Wisconsin State Journal from Madison, Wisconsin • 17

ANDERSON'S MADISON SERVICE a i i ii lac of I hi' i i I .1 ii iiii'Ut'il tiuin I In- iii m. il ion. an-; the 1. 1 ilt. assets lii 1 1 tin Tin-, nun Ilia! the transaction was merely substitution I' one Sitl unlay.

June II, l(M2 al-o tin. I ihal lln- following amounts, winch were charged on the liooliM to paioll account and w-hicli were disallowed by Hie auditor as unsubstantiated and unallowable payroll deduct ions, should properly be added to the cost of Ihe building: $100; 192 1. $418; 1925, $750; 11J6, $200. Wc lurlher find that taxpayer is entitled to a deduction from taxable income for the year of $218,33, and from income of Ihe year of $1,168.08. These amounts represent expense items which were erroneously capitalized on the books and which have been deducted from the cost of the building as shown on Exhibit 192A.

Depreciation on Building Taxpayer takes except ion to the rate of depreciation allowed by the auditor as well as to the period over which the auditor depreciates the additions to the building made subsequent to 1917. The auditor has allowed a depreciation rale of two per cent per oniiuiu on the entire adjusted building cost. Taxpayer has segregated the amounts included in the total adjusted building cost into the following classifications upon which it claims depreciation at the annual rates indicated: Building-two per cent on 1917 additions, later additions at rates which cause them to become fully depreciated in 1967. 1922 oiicher S.ri Voucher 70 'Mi 1923 Y'oucher IIS5 "0 U0 1921 l.i;:hl How Is ion On Y'oucher I 57! I I.Yon Y'oucher 1 587 20 oo Voucher 17 Vmii her 1S01 35.50 Y'oucher 163(1 18 50 Voucher 1(173 170 1925 Y'oucher 2108 46.70 Voucher 45.00 Voucher 2213 115.00 Voucher 2216 5.50 Voucher 2217 8.10 Four Y'acuum 206.55 Y'oucher 2228 14.71 Voucher 2230 153.00 Vouc her 2271 141.21 Y'oucher 2290 8.50 Y'oucher 2320 75 73 Voucher 2400 37.50 Voucher 2406 11.25 Y'oucher 2521 13.05 Y'oucher 2622 42.0 Curtains 56.30 Voucher 2105 109.75 Voucher 1874 115.00 Voucher 1896 42.50 Voucher 2020 83.00 Y'oucher 2024 135.00 Voucher 2031 39 00 Y'oucher 2031 76.95 Voucher 2042 34.40 Voucher 2059 6.24 Y'oucher 2139 1.39 Voucher 2196 10.91 Y'oucher 2280 50.00 Voucher 2326 71.38 Y'oticher 2455 4.75 Voucher 2155 5.0S Y'oucher 2615 30.00 Voucher 2677 833.10 1921! Y'oucher 2928 32.50 Voucher 2997 5.06 Y'oucher 3027 47.5o Y'oucher 3063 76.50 Y'oucher 3177 32.50 Voucher 3296 71.01 Vou. her 3745 35.00 Y'oucher 3263 4.72 1927 Voucher 4348 Voucher 4514 16.00 Y'oucher 4641 42.50 Vouchers 4708.

4624, 4632, 4803 78.88 Voucher 4994 26.16 Voucher 5138 20.00 Voucher 5364 90.00 Y'oucher 5467 30.00 Voucher 5563 60.00 Adjusted Building Cost 1C our 11 Somiilii ami I In-I'll 1 1. ii 1 1 1 1 1 1 1 cmciit i I'm p.i ii Hind i liii ii Soiiums arreeii to sell. asMi-n ami translcr to Ihe I'm pot at uii the lease between himself niiil tli trustees of the Kstate of John l'laukiutou ami until her lease maile April 30, 1913, lie! ween the Tkonle Investment Compuny aud C. Somers. This agreement was never carried Into effect, and on Nov.

3, 1915, an offer was made by Charles V. Homers and A. J. Harvey, S. S.

Harvey and G. A. Harvey, members ot the Ann of Harvey Brothers, to assign to the Plankinton Improvement eompany the Plan-kinton lease together with certain contracts relating to the erection of a new building on the demised premises and subscription agreements for the preferred stock of the rianklnton Arcade company and an agreement between First Trust and Savings bank of Cleveland to purchase the first mortgage bonds ot the Plankinton Arcade company. Consideration for this transfer was to be the acceptance as fully paid of subscriptions to $10,000 of the common capital stock of Plankinton Improvement company and issuance of an additlon-ftl $1,490,000 of common capital tuck of the Plankinton Arcade torn pa ny to whatever parties might be designated by Somers and the Harvey Brothers, the release by the corporation of all rights acquired by it by the contract ot Dec. 30, 1914, and especially all rights acquired by it by virtue of that contract with respect to the lease between C.

