*4288 1. The evidence in this proceeding establishes that $39,147.25 of a write-down of petitioner's capital assets in 1912 should be restored for invested capital and depreciation purposes for the years 1919, 1920, and 1921.
2. The evidence also convinces the Board that the respondent erred in reducing invested capital for the taxable years on account of alleged insufficient depreciation deductions in prior years.
*1169 The Commissioner determined deficiencies in income and profits tax for the fiscal years ended November 30, 1919, 1920, and 1921, in the amounts of $1,887.04, $3,556.97, and $8,403.82, respectively.
The petitioner claims that the Commissioner erred in refusing to include in its invested capital for the taxable years the amount of $39,147.25. In 1912 petitioner's issued capital stock amounted to $100,000 par value and certain individuals who acquired control of the corporation in November, 1912, met and early in December, 1912, concluded to and did arbitrarily write down petitioner's asset account so as to avoid paying out its surplus earnings*4289 in dividends for the time being. In 1917, $39,147.25 of the write-down in the asset account was restored so as to equal and outstanding capital stock.
Petitioner further claims that the Commissioner erroneously reduced its invested capital on account of alleged insufficient depreciation for prior years and in reducing the deductions claimed for exhaustion, wear, and tear during the taxable years.
FINDINGS OF FACT.
Petitioner is a Missouri corporation with principal office at Springfield, where it is engaged in packing and selling meat.
In 1904 U.S. and B. F. Teagarden, who had been carrying on the business sometime as a partnership, purchased from one A. Clas a small meat-packing business and continued operations under the name of Teagarden Brothers. The assets purchased from Clas included 11 1/2 acres of land together with a brick building, machinery, and other improvements thereon for which they paid $12,176.35. Thereafter, in 1905, Teagarden Brothers purchased an additional 27 acres of land for $2,000 subject to a deed of trust which they assumed. During 1904 and 1905 U.S. Teagarden contributed to the partnership at least $25,000 in cash and B. F. Teagarden contributed*4290 at least $18,000 in cash.
*1170 Petitioner was incorporated in December, 1906, under the name of Teagarden Packing Co., and in 1915 its name was changed to Welsh Packing Co. At organization petitioner's authorized capital stock was $75,000 par value, divided into 750 shares of a par value of $100 each. This stock which was issued to Teagarden Brothers for the tangible assets of the partnership had an actual cash value at that time of $57,000. In December, 1908, the petitioner increased its authorized capital stock from $75,000 to $100,000; $10,000 par value of the increased stock was issued to stockholders as a stock dividend against earned surplus and $15,000 par value was sold for cash at par. The partnership had been successful and the business before and after incorporation earned large profits.
During the period from 1906 to December, 1912, petitioner made many additions and betterments to its plant and equipment at considerable cost but due to the loss of its records the actual cost of many of such improvements can not be established. In 1909 petitioner erected new buildings and installed new machinery at a cost of $37,000, which was paid out of earned surplus.
*4291 On November 30, 1908, petitioner declared and paid a cash dividend of $15,000; in 1909 a cash dividend of $20,000; in 1910 a cash dividend of $20,000; in 1911 a cash dividend of $8,000; and in 1912 a cash dividend of $10,000; such dividends in the aggregate amounting to $73,000. These dividends were paid out of surplus earnings. None of the petitioner's stock was ever sold at less than par and a portion thereof was sold at $125 a share.
