W. A. Sheaffer Pen Co. v. Commissioner

W. A. SHEAFFER PEN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. A. Sheaffer Pen Co. v. Commissioner

Docket No. 9408.

United States Board of Tax Appeals

9 B.T.A. 842; 1927 BTA LEXIS 2504;

December 23, 1927, Promulgated

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Where all of the stockholders of a corporation acquire all of the stock of a new corporation and immediately thereafter all of the assets and business of the old are transferred to the new and the stockholders of the old corporation remain in control of the stock of the new for a considerable time thereafter, held, that the transaction is a reorganization within the provisions of section 331 of the Revenue Act of 1918 and that the invested capital of the new corporation should be computed in accordance therewith.

E. H. Pollard, Esq., and Laurence Graves, Esq., for the petitioner.

M. N. Fisher, Esq., for the respondent.

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GREEN

In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the period from January 8, 1918, to December 31, 1918, and for the calendar year 1919, for which the respondent has determined deficiencies in the amounts of $11,804.63 and $18,545.72, respectively. The petition alleges that the respondent erred in applying the provisions of section 331 of the Revenue Act of 1918 to determine its invested capital. If the provisions of said section are not applicable, it further alleges that it is entitled to include in invested capital the value of good will acquired from the predecessor corporation.

FINDINGS OF FACT.

The petitioner, W. A. Sheaffer Pen Co., is a corporation organized under the laws of the State of Delaware with its principal office at Fort Madison, Iowa, where it is engaged in the manufacture and sale of fountain pens.

,W. A. Sheaffer is the inventor of a fountain pen. On April 11, 1913, the W. A. Sheaffer Pen Co., hereinafter called the Iowa corporation, was organized under the laws of the State of Iowa. The Iowa corporation became the owner of the Sheaffer patents and successfully manufactured and sold fountain pens. Its business prospered and from time to time its capital was increased, so that by 1917 there were outstanding 2,239 shares of common stock, par value $100 each, and also 546 shares of nonvoting preferred stock of $100 par value. At the end of 1917 the prospects for the Iowa corporation were much better than they had been before, due partly to the fact that through successful litigation they had been able to establish the validity of their patents, and to the improvement in the general trade conditions. The business was expanding so rapidly that it was seriously handicapped on account of lack of capital. It was apparent that if additional capital was not obtained, bankruptcy was imminent. The only available lines of credit which the Iowa corporation had were with the Fort Madison banks, which was limited by statute, and with the manufacturers from whom it bought its raw materials. A factory had been purchased which required large expenditures to be made before it could be used in the manufacture of fountain pens. A mortgage on this real estate would have impaired the credit of the corporation. The prices of materials and labor were advancing rapidly, but the price of fountain pens, which was fixed by competition, did not advance.

The stock in the Iowa corporation was worth at least double its par value, which precluded the possibility of the sale of Treasury stock. Fort Madison, Iowa, had been the scene of stock promotion activities and the stockholders in the Iowa corporation were insistent that in any scheme used to raise funds by the sale of stock, the stock-selling expense be limited to 10 per cent. They also refused to consider any plan of reorganization and sale of stock unless one-half of their stock in the company to be organized was sold for them after some additional capital had been raised for the corporation. They wanted to get back what they had put into the corporation and be in a position of risking only their profit.

In accordance with this idea, on December 15, 1917, at a meeting at which all the stockholders of the Iowa corporation were represented, it was unanimously agreed to sell all the franchises and property, real, personal, and mixed, to a new corporation of the same name to be organized under the laws of the State of Delaware. The minutes of thie meeting are as follows:

FT. MADISON, IOWA, December 15, 1917.

Special meeting of the stockholders of the W. A. Sheaffer Pen Company, held at the office of George B. Stewart, in the Lee County Savings Bank Building, at Fort Madison, Iowa, on the 15th day of December, 1917, at 2 o'clock P.M., pursuant to a resolution of the Board of Directors, and due and legal notice thereof as required by law and the by-laws of this company, a copy of the notice being appended at the end of the minutes of this meeting.

The motion of George B. Stewart, duly seconded by James C. Brewster, W. A. Sheaffer was elected President of the meeting.

On motion of James C. Brewster, seconded by J. H. Axt, W. A. Scherfe was elected Secretary of the meeting.

