Holeproof Hosiery Co. v. Commissioner of Internal Revenue
| Decision Date | 13 April 1928 |
| Docket Number | Docket No. 7535. |
| Citation | 11 BTA 547 |
| Parties | HOLEPROOF HOSIERY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
W. L. Harrison, C. P. A., and J. B. Grice, C. P. A., for the petitioner.
T. M. Wilkins, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921, in the amount of $15,699.24. The petitioner contends that the Commissioner erred (1) in disallowing a deduction of $1,000 as a loss on stock in a steamship company held by it as an investment; (2) in disallowing a deduction of $2,660, $900 of which represented legal expenses, and $1,760 of which represented an amount paid to the State of Wisconsin, on an increase in its authorized capital stock; (c) in disallowing a deduction of $13,060, representing rent paid for the use of machinery leased by the petitioner; and (d) in denying the right of the petitioner to reduce its closing inventory for 1921, in the amount of $12,924.78.
FINDINGS OF FACT.
The petitioner is a Wisconsin corporation with its principal office at Milwaukee. Its books were kept on an accrual basis.
In 1919, the petitioner purchased 10 shares of stock in the Milwaukee, Chicago & Michigan City Line for $1,000, as an investment. This line operated boats. In May, 1921, the petitioner received the information from some undisclosed source that the Milwaukee, Chicago & Michigan City Line had current liabilities of $113,000 and a possible additional liability of $30,000 or $40,000 for claims for shortages and missing freight, and that the only assets owned by the company consisted of two old steamboats and an old hull which were not in proper condition for operation. Thereafter the petitioner regarded the stock as worthless and charged it off its books. It never received anything from the stock after this charge-off.
The petitioner was organized in 1904. Its stock has always been held by the Freschl family and L. Heilbronner. From time to time the amount of capital stock outstanding has been increased by stock dividends and by applying the proceeds of cash dividends to stock purchases. No outside capital was ever brought in. In 1910 the capital stock was increased to $500,000. In 1917 it was increased to $1,000,000. In 1920 it was increased to $2,000,000 and in December, 1921, an application was made to the proper officer of the State of Wisconsin for authority to increase the capital stock to $3,750,000. The request was granted. All expenses incident to the various increases in the capital stock were charged to expense. In 1921 the following expenditures were incurred, paid and charged to expense in connection with the increase in the amount of its authorized capital stock:
Attorneys' fees ____________________________________________________ $900
State fee for filing an amendment to charter _______________________ 10
State fee of $1 per thousand for increase in authorized capital ____ 1,750
_____
Total ________________________________________________________ 2,660
The petitioner claimed this amount as a deduction on its income-tax return. The Commissioner disallowed it.
In December, 1921, there was in force in the State of Wisconsin, a statute which included chapter 86, entitled "Organization, Powers and Dissolution of Corporations." Section 1772 under this chapter, entitled "Articles to contain what; fees." provided in paragraph (9):
(a) * * * Fees for filings are required to be paid to the secretary of state as follows:
(c) By every other corporation, except as is otherwise provided in these statutes, twenty-five dollars for the articles and ten dollars for each subsequent amendment thereof, together with a further fee of one dollar for each one thousand dollars of its authorized capital stock in excess of twenty-five thousand dollars.
The Secretary of State of the State of Wisconsin made a biennial report of the State Department covering the fiscal years ended June 30, 1921, and June 30, 1922, in compliance with the statutes describing his duties. This report showed the condition of all state funds, together with detailed statements of receipts and disbursements for the period.
