*1785 Petitioner has failed to show abnormalities to entitle it to special assessment.
*935 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ending August 31, 1920, in the amount of $13,664.33.
The petitioner alleges the following errors: (1) In determining its invested capital the cost of capital assets acquired prior to January 1, 1917, was not included as a part of its invested capital; (2) *936 in determining invested capital the statutory allowance for intangible assets acquired at the time of organization was not allowed in invested capital; and (3) that the Commissioner erred in computing the petitioner's excess-profits-tax liability under the provisions of section 301 of the Revenue Act of 1918 instead of under the provisions of sections 327 and 328 of the same act.
There was another assignment of error with regard to depreciation, but no evidence was introduced thereon and the petitioner apparently abandoned it.
*1786 Upon motion, the hearing was limited to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice.
FINDINGS OF FACT.
The petitioner is a corporation with its principal place of business in Los Angeles, Calif. It was incorporated under the laws of California in April, 1903, for the purpose of growing and shipping vegetables and acting as commission merchant.
The Golden West Celery and Produce Company, hereinafter referred to as the Golden Company, was organized about 1901 or 1902 in California. Its principal business was the shipping of celery, but it was also engaged in shipping other vegetables. It owned 600 acres of land which it farmed in California.
The Earl Fruit Company, hereinafter referred to as the Earl Company, prior to 1903 was a packer and shipper of fruits and vegetables. It had been engaged in that business for a number of years. Its vegetable business was only a small part of its total business.
The Fay Fruit Company, hereinafter referred to as the Fay Company, was engaged in the fruit and vegetable business in California.
These three companies last mentioned controlled practically all of the interstate shipments*1787 in the vegetable business in California. Prior to 1903 the operations of all three companies were profitable and their trade reputation was excellent. In 1903 the officers and directors of these companies decided to consolidate the vegetable business and organize the petitioner to take over the vegetable business of each of these three companies. The Earl Company and the Fay Company turned over their vegetable business, including the entire vegetable shipping business and all that went with it in the way of prestige, contracts, agreements, lists of customers, etc., but retained their fruit business. The Golden Company turned over its vegetable shipping business and all that went with it, but retained its ranch properties.
*937 The petitioner was incorporated with a capital stock of 1,000 shares of a par value of $100 each. The parties decided to issue the stock to the three companies upon the basis of the relative standing and amount of business of each one in the following proportions: 42 1/2 per cent to the Earl Company; 42 1/2 per cent to the Golden Company; and 15 per cent to the Fay Company. The three companies transferred to the petitioner tangible assets and*1788 cash of a total value of $15,000 in the same proportion as the stock was issued to them. The capital stock account was set up on the petitioner's books at $15,000. The following is an excerpt from the minutes of a meeting of the board of directors of the petitioner on April 29, 1903:
On motion duly made and carried, it was voted that the paid up capital stock of the CALIFORNIA VEGETABLE UNION should be Fifteen Thousand Dollars ($15,000.00), and that an assessment should be levied on the stockholders, payable in cash or material, the Secretary being instructed to notify the stockholders in writing of such assessment.
Most of the officers of these three companies became officers in the petitioner. Thomas O'Neill, the vice president of the Earl Company, became a director and general manager of the petitioner; W. F. Cronemiller, the president of the Golden Company, became president of the petitioner. A great many employees of the companies also became employees of the petitioner.
At the time of the incorporation of the petitioner the Golden Company had a contract with the Celery Growers Association of Orange County by the terms of which the association agreed to pay a commission*1789 to the Golden Company for the sale of its celery. The Celery Growers Association controlled the bulk of the celery raised in Orange County. At that time this was the principal celery producing district in California. This contract was dated May 3, 1902, and was for a period of three years. It was renewed upon its expiration. The Golden Company also had a contract with the Placentia Cabbage Growers Association, by the terms of which the Golden Company had the selling agency for all the cabbage grown by the members of the association. This was for the season of 1903. Both of these contracts were assigned to the petitioner. From 1903 to 1907 or 1908 the petitioner's celery business increased. After that time it did very little business in celery, but continued to ship other vegetables. During 1903, out of about 4,000 cars shipped, 2,500 were full of celery. All the celery was on the commission basis. Of the remainder, 65 or 70 per cent was purchased outright by the petitioner and the remainder was on commission.