Present	Number of shares
W. A. Sheaffer	1,083
W. A. Sheaffer, by Proxy	289
J. C. Brewster	405
J. C. Brewster, by Proxy	154
Geo. B. Stewart	45
Geo. B. Stewart, by Proxy	98
W. A. Scherfe	45
W. A. Sherfe, by Proxy	10
J. H. Axt	10
J. H. Axt, by Proxy	5
Carl Wahrer	10
T. H. Nabers	5
C. M. Greenman	50
A. P. Brown	5
P. A. Olson	25
Total number of shares	2,239
Total number of shares issued and outstanding	2,239

The President stated the purpose of the meeting to be to take action for or against the sale by the company of all the franchise and property, real, personal and mixed, of the W. A. Sheaffer Pen Company, to the W. A. Sheaffer Pen Company, a corporation, to be organized under the laws of Delaware as per notice mailed to each stockholder within the time required by the by-laws.

The following preamble and resolution were read by A. P. Brown:

Whereas, because of existing financial conditions brought about by the war, and of the continuing rapid advance in the cost of material and labor, it is necessary that the company in the protection of its business interest, enlist and obtain new capital to be used in the protecting company against price advance, by the purchase of adequate supplies and materials used in the manufacture of the company's products, and such capital also to be used in maintaining the volume of the company's business at all times to a point where its products may be sold at a profit and further

Whereas, it is believed that it would be inadvisable, if not impossible, to borrow the required capital upon the company's credit, or to obtain it by selling the present treasury stock of the company, and further

Whereas, it is believed that the necessary capital can be raised by a reorganization of the company and its affairs as follows:

The organization of a corporation under the laws of Delaware with a capital stock consisting of not to exceed a total par value of $75,000 of preferred stock, which shall be preferred as to both assets and dividends, and a total issue of common stock not to exceed the aggregate par value of $1,500,000 to be made up of shares of $100 each, and the sale to said proposed Delaware corporation of all of the assets of the present company. The stockholders of the present company shall receive in payment for their present holdings stock in the Delaware corporation, as follows:

The preferred shareholders of the present Iowa company to receive dollar for dollar in preferred stock of the Delaware corporation, giving them the same preferential rights in the Delaware company which they now hold in the Iowa company, and the common stockholders of the Iowa company to receive, on a par value basis, two shares of common stock in the Delaware company for one share of stock in the Iowa company;

NOW THEREFORE, BE IT RESOLVED by the common stockholders of the W. A. Sheaffer Pen Company, an Iowa corporation, in special meeting assembled pursuant to notice in compliance with the by-laws, each and every share of common stock issued and outstanding voting in favor of this resolution, that said W. A. Sheaffer Pen Company shall sell all of its assets and property, of every kind and nature whatsoever, subject to all existing liabilities of the company at the time of such sale, to a Delaware corporation to be formed with a capital stock of $1,575,000.00, of which $75,000 shall be preferred, and called W. A. SHEAFFER PEN COMPANY, all with the understanding, however, that in the matter of said sale of all of the assets, that the preferred stockholders of this company shall receive preferred stock in the Delaware company, having the same preferential rights as now obtained in favor of preferred shareholders of the present company, and in the same par value, and that the issue of preferred stock in the Delaware Company shall not exceed the total par value of $75,000 without the consent of the preferred shareholders, or until all of the preferred stock issued to present preferred shareholders in this company shall have been redeemed at par plus Ten Dollars and accrued dividends, and further, that the present common stockholders of this company shall receive common stock in the proposed Delaware company on the basis of two shares in the Delaware corporation for one share in the present company, the par value of shares in both companies being the same; upon the further understanding that all stock in the Delaware Company issued to holders of stock in the present company shall be fully paid and nonassessable.

Further, that the sale of such assets of the present company to the proposed Delaware corporation shall be subject to all debts, obligations, and liabilities whatsoever of the present company, and which the proposed Delaware company shall assume.

BE IT FURTHER RESOLVED that the officers and directors of the present company be, and they now and hereby are, authorized and directed to take such steps, do such things, perform such acts and execute such instrument or instruments, as may be necessary to carry out the purpose and intent of this resolution, and to dissolve this corporation, with the specific understanding, however, that no stock of the Delaware company shall be sold at a price which will net to the company less than ninety cents on the dollar of the par value thereof.

Mr. Brown thereupon moved the adoption of said preamble and resolution, which motion was seconded by Mr. Greenman.

