*3973 Where one transfers the assets of a business owned by him to a corporation in consideration of cash and stock of the corporation; and where the cash so used was paid in and paid out by the corporation on the same day; and where the only assets of the corporation that remained were the assets of the business conveyed to it; and where an interest of more than 50 per cent in the business, in the form of stock of the corporation, remained in the transferor, held, that the invested capital of the corporation should be computed subject to the limitations of section 331 of the Revenue Acts of 1918 and 1921.
*1111 This proceeding involves the redetermination of income and profits taxes for the calendar years 1919, 1920, and 1921 in the respective amounts of $46.52, $3,926.34, and $2,169.24. Petitioner asserts the following errors: (a) That in the determination of invested capital for the years 1919, 1920, and 1921 respondent has disallowed an item of leasehold, good will, and trade name in the amount of $40,663.38, and (b) that respondent has disallowed*3974 as a deduction from gross income certain amounts attributable to the amortization of a leasehold, good will, and trade name. Petitioner, by stipulation, abandoned contention (b).
In his answer, respondent alleges that petitioner kept its books on the accrual basis and that there should be deducted from petitioner's surplus the further sum of $792.68, which represents income and profits taxes for the year 1919, and that petitioner's invested capital for the year 1921 should be reduced as of January 1, 1921, by its total tax liability for 1920.
*1112 FINDINGS OF FACT.
1. For about 21 years prior to February 20, 1919, one Eugene Tanke was associated with his father, T. C. Tanke, first as an employee and later as a partner, in a jewelry business operating under the firm name of T. C. Tanke. For at least one year, said Eugene Tanke owned a one-half interest in this business. Some time during the year ended February 20, 1919, T. C. Tanke retired from the partnership and made a gift of his one-half interest in the same to Eugene Tanke, who thereby became the sole owner of all the assets of the business theretofore conducted as a partnership and so continued to the date*3975 of sale of such assets to T. C. Tanke, Inc.
2. T. C. Tanke, Inc., was organized on February 20, 1919, under the direction of Eugene Tanke, with an authorized capital of $200,000, divided into 2,000 shares of the par value of $100 each. At the date of such incorporation, 400 shares of the capital stock were sold to Harry C. McCormack for $40,000 and the stock certificates evidencing such sale were issued directly to the said McCormack. At the same time, 1,535 shares were issued to Eugene Tanke and 65 shares to T. C. Tanke, but the 65 shares so issued to T. C. Tanke were immediately endorsed over to T. C. Tanke, Inc., and reissued to Eugene Tanke, who thereby became the owner of 1,600 shares of the stock of the corporation.
3. On February 20, 1919, T. C. Tanke sold to T. C. Tanke, Inc., all its assets, including cash, accounts receivable, merchandise, good will, trade name, lease on business premises, customer lists, and all other property owned by it, and received therefor capital stock of the par value of $160,000 and cash in the amount of $40,000. Resulting from this transaction, Eugene Tanke, at that time the sole owner of the assets and business, received the entire consideration*3976 realized from the sale.
4. At the date of incorporation, Harry C. McCormack became a stockholder of T. C. Tanke, Inc., by virtue of an agreement between himself and Eugene Tanke, in which he proposed to purchase 548 shares of stock for $50,000. This agreement was carried out by the issue of 400 shares t McCormack by the corporation in exchange for $40,000 in cash and by the transfer of 148 shares, owned by Eugene Tanke, to McCormack for $10,000. The steps by which McCormack acquired 548 shares of stock constituted a single transaction. On December 6, 1920, Eugene Tanke sold 1,452 shares of T. C. Tanke, Inc., to Arthur J. Block and received cash therefor in the amount of $134,352.41.
5. The net worth of the assets sold by Eugene Tanke to T. C. Tanke, Inc., on February 20, 1919, was $159,336.32, as evidenced by *1113 the following balance sheet of T. C. Tanke as of January 1, 1919, the effective date of the transfer:
| Assets | Liabilities | ||
| Cash | $23,084.75 | Accounts payable | $4,912.93 |
| Accounts receivable | 9,150.57 | Due bills | 42.61 |
| Inventory | 116,703.03 | Reserves | 915.05 |
| Fixtures and equipment | 15,793.56 | Net worth | 159,336.32 |
| Deferred assets | 475.00 | ||
| 165,206.91 | 165,206.91 |
*3977 6. The fair market value of the 1,600 shares of stock to T. C. Tanke, Inc., at the date of issue to Eugene Tanke was $91.24 a share, or a total of $145,984; the total consideration received by Eugene Tanke for the assets of T. C. Tanke was $185,984; and the total gain resulting from the transaction was $26,647.68.
