*1042 1. Corporations A and B and certain individual stockholders of B in 1897 entered into a contract by which B appointed A its sole selling agent and agreed to sell to A its entire manufactured output at cost, plus $225,000 per year, for a period of 45 years from July 1, 1896. A majority of the capital stock of B was owned by shareholders and officers of another corporation which was the sole stockholder of A. Thereafter A acquired the capital stock of B from time to time until December 3, 1897, when A became the sole stockholder of B. A was dissolved in 1917, and the contract thereby terminated. Held, that the contract did not constitute an exhaustible capital asset in the hands of corporation B in the taxable years 1923 and 1927.
2. In 1927 petitioner paid $525,000 to suppress a competitive trade brand and to eliminate competition. Held, this amount is not deductible from gross income for 1927 as an ordinary and necessary business expense.
3. During the year ended June 30, 1923, petitioner made additions to its plant and equipment comprising approximately 15,000 items, most of which were installed during the first half of the fiscal year. Amount of depreciation*1043 allowable redetermined on the basis of one half of the depreciation sustained on the assets during entire year.
4. Respondent's determination of profit realized from sale of assets in 1923 approved for lack of evidence to show error.
5. On the facts of this case, certain contributions made by petitioner to hospitals held to constitute allowable deductions, as business expense.
6. In 1923 petitioner increased its capital stock and on that account paid to the treasurer of the State of Rhode Island a so-called "fee" in the amount of $4,000. Held, amount is deductible as a tax paid to the state. Borg & Beck Co.,24 B.T.A. 995">24 B.T.A. 995, followed.
*1129 These are consolidated proceedings for the redetermination of deficiencies in income taxes of the petitioners as follows:
| Docket | Petitioner | Year | Deficiency |
| No. | |||
| 38903 | Clark Thread Co | Fiscal year ended | $1,082.04 |
| June 30, 1923 | |||
| 38904 | J. & P. Coats | do | 2,334.39 |
| (R.I.) Inc. | |||
| 47974 | Clark Thread Co | Calendar year 1927 | 70,742.91 |
*1044 The issues are:
(1) Whether or not the petitioner the Clark Thread Co. is entitled to deductions from gross income for the taxable years on account of amortization or exhaustion of a certain contract executed in 1897 by it and George A. Clark & Brother (Inc.), covering a period of 45 years, the latter corporation having been dissolved in 1917 and the petitioner thereafter in the same year having taken over the *1130 assets and assumed the liabilities of the other corporate party to the contract;
(2) Whether or not the petitioner the Clark Thread Co. is entitled to deduct from gross income for the taxable year 1927, as an ordinary and necessary business expense, the sum of $500,000 paid in that year by it to a competitor, and the amount of $25,000 likewise paid in that year to the competitor's attorney, as consideration for the discontinuance or suppression of the competitor's trade brand;
(3) Whether or not the petitioner the Clark Thread Co. is entitled to additional deductions for depreciation on certain additions made to its plant and equipment during the taxable year 1923;
(4) Whether or not the respondent has erroneously determined the amount of gain derived by*1045 the petitioner J. & P. Coats (R.I.), Inc. from the sale in 1923 of certain real property and abandoned and scrapped machinery;
(5) Whether or not the petitioner J. & P. Coats (R.I.), Inc. is entitled to deduct from gross income for the taxable year 1923 certain amounts paid in that year to the Memorial Hospital of Pawtucket, Rhode Island, and Notre Dame Hospital of Central Falls, Rhode Island; and
(6) Whether or not the petitioner J. & P. Coats (R.I.), Inc. is entitled to deduct from gross income for the taxable year 1923 as taxes the amount of $4,000 paid in that year to the treasurer of the State of Rhode Island on account of an increase of capital stock.
FINDINGS OF FACT.
Issue (1) - Amortization of Contract of 1897.
The petitioner the Clark Thread Co. is a New Jersey corporation, with its principal office and mills at Newark, and was organized in or about the year 1865, for the purpose of manufacturing and selling spool sewing cotton, yarns, thread, and other products of a similar nature. Since organization, it has been engaged in the manufacture of such products, which have been widely distributed throughout the United States and its possessions.
A family named*1046 Clark began the manufacture of cotton thread in Paisley, Scotland, more than 100 years ago and sold the thread in various parts of the world. More than 70 years ago a branch of that family came to the United States and engaged in the sale of "Clark thread" in this country. The incorporators of the petitioner, the Clark Thread Co., were members of that group.
The petitioner the Clark Thread Co. took over the factory equipment and other assets of the partnership of George A. Clark & Brother of Newark, New Jersey, and the partnership thereafter acted *1131 as its sole agent for the sale and distribution of its products until 1897. The petitioner also acquired the right to use in the United States the trade-marks, wrappers and trade names of the firm of J. & J. Clark & Co. of Paisley, Scotland, which was the original family of thread manufacturers and predecessor of Clark & Co.
The petitioner J. & P. Coats (R.I.), Inc. is a Rhode Island corporation organized in December 1912, with its principal office and mills at Pawtucket. As of January 1, 1913, it took over the thread mills and other assets of the Conant Thread Co., a thread-manufacturing corporation in Pawtucket. The*1047 Conant Thread Co. was the American branch of J. & P. Coats, Ltd., of Paisley, Scotland, and the petitioner is also controlled by said J. & P. Coats, Ltd.
J. & P. Coats, a copartnership, established the "Coats" thread business at Paisley, Scotland, in about the year 1830, and by reason of the superior quality of their product, long maintained, they acquired a reputation throughout the world as manufacturers of fine thread. In 1890, J. & P. Coats, Ltd., a British corporation, was organized, and the property taken over by such corporation included the plant at Paisley, Scotland, and a large majority of the shares of the capital stock of the Conant Thread Co., a Rhode Island corporation, which then owned mills at Pawtucket.
In July 1896, J. & P. Coats, Ltd., acquired more than 95 percent in amount and number of the shares of capital stock of three other British thread-manufacturing corporations, namely, Clark & Co., Ltd., of Paisley, Scotland, James Chadwick & Brother, Ltd., of England, which owned a branch mill in New Jersey, and Jones Brook & Brothers, Ltd., of England, which also had a branch in the United States.
In September 1896, J. & P. Coats, Ltd., acquired more than*1048 90 percent in number and amount of the shares of capital stock of the Clark Mile-End Spool Cotton Co., a New Jersey corporation organized in 1882 and having thread mills situated at East Newark, New Jersey.
In 1897 and for many years prior thereto the majority of the shares of capital stock of the Clark Thread Co. was owned and held by individuals who were residing and doing business in Great Britain and were interested, as shareholders or as officers, in Clark & Co., Ltd.