For the fiscal year ended June 30, 1922, the report showed in regard to the general fund, which fund embraced all state revenues applicable to the payment of ordinary governmental expenses, total book receipts of $33,626,072.77, including receipts from the Department of State in the amount of $4,313,233.45, and total book disbursements in the amount of $30,758,898.25, which included disbursements in the State Department of $233,653.20. The receipts of the State Department included motor vehicle license fees in the total amount of $4,088,570, and the following:
Domestic corporations _________________ $79,000.75
Foreign corporations __________________ 28,658.50
Miscellaneous corporation fees ________ 36,428.30
Amendments ____________________________ 72,275.75
Notaries Public _______________________ 6,198.00
Miscellaneous _________________________ 1,802.15
E. R. Mihills, refund of salary _______ 300.00
__________
Total ___________________________ 224,663.45
The disbursements in the State Department from the general fund in the amount of $233,653.20 were itemized in the report and were then recapitulated as follows:
Disbursements by appropriations
General administration ____________________________ $51,921.58
Automobile registration (including refunds) _______ 181,731.62
__________
233,653.20
The biennial report of the Treasurer of the State of Wisconsin for the fiscal years ending June 30, 1921, and June 30, 1922, shows total book receipts of $51,957,421.07 and total book disbursements of $48,455,361.27 for the year ending June 30, 1922. For this year the total book receipts included $33,626,072.77 from the general fund and the total book disbursements included $30,758,898.25 from the general fund. The report stated that the general fund embraced all the revenues of the State applicable to the payment of the ordinary expenses of the state government and included in the receipts of this fund $11,530,666.75 as departmental receipts, made up of the following from the State Department:
Fees and income ______________________________ $224,363.20
Motor vehicles _______________________________ 4,088,570.25
Legislature __________________________________ 158.00
The report showed that general fund disbursements included those of the State Department, which amounted to $233,653.20, itemized as follows:
Salaries _____________________________________ $88,630.46
Traveling and field expense __________________ 5,852.82
Stationery and office supplies _______________ 1,238.89
Postage ______________________________________ 30,679.70
Telephone and telegraph ______________________ 286.67
Express, freight and drayage _________________ 363.84
Printing and binding _________________________ 36,933.27
Publishing delinquent corporations ___________ 224.70
Auto plates __________________________________ 60,899.75
Miscellaneous ________________________________ 8,543.10
Refund _______________________________________ __________
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233,653.20
On July 27, 1921, the petitioner, as lessee, entered into four lease agreements with the Textile Machine Works of Wyomissing, Pa., as lessor, each of which provided in part as follows:
That the lessor doth hereby lease and hire unto the Lessee certain machines and property manufactured and owned by the Lessor and described as follows:
3 — Standard 18 Section 39 Gauge Full-fashioned Leggers (here follows
a description of the machine)
Price per machine complete, as specified above __________________ $6,600.00
1 — Standard 20 Section 39 Gauge Full-fashioned Footers (here follows
a description of the machine)
Price per machine complete, as specified above ___________________ 6,850.00
In consideration of the execution of this agreement by the Holeproof Hosiery Company, the Textile Machine Works, guarantees that the machinery to be delivered by them hereunder will be new, well designed and well made of proper materials and properly erected by them for its purpose, namely, the knitting of Full-fashioned Hosiery, and that any imperfections on account of wrongful materials or imperfect workmanship or adjustments becoming manifest during the term of the lease herein contemplated, shall be promptly rectified by the Textile Machine Works, without loss or expense to the Holeproof Hosiery Company each machine being valued as specified above, and all of them being valued at Twenty-six Thousand Six Hundred Fifty ($26,650.00) Dollars, with the privilege of using the same at Hole Proof Hosiery Co., 4th & Fowler Street, Milwaukee, Wis., or at any other place or places to which, with the written consent of the said Lessor, said machines and property may be removed by the Lessee, for the term of Thirty Months, from the date hereof, at a rental of Two Hundred ($200.00) Dollars, per machine per month plus any sums that may be paid by the Lessor as premium for the insurance of said demised property against loss by fire; said rental to be payable as follows, viz: the sum of Two Hundred ($200.00) Dollars, per machine in cash upon delivery of each machine and the balance of said rentals (exclusive of the insurance premiums and taxes, charges and assessments hereinafter mentioned) in monthly instalments as follows, viz:...
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