*1535 1. A corporation, after unsuccessful attempts to refinance itself, granted, with approval of its shareholders, an option to three shareholders, who were endorsers on its notes, to purchase its entire assets in consideration of the assumption of its liabilities. The option was duly exercised and the optionees transferred their rights under the option to a new corporation organized by them "in consideration of its assumption of all our obligations under said contract." The majority of the shareholders of the old corporation, including the optionees, subscribed for all of the shares of the new corporation, and all of them paid for their subscriptions in cash and received their shares when the final cash payment was made. Held, that the assets were acquired by the new corporation by purchase for the fixed amount of the liabilities assumed, and not by way of gift from its shareholders nor for shares of stock, and hence the cost, rather than the value of the assets when acquired, is the measure of its invested capital.
2. Recitals in a copy of minutes of the new corporation that the assignment of the assets be accepted in part consideration for stock, are considered insufficient*1536 to support a conclusion that the assets were acquired in part for stock, since the evidence indicates the resolution was not carried out, and the deliberate destruction of the partially mutilated original and the preparation of the copy by the petitioner's agents after the present controversy arose, prevents the Board from determining for itself from the original evidence what the minutes contain and amounts to a subversion of the best evidence rule.
*346 The respondent determined deficiencies in petitioner's income and profits taxes of $256,138.30 for 1917 and $13,704.46 for 1918, resulting from several adjustments in petitioner's invested capital and net income. The principal issue is whether the respondent has erroneously excluded from invested capital for each year the excess of the value of property formerly owned by a predecessor corporation and acquired in the circumstances shown by the evidence, over the amount of liabilities assumed at the time of acquisition. Other issues concern*1537 deductions for depletion and depreciation, and a loss in 1919 from the sale of coal lands to be used as a net loss applied against 1918 income.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of Pennsylvania, with its principal office at Pittsburgh.
The Consolidated Connellsville Coke Company, hereinafter referred to as the Connellsville Company, was a corporation organized under the laws of Pennsylvania in 1907, having an authorized capital stock of $1,000,000, divided into 10,000 shares of a par value of $100 per share.
In August, 1914, the Connellsville Company had assets which were carried on its books at a value of $3,711,775.64, and its liabilities amounted to $2,011,938.70. The liabilities included bonds of the par value of $936,000, secured by a mortgage on the company's property, *347 another mortgage for $280,000, and between $500,000 and $600,000 in notes. Several of its majority stockholders were endorsers on its notes in an amount in excess of $500,000. It was in need of money and several unsuccessful attempts had been made to refinance it. These consisted of a proposal to assess the shareholders and a proposal to issue*1538 second mortgage bonds to be purchased by the shareholders. Both of these were rejected. George Whyel, Harry Whyel and I. W. Semans, three of the shareholders who were endorsers on a large part of the outstanding notes, then made a proposal that the corporation give them an option to purchase the property.
On August 25, 1914, the board of directors authorized the execution and delivery by the corporation of an indemnity bond in the sum of $500,000 to George Whyel, Harry Whyel, I. W. Semans, E. S. Hackney and W. W. Lawrence to save them harmless from any loss as endorsers and guarantors upon the notes of the corporation.
Pursuant to a published notice, a meeting of the shareholders was held on August 25, 1914, for the purpose of "approving or disapproving of a proposed sale of all the plants, equipment and business of the company." At this meeting, 7,656 shares of stock were represented in person or by proxy. The minutes of said meeting are as follows:
A majority of the outstanding stock being present or represented, the minutes of the last meeting were read and approved. The chairman stated that the general purpose of this meeting was to consider and approve or disapprove*1539 a proposition to sell the property of the Company upon terms which would be further explained.
