*2990 1. Petitioner denied special assessment for the year 1921.
2. Respondent's determination of invested capital for that year upheld.
*290 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921, in the amount of $3,525.25.
The errors alleged are:
(1) The respondent failed to hold that petitioner was within the provisions of section 327(c) and (d) and (a) of the Revenue Act of 1918, and failed to assess petitioner's excess-profits tax under section 328 of said Act;
(2) The respondent improperly determined petitioner's invested capital.
FINDINGS OF FACT.
The business of Moody and Waters, a partnership operating in Chicago, Ill., was incorporated in 1890, under the laws of the State of Illinois. The partnership was organized in 1868 or 1869, and was engaged in the business of manufacturing pies for sale to grocers, restaurants, hotels and delicatessen stores. The customers of the business at the time of the incorporation and afterwards, up until the present time, have included*2991 a majority of the leading restaurants of Chicago. The pies were delivered to the customers in specially constructed wagons. At the time of the incorporation, the partnership was using the trademark "Home Made Pies."
*291 The sales of the partnership for five years prior to incorporation were as follows:
| 1885 | $169,850.98 |
| 1886 | 199,201.75 |
| 1887 | 220,359.97 |
| 1888 | 198,891.21 |
| 1889 | 206,354.25 |
The net profits of the partnership, after deducting the compensation paid the partners during these years, were as follows:
| 1885 | $16,943.77 |
| 1886 | 19,454.21 |
| 1887 | 23,735.60 |
| 1888 | 16,127.85 |
| 1889 | 19,491.70 |
The salaries of the partners had been charged to general expense on the books of the partnership.
The corporation did business with the customers of the partnership. The trade-mark was imprinted on the pie-plates, was stamped on the top of each pie, was painted on the wagons, and was printed on the advertising cards and other advertising matter. A copyright was refused on the trade-mark, which was sometimes used by competitors. Moody and Waters never tried to restrain such use.
In 1890, there were 15 delivery routes covered by the pie*2992 wagons each day and each route included an average of 100 customers. The corporation continued to deliver daily to the same customers over the same routes.
At its organization the corporation received from Alex. Moody the fixtures, live stock, wagons and harness, merchandise, all outstanding accounts, Moody's equity in a lot at the corner of Aberdeen and Congress Streets, in Chicago, and the good will of the partnership, for $40,000 of the capital stock of the corporation. The corporation assumed the liabilities of account of the partnership to the amount of $7,000. Moody also leased to the corporation the premises formerly occupied by the partnership for $4,000 per year.
The capitalization of the corporation was $75,000. The remaining $35,000 of the capital stock was issued for $35,000 cash. The charter of the corporation was for a period of 25 years and it expired in 1915. A new corporation, the petitioner, was then organized.
On October 26, 1915, the board of directors of the old corporation, consisting of Charles H. Moody, Frank A. Moody and Lillian R. Deering, held a meeting, the minutes of which showed the following:
Whereas: Moody and Waters Company was*2993 incorporated under the laws of the State of Illinois on the seventh day of January 1890, for a period of twenty-five years; and
*292 Whereas: the charter of said Company has expired by lapse of time and, under law, cannot be renewed; and
Whereas: a new corporation by the same name has been organized by the Stockholders of this Company and a charter has been issued to said new Company, dated October 11, 1915, and filed for record in the officer of the Recorded of Deeds of Cook County, Illinois, on the twenty-fifth day of October 1915; and
Whereas: the stockholders of this Company are desirous of conveying to said new Company all of the real estate and personal property owned by this company at the time of the expiration of its charter consisting of the real estate, together with the building and improvements thereon employed in said business; also office and factory equipment, horses, harness and wagons; manufactured goods and all materials, bank accounts, bills and accounts receivable and good will of said Company;
Now, Therefore, Be it Resolved that all of said property be conveyed to said new company in consideration of the sum of one dollar ($1.00) *2994 and other valuable consideration and that the President and Secretary of this Company be and they hereby are authorized and directed to execute and deliver a proper deed of conveyance in the name of this Company to said new company, conveying the following described real estate, to-wit:
Lot two (2) in Chapin, March and Leonard's Subdivision of the east half (E-1/2) of Block thirty-six(36) in Canal Trustees Subdivision of the west half (W-1/2) and the west half (W-1/2) of the northeast quarter (NE-1/4) of of section seventeen (Sec. 17,) Township thirty-nine (Twp. 39) north, Range fourteen (R. 14) east of the Third Principal Meridian, situated in the City of Chicago, County of Cook and State of Illinois;
And,
Be it further resolved that the said President and Secretary be and they hereby are authorized and directed to execute and deliver, in the name of this Company, conveyances of the personal property belonging to this Company at the time of the expiration of its charter; and
Be it further resolved that all of said conveyances shall be subject to the outstanding indebtedness of this Company at the time of the expiration of its charter.
