Opinion
No. J-446.
November 2, 1931.
Suit by the Oxford Paper Company against the United States.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the stipulation of the parties and the evidence adduced, makes the following special findings of fact:
The plaintiff is a corporation engaged in the manufacture of paper and pulp. On April 1, 1918, plaintiff filed an income and excess profits tax return for the calendar year 1917, and the Commissioner assessed taxes in the amount of $450,427.96, of which the plaintiff paid $100,000 on June 7, 1918, and the remainder on June 14, 1918.
The net income of plaintiff for the calendar year 1917, upon the basis of which the said taxes were assessed and paid, amounted to $1,474,716,36, and its invested capital for said year was reported as $4,105,384.40.
On November 27, 1917, the plaintiff exchanged $850,000 par value of 6 per cent. second mortgage bonds of Nashwaak Company, a corporation organized and existing under the laws of New Brunswick, for 8,500 shares of the preferred capital stock of the said Nashwaak Company. Said bonds were purchased by the plaintiff in 1916 at an actual cost of $771,071.50 in cash.
The said Nashwaak Company was organized in November, 1916, with an authorized capitalization as follows: 15,000 shares of common stock without nominal or par value, $1,500,000 first mortgage 6 per cent. bonds, and $1,750,000 second mortgage 6 per cent. bonds. All of the common stock was issued for cash in the amount of $75,000. All of the first mortgage bonds were issued for property consisting mostly of timberlands. All of the second mortgage bonds were issued for cash.
In November, 1917, the charter of Nashwaak Company was amended to authorize 17,000 shares of preferred stock of the par value of $100 each, making a total increase of capital of $1,700,000 over and above the 15,000 shares of common stock then outstanding. This preferred stock was without voting rights in any circumstances. No cash dividends were paid on the preferred stock, but on December 31, 1919, a dividend on said stock in the amount of $204,000 was paid with the Nashwaak Company's promissory note, which note was shortly thereafter exchanged for common stock of the Nashwaak Company.
The business of the Nashwaak Company was that of cutting from its properties and selling pulpwood for the manufacture of paper.
The balance sheet of said Nashwaak Company as at December 31, 1917, according to its books, was as follows:
Nashwaak Pulp Paper Co., Limited, Balance Sheet, Dec. 31, 1917 Assets
Current assets: Cash in banks ............... $ 64,513 02 Accounts receivable ......... 256,660 15 Mill inventories ............ 329,329 95 Lumber inventories .......... 28,288 19 _____________ $ 678,791 31 Deferred charges: Insurance prepaid ........... 10,000 00 Discount on bonds ........... 151,666 67 _____________ 161,666 67 Investments: Marysville General Stores (capital stock) ..... 40,400 00 Avon Coal Co., Limited (capital stock) ............ 110,000 00 Canadian Victory loan bonds ...................... 2,000 00 _____________ 152,400 00 Sinking fund, first mortgage bonds ......................... 75,000 00 Capital assets — St. John: Buildings and foundations ... 116,277 05 New wood room ............... 107,383 51 Machinery and equipment ..... 495,305 05 Wharves ..................... 25,000 00 Sidings ..................... 11,594 64 Real estate ................. 40,555 80 Tenements ................... 7,089 95 Stable equipment ............ 2,975 00 Office furniture ............ 2,875 56 ____________ 809,056 56 Timberlands ................. 2,047,172 49 Operating equipment ......... 135,003 40 Real estate ................. 49,730 59 Houses and stores ........... 69,355 78 Napudogan sawmill ........... 6,000 00 Blackville machinery and equipment .................. 5,349 86 Stanley lumberyards ......... 284 33 ____________ 2,312,896 56 ____________ 4,189,811 10 Liabilities
Current liabilities: Accounts payable ............ 65,065 16 Accrued labor ............... 1,486 44 Notes payable ............... 130,000 00 ____________ 196,551 60 Deferred credits: Poplar wood sales ........... 4,657 13 Blackville lumber sales 390 01 Stanley lumber sales ........ 557 16 ____________ 5,604 30 Depreciation reserve ........... 429,565 49 Capital stock: Preferred ................... 1,700,000 00 Common ...................... 75,000 00 ____________ 1,775,000 00 First mortgage bonds .......................... 1,500,000 00 Surplus ....................................... 133,535 76 Loss and gain ................................. 149,553 95 ____________ 4,189,811 10
The preferred stock of Nashwaak Company was not traded in on the open market and there were no sales thereof to indicate what its fair market value was on or about November 27, 1917. From all of the competent and material evidence in the case, the fair value of this stock at the date last mentioned is found to be $60 a share.
