Opinion
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following findings of fact:
1. Plaintiff, a Michigan corporation, was organized July 26, 1911, with its principal office and place of business in Detroit, and was engaged in the fire insurance business. The articles of association were filed with the commissioner of insurance at Lansing, Mich., May 11, 1911, and a copy of said articles was filed with the county clerk of Wayne county, Mich., March 12, 1913. March 1, 1913, plaintiff was authorized to transact business
2. April 22, 1930, plaintiff filed its completed income tax return for the portion of the year 1929 during which it was in existence, namely, the period beginning January 1 and ending December 17, 1929, inclusive. The foregoing return indicated a tax liability of $34,203.54, which was paid as follows:
March 15, 1930 ....................
$5,000.00
April 23, 1930 (including $21.84 interest).........................
3,550.94
June 27, 1930 ......................
8,572.78
September 13, 1930 .................
8,572.78
December 13, 1930 ..................
8,507.04
The return showed a taxable net income of $310,941.27, and included in the determination of such net income was an item of $379,252.78, which was set out on the return as "Profit from sale of assets." The following explanation was given on the return of the manner in which the profit from the sale was determined: "On December 16, 1929, Monarch Fire Insurance Company of Cleveland, Ohio, purchased the entire assets and business of The Columbian National Fire Insurance Company, assuming all of the latter's liabilities and paying it in addition the sum of $1,118,000.00 The above balance sheet is adjusted under the heading 'Cost', to reflect the cost of the assets transferred to the Monarch Company. By allocating $952,226.83 of the assets to off-set the liabilities assumed by the Monarch Company, and subtracting the remaining assets, at cost--$738,747.22 from the price paid by the Monarch Company--$1,118,00.00--the profit from the sale--$379,252.78--is determined."
The cost of assets as reflected in the balance sheet referred to in the above explanation was $1,690,974.05. The following tabulation accordingly shows in effect the manner in which the profit as reported on the return was determined:
Cash received for assets sold .......
$1,118,000.00
Liabilities of plaintiff assumed by purchaser..................
952,226.83
-------------
$2,070,226.83
Less cost of assets as reflected in the adjustedbalance sheet at December 16, 1929 ..........
1,690,974.05
-------------
Profit from sale of assets ...........
$ 379,252.78
3. December 22, 1931, plaintiff duly filed a claim for the refund of the entire tax and interest paid for 1929 as set out in finding 2, and assigned the following basis therefor: "Failure on the part of the Columbian National Fire Insurance Company to take proper deductions for costs, in the sale of its assets to the Monarch Fire Insurance Company of Cleveland, Ohio, on December 16, 1929. In the preparation of the return, costs aggregating $901,892.87 were omitted and in place of a profit of $379,252.78 as shown by the return a loss of $522,640.99 should have been shown plus an operating loss of $66,961.25 or a total loss of $589,601.34 and therefore requests a return of $34,203.54, being taxes erroneously paid."
The net loss referred to above was computed as follows:
Surplus March 1, 1913 .......
$209,140.89
Commissions on stock "see report".....................
275,000.00
Paid-in surplus 2d issue, December 31, 1913 ...........
129,755.25
Commissions 2d issue .........
272,894.75
Consolidation expense 1922 ....
15,101.98
-----------
Total costs omitted .....
$901,892.87
Profit reported ..............
379,252.78
-----------
Net loss--Sale of assets ....
$522,640.09
January 19, 1932, plaintiff filed amendments to the original claim as follows:
"Alternatively, the corporation claims that on December 16, 1919, it sold its entire capital stock to the Monarch Fire Insurance Company, Cleveland, Ohio (Ex. E), for the sum of $1,118,000.00, and that as of that date the cost of the said capital stock so sold was, to wit, $1,640,640.09. "And as a further alternative, the corporation claims that its good-will was also sold on the date aforesaid to the Monarch Fire Insurance Company (Ex. E); that, due to regulations of the Insurance Commissioner of Michigan, such assets did not appear on the books of account, but that, nevertheless, the goodwill had a fair market value as of March 1, 1913, of not less than, to wit, $500,000.00."
