*1082 1. Upon the evidence herein, held, the petitioner is entitled to have its profits tax for 1917 computed under the provisions of section 209 of the Revenue Act of 1917.
2. An amount representing accrued and unpaid wages at the close of the year 1922, deducted by petitioner in computing its net income for that year, allowed as a proper deduction.
*690 The petitioner seeks a redetermination of the deficiencies in income and profits taxes asserted against it by the respondent, for the years and in amounts as follows:
| Docket No. | Year or period | Deficiency |
| 1917 | $44,324.37 | |
| 1918 | 69,124.26 | |
| 35260 | 1919 | 25,678.16 |
| 1/1/20 to 10/28/20 | 23,006.64 | |
| 10/29/20 to 12/31/20 | 4,511.53 | |
| 35617 | 1922 | 16,606.48 |
The issues raised by the amended petitions and the respondent's affirmative defense are: (1) Whether the 1917 profits tax should be computed at the rate of 8 percent as provided by section 209 of the Revenue Act of 1917, in the case of a trade or business having*1083 no invested capital or not more than a nominal capital; (2) alternative to (1), whether the excess profits tax rate determined by respondent for 1917, under section 210 of the Revenue Act of 1917, is the proper rate for computing that tax; (3) whether the profits tax rates determined by respondent for 1918 and 1919, under section 328 of the Revenue Act of 1918, are the proper rates for computing the profits taxes for those years; (4) whether the deductions allowed by the respondent for the years and intervening periods 1917 to 1923, inclusive, for depreciation, are reasonable allowances for the depreciation *691 sustained; (5) whether the deductions allowed by the respondent for the years and intervening periods 1917 to 1923, inclusive, for depletion, are reasonable allowances for the depletion sustained; (6) whether 1917 sales of coal, in the amount of $18,975.98, should be included in 1917 income or treated as a nontaxable recovery of the cost of developing petitioner's mines; (7) whether the petitioner sold its Cora Mine properties in 1922, and sustained a deductible loss in that year, upon the alleged sale, of $70,082.64; (8) whether petitioner was affiliated with any other*1084 corporation during the years 1920 to 1923, inclusive, within the purview of section 240(b) of the Revenue Act of 1918 and section 240(c) of the Revenue Act of 1921; and (9) whether respondent erred in disallowing the deduction from 1922 income of certain wages which, at the close of that year, were unclaimed by the persons entitled thereto. Upon motion of the parties, which was duly granted, the hearing was limited, as provided by Rule 62(a), to the trial of the issues other than the second and third, the last two mentioned issues involving section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918, respectively. At the hearing, the parties made an oral stipulation disposing of the fourth, fifth, sixth, seventh and eighth issues; and full effect will be given that stipulation in the recomputation under Rule 50. The proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
Petitioner, a West Virginia corporation, was incorporated on May 14, 1917, with an authorized capital stock of $600,000 par value, divided into 600 shares of the par value of $100 each, and has continuously been engaged in a coal-mining business.
On March 30, 1917, the*1085 Cora Coal and Coke Co., hereinafter called the Cora Co., made an offer in writing to J. K. Gentry, the body of which reads as follows:
We will sell you the Cora lease taken from Jackson heirs and U.S.C. & O. Co., in Logan County, West Va., together with the operation thereon and all improvements on West Side of Trace Fork of Island Creek, - for the sum of $250,000.00 net to us, payable $50,000.00 cash, and $12,500.00 per month, with interest at 6 per cent per annum. Deferred payments to be secured by deed of trust on property conveyed. Possession to be given on payment of said cash payment of $50,000., the buyer assuming the current unexpired contracts for month of April, - and taxes for the current year.
If you desire to take the property you must advise us within four (4) days and consummate the transaction within ten (10) days from date hereof.
On May 3, 1917, the Loma Coal Co., hereinafter called the Loma Co., gave a written option to Gentry, which reads as follows:
I will give you an option to purchase the Loma Coal Company stock for $250,000.00 in cash or its equivalent; this option expiring on May 14th. The *692 present stockholders to assume the obligation*1086 for material or accounts made by us prior to May 1st.
