Hotel Wisconsin Realty Co. v. Commissioner of Internal Revenue, Docket No. 11755
| Decision Date | 02 May 1929 |
| Docket Number | 22221.,22220,Docket No. 11755 |
| Citation | 16 BTA 334 |
| Parties | HOTEL WISCONSIN REALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frank Hormuth, Esq., for the petitioner.
Brice Toole, Esq., for the respondent.
Respondent has determined deficiencies in petitioner's income and profits taxes in the amounts of $2,406.02 for the year 1918; $37,033 for 1919; $23,417.44 for 1920, and $6,146.53 for 1921, and petitioner's three appeals from said determinations have been consolidated for the purposes of a hearing and decision by this Board.
In its three petitions as amended at the hearing, the petitioner assigns the following errors by respondent:
(1) The assertion of any deficiencies for the years 1919, 1920, and 1921, it being alleged that the statute of limitations has run and no further assessments may be legally made.
(2) The increase of income due to the disallowance of deductions for (a) sufficient depreciation in 1918, 1919, 1920, and 1921 on the value of petitioner's leasehold; (b) loss sustained in 1918, 1919, and 1920 due to liquor and license rights and privileges and good will becoming worthless and obsolete; and (c) loss sustained in 1919 due to liquor on hand for sale becoming worthless
(3) The reduction of petitioner's invested capital by not including therein for the years 1919, 1920, and 1921, alleged paid-in surplus created by (a) the value of the leasehold in excess of the capital stock issued therefor; (b) the cash value of hotel equipment in excess of the consideration paid therefor; (c) the value of liquor license rights and privileges and good will in excess of capital stock issued therefor; and the further adjustments made, (d) in reducing invested capital for 1919, 1920, and 1921 by prorated Federal income taxes; and (e) in reducing invested capital for 1921 by applying a tentative tax to current earnings available for dividend payments in that year.
(4) The computation of petitioner's tax for the year 1919 under the provisions of section 328 of the Revenue Act of 1918, it being alleged that the tax computed under sections 230 (a) (2) and 301 (b) of said Act would be a lesser amount had the foregoing errors assigned as to the year 1919, not been committed by respondent in his computation under said latter sections.
FINDINGS OF FACT.
Petitioner is a Wisconsin corporation with its principal office at 172-180 Third Street, Milwaukee.
For the taxable years 1919, 1920, and 1921, petitioner filed its returns on March 15, 1920, March 16, 1921, and May 23, 1922, respectively. As to any taxes due for the year 1919 a waiver was duly executed on January 24, 1925, extending the time for making any assessment until December 31, 1925. On December 10, 1925, respondent mailed to petitioner the required deficiency notice of his final determination as to petitioner's tax liability for the year 1919 and on February 8, 1926, petitioner filed its appeal therefrom, which appeal was docketed as No. 11755. As to any taxes due for the years 1920 and 1921, separate waivers for each of those years were duly executed on December 18, 1925, extending the time for making any assessment until December 31, 1926. On November 3, 1926, respondent mailed to petitioner the required deficiency notice of his final determination as to petitioner's tax liability for the years 1920 and 1921, and on December 30, 1926, petitioner filed its appeal therefrom, which appeal was docketed as No. 22221. All three of the said waivers were duly executed upon the usual accepted form "Income and Profits Tax Waiver" and filed with the respondent.
