*347OBINION.
Littleton :The errors assigned by the petitioner are:
(1) Failure to make proper adjustment in its invested capital for 1917, 1918, and 1919 on account of a “ loss on Keystone Hardware Co. stock ” which was taken by the petitioner as a deduction from gross income in 1916, but' not allowed by the Commissioner until 1918.
(2) Elimination of $500,000 for good will restored by a charge against capital stock instead of a charge against surplus in determining invested capital for 1917, 1918,1919, and 1920.
The Commissioner filed a plea in bar to the right of the petitioner to maintain this proceeding as to the year 1917 on the ground that *348“ the adjustment in the tax liability lor the said year, against which the taxpayer appeals, is a refund and not a deficiency.”
The position of the Commissioner is well taken in so far as it applies to a consideration of the amount of refund which may be due for 1917. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. It should be noted, however, that the appeal comes before the Board on a notice of deficiencies for 1918 and 1920 and the major item on account of which the appeal is taken carries through for all years. Section 274(g), Revenue Act of 1926 provides:
The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable’ years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.
We said in the Appeal of Cornelius Cotton Mills, supra:
In determining the correct amount of the deficiency, we may consider such facts with relation to taxes for other taxable years as may be necessary correctly to redetermine the amount of the deficiency involved; for example, in determining the invested capital for the year for which the deficiency against a corporation has been determined, we may determine what was the tax liability during a preceding year.
The plea of the Commissioner is, therefore, overruled in so far as a consideration of 1917 may be necessary for a correct determination of the deficiencies for 1918 and 1920.
At the hearing the petitioner and respondent filed a Joint Exhibit marked “ Exhibit A” in which they agreed as to the adjustment which should be made on account of the first error assigned above, and therefore this point will not be considered further.
Before considering the other point raised, we find it necessary to go beyond the pleadings and consider the real issue in the case, an issue not raised either in the petition or in the answer by the Commissioner, but one on account of which almost the entire evidence was presented and one which is fundamental in a determination of the petitioner’s invested capital, viz., the amount of the surplus or deficit at the time good will was increased by $500,000, which, in turn, involves the effect on invested capital of a financial reorganization in 1911.
The facts relative to what took place in 1911 are quite complicated and the evidence with respect thereto is not very clear. We are handicapped in the first instance by the failure of the petitioner to submit the original plan of reorganization, and we have had to rely on the amendments to the original plan and secondary evidence presented to show what was agreed as the complete plan of bringing the four allied companies together. Further, the evidence is incomplete *349in many particulars which would have been helpful in tracing the detailed steps in the consummation of the plan.
Petitioner’s counsel states in his brief filed after the hearing, with respect to the additional point which we find it necessary to consider, as follows:
The invested capital of the taxpayer for the year 1917 and subsequent years must be based on the amount of capital stock of Reading Hardware Company issued by it under the reorganization plan effected in 1911, subject only to proper additions and deductions for later years.
In this we can not concur. The above position is evidently based upon the proposition that there was such a change of status of the allied corporations in 1911 that it would be considered that their assets were paid in to the petitioner at this time as contemplated by section 207, Revenue Act of 1917 and section 326, Revenue Act of 1918. In 1911 there was a revaluation of the assets of the petitioner, the Keystone Company and such assets of the Brass Company as had been taken from that plant and intermingled with the assets of the petitioner. On the basis of the surplus which was shown by setting up this valuation on the books of the petitioner and by setting up certain securities which came to the petitioner through the financial reorganization plan of July 1, 1910, as modified by the amended plan dated May 1, 1911, a stock dividend was declared on September 26, 1911, of $897,000, par value of common stock of the petitioner, wdiich, together with the capital stock already outstanding and the surplus remaining after the declaration of the stock dividend, the petitioner contends should be the starting point for invested capital purposes.
Before considering the question of the correctness of the valuation on which petitioner’s invested capital is based, we must determine whether there was a basis for such valuation in 1911, i. e., whether the assets of the allied companies on which the valuations were placed can be considered as having been “ paid in ” in 1911 as contemplated by the provisions of the statutes heretofore referred to.
In the first place, were the assets which were owned by the petitioner prior to 1911 again paid in to the petitioner in 1917? The question answers itself in the negative when we consider that the corporation with which we are here dealing is the same legal entity which came into being in 1886, and its legal existence was not changed in the slightest by what took place in 1911 and 1912. It has the same charter in the taxable years under consideration with which it began business in 1886. There were changes in stock ownership during the period of its existence, but this did not affect the ownership of its assets. That the ownership of stock and ownership of assets are not identical and that changes of ownership in stock may *350occur without affecting the ownership of the assets has been so long recognized that it hardly admits of questioning. See United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; and Cullinan v. Walker, 262 U. S. 134.
