Henry Prentiss & Co. v. United States

• Decision Date: 11 April 1932
• Docket Number: No. 318.,318.
• Parties: HENRY PRENTISS & CO., Inc., v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

57 F.2d 676 (1932)

HENRY PRENTISS & CO., Inc., v. UNITED STATES.

No. 318.

Circuit Court of Appeals, Second Circuit.

April 11, 1932.

Jeffery & Redmond, of New York City (Joseph F. Murray and William P. Jeffery, both of New York City, of counsel), for plaintiff.

George Z. Medalie, U. S. Atty., and Leon E. Spencer, Asst. U. S. Atty., both of New York City.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

MANTON, Circuit Judge.

Plaintiff in this action seeks recovery for taxes overpaid in 1918 and 1920. It paid income and profits taxes for 1918 on a return to be due in the sum of $535,144.20. An additional assessment was paid in the amount of $119,191.19. For 1920, its income and excess profits were computed on a return to be due in the sum of $92,265.40. Plaintiff's contention is that the 1918 and 1920 taxes have been overpaid in the respective sums of $12,102.95 and $7,975.21, as a result of the Commissioner's failure to allow in each year a sufficient sum for invested capital. It is argued that the plaintiff should have been allowed in each year an increase of invested capital of $153,871.08. Of this sum, $46,371.08 represented an additional value for real estate, and $107,500 a value for intangibles, such as good will. Below, the plaintiff was denied any amount for the calendar year 1918 because of the insufficiency of the claim for refund filed for that period. For 1920, the court granted a recovery in the sum of $7,975.21. By stipulation the real estate is valued at $81,000 as of September 1, 1916. The defendant urges that the allowance for intangibles is not justified as a matter of law.

The plaintiff was organized in August, 1916, with an authorized capital stock of $10,000, which was issued to the Prentiss Tool & Supply Company, its predecessor in title. On the day after this stock was issued, it was increased from $10,000 to $500,000 par value and the 4,900 new shares were issued to the original stockholders. Thereupon, all the property was transferred to the plaintiff. The stock, pursuant to a resolution therefor, was distributed pro rata to the stockholders of the old company and the property passed from the old company to the plaintiff so that the stockholders had the same interest as before. The closing balance sheet of the old company and the opening one of the new showed the same assets and identical items of capital and liability, except that the capital stock of the Prentiss Tool & Supply Company was $25,000 and the surplus $913,894.35; whereas the plaintiff's stock was shown as $500,000 and the surplus as $438,894.35. Neither balance sheet included any value for good will and no such item was carried on the books of either company. The capital and surplus immediately before and after this transaction was the same total sum.

Section 326 (a) of the Revenue Act of 1918 (40 Stat. 1092), provides, in the calculation of taxes, that in determining invested capital for any calendar year the taxpayer is entitled to include as such any amount representing a value for intangibles or good will if it represents, (a) an actual cash sum, paid in for stocks or shares; (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25% of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest. And section 327 (40 Stat. 1093) provides for the determination where the Commissioner is unable to determine invested capital as provided in section 326. But section 327 requires a specific allocation as to shares issued for tangible and intangible property. From the balance sheet and this record, it is very evident that no shares were issued by the Prentiss Tool & Supply Company or this taxpayer for intangible property. For taxation purposes, there may be no "write-up" to increase invested capital. Here the plaintiff issued all its capital stock in the sum of $500,000 to the old company in exchange for its assets. The resolution of the old company provided that the stock be acquired from the plaintiff and distributed pro rata among its stock-holders. There was no item for good will. The plaintiff received in exchange for its capital stock all the business property previously owned by the Prentiss Tool & Supply Company, but the capital stock was issued for the assets as they were then fixed and valued, as the financial statement indicated. While it is true that the plaintiff is a separate corporate entity and may have acquired the property of its predecessor at a value corresponding to the property's true value, it is also a fact that the Prentiss Tool & Supply Company in the resolution of its board of directors, August 25, 1916, wherein the transfers were provided for, offered to accept $490,000 par value of the stock in lieu of cash. At this time, apparently, there was no intention to write up an increased invested capital. The value was fixed by the financial statement and there no value was allocated to good will. We must conclude that the plaintiff issued capital stock for the property as it then stood. The good will followed the property and was no part of the consideration for which the stock was issued...