For many years prior to 1897, the sale and distribution of the thread manufactured by the Clark Thread Co. was conducted by the partnership of George A. Clark & Brother, as sole agent. At and prior to May 18, 1897, the members of the partnership were Stewart Clark of Paisley, Scotland, William Clark, of London, England, and Robert Brown Symington and Robert Cumming, of Newark, New Jersey. On or about May 18, 1897, a corporation of the same name was organized by the members of the partnership under the *1132 laws of the State of New Jersey, and the corporation acquired all the assets of the partnership. Thereafter and by the close of the year 1897, the shares of capital stock of the corporation were*1049 acquired by Clark & Co., Ltd., a majority of the stock of which was owned by J. & P. Coats, Ltd., of Paisley, Scotland. George A. Clark & Brother (Inc.) then acquired, with funds furnished by Clark & Co., Ltd., a majority of the shares of capital stock of the Clark Thread Co., petitioner herein.
George A. Clark & Brother (Inc.) acquired the capital stock of the Clark Thread Co. as follows: On May 19 and June 16 and 19, 1897, a contract of purchase and sale was executed by George A. Clark & Brother (Inc.) and the holders of 3,758 shares out of a total of 7,500 shares of the capital stock of the Clark Thread Co., or eight shares in excess of 50 percent of its then total issued and outstanding shares of capital stock. The contract also stated that other stockholders (who did not sign the contract and who held 3,742 shares) might avail themselves of the agreement, which provided for the purchase of the stock by George A. Clark & Brother (Inc.) as of June 30, 1896. The selling stockholders agreed not to engage either directly or indirectly in the manufacture of thread in the United States or Canada for a period of 45 years from July 1, 1896, and further agreed to endorse their stock*1050 certificates in blank or cause them to be transferred to the vendee or its nominee. The certificates were transferred of record to George A. Clark & Brother (Inc.) on various dates prior to December 3, 1897, so that on that date it was the record holder of all of petitioner's stock.
The contract for the purchase and sale of the stock of the Clark Thread Co. was signed by or in behalf of the Clark Thread Co. at Newark, New Jersey, on May 19, 1897, and was signed by the other parties thereto as follows:
| May 19, 1897, at Newark, New Jersey. | |
| Stockholder | Shares held |
| John William Clark * | 200 |
| Wm. Campbell Clark | 50 |
| Robert Cumming | 100 |
| Mrs. Elizabeth Aitken Cumming | 60 |
| Robert Brown Symington | 50 |
| June 16, 1897, at Paisley, Scotland. | |
| Stockholder | Shares held |
| Stewart Clark | 1,300 |
| Mrs. Margaret Campbell Kerr | 640 |
| June 19, 1897, at London, England. | |
| Stockholder | Shares held |
| William Clark | 1,208 |
| Hugh Houston Smiley | 50 |
*1133 By another contract executed by the various parties thereto on May 19 and June 16 and 19, 1897, George A. Clark & Brother (Inc.) agreed to purchase, and the Clark Thread Co. agreed to sell, the entire manufactured output of the latter corporation for a period of 45 years from July 1, 1896. In addition to the two corporate parties, this contract was also signed by the same stockholders who executed the contract referred to in the preceding paragraph. The agreement provided that during the period mentioned George A. Clark & Brother (Inc.) would pay to the Clark Thread Co. for its products an annual consideration equal to the cost of manufacture plus $225,000, or a net profit of 30 percent on the basis of its then authorized capital stock; provided that if the capital stock of the Clark Thread Co. should thereafter be increased with the consent of George A. Clark & Brother (Inc.) the consideration would also be increased so as always to provide a net profit equal to 30 percent of the capital stock.
The Clark Thread Co., by the same*1052 instrument, agreed to manufacture and sell to George A. Clark & Brother (Inc.) its requirements of thread, not to sell its products to any other person, and to make the latter corporation its sole and exclusive agent in the United States, Canada and elsewhere for the sale of its products. The majority stockholders, as in the prior agreement, agreed not to engage directly or indirectly in the manufacture of thread in the United States or Canada for a period of 45 years from July 1, 1896.
The contract was executed for both George A. Clark & Brother (Inc.) and the Clark Thread Co. by W. Campbell Clark and Robert Brown Symington, who acted as officers of both corporations.
George A. Clark & Brother (Inc.) entered into a written contract, executed December 3, 1897, and January 14, 1898, with Clark & Co., Ltd., of Scotland, whereby the former corporation agreed to borrow from the latter, and the latter corporation agreed to loan to the former the sum of $7,280,625 to be used by George A. Clark & Brother (Inc.) solely for the purpose of purchasing and acquiring the capital stock of the Clark Thread Co. The borrowing corporation agreed to deliver all of said shares of stock to Clark*1053 & Co., Ltd., as collateral security for the loan and to pay annually to Clark & Co., Ltd., as compensation for the loan of all of its net profits in excess of $25,000. A new ledger was opened for the Clark Thread Co. as of July 1, 1896.
After the foregoing agreements had been executed, and the stock and assets transferred as therein provided, the following situation *1134 existed: J. & P. Coats, Ltd., of Paisley, Scotland, owned more than 95 percent of the capital stock of Clark & Co., Ltd., also of Scotland, and the latter corporation owned all the capital stock of George A. Clark & Brother (Inc.), which owned all the capital stock of the petitioner, the Clark Thread Co. The Clark Thread Co. derived a fixed profit of $225,000 per year, and it paid this profit, less dividends on qualifying shares, to George A. Clark & Brother (Inc.) as a dividend on its capital stock. George A. Clark & Brother (Inc.) paid all of its profits, in excess of $25,000, to Clark & Co., Ltd., as compensation for its loan, pursuant to the loan agreement, and also paid the $25,000, less dividends on qualifying shares, to the same corporation as a dividend on its capital stock. The certificates*1054 of capital stock of the Clark Thread Co. were in the possession of Clark & Co., Ltd., as collateral security for the loan.
In 1898 the Spool Cotton Co. was organized under the laws of New Jersey, with its principal office in New York City. On January 1, 1899, it became the sole distributing agent in the United States of the thread manufactured by the Clark Thread Co., James Chadwick & Brother, Ltd. (American branch), Jonas Brook & Brothers, Ltd. (American branch), and the Clark Mile-End Spool Cotton Co. After the incorporation of J. & P. Coats (R.I.), Inc., in 1912, the Spool Cotton Co. also sold all the thread manufactured by that company.
In 1899 George A. Clark & Brother (Inc.) transferred its entire selling organization and office furniture and equipment to the Spool Cotton Co. and discontinued its active operations. Thereafter it had no employees. Its officers were also officers of the Clark Thread Co., which paid their salaries. It maintained no office except that of the Clark Thread Co., and its books were kept by employees of the latter company. Practically its only activity was the collection of profits derived from sales made through the Spool Cotton Co. Those*1055 profits were not actually remitted by the Spool Cotton Co., but were held for its account and remitted at its direction to the Clark Thread Co. or to Clark & Co., Ltd.
The intercompany relationship above indicated continued until the year 1917. For the period from 1898 to 1917 the books of the Clark Thread Co. showed average "net earnings" of $225,000 per year in accordance with the contract with George A. Clark & Brother (Inc.). The sale prices of manufactured products were estimated with a view to earning that amount, and if at the end of the year they earned more or less than $225,000, adjustments were made to produce that figure.