March 12, 1932, plaintiff filed a further amendment to the original claim as follows: "Alternatively, the corporation claims that on December 16, 1929, the Monarch Fire Insurance Company, Cleveland, Ohio, purchased from the stockholders of the said Columbian National Fire Insurance Company, all of its capital stock for the sum of $1,118,000.00, and that, by virtue thereof, the said Monarch Fire Insurance Company thereupon took over all of the taxpayer's assets and liabilities as of December 16, 1929. Therefore, it is alternatively contended there was no sale of assets by the taxpayer and no profit in connection therewith should have been reported in its income-tax return."
4. Upon audit and review of plaintiff's income tax return for 1922, the Commissioner of Internal Revenue found an overpayment in favor of plaintiff for $795.09, and interest thereon of $1.22, for which he issued his certificate of overassessment No. 2,208,458 on February 26, 1932. Said sums of $795.09 and $1.22, together with interest thereon, were duly refunded to plaintiff July 29, 1932, in the total amount of $846.82. Subsequently, by letter dated May 11, 1932, specifically referring to plaintiff's alternative claims for refund of January 9, 1932, and March 12, 1932, plaintiff was advised by the Commissioner that the overassessment of $795.09, previously determined by him, was considered to be correct, and no further adjustment in its tax liability was warranted.
July 28, 1932, plaintiff made formal application for the reopening of its claim for refund, and August 15, 1932, plaintiff was notified by the Commissioner that its claim for refund of taxes for the year 1929 in the amount of $34,203.54 was disallowed to the extent indicated in certificate of overassessment No. 2,208,458, on a schedule dated February 26, 1932. November 10, 1932, plaintiff was advised by the Commissioner that its application for the reopening of its claim for refund was denied.
The facts which form the basis of this controversy are as follows:
5. In 1911 certain individuals conceived the idea of forming a fire insurance company which would be owned and controlled by individuals of the Catholic faith and which would specialize in writing insurance on property owned by Catholics. At that time a similar organization was being formed in Indiana known as the Columbian Insurance Company of Indiana, which was confining its activities to the state of Indiana, but the promoters of plaintiff sought to establish a company which would have a national aspect. A ready response to the idea was found among Catholics, both lay and clergy, and July 26, 1911, plaintiff was organized with prominent Catholics as its officers and directors. A basis on which the promoters of plaintiff made their appeal for the sale of the stock is indicated from literature used at that time in which the number of Catholics in the United States in 1911 was shown at 14,618,761, the number of Catholic churches and schools at approximately 14,000, and further stated: "The insurance on this property amounts to many millions. If the Columbian National Fire Insurance Company receives but a small part of the enormous premiums paid for this insurance its income from this source alone would assure the financial success of the Company."
Another circular stated in part:
"The control of the organization to be in the hands of representative Catholics of the United States. "There is no company of this kind or character operating today in America. "It is believed that such a company would merit and receive liberal patronage from those in a position to place the insurance on church property. "When it is known that the Columbian National Fire Insurance Company is an organization controlled by the Catholic people of the country, no progressive fire insurance agency can but realize that with this company behind them they could procure business that otherwise they could not reach. Having once formed relations with the local agencies, the company would at once be in a position to appeal to the general public."
6. The original stock authorized was 20,000 shares of a par value of $25 per share. A contract for its sale was entered into with one A.D. Blake, by which Blake sold the entire amount authorized at $50 per share and received as compensation for such service $275,000, that is 27 1/2 per cent. Under the foregoing arrangement for the sale of the stock, Blake paid all expenses incident to the sale of the stock and organization of plaintiff out of the commission received by him, including commission to salesmen of approximately 20 percent. out of the 27 1/2 per cent. received, rent of the plaintiff, printing, clerk hire, and similar expenses, up to on or about March 1, 1913, when plaintiff started business. Upon the sale of the stock by Blake the entire amount for which the stock was sold, $50 per share, was paid to plaintiff, and plaintiff made payment to Blake for his commission from time to time as it accrued under the arrangement referred to above.