Shortly after its incorporation the petitioner borrowed from $125.000 to $150,000 from the First National Bank, on its unsecured note.
*938 The following*1790 table shows the amount of earnings and dividends of the petitioner for the first five years of its existence:
| Date | Item | Debit | Credit |
| May 24, 1904 | Cash dividend | $43,000.00 | |
| Do | Earnings | $51,312.28 | |
| Apr. 30, 1905 | do | 58,673.34 | |
| Do | Cash dividend | 50,000.00 | |
| Apr. 30, 1906 | Earnings | 83,147.87 | |
| Do | Cash dividend | 75,000.00 | |
| Apr. 30, 1907 | Earnings | 77,307.73 | |
| Feb. 27, 1907 | Cash dividend | 50,000.00 | |
| Apr. 30, 1908 | Earnings | 89,885.02 | |
| Apr. 30, 1907 | Cash dividend | 27,307.73 | |
| do | 25,000.00 | ||
| June 16, 1908 | do | 9,550.00 |
The petitioner followed a consistent bookkeeping policy of treating such items as automobiles, furniture and fixtures and improvements as capital assets when purchased and at the end of a year or a year and a half of charging the amount to expense. The usual rate of depreciation on automobiles is 25 per cent. Similar items of equipment and tools were charged to expense. In this way these items did not appear on the books as capital items more than a year after they were purchased. The officers of the petitioner desired to keep these items as low as possible on the books in order to avoid city and county taxes. The revenue*1791 agent, in determining the petitioner's invested capital for the fiscal years ending August 31, 1917, to August 31, 1921, went over the books from 1917 on and restored such items properly depreciated to invested capital.
The petitioner in the year 1920 paid officers' salaries in the amount of $19,740, as follows: To O'Neill as president, $12,000; to the general manager, $6,900; and to Cronemiller, secretary-treasurer, $840. These amounts were allowed as deductions by the Commissioner. O'Neill received a salary of $9,000 in that year from the Golden Company and also a salary from the O'Neill Fruit Company, a holding company.
The following table shows the net taxable income of the petitioner for the taxable year, the invested capital, ratio of tax to invested capital, etc., as determined by the Commissioner:
| Net taxable income | $95,050.03 | |
| Invested capital | 191,810.84 | |
| Excess-profits tax | 26,678.60 | |
| Total tax | 33,315.74 | |
| Percentage of net income to invested capital | per cent | 49.5 |
| Percentage of excess-pfofits tax to net income | do | 28 |
| Percentage of total tax to net income | do | 35 |
The amount of invested capital, $191,810.84, did not include any*1792 amount representing intangibles acquired by the petitioner for stock.
*939 OPINION.
MATTHEWS: The petitioner is claiming special assessment upon three grounds: (1) That upon its organization it acquired valuable good will which was not included in its invested capital and the entire value of which could not be so included on account of the limitations of section 326(a)(4) and (5) of the Revenue Act of 1918; (2) that capital items had been charged to expense and that the amount thereof could not be determined; and (3) that inadequate salaries had been paid to its officers during the fiscal year ending August 31, 1920.
Section 327 of the Revenue Act of 1918 provides in part as follows:
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;
* * *
(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*1793 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 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, * * *
We have held heretofore that the mere exclusion of an asset from invested capital does not entitle a taxpayer to have its tax computed under the provisions of sections 327 and 328, but that it must be shown that such asset was valuable, that it was a material incomeproducing factor and that its exclusion created an abnormality in income or invested capital. .
It is doubtless true that the petitioner in this proceeding acquired upon its organization something in addition to the tangible assets and that its earnings and dividends were large in proportion to its tangible assets. The petitioner contends that it acquired good will of a value of at least $300,000 and that its earnings were attributable to a great extent*1794 to this good will. We do not believe that the petitioner acquired any good will upon organization. Good will has no existence separate and apart from an established business. ; certiorari denied, . In , the Supreme Court said:
*940 Undoubtedly, good will is in many cases a valuable thing, although there is difficulty in deciding accurately what is included under the term. It is tangible only as an incident, as connected with a going concern or business having locality or name, and is not susceptible of being disposed of independently. Mr. Justice Story defined good will to be "the advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessity, *1795 or even from ancient partialities or prejudices." Story Part. sec. 99.