Upon motion of Mr. Geo. B. Stewart, seconded by Mr. Axt, Mr. Axt and Mr. W. A. Sheaffer were elected judges of the election and were instructed to proceed with the election for or against the adoption of said preamble and resolution, and make return of the same.

A written ballot was had and the said judges reported that in due form and manner they received the votes of the stockholders of the company and that at the said election there was voted in favor of the adoption of said resolution and in favor of such sale 2239 shares, and none against the adoption of said preamble and resolution and against said sale, thereby evincing the unanimous consent of the persons holding all of the common stock of the said company to the adoption of said preamble and resolution and to such sale.

Whereupon the President declared the said resolution carried.

Upon motion of George B. Stewart, seconded by James C. Brewster, the proxies and ballots were directed to be filed with the Secretary.

On motion of James C. Brewster, seconded by George B. Stewart, the stockholders meeting adjourned.

W. A. SHEAFFER,

President.

W. A. SCHERFE,

Secretary.

A Delaware corporation, known as the W. A. Sheaffer Pen Co., the petitioner herein, was organized and on January 14 certain individuals offered to sell to the petitioner all the outstanding stock of the Iowa corporation. The offer was as follows:

Chicago, Illinois, January 14, 1918

TO W. A. SHEAFFER PEN COMPANY, a corporation organized under the laws of Delaware,

443 Rookery Building,

Chicago, Illinois.

THE UNDERSIGNED, W. A. SHEAFFER, W. A. SCHERFF, GEORGE B. STEWART, J. C. BREWSTER AND J. H. AXT, desire to present to your company a proposition as follows:

The undersigned will deliver to you all of the issued and outstanding capital stock of the W. A. SHEAFFER PEN COMPANY, an Iowa corporation, and consisting of twenty-two hundred and ninety two (2292) shares of voting common stock, of the par value of One Hundred Dollars ( $100) per share, and five hundred forty-six (546) shares of non-voting preferred stock, seven per cent (7%) cumulative, and preferred as to both assets and dividends, of the par value of One Hundred Dollars ( $100) per share, in consideration of the issue of the undersigned, or their nominees, of fully paid and nonassessable stocks of your company, as follows:

Four thousand five hundred and eighty-four (4584) shares of voting common stock, of the par value of One Hundred Dollars ( $100) per share, and Five hundred and forty-six (546) shares of seven per cent (7%) cumulative nonvoting perferred stock of the par value of One Hundred Dollars ( $100) per share, and preferred as to both assets and dividends.

We desire to say to you that the W. A. SHEAFFER PEN COMPANY, the Iowa corporation, is the owner of a large and successful business in the manufacture of fountain pens, having agencies all over the United States, a large and well-equipped plant and factory at Fort Madison, Iowa, together with machinery, supplies, tools, etc., and we believe that a fair statement of the resources of this Iowa Company is as follows:

RESOURCES
Real Estate, Buildings, etc	$127,000.00
Patents, Leases, Copyrights, etc	135,500.00
Tools, Machinery-Equipment	61,153.15
Office Fixtures and Supplies	5,909.72
Completed Pens and Material	67,370.80
Advertising Supplies	4,846.60
Salesmen's Samples and Advances	8,951.17
Branch Office Merchandise	9,594.83
Notes and Accounts Receivable	171,193.57
Cash on hand and in banks	24,057.55
	$615,577.39

We further desire to say that all property owned by the Iowa Company is free and clear from lien or incumbrance, and that it is indebted only to the extent of accounts payable approximately Thirty-six Thousand Two Hundred Thirty-seven Dollars ($36,237) notes payable, approximately Fifty Two Thousand Dollars ($52,000) and undivided profits of approximately Forty Five Thousand Two Hundred Fifty-seven Dollars and Nine cents ($45,257.09). The delivery to you of all of the issued and outstanding stock of the Iowa company therefore carries with it all of the assets of such Iowa Company, subject only to such existing indebtedness, which, if you accept this proposition, you will as a matter of course assume.

We will undertake, as a part of this proposition, to see that the Iowa Company executes such deeds, bills of sale or other instruments as may be necessary to give title eventually in your company to the property and assets of the Iowa company.

Respectfully submitted,

W. A. SHEAFFER J. C. BREWSTER W. A. SCHERFE

GEORGE B. STEWART

J. H. AXT

On the same date, the petitioner accepted the offer by the following resolution:

Minutes of the meeting of the Board of Directors of W. A. Sheaffer Pen Company, held at Suite 443 "The Rookery" Chicago, Illinois, on the 14th day of January, 1918, at the hour of 11 o'clock A.M.

