*1158OPINION.
Smith:The issues to be considered are (1) whether the value, if any, of the contract above described may be included in the petitioner’s invested capital; (2) what amount, if any, of such value representing exhaustion thereof, may be deducted from income for each of the years involved; and (3) the actual cash value of the contract at the time acquired by the petitioner.
The petitioner contends specifically (1) that the total value of the contract should be included in invested capital as representing tangible property; or in the alternative, (2) that the value of the leasehold contained in the contract should be included in invested capital as tangible property in an amount equal to the total value claimed for the contract; (8) that the contract had a fair market value when acquired of at least $150,000; (4) that the entire value of the contract should be exhausted ratably over the five years of its life.
The statutory definition of invested capital is found in section 326 of the Revenue Act of 1918, which reads as follows:
Seo. 326. (a) That as used in this title the term “invested capital” for any year means (except as provided in subdivisions (b) and (c) of this section) :
*1159(1) Actual cash bona fide paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: Provided., That the Commissioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus. The Commissioner shall furnish a copy of such record and other detailed information with respect to such eases w'hen required by resolution of either House of Congress, without regard to the restrictions contained in section 257;
(3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year;
(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest;
(5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year * * *.
Since the contract here in question was acquired by the petitioner as a gift, the question of whether its value in any amount may be included in invested capital as intangible property comes squarely within our ruling in the Appeal of Herald-Despatch Co., 4 B. T. A. 1096, and must therefore be decided adversely to the contentions of the petitioner.
The 1918 Act defines intangible property and tangible property as follows:
The term “ intangible property ” means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property;
The term “ tangible property ” means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property. [Sec. 325. (a).]
It is not clear to us that contracts generally are so like or unlike the properties enumerated as intangible property and tangible prop*1160erty as to fall very readily into either class. We may conjecture that because of their divergency of character contracts were considered incapable of satisfactory classification. It is stated in the Commissioner’s [Regulations 45, article 811, that a contract should be treated as intangible property unless it is shown that it relates to rights in tangible property to such an extent that its value arises chiefly therefrom. If the contract here had been simply for the hire of convict labor, we would have no difficulty in finding that it was intangible property. There is certainly no element of tangibility in unperformed labor. We are asked to find, however, that the leasehold embodied in the contract had itself a value in excess of the value claimed for the entire contract. We are unable to arrive at this conclusion. The evidence as well as the construction of the contract itself indicates that the convict labor was the chief element of value. Since the work could not be performed without the confines of the penitentiary, it was a matter of necessity that the use of the buildings be offered for factory purposes as an inducement for bids for the convict labor. The buildings would of course have had no value apart from the convict labor; so that whatever value the leasehold in itself may have had, it was a part of and indistinguishable from the value of the labor feature of the contract.
It is now well recognized that under section 234(a)(7) of the 1918 Act, deductions may be taken by a corporation for exhaustion of contracts and like property where the cost or the March 1, 1913, value of such property constituted capital of the corporation. Kaufman-Straus Co. v. Lucas, 12 Fed. (2d) 774; Appeal of Atlantic Carton Corporation, 2 B. T. A. 380; Appeal of General Equipment Co., 2 B. T. A. 804; Appeal of Automatic Fire Protection Co., 3 B. T. A. 1267; and Appeal of National Film Publicity Co., 4 B. T. A. 118. In Appeal of J. M. Browning, 6 B. T. A. 914, we allowed a deduction for the exhaustion of intangibles paid in without cost, or at a nominal cost of $1, on the basis of their proved value at the date acquired by the corporation. Under that decision the contract here in question should be exhausted over the period of its life at its actual value when acquired by the petitioner.
The petitioner claims that the value of the contract set up on its books at date of organization at $150,000 was understated; that the true value more nearly approximated $450,000. It asks us to determine the value of the contract and to permit the deduction from the gross income of each of the taxable years of an aliquot part of such value.
The evidence indicates that the contract was a fair contract as between the State and the contractor for the employment of convict labor. The petitioner was paying as much for the labor of its convicts as was paid by other contractors of convict labor at Mounds-*1161ville, with the exception of the Bai’dol contract where, by reason of the character of the work and for other reasons, a larger per diem amount was paid. The petitioner was paying as much as was paid for convict labor under the Gordon contract and it appears that upon a renewal of the Gordon contract by the Reliance Manufacturing Co., a smaller per diem was paid for convict labor. Bloyd was clearly of the opinion that the contract had a very great value. He believed that it could be operated profitably. He told his business associates that in his judgment the contract had a value to the Kleeson Company of $150,000. The basis for this value was testified to by him as follows:
There' are very few outside people who would know anything about prison contracts. I mean outside business people. There are only a few of them and people don’t know. But from the time I served on the Board there, I studied the conditions of those contracts, studied them, and I became acquainted with the value of them, and after the Klee people decided to move to New York, there came conditions there they thought, on account of legislation and one thing and another, that their contract might not be so valuable, but those things changed around. Then, another thing; the last few years they did not manage their factory economically. They were wasting thousands a year there in trimmings that ought not to be wasted. They had twice as many outside — what we call free help — as they would have to have. I knew that from the conditions. I told our people that when I took over the contract that I would eliminate $1,000 a month on this outside help, which I did. As soon as I took over the contract I went to work and cut off just $12,000 a year there; and I went out in the trimming department, where they were using so much more trimming than was necessary, and the first year, well, not the first year, but it was in a couple of years only — we eliminated a waste of over $27,000, and those things I knew.
As we stated in Rockford Malleable Iron Works, 2 B. T. A. 817, “Value is what the property is worth. It is what it would bring in the open market if offered for sale by an owner willing, but not compelled, to sell to a purchaser willing, but not compelled, to buy.”
The petitioner claims that by virtue of the contract it had the use of the prison buildings free of rent, the rental of which was worth $30,000 per year. This, however, appears to be a characteristic of all contracts for the employment of convict labor. That was only one of the elements that made it profitable for persons to bid for the employment of convict labor.
The petitioner also claims that the sale of the Gordon contract in 1923, calling for the employment of 400 male and female convicts for a price of $200,000 serves to establish a value for a contract of the character of that possessed by the petitioner. We think, however, that the sale of that contract in 1923, without more information than is contained in the record, furnishes little evidence of the value of the Klee’s Sons contract in 1919. In our opinion the evidence does not warrant a finding that the contract acquired by Bloyd and Bachenheimer from the State Board of Control on March 26, 1919, *1162and turned over to the petitioner as a gift to it had a value (in excess of the amount paid by Bloyd and Bachenheimer for machinery and merchandise to the Klee brothers) which may be the basis of a deduction for exhaustion in the tax returns of the petitioner for the years 1920, 1921, and 1922.
Judgment will be entered for the respondent.