Upon the completion of the sale of the first issue of stock, plaintiff authorized a second issue of stock of 20,000 shares of a like par value as the first issue. This was likewise sold by Blake at $50 per share under a contract entered into February 3, 1913, by which Blake received a commission of 25 per cent., but was required to bear all expenses incident to the sale. The second issue was sold from March, 1913, to December 31, 1913, inclusive, and Blake was paid during that period commissions amounting to $250,000.
Upon the sale of the stock at $50 per share (both the first and second issues), one-half of that amount was credited as payment in full for the stock at its par value of $25 per share and the remaining $25 per share was credited to paid-in surplus. The commissions to Blake under both issues ($275,000 and $250,000, respectively) were paid out of the aforementioned surplus.
7. At the time plaintiff started business on March 1, 1913, its stock had been sold in approximately 23 states, extending from Pennsylvania to California and from Minnesota to Louisiana, and in Canada. Plaintiff began business in March, 1913; the first policy being issued March 17, 1913. Plaintiff's first annual report was for the period ending December 31, 1913; the first business month being referred to as ending April 30, 1913. By December 31, 1913, the number of stockholders had increased to approximately 3,500, scattered over 33 states.
During the stock selling campaigns heretofore referred to, it was the practice of the salesmen to secure pledges of insurance to be taken out with plaintiff. Usually such pledges were to take insurance from the plaintiff upon the expiration of policies which the individuals, from whom the pledges were received, had on their properties. Between $30,000,000 and $40,000,000 of insurance was so pledged prior to December 31, 1913, and from one-half to two-thirds of that amount was pledged prior to March 1, 1913, during the sale of the first issue of stock. The pledges were usually fulfilled. December 31, 1913, plaintiff paid to Blake (heretofore referred to) $25,487.57 on account of pledges which he had secured, of the character referred to above, of insurance amounting to approximately $7,282,737. The arrangement with Blake was to pay him 35 cents for each $100 of insurance secured.
8. As indicated in findings 5, 6, and 7, plaintiff was organized on the theory that its religious appeal would be of advantage or benefit to it in securing business. Plaintiff contends that when it started business on March 1, 1913, such an appeal had resulted in the building up of good will as an asset at that time of a substantial value which should be used as an offset against the amount received for its assets in 1929, in the transaction referred to in findings 10, 11, and 12. The evidence is insufficient to show what value attached to good will or other intangible asset, if any, at March 1, 1913, which might be used in the manner contended for by plaintiff.
9. In November, 1922, the plaintiff acquired the assets and liabilities of the Columbian Fire Insurance Company of Indiana and the transfer was entered on plaintiff's books as of December 31, 1922. The Columbian Fire Insurance Company of Indiana did not own any stocks, and its only bonds were some municipal and Liberty bonds. These were taken over at market which was lower than cost. Real estate, mortgages, and cash were taken over at cost per the books, and agents' balances at par for balances less than 90 days old, with all other balances discarded. Various subsidiary and non-ledger assets were carried at the examiners' figures. The assets taken over from the Columbian Fire Insurance Company of Indiana were reduced about $60,000 below cost when entered on plaintiff's books. Plaintiff incurred expense in acquiring the property of the Indiana company in the sum of $5,101.98, and also paid $10,000 to a broker for services in obtaining new insurance policies to take up a certain class of policies acquired from the Indiana company which were not considered desirable. Neither of these items was claimed as a deduction in plaintiff's income tax return for 1922.
In connection with the foregoing transaction plaintiff's capital stock was reduced from $976,675 to $650,000, of which $488,337.50 was issued to plaintiff's former stockholders on the basis of one share for two shares previously held, and the balance of the stock, $161,662.50, was issued to the former stockholders of the Columbian Fire Insurance Company of Indiana in exchange for the assets thus acquired.