Present: Messrs.

J. M. Griffen H. L. Reetz

Frank L. Wolf

M. A. Graham

The above named constitue all of the directors of said corporation.

Mr. Griffen was chosen temporary Chairman and Mr. Wolf was chosen temporary Secretary of the meeting.

Upon motion duly seconded and carried, the following preambles and resolutions were unamimously adopted:

WHEREAS, W. A. Sheaffer, J. C. Brewster, George B. Stewart, W. A. Scherfe and J. H. Axt have offered to sell to this corporation all of the issued and outstanding capital stock of the W. A. Sheaffer Pen Company, an Iowa corporation, cinsisting of $229,200 par value of common capital stock made up of 2292 shares of the par value of $100.00 each, and $54,600 par value of preferred stock consisting of 546 shares of the par value of $100.00 each in full payment of 4584 shares of the common capital stock of this company of the par value of $100.00 per share and 546 shares of the preferred stock of this company of the par value of $100.00 per share; all of the stock of this company to be issued to them or their nominees, and in full payment on behalf of the signers of the certificate of incorporation of this company for the 10 shares of stock of this corporation subscribed for by them respectively as shown by the certificate of incorporation; and

WHEREAS, the board of directors has investigated the affairs of the W. A. Sheaffer Pen Company, an Iowa corporation, and believe from such investigation that the stock of such Iowa corporation is well worth the stock of this company which it is proposed to issue in payment therefor; and further,

WHEREAS, the purchase of said W. A. Sheaffer Pen Company, an Iowa corporation, will give to this corporation a plant and going business of said Iowa company located at Fort Madison, Iowa; and which Iowa corporation the board is informed has resources approximately, as follows:

Real Estate, buildings, etc	$127,000.00
Patents, Leases, Copyrights, etc	135,500.00
Tools, Machinery, Equipment	61,153.15
Office Fixtures and Supplies	5,909.72
Completed Pens and Material	67,370.80
Advertising Supplies	4,846.60
Salesmen's Samples and Advances	8.951.17
Branch Office Merchandise	9,594.83
Notes and Accounts Receivable	171,193.57
Cash on Hand and in Banks	25,057.55
	$615,577.39

and is indebted as the board is also informed only in the approximate amount of

Accounts Payable	$36,237.09
Notes Payable	52,000.00

and said Iowa corporation having as well cash undivided profits; and further,

WHEREAS, the plant and property of said Iowa corporation are free and clear from any lien or encumbrance whatsoever; and,

WHEREAS, in the judgment of this board the said stock of the Iowa company and the ownership of the plant and property of said Iowa company passing with and belonging to such stock are necessary for the business of this corporation and are of a value at least equal to the par value of the stock remitted therefor.

NOW THEREFORE, BE IT RESOLVED, That the offer of said W. A. Sheaffer, J. C. Brewster, George B. Stewart, W. A. Scherfe and J. H. Axt to sell to this corporation the stock hereinabove described, which said stock the board of directors do hereby adjudge and declare to be of the value of at least $615,577.39 and necessary for the business of this corporation, be and it is hereby accepted, and that the president and treasurer of this corporation be and they are hereby authorized and directed to execute and deliver in the name and on behalf of this corporation and under its corporate seal the stock of this company to be issued and delivered as provided in this resolution together with such agreement or agreements as may be necessary for the purchase of said property in accordance with said offer.

AND BE IT FURTHER RESOLVED That the proper officers of this corporation be authorized and directed to take such steps as may be necessary in their judgment and under the advice of counsel, to give good title, ownership and control of all of said plant and property of said W. A. Sheaffer Pen Company, an Iowa corporation, to this corporation.

AND BE IT FURTHER RESOLVED that the president and treasurer be and they are hereby authorized and directed to deliver in payment for said stock of said Iowa corporation in accordance with the said offer fully paid capital stock of this corporation, to the aforementioned W. A. Sheaffer, J. C. Brewster, George B. Stewart, W. A. Scherfe and J. H. Axt, or their nominees, as follows:

4584 shares of the common capital stock of the par value of $100.00 per share; and

546 shares of preferred capital stock, of the par value of $100.00 a share and to the signers of the certificate of incorporation or to their respective assigns for the 10 shares subscribed by them as shown by the certificate of incorporation.

Upon motion duly made, seconded and carried, the meeting thereupon adjourned.