The purchasing company to assume all our obligations, covering contracts and material after May 1st.
The tonnage of Loma #1 is now contracted until June 1st, at which time there are no contracts on output of mine.
At the times above mentioned, the Cleveland and Western Coal Co., hereinafter called the Cleveland Co., was engaged in the business of buying and selling coal for its own account and in acting as sales agent for coal-mining companies. Being in need of additional coal to fulfill its contracts, it sought connections in the West Virginia field, where the mines of the Cora and Loma companies were located. Early in May 1917, it was advised of the purchase options which Gentry held on the properties of the Cora Co. and the capital stock of the Loma Co., and it sent its representative to Huntington to negotiate with Gentry and the Cora and Loma companies for the acquisition of those properties. The Cleveland Co.'s representative in these negotiations was its treasurer, C. F. Taplin, who, upon organization of the petitioner, became one of petitioner's directors and its secretary-treasurer. As the Cleveland Co. was*1087 not authorized to do business in West Virginia, arrangements were made with one Ashby, an attorney and associate of Gentry, to organize a new corporation under the laws of that state, to take over and operate the properties proposed to be acquired. It was thus that the petitioner came to be organized.
Upon arrival in Huntington, Taplin found that the petitioner had been organized and was ready to commence business. He immediately began negotiations with the Cora and Loma companies, with a view to closing the deals under the options held by Gentry. For that purpose he carried to Huntington the Cleveland Co.'s check for $50,000, with which to make the down payment specified in the option on the Cora Co.'s properties. The Cora Co., however, flatly refused to go through with the deal, on the ground that the option held by Gentry had expired. An agreement was finally reached between the Cora Co. and Taplin, whereby the former was to sell all of its mining properties to the petitioner for the sum of $300,000.
Under date of May 12, 1917, Gentry addressed a communication to the Loma Co., which had been prepared for his signature by Taplin, as follows:
In compliance with the terms*1088 of an option of purchase of the stock of your company, dated May 3, 1917, which I have heretofore formally accepted, I beg to tender you herewith certified check for One Hundred Thousand Dollars ($100,000.00), and three notes of The Cleveland and Western Coal Company, each in the sum of Fifty Thousand Dollars ($50,000.00), of even date herewith, bearing six (6) per cent, interest, and payable, one in four months, one in *693 eight months and one in twelve months from date; and upon delivery to me of said stock, I further agree to endorse same back to you as security for said notes.
In the event that the physical properties of the Loma Company (to-wit: All leaseholds held by it and all tangible property of every nature and description owned by it, except cash in hand or in bank and accounts receivable created prior to May 1st, 1917, but including all contracts existing on May 1st and calling for the delivery of material or other property to said Company thereafter, or calling for the performance of acts to be done thereafter) are transferred to me instead of the stock, I will deed said properties in trust to secure the payment of said notes and interest and the obligations*1089 of your Company created since May 1st, as well as obligations entered into prior to May 1st, which obligations it is understood are to be assumed by me as stated in said option.
On or about the same day, Taplin prepared, and secured the signatures of Gentry and the Loma Co. to the following acknowledgment, which was attached to the above communication:
We, Loma Coal Company, hereby acknowledge the tender to us on the above date of said check and notes above stated.
It appearing to be mutually desirable that the physical properties of Loma Coal Company be transferred to Mr. Gentry or his designates instead of the capital stock of said Company, and it appearing that the time necessary to secure the formal authorization of said sale by the stockholders of Loma Coal Company, will extend beyond the date of said option of May 3rd, which expires on May 14th, it is mutually agreed that said option shall be considered as modified and extended as follows:
That Loma Coal Company shall take the necessary steps immediately to secure a formal authorization by its stockholders of the sale of its physical properties as above designated, to said J. K. Gentry or his designates who shall pay*1090 for said property the sum of Two Hundred Fifty Thousand Dollars ($250,000.00); One Hundred Thousand Dollars ($100,000.00) in cash, and the balance of One Hundred Fifty Thousand ($150,000.00) in three (3) notes, each in the sum of Fifty Thousand Dollars ($50,000.00) bearing interest at the rate of six (6) per cent. per annum, and payable in four (4), eight (8) and twelve (12) months from date of execution, at the First National Bank of Cleveland, Ohio.
