Add one more complication;

              94 HASKINS & SELLS December
Add One More Complication
CAPITAL stock without par value no
longer can be said to be a novelty.
Since the State of New York first author­ized
its issuance in 1912, well-nigh count­less
corporations have availed themselves
of the non-par stock laws existing in various
states, now numbering over thirty. The
principle has been applied to all kinds of
corporations and all classes of stocks. In
current stock offerings the assignment of
par value seems to be the unusual pro­cedure
rather than otherwise.
And yet withal, the entire gamut of
non-par stock problems apparently has not
been run. This seemingly simplest of de­vices,
when applied to the complexities of
modern financing, continues to create un­anticipated
situations, and to furnish
abundant material for rumination. The
following case, involving both common and
preferred stock without par value—a fre­quent
cause for confusion—is an interesting
example.
An individual was an original subscriber
to the capital stock of a corporation re­cently
formed to acquire the assets and
purchase the good-will of a well-known
large industrial concern.
The authorized capital stock of the com­pany
in question consisted of preferred
stock, without par value, entitled to cumu­lative
dividends at the rate of seven dollars
per share annually, redeemable in case of
liquidation, or prior thereto at the com­pany's
option, at one hundred five dollars
per share; and common stock, also without
par value.
The preferred stock was issued for one
hundred dollars per share, and each share
carried "as a bonus" one share of common
stock. The entire capital stock was issued
almost wholly against the company's earn­ing
capacity, as represented by its good­will,
since bonds were sold practically to the
limit of the equity in its net tangible assets.
The individual mentioned thus acquired
an equal number of preferred and common
shares on the basis described. Several
months later he disposed of his common
stock at a price of approximately thirty-six
dollars per share. And now, in attempt­ing
to ascertain, for income tax purposes,
the gain or loss resulting from the trans­action,
he finds himself confronted with a
perplexing question: how much did his
common stock cost him?
The terms of the original offering, as
stated, were a price of one hundred dollars
per share of preferred stock, the purchaser
of each preferred share receiving "as a
bonus" one share of common stock. Under
the circumstances, however, it manifestly
is unfair to preserve this fiction, and to
maintain that the subscriber's preferred
stock cost him one hundred dollars per
share, and that his common stock cost him
nothing. The transaction should be re­garded
in its entirety. The subscriber paid
one hundred dollars, and received therefor
two shares of stock, one preferred and one
common, without par value. The problem
then is to apportion the purchase price
between the two.
Reference to the company's published
balance sheet at the commencement of
business proves unenlightening. As has
been stated, the capital stock was issued
almost entirely against earning capacity,
as represented by good-will. In the bal­ance
sheet, however, apparently because
of conservatism, good-will is shown at the
nominal amount of one dollar. Corre­spondingly,
preferred stock outstanding is
stated nominally at one dollar per share,
and common stock outstanding at ten
cents per share. There remains a small
capital surplus, after eliminating from the
proceeds of capital stock sales all but one