The Company's Attorney then read a resolution which he had prepared and explained the intention of the action therein outlined and the further steps necessary to carry it into effect. Said resolution read as follows:
WHEREAS, owing to a depressed state of the market, continuing for some time, Consolidated Connellsville Coke Company has become so involved financially as not to be able to carry on its business upon its own corporate credit, and has been compelled to have the indorsement of certain of its stockholders upon a large amount of its paper, thus involving them personally to a large extent; and
WHEREAS, every possible effort has been made to have this liability distributed among all its Stockholders in proportion to their holdings, but without success; now
BE IT RESOLVED, by the Stockholders of said Consolidated Connellsville Coke Company in special meeting assembled, that the Directors of said Company be and are hereby authorized and directed to execute and deliver to George Whyel, Harry Whyel and I. W. Semans, the Stockholders who are indorsers on the bulk of the outstanding*1540 paper of the said corporation, a contract granting unto said George Whyel, Harry Whyel and I. W. Semans, their heirs and assigns, for thirty (30) days next ensuing its date, the right to purchase from said Company all of its property in Fayette County, Pennsylvania, real, personal and mixed, including coal lands, coke plants, buildings of all kinds, mine and oven equipment, supplies now on hand, office furniture and fixtures, and all outstanding contracts and accounts *348 receivable, but subject to the lien of its bonds and underlying mortgages now outstanding, for a price equal to the total indebtedness of this Company of every kind and character whatsoever, save the underlying mortgages and bonds aforesaid, payment to be made as follows: - Upon the acceptance thereof by the said Whyels and Semans, their heirs or assigns, the said Company shall deliver to them a schedule or detailed statement of all of its indebtedness, save the underlying mortgages and bonds secured by mortgages upon its real estate, giving the names of the creditors or holders thereof, whereupon the acceptors are to execute and deliver to said Consolidated Connellsville Coke Company their written obligation*1541 to assume and pay all such indebtedness so scheduled. Within ninety (90) days from the date of said acceptance said acceptors are to deliver to said Company the written discharge or discharges of said Company from all such scheduled debts; signed by the owners or holders thereof, or present other satisfactory evidence that said Company has been released from all obligation therefor. When such discharge or discharges are so delivered, said Company shall forthwith execute and deliver to said Whyels and Semans, their heirs or assigns, a good and sufficient deed for all of its real property in Fayette County and a bill of sale for all its personal property, said real estate to be subject only to the lien of the underlying mortgages and the mortgages given to secure its respective bond issues.
The existence of any claims disputed by this Company shall not interfere with aforesaid transfer of title, but such claim or claims shall be adjusted by the said acceptors, or their assigns, within thirty (30) days after final legal determination of the validity of such claim or claims.
John Husband moved the adoption of the resolution, which motion was seconded by S. J. Harry.
It was determined*1542 to take the vote by a call of the roll of the stock. A call was had and 7,396 shares, present in person or by proxy, voted for the adoption of the resolution, while 327 shares voted against it. The motion was, therefore, declared carried.
After some further discussion of the proposed plan of reorganization, the meeting adjourned.
Pursuant to the aforesaid resolution, the board of directors on the same day authorized the officers of the company -
to execute and deliver a written contract in accordance with the resolution of said Stockholders, and [they] were further authorized, in case said option is finally accepted within the time specified, to do all and sundry the things egally necessary to the consummation of such contract, including the execution, acknowledgment and delivery of a deed and bill of sale as provided in said resolution, the Secretary of this Company being appointed the Attorney of the corporation for the purpose of the acknowledgment of such deed.