All that the petitioner acquired was the vegetable businesses of three companies, one of which had only been in existence about two years. All of the companies remained in existence and retained their corporate names. Two of them continued to carry on the fruit business and one of them continued to own and operate ranch properties. The petitioner did not acquire the name of any of these companies nor did any of them agree not to compete in business with the petitioner. Some authorities hold that both of these elements are necessary to constitute good will. It is hard to see how good will of a company can be divided and a part of its good will transferred with a part of the assets.
It is also true that the petitioner, even if it did not acquire good will, acquired intangibles of some value in the qualifications of the officers, their clientele and in various contracts assigned to the petitioner by these companies. In , special assessment was granted where the evidence showed that the earnings of the corporation were attributable to conditions not*1796 properly reflected in invested capital such as its reputation of long standing, the character of its personnel, and other intangible factors, and that unlike any other taxpayers in its particular line of business it operated on a cost-plus basis which involved current outlay by its clients and limited risk to itself. In that case it was shown that there was an abnormality. In the instant proceeding we have no evidence that the exclusion of the intangibles from invested capital created an abnormality or that the earnings were attributable to any great extent to the intangibles. See ; . It appears, on the contrary, that during 1903, the first year after its organization, a large part of the petitioner's business was done on a commission basis, which did not require a large amount of invested capital. It is not shown that the petitioner's invested capital as compared with other corporations engaged in a similar business is other than normal. In such a situation section 327 has no application. In *1797 , we said:
* * * These favorable conditions may indicate good management and may have resulted in substantially larger income than could have been hoped *941 for under less favorable conditions, but in our opinion they do not create abnormalities in either the capital or income. Section 327 of the Act expressly provides that it shall not apply to any case in which the tax is high merely because the corporation earns a high rate of profit upon a normal invested capital. The record leads us to believe that this was the situation of the petitioner. No two businesses can be alike in all their factors. Each is bound to have certain favorable or unfavorable conditions as compared with others. It was not to such things as these that Congress had reference in the use of the word abnormalities in section 327, but rather to those situations where by reason of some peculiarity in the corporate structure, invested capital was unusually small as compared with the total capital employed in the business or income was affected by some unusual circumstance. * * *
See also *1798 , and .
As to the contention that capital assets had been charged to expense and that the amount thereof could not be determined, the record shows that the revenue agent, in computing the amount of invested capital, which amount was used by the respondent in determining the deficiency, went over the books of the petitioner from 1917 on and restored capital items which had been erroneously charged to expense to invested capital. W. E. Empey, auditor of the petitioner from 1913 to 1917, testified that it would be possible to pick out definitely the various items which had been erroneously charged to expense as far back as 1915. The only items concerning which the witness testified were automobiles, the ordinary life of which is four years. It is clear that the cost of any automobiles erroneously charged to expense would have been fully depreciated prior to the taxable year. Since the amount charged to expense can be determined as far back as 1915 and since there is no evidence that any items charged to expense prior to that time are still in existence the petitioner's claim on*1799 this ground must also be denied. ;; .
There remains only the question of salaries. The evidence does not establish that the salaries paid were lower than those paid by other corporations. The only testimony on this point is that of the witness Jones, formerly chief deputy collector in Los Angeles. He testified that the salaries paid by the petitioner were less than those paid by other corporations engaged in the same line of business and making about the same amount of gross profit. Upon cross-examination it appeared that his knowledge of the duties performed by these officers was based upon his observations when he went to the offices of the companies in connection with income-tax matters, spending a period of about four days a year. We do not consider that this is sufficient to establish that the salaries paid by the petitioner *942 were inadequate. Moreover, there is no showing that such inadequacy, if there were any, created an abnormality. See *1800 .
Judgment will be entered for the respondent.