The books of George A. Clark & Brother (Inc.) are not available for years prior to 1902, but for the years ended June 30, 1902, *1135 to June 30, 1917, they show its annual net profits from trading average $2,059,958.07. There was also carried on the books of George A. Clark & Brother (Inc.) prior to 1917 a liability account in the amount of $9,182,689.29. After 1901 this account was designated on the ledger as "Clark & Company, Ltd., Capital Loan Account." It was identified as "balance prior ledger", and was the only item on the account*1056 prior to its closing in 1917.
The contract of 1897 between George A. Clark & Brother (Inc.) and the Clark Thread Co. was not carried as an asset on the books of George A. Clark & Brother (Inc.) and no amortization with respect to the contract was taken or claimed by the latter corporation prior to its dissolution in 1917, nor was the contract set up on the books of the Clark Thread Co. as an asset acquired from George A. Clark & Brother (Inc.) in 1917.
In and prior to 1896, J. & P. Coats, Ltd., James Chadwick & Brother, Ltd., the Clark Thread Co., the Clark Mile-End Spool Cotton Co., and Jonas Brook & Brothers, Inc., manufactured and sold approximately 33 1/3 percent of all the cotton thread sold in the United States and its territories, the greater part of which was manufactured in the United States. In 1917 the Coats group manufactured and sold 45 percent of the thread on the domestic market; and it, together with the American Thread Co. and its subsidiaries, sold from 70 to 80 percent.
The United States Government instituted a proceeding in equity against said companies and other thread manufacturers and dealers under the antitrust laws, and pursuant thereto a decree was*1057 entered on June 2, 1914, in the United States District Court for the District of New Jersey. The decree, among other things, enjoined the defendants, J. & P. Coats, Ltd., the Spool Cotton Co., the Clark Thread Co., the Clark Mile-End Spool Cotton Co., George A. Clark & Brother (Inc.), J. & P. Coats (R.I.), Inc., James Chadwick & Brother, Ltd., Jonas Brook & Brothers, Ltd., and their officers, directors and agents, from entering into any combinations with, and from acquiring directly or indirectly any interest in the American Thread Co., the Thread Agency, or the English Sewing Cotton Co. The decree also enjoined the latter group of corporations, in like manner, from entering into any combination with, or from acquiring directly or indirectly any interest in the stock or securities of the first mentioned group of corporations.
On or about July 1, 1917, George A. Clark & Brother (Inc.) was dissolved, and its affairs thereafter wound up by its directors, as trustees on dissolution under the statutes of the State of New Jersey. On November 17, 1917, a contract was executed by the trustees and the Clark Thread Co., whereby, for a stated consideration of one dollar *1136 and*1058 the assumption of its liabilities, the assets of the dissolved corporation were transferred to the Clark Thread Co. The contract recited that George A. Clark & Brother (Inc.) had "no indebtedness except current liabilities" and that it had "assets greatly in excess of such liabilities." On the books of the corporations the assets were transferred as of July 1, 1917.
In May 1917, prior to its dissolution, George A. Clark & Brother (Inc.) transferred to Clark & Co., Ltd., at the request of the latter, for a recited consideration of one dollar, all of the capital stock of the Clark Thread Co., which had been in the possession of Clark & co., Ltd., since 1897, as collateral security for the loan evidenced by the "Capital Loan Account" hereinabove referred to. By an entry of July 1, 1917, Clark & Co., Ltd., extinguished the "Capital Loan Account" and canceled on its books the indebtedness of George A. Clark & Brother (Inc.) represented thereby. On the books of Clark & Co., Ltd., the capital shares account and capital loan account of George A. Clark & Brother (Inc.) were balanced by credits to "U.S.A. Companies Merger Account" under date of July 1, 1917.
In connection with the above*1059 transactions, the books of Clark & Co., Ltd., contained the following journal entries: "July 1, 1917 U.S.A. Companies Merger A/c Dr. $9,182,689.29." Said amount was credited to "George A. Clark & Bro. Loan A/c", with the explanation, "for transfer of G.A.C. & Br. Capital Loan consequent upon the amalgamation of the U.S.A. Cos." "July 1, 1917 U.S.A. Companies Merger A/c Dr. $99,100." Said amount was credited to "George A. Clark & Bros. Share Account for value of 991 G.A.C. & Br. Shares of $100.00 each cancelled on account of the amalgamation of the U.S.A. Cos."
Under the same date, July 1, 1917, in the same journal of Clark & Co., Ltd., there appeared an entry by which "The Clark Thread Co. Share Account" was debited and "U.S.A. Companies Merger Account" was credited with $10,859,154.07, including the item "G.A.C. & B. Share Cap. Loan $9,182,689.29", with the following explanation, "for Cost of 119,990 shares of $100.00 each in The Clark Thread Co., Newark, N.J., U.S.A.
The assets of the Clark Mile-End Spool Cotton Co. were transferred to the Clark Thread Co. in 1917, and the corporation was dissolved. Also the assets of the American branch of James Chadwick & Brother were transferred*1060 to the Clark Thread Co. New books were opened for the Clark Thread Co. as of July 1, 1917, and in November 1917, the authorized capital stock of the corporation was increased from $750,000 to $12,500,000. The original stock of that corporation was then held by Clark & Co., Ltd., of Scotland, and the *1137 new or increased capital stock was issued to the same company, except 5,000 shares of the par value of $100 each, or total par value of $500,000, were issued to James Chadwick & Brother, Ltd.
The assets of George A. Clark & Brother (Inc.), as shown by its books, which were transferred to the Clark Thread Co. pursuant to the contract of November 17, 1917, consisted of accounts receivable in the amount of $2,088,552.81, and inventory of the value of $650,326.94, or total assets of $2,738,879.75. The liabilities of the dissolved corporation, assumed by the Clark Thread Co., consisted of accounts payable in the amount of $52,683.65 and "Current Account Clark & Co., Ltd." $2,457,096.20, or total liabilities of $2,509,779.85.
The average annual earnings of the Clark Thread Co. for the years 1918 to 1922, inclusive, (after the capital stock had been increased to $12,500,000) *1061 amounted to $2,257,674.33.
Issue (2) - Deduction of Amounts paid for Discontinuance of Competitive Trade Brand.
In 1881 a partnership was formed in New York City between one John J. Clark and one Frank R. Swackhamer under the firm name of John J. Clark & Co., and it thereafter engaged in the sale of cotton sewing thread.
The Clark Thread Co., petitioner herein, contended that the partnership was infringing its trade name "Clark", and in 1883 filed a suit in equity against the members of the partnership in the supreme court of New York County. As a result of that proceeding a decree was entered under date of January 9, 1884, by consent of the parties, whereby the partners were enjoined from using the name "Clark" in connection with the sale of thread, except in the following combinations, "John J. Clark", "John J. Clark's", "John J. Clark & Co.", and "John J. Clark & Co.'s."
In 1885 a partnership known as Blodgett & Orswell Co. was formed, which thereafter supplied thread to the firm of John J. Clark & Co. The latter company bought the thread in the rough, and then dyed and finished it. In 1888 the Blodgett & Orswell Co. was incorporated under the laws of Rhode Island.