On August 26, 1914, pursuant to the foregoing resolutions, the corporation entered into the following agreement with George Whyel, Harry Whyel and I. W. Semans:
WHEREAS, by resolution regularly adopted by*1543 vote of a majority in interest of the stockholders of Consolidated Connellsville Coke Company, at a special meeting of said stockholders called for that purpose and held August 25, 1914, of which due notice had been given as required by law, the directors of said *349 company were authorized and directed to enter into a contract with George Whyel, Harry Whyel and I. W. Semans, granting unto them, their heirs and assigns, for thirty days next hereafter ensuing, the right to purchase all the real and personal property of said company upon the terms hereinafter set forth, and
WHEREAS, said action was further confirmed and ratified, as required by law, by the written consent and agreement of a majority in value of said stock, evidenced by the signatures of the owners thereof, and
WHEREAS, by vote of said Board of Directors at a regular meeting thereof, held on the day last aforesaid, such contract was directed to be executed and delivered on behalf of the corporation by its Vice President and Secretary; now
THIS AGREEMENT, Made and entered into this 26th day of August, 1914, by and between CONSOLIDATED CONNELLSVILLE COKE COMPANY, a corporation of the State of Pennsylvania, *1544 having its domicile in the Borough of Uniontown, Fayette County, said State, party of the first part,
AND
GEORGE WHYEL, HARRY WHYEL and I. W. SEMANS, all of the same town, county and state, parties of the second part, WITNESSETH:
That said party of the first part, in pursuance of the above recited authority and direction, as well for and in consideration of the sum of one dollar to it in hand paid, as of the conservation of the interest of its stockholders by a contemplated change of organization, hereby grants unto said parties of the second part, their heirs and assigns, the exclusive right, for thirty days next ensuing the date hereof, to purchase from said party of the first part, all of its property in Fayette County, Pennsylvania, real, personal and mixed, including coal lands, coke plants, buildings of kinds, mine and oven equipment, supplies on hand, office furniture and fixtures, and all outstanding contracts and accounts receivable, but subject to the lien of its bonds and underlying mortgages now outstanding, for a price equal to the total indebtedness of said first party of every kind and character whatsoever, save the underlying mortgages and bonds aforesaid, said*1545 price to be ascertained and paid in manner following:
Upon election of said parties of the second part to accept the said property upon the terms hereof, which election shall be in writing signed by them and delivered to said company within the time aforesaid, said party of the first part shall deliver to them a schedule or detailed statement of all its indebtedness, save the underlying mortgages and bonds secured by mortgages upon its real estate, giving the name of the creditors or holders of said indebtedness, whereupon said parties of the second part, their heirs or assigns, shall execute and deliver to said party of the first part their written obligation to assume and pay all such indebtedness so scheduled.
Within ninety days from the date of said acceptance, or election to accept, said parties of the second part, their heirs or assigns, shall deliver to said first party the written discharge or discharges of said Company from all such scheduled debts, signed by the owners or holders thereof, or present other satisfactory evidence that said company has been released from all obligation therefor.
When such discharge or discharges are so delivered, or such other satisfactory*1546 evidence presented, said party of the first part shall forthwith execute and deliver to said parties of the second part, their heirs or assigns, a good and sufficient deed for all its real property in Fayette County and a bill of sale for all its personal property, said real estate to be subject only to the lien of the underlying mortgages and the mortgages given to secure its respective bond issues. The said bill of sale shall include a transfer and assignment of *350 all of the first party's rights, subject to its obligations, under all outstanding contracts for the sale and delivery of coke.
The existence of any claims disputed by the said party of the first part shall not interfere with aforesaid transfer of title, but such claim or claims shall be adjusted, and their release secured within thirty days after final legal determination of the validity of such claim or claims.
The existence of this contract, until finally consummated by delivery of the deed and bill of sale, shall not interfere with the continuous prosecution of its business by said party of the first part, but the said contract, as to the delivery of supplies, etc., used in the prosecution of said business, *1547 as to the coal being actually mined, or of coke manufactured from day to day, and as to outstanding contracts for the sale of coal and coke to purchasers in the regular course of business, shall speak as of the date of final consummation and not otherwise.
Unless the proposition of sale herein embodied is accepted in writing, signed by the parties of the second part, their heirs or assigns, within thirty days next ensuing, this contract shall become void and bind nobody.
When the option was given, George Whyel, who was president and a director and shareholder of the Connellsville Company, informed the directors and shareholders, at meetings and on other occasions, of his intention to organize a new corporation and to assign the option to it and to permit the old shareholders to subscribe pro rata for shares of the new corporation.
The petitioner was organized in September, 1914, under the laws of Pennsylvania, with a capitalization of $5,000, divided into 50 shares of a par value of $100 per share. Letters patent were granted September 28, 1914. On September 24, 1914, George Whyel, Harry Whyel and I. W. Semans elected in writing "to accept the property described in said*1548 [option] agreement upon the terms therein set forth, and to comply with the provisions of said agreement." On the same day, September 24, 1914, they assigned to the petitioner all of their rights under the option agreement of August 26, 1914. The assignment is as follows:
For and in consideration of its assumption of all our obligations under said contract, we hereby assign, transfer and set over unto Consolidated Coke Company, a corporation newly organized under the laws of the State of Pennsylvania, all our rights under the contract dated August 26th, 1914, in and by which Consolidated Connellsville Coke Company grant unto us, our heirs and assigns, the right to purchase from said company all of its real and personal property, upon terms more fully in said contract set forth, for a period of thirty days next ensuing the date thereof, and we hereby grant, assign and transfer unto the said Consolidated Coke Company all our right, title and interest in and to the property described in said contract which may have vested in us by reason of said contract.