In November, or early in December, 1912, W.T. and L. C. Kennedy, brothers, T. J. Glyn, and Thomas N. Welsh acquired the majority of petitioner's stock and came into active control of the business. L. C. Kennedy, now deceased, was elected treasurer and had charge of petitioner's books. Prior to that time petitioner had maintained single entry books which had been kept by U. S. Teagarden. All of petitioner's books, with the exception of the minute book, were destroyed by a cyclone in May, 1915. When the individuals above mentioned had acquired the majority of petitioner's stock and had become its board of directors, they met on or about December 1, 1912, examined into and discussed the affairs of the corporation and the matter of opening a*4292 new set of books. The business had for a long period of time been earning large profits and paying large dividends each year and they concluded that it would be wise and prudent to keep the earnings in the business for some time and enlarge and expand the enterprise instead of paying out a large portion of the earnings each year as dividends. In order to do this and to avoid being called upon by various minority stockholders to declare dividends, the officers and directors, who were also the owners of a majority of petitioner's stock, concluded to and did open a new set *1171 of books and prepared a new balance sheet. At that time the net worth of petitioner at November 30, 1912, was in excess of $118,000 and the actual cash value of petitioner's assets at that time, over and above its liabilities, was at least $118,000. The actual cash value of the tangible assets originally acquired by the petitioner for stock, the surplus of the partnership at the date of incorporation, the cost of capital assets subsequently acquired by petitioner and the cash paid in for its stock and its earned surplus at December 1, 1912, more than equaled its outstanding capital stock of $100,000*4293 par value. The new balance sheet prepared as of November 30, 1912, was as follows:
| RESOURCES | ||
| Stock (merchandise) | $8,000.00 | |
| Land | 14,800.00 | |
| Buildings | 20,000.00 | |
| Machinery | 18,000.00 | |
| Accounts receivable | 16,500.00 | |
| Horses and wagons | 3,000.00 | |
| Cash and bank balance | 2,746.39 | |
| $83,046.39 | ||
| LIABILITIES | ||
| Accounts payable | $160.00 | |
| Bills payable (notes) | 2,600.00 | |
| Checks (outstanding) | 2,729.64 | |
| City bills | 500.00 | |
| U.S. Teagarden | 6,304.00 | |
| Less dividend (accrued) | 10,000.00 | |
| 22,193.64 | ||
| Net worth December 1, 1912 | 60,852.75 |
This balance sheet did not and was not intended to reflect the cost or actual value of petitioner's assets or its true net worth at December 1, 1912. The asset values, except cash on hand, were arbitrarily written down to the amounts shown.
In 1917 petitioner restored to its invested capital account on its books the sum of $39,147.25, the amount by which its net worth at December 1, 1912, had been reduced below $100,000, the par value of its outstanding capital stock. In computing petitioner's invested capital for the taxable years the Commissioner used as the basis the net worth of $60,852.75 as shown by the balance sheet*4294 after the write-down had been made at December 1, 1912, and refused to restore the amount of $39,147.25. The Commissioner also reduced invested capital in the amount of $10,935.05 upon the ground that in his opinion that amount represented insufficient depreciation taken by the petitioner in the years 1913 to 1916, inclusive. The Commissioner also reduced the deductions claimed by the petitioner for exhaustion, wear and tear as a result of his elimination of the item of $39,147.25 from the capital account.
*1172 From 1909 to and including the taxable years, petitioner deducted in its excise-tax returns and income-tax returns various amounts for depreciation except in certain years when petitioner made numerous repairs which it regarded as sufficient to offset depreciation. Early in petitioner's history certain improvements and betterments were charged to expense and later capitalized, but during the period prior to the taxable years, certain additions and improvements were made which were not shown upon the books.
OPINION.
TRAMMELL: The $39,147.25, which forms the principal controversy in this proceeding, should, in the opinion of the Board, be restored to the capital*4295 account at December 1, 1912, as claimed by the petitioner, so that the asset account on that date will reflect the value of $100,000. The Commissioner's refusal to restore this item was entirely due to the fact that he concluded that the balance sheet at December 1, 1912, showing the net worth of $60,852.75 correctly reflected the true situation. The petitioner has clearly overcome the Commissioner's determination in this regard. While the petitioner is without original books and records for any period prior to May, 1915, the owners and officers of the business from its inception testified at length regarding the property and business of the corporation. We are convinced from all of the testimony that the amount claimed by the petitioner should be restored to capital account for invested capital and depreciation purposes. The values reflected by the balance sheet at December 1, 1912, were purely arbitrary and have been shown to be far less than the actual cost of the assets. The evidence shows that the actual net worth at December 1, 1912, was in excess of $118,000.
The Commissioner based his computation of petitioner's invested capital on the net worth of $60,852.75 as shown*4296 by the balance sheet at December 1, 1912, on the theory that the $39,147.25 written off as of that date represented depreciation of tangible assets not theretofore taken and which, to that extent, constituted a distribution of capital assets in dividends of $73,000 declared and paid from 1908 to 1912. Under the evidence this theory can not be supported. The testimony is that the dividends were paid out of surplus earnings and there is also in the record sufficient evidence to show that petitioner's actual net worth at December 1, 1912, was in excess of $118,000 and that the excess over the amount which the petitioner seeks to restore was more than adequate to take care of the depreciation sustained to that date.
The Board is also of the opinion from all of the evidence introduced that the Commissioner was in error in holding that invested *1173 capital should be reduced for insufficient depreciation taken in the years 1913 to 1916. While the depreciation taken by the petitioner was not on any systematic basis, it was substantial in amount and, in view of the evidence submitted by the petitioner, we reverse the Commissioner on this point. The Commissioner has submitted*4297 no evidence which would warrant us in holding that the deductions taken by the petitioner for depreciation were not adequate. ; .
Reviewed by the Board.
Judgment will be rendered on 15 days' notice, under Rule 50.
SIEFKIN did not participate.