3 B.T.A. 753

Appeal of THE NEW OTTAWA COUNTY TELEPHONE CO.

Docket No. 5558.

Submitted January 1, 1926.

Decided February 15, 1926.

Alfred L. Geiger, Esq., for the taxpayer.

Thomas P. Dudley, Jr., Esq., for the Commissioner.

Before Smith, Littleton, and Trussell.

*754OPINION.

Smith:

The taxpayer claims the right to include in invested capital an amount representing appreciation in the value of its assets, the amount being the difference between the book value of the assets and the value placed upon them as the result of an inventory made by the taxpayer’s employees. The inventory was taken at the instance of the Public Utilities Commission of the State of Ohio, the basis of which was “ reproduction cost in 1915.”

At the hearing it was intimated that the books of account did not accurately reflect the cost of the assets owned by the taxpayer at the date of the inventory. However, this was not proven. So far as the record shows the entire amount of the increase in the inventory over the book value of the assets represented by “ inventory surplus ” was appreciation in the value of those assets. It is significant to note in this connection that the taxpayer, in keeping its books of account, did not carry this amount as a part of its general surplus, which it might properly have done had there been an error in the keeping of its books. It carried the increase simply as “ inventory surplus.” It is a well-established principle of the income tax laws that appreciation in the value of assets may not be included in invested capital. La Belle Iron Works v. United States, 256 U. S. 377.

The argument with respect to the inclusion in invested capital of an amount set up as a reserve for depreciation is that depreciation is a charge against only the earnings of the current year, and that where a corporation has failed to charge depreciation against the *755current earnings the amount carried to surplus acquires the character of “earned surplus,” and that thereafter it may not be reduced by a charge for depreciation covering a series of years or by an operating deficit for any year; furthermore, that although the earned surplus of a mercantile concern might properly be reduced by an operating deficit, the surplus of a public utility, which derives its income from services rendered to the public under rates-established by governmental authority, occupies a different status and may not be thus reduced.

We think such an argument is unsound. The surplus of a corporation is the equity of the stockholders in the assets of the corporation over and above the par value of the capital stock, and an “ earned surplus ” is simply that portion of the surplus which comes in through earnings. “ Earned surplus ” is not necessarily what a taxpayer’s books of account show as such, for the books of account may be in error. If a corporation which suffers depreciation does not charge it off against operating profits its book earned surplus is not its true earned surplus. Appeal of City National Bank, 2 B. T. A. 623; Appeal of Alexandria Paper Co., 3 B. T. A. 239. In the instant case the taxpayer came to the conclusion in 1908 that its true earned surplus was overstated in the amount of $25,000; hence the reduction of the book surplus by that amount. In 1916 there was a similar reduction of the hook surplus in order to bring its books of account into accord with actual facts. From the record we can not find that the true earned surplus of the corporation was in excess of that shown by the books of account.

Appeal of the New Ottawa County Telephone Co.
3 B.T.A. 753

Case Details

Name
Appeal of the New Ottawa County Telephone Co.
Decision Date
Feb 15, 1926
Citations

3 B.T.A. 753

Jurisdiction
United States

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