*1062 The partnership of John J. Clark & Co. continued to sell thread supplied to it by Blodgett & Orswell Co. until 1904, in which year John J. Clark died. In 1905 the Clark Thread Co. or its distributing agent, the Spool Cotton Co., entered into negotiations with the surviving partner of J. J. Clark & Co. for the purchase of the partnership business and assets, but the negotiations were unsuccessful. In 1905, a corporation was organized under the name of John J. Clark & Co. to take over the assets of the former partnership of that name, and in 1908 this corporation sold the assets to the Blodgett & Orswell *1138 Co. The latter corporation continued the sale of thread under the name of "John J. Clark."
In 1910 the Spool Cotton Co. began negotiations with the Blodgett & Orswell Co. with a view to inducing the latter company to discontinue selling thread under the name of "Clark." The Spool Cotton Co. contended that the business of the Clark Thread Co. was being injured by the selling of the Blodgett & Orswell Co.'s goods under a similar name, and suggested that it would pay compensation to the latter company for the discontinuance of such sales. The Blodgett & Orswell Co. *1063 declined to entertain any proposition to discontinue its "John J. Clark" brand except in connection with the sale of its entire business, and the negotiations were terminated.
The Blodgett & Orswell Co. continued to sell "John J. Clark" thread, and the Spool Cotton Co. continued to complain that the purchasers of thread were confusing that brand with its own brands. The latter company did not contend that the Blodgett & Orswell Co. was violating the terms of the consent decree of 1884, or that said company was disputing its right to use the word "Clark." Its complaint in substance was that jobbers, wholesalers and retailers, located in various places in the United States, were, in their advertising and distribution, confusing the "John J. Clark" brand with the brands manufactured by the Clark Thread Co.
On May 12, 1926, the Clark Thread Co., as complainant, filed an equity action in the United States District Court for the Eastern District of Missouri against the Cupples Co. of St. Louis, defendant. The defendant conducted a jobbing and wholesale business, and the Clark Thread Co. alleged that it was selling thread, made by or for the Boldgett & Orswell Co., in such manner*1064 as to infringe its trade brands. On January 31, 1927, the Clark Thread Co. also filed a suit in equity against the Blodgett & Orswell Co. in the United States District Court for the Southern District of New York. In each of the equity actions mentioned, the Clark Thread Co. sought a perpetual injunction to restrain the respective defendants from using the word "Clark" in connection with the manufacture and/or sale of thread in such a manner as to cause their products to be confused with those of the complainant, or to infringe its trade-marks.
After the filing of the equity action against the Cupples Co. of St. Louis, negotiations were again opened between the Clark Thread Co. and the Blodgett & Orswell Co. which extended over a period of several months.
It was first suggested by the Blodgett & Orswell Co. that a consent decree be entered in the Cupples Co. case based on the New York decree of 1884, but that suggestion was refused. The Blodgett & Orswell Co. then made the suggestion that for compensation of *1139 a million or a million and a half dollars it would discontinue the use of the trade name "John J. Clark", or the name of "Clark" in any form. The Clark Thread*1065 Co. declined to pay any such amount, stating that it did not want the business of the Blodgett & Orswell Co., but merely wanted to stop the use by said company of the name "Clark." The Clark Thread Co. then suggested a plan, referred to as "the ten-year purchase plan", which contemplated taking into consideration the earnings of the Blodgett & Orswell Co. over a period of ten years.
The negotiations were continued on that basis, and finally terminated in a settlement by which the Clark Thread Co. paid to the Blodgett & Orswell Co. the sum of $500,000 and to the attorney for the company the sum of $25,000. The terms of the settlement were embodied in a written agreement dated April 5, 1927, which provided that the Blodgett & Orswell Co. would not thereafter make any use whatsoever of the name "Clark" in any form or combination of words or letters in connection with thread, except that it and its dealers might, during a period of six months, dispose of their stocks of thread bearing the "John J. Clark" label, and that thereupon the company would consent to an entry of a decree in the pending equity proceedings perpetually enjoining the defendants from all use of the word "Clark. *1066 " The agreement further provided that neither the Blodgett & Orswell Co. nor the Cupples Co. should be required to pay any sum of money to the Clark Thread Co. by reason of the entry of said decrees.
The settlement was carried out in accordance with the terms of the written agreement. The Blodgett & Orswell Co. and its dealers proceeded to dispose of their stocks of thread and at the end of the six-month period consent decrees were entered in the respective court proceedings in October and November 1927, providing for perpetual injunctions. Following the entry of the decrees, the Blodgett & Orswell Co. disposed of its remaining assets and discontinued its business.
Issue (3) - Depreciation on Additions to Plant and Equipment.
During the fiscal year ended June 30, 1923, the petitioner the Clark Thread Co. expended for additions to its manufacturing plant and equipment the total sum of $1,670,760.67. The petitioner originally computed the depreciation sustained on these additions for the fiscal year 1923 in the amount of $8,437.72, and claimed that amount as a deduction in its return, which was allowed by the respondent.
The depreciable assets in question consisted of*1067 buildings, water and steam pipes, gearing, electric light equipment, and machinery, *1140 comprising approximately 15,000 items. The expenditures therefor were made from time to throughout the fiscal year from July 1, 1922, to June 30, 1923, but the larger part of the additions was installed during the first half of the fiscal year.
The contract depreciation sustained on the assets in question during the fiscal year ended June 30, 1923, was $46,234.30.
Issue (4) - Assets of J. & P. Coats (R.I.), Inc., Sold in 1923.
During the fiscal year ended June 30, 1923, the petitioner J. & P. Coats (R.I.), Inc. sold certain real estate, with the houses and improvements thereon, and also in the same year scrapped and sold various kinds of machinery. As a result of these sales, the petitioner credited its surplus account with the sum of $81,520.55, and reported in its tax return for that fiscal year a profit on the sale of all of said assets in the total amount of $32,911.03.
The respondent increased the amount of profit reported on the sale of the assets by the amount of $10,522.36, with the following explanation:
From the information shown by return it is apparent that*1068 the taxpayer did not take into consideration depreciation for the taxable year. The correction is computed as follows:
| Total assets sold or removed | $209,156.88 |
| Less: Value of land | 10,510.44 |
| Balance | $198,646.44 |
| Kind of property | Rate | Depreciation | Value |
| Shafting and belting | 7 1/2% | $2,819.62 | $37,594.91 |
| Buildings | 2 1/2% | 349.83 | 13,993.25 |
| Machinery | 5% | 7,352.91 | 147,058.28 |
| Total | $10,522.36 | $198,646.44 |
Issue (5) - "Contributions" to Hospitals.
During the fiscal year 1923, the petitioner J. & P. Coats (R.I.), Inc. contributed the sum of $5,000 to a campaign fund of the Memorial Hospital of Pawtucket, and in the same year contributed the sum of $1,000 to the building fund of the Notre Dame Hospital of Central Falls, Rhode Island. The latter hospital was not in operation during the fiscal year 1923.