On motion duly made and carried*2995 said resolution was unanimously adopted.
On November 1, 1915, the old corporation executed a deed transferring the realty to the petitioner.
The petitioner was organized on October 2, 1915, and took over all of the assets of the old corporation. The stockholders were the same as those in the old corporation and the stockholdings did not change. They were as follows:
| Charles H. Moody | 358 shares |
| Frank A. Moody | 321 shares |
| Delavan B. Cole | 71 shares |
Charles H. Moody, Frank A. Moody, and Mrs. R. E. Deering were elected directors.
*293 The minutes of a meeting of the stockholders of the petitioner held on October 6, 1915, provided in part as follows:
The Secretary then presented the following proposition to the stockholders and directors of Moody and Waters Company, Chicago, Illinois:
We, the undersigned, being the owners of all of the capital stock of the corporation known as Moody and Waters Company, whose charter has expired by lapse of time, and being the owners of all of the property of said Moody and Waters Company, whose charter has expired as aforesaid, subject to the outstanding indebtedness of said Company, hereby propose to sell to Moody*2996 and Waters Company, now in the process of organization, the following described property, for the sum of Seventy-Five Thousand ($75,000.00) dollars, in cash, or the equivalent thereof of stock in the said Company, at its par value, to be issued to us or our nominees in full satisfaction of our respective stock subscriptions to your Company.
Signed:
Charles H. Moody. Frank A. Moody. Delavan B. Cole.
Description:
All of the real estate and personal property owned by the Moody and Waters Company, a corporation, under the laws of the State of Illinois, whose charter has expired by lapse of time, which said property has heretofore been employed by said Company in conducting a general bakery business in Chicago, Illinois, and consists of real estate, together with the buildings and improvements thereon - office and factory equipment - horses, harness and wagons - manufactured goods and raw materials - bank account - bills and accounts receivable - good will and all other property of every description owned by said Company at the time of the expiration of its charter, subject to the outstanding indebtedness of said company.
On motion duly made and carried the following resolution*2997 was unanimously adopted:
Whereas Charles H. Moody, Frank A. Moody and Delavan B. Cole have offered to sell to this Company the following described property for the sum of Seventy-Five Thousand ($75,000) Dollars in cash or its equivalent in stock of this company at its par value, to be issued to them or their nominees, to-wit:
All of the real estate and personal property owned by the Moody and Waters Company, a corporation under the laws of the state of Illinois, whose charter has expired by lapse of time, which said property has heretofore been employed by said company in conducting a general bakery business in Chicago, Illinois, and consisting of real estate, together with the buildings and improvements thereon - office and factory equipment - horses, harness and wagons, manufactured goods and raw materials - bank account - bills and accounts receivable - good will and all other property of every description owned by said company at the time of the expiration of its charter, subject to the outstanding indebtedness of said company.
AND WHEREAS it appears to the stockholders of this Company that such property is necessary for the business of this Company, and that the same is*2998 of a fair cash value of Seventy-Five Thousand ($75,000) dollars.
*294 NOW, THEREFORE, be it resolved that the Board of Directors of this Company be, and they hereby are authorized to purchase the above mentioned property for the said price, and to issue stock of the new company in payment therefor, in accordance with the terms of said resolution, provided that in the judgment of the said directors, the said property is of the value as above stated.
AND BE IT FURTHER RESOLVED that the Board of Directors of this Company be, and they hereby are authorized and directed to accept said property in full payment of the several stock subscriptions of the said Charles H. Moody, Frank A. Moody and Delavan B. Cole to the Capital stock of this Company, and to issue to said parties or their nominees, seven hundred and fifty (750) shares of the capital stock of this company at par in payment for the same.
