Fred Cantrell Co. v. Commissioner

Before JAMES, LITTLETON, SMITH, and TRUSSELL.

This is an appeal from the determination of deficiencies in income and profits tax for the years
1919, 1920, and 1921, amounting to $2,740.05. They result from the disallowance of certain
deductions made for exhaustion, wear and tear of property, and from the exclusion of certain
amounts from the taxpayer's claimed invested capital for the years in question.

FINDINGS OF FACT.
The taxpayer is a Tennessee corporation with its principal office in Chattanooga, and is engaged in
the business of contracting and dealing in plumbing, heating, and electrical supplies. The
business was previously conducted as an individual enterprise by Fred H. Cantrell.

The taxpayer was incorporated April 1, 1918. The assets of the individual business conducted by
Cantrell, with the exception of accounts receivable, were paid in to the corporation in exchange
for its entire issue of capital stock in the amount of $150,000. Immediately prior to the date of
incorporation, Cantrell, who had been in business for 25 years, had made an inventory of his stock
of merchandise, furniture, fixtures, tools, machinery, etc. In the making of the inventory,
depreciation upon depreciable property was taken into account. The assets inventoried had cost from
$10,000 to $15,000 more than the amount of the inventory, which totaled $140,000. The assets were
inventoried and placed upon the taxpayer's books of account as follows

Merchandise_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

$130,000

Tools and machinery_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

6,000

Autos and trucks_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

2,500

Furniture and fixtures_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

1,500

Cash_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

10,000

Total_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

150,000

The principal reason for incorporating the business was to enable employees to acquire an interest
in the business. Some of these employees were permitted to acquire stock at a price of $66⅔ a
share. Each employee subscribing for shares of stock gave Cantrell notes in payment therefor. It
was supposed that the notes would be paid by the employees from dividends and from salaries.
Cantrell also attempted to interest certain prominent business men in Chattanooga in the enterprise
, and offered to sell certain business men shares at a price of $66⅔ a share. Only one of the
business men, however, purchased any shares of stock at that price.

By reason of the fact that certain shares of capital stock of the corporation were sold at a price
of two-thirds of the par value, the Commissioner held that the actual cash value of the assets paid
in for shares of stock was only two-thirds of the par value of the shares, and reduced invested
capital accordingly. He also held that the value of the depreciable assets paid in for such shares
was only two-thirds of the amount claimed and reduced the depreciation claimed in like proportion.

Order of redetermination will he entered on 15 days' notice, under Rule 50.