*2618 1. INVESTED CAPITAL - PAID-IN SURPLUS. - On July 1, 1918, there were paid in to petitioner various tangible assets, having an actual cash value of $1,810,901.20 on that date, for $950,000 par value of petitioner's preferred stock. Held, petitioner is entitled to include in its invested capital for 1920 the amount of $860,901.20 as paid-in surplus.
2. DEPRECIATION. - The amount of the deduction for depreciation on those assets to paid in should be computed upon the basis of the value thereof on the date paid in.
3. Id. - Held, the amount of depreciation already allowed on those assets, plus additional depreciation computed at the same rates upon the additional capital values found as to those assets, constitutes a reasonable allowance for depreciation.
4. Id. - Held, the record does not establish accelerated depreciation for the year 1920.
*639 The proposed deficiency in this petitioner's income and profits tax for the year 1920 is in the amount of $56,161.61. The petitioner assigns three errors - (a) the respondent's allowance*2619 of only $95,000 as a paid-in surplus instead of an amount greatly in excess of that, (b) the respondent's failure to use as a basis for computing depreciation of the Flat Rock Mill the actual fair market value of said assets on the date of acquisition, and (c) the respondent's failure to allow a sufficient rate of depreciation on the property used in the business. Petitioner alleges an overpayment of taxes for the year 1920 in an amount not in excess of $50,000.
FINDINGS OF FACT.
The petitioner is a corporation with its principal office at Philadelphia, Pa., and is engaged in the manufacture of paper.
Prior and subsequent to July 1, 1918, there was outstanding $1,500,000 par value of common stock of the petitioner.
On or about July 1, 1918, petitioner acquired certain assets, including paper mill, land, water rights, equipment and appurtenances and other assets from the M. & W. H. Nixon Paper Co., in exchange for which petitioner issued to the said company and/or its stockholders, $950,000 par value of preferred stock and assumed certain liabilities of the M. & W. H. Nixon Paper Co.
On or about July 1, 1918, the value of the current assets, which did not include real*2620 estate, buildings, machinery, equipment, etc., less the current liabilities acquired from the M. & W. H. Nixon Paper Co., amounted to $270,613.64, arrived at as follows:
| Current assets | ||
| Cash | $79.01 | |
| Accounts receivable | 142,986.92 | |
| Prepaid insurance | 6,549.55 | |
| Liberty bonds | 400.00 | |
| Stocks (raw and manufactured) | 432,164.28 | |
| Automobiles | 2,647.04 | |
| Total current assets | $584,826.80 | |
| Current liabilities | ||
| Accrued wages | $11,316.40 | |
| Notes payable | 100,000.00 | |
| Accounts payable | 202,896.76 | |
| Total liabilities | 314,213.16 | |
| Value of net current assets | 270,613.64 |
*640 The opening entries on petitioner's journal disclose the following as to the acquisition of the Flat Rock Mill property from the Nixon Co.:
| Nixon real estate | $50,000.00 | |
| Nixon buildings | 448,628.22 | |
| Nixon machinery | 736,121.53 | |
| Current assets | 584,826.80 | |
| 1,819,576.55 | ||
| Current liabilities | $314,213.16 | |
| Nixon building reserve | 185,121.13 | |
| Nixon machinery reserve | 370,242.26 | |
| 869,576.55 | ||
| Par value of petitioner's preferred stock issued | 950,000.00 |
The fair market and/or actual cash values on July 1, 1918, of the various assets paid in to petitioner*2621 on that date for $950,000 par value preferred stock were as follows:
| Buildings | $469,118.73 |
| Machinery and equipment | 725,636.00 |
| Shafting and belting | 30,346.89 |
| Piping | 57,597.50 |
| Electric wiring | 8,694.00 |
| Water rights | 50,000.00 |
| Land | 198,894.44 |
| Net current assets | 270,613.64 |
| Total | 1,810,901.20 |
The plant known as Flat Rock Mill was located on land abutting the Schuylkill River. Other paper mills were located in the same vicinity. The Flat Rock Mill used from two and one-half to three million gallons of water a day.
Petitioner owned another paper mill known as the Delaware Mill. The Delaware Mill and the Flat Rock Mill were equipped with the same type of machinery, produced the same type of paper and both mills were run 24 hours a day under normal conditions. During 1920 the machinery in both mills was run at a faster rate of speed and the output for that year was increased over that of preceding years, although the quality of the paper was reduced. The machinery and equipment in both mills sustained more wear and tear during 1920 than under normal operating conditions.
In computing the deficiency in controversy the respondent has included in petitioner's*2622 invested capital a paid-in surplus of $95,000 on account of the Flat Rock Mill property acquired on July 1, 1918, for $950,000 par value preferred stock. Respondent has allowed depreciation at the rate of 6 1/2 per cent on machinery and equipment valued at $736,121.53 and 2 1/2 per cent on buildings valued at $448,628.22 at the Flat Rock Mill and he used the same rates for depreciation of the Delaware Mill property.
*641 OPINION.
TRUSSELL: The uncontradicted testimony of several qualified witnesses establishes the fair market and/or actual cash values on July 1, 1918, of the Flat Rock Mill properties, as set forth in our findings of fact. The total net value of all the assets of the Flat Rock Mill on July 1, 1918, amounted to $1,810,901.20, for which petitioner issued on that date $950,000 par value of its preferred stock. We are of the opinion that petitioner is entitled to include in its invested capital for the year 1920 a paid-in surplus in the amount of $860,901.20, as provided in section 326(a) of the Revenue Act of 1918. Cf. *2623 ; 315 .
Depreciation of the Flat Rock Mill properties should be allowed on the basis of the values thereof on the date of acquisition as set out in the findings of fact. ; .
Section 234(a)(7) of the Revenue Act of 1918 provides that in computing the net income of a corporation there shall be allowed as a deduction:
A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.
In respect to the Flat Rock Mill (Nixon) property, it appears that the respondent has allowed petitioner a depreciation deduction in the amount of $47,847.89 on machinery and equipment computed at a flat rate of 6 1/2 per cent on a value of $736,121.53, and a depreciation deduction in the amount of $11,215.70 on buildings computed at a rate of 2 1/2 per cent on a value of $448,628.22. We are of the opinion that those amounts already allowed, plus the additional allowable depreciation computed at the same rates*2624 on the additional capital values found in this decision, constitute a reasonable allowance for exhaustion, wear and tear of the Flat Rock Mill property for the year 1920.
It further appears that respondent has applied the same rates of depreciation to the Delaware Mill property, the value of which is not in controversy. With respect to both mills, the petitioner contends that during 1920 the rate of depreciation on buildings and machinery was accelerated due to additional wear and tear caused by running the machinery above the normal speed for the purpose of increasing the production of both mills. The plants were run 24 hours a day during 1920, the same as under normal conditions and we have before us only the fact that in 1920 the machinery was run at a more rapid pace than under normal conditions. We do not have *642 before us sufficient facts to enable us to determine to what extent, if any, the normal rate of depreciation was accelerated during 1920. Petitioner has failed to sustain the burden of proving accelerated depreciation.
Judgment will be entered pursuant to Rule 50.