*3033 The evidence does not establish that petitioner is entitled to include in invested capital any greater amount than allowed by the respondent.
*61 The respondent determined deficiencies in income and profits taxes for the calendar years 1917, 1918, and 1919, in the respective amounts of $10,909.20, $26,945.27, and $4,364.51. It is alleged that the respondent erred in his computation of invested capital by not allowing any value for intangibles, by not allowing the full cash value of stock acquired by petitioner's predecessor, and by reducing invested capital on account of prior years' taxes.
FINDINGS OF FACT.
Petitioner is a New York corporation, organized November 5, 1917, with preferred capital stock of $3,000,000 and common capital stock of $4,500,000. Upon organization it issued stock of the par value of $6,685,719.37 for all the assets of the Autosales Gum & Chocolate Co. hereinafter called the Chocolate Co.
The Chocolate Company was organized in May, 1911. In that month it acquired either the properties or stock of some 30 companies*3034 in exchange for $5,999,500 of its capital stock and $3,600,000 of its 6 per cent bonds. It received, from the brokers handling the deal, $530,000 in cash.
On May 15, 1911, the Chocolate Company deposited with a trust company cash in the amount of $538,500, its bonds of the face value of $311,500, and its stock of the par value of $225,000 for the purpose of acquiring all the capital stock, of the par value of $100,000, of the Weighing & Sales Co., which was organized in May, 1911. The trust company paid $163,500 of the cash received to the brokers negotiating the transaction and received from the brokers $163,500 face value of bonds of the Chocolate Company, and with this change, on May 22, 1911, turned over the cash and securities to the Empire Trust Co. The stock of the Weighing & Sales Co. was thereupon delivered to the Chocolate Company. The Empire Trust Company was trustee under a deed of trust given by the Weighing & Sales Co. to secure its bonded indebtedness in the amount of $406,800. The deed of trust provided for the establishment of a sinking fund of $20,000 a year for the retirement of the bonds and by its terms extended to all property which the Weighing & Sales*3035 Co. then had or might in the future acquire, including contracts for the placing of its *62 weighing and vending machines. Most of the contracts were with railroad companies and allowed the installation of machines in places frequented by the public upon payment of a rental or commission The contracts were for the term of one year, but were automatically renewed for another term if not terminated by the railroad company within 30 days before the expiration of the term.
By an instrument dated October 31, 1911, the Weighing & Sales Co. leased to the Chocolate Company all its vending and weighing machines, and assigned to it all its patents, contracts for the location of machines and supplies on hand for the machines, subject to the deed of trust held by the Empire Trust Co. The Chocolate Company agreed to operate the machines and keep them in good order and repair, and to discharge all the obligations of the lessor, including the interest on the lessor's bonds and to make the sinking fund payments required by the deed of trust. The Weighing & Sales Co. had at that time about 7,500 weighing machines and 9,000 vending machines, the operation of which was taken over by the*3036 Chocolate Company under this lease agreement. By an instrument dated March 31, 1913, the Chocolate Company reassigned to the Weighing & Sales Co. the contracts for location of machines, in order to conform to the terms of the deed of trust, but the Chocolate Company continued to operate the machines covered by such contracts.
The assets of the Weighing & Sales Co., in addition to the weighing and vending machines, consisted of patterns, tools and dies for their manufacture, and a factory for the manufacture of gum for the vending machines. It also owned or controlled the stock of the National Weighing Machine Co., the Gum Supply Co., the Manhattan Introduction Co., the Champion Scale Co., and the Gum & Sweetmeat Co. The Gum Supply Co. manufactured gum and the other companies operated weighing and vending machines. An audit of the books of these companies at May 20, 1911, disclosed the following totals of assets and liabilities:
| Assets | |
| Capital assets: | |
| Machines | $160,661.67 |
| Property rights, franchises, privileges | 1,468,020.48 |
| Patents | 43,726.75 |
| Leases | 250,000.00 |
| Current assets: | |
| Cash | 55.52 |
| Empire Trust Co | 1,865.99 |
| L. W. Baldwin | 2,124.88 |
| Inventory | 65,339.80 |
| Accounts receivable | 41,028.03 |
| Intercompany accounts | 5,183.00 |
| Deferred charges: | |
| Commissions paid in advance | 226.39 |
| Unexpired insurance | 929.71 |
| Stationery | 1,172.45 |
| Bennett operating expense | 10.00 |
| Prepaid interest | 319.00 |
| Total | 2,040,664.26 |
| Liabilities | |
| Bonded indebtedness and capital: | |
| Outstanding bonds | $487,455.00 |
| Preferred stock | 268,415.00 |
| Common stock | 1,047,350.00 |
| Surplus | 74,658.76 |
| Sinking fund reserve | 50,170.00 |
| Current liabilities: | |
| Bills payable | 23,000.00 |
| Accounts payable | 6,080.09 |
| Notes payable | 36,500.00 |
| Accrued interest | 14,362.89 |
| Dividends | 13,039.04 |
| Intercompany accounts | 19,250.00 |
| Deferred liabilities | 383.48 |
| Total | 2,040,664.26 |
*3037 *63 The gross and net earnings of the Weighing & Sales Co., before deduction of bond interest, were as follows:
| Gross | Net | |
| May 15, 1911, to Apr. 30, 1912 | $345,895.45 | $110,758.51 |
| May 1, 1912, to Apr. 30, 1913 | 398,989.07 | 163,240.17 |
| May 1, 1913, to Apr. 30, 1914 | 445,095.70 | 177,037.37 |
| May 1, 1914, to Apr. 30, 1915 | 628,825.79 | 161,656.32 |
| May 1, 1915, to Nov. 1, 1917 | 1,695,977.28 | 353,959.50 |
Total bond interest paid during this period on the bonds of the Weighing & Sales Co. amounted to $118,340.84. Average net yearly earnings, after deduction of bond interest, amounted to $131,351.39.
