*2753 Petitioner was incorporated to take over business of a profit-sharing partnership of three members, the operating assets of which were owned entirely by one partner. Large profits accumulated by the partners and held by the firm for their accounts were transferred to petitioner for liquidation. Credits with petitioner were established for the two other stockholders, not members of the partnership, by charging amounts thereof against the partners' accounts. The three partners and two others subscribed to all capital stock, $250,000 par value, and also subscribed the surplus of $250,000, the total subscription of each being charged against his credit balance due from the corporation. Petitioner then purchased for $490,709.29 the operating assets of the partnership, consisting of good will at $50,000 and tangibles at $440,709.29, and charged off good will to profit and loss. Held:
(1) That $500,000 in cash, or the equivalent, was paid in to petitioner for stock and surplus, and is the true invested capital at the time of organization; that this amount is the proper basis for computing invested capital for taxable years.
(2) That the invested capital should not be reduced*2754 by excluding therefrom $50,000 for good will written off.
*955 These proceedings are for the redetermination of income and profits taxes for the calendar years 1919 and 1921, as to which the Commissioner has determined deficiencies of $145.12 and $2,077.94, respectively. It is alleged that the Commissioner erred in the determination of invested capital (1) by excluding therefrom good will in the amount of $50,000; (2) by failing to recognize that at the time of incorporation the petitioner had assets of $500,000, consisting of the subscriptions of its subscribing stockholders, charged against credit balances to their accounts, and that thereafter it did expend $490,709.29 thereof for certain assets owned by Michael Werk and used by the partnership of M. Werk & Co., consisting of tangible property in the amount of $440,709.29 and good will in the amount of $50,000; and (3) by failing to allow as paid-in surplus a contribution of $9,290.71 made by M. Werk on October 4, 1888. In the petition covering the year 1921 it is also alleged as error that the*2755 Commissioner failed to compute invested capital in accordance with the Board's decision in . This issue, however, was abandoned.
FINDINGS OF FACT.
Petitioner is an Ohio corporation with principal offices at St. Bernard, Ohio. It was incorporated August 1, 1888, with $250,000 capital stock divided into 50 shares of $5,000 par value each, for the purpose of taking over the business of M. Werk & Co., a partnership.
The business orginally was owned and operated by Michael Werk as sole proprietor. Later he associated with him Michael Schwartz and Casimir L. Werk as partners on a profit-sharing basis only, the profits to be divided on the basis of 60 per cent to M. Werk, 20 per *956 cent to M. Schwartz, and 20 per cent to C. L. Werk. The operating assets of the business, consisting of land, buildings, machinery, equipment, inventory and good will, were owned solely by M. Werk and throughout the partnership existence remained his individual property. The partnership operated the business for a number of years prior to August 1, 1888, and accumulated large profits, which were credited on the books of the firm to*2756 the individual accounts of the partners in their respective proportions. The partners drew no salaries, but maintained personal accounts on the books of the firm and drew against the same such sums as they required or desired. Each partner's account was credited with his proportion of the profits and was charged with sums withdrawn by him and funds paid out for his personal benefit. The partnership also operated a wine business under the trade name of M. Werk & Son and a separate account for the same was carried on the firm's books. On August 1, 1888, the net balances to the credit of the partners, and M. Werk & Son in their personal and separate accounts on the partnership books were:
| M. Werk | $581,173.69 |
| C. L. Werk | 128,521.68 |
| M. Schwartz | 186,814.85 |
| M. Werk and Son | 116,752.02 |
These credit balances represented funds owing to the partners individually, and to the wine business, from the partnership on account of accumulated profits and were fully covered by assets in the possession of the partnership, consisting principally of stocks, bonds and other securities.
Upon incorporation of the petitioner all the assets and liabilities of the partnership (which*2757 did not include the operating assets owned solely by M. Werk) were transferred to the corporation for liquidation only, and appropriate accounts therefor were opened on its books as of August 1, 1888. Among the liability items transferred for liquidation were the above-stated credit balances of the partners and the wine business. The personal accounts of Albert Schwartz, son of M. Schwartz, and Eugenie M. Werk, daughter of M. Werk, were credited with $10,000 each and a like amount was charged against the accounts of M. Schwartz and M. Werk & Son, as of August 1, 1888.
On or about August 9, 1888, the three former partners, M. Werk, C. L. Werk, and M. Schwartz, together with Albert Schwartz and Eugenie M. Werk, subscribed to all the capital stock of the petitioner at par value, as follows:
| Number of shares | Par value per share | Par value of capital stock | |
| M. Werk | 29 | $5,000.00 | $145,000.00 |
| C. L. Werk | 10 | 5,000.00 | 50,000.00 |
| M. Schwartz | 9 | 5,000.00 | 45,000.00 |
| A. Schwartz | 1 | 5,000.00 | 5,000.00 |
| E. M. Werk | 1 | 5,000.00 | 5,000.00 |
| Total | 50 | 250,000.00 |
*957 In the organization of the corporation a surplus was created in an amount equal to the*2758 total par value of the capital stock, each prospective stockholder contributing thereto an amount equal to the par value of the shares of stock subscribed for, as follows: M. Werk, $145,000; C. L. Werk, $50,000; M. Schwartz, $45,000; A. Schwartz, $5,000; and E. M. Werk, $5,000; a total surplus of $250,000.
The subscriptions to capital stock and contributions of surplus were paid in to the corporation by charging against the personal account of each subscriber the total amount of his subscription for stock and contribution to surplus.