YV. Somers and the Ticonic Investment company, and the transfer back to the tlgnors of whatever right was acquired by the corporation to the name Plankinton as used in connection with the plankinton hotel and to conduct the business of that hotel. Plankinton Improvement company further agreed to change Us name to Plankinton Arcade company and to increase the authorized amount of its capital stock from $10,000 of common stock to $1,500,000 of common and 000 of preferred stock. This offer was accepted by the corporation, and on Nov. 6, 1915.

Chas. YV. Somers, the owner of record of the leasehold, executed a formal assignment of it to. the corporation. Pursuant to the terms of the offer, common capital stock of a par value of $1,460,000 was issued to Harvey Brothers.

Chas. W. Somers, and other par ties designated by them, and it Is the par value of this stock in said sum which taxpayer contends must be added to the income tax cost of the leasehold. The record discloses that Harvey Brothers and C. YV.

Somers were the only persons who had an Interest in the leasehold prior to the assignment of it to the corpor ation, except for a mortgage held by Harry Payne Whitney, and that the other persons who receiv ed shares of the common stock of Plankinton Arcade company received such shares in satisfaction of obligations of Somers or of Harvey Brothers to them and not because of any interest which they had in the leasehold. It appears that Plankinton Improvement com pany had transacted no business previous to Nov. 3, 1915. except to receive subscriptions to the of authorized capital stock and to accept the offer of ChaH. YV Somers dated Dec.

30, 1914. The question here presented is one which has never been passed upon before in connection with the Wisconsin income tax law. YVe are cited by taxpayer to State ex rel. Van Dyke vs. Cary, 181 Wis.

664, where it was held that divi dends paid in capital stock were taxable to the recipients thereof, and that the requirement of the statutes that capital stock cannot be issued for less than par, conclusively established the value of such slock at an amount not less than its par value. Upon this authority, the taxpayer argues that in the absence of evidence to show that the leasehold did not have a value equal to the par value of the stock issued for it, the corporation must be allowed to treat the par value Of the stock issued as a part of the income tax cost ot the leasehold to It. In Miller vs. Tax Commission, 195 Wis. 219, plaintiff transferred certain assets owned by him which had cost him approximately $150,000, to a newly organised corporation in exchange for the entire capital, stock of said corporation of a par value of and a promissory note of the corporation in the sum of $10,000.

He was assessed an additional Income tax upon the difference between $210,000, representing the I1 I a i'- I 1-1 I lie leasehold lor I In 'ii I pose of ill-Ill ininiiij; (he pert cili amoi I ion ol the leasehold which taxpayer is entitled to definition its Wisconsin income tax el in ns. AMOIM'IZATION OT LEASEHOLD YVe are accepting ns proper the rates proposed by taxpayer in the schedules showing the amount of amortization which it claims lor the leasehold. It is therefore ordered that the income tax cost of the leasehold as hereinbefore determined be amortized a said rates. I API I'M, ADDITIONS HUM. I TO EXPENSE The auditor has adjusted income for each of the years here under review by disallowing deduction oT certain items charged to expense which lie contends should have been capitalized.