In Appeal of Regal Shoe Co., 1 B. T. A. 896, the Board said:
We need not dwell upon tlie well recognized distinction between a corporation and its stockholders, nor repeat what so frequently has been said to the effect that the ownership by a corporation is not the ownership of its stockholders, and that the rights and liabilities of the former are separate from those of the latter.
What, therefore, happened in 1911 with respect to the petitioner did not affect the legal existence of the corporation, even though there were changes as to stockholdings, and the value of its assets for invested capital purposes, in so far as it relates to assets which it acquired prior to the financial reorganization, must be based upon the original cost at date of acquisition. These assets were not paid in to the petitioner at this time, but were paid in from 1886 until this time.
Nor does the fact of a stock dividend in 1911 aid the petitioner in its contention, since nothing thereby came in to the corporation in so far as its previously owned assets were concerned. In Gibbons v. Mahon, 136 U. S. 549, the court said:
A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. After such a dividend, as before, the corporation has the title in all the corporate property; the aggregate interests therein of all the shareholders are represented by the whole number of shares; and the proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.
In LaBelle Iron Works v. United States, 256 U. S. 377, this statement is made in regard to a stock dividend:
That distribution, in substance and effect, was an internal transaction, in which the company received nothing from the stockholders any more than they received anything from it.
We must hold, therefore, that to the extent that petitioner’s invested capital is based on a revaluation of assets in 1911 which were acquired prior to this time, it can not be sustained.
Our next consideration is to determine whether there were other assets which can be said to have been paid in to the petitioner at the time of this financial reorganization.
We will first examine the Brass Company. In 1904, substantially all of its preferred stock was acquired by the Consolidated Company in exchange for an issue of bonds, which condition of ownership *351existed in 1911. The Brass Company also bad a relatively small issue of common stock, but this was of so little consequence that it was given but negligible consideration in the working out of the financial reorganization plans. By the deposit of securities under the reorganization plan this preferred stock of the Brass Company came to the Reorganization Committee and the petitioner issued a part of the stock dividend heretofore referred to of like par value as the preferred stock in exchange therefor. When this occurred, the petitioner acquired tangible assets, viz., preferred stock, which can be considered at its actual cash value as paid in at this time. Likewise, in 1913, when the petitioner, through ownership of substantially all of the stock of the Brass Company, effected a dissolution in liquidation of the Brass Company, it became the owner of the Brass Company assets, if any, and was entitled to a valuation for invested capital purposes at their cash value as paid in in 1913. Appeal of Regal Shoe Co., supra.
For a like reason as in the case of the Brass Company, the interest in the stock of the Keystone Company which came to the petitioner through the reorganization plans and which was not formerly owned by the petitioner may properly be included in the invested capital of the petitioner at its cash value at date of acquisition in 1911.
Through the financial reorganization the petitioner also received the stock and bonds of the Consolidated Company, but we do not see anything here of value as having been paid in, which is not otherwise accounted for. This company was organized as a holding company and issued its bonds for the entire common stock of the petitioner and substantially all the preferred stock of the Brass Company. With the surrender to, and cancellation by, the petitioner of these bonds, the petitioner was not thereby relieved of any liability nor did that constitute a payment of anything of value in to the petitioner. The stock of the petitioner, which was the only asset back of the Reading bonds of the Consolidated Company, did not become an asset of the petitioner, but merely passed to the persons entitled thereto under the reorganization agreement who thereby became stockholders of the petitioner. The stock of the Brass Company for which the Brass bonds of the Consolidated Company were issued, and which became an asset of the petitioner is accounted for in another connection. As to the capital stock of the Consolidated Company we are convinced that counsel for the petitioner made a correct statement of its status in these words, when presenting the case to the Board:
Of course, from tlie figures that I have given you, it is evident that the Consolidated Hardware Co. stock should not or could not be given any value because there was not sufficient there for that purpose, and that was all lost in the transaction, and surrendered.
*352As further indicating its lack of value we find that while the stockholders of the Consolidated Company are mentioned as parties to the reorganization agreement, no provision is made for the receipt by them of any payment for their stock upon the surrender thereof.
We next consider the valuation of the several classes of assets which may properly be considered as entering into petitioner’s invested capital on the basis hereinbefore indicated.
We have already stated that as to petitioner’s assets which were owned by it prior to 1911 there could be no revaluation in 1911, but that original cost to the petitioner should be used. From the evidence submitted we find that the petitioner has not attempted to use an original cost basis. In the first place an appraisal was made in 1910 of its assets on the basis of reproduction new less an estimated amount for accrued depreciation, and included in this appraisal were certain assets of the Brass Company to which it did not have title, and assets of the Keystone Company. On August 31, 1910, on the basis of this appraisal, new fixed-asset accounts were set up by the petitioner in accordance with the classification of assets and values fixed in the appraisal, the old accounts being charged off, and a depreciation reserve provided for on account of these fixed assets.