The petitioner's manufacturing plant was located partly in Pawtucket and partly in Central Falls, which are adjoining cities. The two cities make up a single metropolitan area, which in 1923 had a total population of about 90,000 people. These cities also are close to Providence, Rhode Island, which in*1069 1923 had a population of approximately 200,000 people. All of these cities are located in an industrial district which is occupied by many mills.
*1141 The petitioner had an arrangement with the Memorial Hospital in Pawtucket by which it paid amounts annually to the hospital, in return for which it was entitled to free hospital services for its employees up to the amount of its contribution, that is to say, until the normal charges for such services equaled the amount so contributed to the hospital. Any services in addition were paid for by petitioner as rendered. Invoices were sent to the petitioner by the hospital showing the balance of the particular fund remaining to be used. The amounts contributed by petitioner to the hospitals were less than it would have cost the petitioner to maintain hospital facilities of its own, and it would have been necessary for it to maintain such facilities if they had not been otherwise available.
In its tax return for the fiscal year 1923, the petitioner deducted the sum of $2,500 on account of the contribution made to the campaign fund of the Memorial Hospital, and likewise deducted the sum of $1,000 on account of the contribution*1070 made to the building fund of the Notre Dame Hospital. These deductions, in the total amount of $3,500, were disallowed by the respondent.
Issue (6) - Fee Paid on Account of Increase of Capital Stock.
During the fiscal year ended June 30, 1923, the petitioner J. & P. Coats (R.I.), Inc. increased the amount of its authorized capital stock, and on that account paid to the general treasurer of the State of Rhode Island the sum of $4,000. In its tax return for that year the petitioner deducted $4,000 as tax paid to the State of Rhode Island, which deduction was disallowed by the respondent on the ground that the amount constituted a capital expenditure.
OPINION.
Issue (1) - Amortization of Contract of 1897.
TRAMMELL: The petitioners contend that the Clark Thread Co. is entitled to a deduction from gross income for each of the taxable years 1923 and 1927 on account of amortization of the contract entered into by and between George A. Clark & Brother (Inc.) and the Clark Thread Co. (and certain of the latter's stockholders) in 1897 in the circumstances detailed under this issue in our findings of fact.
The petitioners claim that the contract constituted a valuable*1071 capital asset in the hands of George A. Clark & Brother (Inc.) from the date of its execution in 1897, subject to exhaustion in the process of earning income, and that the Clark Thread Co. acquired the contract in 1917. Petitioners concede that, coincident with its acquisition by the Clark Thread Co. and the dissolution of the other *1142 principal party thereto in 1917, the contract was terminated and ceased to exist, but contend that the Clark Thread Co. thereby acquired a valuable property right in the nature of an exhaustible capital asset, namely, the right to receive thereafter the entire amount of its net earnings for the remaining period of the original life of the contract.
The petitioners argue that the Clark Thread Co. is entitled to deductions in the taxable years on account of amortization or exhaustion of the capital asset so acquired in 1917, and propose as the proper basis for the computation of such deductions, first, the fair market value of the contract at March 1, 1913, alleged to have been $23,000,000, spread over 28 1/3 years, the remaining period of life of the contract on that date, which would give an annual amount in excess of $800,000. This basis*1072 is contended for on the theory that because George A. Clark & Brother (Inc.) owned 100 percent of the stock of the Clark Thread Co. in 1917 and the two corporations thus were affiliated at that time, the Clark Thread Co. is entitled to the same basis as George A. Clark & Brother (Inc.) would be entitled to if the contract had remained in its possession.
In the alternative, the petitioners argue that if the March 1, 1913, value is not the proper basis for computing these deductions, then the Clark Thread Co. is entitled to deductions on the basis of the fair market value in 1917, said to have been $21,000,000, spread over the period of 24 years from July 1, 1917, to July 1, 1941, the date on which the contract would have expired by its own terms. Another alternative basis suggested by the petitioners is the cost to the Clark Thread Co. of acquiring the contract in 1917, alleged to have been $8,953,589.39.
Respondent's contentions, in substance, are that the contract was an intercompany transaction between two subsidiary members of an affiliated group of corporations; that it represented nothing more than the method by which, or channel through which, the parent corporation in*1073 Scotland elected to take the profits of its American subsidiaries, the Clark Thread Co. and George A. Clark & Brother (Inc.); and that in any event the contract did not constitute a depreciable capital asset which was being used in the business of the Clark Thread Co. in either of the tax years, since the capital value of the contract, if it ever had any such value, was destroyed or disappeared on December 3, 1897, on which date George A. Clark & Brother (Inc.) became the record owner of all the shares of capital stock of the Clark Thread Co.
Before discussing the proper basis for the computation of the amortization deductions claimed by the petitioners, we will consider first the question which is of primary importance here, namely, *1143 whether or not the Clark Thread Co. acquired a capital asset in 1917 which is subject to amortization deductions. If that company and George A. Clark & Brother (Inc.) were in fact affiliated on May 19, 1897, when the contract in controversy was executed by them, then the contract must be regarded for tax purposes as an intercompany transaction, which did not result in the acquisition of a depreciable asset by the latter corporation. If*1074 the contract was not a depreciable capital asset in the hands of George A. Clark & Brother (Inc.) at March 1, 1913, or July 1, 1917, then the Clark Thread Co. is not entitled to amortization deductions on the basis of the fair market value of the contract at either of those dates, or on any other basis.
If the two corporations mentioned were subsidiary members of an affiliated group when the contract was executed, the net worth of that group was neither increased nor diminished by their agreement. The contract, then, would represent merely an intercompany transaction by which the net earnings of the one were shifted to the other. Nothing of value was added thereby to the assets of the affiliated group. Cf. , and for a discussion of the nature of intercompany transactions see opinion of the circuit court in , affirmed by the decision of the Supreme Court above cited. If the corporations were not affiliated when the contract was signed, but were independent corporations dealing at arm's length, a different conclusion might be reached.
*1075 The record contains much significant information respecting the relationship of the contracting corporations, both prior and subsequent to May 1897. The Clark Thread Co. was incorporated in 1865, and for many years prior to 1897 its products were sold by George A. Clark & Brother, a partnership. The partnership was incorporated under the same name on May 18, 1897, and on the next day, May 19, 1897, the contract which is the subject matter of the claimed deductions was executed by the two corporations.
All the capital stock of the new corporation, George A. Clark & Brother (Inc.), was acquired by Clark & Co., Ltd., of Paisley, Scotland. The principal stockholders of the Clark Thread Co. at that time, and the number of shares held by each, were as follows: Stewart Clark of Paisley, Scotland, 1,300 shares; James Clark, 1,280 shares; William Clark, 1,208 shares; John Clark, 1,040 shares; James and John Clark, trustees, 800 shares; J. William Clark, individually and as trustee, 300 shares; William Campbell Clark, 50 shares; Robert Brown Symington, 50 shares, and Robert Cumming, 100 shares; total, 6,128 shares out of a total of 7,500 shares, or more than 80 percent of the then issued*1076 and outstanding capital stock. The individuals named were also shareholders or officers of Clark & *1144 Co., Ltd., of Paisley, Scotland, which became the sole stockholder of George A. Clark & Brother (Inc.), the other party to the contract in question.