FRANK L. WOLF

Secretary.

On the same date the following agreement in regard to the sale of the petitioner's treasury stock was entered into:

THIS AGREEMENT entered into this day of January, A.D. Nineteen Hundred and Eighteen (1918), by and between W. A. SHEAFFER, W. A. SCHERFE, GEORGE B. STEWART, JAMES C. BREWSTER, and J. H. AXT, all of the City of Fort Madison, Iowa, for and on behalf of the stockholders of W. A. SHEAFFER PEN COMPANY, an Iowa corporation, party of the first part, hereinafter called the "Committee of Stockholders," W. A. SHEAFFER PEN COMPANY, a corporation organized under the laws of Delaware, and hereinafter called the "Delaware Corporation," party of the second part, and W. A. SHEAFFER PEN COMPANY, a corporation organized under the laws of Iowa, hereinafter caled the "Iowa Corporation," party of the third part, WITNESSETH:

WHEREAS, the Committee of Stockholders has sold all of the issued and outstanding stock of the Iowa Corporation to the Delaware Corporation, receiving for such stock from the Iowa Corporation, stock of the Delaware Corporation, as follows:

One (1) share of preferred stock of the par value of One Hundred Dollars ( $100) per share for one (1) share of preferred stock of the same par value of the Iowa Corporation, and two (2) shares of common stock of the Delaware Corporation of the par value of One Hundred Dollars ( $100) per share for one (1) share of common stock of the same par value of the Iowa Corporation.

WHEREAS, as a part of the consideration of the stock of the Iowa Corporation, as aforesaid, the Delaware Corporation has agreed to sell stock in the Delaware Corporation received in exchange for the stock in the Iowa Corporation, in the manner and under the terms and conditions hereinafter set forth:

NOW THEREFORE, IT IS NOW AND HEREBY AGREED by the Delaware Corporation for the sum of One Dollar ($1.00) to it in hand paid (the receipt whereof is now and hereby acknolwedged) and as a further consideration to the stockholders of the Iowa Corporation for the sale or exchange of the stock in the Iowa Corporation for stock in the Delaware Corporation, as follows:

The Delaware Corporation agrees that, when and at such time as it shall have sold Two Hundred Thousand Dollars ($200,000) par value of its unissued common capital stock, it, the Delaware Corporation, will, before selling any additional shares of its own stock, either common or preferred, first sell any and all of the common stock in the Delaware Corporation which may have been received in exchange for common stock in the Iowa Corporation and deposited hereunder, at a price which shall net to the former stockholders in the Iowa Corporation Ninety Cents (90??) on the dollar, of the par value of their common stock in the Delaware Corporation so sold, all expenses of such sales to be borne by the Delaware Corporation from the difference between Ninety Cents (90??) and One Dollar ($1.00).

It is understood and agreed that at such time as the Delaware Corporation shall have sold Two Hundred Thousand Dollars ($200,000) par value of its unissued common stock at a price netting the Delaware Corporation Ninety Dollars ( $90) per share, it, the Delaware Corporation, shall immediately notify first party of such fact, and thereupon said first party, on behalf of former stockholders in the Iowa Corporation, who have received stock in the Delaware Corporation by way of exchange, or said stockholders, on their own behalf, who desire to sell their common stock in the Delaware Corporation under the terms of this agreement, shall within ten (10) days after receipt of such notice, present and deliver to the Delaware Corporation the common stock in the latter company they desire to be so sold, and said Committee of Stockholders, and any stockholder holding stock exchanged for that in the Iowa Corporation, shall be barred from any rights under this agreement, unless the common stock desired to be sold hereunder is deposited within ten (10) days from the receipt of the last mentioned notice.

It is further understood and agreed that all moneys received by the Delaware Corporation from time to time from the sale of stock deposited, as herein provided, shall be paid out within a reasonable time after receipt, pro rata to the depositing stockholders in the proportion that their respective deposits bear to the aggregate of all stock deposited hereunder.

It is further understood and agreed that as a part of the consideration for the exchange of stock by stockholders in the Iowa Corporation, it was made a condition precedent that no common stock in the Delaware Corporation shall be sold at a price to net the Delaware Corporation less than Ninety Dollars ( $90) per share, and it is now and hereby agreed that no common stock of the Delaware Corporation shall be sold for a price which shall net the latter corporation less than the sum of Ninety Cents (90??) on the Dollar, until and after all stock desposited hereunder shall be sold, as herein provided for, and the depositing stockholders paid therefor.