In computing and determining the plaintiff's net income for the calendar year 1917 to be $1,474,716.36, as aforesaid, no allowance or deduction was made for any loss, if there was any such loss, sustained by the plaintiff in the year 1917 by reason of the aforementioned exchange by the plaintiff of bonds of the Nashwaak Company for the preferred stock of the Nashwaak Company.
On March 21, 1925, the plaintiff duly filed a claim for refund of $10,000, or such greater amount as was legally refundable. In the said claim for refund, the plaintiff contended that it sustained a loss by reason of the aforesaid exchange, and that such loss should be deducted from its gross income for 1917 in determining its taxable net income for 1917. The said claim for refund was wholly denied and rejected by the Commissioner of Internal Revenue on July 7, 1926.
Johnson Shores, of New York City, for plaintiff.
Lisle A. Smith, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (T.H. Lewis, Jr., of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, WHALEY, WILLIAMS, and LITTLETON, Judges.
The plaintiff in this case brings suit to recover $223,684.80, alleged to have been wrongfully collected from it as income taxes for the year 1917.
The action is based on a claim that, in determining the amount of plaintiff's tax for that year, the Commissioner refused to allow the plaintiff for a loss sustained in the exchange of certain bonds for preferred stock of the Nashwaak Pulp Paper Company, Limited. The parties agree that the bonds exchanged were purchased by plaintiff in 1916 at an actual cost of $771,071.50 in cash, and that plaintiff received stock in the Nashwaak Company therefor in the amount of $850,000 face value, which, however, it contends was actually worth only $40 a share, or $340,000. The Commissioner refused to allow any loss whatever therefor, holding in effect that the stock was worth what the bonds cost.
It will be seen that the question is wholly one of fact to be determined on the evidence submitted in the case.
It is contended on behalf of the defendant that the only way to establish the market value of shares of stock in a closely held corporation like the Nashwaak Pulp Paper Company, where there is no evidence of any sales, is to ascertain the value of the property which they represent, assigning to each share its proportionate worth. The authorities cited on behalf of defendant pertain to common stock. Undoubtedly, in estimating the value of common stock under circumstances like those in the instant case, the value of the net assets of the corporation have an important bearing. They may also have some application in the case of preferred stock, but the value of preferred stock may be much less than the value of the assets. In any event, we find nothing in the evidence which shows the value of the property of the corporation, except that it is stipulated that the balance sheet of the company for the year in question is as shown in the findings of fact. But the mere fact that the balance sheet states the assets of a corporation to be a given sum is no evidence that such value actually exists, as many persons have found to their sorrow.
It is also contended by defendant that the testimony with reference to actual sales prices of high-grade preferred stock on the open market is not admissible to show the value of the preferred stock involved herein. But we think when the dividend rate of these stocks is shown, and other matters showing how such stock is rated, that while such evidence is not conclusive, it tends to show the value of preferred stock bearing a dividend rate equivalent to that of the stock in question, and may be considered together with all of the other evidence in the case bearing thereon in determining the value of the stock of the Nashwaak Pulp Paper Company. Proceeding in this manner, we find the value of the stock received by the plaintiff in exchange for bonds at the time of the exchange to have been $60 a share, and that plaintiff by such exchange sustained a loss of $261,071.50.
It follows from what has been said above that plaintiff is entitled to recover herein, and that the amount of its taxes for the year involved should be computed after allowance has been made for this loss; but there seems to be some question as to whether by inadvertence the amended stipulation executed by the parties is correct in all particulars. Counsel for plaintiff say in argument, "We desire that this proceeding be settled according to the right of the matter, and notwithstanding the stipulation, we agree that any recovery should be calculated in light of the actual invested capital, corrected income and the taxes paid."
Accordingly, judgment will be withheld, with leave to the respective parties to submit a computation of the proper tax and amount to be refunded in accordance with the conclusions stated above. If the parties agree with reference to the result of the computation, judgment will be entered for the amount so fixed; otherwise the court will have the computation made, and the judgment entered.