income taxes which became due and payable during each of said years, in accordance with the regulations in force in respect to such taxable years. However, the effect of this decision upon the taxes due from this petitioner should be reflected in the amounts so deducted from invested capital.
Under authority of the Board's decision in , we must hold that respondent erred in reducing petitioner's invested capital for 1921 by computing a tentative tax theoretically set aside from the current year's earnings in determining the extent to which dividends*2616 paid in 1921 were paid from current earnings.
For the year 1919 respondent computed petitioner's tax under section 328 of the Revenue Act of 1918. Petitioner contends that had the respondent not committed the alleged errors the computation of the tax under sections 230 and 301 would have been a lesser amount than that asserted in respondent's final determination for the year 1919. The tax liability for the year 1919 should be recomputed in accordance with this decision as to the matters in controversy and also in accordance with the provisions of sections 230 and 301, and section 328 of the Revenue Act of 1918, and the computation which results in the lesser amount of tax should be adopted in determining petitioner's tax liability for 1919.
Judgment will be entered pursuant to Rule 50.