It is to be noted that the partnership of George A. Clark & Brother, which was the sole selling agent of the Clark Thread Co., prior to May 18, 1897, was composed of the following members, all of whom were stockholders of the Clark Thread Co.: Stewart Clark, of Paisley, Scotland; William Clark, of London, England, and Robert Brown Symington and Robert Cumming, of Newark, New Jersey.
It is also shown by the record that Stewart Clark, of Paisley, Scotland, who was the largest individual stockholder of the Clark Thread Co., was an executive of or managing director of Clark & Co., Ltd. (the sole stockholder of George A. Clark & Brother (Inc.)), and a member of the former partnership of George A. Clark & Brother. William Campbell Clark was the president of George A. Clark & Brother (Inc.) and a stockholder and vice president of the Clark Thread Co. Robert Brown Symington was a stockholder and secretary of the Clark Thread*1077 Co.; he was also secretary of George A. Clark & Brother (Inc.) and was a member of the former partnership of George A. Clark & Brother.
From the foregoing facts it appears that in May 1897, and for many years prior thereto, at least 80 percent, and perhaps a much larger percentage, of the capital stock of the Clark Thread Co. was owned and held by the stockholders of Clark & Co., Ltd., of Scotland, which subsequently became the sole stockholder of George A. Clark & Brother (Inc.). In the light of those facts, we can not assume that the Clark Thread Co. and George A. Clark & Brother (Inc.) were independent corporations acting at arm's length when the contract of May 19, 1897, was executed. We can not escape the conclusion that they were subsidiary corporations of a closely related group.
Upon completion of the reorganization of 1897, of which the contract in question was an integral part, the status of the corporations was not materially changed. They remained subsidiaries of the same affiliated group. The record ownership of the stock of the Clark Thread Co. was merely changed from the former individual stockholders, who were shareholders of Clark & Co., Ltd., of Scotland, *1078 to George A. Clark & Brother (Inc.), all of whose stock was owned by the same Scottish corporation.
Whatever may have been the relationship of the contracting corporations on May 19, 1897, it is conceded that they became affiliated on December 3, 1897, when George A. Clark & Brother (Inc.) acquired 100 percent of the capital stock of the Clark Thread Co., *1145 and that such status continued from that date to the year 1917. In any event, then, if these corporations were not affiliated on May 19, 1897, it is apparent that this contract between two subsidiaries of an affiliated group on and after December 3, 1897, conferred no benefits upon either member any more than either would have had without such contract. Without the contract, one corporation might have permitted any proportion of its profits it saw fit to be transferred to the other without any effect upon the enterprise. It was like taking money from one pocket and putting it in another. Because the two corporations by contract did, and continued to do, what might as well have been done without it, that is, shift profits from one to the other, does not give rise to an exhaustible asset. These two corporations*1079 by virtue of the contract brought into the business enterprise, consisting of the affiliated group, nothing in the way of capital asset values which the group would not have possessed if the contract had not been in existence. Therefore, if the contract ever had any value as a capital asset in the hands of George A. Clark & Brother (Inc.) prior to December 3, 1897, we think there is no doubt that such value disappeared on that date.
George A. Clark & Brother (Inc.) thereafter possessed no rights under the contract which it could not have exercised by reason of its ownership of all of the capital stock of the Clark Thread Co. Indeed, its ownership of that stock gave it powers and rights greatly in excess of those conferred by the contract. Any time after December 3, 1897, George A. Clark & Brother (Inc.) could have caused the Clark Thread Co. to cancel the contract, or to execute a new contract on such terms and conditions as it pleased. It could have appointed itself the sole selling agent of the Clark Thread Co. and could have taken not only 90 percent of the earnings of its subsidiary, but could have taken all of its earnings either under the provisions of the contract, or*1080 as dividends, or a portion of the earnings by both methods. It could have canceled the contract in question without consulting the Clark Thread Co., and there would have been none who could make legal objection.
The fact that after December 3, 1897, George A. Clark & Brother (Inc.) elected to continue the contract in effect and to take approximately 90 percent of the net earnings of the Clark Thread Co. under the provisions of the contract, and the balance of its earnings as dividends, is unimportant so far as attaching value to the contract as a capital asset.
But the petitioners insist that nevertheless George A. Clark & Brother (Inc.) did continue the contract in force and effect from 1897 to 1917; that it was a valuable capital asset because it produced a net profit to said corporation of more than $2,000,000 annually; *1146 and that George A. Clark & Brother (Inc.) could have sold the contract for many millions of dollars. We are not impressed by this argument. It is plain that George A. Clark & Brother (Inc.) could not have sold this contract without parting with its right as sole stockholder to receive approximately 90 percent of the earnings of the Clark Thread*1081 Co., and if the contract had not been in existence the sole stockholder could have sold its right to such earnings for as large a consideration as it could have gotten for the contract.
If George A. Clark & Brother (Inc.) subsequent to 1897 had in fact sold the contract to a third party, and the purchaser were before us claiming deductions for amortization of the contract, a different situation would be presented. But here we are dealing with a claim which is allowable only on the theory that the contract in question constituted an exhaustible capital asset in the hands of a parent corporation, by means of which contract the parent corporation took from its wholly owned subsidiary approximately 90 percent of the subsidiary's net annual earnings by causing the subsidiary to sell its output to the parent at cost plus approximately 10 percent of its earnings. In taking under the contract the greater portion of the subsidiary's earnings George A. Clark & Brother (Inc.) reduced to that extent the amount of net earnings available for distribution to it as dividends. In these circumstances, the allowance of deductions for amortization of the contract would amount substantially to amortization*1082 of the right of the sole stockholder to receive the net income of its corporation.
The right of a stockholder to receive as dividends the net earnings of the corporation whose stock he owns is a valuable property right, but it represents to the stockholder income derived from the investment of capital in the corporation's stock; it is not a capital asset which may be amortized.
In , Kramer and Schnadig, who were the sole stockholders of the Pullman Couch Co., caused that corporation to assign and transfer to them its right to receive certain patent royalties. The petitioners contended that they thereby acquired valuable contractual rights upon the basis of which they were entitled to deductions for exhaustion. In our opinion, we said:
However, they (Kramer and Schnadig) were already entitled to receive those royalties from the corporation as dividends on their stock. Instead of permitting the corporation to receive the royalties and then pay the same over to them in the form of dividends, they caused the corporation to assign the royalties to them directly. * * * Under these circumstances, the socalled "contractual*1083 rights" of the petitioners to receive the corporation's royalties did not, in our opinion, give rise to a capital asset in respect of which amortization or exhaustion deductions are allowable. * * * The right to *1147 receive dividends does not constitute a capital asset which may be made the subject of amortization deductions.
