[955] OPINION.
Littleton:
Two questions are presented by this appeal, namely: (1) Is the taxpayer entitled to deduct from gross income for the year 1918 the interest paid by it in that year for the year 1917; and (2) is it entitled to a paid-in surplus on account of the assets purchased by it from the McIntosh & Seymour Co. ?■
With reference to the first question the evidence shows that during the year 1917 the taxpayer was indebted to its principal stockholder for money borrowed from him on which it was obligated to pay interest. During that year it did not accrue on its books of account the interest due and payable on the money so borrowed, although its books were kept and its income-tax return was rendered on that basis. In the year 1918 it entered on its books of account and paid the interest due for the year 1917. The taxpayer, relying on the case of Brilliant Coal Co. v. United States, 59 Ct. Cls. 481, contends that [956] under the Revenue Act of 1917 interest could not be taken as a deduction unless actually paid and that, since the interest in question was not paid in the year 1917, but was paid in the year 1918, the amount thereof is a proper deduction from income in the latter year.
. We are of the opinion that the contention of the taxpayer is not well founded. The facts here are practically identical with the facts in the Appeal of Tel-Electric Co., 1 B. T. A. 434. The evidence in that appeal established that in July, 1914, the Tel-Electric Co. became indebted to one of its stockholders in the amount of $22,-054.50, represented by notes dated July 1, 1914, payable on demand and bearing 6 per cent interest. In 1917 interest on these notes wa,s computed from July 1, 1914, to December 31, 1917, inclusive, in the amount of $4,631.45, and that amount was paid in 1917 and deducted by the taxpayer in its return for the calendar year 1917. During the several calendar years prior to 1917, the taxpaj^er had not accrued on its books or deducted on its returns any portion of such interest, although its books of account were kept and it,s returns were rendered on the accrual basis. The Commissioner, upon audit of the taxpayer’s return for the calendar year 1917, allowed as a deduction only the interest due for the year 1917, and disallowed as a deduction for the year 1917 the interest due on the indebtedness for the period July 1, 1914, to December 31, 1916, inclusive. This Board in approving the determination of the Commissioner said:
The Board is of the opinion that the interest on the indebtedness of the taxpayer accrued and became a liability in each of the years 1914 to 1917, inclusivo, and constituted proper accrual items, and were allowable deductions in those years; therefore, interest which accrued and became a liability in years prior to 1917 can not be deducted from the gross income of 1917. The fact that the interest was not accrued on its books or deducted in its returns for each of the years when liability therefor was incurred can not justify the deduction in the return for the year 1917. When a taxpayer elects to report his income on either the cash receipts and disbursements or the accrual basis he must consistently report his income and deductions on that basis. Otherwise his return would not reflect his true net income. We can find no justification in the law for the deduction in the return for 1917 of the interest which accrued in the years 1914 to 1916, inclusive, when the taxpayer has adopted the accrual method of reporting income.
Taxpayer relies upon the decision of the Court of Claims in the case of the Brilliant Coal Company v. United States, 59 Ct. Cls. 481, in support of its contention that interest on its indebtedness which accrued in years prior to 1917 is an allowable deduction in the year in which paid. There is nothing in that decision to indicate whether the taxpayer was on a cash receipts or an accrual basis. We are of the opinion that the conclusion reached by the court in that case is not applicable to the case of a corporation taxpayer which keeps its books and reports its income on the accrual basis.
The interest involved in this appeal accrued and became a liability in the year 1917 and was an allowable deduction from the taxpayer’s income in that year'. It was not, therefore, a proper deduction for [957] the year 1918. Appeal of Clarence Schock, 1 B. T. A. 528; Appeal of John W. Butler, Inc., 1 B. T. A. 1105.
With reference to the second question presented, the taxpayer contends that in the year 1918 it purchased for preferred stock, of the par value of $850,000, certain tangible assets which had at that time a fair market value of $597,917.16, and that, in computing its invested capital for the years 1918 and 1919, it is entitled to include therein the excess of such fair' market value over the par value of the stock.
Section 826 of the Revenue Act of 1918 provides:
Sec. 326. (a) That as used in this title the term “invested capital” for any year means * * *
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which ease such excess shall be treated as paid-in surplus; * * *. [Italics ours.]
It is incumbent upon the taxpayer to show that the actual cash value of the assets in question at the time paid in for stock was clearly and substantially in excess of the par value of the stock issued therefor. Appeal of Sphar Brick Co., 2 B. T. A. 946.
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[955] OPINION.
Littleton:
Two questions are presented by this appeal, namely: (1) Is the taxpayer entitled to deduct from gross income for the year 1918 the interest paid by it in that year for the year 1917; and (2) is it entitled to a paid-in surplus on account of the assets purchased by it from the McIntosh & Seymour Co. ?■
With reference to the first question the evidence shows that during the year 1917 the taxpayer was indebted to its principal stockholder for money borrowed from him on which it was obligated to pay interest. During that year it did not accrue on its books of account the interest due and payable on the money so borrowed, although its books were kept and its income-tax return was rendered on that basis. In the year 1918 it entered on its books of account and paid the interest due for the year 1917. The taxpayer, relying on the case of Brilliant Coal Co. v. United States, 59 Ct. Cls. 481, contends that [956] under the Revenue Act of 1917 interest could not be taken as a deduction unless actually paid and that, since the interest in question was not paid in the year 1917, but was paid in the year 1918, the amount thereof is a proper deduction from income in the latter year.