No contract of any kind, either oral or written, was up to this time made directly between the Connellsville Company and the*1549 petitioner.
*351 The minute book of the petitioner contains what purports to be a record of proceedings of its board of directors on October 12, 1914, which are in part as follows:
H. L. Robinson acted as Chairman of the Meeting and John L. Robinson as Secretary. Mr. John L. Robinson then presented and read the following resolutions, viz:
RESOLUTIONS
WHEREAS this company was incorporated as a means of carrying out the plan adopted by the stockholders and directors of Consolidated Connellsville Coke Company for the reorganization of that company, and
WHEREAS the stockholders of Consolidated Connellsville Coke Company, pursuant to arrangements among themselves, have subscribed for all the shares of the capital stock of this company, and
WHEREAS said plan contemplated that this company would issue certificates for fully paid, non-assessable shares of its capital stock having a par value of $100,000.00, in consideration of the receipt from its stockholders of $100,000.00 in cash, and in addition thereto, in consideration of the assignment to it of an agreement which would enable this company to acquire all the assets of Consolidated Connellsville Coke Company, merely*1550 by the assumption of its indebtedness, and
WHEREAS in accordance with said plan the stockholders of Consolidated Connellsville Coke Company have subscribed for and agreed to purchase all of the shares of capital stock of this company, which have a total par value of $100,000.00, and have caused to be assigned to this company by George H. Whyel, I. W. Semans and Harry Whyel, an agreement for the acquisition of all the assets of Consolidated Connellsville Coke Company, merely by the assumption of its indebtedness.
NOW, THEREFORE, BE IT RESOLVED, That the assignment of said agreement to this company by George Whyel, I. W. Semans and Harry Whyel, be and hereby is accepted as part consideration for the issuance of the capital stock of this company under the reorganization plan, and
BE IT FURTHER RESOLVED, That the payment of said subscriptions to the stock of this company be and hereby is accepted as the balance of the consideration for the issuance of the capital stock of this company under the reorganization plan, and
BE IT FURTHER RESOLVED, That the officers of the company are authorized to issue and deliver certificates for shares of its fully paid, non-assessable capital stock*1551 as and when said subscriptions are paid.
The adoption of the foregoing resolution was duly moved by John L. Robinson and seconded by J. C. Patterson, and unanimously carried.
The president called the attention of the Board to the offer made by George Whyel, Harry Whyel and I. W. Semans to assign to this company their option for the purchase of the real estate, plants and equipment of Consolidated Connellsville Coke Company, provided this company would assume the obligations of the parties named under and by virtue of the terms of said contract.
Mr. John L. Robinson then presented and read the following resolutions, viz:
RESOLUTIONS
WHEREAS, Consolidated Connellsville Coke Company has granted to George Whyel, Harry Whyel and I. W. Semans, and their assigns, an *352 option to purchase all of the plants, properties, fixtures and equipment of said company, subject to the lien of its mortgages, for the consideration of the assumption and payment by said proposed vendees of all the debts and obligations of said Consolidated Connellsville Coke Company; and
WHEREAS, said George Whyel, Harry Whyel and I. W. Semans have accepted said option and agreed to assume payment*1552 of said debts and obligations, but are willing to assign all their right, title and interest in and to said contract to this company in consideration of this company assuming their obligations thereunder and relieving them personally from the performance thereof; now
BE IT RESOLVED, by the Board of Directors of Consolidated Coke Company that this company accept said assignment of said contract, and do assume and pay or arrange for all the obligations of said George Whyel, Harry Whyel and I. W. Semans, in and under the same, so as to relieve them as individuals from the performance thereof.
The adoption of the foregoing Resolutions was duly moved by John L. Robinson and seconded by J. C. Patterson and unanimously carried.
