*2192 INVESTED CAPITAL - INTANGIBLE ASSETS. - So much of the paid-in capital as represents the circulation structure of a newspaper plant constitutes intangible assets within section 326 of the Revenue Act of 1918.
*1405 The respondent asserted a deficiency in income and profits tax against the petitioner for the calendar year 1920 in the amount of *1406 $4,554.97. In support of its appeal the petitioner first alleges that the respondent committed error in holding that $160,000 of its invested capital, as reported, represented intangible assets, and in reducing its invested capital by $85,000 in computing excess-profits tax. It also urges, as an alternative issue, that even if the respondent is correct in allocating this amount of its assets to intangibles, that fact is immaterial since, in the circumstances of this appeal, the entire capital stock of the par value of $300,000 was in effect issued for that amount of cash, and, therefore, the rule invoked by the respondent does not apply.
FINDINGS OF FACT.
The petitioner is a corporation*2193 engaged in the publication of a newspaper known as the Tulsa Tribune, at Tulsa, Okla. It was incorporated on January 19, 1920, under the following circumstances: For a period of some eight years, prior to 1919, Richard Lloyd Jones was principal owner and publisher of the Wisconsin State Journal, hereafter called the Journal, at Madison. In connection with the publication of this paper, Jones was associated with T. Floyd McPherson, G. Logan Payne, and Amy Comstock, hereinafter called the associates, each owning an interest in the Journal and exercising important roles in connection with that paper.
Early in 1919, or thereabouts, it was agreed between Jones and the associates that they should sell the Journal and relocate in some other and larger field. It was understood that the selection of the new field should be left to the judgment of Jones, after which a corporation should be formed by himself and associates, to own and operate any newspaper plant they might establish or acquire; that the capital stock of the corporation, when formed, would be distributed among them in accordance with an agreed ratio, relatively based upon the amount of money each was to contribute to the*2194 enterprise when the requirements in respect to capital were ascertained. In accordance with this understanding they sold the Journal, and, after some investigation and research, Jones found that the Tulsa Democrat, a daily published at Tulsa, Okla., was for sale.
The facts in connection with the Tulsa paper and the field it served were made known to the associates by Jones and all except Amy Comstock visited Tulsa and had some part in the negotiations which followed. On November 22, 1919, Jones, having come to an agreement with the owners of the paper, outlined the terms of purchase and general plans that would govern these associates in their development with each other and their respective rates and prospective interests in respect to the corporation to be formed, in a letter to Amy Comstock as follows:
I have concluded the matter of buying the assets of The Tulsa Democrat from Charles Page. We are to pay $300,000 for the property. We can *1407 arrange this payment by borrowing $200,000 from the Exchange National Bank here in Tulsa with the stock of the new company as collateral, and the $100,000 which we raise among ourselves. This means that each of us will pay*2195 one-third of the par value of the stock in cash and each of us will sign notes for the amount of our respective holdings for the other two-thirds. Of course the Exchange National Bank deals with me in the matter, as does Mr. Page, and I will deal with you and George and Logan and Mac but the notes to the bank will be your notes but with my personal endorsement.
Get yourself together for this as soon as you can, please. Your hunk will be four thou. Logan has asked for a little time on his payment. This will embarrass me a little as I wanted to pay Mr. Page the full one-third in cash at the start. I have no doubt but that he will extend me a little time on part of it if I have to ask it.
I am going to run home shortly and will phone you from Madison. There will be a good deal of preliminary work, pending the reorganization of the plant itself and the development of the new corporation which will soon be put into the hands of our attorneys to effect.
If you could arrange to come down here soon you would be a good deal of help. Best greetings to the folks.
Following conferences between the associates, a meeting was held between Jones and several of them, in the office*2196 of a firm of lawyers in Tulsa, on November 26, 1919, at which final plans were perfected for taking over the assets of the Tulsa Democrat in behalf of the corporation they proposed to organize. At this meeting they employed counsel, who, at their request, drew appropriate papers for use in the purchase of the property, and, also, an application to be filed with the secretary of state for the incorporation of their proposed corporation. In this application, which was signed by Jones, the capital stock of the corporation was fixed at $300,000, the price agreed upon to be paid in purchasing the assets of the Tulsa Democrat.