The capitalization of the petitioner was fixed at $75,000 in order to effect no change in the business as carried on by the old corporation.
The earnings of the old corporation from 1910 to 1924 were:
| 1910 | $13,435.52 |
| 1911 | 30,533.82 |
| 1912 | 21,152.63 |
| 1913 | 61,973.56 |
| 1914 | 20,441.05 |
*2999 The sales over this period were:
| 1910 | $558,729.98 |
| 1911 | 533,739.11 |
| 1912 | 554,190.20 |
| 1913 | 608,061.00 |
| 1914 | 547,145.36 |
The sales of the petitioner from 1915 to 1919 (including the sales of the old corporation in a part of 1915) were:
| 1915 | $530,709.95 |
| 1916 | 689,637.28 |
| 1917 | 926,713.62 |
| 1918 | 1,008,942.94 |
| 1919 | 1,311,215.74 |
Among the assets taken over by the petitioner were 28 delivery routes, each including an average of 100 to 110 customers.
On the books of the petitioner the assets taken over were entered at the same sum as appeared on the books of the old corporation.
The books of the old corporation show that the assets and liabilities of the corporation at September 30, 1915, were as follows:
| Dr. | Cr. | Dr. | Cr. | |
| Capital stock | $75,000.00 | |||
| Charles H. Moody | $35,800.00 | 35,800.00 | ||
| Frank A. Moody | 25,000.00 | 25,000.00 | ||
| Mary Moody Cason | 7,100.00 | 7,100.00 | ||
| Lillian Moody Deering | 7,100.00 | 7,100.00 | ||
| Alex. Moody estate | 1.65 | $56,811.39 | ||
| Merchandise | 321,823.74 | 390,249.61 | 68,425.87 | |
| Cash | 3,731.80 | |||
| Expense | 55,162.20 | $55,162.20 | ||
| Sales expense | 81,180.85 | 81,180.85 | ||
| Loss and gain | 497.56 | 116,334.62 | 497.56 | |
| Real estate | 60,555.28 | 1,972.74 | ||
| Aberdeen St | 2,500.00 | 985.00 | ||
| Rents | 249.92 | 1,073.57 | ||
| 514 | 58.50 | 2,866.54 | ||
| Fixtures | 46,311.50 | 3,379.99 | ||
| Live stock | 13,635.00 | 1,426.76 | ||
| Wabash Ave | 1,825.00 | 31.52 | ||
| Wagons | 15,565.00 | 3,963.10 | ||
| Harness | 1,094.00 | 4,811.25 | ||
| Bills rec | 4,277.24 | |||
| Accounts rec | 3,431.66 | |||
| Mary Moody Cason | 3,698.52 | |||
| Lillian Moody Deering | 1,754.23 | |||
| Allen Moody | 200.00 | |||
| McCabe & Cloyes | 620.85 | |||
| F. A. Moody, special | 673.75 | |||
| Routes 1-28 | 12,263.93 | |||
| Sundry deposits | 1,000.00 | |||
| Bills payable | 15,000.00 | |||
| C. H. Moody | 8,323.01 | |||
| F. A. Moody | 13,925.70 | |||
| American Hominy Co | 58.56 | |||
| Habicht Braun Co | 110.70 | |||
| H. Kohnstamm | 22.28 | |||
| Wm. J. Moxley | 2,138.16 | |||
| Thos. Smith | 626.85 | |||
| Steele Wedeles Co | 114.10 | |||
| Stein Hirsch & Co | 107.00 | |||
| Jno. C. Morgan Co | 20.50 | |||
| Jones & Williams | 1,891.20 | |||
| C. H. Weaver & Co | 5,221.45 | |||
| T. F. Gore | 251.60 | |||
| 705,803.76 | 705,803.76 | 141,294.17 | 141,294.17 |
*3000 *295 Included in the figure above for real estate is land carried at $23,000, which represents its cost in 1889. This is the property at Congress and Aberdeen Streets in Chicago. The item also includes the building thereon which was in good condition in 1915. Part of it was built in 1890 and an addition to it was constructed in 1910. It was carried at cost. The value of land had increased between 1890 and 1915.
The item "live stock" represents 90 horses which the old corporation transferred to petitioner. They had increased in value in 1915 over their cost due to the demand for horses in the World War. By 1921, there had been a reasonable decrease in the number of horses owned by petitioner.
