*1759 1. Value of leasehold determined.
2. Held, an oral assignment of a leasehold is not void, but voidable only, and where the parties themselves have recognized the assignment as valid, it can not be attached by a third party.
*1153 This proceeding is for the redetermination of deficiencies in income and excess-profits taxes asserted by the respondent for the fiscal years ended July 31, as follows:
| 1917 | $4,031.05 |
| 1919 | 4,130.77 |
| 1920 | 3,555.19 |
| 1921 | 3,386.77 |
| 1922 | 1,706.02 |
*1154 The petition assigns as error the action of the respondent (1) in disallowing the amount of $41,833.19 as paid-in surplus, and reducing the invested capital by that amount for each of the years involved; (2) in disallowing a deduction for amortization sustained by the petitioner with respect to a leasehold for each of the taxable years; and (3) in failing to compute the profits taxes for 1917 under section 210 of the Revenue Act of 1917, and for the years 1919, 1920, 1921 and 1922, under section 328 of the Revenue*1760 Acts of 1918 and 1921.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation organized in March, 1916, with its principal office in Pittsburgh.
On July 27, 1905, one James G. Pontefract and his wife, Elizabeth W. Pontefract, executed to Willis S. Johnson and R. G. Johnson, a lease of certain real estate in the city of Pittsburgh, Pa., together with all buildings thereon used as a distillery or for warehouse purposes, and all machinery, equipment, etc., in and upon said premises and used in the manufacture and storage of whiskey, for a rental of $20,000 per year. The land comprised about two and one-half acres, was adjacent to two railroads, and had a private sidetrack. Water transportation was also available, as the land bordered on a river. The plant was easily accessible from any part of the city and from other railroad stations.
The distillery had been in operation for many years prior to the time of making the lease, and one brand of its product, known as "Finch's Golden Wedding Rye," had acquired a widespread reputation as a fine, pure and mellow whiskey, and it was extensively sold. The lease granted to the Johnsons the right to manufacture that brand*1761 of whiskey and to use that label and all other trademarks and trade names which had been used by the distillery owners. The lease also gave an option for purchase of the entire property, and it was provided that the lease should not be assigned, or the premises or any part thereof sublet, without the consent in writing of Pontefract and his wife.
James G. Pontefract died in 1906. By his will the distillery property was left to John Walker and Elizabeth W. Pontefract, in trust. R. G. Johnson died in 1909, and by his will gave to Willis S. Johnson all of his right, title and interest in and to the distillery property.
The Pontefract trustees consented in writing on February 14, 1916, that Johnson might assign and transfer the lease of the distillery property to one S. Rosenbloom. On the same date Johnson entered into a written agreement with Rosenbloom whereby Johnson covenanted and agreed that he would, on March 1, 1916, sell, assign, transfer *1155 and convey to Rosenbloom the original lease of the distillery property. By the same agreement Rosenbloom covenanted that he would keep and perform the promises, covenants, terms and conditions of the original lease, and*1762 in addition to the rental reserved therein, would pay to Johnson a further rental of $1,000 per month for the remainder of the term. At that time the lease had a remaining life of 9 years, 4 months, and 18 days.
On March 20, 1916, the following agreement was executed:
THIS AGREEMENT
Made and entered into this 20th day of March, 1916, by and between JOHN WALKER and ELIZABETH W. PONTEFRACT, Trustees under the last will and testament of James G. Pontefract, deceased, hereinafter called "THE TRUSTEES", parties of the first part;
S. ROSENBLOOM of the City of Pittsburgh, County of Alleghany and State of Pennsylvania, hereinafter called "ROSENBLOOM", party of the second part; and
JOSEPH S. FINCH AND COMPANY, a corporation created and existing under and by virtue of the laws of the Commonwealth of Pennsylvania with its principal office in the City of Pittsburgh, party of the third part.