Having completed these preliminary details, Jones then purchased the plant of the Tulsa Democrat from its owner, paying the entire consideration of $300,000 in cash. Of this total amount paid, $100,000 was supplied by Jones and the associates from their available cash and temporary short loans, and the remaining $200,000 was borrowed by Jones as a time loan, from a Tulsa bank, upon his own personal note, acting for himself and associates. Soon after the incorporation of the petitioner, this note was taken up by the corporation and its own note in the sum of*2197 $200,000 issued in replacement thereof. The several associates eventually paid their ratable share of the note out of their salaries and the dividends earned by their stock.
In the interim of about two months from the date of the purchase of the assets of the Tulsa Democrat and the completion of the incorporation of the petitioner, that paper was published under the management of McPherson, assisted by Amy Comstock and an auditor *1408 named Gargile, formerly in the employ of the selling company. The corporation of the petitioner was perfected on January 19, 1920, after which date it assumed full control and operation of the plant. In accordance with the preorganization agreement, and based upon the proportionate amount of money contributed by each, the entire 3,000 shares of capital stock of the corporation were issued for the assets purchased from Page and were distributed among its incorporators as follows:
| Shares | |
| Richard Lloyd Jones | 1,560 |
| Mrs. Georgia H. Jones | 750 |
| T. Floyd McPherson | 420 |
| G. Logan Payne | 150 |
| Amy Comstock | 120 |
In making up its property account, the auditor of the corporation set up on its books the assets of the Tulsa Democrat*2198 Co. under a divided classification, which attributed $160,000 to "circulation." In auditing the petitioner's income and profits-tax return for that year, the respondent held that this sum attributed to circulation represented intangible assets for which allowance as invested capital could be made only to the extent of 25 per cent of the whole $300,000, thus reducing the reported invested capital in the amount of $85,000.
OPINION.
LANSDON: The petitioner's claim that its circulation structure must be treated as a tangible asset and not subjected to the limitation of section 326 of the Revenue Act of 1918 respecting invested capital has been decided contrary to that contention so often that it is not now necessary to give it any further consideration. The action of the respondent, therefore, under this issue must be sustained. .
The alternative contention of the petitioner is that in effect its stock was issued for $300,000 in cash and therefore the total par value thereof should be included in the computation of its invested capital for the taxable year. The record does not support this view of the transaction culminating*2199 in incorporation on January 19, 1920. The evidence discloses that Jones bought the assets of the Tulsa Democrat from Charles Page some time in November, 1919, and paid therefor the amount of $300,000 in cash. Funds for this payment were supplied by Jones and his associates largely obtained as a loan from a Tulsa bank. Whether the note given to the bank was the obligation of Jones endorsed by the other associates, or of the associates endorsed by Jones, is not clear and is immaterial, since it is established that the assets of the Tulsa Democrat were purchased by the associates and that for some time the new paper was operated either as an individual enterprise by Jones or as a partnership composed of himself *1409 and associates. Any small profit that resulted from operation before incorporation, on his own admission, was conceded or awarded to Jones in compensation for his services in promoting the transaction. On January 19, 1920, incorporation was completed and on that date the assets purchased from Page were turned in and stock of the par value of $300,000 was issued therefor.
The petitioner does not challenge the Commissioner's determination that among the assets*2200 purchased from Page and turned into the corporation was included circulation structure of the value of $160,000. Since this asset was an intangible, as held above, and the circumstances bring the incorporation squarely within the provisions of section 326(a)(5) of the Revenue Act of 1918, the determination of the Commissioner must be approved.
Reviewed by the Board.
Decision will be entered for the respondent.
STERNHAGEN concurs in the result only.