Stock and bonds of the Chocolate Company sold during 1911 at the following high and low prices:
Stock - May 24 to December 27 - high 86, low 50.
Bonds - July 21 to December 29 - high 85, low 75.
In December, 1915, or January, 1916, the Chocolate Company went into the hands of a receiver, who operated its properties until they were taken over by petitioner in 1917. When the petitioner took over the business of the Chocolate Company all of the vending and weighing machines were placed and were earning profits. Petitioner has since continued to operate*3038 the machines under virtually the same location contracts as its predecessor, only a very few contracts having been lost.
Both the Chocolate Company and the petitioner entered the stock of the Weighing & Sales Co. on their books at the nominal value of $1. The petitioner in its opening entries included the properties of the Weighing & Sales Co. with its own assets of a similar kind. The principal assets of the Weighing & Sales Co. were the machines and the location contracts. No depreciation has been set up for the machines, as they last for many years, and the cost of upkeep and repairs has been charged to operating expense.
The respondent, in computing petitioner's invested capital, has included the sum of $160,661.67, which is the book value of the machines of the Weighing & Sales Co. This amount is the only item respondent has included in petitioner's invested capital on account of its ownership of the Weighing & Sales Co. stock.
For the several taxable years the respondent reduced the consolidated invested capital of petitioner and affiliated companies on account of prior years' taxes.
OPINION.
ARUNDELL: Petitioner alleges that for each of the years the respondent*3039 erred in refusing to allow, for invested capital purposes, the full *64 cash value of the stock or the assets of the Weighing & Sales Co., and in refusing to allow any value for intangibles. Apparently the claim for inclusion of intangibles was abandoned as no proof was directed to that issue and it is not argued in petitioner's brief.
As to the claim for inclusion of the value of the stock or assets of the Weighing & Sales Co., the facts, briefly restated, are these: The Chocolate Company, upon organization in 1911, acquired for cash and its own stock and bonds the entire stock issue of the Weighing & Sales Co. which in turn owned or controlled five other companies. In November, 1917, a new corporation, the present petitioner, was organized and issued a part of its stock for the assets of the Chocolate Company. The Commissioner has included in invested capital of the petitioner the book value of the machines of the Weighing & Sales Co. and this is the only item he has included on account of petitioner's ownership of the Weighing & Sales Co. stock.
There is no issue as to the inclusion of the value of any stock or tangible assets other than those of the Weighing & Sales*3040 Co.
It is clear that through the ownership, first by the Chocolate Company and later by the petitioner, of all the stock of the Weighing & Sales Co. there was a statutory affiliation and invested capital must be determined on that basis. Petitioner's idea seems to be that in computing the invested capital of the affiliated group, there should first be determined the cash value of the stock or assets of the Weighing & Sales Co. and that that value should go into and remain in the invested capital of the Chocolate Company and follow through into the invested capital of the present petitioner, subject to the limitations of section 208 of the Revenue Act of 1917 and section 331 of the Revenue Act of 1918. We may say here that we can not determine that these sections have any application because we have not been furnished with sufficient details of the so-called reorganization by which the petitioner took over the Chocolate Company's assets. In the view we take of the case it is not necessary to decide this question. Petitioner's theory for the computation of consolidated invested capital is not in accord with the method we have approved as correct, and which is stated in *3041 , as follows:
Under requirements made by the Treasury Department one of the early steps in ascertaining the consolidated invested capital of a group of affiliated companies is the preparation of a consolidated balance sheet. Each member of the affiliated group enters the consolidation with its invested capital as defined by section 326 of the Revenue Acts of 1918 and 1921. From this preliminary exhibit there is then eliminated such items or amounts as are shown to be duplications either of investment or of earned surplus and undivided profits. (Italics added.)
*65 See also , and . From this it is evident that in order to compute consolidated invested capital there must be in the record sufficient facts to permit of a computation of the invested capital of Weighing & Sales Co. under section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918. We do not have the necessary facts in this case. All the evidence before us on this point consists of the balance sheets of the five companies*3042 that the Weighing & Sales Co. owned or controlled in 1911. From this evidence alone it is impossible to determine the invested capital of the Weighing & Sales Co. and consequently we can not determine the amount to be included in consolidated invested capital. We are accordingly unable to find that the respondent erred in refusing to include in the consolidated invested capital any more than the amount he has allowed.
Petitioner concedes in its brief that the remaining question is settled by decisions of the Board holding that under section 1207 of the Revenue Act of 1926 invested capital may be reduced on account of taxes for prior years.
Judgment will be entered for the respondent.