10. The Monarch Fire Insurance Company of Cleveland, Ohio (hereinafter sometimes referred to as "Monarch"), was organized by a group of Cleveland bankers on August 19, 1929, under the laws of the state of Ohio, for the specific purpose of acquiring the business and assets of the plaintiff as a nucleus for the new company, which was accomplished pursuant to an agreement dated December 16, 1929, as hereinafter shown.
On or prior to July 17, 1929, plaintiff had received an offer from the Cleveland bankers to purchase 18,000 shares or more of its stock at $43 per share, and at a meeting on that date plaintiff's officers and directors voted to recommend to its stockholders the acceptance of such offer. All of the Monarch stock was underwritten by Otis & Co. of Cleveland. That firm of underwriters also acted as brokers for the Monarch in acquiring plaintiff's stock, and September 5, 1929, Monarch paid that concern $787,810.88, at the rate of $43 per share for 18,321 11/60 shares so acquired. October 30, 1929, Monarch purchased an additional 167%] 1/2 shares for $7,202.50, which was likewise at the rate of $43 per share. That total of 18,488 41/60 shares of plaintiff's stock was issued to Monarch, and was the amount of such stock standing in its name on December 16, 1929, out of a total amount of 26,000 shares then issued and outstanding.
11. By reason of its ownership of over 70 percent. of its stock, Monarch obtained control of plaintiff corporation, the same individual serving as president of both companies, and at a meeting of plaintiff's stockholders on December 16, 1929, caused plaintiff to agree to sell all of its "property and assets, of whatsoever kind," to Monarch in consideration of the payment by Monarch to plaintiff of $1,118,000 and the assumption by Monarch of all of plaintiff's liabilities.
12. The transaction referred to in findings 10 and 11 was carried out in the following manner: December 16, 1929, a check for $1,118,000 (which was at the rate of $43 per share for the 26,000 outstanding shares of plaintiff) was deposited by Monarch to plaintiff's credit in the Guardian Detroit Bank. Immediately thereafter plaintiff issued its check to Guardian Detroit Bank for $795,013.40 (which was at the rate of $43 per share for 18,488 41/60 shares of plaintiff's stock held by Monarch), and that amount was forthwith transferred to the credit of Monarch. At the same time two checks were drawn by plaintiff, totaling $234,398, which were turned over to the Central Trust Company, to be used by that company in fulfillment of plaintiff's obligation to pay $43 per share for 5,451 7/60 shares of plaintiff's stock which was then outstanding, but had not been presented for payment. Upon the completion of the payments as set out above, plaintiff transferred to Monarch "all of the property and assets, of whatsoever kind, in or to which the said Columbian has at the close of its business on December 16, 1929, any estate, title, right, or interest of whatsoever character, including--inclusive, but not exclusive--its entire capital and surplus, its goodwill and business as a going concern and all of its policies, goods, chattels, furniture and fixtures, reserves, bonds, bills, notes, accounts, mortgages, demands, money, premiums in course of collection, premiums or other property in the hands of agents or other persons, and all funds of every nature on deposit with an officer of any State wherein the Columbian has been qualified or doing business, intending by this general description to include all real property, all personal property, and all choses in action, and everything or right whatsoever and wheresoever located, in or to which it has any title or claim," and Monarch assumed all of plaintiff's liabilities. The contract, in the form used in consummating the transaction, was that required and approved by the insurance commissioners of Michigan and Ohio.
13. The Central Trust Company, acting as trustee for stockholders of plaintiff whose stock had not been presented on December 16, 1929, turned over to Monarch 3,849 46/60 and 538 56/60 shares of plaintiff's stock on July 17, 1930, and January 26, 1931, respectively, such stock having been redeemed at $43 per share, thus leaving on the latter date 1,062 25/- shares of plaintiff outstanding and unretired on the latter date. The balance of the trust fund held by the Central Trust Company was thereupon turned over to Monarch, which thereafter acted as trustee in the redemption of the unretired balance.