There shall be executed by the party into whose name said properties shall be transferred, a deed of trust to secure the payment of said notes and interest, and also to secure the fulfillment of all obligations of Loma Coal Company created since May 1st, 1917, as well as obligations of Loma Coal Company created prior to May 1st, so far as they involve performance subsequent to May 1st.
It is understood that said sale is to be effective as of May 1st, and all coal produced thereafter is to be regarded as property of the purchaser.
All property transferred by Loma Coal Company is understood and agreed to be free and clear of all liens or charges of any sort whatsoever.
It is stipulated that Loma Coal Company will notify J. K. *1091 Gentry when it is prepared to consummate the transfer of said properties which it anticipates will be within a period of two weeks from date, and Mr. Gentry is to have not to exceed three days after said notice and submission of papers, in which to perform his part of said transaction.
It is understood that the above agreements regarding the transfer of the physical properties of Loma Coal Company do not in any way waive or affect *694 the rights of the parties hereto, under the option as originally given and the tender above acknowledged, in case for any reason the transfer outlined in the above modification and extension of said option, does not become effective.
The above communication of Gentry to the Loma Co. and the acknowledgment of the parties is a substantial outline of the agreement reached between the Loma Co. and Taplin.
Under date of May 14, 1917, Gentry made an offer to the stockholders and directors of the petitioner, as follows:
I have a contract to purchase the lease and leasehold estate and tangible property of the LOMA COAL COMPANY on Henry's Branch of the Guyandotte River, Logan County, West Virginia, at the price of $250,000.00, $100,000.00 in*1092 cash and the balance in four, eight and twelve months, with interest.
I also have a contract to purchase the lease and leasehold estate and tangible property of the CORA COAL AND COKE COMPANY, located on Island Creek in Logan County, West Virginia, for the sum of $300,000, $75,000.00 in cash, and the residue at the rate of $15,000.00 per month with 6% interest, and as much more as the proceeds of the coal from the mine will produce after deducting $1.00 per ton for operating expenses.
These properties I will turn over to your company for $599,000.00 fully paid nonassessable stock, and $1,000 in cash your company to assume the purchase price of said properties. In case the sale is consummated your company shall have the right to give its notes for the purchase price of said properties and secure the same by deeds of trust or mortgage upon the properties, either to the vendors of the properties or to whoever furnishes the money for the purchase price of said properties, or, mortgages or deeds of trust to the vendors and also mortgages or deeds of trust to the party or parties furnishing any part of the purchase price, respectively.
The contracts which Gentry proposed, by the*1093 above offer, to convey to the petitioner were the contracts which had been made between Taplin and the Cora and Loma companies and which had been made in Gentry's name. In the making of those contracts, both Taplin and Gentry were acting for the petitioner.
On May 18, 1917, the above offer of Gentry was accepted by the petitioner by the following resolution:
Resolved, that the proposition of J. K. Gentry this day submitted to this meeting, offering to sell to this Company the leases and leasehold estates and tangible properties of the Loma Coal Company and the Cora Coal and Coke Company, upon the terms and conditions set forth in his said proposition, be, and the same is hereby accepted, and the Board of Directors and officers of this Company, when elected, are hereby authorized and directed to do any and all things necessary to the prompt consummation of said purchases and transfers, and in connection therewith, to execute and deliver to the vendors of said properties, and to any party advancing money to this company to enable it to finance said purchases notes to cover the balance of the purchase price of said properties, and any loans secured for said purposes and for the*1094 general financing of the company, and any trust deed or deeds necessary and proper to be given to secure such notes and other obligations assumed in connection with said purchases.