It is understood that the Delaware Corporation does not obligate itself to sell the stock so deposited, but it does agree to sell such deposited stock before it shall be permitted to sell more than Two Hundred Thousand Dollars ($200,000) of its own unissued common stock, and it agrees to use its best efforts and endeavors in the sale of such deposited stock.

It is further agreed that any stockholder depositing hereunder, either by himself or through the Committee of Stockholders, may withdraw his stock so deposited at any time after four (4) months from the date of deposit, and that such withdrawal by any stockholder shall be the equivalent of a sale by the Delaware Corporation under the terms hereof, it being understood and agreed that any depositing stockholder, who withdraws his stock, must first account to the Delaware Corporation for any moneys he may have received in the pro rata distribution of cash herein provided for.

It is further understood and agreed that no depositing stockholder shall sell any stock in the Delaware Corporation by him owned or received in the exchange herein mentioned, so long as he is a party to this agreement and not released therefrom under its terms but this shall not prevent bona fide hypothecation of stock, and it is further agreed that, if any depositing stockholder shall sell any of his stock by him owned or received, as aforesaid, in violation of the terms of this paragraph, in such case he shall pay to the Delaware Corporation the sum of Fifteen Dollars ( $15) per share for any stock so sold, as liquidated damages for breach of the terms of this paragraph, and the Delaware Corporation is authorized to reimburse itself, in so far as it may, for such damage out of any stock or moneys by it held on deposit hereunder of any such stockholder who may violate the terms of this paragraph.

The Iowa Corporation signs this instrument in approval and ratification of its terms.

IN WITNESS WHEREOF the Corporation parties hereto have caused their corporate names to be signed to this instrument by their duly authorized officers, and their corporate seals affixed, and attested by their respective Secretaries, and the Committee of Stockholders have signed and sealed the instrument in their individual names, and this instrument is executed in triplicate on the day and year first above written.

W. A. SHEAFFER PEN COMPANY,

A Corporation of Delaware,

President.

ATTEST:

Secretary.

In order to enable the petitioner to give two shares of its stock for one share of stock in the Iowa corporation, the assets received from the Iowa corporation were written up on the books of the petitioner in the amount of $224,000.

The following facts have been stipulated by the parties hereto to be correct:

ASSETS TRANSFERRED
	Cost to old corporation	Fair market-value, Jan. 14, 1918	Excess over cost
Real estate and buildings	$39,946.00	$127,000.00	$87,054.00
Patents	6,925.73	135,500.00	128,574.27
Tools, machinery, and equipment	56,092.24	61,153.15	5,060.91
Office fixtures	4,764.29	5,909.72	1,145.43
Advertising supplies	4,846.60	4,846.60
Completed pens and material	67,370.80	67,370.80
Salesmen's samples and advances	8,951.17	8,951.17
Breanch office merchandise	9,594.83	9,594.83
Notes and accounts receivable	171,193.58	171,193.58
Cash	21,377.35	21,377.35
Pen show cases in dealers' hands			538.39

Sock holdings in the Iowa and Delaware corporations
	Number shares	Number shares	Number shares	Number shares
	petitioner's	petitioner's	petitioner's	petitioner's
	common stock	common stock	preferred stock	preferred stock
	outstanding	owned by stock-	outstanding	owned by stock-
		holders in Iowa		holders in Iowa
		corporation		corporation
Dec. 31, 1918	8,315 1/2	3,269	546	511
Dec. 31, 1919	9,897	3,944	591	501
Dec. 31, 1920	10,082	3,919	1,953	394
Dec. 31, 1921	10,123	3,701	3,893.6	947
Dec. 31, 1922	10,063	3,717	3,926.3	978 1/2
Dec. 31, 1923	9,941	4,070	3,895.1	972
Dec. 31, 1924	9,838	3,273	3,882.1	992
Dec. 31, 1925	9,867	3,318	3,838.2	983
Dec. 31, 1926	9,835	3,358	3,813	963

NET INCOME
Period	Net income	Capital stock issued and outstanding	Common stock
Apr. 15, 1913, to Jan. 20, 1914	$16,959.33	$35,000	$35,000
Jan. 20, 1914, to Dec. 31, 1914	29,037.04	78,000	58,800
Month ending Jan. 31, 1915	4,537.07	78,000	58,800
Fiscal year ending Jan. 31, 1916	18,681.82	88,900	64,500
Fiscal year ending Jan. 31, 1917	45,467.97	89,200	64,500
Feb. 1, 1917, to Jan. 8, 1917	43,694.36	278,600	224,000
1918	116,504.65
1919	239,488.62

The stock of the petitioner was exchanged for the stock of the Iowa corporation on January 14, 1918. The assets of the Iowa corporation were immediately transferred to the petitioner and on May 28, 1918, a resolution was published announcing the dissolution of the Iowa corporation.