December 16, 1929, all of plaintiff's stock was canceled and retired, except the shares covered by the deposit with the 'Central Trust Company as indicated above, and that has since been canceled and retired from time to time as presented by the stockholders.
After the acquisition by Monarch of the assets and property of plaintiff, the same persons who had held stock in the plaintiff corporation did not hold stock in the Monarch. The stock of the Monarch was sold to the public through its bankers, the stockholders were entirely different, and no stock was exchanged.
14. In computing the profit from the transaction that the plaintiff had with the Monarch Fire Insurance Company, the Commissioner did not make any allowance or deduction for commissions paid by plaintiff for the sale of its stock, nor did he add anything to the cost of the assets of plaintiff for value of good will at March 1, 1913, or any other time, and accordingly did not in any way reduce the profit shown by plaintiff's return on account of either of these items.
15. There is no evidence showing or tending to show the value of any good will, if there was any good will, possessed by plaintiff on March 1, 1913, or at any other time. [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] William P. Smith, of Washington, D.C. (Elven T. Larson, on the brief), for plaintiff.
Guy Patten, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
GREEN, Judge.
Plaintiff seeks to recover $33,429.07, with interest, on account of income taxes alleged to have been overpaid by it for the year 1929 under the Revenue Act of 1928. A timely and proper claim for refund was filed and rejected.
It appears that the plaintiff is a fire insurance company organized under the laws of Michigan and 1911, began business in March, 1913, and its first policy was issued in that month. On November 1, 1922, the plaintiff took over the Columbian Fire Insurance Company of Indiana, and the assets and liabilities of that company were transferred to plaintiff's books as of the last day of that year. On August 19, 1929, a group of Cleveland bankers organized the Monarch Fire Insurance Company for the specific purpose of acquiring the business and assets of the plaintiff as the nucleus in a new company. The Monarch Company, acting through its brokers, in September and October, 1929, purchased 18,488 41/60 shares (out of a total of 26,000) of plaintiff's stock at the rate of $43 per share, paying therefor a total of $795,013.40. Having thus acquired the ownership of over 70 per cent. of plaintiff's stock, the Monarch Company obtained control of the plaintiff corporation, the same individual serving as president of both companies, and an agreement was made on behalf of plaintiff to sell all of its "property and assets, of whatsoever kind," to the Monarch Company in consideration of the payment to plaintiff of $1,118,000 and the assumption by the Monarch Company of all of plaintiff's liabilities. The plaintiff received this sum and caused it to be distributed to its stockholders, and all outstanding stock of the plaintiff corporation was retired and canceled, having been redeemed at $43 per share.
The plaintiff filed its income tax return for 1929 which disclosed a taxable net income of $310,941.27 and a tax liability of $34,203.54, which was duly paid. Included in its gross income was an item of $379,252.78 shown as "profit from sales of assets." The return set out the sale of its assets and business, as above stated, charged plaintiff with the $1,118,000 received in cash, and offset against the same the cost of the assets less the liabilities assumed. The amount of the net assets was stated in the return at $738,747.22, and this deducted from the price paid by the Monarch Company made the profit from the sale $379,252.78. The cost of the assets as shown in the return and used by the Commissioner in computing the tax did not include any amount for the value of good will on March 1, 1913.
The plaintiff filed a claim for refund of the entire tax for 1929 and interest thereon. This claim was based on several grounds as shown in finding 3. The first ground mentioned may be summarized by saying that it claimed that the return for the year 1929 in place of showing a profit of $379,252.78 should have set out a total loss of $589,601.34 composed of certain items to which we shall hereinafter refer. Amendments were filed to this claim alleging alternatively that in 1929 plaintiff sold its entire capital stock to the Monarch Fire Insurance Company of Cleveland, Ohio, for the sum of $1,118,000, and that as of that date the cost of the capital stock so sold was $1,640,640.09; and as a further alternative the plaintiff claimed that good will was sold at the same time to the Monarch Fire Insurance Company, which had a market value as of March 1, 1913, of not less than $500,000, for which the plaintiff was entitled to a credit as an asset.