*695 Pursuant to the foregoing offer and acceptance, the petitioner, on or about May 18, 1917, issued 5,990 shares, of a total authorized issue of 6,000 shares, of its capital stock to Gentry, and assumed the payments to be made for the properties of the Cora and Loma companies. Being entirely without funds wherewith to make those payments, the petitioner borrowed $190,000 from the Cleveland Co., on its own interest-bearing notes. Those notes were subsequently paid. The Cleveland Co.'s loan was paid to the petitioner in five checks which were payable to petitioner's order. One of those checks, in the principal sum of $100,000, was endorsed by the petitioner and made payable to the Loma Co., while another check, in the principal sum of $75,000, was endorsed by the petitioner and made payable to the Cora Co. The deferred payments on the purchase prices of the properties were evidenced by petitioner's own interest-bearing notes, of which three in the principal sum of $50,000 each were issued*1095 to the Loma Co., and fifteen in the principal sum of $15,000 each were issued to the Cora Co.; and these notes were secured by deeds of trust on the properties. The properties were transferred directly to the petitioner by the Cora and Loma companies.
Prior to the petitioner's issuance of its shares of stock to Gentry, it had been agreed between Gentry and Taplin that, in order to assure the repayment of the loans which the Cleveland Co. had made to the petitioner and to make certain that the Cleveland Co. would be able to obtain from the petitioner the coal of which it was in need to meet its contracts, the Cleveland Co. was to have a two-thirds control of petitioner, and, in order to give the Cleveland Co. that control, Gentry would turn over to Taplin 3,850 shares of the stock to be issued to him by the petitioner. This agreement was carried into effect; and the 3,850 shares were subsequently turned over to the Cleveland Co. without any consideration therefor.
On its books of account the petitioner charged the par value of the shares of stock issued to Gentry, $599,000, to its property account. No cash or other property of any kind, nature or description was paid in to*1096 petitioner by Gentry or any other person as consideration for the issuance of the shares of stock; and no cash or other property was paid in to petitioner as paid-in surplus prior to December 31, 1917.
Under date of May 21, 1917, two agreements were entered into between the petitioner and the Cleveland Co. One of these agreements provided that from May 1 to November 30, 1917, the petitioner would sell its entire output of coal to the Cleveland Co. at $3 per ton. In the other agreement the petitioner appointed the Cleveland Co. its exclusive selling agent for all of the coal produced by the petitioner, beginning December 1, 1917, and extending throughout the *696 life of petitioner's mines. No cash, property, or stock considerations were involved in the making of these agreements.
At the time of petitioner's organization, two shares of its capital stock were subscribed for by and subsequently issued to each of the five "dummy" incorporators, in all ten shares of the par value of $1,000. At the same time entries were made on the petitioner's books of account purporting to record the receipt of $1,000 cash in payment for those shares. About the same time a further entry*1097 was made on the petitioner's books purporting to record the payment of the $1,000 cash to GentryIn part payment for the contracts for purchase of the Cora and Loma properties. The petitioner's certificate of incorporation contains the following statement:
The amount of the total authorized capital stock of this corporation shall be $600,000, which shall be divided into 6,000 shares of a par value of $100.00 each, of which authorized capital stock, the amount of $1,000 has been subscribed and the amount of $100.00 has been paid.
Article 7 of the petitioner's bylaws contains the following provisions:
SECTION 2. Each holder of stock shall be entitled, when any share of stock is fully paid up, to a certificate therefor, under the seal of the corporation, signed by the president and secretary, stating the capital of the company, the number of shares into which divided, the number of shares for which said holder has paid, and the manner in which it is transferred.
* * *
SECTION 8. At least 10 per cent of the par value of each share shall be paid at the time of subscription, and the residue as required by the Board of Directors, and no stock shall be regarded as taken or the*1098 person subscribing therefor considered entitled to the same until the first installment is paid thereon.
Not one cent of cash was ever paid by the "dummy" incorporators on their subscriptions for petitioner's capital stock; and the entries made on the petitioner's books and the statement in the certificate of incorporation purporting to show the receipt of cash payments by the incorporators on their stock subscriptions were false, and were made only because the petitioner's officers were advised by counsel that the petitioner's records must show compliance with the West Virginia laws relating to the organization of corporations in that state, requiring that 10 percent of the par value of the stock subscribed for upon organization be paid in cash. No cash payment was ever made by the petitioner to Gentry for any property.
