Stollwerck Chocolate Co. v. Commissioner, Docket No. 6030.

Docket No. 6030. | B.T.A. | Jul 28, 1926

Lead Opinion

OPINION.

Trammell

: The taxpayer in its tax return claimed a deduction for exhaustion, wear and tear of its buildings, machinery, and furniture and fixtures in the sum of $97,079.03, which the Commissioner reduced to $62,722.30. There is no question between the parties as to the proper rate of depreciation or as to the depreciation to be allowed on assets purchased after taxpayer had taken over the business of Stollwerck Brothers, Inc. The sole question involved is the cost to the taxpayer of the depreciable assets acquired from Stoll-werck Brothers, Inc.

In 1917 the stock of Stollwerck Brothers, Inc., consisted of 6,000 shares preferred and 6,500 shares common of the par value of $100 each. Except for 335 shares, this stock was owned by enemy aliens and was taken over by the Alien Property Custodian. In the latter part of 1918 the stock owned by the Custodian was sold at public auction for $1,503,390, and the remaining 335 shares were acquired by the same interests for $55,610, a total purchase price of $1,559,000 for the equity of the stockholders in the company. Two months after the auction the purchasers caused the taxpayer to be organized and the assets, subject to the liabilities, to be transferred to it in exchange for $1,000,000 par value of preferred stock, $1,997,000 par value of common stock, and $300 cash. This stock was then offered to the public at $97.50 per share for the preferred and $92 per share for the common, and a substantial amount is shown by the testimony to have been sold at that price.

The parties are agreed, and there seems to be no reason to doubt, that in such circumstances as these the cost of the property is measured by the value of the stock issued therefor. The value of the stock is in turn measured by the market value of the assets acquired, including good will. The regulations of the Commissioner prescribe that, in such circumstances, the basis for depreciation is the fair market value of the property acquired for the stock and, in this appeal at least, we see no reason for questioning the correctness of that basis.

The Commissioner contends that the fair market value of the property transferred is to be measured bv the erice of stock of Stollwerck Brothers, Inc., sold at auction and private sale; namely, $1,559,000 for the assets in excess of liabilities. Taxpayer claims that the fair market value is established by opinion evidence and sales of the stock of taxpayer to the public. The opinion evidence was based upon estimated cost of reproduction less theoretical depreciation. The reproduction cost new of assets less an amount of depreciation based on an arbitrary formula does not necessarily establish the value of the assets. Appeal of Kinsman Transit Co., 1 B. T. A. 552; Appeal of Valley Steamship Co., 1 B. T. A. 1107; Appeal of Rockford Malleable Iron Works, 2 B. T. A. 817; Appeal of Tibby-Brawner Glass Co., 2 B. T. A. 918. Nor is the evidence of the price at which some of the stock of the taxpayer was sold to the public sufficient in our minds to establish the value either of the stock or assets acquired, in the absence of some showing as to the manner and volume in which sales were made. Appeal of Fruen Investment Co., 2 B. T. A. 542; Appeal of Automatic Transportation Co., 3 B. T. A. 505; Appeal of Kennedy Construction Co., 4 B. T. A. 276. The record indicates that most of the sales of the common stock, at least, were made in small blocks of from two to- twenty-five shares.

While sales at auction .are not always the best criterion of value, and certainly are not conclusive, we believe that in this instance the actual value of the whole property is more nearly established by the auction sale than by any other testimony before us. There were some twenty buyers present, seven or eight of whom made bids for the property. The Commissioner claims that he has determined the cost of the depreciable assets by an apportionment of the price at which the stock sold at auction. In making this apportionment he has given to these assets a value less than the depreciated cost as shown on the books of the predecessor corporation. In this respect we believe that error has been committed. While we accept the basis used by the Commissioner in determining the cost of all the assets, tangible and intangible, we are of the opinion that the apportionment should be changed. The business taken over by the taxpayer had been profitably operated for several years and the depreciation taken during the years of operation, in so far as the record goes, has not been questioned by the Commissioner. In such circumstances, there is no reason to believe that these assets had a less value than their depreciated cost to the predecessor. It is conceivable that they had a greater value, but the evidence is not sufficient to justify us in determining any greater amount. The deduction for depreciation should be recomputed upon the basis of the depreciated cost to the predecessor company, as set out in the findings, and the deficiency should be recomputed accordingly.

Order of redetermination will be entered on 10 days' notice, under Rule 50.