We find vlhat the following ileitis, disallowed by the auditor, were pivnperly charged to expense and are properly deductible from income of the years indicated: Dttl Voucher 75 $310.00 Y'oucher 2102 188.75 122 Y'oucher 833 510.00 last Y'oucher 1002 225.50 Voucher 1015 750.00 Voucher 1068 207.05 Voucher 1147 392.00 Y'oucher 1655 212.50 Y'oucher 1742 232.36 vm, Voucher 2207 25.50 Y'oucher 2216 10.62 Voucher 2216 18.0) Voucher 2216 37.00 Voucher 2229 23.00 Voucher 2359 27.75 Voucher 2359 15.75 Interest on Notes 24.38 l2fi Y'oucher 2S55 35.O0 Interest on Notes 281.20 1927 Voucher 445S 35.00 Interest on Notes 101.55 The following amounts must be treated as a part of the cost of the taxpayer's leasehold: 19-21 Voucher 2053 44.75 19-24 Y'oucher 1532 75.00 1927 Voucher 5131 20.00 From the evidence submitted, we find that the following items must be considered as a part of the cost of the building and depreciated at the rate allowed for depreciation on the building: 1921 Y'ouchers 2025. 2169, 2329 37.00 Y'oucher. 63 242.90 Vouchers 26, 63, 73 360.40 Voucher 288 176.11 1922 Y'oucher 545 70.00 Y'oucher 545 244.44 Voucher 648 512. 40 Vouchers 835, 846, 876 561.50 Voucher 918 13.00 UttS Voucher 963 44.21 Voucher 963 53.00 Voucher 10S9 76.0O Voucher 1089 10.00 Voucher 1090 227.2" Voucher 1187 306.93 Y'ouiher 13(16 136. 26 Voucher 1306 293.57 1924 Voucher 1377 186.81 Voucher 1413 41.59 Voucher 1483 93.21 Two Meters 53.46 Voucher 1742 223.55 Integrity Building fc Loan 658.76 1925 Y'oucher 2102 180.00 Voucher 2114 28.00 Y'oucher 2206 716.56 Y'oucher 2226 21.25 Y'oucher 2400 80.00 Y'oucher 2197 373.39 Y'oucher 2504 190.70 Y'oucher 2504 10.00 Voucher 2751 51.57 Y'oucher 2452 44.80 Y'oucher 2202 500.00 Voucher 2057 478.13 Y'oucher 2096 360.00 Voucher 2139 3.88 Y'oucher 2145 750.00 Y'oucher 2407 868.00 Voucher 2107 147.00 Y'oucher 2475 $426.84 Voucher 2519 45.0(1 1926 Voucher 3108 34.30 Voucher 3108 9.50 YVe find that the following Hems charged to expense and disallowed by the auditor are properly chargeable to equipment and that depreciation must be allowed thereon at the rate of 10 per cent pe annum 1921 Voucher 2016 45.50 Voucher 2016 17.64 Y'oucher 4 55 00 Voucher 141 63.18 lot in ol ownership for another ami did no! give rise In a taxable prof it to the plaintiff.

Thus, the court has that although both the corporation issuing and the stockholder receiving stock are estoppel from denying that the stock was worth less than its par value: that such value does not necessarily control in determ ining whether or not a taxable profit or a deductible loss has been realized or sustained, and that when assets are transferred to newly organized corporation in exchange for all of Its capital stock, no profit may be recognized upon the exchange for the reason that the transaction is a mere substitution of one form of ownership for another and is not a closed transaction upon which a taxable gain or loss may he recognized. What, then, is the income tax cost to the corporation of the assets received by it in exchange for its stock? Now. it must be recognised that actual cost and income tax are not necessarily identical and that under certain situations the income tax cost may exceed or may be less than the actual cost of the assets. Since it has been held that an exchange of corporate stock for assets does not constitute a sale. the corporation receiving the as sets cannot be said to have purchased them, and, therefore, it may not use the par value of the stock exchanged as the income tax cost of the assets received.

Nor can it use the fair market value of the assets on the date of acquisition unless expressly or impliedly authorized by statute to do so. To do this would result, in many cases, in exempting increases in the value of the property from Income tax. YVe, therefore, conclude that in transactions ct this nature, the income tax cost to the corporation of the assets transferred to it must be the same us the income tax cost of such assets in the hands of the transferor. In the Miller case, supra, the court referred to a section of the 1927 statutes which provided for the non-recognition ot the gain or loss upon transactions of this nature although that statute did not apply to the years the income of which was involved in the Miller case. The court said that it found reassurance as to the correctness of its conclusion in that provision of the Statutes.

YVe likewise find leassurance as to the correctness of our conclusion herein in the fact that the statutes of 1927 and subsequent years provide that if the property is transferred to a corporation solely in exchange for stock in said corporation and immediately after the transfer an interest or control in such property of 80 per cent or more remained In the transferor, then the basis for determining gain or loss, depletion or depreciation, should be the same as it would be in the hands of the transferor. Section 71.02 (2 (1) and (J) of Stats, of 1927 and succeeding years. In the instant case the record shows that Chas. W. Somers and Harvey Brothers transferred their interest in the leasehold to taxpayer for $1,460,000 of taxpayer's common stock and that they then directed that some of this stock be issued to eerttain other persons.

Of the stock actually issued. 11.500 phares were issued to the transferors and 3,100 shares were issued to others. Thus, Harvey Brothers and Somers received certificates for approximately 79 per cent of the stock which v. i issued. For the purposes of determining whether or not they had an interest or control of 80 per cent In the leasehold after the transfer, the stock which was Issuable to them, but which they directed to be Issued to others, must be considered to represent a part of their interest or'control in the property.