The portion of the minutes of October 12, 1914, above set forth is not the original record made of the proceedings of the directors. In December, 1927, after the notice of deficiency in the present proceeding had been mailed, Thomas Watson, counsel for the petitioner, and H. L. Robinson, a lawyer and then president of the petitioner, had the minutes recopied to supply what Watson testified to be illegible portions. They then pasted the new copy in the minute*1553 book and destroyed the original.
On October 10, 1914, the capitalization of petitioner was increased to $100,000, divided into 1,000 shares having a par value of 100 each. The original $5,000 of authorized capital stock (50 shares) was issued on October 10 and 28, 1914, to its incorporators, H. L. Robinson, John H. Robinson, and J. C. Patterson. The latter were not shareholders of the Connellsville Company, but merely acted as directors for the purpose of incorporating the petitioner. Five Hundred Dollars in cash was paid in to the petitioner on account of the original capital stock and a note for $4,500 was given for the balance. The incorporators assigned their certificates to George Whyel, Harry Whyel and I. W. Semans on October 28, 1914, and on November 11, 1914, new certificates were issued to the latter. On January 4, 1915, George Whyel transferred two shares to F. E. Wedell, and a new certificate therefor was issued. No more certificates were issued until June 1, 1915.
At the meeting of the directors of petitioner on October 12, 1914, a resolution was passed authorizing an increase of $600,000 in the company's indebtedness, to be represented by bonds secured by a*1554 mortgage on all the property of the Connellsville Company to be acquired under the option agreement with the Whyels and Semans. This was one of several plans proposed for the raising of additional capital, but it was not carried out. The plan for raising $100,000 by *353 issuing shares of the petitioner was considered prior to the organization of the petitioner, but this course was not finally decided upon until early in 1915 after the plan for raising $600,000 through a bond issue had been abandoned.
George Whyel, Harry Whyel and I. W. Semans, who owned 942, 755, and 1,271 shares, respectively, of the Connellsville Company, subscribed for 166 1/2, 153, and 2 shares, respectively, of the petitioner. They made numerous efforts to induce all of the shareholders of the Connellsville Company to subscribe for the shares of the petitioner, which were offered to them for cash in proportion to their holdings in the Connellsville Company. They also informed the shareholders, and the shareholders knew, that the property was valuable, and they advised them "not to drop their interests." The Connellsville Company had 47 shareholders. Twenty-two of them, owning in the aggregate 3,072*1555 shares, or 30.72 per cent of the shares, declined to subscribe for the shares of the petitioner; seven of them, owning 3,428 shares, or 34.28 per cent, subscribed for 102 1/2 shares, or 10.25 per cent; fifteen of them, owning 3,410 shares, or 34.1 per cent, subscribed for 888 1/2 shares, or 88.85 per cent; and three of them, owning 90 shares, or 0.9 per cent, subscribed for 9 shares, or 0.9 per cent. The shareholders who did not subscribe were indifferent as to who acquired the shares to which they were entitled and raised no objection to their acquisition by others. All the shares of the petitioner were thus subscribed for by shareholders of the Connellsville Company, except that the creditors of one of the old shareholders and an employee of another took not more than 12 of the new shares. Subscriptions to shares were paid in during the year 1915 in the amount of $60,275. Additional subscriptions were paid in during the year 1916 in the amount of $12,041.67, and during the year 1917 in the amount of $7,233.33. The shares were issued to the subscribers at or about the time when the last payments were made of cash due on the subscriptions. The amounts thus paid in to the petitioner*1556 were used by it for working capital and no part thereof was turned over to the Connellsville Company as consideration for the conveyance of assets to the petitioner.
On December 19, 1914, the Connellsville Company conveyed directly to the petitioner by deed "all of the lands, coal or coal lands, rights and privileges whatsoever of it, the said party of the first part [Connellsville Company] situate in German and Nicholson Townships, Fayette County, Pennsylvania." At that date the two mortgages of $936,000 and $280,000 were still outstanding against the property of the Connellsville Company.
The other assets of the Connellsville Company were also transferred directly to the petitioner and the petitioner assumed the liabilities *354 of the Connellsville Company in the total amount of $2,011,938.70. The assets of the Connellsville Company were entered on the books of the petitioner at a total value of $2,011,938.70.