Prior to mailing the deficiency notice for 1917, the respondent advised the petitioner that he had determined the petitioner's invested capital for 1917 to be $591.92, this amount being the $1,000 cash assumed to have been paid in by the incorporators on their stock subscriptions, prorated from the assumed date of payment. In the *697 deficiency notice, *1099 the respondent determined petitioner's profits tax liability for 1917 by special assessment.
The petitioner had no invested capital in 1917.
At the hearing the parties orally stipulated as follows:
It is stipulated by and between the parties that the petitioner's books show, under the heading of "unclaimed wages", for each of the following years, the following amounts: 1917, $504.62; 1918, $25.64; 1919, $952.68; 1920, $464.99; 1921, $905.86; and 1922, $1,128.52. This makes a total of $3,982.31 in said account on December 31, 1922; that said items were placed on the books of the company in the ordinary course of business, as items taken from the payroll and said items were included in cost of operations in computing the taxable net income for each of the said years; that said amount of $3,982.31 has never been paid; that no claim for said wages has been filed with the petitioner, and in the year 1931 said amounts with other similar items, was closed out of the unclaimed wages account and credited to taxable income. It is further stipulated that this same amount of $3,982.31 has been added to petitioner's income for the year 1928, by the respondent.
OPINION.
*1100 MARQUETTE: The respondent has not determined any deficiencies for 1921 and 1923; hence, we have no jurisdiction of the issues raised in respect of those years. , and . The proceedings are dismissed, so far as they relate to those years.
Only two issues remain for decision at this time: (1) Whether petitioner's profits tax for 1917 should be computed under section 209 of the Revenue Act of 1917, at the rate of 8 per centum; and (2) whether respondent erred in allowing the deduction from 1922 income, of certain wages which, at the close of that year, were unclaimed by the persons entitled thereto.
Section 209 of the Revenue Act of 1917 provides:
That in the case of a trade or business having no invested capital, or not more than a nominal capital there shall be levied, assessed, collected, and paid, in addition to the taxes under existing law and under this act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation*1101 $3,000; * * *
We have made findings of fact based upon the evidence which conclusively indicates that the petitioner had no invested capital in 1917. Any lengthy discussion of the evidence is entirely unnecessary and would add nothing to what has already been stated in those findings. The petitioner is entitled, therefore, to have its 1917 excess profits tax computed at the rate of 8 per centum upon the net income in excess of the deduction of $3,000, as provided in the above quoted provisions of section 209.
*698 The other issue to be considered arises from the affirmative allegation in the respondent's amended answer, which is as follows:
Petitioner reduced its income for the year 1922 by setting up, as an account payable, unclaimed wages in the amount of $3,982.31. Respondent alleges that petitioner's liability for said item was contingent and based upon conjecture; that no claim for any part of said wages has been filed with petitioner; and that the time within which any creditor might sue for recovery of any part of said wages has expired. Respondent alleges that said item is not a proper charge against the income of the petitioner for the year 1922; that the*1102 book entries covering said item should be reversed; and that petitioner's income for the year 1922 should be increased accordingly. Respondent has claimed, in the alternative, that said item should be included in income for the year 1928 and said claim is now pending before the Board in the case of North American Coal Corporation v. Commissioner, Docket No. 52492.
The stipulation which the parties orally made at the hearing sets forth that of the amount in question, $3,982.31, only $1,128.52 was deducted by the petitioner, and allowed by the respondent, in computing taxable net income for 1922, the remainder having been deducted in prior years. There is nothing in the stipulated facts which would indicate that the amount of $1,128.52 representing accrued and unpaid wages at the close of the year was improperly allowed by the respondent in computing the taxable net income for 1922.
The proceeding in Docket No. 35260 will be restored to the general calendar for hearing in due course, under Rule 62(b), on the special assessment issues, unless the petitioner files a waiver of such issues within 30 days after the promulgation hereof, in which event, judgment will be entered under*1103 Rule 50. Judgment will be entered in Docket No. 35617 in accordance with Rule 50.