opinion.
Murdock:The Commissioner determined a deficiency in income and profits taxes for the calendar year 1921 in the amount of $753.80. Several issues raised by the petition have been settled by a stipulation of the parties, leaving for our" determination but one issue *1331which is that the Commissioner has erred in rejecting the petitioner’s application to have its profits tax computed under section 328 of the Revenue Act of 1921.
The petitioner is a New Jersey corporation, with its principal office in New York City.
For almost sixty years prior to 1909 the Delaware, Lackawanna and Western Railroad Company had engaged extensively in mining, purchasing, transporting and selling anthracite coal. In May, 1909, the Supreme Court of the United States decided that these activities were in violation of the Hepburn Act. United States v. Delaware, Lackawanna & Western R. R. Co., 213 U. S. 366. The railroad company, after considering various methods calculated to comply with the law and yet to save its valuable coal business for its stockholders, finally decided to organize the petitioner. The petitioner was organized in June, 1909, with an authorized capital stock of $6,800,000, divided into 136,000 shares of the par value of $50 each. The petitioner was to purchase the coal of the railroad company, just prior to shipment, and to ship and sell it as the railroad company had done formerly. Stockholders of the railroad company were advised of the situation and were permitted to subscribe for the petitioner’s stock on the basis of one share to each share of railroad stock held. In order to enable the stockholders to purchase their allotted shares, the railroad company declared a 50 per cent dividend and suggested that each stockholder authorize the treasurer of the railroad company to use one-half of the dividend to pay for the number of shares in the petitioner to which such stockholder was entitled to subscribe. Practically all of the stockholders of the railroad company followed the plan suggested so that the stockholders of the two corporations were identical for the most part. The petitioner began business immediately, with personnel taken over from the railroad company with the business. A contract was entered into by the railroad company and the petitioner on August 2, 1909, whereby the petitioner purchased coal on hand, leased certain equipment, and agreed to take over existing sales contracts and to conduct the business so as best to conserve the good will and markets of the railroad company. The agreement was to continue until either party gave notice of six months. The rental was less than the railroad would have accepted from outsiders. The customers were notified of the change and urged to continue as customers of the new coal company.
The petitioner’s gross tonnage, gross sales, and net profits for a representative period after the exchange compared favorably with those of the railroad company from its coal-selling business before the change. Sales of the petitioner’s stock in the last six months of 1909 ranged in price from $90 to $130 per share.
*1332The validity of this contract was attacked by the Federal Government, and the Supreme Court on June 21, 1915, handed down its decision in United States v. Delaware, Lackawanna & Western R. R. Co., 238 U. S. 516, holding the contract illegal and enjoining further transportation of coal under it because the contract retained for the railroad company too great interest in and control over the coal sold and thus violated both the commodity clause of the Hepburn Act and the Anti-Trust Act. In the meantime, on June 5, 1914, the two corporations had entered into a new contract eliminating some of the objectionable features of the old, but. preserving the essentials of the petitioners’ business derived from the railroad company. On July 30, 1915, they entered into another contract to further conform to the decision of the Supreme Court. These various changes gave the railroad company less control over the business of the petitioner and gave the latter the right to exercise greater freedom in its dealings with the railroad company and others. The actual business of the petitioner and the profits derived therefrom went on uninterruptedly throughout this period. Old customers were retained through the year here involved. In 1921 all but about 25 per cent of the petitioner’s stock was held by stockholders of the railroad company. In 1921 or thereafter the railroad company sold its coal-mining business and the purchaser took over the contract with the petitioner.
The following are condensed balance statements of the petitioner as of January 1 and December 31, 1921:
[[Image here]]
*1333The petitioner, in its return for the calendar year 1921, reported, among other items, the following:
Gross sales less returns and allowances_$82, 374,199. 31
Gross income-1_ 7,099,821. 30
Net income- 4,435,187. 78
Invested capital- 14,252, 111. 26
The Commissioner reduced net income to_ 4,158, 702. 40
increased invested capital to_ 14, 256, 771.92
and determined profits taxes to be_ 863, 997. 74
The parties now agree that invested capital should be further increased by $74,675.28.
The petitioner has applied for and the Commissioner has denied it the privilege of having its profits taxes computed as provided in section 328 of the Eevenue Act of 1921.
The petitioner came into being under peculiar circumstances. The railroad company had built up, over a long period of years, a very large and profitable coal business, mining, buying, transporting and selling coal from the anthracite fields of eastern Pennsylvania. Its customers were located at various points reached by its rails. It could no longer continue this business under the law. In an effort to comply with the law and, at the same time, to preserve the value of the business to its stockholders, the petitioner was formed and the business turned over to it. Overnight the petitioner was launched in a prosperous business earning far more than a normal return on its tangible assets. The stock of the petitioner immediately sold at double its par value, at which the original stockholders had obtained it. The petitioner paid nothing and gave no stock for the valuable intangible assets of this business. These intangible assets obtained by the petitioner are not reflected in its invested capital. The railroad, instead of transferring the intangibles to its stockholders and allowing them to pay them in for stock or shares, attempted to transfer them directly to the petitioner. The railroad could afford to do this because its stockholders lost nothing through the change and the railroad retained all of the advantages which it thought the law allowed. Although the early contracts were invalid, the petitioner was permitted to enjoy all the benefits of the old business to the same extent it would have enjoyed them had the contracts been valid. The advantages which the petitioner thus acquired and which it retained through its close relation with the railroad were among its most important income-producing factors during the period from its beginning through the year here in question. .
There was an abnormality in the petitioner’s capital of such magnitude as to entitle it to have its profits taxes computed under *1334section 328 of the Revenue Act of 1921. Cf. J. M. & M. S. Browning Co., 6 B. T. A. 914; Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Rothschild Colortype Co., 14 B. T. A. 718; Stephens-Adamson Mfg. Co., 16 B. T. A. 41; Gantz Tank Co., 16 B. T. A. 212; Roslyn Fuel Co., 16 B. T. A. 285; Marc Eidlitz & Son, Inc., 18 B. T. A 187; Concrete Engineering Co., 19 B. T. A. 212.
Reviewed, by the Board.
Fwther proceedings will be had under Rule 62 (c).