*2155 Actual cash value of a contract on a certain day determined.
*1246 The Commissioner determined the following deficiencies:
| Docket No. | Fiscal year ended - | Amount |
| 11459 | Mar. 31, 1920 | $20,700.24 |
| 11459 | Mar. 31, 1921 | 9,287.10 |
| 20512 | Mar. 31, 1922 | 6,761.09 |
| 20512 | Mar. 31, 1923 | 1,493.75 |
| 20512 | Mar. 31, 1924 | 1,500.00 |
The only issue is the actual cash value of a certain contract at the time it was paid in for stock.
FINDINGS OF FACT.
The petitioner is a Missouri corporation with its principal office at St. Louis.
On December 1, 1911, P. D. Ball and the St. Louis, Iron Mountain & Southern Railway Co., a subsidiary of the Missouri Pacific Railroad Co., entered into an agreement wherein Ball was sometimes referred to as the contractor, and the St. Louis, Iron Mountain & Southern Railway Co. as the Railway Company. This contract recited that Ball had proposed to construct, equip and operate a plant for the manufacture of ice in the City of Argenta, Pulaski County, Ark., upon land owned by the Railway Company, for the*2156 purpose of manufacturing ice for sale to the Railway Company, and that the Railway Company was willing to lease certain land to Ball for the purpose and enter into a contract for the purchase of the ice manufactured by him.
The contract then provided that the Railway Company should lease for 15 years from April 1, 1912, certain land to be more fully described in the lease; upon this land the contractor should, at his own expense, erect a plant for the manufacture of ice with an annual maximum capacity of 25,000 tons and have the same in full operation for the manufacture of not less than 100 tons of ice daily on or before April 1, 1912, and he should thereafter maintain and operate the plant at his own expense making ice of a certain kind and also install, at his own expense, all the necessary storehouses, machinery and platforms to handle the ice and load it into cars; the contractor should manufacture at the plant and deliver to the Railway Company *1247 not less than 15,000 tons of ice and should not be required to manufacture and deliver more than 25,000 tons of ice unless this maximum should be increased in accordance with the provisions of the contract, and the Railway*2157 Company should purchase from the contractor not less than 15,000 tons of ice during each year; the contractor should exercise diligence in constructing a warehouse of $10,000 tons capacity and have the same full of ice on or before the first of April of each year; the Railway Company could inspect and reject ice and the contractor should furnish a scale to assist the inspectors in weighing the ice; the contractor, at his own expense, should properly ice all refrigerator cars placed at the plant by the Railway Company for icing in accordance with instructions given him from time to time by the Railway Company, and should also load all cars set at the plant by the Railway Company for loading with ice for switching or shipment to other points; the Railway Company should pay the contractor $2.90 for each ton of ice placed by the contractor in the bunkers of refrigerator cars and $2.40 for each ton of ice loaded in each car for switching or shipment to other points, if the car was loaded with 10 tons or more of ice, otherwise, the Railway Company would pay $2.90 per ton for this car load ice also; the Railway Company should not, during any part of any year, demand of the contractor more*2158 ice in the aggregate than the capacity of the plant for the manufacture of ice during the period at the rate of 100 tons per day, unless the capacity of the plant should be increased, in which event the Railway Company should not at any time demand of the contractor more than 300 tons of ice during a day; the Railway Company should pay the contractor within 30 days after each month for the ice delivered during that month; the Railway Company should properly place cars for icing and give the contractor notice thereof; the contractor should build a plant in such a manner that the capacity might be increased up to double its original capacity upon request from the Railway Company; the Railway Company should lease more land if necessary, and if notified by the Railway Company, the contractor should increase the size of the plant, in which case certain increases in the ice to be manufactured and delivered were provided; the contractor should not, without written consent of the Railway Company, engage in a commercial ice or coal service business at the plant to be erected, or sell to any one other than the Railway Company; what could be done in case the contractor failed to furnish ice in*2159 accordance with the contract; the contractor should not assign or transfer the agreement either in whole or in part in any way without the written consent of the Railway Company, and in no event should he be released from liability to the Railway Company arising prior to his assignment; the contractor should save the Railway Company harmless from all suits or claims in any manner *1248 arising out of injury or death of the contractor or those under him, whether or not by reason of the negligence of the Railway Company; unless it was sooner terminated, the agreement should remain in full force for 15 years after April 1, 1912, and thereafter until 30 days after the service of a written notice by either party upon the other, provided that the Railway Company might at its option terminate the agreement at the expiration of 10 years from the date by purchasing the plant and all the appurtenances thereunto belonging from the contractor at an amount to be fixed by an appraisal of the then actual value of the plant and appurtenances, making proper allowance for deterioration of the plant equipment and for the inadequacy of the plant for the manufacture of ice in the light of any new*2160 developments, but without any consideration given to the good will of the contractor or any damages for the termination of the agreement; three appraisers should be named for this purpose and the contract could be canceled on 30 days' notice upon failure of the contractor to comply with the terms of the contract.
On December 1, 1911, the same parties also entered into a lease mentioned in the foregoing agreement whereby the Railway Company leased certain land to Ball for the erection of the plant at a rental of $12 a year for 15 years.
After making this contract, Ball, with a number of his associates, caused the petitioner to be incorporated on the 15th day of February, 1912, and on that date assigned the contract and the lease above described to the petitioner. At incorporation, the petitioner's capital stock consisted of 1,500 shares of common stock of the par value of $150,000 and 1,500 shares of 7 per cent preferred stock of the par value of $150,000. $120,000 par value of the preferred stock was issued for $120,000 in cash and the remaining 300 shares of preferred stock and all of the common stock were issued to Ball for his assignment to the petitioner of the contract*2161 and lease above described.