Subsequently, a further amendment was filed to the original claim stating alternatively that the Monarch Fire Insurance Company in 1929 purchased from the stockholders of the plaintiff all of its capital stock for the sum of $1,118,000, that by reason thereof there was no sale of assets by the taxpayer, and no profit which should have been reported in its income tax return.
In addition to the matters stated above, the plaintiff included in its refund claim as a part of its net loss an item of "Consolidated expense 1922, $15,101.98." In the consideration of the claim for refund this last item will be first taken up.
The evidence shows that in 1922 plaintiff acquired all the assets and liabilities of the Columbian Fire Insurance Company of Indiana including its obligations on fire insurance policies which it had issued. After the plaintiff had taken over the business of the Indiana company, it was considered advisable, for certain reasons not necessary to mention here, to reinsure a portion of the risks upon which the Indiana company had issued policies, and an insurance broker was paid $10,000 for effecting the reinsurance thereof with other companies. Plaintiff claims that in addition to this brokerage other expenses were incurred and paid during 1922 in connection with the so-called merger amounting to $5,101.98. The testimony in the case shows that this amount was made up of a number of smaller items some of which in the first instance may have been paid by the Indiana company. The evidence is not as clear as it might have been made with reference to this matter, but on the whole we are satisfied that plaintiff incurred expense in acquiring the assets of the Indiana company in the amount of $5,101.98 in addition to the brokerage fee which was incurred. The two items of expense, however, were of a very different nature. Without going into details, we may say that the items which made up the $5,101.98 were somewhat in the nature of organization expenses. They were costs which plaintiff was obliged to pay in order to carry out the transactions by which it acquired the assets of the Indiana company. The brokerage fee was paid for effecting the reinsurance of a portion of the insurance contracts acquired from the Indiana company evidenced by policies issued; it being considered that they belonged to a class which it was not desirable for the plaintiff to carry. The brokerage fee, being paid in order to get plaintiff's business in more satisfactory condition, was either an ordinary and necessary expense or it was a capital expenditure, as the benefits obtained through it were permanent; but in either event we do not think it was part of the cost of the assets of plaintiff. If it was an ordinary expense, it should have been deducted in 1922. If it was a capital expenditure, no deduction can be allowed therefor. We are satisfied that the brokerage fee was not deductible as a loss on the sale of plaintiff's assets. On the other hand, if we are right in concluding that the item of $5,101.98 was a part of the cost of the assets acquired from the Indiana company it becomes properly deductible as a loss at the time the plaintiff finally sold all of its assets to the Monarch Company.
Of the other items of plaintiff's claim for refund only two are presented in argument. One relates to good will, and the other to commissions on the sale of stock.
It is urged on the part of plaintiff that the evidence shows that when plaintiff's assets were sold there was included a good will which on March 1, 1913, was worth not less than $250,000, and that the amount of this good will should have been included by the Commissioner in plaintiff's assets and considered in determining the gain or loss on the final sale thereof to the Indiana company. In this connection it should be said that although there is some mention in the claim for refund of an alternative claim that instead of a sale of the assets there was a sale of the stock of plaintiff to the Indiana company, this claim seems to have been abandoned and the plaintiff's counsel now practically concede that the transactions between the plaintiff and the Monarch Company amounted to a sale of all of the plaintiff's assets to that concern which assumed all of plaintiff's liabilities to the stockholders for the proceeds of the sale.
It will be observed that it is claimed that this good will existed on March 1, 1913, which was the date on which the plaintiff was authorized to commence business as a corporation.
