Ralston Steel Car Co. v. Commissioner of Internal Rev.

• Decision Date: 30 December 1931
• Docket Number: No. 5747,5748.,5747
• Citation: 53 F.2d 948
• Parties: RALSTON STEEL CAR CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

53 F.2d 948 (1931)

RALSTON STEEL CAR CO. v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 5747, 5748.

Circuit Court of Appeals, Sixth Circuit.

November 3, 1931.

Petitions for Rehearing Denied December 30, 1931.

Edw. C. Turner, of Columbus, Ohio (Albert M. Calland, of Columbus, Ohio, on the brief), for petitioner.

M. K. Rothschild, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and A. G. Divet, both of Washington, D. C., on the brief), for respondent.

Before HICKS and HICKENLOOPER, Circuit Judges, and SIMONS, District Judge.

HICKENLOOPER, Circuit Judge.

In computing the amount of the "invested capital" of a corporation, to be used in assessing federal excess profits taxes, the definition contained in the pertinent act is controlling. Two general factors must be taken into consideration: (1) The amount (in money or money's worth) actually paid in for capital stock and as surplus; and (2) the amount of earned surplus and undivided profits used or employed in the business. Borrowed money, although used in the business, may not be included; nor is the amount of the surplus to be affected by an increment in the value of fixed assets after the same were acquired. La Belle Iron Works v. U. S., 256 U. S. 377, 41 S. Ct. 528, 65 L. Ed. 998. Subject also to the other limitations therein provided, tangible or intangible property paid in for capital stock is to be taken at its money value at the time of payment. Neither the value of such property during a later tax year, nor the March 1, 1913, value, is of importance in fixing the initial amount of capital and paid-in surplus, that is, the "invested capital" with which the company started business.

If the "invested capital" becomes impaired by the operation of the business, the amount thereof to be used in computing excess profits taxes nevertheless remains the same as before such impairment. The amount paid in for capital stock or as surplus thus forms a minimum, and is not affected by subsequent operating losses. Compare Willcuts, Collector v. Milton Dairy Co., 275 U. S. 215, 48 S. Ct. 71, 72 L. Ed. 247. Conversely, where there is no impairment, but the conduct of the business has resulted in an earned surplus or undivided profits, and these earnings are left with the company to be employed in its business, the amount thereof is to be added to the paid-in capital and surplus and the sum will represent the "invested capital" for taxation purposes. In such case the true amount of earned surplus and undivided profits can be determined only by annually depreciating consumable, wasting, or depreciable assets. Such depreciation is essentially an item of expense and must be taken into consideration to the end that the books of the company may accurately reflect its true financial condition. So, also, it is wholly immaterial whether the company has or has not made deductions from income for such depreciation during prior years. Regulations 45, art. 838, has been held correctly to interpret section 326 (a) (3) of the Revenue Act of 1918 (40 Stat. 1092), and such regulation is here controlling. Willcuts v. Milton Dairy Co., supra. Compare United States v. Ludey, 274 U. S. 295, 47 S. Ct. 608, 71 L. Ed. 1054.

It follows from what has already been stated that the Commissioner and the Board of Tax Appeals were right in requiring the patents, which were transferred to the petitioner at the time of organization in payment for common capital stock, to be depreciated in value in computing that portion of "invested capital" which was attributable to earned surplus. Patents are essentially wasting assets, and in the absence of evidence to the contrary it must be assumed that the depreciation is to be evenly distributed over the life of the patent. In the present case the Board of Tax Appeals found that the group of patents here involved had a reasonable value of $600,000 (the par value of the amount of capital stock issued in exchange therefor) as of the time of the organization of the petitioner...