After the stock was thus issued, there was some discussion as to whether Ball should keep all of the common stock and the portion of the preferred which he held, so he decided not to keep any of the stock, and several months after the original stock was issued, Ball distributed the $30,000 par value of preferred and $150,000 par value of common theretofore held by him pro rata to the stockholders who had paid cash for the remaining $120,000 par value of preferred.
In the petitioner's articles of association, the incorporators certify that 300 shares of the preferred stock of the par value of $100 each and 1,500 shares of the common stock of the par value of $100 each has been in good faith subscribed and actually paid up in property of the reasonable cash value of $180,000, which property *1249 consists of "A certain contract under date of the first day of December, 1911, between the MissouriPacific Railway Company and P.D.C. Ball, covering a period of fifteen (15) years for the supply of ice and refrigeration to said railroad based on the earning [sic] of said contract and reasonably worth the actual cash value of $180,000."
On February 17, 1912, the*2162 Secretary of State of the State of Missouri, issued a certificate of incorporation to the petitioner in which he recited that whereas the Mountain Ice Co. had filed articles of association as provided by law and had in all respects complied with the requirements of law covering the formation of private corporations for manufacturing and business purposes, he certified that the association had become a body corporate.
At the time that the contract was assigned to the corporation by Ball, he and some of his associates knew that in the past three years the railroad had needed more ice at the point in question than the minimum provided in the contract and they believed, and had good reason to believe, that the Railway Company would take more ice each year than the minimum mentioned in the contract.
The petitioner's plant was finished about the end of May, 1912, and in October, 1912, the company paid its preferred dividend. In 1913 it paid a preferred dividend and a dividend of 7 per cent on the common stock. From then on dividends increased and gradually the company was able to develop some commercial business and the railroad business increased gradually. The Railway Company*2163 had promised to take all of its ice from the petitioner's plant when certain unexpired contracts expired.
Due to the war, labor prices and also cost prices increased greatly. About 1919 Ball made arrangements with the Railway Company to increase the price which it was to pay for the ice under the contract.
After deducting amortization of the lease at the rate of $2,000 a year, the petitioner's net income, as determined by the Commissioner, was as follows:
| Calendar year 1912 | $11,195.88 |
| Calendar year 1913 | 18,567.33 |
| Calendar year 1914 | 12,471.29 |
| 3-month period ending Mar. 1, 1915 (loss) | 1 5,040.30 |
| Fiscal year ending Mar. 31, 1916 | 22,413.19 |
| Fiscal year ending Mar. 31, 1917 | 27,019.13 |
| Fiscal year ending Mar. 31, 1919 | 24,637.83 |
| Fiscal year ending Mar. 31, 1920 | 55,639.77 |
| Fiscal year ending Mar. 31, 1921 | 52,911.34 |
| Fiscal year ending Mar. 31, 1922 | 50,386.26 |
| Fiscal year ending Mar. 31, 1923 | 28,757.50 |
| Fiscal year ending Mar. 31, 1924 | 30,622.27 |
*1250 The actual cash value of the contract and*2164 lease at the time paid in to the petitioner for stock or shares was $150,000.
OPINION.
MURDOCK: Our problem in this case is to determine, if possible, the actual cash value of the contract and the lease which accompanied it at the time paid in for stock of the petitioner on February 15, 1912, and to do this from the evidence presented in the case. The Commissioner determined that this value was $30,000 because preferred stock of that par value was issued for the contract and lease at a time when the stock was selling for cash at par. He refused to give any added value to the lease because the $150,000 par value of common stock also issued for the contract and lease was not shown to have had any value. The petitioner contends that the contract and lease had a value of $180,000, the par value of the preferred and common stock issued to Ball.
We have the testimony of a number of witnesses who in 1912 were experienced in the business of manufacturing ice for use in icing refrigerator cars and for sale in bulk to railroads under contracts similar to that assigned to the petitioner. From them we learn that it was possible to estimate with a reasonable degree of accuracy, the*2165 probable profits from such a contract based upon past experience and with regard to probable future events as then reasonably foreseen. They were agreed that the railroad would probably take more ice than the minimum of 15,000 tons each year, and that more than half of this ice would be placed in the bunkers of refrigerator cars and less than half would be in car loads. They were not entirely in agreement as to the cost of a plant capable of furnishing the ice required under the contract nor as to the cost of producing 15,000 tons of ice, although we are satisfied that it was reasonable to suppose that this cost would be between $21,737.33, the amount estimated by Ball and his able assistant, and $24,000. They also testified that there was not a great risk to the contractor in such an undertaking as this, and that to a great extent it could offset possible increases in the cost of various elements. Ball had made an extensive investigation of the situation at the time he assigned the contract.
In our opinion, Ball and his assistant failed to take into consideration certain minor elements of cost and of risk, and also their cost and expense figures were in some cases lower than*2166 those testified to by other disinterested witnesses, although their labor estimates were generous in the opinion of other witnesses. The evidence does not show satisfactorily to what extent the ice the railroad would take would probably exceed the minimum of 15,000 tons, therefore, we can not assume the amount would greatly exceed this minimum.
*1251 After careful consideration of all of the evidence, we believe that the petitioner has not shown that the contract and lease had an actual cash value in excess of $150,000 and we hold that the actual cash value of the contract and lease was $150,000 on February 15, 1912, at the time paid in for stock or shares of the petitioner.
Reviewed by the Board.
Judgment will be entered under Rule 50.
SMITH did not participate.
Footnotes
1. The was a period of the year when the petitioner's business was always inactive. The petitioner never had a loss for any full 12-month period. ↩