Petition for Review of Order of the United States Board of Tax Appeals.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
This is a petition by Monarch Electric & Wire Company to review an order of the Board of Tax Appeals entered August 14, 1928, and involves income and excess profits taxes for the year 1920, in the amount of $6,104.03.
The uncontroverted facts relating to this issue are as follows:
In 1906, one Nathan Deutsch owned the entire capital stock of the Monarch Electric & Wire Company, an Illinois corporation organized in 1902 (not the petitioner herein). In the latter part of 1906, Deutsch sold a 16 per cent. interest in this company to each of the three Schwab brothers, L. S. Schwab, H. S. Schwab, and A. G. Schwab, and retained for himself the remaining 52 per cent. controlling interest. In the latter part of the year 1919, the Schwab brothers began negotiations for the purchase of Deutsch's stock. Both parties dealt at arm's length through their respective attorneys. An agreement, dated January 1, 1920, was finally perfected, by the terms of which the name of the company was changed to Schwab Electric Company; a new corporation, the petitioner herein, was organized and acquired all the assets subject to the liabilities of the Schwab Electric Company, with the exception of certain indebtedness of Deutsch which was canceled and $25,300 in Liberty Bonds which was paid directly to Deutsch. Besides the Liberty Bonds and the cancellation of his indebtedness, Deutsch received from petitioner $300,000 par value of its preferred stock (being its total authorized preferred stock). This preferred stock had voting rights, and was entitled to cumulative dividends of 6 per cent. per annum, the payment of the dividends being guaranteed individually by the three Schwab brothers. The Schwab brothers further agreed that this preferred stock would be redeemed at a certain amount each year, the last maturity of which is to be April 1, 1937.
The Schwabs further agreed with Deutsch that until $100,000 of the preferred stock was redeemed their aggregate annual salaries would not exceed $36,000, and until $150,000 par value of preferred stock was redeemed their aggregate annual salaries would not exceed $45,000, and until $200,000 par value of preferred stock was redeemed their aggregate annual salaries would not exceed $54,000.
The three Schwabs received from petitioner all its common stock, which gave the Schwabs a 52 per cent. interest and voting control.
The assets conveyed to petitioner by the Schwab Electric Company had a fair market value, in the amount agreed upon between Deutsch and the Schwabs and admitted by respondent, and were reflected as invested capital in the petitioner's income tax returns as follows:
These assets were taken over by the petitioner at the above figures. The Schwab Electric Company had carried the assets at a much lower valuation, and no ...