The officers and directors of the petitioner and the Iowa corporation were the same.

On account of the fact that the sales expense in connection with the sale of petitioner's stock was limited to 10 per cent, sales were necessarily slow. The sales were effected by the regular traveling salesmen of the petitioner. At the date of reorganization, January 14, 1918, all the stock issued was in the hands of the former stockholders of the Iowa corporation. Two hundred thousand dollars treasury stock was then sold, after which one-half of the stock of the Iowa corporation's stockholders was placed on the market, so that on December 31, 1918, less than 40 per cent of the preferred and common stock of the petitioner was held by the former stockholders of the Iowa corporation.

The respondent held that the provisions of section 331 of the Revenue Act of 1918 should be applied to this reorganization and determined a deficiency in the amount of $30,350.35.

OPINION.

GREEN: The principal issue in this case is whether the petitioner's invested capital should be computed in accordance with the provisions of section 331 of the Revenue Act of 1918. The respondent applied section 331 and his action in this respect is alleged as error. In event it is held that the invested capital should not be computed in accordance with section 331, the petitioner contends that in computing its invested capital it is entitled to have included, in addition to the value of tangible property as to which the parties have stipulated, subject to the statutory limitation on intangibles, the value of the good will acquired, which it alleges was of the value of $224,000.

This transaction took the form of an exchange of stock for stock. The committee of stockholders, holding all of the stock of the Iowa corporation, sold or exchanged all of the stock of that corporation for all of the stock of the Delaware corporation. The assets of the Iowa corporation were immediately transferred to the Delaware corporation and shortly thereafter the Iowa corporation was dissolved.

Does such a transaction come within the provisions of section 331 of the Revenue Act of 1918? That section reads as follows:

SEC. 331. In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation.

The petitioner's contention is that, "The statute is phrased to cover direct ownership, viz.: a partnership, an individual or unincorporated association where the ownership or control are direct and where there is no well recognized intervening entity. It can not by its very terms effect a case of corporate ownership." It contends that, "No interest or control in the trade, business or property or in any asset of a corporation can be vested in a stockholder." Applying the foregoing to this case, its position is, in brief, that the Iowa corporation was the sole owner of the assets and that it transferred them to the Delaware corporation and that no "persons" ever had any "interest or control in" such assets.

The petitioner's contentions are premised upon well recognized principles of corporation law and it strenuously insists that these principles must be read into the statute and our construction thereof made in the light of such principles. We recognize the principles and the broad extent of their applicability. In the construction of the taxing statute, both the courts and this Board have repeatedly accepted and applied them.

Even a cursory examination of the statute discloses that it is limited in its scope to those cases in which "an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them." Clearly then we are concerned only with such interest or control as was had by persons. Section 1 of the Revenue Act of 1918 reads, in part, as follows:

That when used in this Act -

The term "person" includes partnerships and corporations, as well as individuals.

and when, having in mind the statutory definition, we read the above quoted portion of section 331, it is clear that it is not limited in its application to individuals, partnerships, etc., as contended by the petitioner. This, of course, is not a complete answer to the question, for the Iowa corporation and the Delaware corporation are not the same corporations in any sense and no interest or control remained in the Iowa corporation after the reorganization. It is, however, a complete answer to the petitioner's first contention.

If this case falls within section 331 it can only be because "an interest or control in such trade or business or property of 50 per centum or more remains in the same" individuals. We believe the word "interest" as used in the section is intended to cover the rights of individuals in property and may not be used as descriptive of the relationship existing between a stockholder and the corporation or its assets.

In Webster's New International Dictionary the verb control is defined as follows: "To exercise restraining or directing influence over; to dominate; to regulate; hence to hold from action; to curb; subject; over-power." According to this authority it is synonymous with "restrain, rule, govern, guide, regulate, hinder, direct."