On October 18, 1888, M. Werk offered to sell to the corporation the assets owned by him individually and employed in the operation of the former partnership, and agreed to accept in payment therefor "a full discharge of the claims" of the company against the stockholders on account of subscriptions to capital stock and contributions agreed to be made to surplus. The corporation, pursuant to the resolution of its directors adopted on October 18, 1888, accepted said offer. The assets thus sold, and the value thereof as appraised by M. Werk in his offer and accepted by the corporation were:
| Real estate | $43,500.00 |
| Buildings | 61,965.30 |
| Implements | 83,766.00 |
| Glycerine works | 14,098.42 |
| Merchandise (as per inventory) | 184,986.17 |
| Glycerine department inventory | 52,393.40 |
| Good will | 50,000.00 |
| Total value | 490,709.29 |
*2759 Pursuant to said offer of sale and acceptance these assets were transferred and conveyed by M. Werk to the corporation and the agreed value thereof, $490,700.29, was credited to the personal account of M. Werk as of August 1, 1888. This credit was actually paid to him in cash, or its equivalent, on or before February 1, 1890. These assets, except good will, were recorded on the books at the agreed value. Good will was charged off to profit and loss at the agreed value as of August 1, 1888. Certificates of stock were issued by the corporation to each subscriber for the shares of stock subscribed *958 for. The charges made against the personal accounts of the several subscribers for their subscriptions to stock and contributions to surplus were not canceled or credited back to their accounts.
The stockholders of petitioner maintained personal accounts with the corporation, to which dividends, salaries and other personal items were credited, and against which withdrawals of funds and expenditures by the corporation for their personal benefit were charged. By resolution of the directors, adopted October 18, 1888, the corporation agreed to pay interest at the rate of 5*2760 per cent per annum upon the accounts of the three former partners, M. Werk, C. L. Werk and M. Schwartz, to be credited to their respective accounts every six months - January 31 and July 31. Pursuant to resolution of the directors adopted February 1, 1890, the corporation transferred stocks and bonds to M. Werk, C. L. Werk, and M. Schwartz, severally, in liquidation of their respective credit balances as of that date, to wit: M. Werk, $847,261.75; C. L. Werk, $49,157.87; and M. Schwartz, $61,406.25. It was further provided that thereafter no interest should be paid by the corporation upon these accounts.
OPINION.
VAN FOSSAN: The sole question presented in these proceedings is whether or not good will, in the amount of $50,000 acquired by the petitioner at or about the time of organization, may be included in invested capital. The respondent, in determining the deficiencies, excluded good will from invested capital upon the ground that it was acquired for stock and had no value. The substance of petitioner's contentions is that this good will was purchased for cash, or the equivalent of cash, and that its value, when acquired, is determined by the amount of the consideration*2761 paid therefor.
The respondent's determination that the good will was acquired for stock is predicated entirely upon the offer of M. Werk, of October 18, 1888, to transfer and convey good will and certain other assets, to the petitioner, and "to accept in payment of said property a full discharge of the claims of your company against Eugenie M. Werk, Casimir Werk, Michael Werk, Albert Schwartz and myself, and the issue to them respectively of proper certificates for their subscriptions to the capital stock of said company, on condition, however, that the company carry $250,000 of the value of the property so hereby offered as surplus capital and credit the said stock subscribers therewith in proportion to the subscriptions by them respectively made." The claims to which reference was made in this offer related to any obligations of the persons mentioned on account of their stock subscriptions and contributions agreed to be made to surplus. What was sought to be accomplished by the provisions of the offer relating *959 to the consideration to be paid for the assets, and the acceptance thereof by petitioner's directors, is not entirely clear. Reading them literally, it would*2762 appear the intent was that M. Werk should contribute the entire capital and surplus, while the shares of stock were to be issued to all subscribers thereto in proportion to their subscriptions, the subscribers in turn being relieved from any and all obligations on account of their stock subscriptions and the contributions they agreed to make to surplus. If that be the correct interpretation and reflects what was actually done, then there could be no question that the good will was paid in for stock. However, this interpretation gives to the transaction the characteristics of a gift on the part of M. Werk to the other subscribers and the evidence is ample that there was no intent of a gift of that sort. Neither does such an interpretation harmonize with what actually took place. The charges made against the several accounts of the subscribers, on account of their stock subscriptions and the contributions they agreed to make to surplus, were never modified in any respect; and of the liability of the predecessor partnership to each subscriber which the petitioner assumed, there was ultimately paid by the petitioner only the amount thereof, less the charges for stock subscriptions*2763 and surplus contributions. Moreover, when the assets included in the offer of M. Werk were recorded on petitioner's books of account, his account was credited with the agreed value thereof, $490,709.29, including $50,000 for good will, and this credit was actually paid to him in cash, or its equivalent, on or before February 1, 1890.
The transfer to petitioner of the partnership assets on August 1, 1888, was made for the purpose of liquidating the accounts of the members of the partnership. The transfer by Werk of good will and other assets, pursuant to his offer of October 18, 1888, was an entirely distinct and separate transaction, and in no way connected with the earlier conveyance by the partnership. The evidence clearly establishes that ownership of the assets included in the offer referred to vested absolutely in M. Werk; and for those assets Werk was paid cash, or its equivalent. Therefore, the respondent erred in determining that the good will was acquired for stock. We agree with the petitioner that the amount of cash, or its equivalent, paid to M. Werk for the good will, to wit, $50,000, fixes the value thereof at the date of acquisition. The respondent concedes*2764 in his brief that, if the record sustains petitioner's contention, "an invested capital of $500,000 should be allowed instead of $450,000 actually allowed." Invested capital, as determined by the respondent, should be increased $50,000. The sum of $9,290.71 claimed by petitioner as paidin surplus will be taken care of by the allowance of an invested capital of $500,000.
Judgment will be entered under Rule 50.