Manufacturers Paper Co. v. Commissioner of Int. Rev.

• Decision Date: 05 April 1937
• Docket Number: No. 212.,212.
• Citation: 89 F.2d 684
• Parties: MANUFACTURERS PAPER CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

89 F.2d 684 (1937)

MANUFACTURERS PAPER CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 212.

Circuit Court of Appeals, Second Circuit.

April 5, 1937.

John G. Turnbull, of New York City, for petitioner.

Robert H. Jackson, Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

In 1924 the taxpayer sold stock of Shawmut Manufacturing Company, 1,900 shares of which were acquired prior to March 1, 1913. The Board found the value of these shares on that date to have been $256,309. This was very much less than the value asserted by the taxpayer, and resulted in a largely increased profit and a tax deficiency of $65,903.12. Upon this appeal the only question is whether there is substantial evidence to support the Board's valuation.

The Shawmut Manufacturing Company (for brevity hereafter called Shawmut) was a Maine corporation organized in 1904 with a capital stock of 2,000 shares of a par value of $100 each. In 1905 the taxpayer, a New York corporation, acquired 1,900 shares of Shawmut at a cost of $190,000. In May, 1913, Shawmut increased its capital stock to $500,000, and offered the additional 3,000 shares to its stockholders at par. The taxpayer purchased 2,750 shares at $275,000. In August, 1924, the outstanding 5,000 shares of Shawmut stock were sold to Central Maine Power Company at a price which gave the taxpayer $1,119,500.62 for its 4,650 shares. In its return for 1924 it reported a profit of some $61,000, which the Commissioner surcharged by nearly $600,000. The taxpayer appealed to the Board. Before the Board it was agreed that $275,000 was the proper basis for the 2,750 shares acquired in May, 1913, so that the sole issue remaining for decision was the fair market value of the 1,900 shares owned by the taxpayer on March 1, 1913.

The stock was not listed on any stock exchange. Shawmut's operations had not been profitable, and in 1912 it decided to discontinue its wood pulp and lumber business and to engage in generating hydro-electric power. By March 1, 1913, it had erected a dam of reinforced concrete construction, 1,100 feet long and 20 feet high, which could be raised four feet more by flashboards, had built a power house large enough to accommodate six power units, of which three had been installed, each capable of developing 1,200 horse power, and had contracted for the sale of 2,000 horse power per year at $55,000, which was less than a fair price. More than $566,000 was spent on the dam, power house, and flowage rights prior to March 1, 1913, and some $505,000 of this sum was obtained by loans from the taxpayer. On the critical date Shawmut also owned timberlands, a pulp mill, and appurtenances which were carried on its books at about $472,000. The water power interests and timberland interests of Shawmut were segregated in the early months of 1913 by the formation of a company to which the timberlands were transferred in exchange for $450,000 of its stock. The date is not entirely clear, but as these assets appeared on the March 1st balance sheet and did not appear on the balance sheet of May 1st, it must have occurred between these dates. Shawmut distributed $200,000 of these shares to its stockholders as a dividend, and sold the remaining shares at par, $250,000, to the taxpayer, apparently taking in payment credit upon its debts to the latter. "In the late spring of 1913" Shawmut...