The item "wagons" represents wagons that had been in use 15 years or more. Repairs had been made and charged to expense, and some new wagons had been purchased and the cost thereof charged to expense.
*296 The petitioner took over between 2,000 and 2,500 cases which the old corporation had furnished customers in which to keep pies. The old company had made these and charged their cost to expense on the books. These cases never appeared on the books of the petitioner*3001 at any figure. Their fair market value in October, 1915, was $5 each. The life of a pie case is from two to five years.
The petitioner also took over about 100 shipping pie cases which it did not enter on its books. The old company had charged the cost of these to expense. In October, 1915, they were worth $10 each. The life of a shipping pie case is from one to three years.
Good will has never been entered on the books of the petitioner at any value.
In 1921 the petitioner was still using the trade-mark "Home Made Pies." It was never entered on the books at any capital sum.
In 1921 Charles H. Moody was the sole executive officer of petitioner and was on duty both night and day. The stockholders and their holdings in 1921 were as follows:
| Charles H. Moody, president | 358 shares |
| F. A. Moody | 250 shares |
| Mary Cason | 71 shares |
| Lillian R. Deering | 71 shares |
Charles H. Moody is a brother of each of the other stockholders. He has had about 40 years' experience in the pie business. The gross sales of petitioner in 1921 amounted to $1,220,230.02. Moody received a salary of $14,000 in 1921.
Other companies, which in 1921 were in the same business*3002 as petitioner, were the New York Pie Co., of New York City, Pie Bakeries of America, which had its principal office in Newark, N.J., and a branch office in Detroit, Mich., Hutchinson Pie Co., of Philadelphia, Pa., and Case & Martin, of Chicago, Ill.
In 1925 the Spencer-Trask Co. offered petitioner $1,000,000, either in cash or in stock, for its business. The offer was refused by petitioner.
The petitioner had no Government contracts in 1921.
Since 1916 the petitioner has been motorizing its delivery service. In 1921 about 40 per cent of the wagons had been replaced by trucks. The replaced wagons were abandoned.
The invested capital of the petitioner for 1921 was computed by the respondent upon the values appearing upon the books of the petitioner. No attempt was made to revalue the assets and set them up on the books at their value in 1915.
*297 OPINION.
SIEFKIN: The principal question to be decided is whether the respondent erred in failing to hold that the petitioner, during the year 1921, was within the provisions of section 327(a), (c) and (d) of the Revenue Act of 1921, and was, therefore, entitled to have its excess-profits tax computed under section*3003 328 of that Act. The petitioner also alleges that the respondent improperly determined its invested capital.
Section 327 of the Revenue Act of 1921 provides:
That in the following cases the tax shall be determined as provided in section 328:
(a) Where the Commissioner is unable to determine the invested capital as provided in section 326:
* * *
(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively:
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision*3004 shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
The evidence in this case discloses that the petitioner was organized on October 2, 1915, and that it took over the assets of a predecessor corporation of the same name whose charter had expired on January 7, 1915, and assumed the liabilities of the old corporation. In consideration thereof, the petitioner issued the full amount of its capital stock, par vale $75,000, to the stockholders of the old corporation. The minutes of a meeting of the stockholders of petitioner recited that the said stockholders were of the opinion that all the property was of the fair cash value of $75,000.
*298 Part of the assets taken over as evidenced*3005 by the books of the old corporation were as follows:
| Merchandise | $68,425.87 |
| Cash | 3,731.80 |
| Real estate | 60,555.28 |
| Cottages | 2,500.00 |
| Fixtures | 46,311.50 |
| Live stock | 15,460.00 |
| Wagons | 15,565.00 |
| Harness | 1,094.00 |
| Bills receivable | 4,277.24 |
| Accounts receivable | 3,431.66 |
| Routes - 1 to 28 (accounts receivable) | 12,263.93 |
| 233,616.28 |
The petitioner assumed bills payable in the amount of $15,000, and accounts payable in the amount of $33,811.11.