WHEREAS by instrument dated the 14th day of February, 1916, between The Trustees, Rosenbloom and Willis S. Johnson, The Trustees did consent to the assignment of a lease dated July 27, 1905, for a certain tract of land in the thirtieth, now seventeenth, Ward of the City of Pittsburgh having thereon*1763 erected a distillery, a copy of which agreement is hereto annexed and made part of this instrument and marked "Exhibit A"; and
WHEREAS, by Paragraph Fourth of the said Exhibit A The Trustees agreed to consent to a further assignment of the original lease to the J. S. Finch Company, a Pennsylvania corporation owned by The Trustees, under certain terms and conditions but it was found undesirable to execute an assignment of the said lease to the said J. S. Finch Company and therefore a new corporation was organized called the Joseph S. Finch and Company.
Now THEREFORE THIS AGREEMENT WITNESSETH, That the parties hereto for and in consideration of the premises and of the consent herein given and of the mutual covenants and agreements herein contained covenant and agree as follows:
FIRST. The Trustees do hereby consent to the transfer and assignment of the original lease dated July 27th, 1905, between James G. Pontefract, Willis S. Johnson and R. G. Johnson to Joseph S. Finch and Company; provided, however, that neither Johnson nor Rosenbloom is released from the covenants and agreements entered into by them or either of them in the said lease or in the said Exhibit A.
SECOND. *1764 Rosenbloom convenants and agrees with The Trustees that nothing herein contained shall release him from the convenants and agreements contained in the said original lease dated July 27, 1905, and the supplements and amendments thereto or contained in the said Exhibit A.
THIRD. Joseph S. Finch and Company convenants and agrees with The Trustees that it will be bound by all the convenants, agreements and conditions of the original lease and supplements and amendments thereto in the same manner as though it had been a party to and had actually signed the same and that The Trustees shall as against it have the same rights and remedies under *1156 the said original lease of July 27th, 1905, and at law as they had or may have against the said Johnson or against Rosenbloom.
FOURTH. Joseph S. Finch and Company convenants and agrees with The Trustees that it shall neither buy, sell, deal in, or in any way be interested in any products other than the products manufactured on the leased premises.
FIFTH. Inasmuch as The Trustees are consenting to this assignment from Rosenbloom to Joseph S. Finch and Company in order that Rosenbloom may carry on the business through a corporation, *1765 Joseph S. Finch and Company and Rosenbloom, jointly, and severally, convenant and agree with The Trustees as follows:
(a) All the shares of the capital stock of the said corporation shall be owned legally and beneficially by Rosenbloom.
(b) Rosenbloom shall sign in blank all the certificates of the capital stock that are issued to him and will deliver the same to the Fidelity Title and Trust Company of Pittsburgh as trustee to hold the same during the life of the lease in order that they may not be pledged or assigned to any person else.
(c) Any other pledge or assignment of the said shares of stock by Rosenbloom, either voluntary or by process of law, shall be considered a breach of the covenant in the said original lease against assignment and subletting and The Trustees thereupon shall have the same rights and remedies as if the said covenant against assignment and subletting had been broken by the lessee of the said property.
(d) On the termination of the said lease all the shares of the capital stock shall be assigned and delivered to The Trustees; the said corporation, however, by said date shall pay all its debts and may distribute all its assets among its stockholders. *1766 It is understood and agreed, however, that if either Rosenbloom or Joseph S. Finch and Company should exercise the option contained in the original lease of purchasing the property the shares of the capital stock of the said Joseph S. Finch and Company shall thereupon be delivered to Rosenbloom as his absolute property.
SIXTH. The Trustees covenant and agree that they will consent to a reassignment of the original lease from Joseph S. Finch and Company to Rosenbloom at any time.
SEVENTH. Rosenbloom and Joseph S. Finch and Company jointly and severally covenant and agree with The Trustees that neither this consent nor the above promise of a further consent nor the actual execution of such consent shall operate as a waiver of the provision of the original lease, that it shall not be assigned nor the premises nor any part thereof sublet without the consent in writing of the said Trustees being first obtained; it being agreed that there shall be no further assignment of the lease or subletting of the premises or any part thereof without the written consent of The Trustees.