OPINION.
MILLIKEN: All the facts were stipulated and our findings of fact are in exact accord with the stipulation.
Since the stipulation presents no fact with reference to respondent's contention relative to reduction of invested capital by reason of unpaid income and profits taxes, we accordingly have no facts upon which to base a decision.
In its petition, petitioner alleges that it paid cash in the amount of $40,000 for the trade name, good will and leasehold of T. C. Tanke. This allegation is denied and all we have before us are the facts as stipulated by the parties. It is stipulated that on February 20, 1919, the date of petitioner's organization, T. C. Tanke sold to petitioner "all its assets, including cash, accounts receivable, merchandise, good will, trade name, lease on business premises, customers' lists and all other property owned by it, and*3978 received therefor capital stock of the par value of $160,000 and cash in the amount of $40,000." There is nothing in the stipulation which indicates that the sum of $40,000 was paid for good will, trade name and lease, or that such assets had any value, much less that they cost T. C. Tanke that amounts or any amount whatever. On the other hand, it is stipulated that the net worth of the assets sold by Eugene Tanke to petitioner on February 20, 1919, was $159,336.32 or less than the par value of the stock issued therefor. It is true that it is further stipulated that the stock received by Eugene Tanke was worth on the date of organization, $91.24 a share. An analysis of the facts as stipulated shows that this amount is computed by dividing the total amount paid by McCormack, $50,000, by the total number of shares purchased by him, to wit, 548. Multiplying the total number of shares issued, 2,000, by this value, it appears that the total assets acquired by petitioner from Eugene Tanke were probably worth $182,480, or $22,480 in excess of the par value of the stock issued to him.
*1114 Conceding for the purpose of this opinion that the assets acquired by petitioner from*3979 T. C. Tanke were worth $182,480, we are confronted with the question, How much of this amount should be included in invested capital by petitioner? It is at once apparent that the sum of $40,000, which was paid for stock by McCormack, was on the same day paid to Eugene Tanke in part payment for the assets of T. C. Tanke. It is further to be noted that it is stipulated that the purchases by McCormack of 400 shares from the corporation and of 148 shares from Eugene Tanke constituted a single transaction, that is, that McCormack in fact purchased 548 shares from Eugene Tanke, using the corporation as a conduit for the payment of the purchase price of 400 shares. All this occurred on the same day and as part of the plan by which petitioner acquired the assets and business of T. C. Tanke. At the end of that day, petitioner had issued 2,000 shares of its stock and all it had to represent this issue was the assets and business of T. C. Tanke. To put it in a few words, petitioner acquired the assets and business of T. C. Tanke in return for 2,000 shares of its capital stock. The cash payments were in fact transactions between Eugene Tanke and McCormack. The petitioner played the part*3980 only of a stakeholder.
At the beginning of the day, Eugene Tanke owned T. C. Tanke and at the end of the day he owned 1,452 out of a total of 2,000 shares of stock issued by petitioner, and the only assets owned by petitioner were those which had belonged to T. C. Tanke. These facts bring this trnasaction squarely within the provisions of section 331 of the Revenue Acts of 1918 and 1921. The intangibles of T. C. Tanke can be given no greater value in computing the invested capital of petitioner than in computing the invested capital of T. C. Tanke, and since it is not shown that these intangibles cost T. C. Tanke anything of value, they can not be included in petitioner's invested capital. Cf. .
The fact that Eugene Tanke made taxable gain on the transfer of the assets of T. C. Tanke to petitioner has no bearing on the question of what was petitioner's invested capital. Invested capital is a purely statutory concept. Cf. ; 3 Am.Fed. Tax Rep. 3114. Thus, if Eugene Tanke had sold the good will of T. C. Tanke to a corporation in which he did*3981 not retain a 50 per cent interest, he would have been taxable on his gain as in this case, but the corporation could have included such intangibles in its invested capital, whatever may have been their value (subject to certain other limitations) to the extent of only 25 per cent of the par value of its outstanding capital stock. So here he was taxable on the gain arising from his sale to petitioner, but the *1115 extent to which the assets so conveyed may be included in petitioner's invested capital is controlled by section 331.
Reviewed by the Board.
Judgment will be entered for the respondent.