Findings of Fact 124 C. Cls. Same; property paid in for stock valued at fair market value of stock.-Under the applicable Treasury Regulations, where, as in the instant case, the basis of the property to the taxpayer is cost, and the property was paid for in stock, the property may be included in equity invested capital in an amount equal to the fair market value of such stock at the time of its issuance. Internal Revenue 903 Same; determination of fair market value.—In ascertaining the fair market value of the stock at the time of the transaction in question, there is taken into consideration the uncontradicted evidence as to the range of sales, which affords the best available criteria of the market price of the stock. Taking into consideration, further, the circumstances surrounding those sales, as shown by the evidence, it is concluded that the fair market value of the 50,000 shares of preferred stock issued in exchange for the property was $67.50 per share. In computing its equity invested capital, on this basis, the plaintiff was entitled to value the property at $3,375,000. Internal Revenue 1513 Same; estoppel.—Where for the purpose of taxable years 1917 through 1938 the taxpayer and the Commissioner of Internal Revenue agreed upon the value of the property for invested capital purposes, as well as for determination of allowable deductions for depletion and depreciation, as being $2,126,039.68, the cost to plaintiff's agent of acquiring the property, it is held that the plaintiff is not thereby estopped, in the instant case, to claim that the property was paid in for stock and that its value for equity invested capital purposes for 1941 was a higher value, namely the market value of the stock issued for the property. Internal Revenue 1433 The Reporter's statement of the case: Mr. William Waller and Mr. John P. Davis for the plaintiff. Waller, Davis & Lansden, were on the brief. Mrs. Elizabeth B. Davis, with whom was Mr. Acting Assistant Attorney General Ellis N. Slack, for the defendant. Mr. Andrew D. Sharpe was on the brief. Mr. George H. Foster, Trial Commissioner. This is a suit for refund of income and excess profits taxes for the years 1939, 1940, and 1941. All the questions in the case have been settled by agreement of the parties with one exception. The taxpayer contends that certain property was obtained by it in 1917 from William J. Cum 1 Findings of Fact mins, in exchange for its capital stock; that in computing its excess profits tax credit for 1941, it was entitled to include this property as part of its equity invested capital at a value equivalent to the fair market value of the stock issued to Cummins in the exchange; and that the fair market value of the stock at the time of the transaction was not less than $70 a share or a total of $3,500,000. It is defendant's position that the property must be treated as property paid in for cash because in fact it was acquired by Cummins as agent of the taxpayer for the cash sum of $2,126,039.68. Defendant also insists that inasmuch as for the purpose of other taxable years the taxpayer successfully persuaded the Commissioner of Internal Revenue (1) to regard the property as having been obtained for cash through Cummins as its agent, and (2) to value it at its total purchase price for invested capital purposes, the taxpayer is estopped in the present action to contend for equity invested capital purposes that the property was paid in for stock. In the event these arguments are rejected, defendant asserts that the evidence offered by the taxpayer is insufficient to establish the fair market value of the stock in 1917. The court having made the foregoing introductory statement, entered findings of fact as follows: 1. The taxpayer is a corporation organized July 20, 1917, under the laws of the State of Tennessee as the Bon Air Coal & Iron Corporation, which name was later changed to Tennessee Products Corporation. The taxpayer's principal office and place of business was at Nashville, Tennessee. During 1939, 1940, and 1941 plaintiff filed its Federal tax returns on a calendar-year basis and employed the accrual method of accounting. 2. By decree of the Chancery Court for Davidson County, Tennessee, in the cause of Union Bank & Trust Company, Trustee, et al., complainants, v. Bon Air Coal and Iron Company, et al., defendants, entered in Decree Minute Book 95, pages 355 et seq., there was confirmed on June 15, 1917, a sale at public auction to William J. Cummins of 174 tracts or parcels of land, with improvements thereon, lying in the State of Tennessee, together with certain personal Findings of Fact 124 C. Cls. property. The property had belonged to Bon Air Coal and Iron Company, which was in receivership. 3. Prior to the sale to Mr. Cummins, the clerk and master of the sale advertised the sale of the property, by sealed bids and outcry, in newspapers published in Nashville, Tennessee; Boston, Massachusetts; Chicago, Illinois; Philadelphia, Pennsylvania; Portland, Oregon; New York City; and San Francisco, California. At the sale, no bids at all were received on some of the parcels of the property, and the highest bids received on other parcels were from the creditors of the company in receivership. Thereafter, on May 25, 1917, Mr. Cummins submitted a sealed bid on all the properties as a whole, except the personal property, as a result of which the biddings on all the properties previously sold on April 2, 1917, were reopened. The properties, including the personal property, were then sold to Mr. Cummins, no other bids having been received which were higher than the bids of the creditors except as to parcel D, which was