The following tabulation sets forth the value of said assets as shown on the books of the old company as compared with the values as shown on the books of the petitioner:
| Accounts | Value of assets shown on books of old company | Value of assets used in opening books of petitioner |
| CURRENT ASSETS: | ||
| Cash | $448.24 | $448.24 |
| Accounts receivable | 100,565.53 | 100,565.53 |
| Coal and coke | 2,114.22 | 2,114.22 |
| Supplies | 19,940.63 | 18,446.20 |
| Sinking funds | 5,120.35 | 5,120.35 |
| Total | 128,188.97 | 126,694.54 |
| PERMANENT ASSETS: | ||
| Surface land | 45,469.80 | None. |
| Coal lands | 1,787,666.05 | 1,099,712.48 |
| Total | 1,833,135.85 | 1,099,712.48 |
| Development account | 191,939.58 | None. |
| PLANT AND EQUIPMENT: | ||
| Tenements | 292,707.37 | 150,707.37 |
| Yard tracks and sidings | 50,800.28 | 35,800.28 |
| Foust jig - Donald #2 | 107,773.92 | 52,773.92 |
| Foust jig - Donald #3 | 3,151.34 | 45,201.66 |
| Foust jig - Virginia | 28,201.66 | None. |
| Foust jig - Sterling | 62,882.36 | 55,882.36 |
| Christ jig - Donald | 171.34 | None. |
| Mine equipment | 276,063.54 | None. |
| Water system | 41,258.53 | 25,258.53 |
| Trestles and bins | 20,111.10 | 13,111.10 |
| Power house and equipment | 63,856.74 | 50,856.74 |
| Boiler house and equipment | 55,396.07 | 30,396.07 |
| Electrical equipment | 9,438.12 | 4,038.12 |
| Miscellaneous property | 60,372.83 | 10,372.83 |
| Head frame | 17,366.53 | 10,366.53 |
| Crusher | 6,407.47 | 5,207.47 |
| New sand works | 3,745.23 | None. |
| Construction account | 2,334.98 | None. |
| Coke ovens and equipment | 327,244.04 | 250,244.04 |
| Lorries and equipment | 17,731.28 | 8,231.28 |
| Coke drawing machine, track, etc | 24,672.23 | 23,672.23 |
| Live stock, wagons, etc | 14,218.01 | 12,018.01 |
| Furniture and fixtures | 2,951.49 | 451.49 |
| Total plant and equipment | 1,488,856.46 | 784,590.03 |
| Total permanent assets | 3,513,931.90 | 1,884,302.51 |
| DEFERRED CHARGES, ETC.: | ||
| Discount on bonds | 62,772.71 | None. |
| Treasury stock | 1,700.00 | None. |
| Deferred charges | 5,182.07 | 941.65 |
| Grand total, all assets | 3,711,775.64 | 2,011,938.70 |
*1557 The values used in the opening books of the petitioner were not based on any appraisal, but represented an arbitrary reduction of the values shown on the books of the Connellsville Company, made by the officers of petitioner to reduce the aggregate value to an amount equaling the liabilities.
*355 On October 31, 1917, the books of the petitioner were adjusted to reflect the values as they appeared on the books of the Connellsville Company.
The Connellsville Company had acquired 1,749.499 acres of coal lands in 1907, which had cost said company $2,065,390.96, or $1,180.59 per acre. The properties conveyed by the Connellsville Company to to the petitioner, as set forth above, consisted in part of 1,294.4687 acres of coal lands and 454.698 acres of surface land. On January 1, 1917, the petitioner had remaining 1,188.2012 acres of said coal lands. The estimated recoverable coal in said coal lands on January 1, 1917, was 10,000 tons per acre, or 11,882,012 tons. The fair value of surface land acquired by the petitioner at the date of its organization was $100 per acre. The fair value of coal lands on said date was $2,100 per acre. The Commissioner has allowed depletion*1558 on the basis of a cost of $1,099,712.48, representing the portion of total cost of assets acquired by the petitioner at date of organization attributed by the Commissioner to coal lands.