The evidence shows that a special feature of the plan on which plaintiff was organized was that of having an insurance company which would be owned and controlled by individuals with Catholic faith and would specialize in writing insurance on property owned by Catholics. A response to the idea was found among Catholics, both lay and clergy, and on July 26, 1911, plaintiff was organized with prominent Catholics as its officers and directors. The promoters of the company in selling its stock presented an appeal to Catholics generally, referring to the amount of insurance taken out by Catholics and the nature of the organization as showing certain advantages which would accrue to the company, and in the stock selling campaigns it was the practice of the salesmen to secure pledges of insurance to be taken out with the plaintiff. Between $30,000,000 and $40,000,000 worth of insurance was pledged prior to December 31, 1913, and from one-half to two-thirds of that amount was pledged prior to March 1, 1913, during the sale of the first issue of the stock. These pledges were generally fulfilled. The stock salesmen in addition to being paid a commission on the sale of the stock received a commission on the pledges taken.
It is urged on behalf of plaintiff, not only that the good will was acquired through these pledges so obtained, but that from the nature of the organization of the company, and the appeal which it would naturally make to people of the Catholic faith, that a valuable good will existed on March 1, 1913.
On behalf of the defendant it is contended that plaintiff acquired no good will and that if any was acquired the evidence entirely fails to show the value thereof.
There is much discussion in the arguments of respective counsel as to what may or may not constitute good will. We shall not undertake to set out the controlling features of good will when viewed as constituting an asset further than may be necessary to determine whether there is any evidence which shows the value thereof to the plaintiff on March 1, 1913, the date when the company was organized and when it is claimed it existed.
It will be remembered that prior to this date the company had done no business, although parties soliciting subscriptions for stock had obtained contracts which provided for taking out policies when the company came into existence. While these contracts may have had some value above the commissions paid to agents for obtaining them and the cost to the company of carrying the insurance risk, the amount thereof, if there was any such value, is not shown by the evidence. It was quite probable that the stockholders were moved to make these contracts by reason of the particular nature of the organization of the company, but the fact that they held stock in the company may have influenced them as much or more in agreeing to take out the insurance. However this may be, there is nothing here upon which any value was placed by the evidence, nor do we think any could be placed as a matter of good will. It may be argued that as soon as the company was organized it had certain advantages in acquiring the business of Catholics, and if we understand plaintiff's argument correctly this constituted good will of a very considerable value. Without determining whether such advantage in fact constituted good will in a legal sense with reference to the tax statutes, we must again say that there is no satisfactory evidence of its value.
It should also be said in this connection that the fact that surrounding conditions make it likely that a new corporation will be able to secure a profitable business is not of itself sufficient to show that it possessed a valuable good will at the time it entered upon the transaction of business. Corporations are seldom formed unless those organizing them believe that the business to be carried on will be profitable, and that the time is favorable for creating a new corporation. Sometimes the anticipated results follow and the corporation is successful from the outset. If the judgment of the promoters be wrong, a loss of failure will result; but if successful, the success alone is not sufficient to prove the existence of good will. We have entered a finding to the effect that there is no satisfactory evidence of the good will, if any, that the plaintiff possessed, and therefore hold that the Commissioner was correct in refusing to make any allowance or deduction therefor in computing the tax upon the sale of plaintiff's assets.
The evidence shows that plaintiff paid commissions to the amount of $525,000 on the sales of its stock on two different occasions, one of which was before or at the time of its organization and the other a short period later. It is contended on behalf of the plaintiff that this expense is a part of the cost of organization of the company and should be amortized over the period of the organization thereof.
