*2733 An amount claimed to represent the value of intangibles paid in for capital stock at the time of petitioner's incorporation in 1907 held properly excluded from invested capital where neither the character nor the value of the property claimed to have been paid in can be ascertained.
*1118 A deficiency has been determined for the calendar year 1920 in the amount of $13,894.44, of which amount approximately $1,800 is in controversy. The only issue is whether the respondent erred in his adjustment of petitioner's invested capital for the taxable year 1920.
FINDINGS OF FACT.
Petitioner is a corporation with its principal place of business at Saginaw, Mich. It was organized in the year 1907 for the purpose of taking over the boiler making business of Wickes Brothers, a corporation, which for several years had been engaged in manufacturing machinery and supplies used in the lumber business and tubular boilers. The departments were operated separately but no separate books or accounts were kept. The officers of Wickes Brothers were H. T. Wickes, *2734 president, W. J. Wickes, vice president, and E. C. Fisher, secretary. It had a capital stock of the par value of $1,000,000 which was all owned by H. T. Wickes, W. J. Wickes, and their sister, except for $500 par value owned by Fisher.
*1119 Fisher had been connected with Wickes Brothers since 1895. He had supervision of the entire sales department and together with J. F. L. Baker managed the boiler-making department. The latter was superintendent and designing engineer of the boiler shop. He had been connected with Wickes Brothers since 1887.
Early in 1907 Fisher tendered Wickes Brothers his resignation. At that time he and Baker were considering going into the boiler-manufacturing business for themselves. The Toledo Shipbuilding Co. had offered to sell them its boiler-making plant for that purpose. H. T. Wickes and W. J. Wickes, being desirous of keeping Fisher and Baker with Wickes Brothers, agreed with them to organize a new corporation in which they should own stock to take over the boiler-manufacturing department of Wickes Brothers. It was agreed that capital stock in the amount of $464,125 would be issued in exchange for the physical assets to be acquired*2735 from Wickes Brothers. This amount was less than the book value and also less than the appraisal value as of the year 1906. Pursuant to this agreement the Wickes Boiler Co., the petitioner, was incorporated in December, 1907. Its capital stock, of the par value of $500,000, was subscribed and issued as follows:
| H. T. Wickes Subscription Acc | $100,000 |
| W. J. Wickes Subscription Acc | 288,500 |
| E. C. Fisher Subscription Acc | 85,000 |
| J. F. L. Baker Subscription Acc | 20,000 |
| F. H. Payne Subscription Acc | 6,500 |
It was part of the reorganization agreement that $35,875 of capital stock, that is, the difference between the total capital stock of $500,000 and the $464,125 of stock issued in exchange for the Wickes Brothers' assets, would be issued to Fisher, Baker, and Pollak, another employee of Wickes Brothers, in the respective amounts of $27,625, $6,000, and $2,250, upon the condition that they continue their services with the petitioner and contribute to it certain ideas and designs which they had formulated in their minds but had not reduced to drawings or other tangible form. These amounts are included in the above subscription accounts. It was also agreed that Fisher, *2736 Baker, and others would be permitted to acquire other capital stock of the petitioner for cash. Pursuant to such agreement cash on stock subscriptions in the aggregate amount of $82,875 was paid to Wickes Brothers or its owners by Fisher, Baker, and others. Pollak's stock was subscribed and issued through W. J. Wickes.
Petitioner's opening accounts show the following book entries as of January 1, 1908:
| Land | $25,000.00 |
| Buildings, tools and equipment | 198,418.48 |
| Stock "Inventory 12/31/07" | 122,742.30 |
| Patents, patterns and drawings | $90,346.00 |
| W. S. Huyette, Agent | 750.00 |
| S. Perry Pollak Agent | 700.00 |
| J. R. Mason Agent | 350.00 |
| J. F. Glenn Agent | 350.00 |
| Accounts receivable account | 61,343.22 |
| Total | 500,000.00 |
*1120 During the period of their employment with Wickes Brothers, Fisher and Baker had worked together in designing methods of improving the company's products and developing new machinery. There was an oral agreement that during their employment with the company they would assign to it any and all patents issued to them. Several patents pertaining to boilers and other articles had been issued to them and assigned to Wickes Brothers prior*2737 to the petitioner's incorporation. At or about the time of petitioner's incorporation Fisher and Baker had in mind a plan for a new type horizontal boiler, but no drawings or other designs had been prepared prior to December 31, 1907.
Fisher and Baker received the same salaries from the petitioner that they were receiving from Wickes Brothers at the time of petitioner's incorporation. There was no agreement that either of them would continue in the employment of the petitioner for any definite time.