EIGHTH. The Trustees covenant and agree with the Joseph S. Finch and Company to execute and deliver to*1767 it such documents demanded by the United States Government and similar to those executed and delivered to Johnson as may be necessary to enable it, Joseph S. Finch and Company, to lawfully operate a distillery on the premises.
NINTH. It is understood and agreed that this consent is not binding upon The Trustees until the consent of Willis S. Johnson is obtained to the same.
TENTH. This agreement shall extend to and be binding upon the parties, their executors, administrators and assigns.
*1157 IN WITNESS WHEREOF The parties have hereunto set their hands and seals the day and year aforesaid.
(Signed) JOHN WALKER (SEAL)
ELIZABETH W. PONTEFRACT (SEAL)
Trustees under the last will of James G. Pontefract, deceased.
W. S. ROSENBLOOM (SEAL)WILLIS S. JOHNSON (SEAL)
JOSEPH S. FINCH AND CO.
By JOHN J. LYONS (SEAL)
Attest:
(Signed) EDWARD R. FREY,
Secretary.
To this agreement, Johnson executed the following written consent:
Pittsburgh, Pa. July 29, 1916.
I hereby consent to the within agreement, provided (1) that no further subletting or assignment shall be made without my consent; (2) neither this consent, nor the promise to consent to a*1768 re-assignment of the lease to S. Rosenbloom from Joseph S. Finch & Company, nor the actual execution of that consent, shall operate as a waiver of the provisions of the original lease against subletting and assignment, and (3) that any of the breaches on the part of Rosenbloom contemplated in subdivision (c) of the fifth paragraph shall not be considered or construed as a breach on my part and shall not entitle the Trustees to any rights or remedies against me.
Witness my hand and seal the day and year above written.
(Signed) A. G. CONIN
WILLIS S. JOHNSON
(SEAL).
On April 20, 1916, the first meeting of the petitioner's board of directors was held. At that meeting a resolution was adopted, the pertinent provisions of which are as follows:
On motion duly made and seconded, and by the affirmative vote of all present, the following preambles and resolution were adopted.
Whereas, S. Rosenbloom has offered to sell to this Company property as follows: All and singular the lease for a certain tract of land, with the buildings and machinery therein and thereon, described in a certain lease from James G. Pontefract, et ux., bearing date July 27, 1905, unto Willis S. Johnson*1769 and R. G. Johnson, which the said S. Rosenbloom acquired on March 9, 1916, under certain articles of agreement between the said Willis S. Johnson and S. Rosenbloom, bearing date February 14, 1916, as by reference thereto will more fully appear, together with all his rights and privileges with reference to the trademark, brands, labels and trade-names and the option to purchase the real estate therein referred to, and all other property and rights acquired under said agreement, subject, however to all the covenants, agreements, terms and conditions under which the said S. Rosenbloom acquired the same, excluding, however, any and all whiskey which the said S. Rosenbloom acquired from the said Willis S. Johnson under said agreement, but including any personal property acquired by said S. Rosenbloom, including grain, whiskey, manufactured or in process of manufacture since March 9th, 1916, but excluding whiskey so as aforesaid purchased from said Willis S. Johnson, subject, however, to all debts, claims, and contracts contracted or assumed *1158 by the said S. Rosenbloom since March 9, 1916, for the following consideration, to-wit: One hundred thousand ($100,000.00) dollars in full*1770 paid and nonassessable capital stock of this company of the par value of $100 per share which stock shall include the stock subscribed by the incorporators as evidenced by the certificate of incorporation.
And whereas it appears to the stockholders that such property is necessary for the business of this company, and that the same is of the value of $100,000,
RESOLVED, that the board of directors of this company be and they are hereby authorized in their discretion, to purchase the property above mentioned for said price, and to issue said stock in payment thereof, provided that in the judgment of the board of directors, the said property is of the value above stated.
