The opinion
MUNN HOTEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Munn Hotel Co. v. Commissioner
Docket No. 13819.
United States Board of Tax Appeals
14 B.T.A. 93 ; 1928 BTA LEXIS 3025 ;
November 12, 1928 , Promulgated
*3025 The fair market value of property paid in to the petitioner for its capital stock, determined.
Wilbur Bassett, Esq., and Bruce Boggs, C.P.A., for the petitioner.
Shelby S. Faulkner, Esq., for the respondent.
MARQUETTE
*93 This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $993.69. The petitioner alleges that the respondent erred: (1) In reducing its invested capital for 1921 by the amount of income and profits taxes paid in that year for the year 1920 prorated to the due dates thereof; *94 (2) in reducing invested capital for 1921 by the entire amount of dividends paid in that year, and (3) by failing to include in invested capital the value of certain property paid in for stock in excess of the par value thereof.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of California in the year 1916, and it is and has been since that time engaged in owning and operating a hotel in Los Angeles.
Upon the organization of the petitioner in 1916, Arthur T. Munn, and his sister, Maude L. Baldwin, conveyed to it a certain tract of land and *3026 a frame hotel building thereon, known as 438 South Olive Street, Los Angeles, and received in exchange all of the petitioner's capital stock, which was of the par value of $20,000. The property so conveyed had been acquired by the father of Arthur T. Munn and Maude L. Baldwin about the year 1903, the land having been purchased by him for $12,000 and the building constructed at a cost of $25,000 to $28,000. The actual cash value of the property when it was conveyed to the petitioner was $100,000, of which $75,000 was the value of the land and $25,000 the value of the building.
On June 5, 1916, the petitioner's board of directors adopted the following resolution:
RESOLVED, that until further notice by the Board of Directors, the net profits of the corporation be distributed on the first of each month, as a dividend to the stockholders as their respective interests may appear.
Pursuant to that resolution dividends were paid by the petitioner in the year 1921, as follows: January 4 $500
January 19 300
January 25 200
February 7 300
March 16 1,500
April 19 800
May 4 $1,000
Sept 1,000
Oct. 4 800
Dec. 6 1,000
Total 7,400
In the year 1921 the *3027 petitioner paid income and profits taxes assessed against it for the year 1920 in the amount of $1,186.44. Its net income for 1921 was $7,861.35.
The respondent, upon audit of the petitioner's income and profits-tax return for the year 1921, determined that the petitioner's invested capital as of January 1, 1921, was $21,333.46, consisting of capital stock in the amount of $20,000, and earned surplus of $1,333.46, and in computing invested capital for 1921 he reduced the invested capital as of January 1 by $501.39 on account of income and profits taxes for 1920, prorated to their due dates, and by the amount of $6,711.61 on *95 account of dividends paid in 1921, and determined that the petitioner's invested capital for that year was $14,120.46 and that there is a deficiency in tax in the amount of $993.69.
OPINION.
MARQUETTE: The pleadings in this proceeding raise three issues which will be discussed and disposed of in the order in which they are stated above. The first is whether the respondent erred in reducing the petitioner's invested capital for the year 1921 on account of 1920 income and profits taxes, prorated to the dates they were due and payable. On this *3028 issue our decision must be in favor of the respondent. Section 1207, Revenue Act of 1926; .
Relative to the second issue, the evidence shows that on January 1, 1921, the petitioner had earned surplus of $1,333.46, that its net earnings for 1921 were $7,861.35, and that it paid dividends during that year in the amount of $7,400, of which $1,300 were paid during the first 60 days of the year. Section 201(f) of the Revenue Act of 1921, which is applicable here, provides:
(f) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably *3029 during such period.
The record clearly discloses that the petitioner had at the time the first four dividends were paid in January and February, 1921, earnings accumulated during the preceding taxable year sufficient for that purpose. It therefore follows that those dividends must be deemed to have been paid from such accumulated earnings of prior years, even though there were current earnings available, and that invested capital for 1921 should be accordingly reduced. As to the dividends paid in the months of March to December, inclusive, the record shows that they were in an amount less than the petitioner's net earnings or profits for 1921. But no evidence was presented to show the amount of such earnings or profit at any given date, and we must therefore assume that they were accumulated ratably over the year, and the dividends will be deemed to have been paid therefrom to the extent of the accumulations, thus assumed, at the several dividend dates.
The only other issue is as to the value of the land and building that were conveyed to the petitioner in exchange for its capital stock. *96 We find that value to be $100,000, of which $75,000 should be allocated to *3030 the land and $25,000 to the building. These values are clearly established by the testimony of witnesses who are familiar with this property and with other property in the vicinity and are qualified to judge of the values thereof. We hold that the petitioner is entitled to include the property in question in its invested capital for 1921 at the amount of $100,000 with proper adjustments for depreciation of the buildings.
Judgment will be entered under Rule 50.