The net earnings of Wickes Brothers for the years 1902 to 1907, inclusive, were as follows:
| 1902 | $149,408.65 |
| 1903 | 134,361.50 |
| 1904 | 71,147.35 |
| 1905 | 92,586.88 |
| 1906 | $179,301.42 |
| 1907 | 174,947.06 |
| Total | 801,752.86 |
Balance sheets of Wickes Brothers for the years 1902 to 1907, inclusive, show the following assets and liabilities:
| June 30, 1902 | June 30, 1903 | June 30, 1904 | |
| ASSETS | |||
| Land, buildings, machinery | $369,412.93 | $417,152.87 | $444,518.17 |
| Patterns and drawings | |||
| Patents and mfg. contract rights | |||
| Materials and stock on hand | 359,095.15 | 475,176.86 | 475,186.75 |
| Notes and accounts receivable | 239,893.01 | 278,067.46 | 299,131.14 |
| Cash | 3,597.10 | 3,857.93 | 8,353.48 |
| Domestic stocks | 8,000.00 | ||
| 971,998.19 | 1,174,255.12 | 1,235,188.86 | |
| LIABILITIES | |||
| Bills and accounts payable | 340,393.07 | 425,568.68 | 426,812.31 |
| Mortgages payable | 50,000.00 | 30,000.00 | 20,000.00 |
| Accrued pay rolls, interest, etc | 6,970.38 | 9,570.20 | 8,232.96 |
| Capital stock | 150,000.00 | 150,000.00 | 150,000.00 |
| Surplus | 424,634.74 | 558,996.24 | 630,143.59 |
| 971,998.19 | 1,174,255.12 | 1,235,188.86 |
| June 30, 1905 | June 30, 1906 | June 30, 1907 | |
| ASSETS | |||
| Land, buildings, machinery | $473,183.06 | $592,637.51 | $616,275.56 |
| Patterns and drawings | 75,000.00 | 75,000.00 | |
| Patents and mfg. contract rights | 91,370.00 | 92,390.00 | |
| Materials and stock on hand | 403,529.57 | 425,446.57 | 471,365.60 |
| Notes and accounts receivable | 439,809.68 | 464,300.56 | 533,527.27 |
| Cash | 14,248.53 | 21,301.18 | 18,790.00 |
| Domestic stocks | 8,000.00 | 8,000.00 | |
| 1,338,770.84 | 1,678,055.82 | 1,807,348.43 | |
| LIABILITIES | |||
| Bills and accounts payable | 435,661.87 | 545,288.01 | 524,554.47 |
| Mortgages payable | 20,000.00 | ||
| Accrued pay rolls, interest, etc | 10,378.50 | 15,735.92 | 25,815.01 |
| Capital stock | 150,000.00 | 1,000,000.00 | 1,000,000.00 |
| Surplus | 722,730.47 | 177,031.89 | 256,978.95 |
| 1,338,770.84 | 1,678,055.82 | 1,807,348.43 |
*1121 Prior to the taxable year 1920 and beginning with the year 1917 the entire amount of $90,346 entered in petitioner's books under "Patents, Patterns and drawings" had been charged off against current earnings of the business. Deductions of the amounts so charged off were claimed in income-tax returns for the respective years and were disallowed by the respondent. None*2739 of the said amount of $90,346 has been restored to petitioner's books or included in petitioner's invested capital for the year 1920.
OPINION.
SMITH: The petitioner contends that its invested capital for the year 1920 should be increased by the amount of $35,875, representing the value of intangibles paid in for stock, or, as stated in its brief, the value of "the benefit of continuing to enjoy the services of the persons involved and in gaining the benefit of any designs, drawings, or plans which had been conceived and were in some state of development by the persons involved."
Section 326 of the Revenue Act of 1918 permits the inclusion in invested capital of:
(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.
What was the property, intangible or otherwise, that was paid in to the petitioner in exchange for its $35,875 of capital stock, *2740 and how are we to determine its value? The evidence is clear that there was no specific invention, design, or patent, or any drawing of such to which any definite value can be ascribed. It may be that Fisher, Baker, and Pollak had in mind some ideas and plans that were later *1122 to prove valuable to the petitioner's business, but we do not know what they were or whether they were capable of any definite valuation at the time of petitioner's incorporation. The petitioner argues that it acquired for its $35,875 of capital stock property in the nature of good will; that the same result was reached as would have been if this amount of petitioner's stock had been issued for good will and the stock then turned over to the persons named. The facts are, however, that no stock was issued for good will. The good will, if any, came to the petitioner not from these individuals but from the Wickes Brothers corporation. We have heretofore held that the ability, will, experience, or other qualifications of individuals do not constitute good will as an item of property, and do not exist in such form that they may be the subject of transfer. See *2741 ; ; .
It can not be said either that the petitioner issued the stock in question to Fisher, Baker, and Pollak in consideration for their future services for, as the evidence shows, none of them were under any contract with the petitioner to remain in its employ for any definite period of time.
Under these circumstances we can not determine that property of any value was acquired by the petitioner in exchange for the capital stock in question. The amount representing the par value of such stock was properly excluded from petitioner's invested capital.
Judgment will be entered for the respondent.