On August 31, 1911, the 1910 appraisal was extended to that date and the fixed-asset accounts on petitioner’s books again adjusted in conformity therewith, the entire depreciation account being closed out as a credit to profit and loss, various fixed assets reduced or increased, the net effect being an increase in surplus of $240,831.13.
The above net increase in surplus of $240,831.73 is attributable not only to a revaluation of petitioner’s assets, but also of assets of the Brass Company which it had removed to its plant prior to the vesting of a property right therein and to which it did not have title when the foregoing appraisals were made, and assets of the Keystone Company. Obviously any part of this increase which may be due to the Brass Company assets is properly to be eliminated, since title thereto had not yet vested in the petitioner. As to the Keystone Company assets we have found that this company’s plant was being operated under a 999-year lease at and prior to 1911, that through the financial reorganization 4,723 shares of its stock came to the petitioner and that the company continued in existence as late as 1913. To permit of the inclusion of these assets in the invested capital of the petitioner on account of the 1911 appraisal, it must be held that these assets were paid in to the petitioner in 1911. This, however, is inconsistent with the facts as the most that Avas acquired at this time was 4,723 shares of Keystone Company stock, which Ave have heretofore said in this opinion is different from the acquisition of the assets. Any of the foregoing increase in the petitioner’s surplus in 1911 on account of the Keystone assets was, therefore, erroneous.
*353We are constrained, therefore, to hold that in a redetormination of petitioner’s income and profits tax for the years on appeal the increases in surplus in 1911 in the amount of $240,831.73 should be eliminated from invested capital.
At the same time that adjustments were made for the appraisals referred to above, there was a further increase in surplus of $200,-907.44 on account of securities which came to the petitioner through the deposit of securities under the reorganization agreement. The first item entering into this total is “ 280 Shares Beading Preferred Stock $28,000.” The record 4s not sufficiently complete to show exactly the manner in which this stock of the petitioner was returned to the petitioner, but regardless of whether acquired by gift or purchase, it could not give rise to an increase in invested capital. If received by gift, it would not operate to increase invested capital until disposed of, when the amount realized therefrom in the form of assets would serve to increase invested capital. See Appeal of Musical Instrument Sales Co., 1 B. T. A. 402. If acquired by purchase, the amount paid therefor by the petitioner would amount to a return of capital to the stockholders and, therefore, would operate to reduce capital originally paid in. Suffice it to say, therefore, that in either event, an increase in invested capital would not arise as indicated by the foregoing journal entry, and to the extent that proper elimination has not already been made, invested capital should be adjusted accordingly.
The second item entering into the aforesaid credit to surplus is entitled:
$40,500 Consolidated Hardware Company Bonds (Beading Series) being $40,500 of capital stock or ($1,200,000) $21,937.50 of $650,000 common stock book value $238.00 per share — $52,211.25.
The foregoing entry sets up as an asset $40,500 of the Beading bonds which were issued by the Consolidated Company for stock of the petitioner in 1903 and their value is determined from the book value ox petitioner’s stock.
That bonds held by one corporation of another corporation are tangible property we admit, and if we should concede further that bonds of the Consolidated Company issued for the petitioner’s stock would be an asset in the hands of the petitioner, the bonds would not bring anything of value to the petitioner for invested capital purposes when the Consolidated Company passes from the picture, which was what happened in this case prior to the taxable years on appeal. The only asset back of them was the common stock of the petitioner, which,, if it came to the petitioner, would be treasury stock, which we have heretofore said in this opinion, could not serve to increase invested capital while retaining its status as treasury stock.
*354Consistent with the foregoing, we must hold that the additions to surplus of $28,000 and $52,211.25 set up as assets on account of the preferred stock of the petitioner and Reading bonds of the Consolidated Company, respectively, can not be allowed as assets which would operate to increase the invested capital of the petitioner.