By order of the board of directors, fully paid capital stock of the company in the amount of $100,000 par value was at once issued to Rosenbloom in payment for the property. The leasehold and other property were immediately delivered to the petitioner, which began business at the distillery plant without delay. Rosenbloom also paid in to the petitioner company, as working capital, cash in the amount of $41,833.19. All of the petitioner's capital stock was owned and held by Rosenbloom and his immediate family.
*1771 The distillery was in full operation when petitioner took possession, and had been operated continuously for many years prior thereto. Five bonded warehouses were included in the plant, and they had a total storage capacity of 80,000 barrels. At that time the Government required whiskey to be aged four years in bond before it was bottled. The distillery owners received 72 cents per barrel, per year, for storage, and when the petitioner took over the plant there were approximately 50,000 barrels in store in the warehouses.
Each barrel of whiskey would bottle about 12 cases and in 1916 the profit on bottling was 50 cents a case. From March 1916, through July of that year, the distillery bottled 22,560 cases of whiskey. During the next 12 months 75,180 cases were bottled.
During its first year of operation of the distillery petitioner manufactured 13,809 barrels of whiskey, receiving a profit of $5 per barrel from the manufacture.
The leasehold, when petitioner acquired it, had a cash value of $41,833.19.
In September, 1917, a Presidential proclamation prohibited the use of any grains for making whiskey, and thereafter no whiskey was manufactured at petitioner's plant.
*1772 For the fiscal year ended July 31, 1917, petitioner paid salaries to officers in the total amount of $27,600. This included $12,000 to Rosenbloom as vice president, who gave about two hours a day to the business. Thereafter, Rosenbloom drew no salary, but continued to give some attention to petitioner's business until 1920, when he gave all of his time to it. The salaries paid to officers by the petitioner *1159 amounted in 1919 to $6,800; in 1920 to $3,600; in 1921 to $5,425; and in 1922 to $5,100.
Exclusive of any valuation for the leasehold, the petitioner's invested capital for the fiscal years here involved, and its net income for those years, with no deductions for amortization of the leasehold, were:
| 1917 | 1919 | 1920 | 1921 | 1922 | |
| Invested capital | $123,727.84 | $94,065.64 | $111,638.31 | $241,331.56 | $371,823.46 |
| Net income | 50,048.97 | 23,434.33 | 157,826.62 | 201,341.80 | 230,682.22 |
In its income-tax returns for each of the years involved the petitioner deducted the amount of $4,442.40 as amortization of the leasehold value. These deductions were disallowed by the respondent. He also excluded from invested capital account the amount*1773 of $41,833.19 treated by the petitioner as the value of the leasehold claimed to have been acquired from Rosenbloom.
The petitioner made application for assessment, for each of the taxable years, under the provisions of section 210 of the Revenue Act of 1917, and of section 328 of the Revenue Acts of 1918 and 1921. This application was refused by the respondent upon his determination that no abnormality had been shown.
OPINION.
MARQUETTE: The petitioner is a corporation located in Pittsburgh, Pa. In 1916 it purchased from one Rosenbloom in exchange for its capital stock, certain merchandise and supplies, together with a leasehold of certain real estate in the city of Pittsburgh. At the time the lease had nine years and three months of remaining life. The property was at once turned over to the petitioner, which immediately went into possession and so continued throughout all of the years here involved. In addition to the property which was exchanged for the petitioner's capital stock, Rosenbloom also paid in cash to the amount of $41,833.19.
The first two errors charged against the respondent, as set out in our preliminary statement above, rest upon the proposition*1774 that the petitioner, in exchange for some of its capital stock, acquired a leasehold of the value of $41,833.19, which amount it is contended should be credited to invested capital account as paid-in surplus. The proceeding was tried, however, upon the theory that the leasehold had a value of $41,833.19 at the time it was turned in for stock, the like amount of $41,833.19 paid in in cash by Rosenbloom having been allowed as paid-in surplus.