YVe. therefore, find that immediately after the transfer of the leasehold to the corporation, the transferors had an interest or control in said leasehold of 100 per cent. The record also shows that the Income tax cost of this leasehold to the transferors was nothing. The lease was made between Sinners and the lessors, and nothing was paid for it. The record also shows that the moneys advanced by the transferors to meet the obligations imposed by the lease were repaid to them in preferred stock of taxpayer corporation, which we have allowed as a part of the income tax of the leasehold.

Our determination, therefore. Is that the $1,460,000 par value common stock cannot be considered as a part of the income Building fixtures Plumbing Klectrie wiring Heating and ventilating Klevators Incinerator Light fixtures YVindow shades Fi re esca pe 5 4 5 6 5 '7 20 4 Skylight guard 10 In determining the depreciation to be allowed il must be borne In mind that the deduction allowed taxpayer under Section 71.03 3 I of the Statutes on income producing proerties is restricted to a reasonable allowance for depreciation by use, wear and tear, and that no deduction is allowable for obsolescence. In hir, report, the auditor states that ihe rate of two per cent which has been allowed is a composite rate. Therefore, in determining this rate the auditor has considered that charges to the building account include such elements -of building cost as plumbing, heating, elevators, which depreciate through use. wear and tear at a more rapid rate than the steel and concrete building proper.

It is obvious that in the classes of charges to building account which it is claimed should be depreciated at a rate in excess of two per cent the taxpayer has included all of the Items "included in the adjusted building cost which will have become fully depreciated at the end of 50 years by use, wear and tesr. We find that that portion of the charges to the building account to which taxpayer assigns a life of 50 years terminating in 1967, will not be fully depreciated through use, wear and tear at the end of that period, but will have a useful life of many years thereafter. Moreover, many ot the classes of Items upon which taxpayer is claiming a depreciation rate in excess of two per cent are items which will, in all probability, have a useful life as long as that of the building proper. YVe therefore find that the composite rate of two per cent allowed by the auditor is the proper rate of depreciation to be allowed upon taxpayer's building, and that this rate should be applied to the adjusted building cost as hereinbefore set forth to determine the allowable depreciation for each of the years here under review. Taxpayer contends that if.

for purposes of depreciation, the useful life of the building constructed in 1917 ig determined to be 50 years, that it should be entitled to depreciate subsequent additions to the building, including the additional five stories completed in 1925. at a rate which will result in fully depreciating these additions in 1967, when the building erected in 1917 shall have become fully depreciated. It, is apparetit front Ihe record that the additions to the building made after 19l7 will not depreciate from use. wear and tear more rapidly than the structure We find that, with the exception of the adjustments below, the cost of the building is correctly shown on Kxhibits 192 and 192A. Taxpayers contends that the item of $75,000.

which the auditor has deducted from the settlement with the John II. Parker company, must be included in the cost of the original two stories and that the transfer from the John H. Parker Special account in the amount ot $1,363 65. which the auditor has included as a part of the cost of the original two stories of the building, should be increased by $5,187 75. the balance of the John 11.

Parker special account. YVe find that these contentions are supported by the evidence and that these amounts must, therefore, be added to the cost of the building in 1917. Taxpayer also contends that the deduction from the cost of the building to taxpayer for work paid for by Fred G. Smith, a lessee of the basement floor, should be decreased from $122,330.93 to $96,000. The record shows that the amount expended by Fred C.

Smith for fixtures and for his share of the cost of the building whs at leant $122,330.93, but the record shows that only $96,000 of the amount was paid through Plankinton Arcade company. YVe. therefore, find that the sum that should be deducted from the cost of the building, on account, of work done for Fred Smith and paid for bv him. is $96,000. YVe find that in 1921, $816.44 must be added to lie cost of the building for capital additions charged to expense in that year.

We also find that there should be deducted from the building account in 1H21 the amount of $1,608.35, which represents an expense item capitalized. The following adjustments are necessary to properly include as a cost of the building the capital additions charged to expense which we have determined were properly chargeable to building; Building Additions Charged to Expense Per Corrected Build- Adjustment to ing Additions Building Ac- barged to count lis Shown Expense on Exhibit 192 $1,101.44 3I9.M 1.1 (ded.) 1,257.41 69.7iied.) W75.12 4,730.32 43.SO S.H0 Exhibit 192 if 1,07 1.60 $1,327.17 sum 1922 1923 1921 1926.