Our next consideration is to value the 6,904 shares of preferred stock of the Brass Company which we have said should be valued for invested capital purposes at the time it came to the petitioner through the reorganization plans in 1911. Much difficulty arises here for the reason that some of this company’s assets had been transferred to petitioner’s plant prior to 1911 and the earnings attributable to these assets, if any, were reflected in the petitioner’s earnings. In other words, there was not in 1911, nor had there been for at least a short time prior thereto any operation of the Brass Company as such. When the stock itself was sold by the Colonial Trust Co. under the indenture in which this stock was pledged as collateral for the issuance of the Brass bonds of the Consolidated Company, the highest bid received therefor was $531.02, sale being made at this price. Prior to the dissolution of the Brass Company in 1913, its plant was sold by the assignee for the benefit of creditors at a public sale on December 27, 1911, and was purchased in the interest of the petitioner, the principal creditor, for $5,000, subject to a mortgage of $12,000. No payment was made of the purchase price, but instead, the plant was conveyed to the petitioner on account of its claim, and in 1912, petitioner sold it for $50,000, the purchaser assuming the mortgage. In the increase in surplus previously referred to on account of securities which had not theretofore appeared on the books of the petitioner, there, appears this item:
$340,850 Bonds, Consolidated Hardware Company (National Brass and Iron Works Series) and preferred Stock of National Brass and Iron Works, based on Manufacturers’ Appraisal Company Values of August 31, 1911 of $85,976.23 less $12,000 mortgage_$72, 042. 28
This amount is a part of the surplus out of which the stock dividend was declared, and presumably has been considered in computing petitioner’s invested capital. Whether the cash value of the assets received in the form of securities affecting the Brass Company — preferred stock of the Brass Company and bonds of the Consolidated Company, National Brass and Iron Works Series — in 1911, or assets of the Brass Company to which a property right vested in the petitioner upon dissolution of the Brass Company in 1913, was greater or less than the amount shown by the foregoing journal entry, we consider the evidence insufficient to show, but since we do know that assets were received in 1911 and 1913, we will not disturb the amount which has apparently been allowed as a result of the merger of the Brass Company with the petitioner.
*355A similar situation exists with respect to the Keystone Company stock which we have said could be included in petitioner’s invested capital at its cash value when acquired in 1911. In connection with the increase in surplus on account of securities there also appears this item :
4,723 shares Keystone Hardware Company stock, based on Manufacturers’ Appraisal Company’s Values of August 31, 1911 of $55,514.18_$43, 698.91
One hundred additional shares of this stock were purchased by the Reorganization Committee for the petitioner at $6 per share, which amount plus the value placed on the 4,723 shares in the foregoing journal entry equals the loss claimed on Keystone stock in 1916, but which was not allowed by the Commissioner until 1918. Again we are without sufficient evidence to increase or decrease this addition to surplus, but on the entire evidence in the case we will leave this part of petitioner’s invested capital undisturbed.
This brings us to the final issue in the case, viz., the reduction of invested capital due to an arbitrary increase in surplus in 1912 whén. good will, patents and trade-marks were charged and surplus credited in the amount of $500,000. The Commissioner in his determination reduced capital stock by this amount which he now admits was erroneous and agrees with the petitioner that the, reduction should have been from surplus, the account which was originally credited, but, on the other hand contends that this latter method will not alter his original determination of invested capital. The petitioner, however, insists that when the latter method is followed an operating deficit is created which can not be used to reduce capital paid in.
A reduction in surplus when surplus has been improperly increased in the first instance on account of assets which have not been paid in as contemplated by the statute restores the surplus or deficit to its original condition, and does not give rise to an operating deficit which did not theretofore exist. The reason for the rule, which has been generally applied in an intrepretation of the Revenue Acts of 1917 and 1918, that capital or surplus actually paid in is not required to be reduced because of an impairment of capital in the nature of an operating deficit is based on the proposition that the several acts do not require such a reduction and contemplate that invested capital shall at all times include capital or surplus actually paid in until there has been a liquidation or return of the original investment to the stockholders. In Appeal of Guarantee Construction Co., 2 B. T. A. 1145, we said:
Section 326 of the Revenue Act of 1918 makes no provision for the reduction of invested capital of a corporation by reason of an operating deficit. It provides, and we tbink with reason, that invested capital shall at all times include capital or surplus actually paid in. Earned surplus and undivided profits, *356of course, may vary in amount from year to year. We are of the opinion, therefore, that capital and surplus actually paid in remain part of the invested capital of a corporate taxpayer, except where such capital or surplus has been directly or indirectly returned to the stockholders.
The surjilus which was created in this case by setting np good will was not a surplus which arose on account of assets paid in or on account of earnings; it was an improper addition in the first instance, and, therefore, its elimination must serve to reduce invested capital in its entirety, even though a deficit may result from such elimination.
A redetermination should, therefore, be made on the basis of the foregoing, taking into consideration not only the adjustment for the item of $500,000 in the manner set out above, but also the several reductions in surplus, totaling $321,042.98, to the extent adjustment has not already been made therefor, and the treatment of the loss on the Keystone stock on which the parties have reached an agreement.
Judgment will be entered on SO days'1 notice, under Rule 50.