The Connellsville Company had expended, prior to the conveyance of its assets to the petitioner, $191,939.58 in the development of its coal mines, representing the cost of the shafts, openings and development of coal in excess of the revenue derived therefrom during the development period. The said cost of development had depreciated or been depleted at the date of said conveyance to the petitioner in the amount of $50,657.61, which depreciation or depletion was not reflected on the books of the Connellsville Company. The said depreciated or depleted value of cost of development, namely, $141,281.97 was also the fair market value of said development cost at date of acquisition by petitioner. The petitioner, at the time it acquired the assets of the Connellsville Company, attributed no amount to the cost of development. The Commissioner has not allowed depreciation or depletion on said cost of development.
The amounts as shown on the books of the Connellsville Company for depreciable assets*1559 represent cost to that company. The said assets had depreciated at the date of organization of the petitioner to the extent of 25 per cent, which depreciation was not reflected by the books of Connellsville Company. Said depreciated cost, namely 75 per cent of the amounts shown on the books of the Connelsville Company, was also the fair market value of depreciable assets at the time acquired by the petitioner. The said depreciable assets had an average remaining life at the time acquired by the petitioner of 12 1/2 years.
The petitioner during 1919 sold 61.839 acres of coal lands, for which it received $99,028.80. These coal lands were included in the assets acquired by the petitioner at date of its organization and were *356 a part of a tract consisting of 1,294.4687 acres to which the petitioner attributed a value on its books in the amount of $1,099,712.48, or $849.54 per acre. The cost of said coal lands to the Connellsville Company was $1,180.59 per acre, and their value as of the date acquired by petitioner was $2,100 per acre. The petitioner in its income-tax return for the year 1919 claimed a loss of $40,230.45. The Commissioner disallowed said loss, but did*1560 not determine that a gain had been realized from said sale.
OPINION.
STERNHAGEN: The petitioner, having in 1914 acquired the mining properties in question, computed its invested capital for 1917 and 1918 under the war and excess-profits tax by including the full stipulated value of such properties at the date acquired. The statutory authority which it cites is Revenue Act of 1917, section 207(a), and Revenue Act of 1918, section 326(a), which provide that invested capital includes paid-in surplus, and that paid-in surplus may include the clear and substantial excess value of tangible property over the par value of shares for which it is issued. The respondent's determination rests on the view that the properties were not acquired by petitioner for stock or shares and were not paid-in surplus, but were acquired by purchase for the assumption of the Connellsville Company's liabilities.
If the petitioner purchased the properties, the cost is the measure of its investment, and it may not include in invested capital more than such cost irrespective of how much the value of the properties may exceed it. *1561 ; , affirming ; ; . On the other hand, if the properties were paid in to eptitioner expressly for its shares, the actual value of such properties when so paid in, even though exceeding the par value of the shares issued therefor, would measure the investment and thus be within the intendment and letter of the statute defining invested capital. ; ; ; ; .
We may first clear away the suggestion that there was a paid-in surplus by way of gift from shareholders. Nothing in the evidence supports it. The plan of refinancing was based entirely on business necessity with all interests crefully guarded. What Whyel, Semans and*1562 Whyel gave up was paid for. They agreed with the Connellsville Company to buy the assets for an amount equal to its liabilities. *357 In turn they assigned their contract to petitioner for the express consideration of the assumption of their obligation. There is in this neither direct evidence of a gift nor motive or other circumstance from which a gift could be inferred.
Both parties suggest, although with frank lack of conviction, the possibility that, because this was essentially merely an arrangement for new financing, it might be treated as a continuing ownership and that the earlier and later corporations might be regarded as identical. We reject this because the record clearly establishes the legal distinction between the two corporations and the contracts by which the transfer was accomplished.