In Yazoo & M.V.R. Co. v. Searles,85 Miss. 520">85 Miss. 520; 37 So. 939">37 So. 939, 953, the court said, "Control of the business of a corporation within the meaning of all anti-trust statutes, so far as by our researches we have been able to discover, means power to dictate the corporate action of the corporation."

Judge Thayer, in the opinion in the case of United States v. Northeren Securities Co.,120 Fed. 721, said:

It will not do to say that, so long as each railroad company has its own board of directors, they operate independently, and are not controlled by the owner of the majority of their stock. It is the common experience of mankind that the acts of corporations are dictated and their policy is controlled by those who own the majority of their stock. Indeed, one of the favorite methods in these days, and about the only method, of obtaining control of a corporation, is to purchase the greater part of its stock. It was the method pursued by the Northern Pacific and Great Northern Companies to obtain control of the Chicago, Burlington & Guincy Railroad. And, so long as directors are chosen by stockholders, the latter will necessarily dominate the former, and in a real sense determine all important corporate acts. The fact that the ownership of a majority of the capital stock of a corporation gives one the mastery and control of the corporation was distinctly recognized and declared in Pearsall v. Great Northern Railway,161 U.S. 646">161 U.S. 646, 671, 16 Sup.Ct. 705, 710, 40 L. Ed. 838">40 L.Ed. 838. The same fact has been recognized and declared by other courts. Pennsylvania R. Co. v. Commonwealth (Pa.) 7 Atl. 368, 371; Farmers' Loan & Trust Co. v. New York & N. Ry. Co.,150 N.Y. 410">150 N.Y. 410, 425, 44 N.E. 1043">44 N.E. 1043, 34 L.R.A. 76">34 L.R.A. 76, 55 Am. St. Rep. 689">55 Am.St.Rep. 689; People ex rel. v. Chicago Gas Trust Co.,130 Ill. 268">130 Ill. 268, 22 N.E. 798">22 N.E. 798, 802, 8 L.R.A. 497">8 L.R.A. 497, 17 Am. St. Rep. 319">17 Am.St.Rep. 319. In opposition to this view counsel cite Pullman Car Co. v. Missouri Pacific Co.,115 U.S. 587">115 U.S. 587, 596, 6 Sup.Ct. 194, 29 L. Ed. 499">29 L.Ed. 499, but in that case the meaning of the word "controlled," as used in private contract, was the point under consideration, and what was said on the subject cannot be held applicable to cases arising under the anti-trust act, when the point involved is whether the ownership of all the stock of two competing and parallel railroads vest the owner thereof with the power to suppress competition between such roads. We entertain no doubt that it does. Indeed, we regard the suppression of competition, and to that extent a restraint of commerce, as the natural and inevitable result of such ownership.

Our views in this regard are entirely in accord with those of Judge Thayer. We therefore conclude that the ownership of a majority of the stock of a corporation gives the owner or owners control of the corporation and consequently control of the trade, business, or property of that corporation, and since the holders of all of the stock of the old corporation owned all of the stock of the new, they have the requisite control and come squarely within this portion of the statute. It is not necessary for us to consider whether the owner or owners of less than the percentage named in the statute have pro tanto a control within the meaning of the statute.

While it is true that the scheme of reorganization contemplated the ultimate disposition by the stockholders as of the date of the reorganization, of stock to the extent that they would no longer hold a majority thereof, it is equally true that no time was fixed for such disposition and it was anticipated that some considerable time would be required to sell the stock as contemplated. Moreover the stockholders were under no obligation to sell. After the reorganization on January 14, 1918, the control was still in the hands of the same persons and remained there until December 31, 1918. In all cases under section 331 wherein it must be determined whether an interest or control remains, at least two factors must be considered. First, whether the "persons" validly retained an interest or control and, second, the time within which any contractual obligations must be performed. Here, the stockholders of the old company lawfully came into possession of all of the issued stock of the new, with no obligation on their part remaining unperformed. Their subsequent disposition of stock, both as to time and amount, was entirely discretionary. We therefore hold that the control of 50 per centum or more remained in the same persons and that the invested capital of the petitioner shall be computed as provided in section 331. See E. E. Atkinson & Co.,2 B.T.A. 250">2 B.T.A. 250, and Shipowners & Merchants Tugboat Co.,4 B.T.A. 403">4 B.T.A. 403. Our conclusion in this respect makes it unnecessary to consider the contention of the petitioner relative to the inclusion in invested capital of the value of good will.

Judgment will be entered for the respondent.

Considered by STERNHAGEN and ARUNDELL.