Petition by the Consolidated Coke Company, by C. O. Thomas, receiver of the Bank of Pittsburgh, National Association, which was appointed as receiver of the Consolidated Coke Company, to review an order of the Board of Tax Appeals on appeal from the Commissioner of Internal Revenue.
Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
This case involves deficiency assessments in income and profits taxes of the petitioner, the Consolidated Coke Company, in the sums of $256,138.30 for the year 1917, and $13,704.46 for the year 1918. The Board of Tax Appeals refused to disturb the determination of the Commissioner of Internal Revenue. 25 B.T.A. 345. The petitioner brought this petition to review the Board's order of redetermination.
In August, 1914, the Connellsville Coke Company, a corporation of the commonwealth of Pennsylvania, required money to finance its operations. The company carried on its books assets in the amount of $3,711,775.64 and liabilities in the amount of $2,011,938.70, which were secured by a mortgage on the properties of the company; a second mortgage in the amount of $280,000 and promissory notes that had a face value of between $500,000 and $600,000. Its majority stockholders were the indorsers of more than $500,000 of these notes.
There had been several unsuccessful attempts to refinance the company by assessing its stockholders and selling to them bonds secured by a second mortgage. Whereupon, I. W. Semans, George Whyel, and Harry Whyel, three of the stockholders who had indorsed a large part of the notes, proposed that the company give them the right to purchase its property. They obtained a thirty-day option which provided that they might purchase the property, subject to incumbrances, for a price equal to the total indebtedness of the company. If the option was exercised, the purchasers were required to discharge the company's indebtedness within ninety days and thereupon the company would convey its property.
George Whyel, the president and a director of the Connellsville Company at the time the option was executed, informed the other directors and stockholders of the Connellsville Company that it was the intention of the purchasers to organize a new corporation, assign the option to it, and to permit the stockholders of the Connellsville Company to subscribe to its stock in proportion to their holdings in the old company.
Accordingly, the Consolidated Coke Company, the petitioner, was organized with a capital of $5,000 divided into 50 shares of stock, each of a par value of $100. On September 24, 1914, Semans and the Whyels accepted the offer in the option to purchase the Connellsville Company's property and assigned their rights under the contract to the Consolidated Coke Company.
The petitioner increased its capital stock to $100,000, divided into 1,000 shares of $100 each, but no new certificates were issued until June 1, 1915. The 50 shares originally issued for the purpose of incorporation were assigned to Semans and the Whyels on October 28, 1914.
On October 12, 1914, the directors of the petitioner passed a resolution to issue bonds in the amount of $600,000 to be secured by a mortgage on the property to be acquired from the Connellsville Company in order that the petitioner might be properly financed. This plan was not carried out.
The Connellsville Company conveyed all of its property and assets to the petitioner on December 19, 1914. At that time the petitioner had not discharged the indebtedness of the Connellsville Company as the contract required, but it assumed liability for them. The petitioner entered the assets so conveyed on its books at a value of $2,011,938.70, an amount equal to the liabilities of the Connellsville Company. This valuation of the assets was arbitrary and was not based on an appraisal. The petitioner did not adjust its books to reflect the value of the assets as they were carried on the books of the Connellsville Company until October 31, 1917.
George Whyel, Harry Whyel, and Semans, who owned 942, 755, and 1,271 shares, respectively, of the Connellsville Company subscribed for 166 1/2, 153, and 2 shares, respectively, of the petitioner. They made energetic efforts to induce the other stockholders of the Connellsville Company to subscribe, in proportion to their ownership, to the shares of the petitioner. Of the fortyseven stockholders of the Connellsville Company, twenty-two, who owned approximately 31 per centum of the stock, declined to subscribe for the petitioner's stock; seven, who owned approximately 34 per centum, subscribed for approximately 10 per centum, fifteen, who owned 34 per centum, subscribed for approximately 89 per centum, and three, who owned less than 1 per centum, subscribed for their proportionate share of the petitioner's stock. The Board found that the stockholders who did not subscribe to the shares in the petitioner were indifferent to their opportunity and made no objection to others acquiring them, but substantially all of the stock of the petitioner was subscribed to by stockholders in the Connellsville Company. The money paid in for the stock was used by the petitioner for working capital.
The Commissioner of Internal Revenue determined that the property acquired by the petitioner from the Connellsville Company should be included in the petitioner's invested capital on the basis of its cost of $2,011,938.70 to the petitioner and the excess value of $2,137,475.83, as stipulated by the parties, over the cost to the petitioner was not property "paid in for stock" by the stockholders of the petitioner, under section 207 of the Revenue Act of 1917 (40 Stat. 306) and section 326 of the Revenue Act of 1918 (40 Stat. 1092). The Board of Tax Appeals sustained the determination of the Commissioner and found that the petitioner acquired the assets of the Connellsville Company by purchase and held that in such a case, the cost of the property is the measure of the investment. La Belle Iron Works v. United States, 256 U.S. 377, 41 S. Ct. 528, 530, 65 L. Ed. 998.
Section 207 (a) of the Revenue Act of 1917 and section 326 (a) of the Act of 1918 provide substantially, that the "invested capital" of a corporation means "(1) Actual cash bona fide paid in for stock or shares"; (2) the actual cash value of tangible property other than cash, paid in for stock, in excess of the par value of the stock issued therefor, the excess being treated as paid-in surplus; "(3) paid in or earned surplus and ...