*1160 Section 207 of the Revenue Act of 1917 defines the term "invested capital" in the case of corporations as being:
(1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation * * * at the time of such payment * * * and (3) paid-in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year, provided, That * * * (b) the good will, trade-marks, trade brands, the franchise of a corporation * * *, or other intangible property, shall be included as invested capital if the corporation * * * made payment bona fide therefor specifically as such in cash or tangible property, * * *.
A*1775 like definition of invested capital is given in section 326 of the Revenue Acts of 1918 and 1921.
The Revenue Act of 1917 does not define the term intangible property, but section 325 of the 1918 and 1921 Acts provides that:
The term "intangible property" means patents, copyrights, secret processes and formulae, good will, trade-marks, trade brands, franchises, and other like property.
The term "tangible property" means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.
The petitioner gives us no information as to the method it pursued in arriving at the figure of $41,833.19 as the value of the leasehold it acquired. At the hearing one witness testified that in his judgment the leasehold had a cash value in 1916 of $75,000; another valued it at from $110,000 to $115,000. Each witness had had years of experience in the liquor business, and each based his judgment upon the facts that the leasehold gave the petitioner a well equipped plant at low rental, favorably located; an option of purchase; an old established business; an assured income from storage alone, amounting*1776 to much more than the rental which petitioner was to pay, and the prospect of large profits to be made from bottling and manufacturing whiskey. In our opinion the record definitely shows that the leasehold had a very substantial cash value in April, 1916, and while the evidence does not fix that value with mathematical exactness, we are satisfied that such value was at least equal to the amount claimed by the petitioner, namely, $41,833.19.
But the respondent urges that the leasehold was never assigned in writing to the petitioner by Rosenbloom; that under the Pennsylvania statute of frauds the petitioner was never the owner of the lease and, therefore, can not claim the value of the lease as invested capital or amortize such value. The statute relied upon does provide that no leases of lands shall be assigned unless by deed or note, in *1161 writing, signed by the party so assigning or by his agent lawfully authorized in writing. The same section provides that assignments of leases not made in writing shall be considered oral leases only. No penalty is provided for failure to conform to the statutory requirement.
The record does not contain any written assignment*1777 of the leasehold from Rosenbloom to the petitioner, unless the agreement of March 20, 1916, may be considered as such. That agreement was executed by the Pontefract trustees, Rosenbloom and the petitioner. But in our opinion the question regarding a written assignment is not controlling. The evidence shows conclusively that the leasehold was bought by the petitioner from Rosenbloom, who had obtained the consent of the proper parties to an assignment; that the petitioner paid the agreed consideration, went at once into possession and occupancy of the premises described in the lease, and continued therein during all of the years here involved. The parties immediately concerned treated the transaction as a transfer and assignment of the leasehold, and in our opinion there was an oral assignment at least. Such assignments are recognized by the Pennsylvania statute of frauds, and we have upheld them.
In , a lease for years was orally assigned and the Commissioner contended that such oral assignment was void under the statute of frauds. We there held that, at most, such assignment was voidable only and as the parties had recognized the*1778 assignment as valid, its validity could not be attacked by a third party. In our opinion the principle announced in that decision is controlling in the present proceeding. See also .
The petitioner's invested capital account for the years herein involved should be increased by the amount of $41,833.19, which was the value of the leasehold when it was acquired in 1916. The petitioner is also entitled to a deduction, each year, for amortization of the value of the leasehold. There is no dispute as to the correctness of the amount claimed for such deduction and that amount, $4,462.20 per year, is approved.
The third and last contention of the petitioner relates to special assessment. However, as the petitioner urges that contention only as an alternative in the event its first two contentions are denied, the question of special assessment need not be considered.
Judgment will be entered under Rule 50.