. We are of the opinion that the contention of the taxpayer is not well founded. The facts here are practically identical with the facts in the Appeal of Tel-Electric Co., 1 B. T. A. 434. The evidence in that appeal established that in July, 1914, the Tel-Electric Co. became indebted to one of its stockholders in the amount of $22,-054.50, represented by notes dated July 1, 1914, payable on demand and bearing 6 per cent interest. In 1917 interest on these notes wa,s computed from July 1, 1914, to December 31, 1917, inclusive, in the amount of $4,631.45, and that amount was paid in 1917 and deducted by the taxpayer in its return for the calendar year 1917. During the several calendar years prior to 1917, the taxpaj^er had not accrued on its books or deducted on its returns any portion of such interest, although its books of account were kept and it,s returns were rendered on the accrual basis. The Commissioner, upon audit of the taxpayer’s return for the calendar year 1917, allowed as a deduction only the interest due for the year 1917, and disallowed as a deduction for the year 1917 the interest due on the indebtedness for the period July 1, 1914, to December 31, 1916, inclusive. This Board in approving the determination of the Commissioner said:
The Board is of the opinion that the interest on the indebtedness of the taxpayer accrued and became a liability in each of the years 1914 to 1917, inclusivo, and constituted proper accrual items, and were allowable deductions in those years; therefore, interest which accrued and became a liability in years prior to 1917 can not be deducted from the gross income of 1917. The fact that the interest was not accrued on its books or deducted in its returns for each of the years when liability therefor was incurred can not justify the deduction in the return for the year 1917. When a taxpayer elects to report his income on either the cash receipts and disbursements or the accrual basis he must consistently report his income and deductions on that basis. Otherwise his return would not reflect his true net income. We can find no justification in the law for the deduction in the return for 1917 of the interest which accrued in the years 1914 to 1916, inclusive, when the taxpayer has adopted the accrual method of reporting income.
Taxpayer relies upon the decision of the Court of Claims in the case of the Brilliant Coal Company v. United States, 59 Ct. Cls. 481, in support of its contention that interest on its indebtedness which accrued in years prior to 1917 is an allowable deduction in the year in which paid. There is nothing in that decision to indicate whether the taxpayer was on a cash receipts or an accrual basis. We are of the opinion that the conclusion reached by the court in that case is not applicable to the case of a corporation taxpayer which keeps its books and reports its income on the accrual basis.
The interest involved in this appeal accrued and became a liability in the year 1917 and was an allowable deduction from the taxpayer’s income in that year'. It was not, therefore, a proper deduction for [957] the year 1918. Appeal of Clarence Schock, 1 B. T. A. 528; Appeal of John W. Butler, Inc., 1 B. T. A. 1105.
With reference to the second question presented, the taxpayer contends that in the year 1918 it purchased for preferred stock, of the par value of $850,000, certain tangible assets which had at that time a fair market value of $597,917.16, and that, in computing its invested capital for the years 1918 and 1919, it is entitled to include therein the excess of such fair' market value over the par value of the stock.
Section 826 of the Revenue Act of 1918 provides:
Sec. 326. (a) That as used in this title the term “invested capital” for any year means * * *
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which ease such excess shall be treated as paid-in surplus; * * *. [Italics ours.]
It is incumbent upon the taxpayer to show that the actual cash value of the assets in question at the time paid in for stock was clearly and substantially in excess of the par value of the stock issued therefor. Appeal of Sphar Brick Co., 2 B. T. A. 946.
The only evidence offered by the taxpayer to support its contention that the assets purchased by it from the McIntosh & Seymour Co. had a, value at the time of acquisition greater than the par value of the preferred stock issued therefor was an appraisal of the assets made in April, 1913, which gave to them a value of $597,917.16. It appears that these assets were turned over by the persons interested in the old corporation to a new organization, in which they were to have a beneficial interest of less than 30 per cent. Unless there is attached to the preferred stock rights greater than the rights usually attaching to stock of that kind, which the record fails to show, it would, upon the dissolution of the corporation, be entitled to participate in the assets thereof only to the extent of its face value plus dividends. In other words, the value of the assets in excess of the par value of the preferred stock issued therefor, if such value in fact existed, would inure only to the benefit of the holders of the common stock of the new corporation. It appears from the record that the stockholders of the old corporation were to have only a very small interest in the common stock of the new corporation, and there is nothing to indicate that there were any inducements made to them to turn over the assets in question to the new corporation for a consideration of less than 60 per cent of their real value. So far as the record discloses, it was a transaction at arms’ length, involving the [958] offer and acceptance of a price agreed on by tbe parties thereto, and we must conclude, in the absence of convincing evidence to the contrary, that the value placed on the assets of the old corporation by the parties to the transaction represented their fair market value at that time. The appraisal appears to have been made on the basis of reproduction cost, less depreciation, to date of appraisal, and while it may be taken as having some probative value it is not conclusive or convincing proof of the cash or fair market value of the property appraised and, unsupported by other evidence, is not sufficient in view of all of the evidence to warrant the Board in setting aside and disregarding the determination of the Commissioner as to the value of the property. The evidence introduced by the taxpayer is, in our opinion, wholly insufficient to establish that the actual cash value of the assets purchased by it from the McIntosh & Seymour Co. was clearly and substantially in excess of the par value of the stock issued therefor, and the determination of the Commissioner is approved.