subject to the lien of the mortgage held by the New York Trust Company, Trustee, and which was bought by J. M. Overton, Trustee. The sale to Cummins was approved by the court on June 15, 1917. The property was purchased by said William J. Cummins for the lump sum of $1,476,039.68, to which court costs, payment of bond interest, satisfaction of liens and other costs incident to the sale were added, making the total price paid $2,126,039.68. Although Mr. Cummins was treated as a principal by the court in the purchase of the properties, he was acting as agent for others, principally John McE. Bowman of New York. 4. Following the organization of plaintiff corporation, and at the first meeting of the incorporators and board of directors on July 20, 1917, William J. Cummins proposed to said corporation that he assign, transfer and convey to it the aforesaid properties in consideration of the issuance by the corporation, and delivery to him or to his order, of the entire capital stock consisting of $7,500,000 par value preferred and $12,500,000 par value common, subject to an immediate assignment and transfer by Cummins to the treasurer or other designated depository of $2,500,000 of pre 1 Findings of Fact ferred and the same amount of the common stock. This offer was accepted. Pursuant to the offer, $2,500,000 of preferred and $2,500,000 of common stock were transferred to the treasurer of the corporation and held as treasury stock, and also pursuant to the direction of Cummins the remainder of the stock was issued to John McE. Bowman of New York, except 500 shares of common stock retained by Cummins. The incorporators and first board of directors were R. M. Dudley, A. W. Shryer, Houston Dudley, James W. McConnell and C. R. Cockle. 5. The preferred stock which was issued to John McE. Bowman was transferred according to the stock book of the corporation, as follows: 49,650 shares in the name of John McE. Bowman, Trustee; 150 shares in the name of Charles Cockle; 50 shares in the name of Albert W. Shryer; 100 shares in the name of Oliver J. Timothy; and 50 shares in the name of James W. McConnell. As of September 18, 1917, all of the stock originally issued to John McE. Bowman, Trustee, had been transferred. As of October 18, 1917, according to said stock book, 20,350 shares of such preferred stock had been transferred to William Wrigley, Jr., of Chicago, and as of December 7, 1917, 18,350 shares remained in the name of Mr. Wrigley. Mr. Wrigley had become a member of a syndicate with John McE. Bowman in connection with this stock and agreed to assume the liability of Mr. Bowman on the purchase money notes signed by William J. Cummins as principal and John McE. Bowman as surety, covering the purchase price of the properties at the receivership sale. Wrigley sold 1,000 shares of his preferred stock to J. H. Patrick (a close personal friend of Mr. Wrigley's, who lived in his household), on November 5, 1917, at $56.85 a share; and 1,000 shares to his son-in-law, J. R. Offield, on November 14, 1917, at the same price. Subsequently, on April 16, 1918, he transferred 225 shares to N. L. Buck, a vice president of William Wrigley, Jr. Company, at the same price, and 75 shares to James C. Cox, a vice president, at the same price. 6. There is the following evidence available of the fair market value of the stock of Bon Air Coal and Iron Corporation during the latter part of 1917. The preferred stock Findings of Fact 124 C. Cls. was offered for sale by Chicago brokers in August 1917 at a price of $80 per share, carrying with it a bonus of 25 percent in common stock, and the record establishes a number of sales to individuals on that basis. There were a few sales in the latter part of 1917 at a price which, if no part of the purchase price be attributed to the common stock, amounted to approximately $70 per share for the preferred. Each share of preferred, however, carried with it common stock on the basis of up to two shares of common for each share of preferred. In January 1918 there was a substantial sale to Jacob Ruppert which is shown by his account to have been on this basis: 5,000 shares of preferred_‒‒‒‒ 350 shares of common at $15 per share_-_. carrying a bonus of 5,650 shares of common $344, 750 350,000 If no part of the purchase price be attributed to the 6,000 shares of common stock involved, the preferred was sold at $70 per share; however, if all the common stock be valued at $15 per share, the cost of the preferred was $52 per share. 7. At the time of the determination of its tax liabilities for 1917, the taxpayer claimed that the properties possessed by it were purchased by Mr. Cummins on June 15, 1917, for and on behalf of John McE. Bowman; that while at the time of the purchase the corporation was contemplated, it was not organized because Mr. Bowman and his associates did not know whether they would be the successful bidders at the foreclosure sale, and that immediately after the purchase of the property, on June 16, 1917, the books of the corporation were opened although the charter was not granted by the State of Tennessee until July 20, 1917. Upon these representations, the Commissioner of Internal Revenue accepted the claim of the taxpayer that its taxable period was June 16, 1917, to December 31, 1917, instead of July 20, 1917, to December 31, 1917, and computed its income and invested capital for this period. As a result, no excess profits tax was determined to be due for this period since the excess profits credit computed on the invested capital prorated for the taxable period, plus the specific exemption allowed by the Revenue Act of 1917, exceeded the taxable income. |