We are of opinion that the contract was not acquired by petitioner under circumstances which indicate a paid-in surplus. It was, as shown by the express terms of the assignment of September 24 and by the surrounding circumstances, acquired, not as a gift of for shares of stock, but by purchase for the fixed amount of the liabilities assumed. All of the shares of stock*1563 were later subscribed for by various individuals for cash at par and were in due time paid for in cash at par. Whyel, Semans and Whyel, who were by no means the sole shareholders, paid for their shares in cash like all other subscribers and received only the number of shares to which their cash subscriptions entitled them. At that time, the petitioner had already become the owner of the contract rights under the option, and it could not have been deprived thereof nor compelled to issue shares therefor. When Whyel, Semans and Whyel assigned their contract on September 24 they were not making a contribution or investment as shareholders to their corporation, but, as individuals, were thereby disposing of their contractual obligations as well as their rights. The corporation was at the same time investing no more than its obligation to assume the liabilities of the Connellsville Company. As said in , "To hold that any contract made by a corporation through the efforts of a stockholder should be treated as paid in for capital stock would be a novel and startling proposition."
*1564 In holding as we do that the contract does not represent paid-in surplus, we have found it essential only to say that the contract and circumstances in which it was acquired in September, 1914, established that it was not paid in for stock or shares or by way of gift from a shareholder. The statement appearing in the alleged copy of the minutes of October 12, 1914, that the assignment be accepted in part consideration for stock might be treated as a mere resolution which, as shown by the evidence, was not carried out. See . But the circumstances which developed at the hearing in respect of this exhibit *358 require comment. The respondent, not questioning the genuineness of the copy, at first stipulated it to be correct and made no objection to its introduction in evidence. He later moved to strike the exhibit because it was not the best evidence, and because there was no foundation for the use of secondary evidence. He then introduced proof to show that it was inconsistent with the sworn statements and conduct of petitioner's officers and representatives for many years, both in connection with official statements*1565 to the Commonwealth of Pennsylvania and to the bureau of internal revenue. Petitioner's attorney then voluntarily testified that he had himself, together with the now deceased president of petitioner, in 1927, after this proceeding had been instituted, caused the original minutes to be removed from the minute book and destroyed, and had a copy made to replace the original. His explanation for doing this was that the original minutes had become mutilated and to some extent illegible. The copy which he said he had compared with the original carried on its face no statement that it was a copy and no lack of legibility, although it was plainly in different type from that of other minutes in the book.
Under such circumstances we can have no assurance of what the original minutes contain, and the secondary evidence should be disregarded. To permit a party to litigation to deliberately destroy evidence and then in his own behalf introduce a copy made by himself and his attorney would obviously subvert the basic principles of the best evidence rule and promote chicanery. If the original minutes were partially mutilated and their contents illegible, their effect was something to be*1566 determined by the Board from an examination of the original evidence; and petitioner had no right to rewrite the minutes in an attempt to make clear the portions which were doubtful.
We have been able to find no case like this in the books, but the unmistakable implications support the disregard of secondary evidence introduced by a party in his own behalf after he has voluntarily and deliberately destroyed the best evidence during the pendency of the controversy. The discretion of the court to receive such evidence when the original has been involuntarily or inadvertently destroyed if satisfied of its reliability can not reach the present situation.
In , the Supreme Court said:
It will be admitted that where a writing has been voluntarily destroyed, with an intent to produce a wrong or injury to the opposite party, or for fraudulent purposes, or to create an excuse for its non-production, in such cases, the secondary proof ought not to be received; but in cases where the destruction or loss (although voluntary) happens through mistake or accident, the party can not be charged with default. *359 See also 9 Am. and Eng. *1567 Ann. Cases, page 4841 note; Wigmore on Evidence (2d Ed.) § 1198; Jones on Evidence (3d Ed.) § 217.
We hold that respondent correctly excluded from petitioner's invested capital for 1917 or 1918 any amount in respect of the contract to purchase the Connellsville properties and any amount in respect of such properties themselves in excess of the purchase price thereof paid pursuant to this contract.
It follows also from what has been said that, since the depreciable and depletable properties were acquired by purchase after March 1, 1913, the basis for annual deductions in 1917 and 1918 (and 1919 for net loss purposes in 1918) for depreciation and depletion is the cost represented by the amount of liabilities assumed, with proper adjustments for subsequent depreciation, depletion and new acquisitions.
There is in the record, particularly in view of our holdings above, insufficient ground to modify the respondent's determination of loss in 1919 to be used as a net loss in computing the deficiency for 1918.
Judgment will be entered under Rule 50.