On principle, the instant case, we think, is not distinguishable in any material respect from the one above cited. There, the two stockholders of the couch company by a written contract caused the corporation to assign and transfer to them its right to receive income which would otherwise have been available for distribution to them as dividends. Here, George A. Clark & Brother (Inc.), the sole stockholder of the Clark Thread Co., on and after December 3, 1897, by means of a written contract took from its subsidiary approximately 90 percent of its earnings which otherwise would have been received by the subsidiary and distributed to the sole stockholder as dividends. The fact that George A. Clark & Brother (Inc.) took the profits which otherwise would have been received by its subsidiary in excess of the stipulated annual amount, by causing the*1084 subsidiary to turn over its products at cost, plus said annual amount, we think is not controlling. The method selected by the parties in the instant case deprived the subsidiary of income which, except for the contract, would have been eventually distributed to its sole stockholder in dividends, quite as effectively as did the contract in the Kramer case. And as we held there, so must we hold here, that the right of a sole stockholder to receive the income of his corporation as dividends can not by contract be converted into a capital asset which may be made the subject of amortization deductions merely because the stockholder elects to take such income directly under the terms of a contract by which the corporation is required to sell its products to the stockholder at cost.
For the reasons stated, it is our opinion that George A. Clark & Brother (Inc.), upon execution of the contract in question, did not acquire an exhaustible capital asset, and was not entitled to amortization deductions on the basis of the value at March 1, 1913, nor July 1, 1917. It follows that there is no basis for the allowance of amortization deductions to the Clark Thread Co., and it is unnecessary*1085 for us to discuss what would be the proper basis for computing such deductions if they were allowable.
The same conclusion may be reached on another ground. The precise question for decision here is whether or not the Clark Thread Co. during the taxable years 1923 and 1927 possessed an exhaustible capital asset upon which it is entitled to amortization deductions. The events which transpired in the prior years, particularly the years 1897 and 1917, are pertinent only in so far as they throw light upon this issue.
It is significant that the termination of the contract between the Clark Thread Co. and George A. Clark & Brother (Inc.) resulted from the dissolution of the latter corporation on July 1, 1917, and *1148 not from any action on the part of the Clark Thread Co., which did not acquire the assets and assume the liabilities of its former stockholder until November 17, 1917. Obviously, we think, the contract by its very nature and terms was not transferable, and as far as shown, no other person, individual or corporate, succeeded to any of the rights of George A. Clark & Brother (Inc.) thereunder. Whatever benefits, if any, flowed to the Clark Thread Co. were merely*1086 incidental to the termination of the contract by reason of the dissolution of the other principal corporate party.
These circumstances, in our opinion, could not and did not give rise to the acquisition of an exhaustible capital asset by the Clark Thread Co. The net result to the surviving company was only to relieve it of a burdensome contract which was in the nature of a continuing liability. Under the terms of that contract the thread company was bound to turn over its entire manufactured output to its sole stockholder at cost, plus an amount which in fact equaled only about 10 percent of its potential annual earnings. Upon termination of the contract on July 1, 1917, the Clark Thread Co. was enable thereafter to receive the full amount of its earnings, but the termination of a disadvantageous contract does not result in the acquisition of a capital asset. We conclude, therefore, that during the tax years the Clark Thread Co. did not possess a capital asset upon the basis of which it is entitled to the amortization deductions claimed.
For all the reasons hereinabove indicated, the action of the respondent on the first issue is approved.
Issue (2) - Amounts Paid for*1087 Discontinuance of Competitive Trade Brands.
In 1927 the Clark Thread Co. paid to the Blodgett & Orswell Co., a competitor, the sum of $500,000 and to its attorney the sum of $25,000, as consideration for the discontinuance of the sale of thread by the latter company under the name of "John J. Clark." The detailed circumstances of the transaction and the incidents leading up thereto are fully set out in our findings of fact. The petitioners claim they are entitled to deduct the aggregate amount of $525,000 from gross income for 1927 as a business expense, while the respondent contends that the amount represents a capital expenditure. The evidence clearly establishes, we think, that the amount was paid by the Clark Thread Co. for the sole purpose of suppressing a competitive trade brand and thereby eliminating competition. It is also obvious that the Clark Thread Co., after mature consideration, believed that the benefits to be derived by it were worth at least the *1149 amount of money paid out. Those benefits were not of a temporary nature, to be enjoyed only during the year 1927, but over an indefinite period of many years, and the whole cost thereof should not, therefore, *1088 be charged against income for the year 1927. Such benefits are in the nature of an intangible capital asset, and the amount paid therefor is a capital expenditure, not a deductible expense.
Where the benefits accrue for a limited and definite term of years, the value of the asset is exhausted ratably by the passage of time and an aliquot part of the cost is allowed as a deduction on account of such exhaustion for each year of the period, but where, as here, the benefits derived are permanent or of indefinite duration, no deduction for exhaustion is allowable. ; affirmed as ; ; ; ; .
In , the rule was stated by the court as follows:
* * * The simple question then arises whether the cost of eliminating competition can constitute a loss within the meaning*1089 of section 234(a)(4) of the Revenue Act of 1921 (42 Stat. 255); or whether the value of the thing procured, that is, the elimination of competition, is a capital asset to be carried to capital account. That the cost of eliminating competition in a capital asset has been established by a long line of decisions of the Board of Tax Appeals. In this case it appears to be clear that the taxpayer was willing to pay the amount of its claimed loss for the benefits to be derived from the elimination of the two competitors. The value of this intangible asset, which must be presumed to be measured by its cost, should have been credited to the capital account and carried as a capital asset. The fact that businessmen, perhaps of wide experience, were willing to pay out the money in return for the gain, clearly negatives any idea that they contemplated that the gain would be less than the expenditure.
On the second issue, respondent's action is approved.
Issue (3) - Depreciation on Additions to Plant and Equipment.
During the fiscal year ended June 30, 1923, the Clark Thread Co. expended the total sum of $1,670,760.67 for additions to its manufacturing plant and equipment. These*1090 additions consisted of buildings, water and steam pipes, and various kinds of equipment and machinery, comprising some 15,000 items, the larger part of which was installed during the first half of the fiscal year. The petitioner claimed in its return a deduction for depreciation on these additions in the amount of $8,437.72, which was allowed by the respondent.
The petitioner now contends that the amount claimed and allowed was inadequate, and that it should be allowed a deduction in the amount of $43,234.30 computed on the basis of one half the depreciation *1150 sustained on the assets during an entire year. There is no controversy between the parties as to the total cost of the additions in question, the periods of useful life or proper rate of depreciation to be applied, nor the fact that the larger part of such additions was installed during the first half of the fiscal year.
The respondent concedes that in the case of depreciable assets comprising a large number of similar items, under the circumstances disclosed here, it is his customary procedure, as a matter of practical expediency, to determine depreciation on the basis now urged by the petitioner, but contends*1091 that there is no statutory authority for such method, and that where in the exercise of discretion he has declined to compute depreciation on that basis, his action should not be disturbed unless the taxpayer offers proof in respect of each item. This view, we think, overlooks the rule that discretion vested in any officer of the Government, either administrative or judicial, may not be exercised in an arbitrary and unreasonable manner to the injury of a taxpayer.