On or about August 1, 1912, the Hotel Wisconsin Co. acquired a lease for a term of 99 years for certain property including a 100-foot frontage on Third Street and a depth of 150 feet. The property was bounded on the north and east by an alley, so that it had good light protection, and it was 90 feet from the corner of Third Street and Grand Avenue, which was the main business corner of and the most valuable property in Milwaukee in 1914. The property was an exceptionally desirable site for a hotel. The Hotel Wisconsin Co. erected on that site the Hotel Wisconsin, but upon completion of the building in the latter part of 1913 there remained unpaid claims, totaling $350,792, of about 43 contractors and others, who at that time secured liens against the property. The Hotel Wisconsin Co. had assets consisting of the hotel building, valued at $1,152,000, and the long-term lease on the ground upon which the hotel had been erected. There were outstanding first and second mortgage bonds totaling $800,000. The said 43 contractors and other creditors took over the said assets subject to the said liabilities and then held many meetings to determine what course they should pursue and also the value of the lease. After having appraisals made and investigating property values, they determined upon a cash value of $120,000 in February, 1914, for the ground lease. They also knew that the liquor license granted by the City of Milwaukee, permitting the operation of a bar in the hotel, would be a factor in bringing guests to the hotel. The contractors agreed to organize a new corporation which would take over all the assets and liabilities of the Hotel Wisconsin Co. and which would issue its capital stock to the said contractors.
The Hotel Wisconsin Realty Co., the petitioner herein, was organized and incorporated by the said contractors in or about February, 1914, with an authorized capital stock of 4,000 shares of the par value of $100 each. The said assets, that is, the Hotel Wisconsin and the leasehold, were paid in by the said contractors to petitioner, which issued $351,200 par value of its capital stock to the said contractors in proportion to their respective claims, plus small amounts of cash totaling $408. Petitioner retained $48,800 par value of stock as treasury stock. Petitioner assumed the liabilities of the Hotel Wisconsin Co., and on February 17, 1914, the opening entry on petitioner's books was as follows:
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| Assets | Liabilities
----------------------------------------------------------|---------------|--------------
Hotel Wisconsin building ________________________________ | $1,152,000 | _____________
Ground lease ____________________________________________ | 120,000 | _____________
First-mortgage bonds ____________________________________ | _____________ | $500,000
Second-mortgage bonds ___________________________________ | _____________ | 300,000
Accounts payable ________________________________________ | _____________ | 350,792
Proprietary equity ______________________________________ | _____________ | 121,208
| _____________ | _____________
| 1,272,000 | 1,272,000
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In February, 1914, the long-term lease for the ground upon which the Hotel Wisconsin had been erected and which was paid in to petitioner for stock, had an actual cash value of $120,000. The respondent has allowed a value of only $25,000 for the said leasehold for the purposes of invested capital and depreciation.
Prior to February, 1914, the Hotel Wisconsin had been operating for a period of about 4 months and a bar had been operated in the hotel under a license obtained from the City of Milwaukee. That license had a considerable value, due to the location of the hotel bar in the center of the business district and, also, because there was a limited number of licenses granted by the city. Such licenses were issued yearly, but it was customary to renew them as a matter of course in instances where the bars were operated properly and orderly. Petitioner acquired a license to operate the bar in the Hotel Wisconsin and during the years 1915 to 1918, inclusive, its average yearly net income amounted to $32,000 from that source. The bar not only produced good profits from the sale of liquor, but it also brought a great many guests to the hotel. Respondent has excluded from petitioner's invested capital any value for the liquor license and privileges and good will, and has disallowed any deduction on account of said intangibles becoming worthless due to prohibition.
On July 1, 1919, petitioner had on hand a quantity of liquor which had been purchased, at a cost of $12,093.85, for the purpose of resale in the bar. The War Prohibition Act prohibited the sale by petitioner of its liquor for beverage purposes after June 30, 1919. Petitioner's directors were afraid to keep the liquor on the hotel premises and immediately disposed of all of it by giving it to any individuals who would carry it off the hotel premises. Petitioner received no cash consideration in return for its liquor thus disposed of. Respondent disallowed the claimed deduction in the amount of $12,093.85 as a loss sustained upon the said disposition of the liquor purchased for sale in petitioner's bar.
From the time the Hotel Wisconsin opened its doors to the public until the latter part of 1914, it was operated by the Hotel Wisconsin Operating Co., which became bankrupt at the latter date. The said operating company had purchased the entire hotel equipment on the installment basis. At the bankruptcy sale petitioner purchased the...
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