The assets taken over by the petitioner were carried on the books of petitioner at the same values as they appeared on the books of the old corporation, no attempt being made at that time to revalue them. Charles H. Moody, who was a director of both the old corporation and the petitioner, and who was president of the petitioner in 1921, testified at the hearing that the assets at the time taken over, with the exception of bills receivable, accounts receivable and possibly merchandise, were of twice the value that they were carried on the books of the old corporation. He stated that the figures on the old corporation's books represented cost of assets less depreciation, but on cross-examination stated that he did*3006 not know that depreciation was taken on any of the assets, with the possible exception of horses and wagons two years before they were transferred to the petitioner.
The real estate taken over included land carried on the books of the old corporation at $23,000, which represented its cost in 1889. Included in the real estate was also a building on this land, part of which was constructed in 1890 and a part of which was constructed in 1910. It was carried on the books at cost. No evidence was submitted to show the value of the land or the buildings taken over, the testimony being only that the land had increased in value between 1890 and 1915, without any definite indication of the extent of such increase.
Live stock taken over by the petitioner represented 90 horses. Moody testified that in 1915, when acquired by the petitioner, their value was 50 per cent greater than the value at which they were carried on the books of the old corporation.
The wagons taken over by the petitioner had been in use for a varying number of years. Repairs had been made and charged to *299 expense on the books of the old corporation, and the cost of the new wagons purchased had been*3007 charged to expense.
The petitioner took over between 2,000 and 2,500 pie cases which the old corporation had manufactured, the cost of which had been charged to expense on the books. The petitioner never carried these cases on its books at any value. Moody testified that their fair market value in October, 1915, was $5 each. The petitioner also took over about 100 shipping pie cases which it did not enter on its books. The cost of these had been charged to expense on the books of the old corporation. Moody testified that in October, 1915, they were worth $10 each.
The petitioner also continued to use the trade-mark "Home Made Pies" which had been in use by the predecessor corporation and its predecessor partnership.
The petitioner alleges and we find that in 1915, when the petitioner was organized, there was paid in to it an aggregate of tangible and intangible property for stock. The intangible property was good will which, upon the books, was not assigned any value.
The minutes of a meeting of the stockholders recited that the value of all the property received was $75,000, and this value was used by the respondent in computing invested capital of the petitioner. *3008 Charles H. Moody testified that the books did not represent the true value of the assets. No attempt was made by the petitioner to show what the value of the real estate was in 1915, nor was any evidence adduced to show that it was impossible to prove what the value was. Moody testified that the horses were worth 50 per cent more in 1915 than their cost, which was the figure at which the horses were entered on the books of the old corporation. Moody testified also that the pie cases acquired by the petitioner at organization numbered between 2,000 and 2,500 and that they had a value in October, 1915, of $5 each, and that the petitioner also acquired about 100 shipping pie cases having a value at the time of acquisition of $10 each. The petitioner contends that since the exact number of cases acquired is not known, the invested capital of the petitioner for 1921 can not be determined as provided in section 326 of the Revenue Act of 1921. However, if we took these approximate figures at the values shown by the petitioner, it is our opinion that the invested capital of the petitioner would not be greatly misrepresented.
Good will was never entered on the books of the petitioner*3009 at any value, nor has the petitioner shown what the value thereof was at the time acquired, or that it had any value at all. Evidence of earnings and gross sales for the five years prior to the organization of the petitioner was adduced, but the tangible assets and their value for those years were not shown.
*300 From all the evidence we conclude that the petitioner has failed to show that it comes within the provisions of subdivision (c) of section 327. Nor does the testimony of Charles H. Moody, president of the petitioner, to the effect that it can not now be determined what property in use by the petitioner in 1921, had been acquired at organization in 1915, bring the petitioner within the provisions of subdivision (a) of section 327.
In 1921, Moody received a salary of $14,000. He testified that he would not have worked for any other corporation for this salary and stated that he believed his services were worth $25,000. This alone does not entitle petitioner to special assessment under the provisions of subdivision (d) of section 327, no showing having been made that the low salary creates such an abnormality as would work an exceptional hardship upon the petitioner. *3010 See , and . It is our conclusion that the petitioner is not entitled to special assessment for the year 1921 on that ground.
The petitioner also assigns as error that the respondent improperly determined petitioner's invested capital for the year 1921. However, the petitioner has failed to submit sufficient proof to overthrow the presumption of the correctness of the respondent's determination in this respect.
Judgment will be entered for the respondent.