In the light of the facts presented here, it is our opinion that the petitioner is entitled to the depreciation claimed, and we so hold.
Issue (4) - Profit on Assets Sold in 1923.
During the fiscal year 1923, the petitioner J. & P. Coats (R.I.), Inc. sold certain assets consisting of real estate, with the houses and improvements thereon, and various kinds of machinery which had been discarded and scrapped. In its tax return for that year the petitioner reported a profit from the sale of all of these assets in the amount of $32,911.03, which respondent increased by the amount of $10,522.36 on the ground that the petitioner had not taken into consideration depreciation for the taxable year. The petitioner acquired*1092 all of the property involved on January 1, 1913.
At the hearing petitioner offered opinion testimony of two witnesses for the purpose of establishing the value of the land without improvements at March 1, 1913, and the separate value of the houses and improvements. Cost was the same as value, and the value at January 1, 1913, was stated to be the same as at March 1, 1913. On the basis of this testimony the petitioner argues that the difference between the cost of the land, plus the cost of the improvements, less depreciation sustained, and the selling price represents the profits realized from the sale of the real estate, which amount is said to be $2,464.06. Petitioner asserts that the respondent computed the profit from the sale of the real estate in the amount of $18,356.43.
The balance of the profit determined by the respondent is allocated to the machinery which was scrapped and sold during the year, and the amount of profit so determined by the respondent is alleged by *1151 the petitioner to be $31,800.43 on machinery which was sold for $1,784.04. The petitioner contends that the respondent allowed a loss of $6,723.47 on certain items of machinery, and on all*1093 the items of machinery computed a net gain of $25,076.96, so that the amount of profit determined by the respondent on the machinery, other than the items on which he allowed the loss, was $31,800.43. The petitioner argues, therefore, that if no cost is allowed as the basis for determining gain or loss, the net gain could not exceed the net proceeds of sale, which amounted to only $1,784.04.
With this last proposition of the petitioner we are, of course, in agreement, but we can not concur in the petitioner's conclusions of fact. Testimony was offered by the petitioner for the purpose of establishing the figures stated, but it is apparent that those amounts represent mere assumptions of the witness, which are not supported by the record; and in that situation, such testimony can not be accepted as proving facts.
It is not disclosed by the record that the respondent computed the profit from the sale of the real estate separately, or that he allowed a loss on the sale of a part of the machinery and determined a profit on the sale of the balance of the machinery. The deficiency letter clearly indicates that the respondent accepted as correct the amount of profit reported by the*1094 petitioner on the sale of its assets as a whole, with the single exception that he reduced cost by depreciation sustained in the taxable year in the amount of $10,522.36, which resulted in increasing by that amount the total net gain.
The petitioner does not attack the action of the respondent in determining that additional depreciation as stated was sustained in the tax year and not taken into consideration by the taxpayer in reporting the profit realized from the sale of the assets. The determination of the respondent on this issue is, therefore, approved for lack of evidence to show error.
Issue (5) - Contributions to Hospitals.
The petitioner J. & P. Coats (R.I.), Inc. during the fiscal year 1923 contributed the sum of $5,000 to a campaign fund of the Memorial Hospital of Pawtucket, and the sum of $1,000 to the building fund of the Notre Dame Hospital of Central Falls, Rhode Island. The petitioner's manufacturing plant was located partly in Pawtucket and partly in Central Falls.
The petitioner had an arrangement with the Memorial Hospital whereby amounts paid annually by it to the hospital entitled its employees to free hospital service up to the amount so contributed. *1095 Any additional services were paid for by the petitioner as rendered, *1152 and statements were sent to the petitioner by the hospital from time to time showing the balance of the particular fund remaining unused. The petitioner did not maintain hospital facilities at its plant, which would have been necessary if such facilities had not been otherwise available, and the amounts contributed by the petitioner to hospitals were less than it would have cost it to provide such services. In the light of these facts, the so-called contributions were in no sense charitable or philanthropic, but were actuated by business reasons and resulted in direct business benefits. In our opinion, they constitute allowable deduction from gross income as business expenses. ; ; .
In respect of the $1,000 paid by the petitioner to the Notre Dame Hospital building fund, the respondent points out that the hospital was not in operation during the tax year, and argues that this amount is therefore not deductible from gross income for the*1096 fiscal year 1923. That fact, we think, under the circumstances shown, is not controlling. The amount was in fact paid during the fiscal year 1923 and constituted a business expense deductible from income of that year. The same situation was considered by us in , and the amount paid was allowed as a deduction from income of the year in which paid.
The petitioner asserts that it claimed deductions for the entire amount of the hospital contributions in question and that the respondent disallowed its claims in the amount of $3,500; whereas the respondent states that the petitioner claimed only the amount of $3,500, which was disallowed. However that may be, the petitioner is here claiming an additional deduction in the amount of $3,500, which, in our opinion, is allowable. The respondent's action on this issue is reversed.
Issue (6) - Fee Paid on Account of Increase of Capital Stock.
During the fiscal year 1923, the petitioner J. & P. Coats (R.I.), Inc. increased its capital stock and on that account paid to the general treasurer of the State of Rhode Island a "fee" in the amount of $4,000. The petitioner claimed a*1097 deduction in its return for 1923 of this amount as a tax paid to the State of Rhode Island, which was disallowed by the respondent.
In , we held that a "fee" paid to the State of Wisconsin on an increase of capital stock was deductible as a tax, and in the case of the , we also held that "fees" paid to the State of Illinois on account of increases of capital stock were deductible as taxes. In *1153 those cases we pointed out in some detail the distinction between a fee and a tax, which we think it is unnecessary to repeat here.
In support of his action, the respondent relies upon our decision in , in which we held that a so-called "bonus" exacted from corporations by the State of Pennsylvania for the privilege of increasing authorized capital stock was not a tax and did not constitute an allowable deduction in computing net income. That decision was based upon decisions of the courts of Pennsylvania and of the Federal courts sitting in that state, which specifically held that the Pennsylvania capital stock "bonus" *1098 was not a tax.
In connection with the present case, there has been called to our attention no decision of the courts of Rhode Island, or of the Federal courts, holding that the "fee" exacted from corporations by the State of Rhode Island on increase of capital stock is not a tax. On the contrary, as distinguished from the Pennsylvania "bonus", the Rhode Island "fee" appears in all material respects to be similar to the "fees" exacted by the States of Wisconsin and Illinois, which we have held are deductible as taxes.
Following our decisions in , and , we hold that the "fee" of $4,000 paid by the petitioner to the treasurer of the State of Rhode Island was a tax, and as such is deductible from gross income for the fiscal year 1923, under the provisions of section 234(a)(3) of the Revenue Act of 1921. Respondent's action on this issue is reversed.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
*. (John William Clark held 200 shares individually and 100 shares as trustee. He signed the contract in his individual capacity only, but on the same date, May 19, 1897, executed powers of attorney and surrendered to George A. Clark & Brother (Inc.) the certificates representing both the 200 shares held individually and the 100 shares held as trustee.) ↩