If the question thus raised were new and original, we think it might present an interesting problem. The Board of Tax Appeals and the courts, whenever the question has arisen of making a deduction by amortization or the discount on the sale of bonds or commissions paid for the allowance thereof, seem to have uniformly held in favor of the taxpayer. It would seem there was as much reason for allowing a commission upon the sale of stock sold for the purpose of obtaining capital as in allowing a commission on the sale of bonds for the same purpose where the length of time the capital so obtained by sale of stock is known as it was in this case. If there is a distinction it is because the issuance of bonds created an absolute liability, but the sale of stock did not. In each instance it may seem that the commissions were the cost of obtaining capital, and if the rule with reference to commissions on bonds is followed this cost should be amortized over the period that the capital was used. But the decisions of the Board of Tax Appeals and of the courts which have considered the question, so far as they have decided it either directly or indirectly, all appear to be against the taxpayer. It is true that in most of these cases the corporation was still in existence and there was no way of determining for what length of time the capital which had been obtained by the sale of stock would be used and therefore no way of determining the amount of amortization for any particular year. But this fact was not given as a reason for any of these decisions. On the contrary they were based upon grounds which are entirely inconsistent with the allowance of the deductions claimed by plaintiff. In Simmons Co. v. Commission (C.C.A.) 33 F. (2d) 75, it was held, in effect, that commissions paid to bankers for sales of stock were not organization expenses nor "ordinary and necessary expenses" within the meaning of the tax law, and, further, that "commissions paid for marketing stock simply diminish the net return from the stock issue" and are equivalent to an issue of stock at a discount. This decision was rendered in 1929, and was based upon the Treasury regulations. The court gave as a reason for upholding the regulations the fact that they had existed and had been enforce for a long time without any change in the law by Congress.
In Corning Glass Works v. Lucas, 59 App.D.C. 168, 37 F. (2d) 798, 68 A.L.R. 736,the rules laid down in the Simmons Co. Case, supra, were approved, and the court again called attention to the fact that its decision was supported by Treasury regulations promulgated under the Revenue Acts of 1921, 1924, 1926, and 1928, and also called attention to a Treasury decision promulgated in 1922 to the effect that a commission paid for marketing preferred stock was a capital expenditure, and said that this interpretation of section 234(a)(1) of the Revenue Act of 1921 (42 Stat. 254) was impliedly approved by Congress through the re-enactment of the section in unchanged form in the Revenue Act of 1924, § 234(a)(1), 26 USCA § 986(a)(1). If the commission so paid was a capital expenditure, it is obvious that it is not an ordinary and necessary expense of business, and that it cannot be amortized as a part of the cost of obtaining capital, or treated as organization expense for the purpose of allowing a deduction therefor. In the Revenue Acts of 1926 and 1928, section 234 was re-enacted (as section 234 in 1926, 26 USCA § 986 and as section 23 in 1928, 26 USCA § 2023), and as the Revenue Acts enacted since have made no change in it the reasoning of the decisions in the two cases cited above applies with increased force. Plaintiff cites the cases of Hershey Manufacturing Co. v. Commissioner, 14 B.T.A. 867; Id. (C.C.A.) 43 F. (2d) 298, and Malta Temple Association v. Commissioner, 16 B.T.A. 409, but it is not necessary to review the decisions therein. Neither of the cases involved any question with respect to commissions paid or discounts allowed on the sale of corporate stock, but dealt only with organization expenses, and we are of the opinion that the commissions in question in the new case now before us cannot be held to be organization expenses.
It thus appears that for more than thirteen years Treasury regulations have been promulgated denying any deductions on account of commissions paid for sales of stock, and from time to time the courts and the Board of Tax Appeals have approved these regulations. Although numerous Revenue Acts have been enacted since these regulations were first promulgated, Congress has not seen fit to take any action changing the statute. Under these circumstances, we think the law must be considered settled, and that no deduction can be allowed plaintiff on account of this matter.
In this connection we think it ought to be said that even if plaintiff's contention for amortization of the commissions involved were sustained, there does not appear to be any rule of law under which we could allow the plaintiff any further deduction than the pro rate part of such expenses for the last year. In other words, there does not seem to be any method of giving the plaintiff a complete and logical remedy under the theory that the commissions were part of cost of capital.
The plaintiff is entitled to recover the amount of improper excess in its taxes arising from the failure to allow as a deduction expenses incurred in acquiring the assets of the Columbian Fire Insurance Company of Indiana. Before judgment is entered, counsel for the respective parties may submit to the court a stipulation as to the amount of judgment which should be entered in accordance with this opinion if they can agree thereon. If not, they may submit computations of this amount as they respectively consider it should be determined, and upon consideration thereof the court will enter final judgment.