*3172 Special assessment denied petitioner upon failure to show that it comes within the class of cases set forth in section 327 of the Revenue Act of 1918.
*860 This is a proceeding for the redetermination of a deficiency in income and war-profits taxes for the year 1918 in the amount of $5,823.09.
*861 The errors assigned are:
1. The holding of the respondent that petitioner was not entitled to have its tax for the year 1918 computed under the special assessment provisions as provided in sections 327 and 328 of the Revenue Act of 1918;
2. The failure of the respondent to take into consideration the fact that $62,595.57 of the working capital of petitioner during the year 1918 was borrowed and contributed proportionately to the earning of the income upon which the taxes are proposed to be assessed and collected; and
3. The failure of the respondent to take into consideration the fact that there was an operating good will, worth approximately $50,000, which contributed materially to producing the income of petitioner.
FINDINGS OF FACT.
*3173 The petitioner is a Missouri corporation engaged in the bakers' and confectioners' supply business in St. Louis.
In 1874 W. E. Beckmann started in the bakers' and grocers' supply business on a small scale. The business increased and about the time the business was incorporated, in 1915, the books showed a net worth of physical assets of $122,228.27. This was attributable entirely to earnings of the business. The company was incorporated in June, 1915, and $50,000 capital stock was issued. The reason for incorporating for $50,000 was to allow Beckmann's son-in-law, Louis Alewel, to obtain a one-fourth interest in the business upon that basis. All of the assets belonging to the old concern were left in the business and the corporation assumed the liabilities. The title to some of the personal property and stock, however, was retained by Beckmann. All of the capital stock was paid for with tangible assets. The stockholders were Beckmann, his wife, and Louis Alewel. Before incorporation Beckmann had been doing a business of from $400,000 to $900,000 per year and had from 400 to 500 customers.
The petitioner continued in the same business and had the same customers as the*3174 old business, except for the addition of new ones and the loss of old ones in the course of business. The petitioner did not pay Beckmann anything for the right to use his list of customers. No records had been kept by Beckmann from 1874 up to the time of incorporation.
The statement of liabilities of petitioner at December 31, 1917, showed:
| Capital stock | $50,000.00 |
| W. E. Beckmann, investment | 72,595.57 |
| W. E. Beckmann, personal | 2,995.61 |
| Storage | 11.10 |
| Wagon and harness repairs | 6.25 |
| Surplus | 73,562.34 |
*862 No accounts payable for merchandise were shown on the balance sheet.
At the end of the year 1918 the statement of liabilities showed:
| Capital stock | $50,000.00 |
| W. E. Beckmann, investment | 62,595.57 |
| Surplus | 95,971.80 |
No accounts payable to anyone were shown. Petitioner tried to make it a rule to refrain from owing anybody at the end of the year for merchandise purchased. The amount of capital needed in the business varies with the condition of the market. When conditions are good capital is needed to buy supplies.
The return of the petitioner for 1918 shows gross sales of $699,814 and net sales of $677,194.95.
*3175 OPINION.
SIEFKIN: The petitioner contends that it should have its taxes for the year 1918 computed under the special assessment provision of sections 327 and 328 of the Revenue Act of 1918. As reasons for this the petitioner contends that $62,595.57 of the working capital of the petitioner during the year 1918 was borrowed and contributed proportionately to the earning of the income and that the operating good will which was not included in invested capital had a value of $50,000, which also contributed materially to producing the income.
Section 326(a) of the Revenue Act of 1918 provides:
That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section):
* * *
(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest.
It will be noted that only such intangible property*3176 as is paid in for stock, and that only to a limited extent, may be included in invested capital. The good will of the petitioner was not acquired for stock or shares and thus the statute itself precludes the allowance of this item in invested capital.
In , we said:
It may also be stated, without extended discussion, that regardless of the value of the several contracts on January 2, 1915, the date they were acquired by the petitioner, it is not entitled to include that value or any part thereof in its invested capital for the year 1918. The contracts were paid in to the petitioner corporation by the Brownings without any consideration therefor *863 except the nominal consideration of one dollar, and under the decision of this Board in the , they may not be included in invested capital under section 326(a)(3) of the Revenue Act of 1918. See also .
It can not be said that merely by reason of statutory exclusion, any abnormality in this respect exists which would allow special assessment. See*3177 , and .
Evidence was introduced to show that tangible assets to the extent of approximately $62,000, the title to which was still held by Beckmann, were left in the business and the petitioner conends that such borrowed capital created an abnormality which brings petitioner within the provisions of section 327 of the Revenue Act of 1918. However, the petitioner has not shown what the normal condition in this particular business is.
In , we stated:
Petitioner claims that it falls within section 327 of the Revenue Act of 1918 and is entitled to have its tax computed by a comparison with the tax paid by representative concerns, as provided in section 328. Its argument is based primarily upon the amount of borrowed money used. It appears that during the year its invested capital was $2,656,613.61 and its average borrowed capital, $2,189,025.25; in other words, 40 per cent of its operating capital was borrowed. In many businesses this would not be regarded as unusual or abnormal and in the absence of any evidence*3178 that it is abnormal in the wholesale drygoods business there is nothing on which we may base an opinion as to normality or abnormality.
In , we stated:
The above-quoted sections require that before special assessment is to be decreed there shall be proof of an abnormal condition affecting petitioner's capital or income. On the record before us, petitioner has failed to prove this fundamental fact.
Before we can find an abnormal condition in capital or income, we must know the facts with respect thereto. From the evidence we know little or nothing of the amount of invested capital, borrowed capital, gross sales, cost of goods sold, merchandise inventory, or income of petitioner. Nor do we have similar evidence as to what petitioner alleges to constitute a normal condition.
* * *
Petitioner complains of the exclusion of good will from invested capital, but fails to prove either that the good will was paid in for stock or what amount, if any, was expended in its acquisition or accumulation. (See *3179 .) * * *
We must hold that the petitioner is not entitled to special assessment.
The respondent in his answer prays that the Board award the United States damages in the amount of $500 on account of the institution of a frivolous appeal for the purpose of delay. Such prayer *864 is herewith denied for the reason that the evidence does not show that this appeal was brought for such a purpose.
Judgment will be entered for the respondent.