*3154 Evidence held insufficient to overcome respondent's determination of a deficiency.
*889 In this proceeding the petitioner seeks a redetermination of its income and excess-profits taxes for the fiscal year ended February 28, 1921, for which the respondent, as set forth in his deficiency letter dated February 12, 1926, determined a deficiency of $16,375.76. Two errors were alleged, the first one being:
The failure to include in invested capital an allowance for intangible assets in an amount equal to twenty five per centum of the capital stock outstanding at the beginning of the taxable year on the alleged ground that the value had not been substantiated.
The second allegation of error was abandoned at the hearing.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of New Jersey with its principal office at Trenton. It was incorporated *890 on April 15, 1902, with an authorized capital stock of $1,000,000, divided into $400,000 preferred and $600,000 common. Its business is manufacturing ceramic*3155 supplies. At a meeting of its board of directors on April 16, 1902, the following resolution was adopted:
On motion it was unanimously resolved that this company purchase of the holder or holders of the Golding & Sons capital stock nine hundred and ninety-five shares thereof, and pay for the same by the issue of the entire capital stock of this company to the holders of said Golding & Sons Company stock, or their assigns. And the president and treasurer of this company are hereby authorized and directed to issue the entire capital stock of this company to the holders of said Golding & Sons Company stock, as provided in the above resolution.
The reorganization of the old company had been arranged by Hugh Hamill, Barker gummere, W. S. Hancock and John Relstabb, who were business men of Trenton. J. N. Manor had been appointed a committee of one to represent the old interests. M. E. Golding, Edwin Golding, F. P. Golding, Charles Golding, William MacKenzie, Mary MacKenzie, Martha Golding and J. N. Manor were stockholders in the predecessor company and also became stockholders in the new company.
The committee on reorganization orally agreed that the price which the petitioner*3156 was to pay for the stock of the old company was to be based upon a 15 per cent earning of the old company for a period of 5 years back.
The predecessor company operated separate plants at Trenton, Wilmington, and Hockessin, Del., and East Liverpool, Ohio. It also had a storehouse at Caln, Pa., for the finished articles produced at Trenton. A separate set of books was kept at each plant. The net earnings of the Golding & Sons Co. for the years ended June 1, 1898, to 1902, inclusive, for each plant (except the one at East Liverpool) are as follows (amounts in parenthesis represent losses):
| Years ended | Trenton | East | Hockessin | Wilmington | Caln |
| June 1 - | Liverpool | ||||
| 1898 | $15,534.01 | (1) | $10,582.63 | $8,016.85 | None |
| 1899 | 10,805.28 | (1) | 15,860.55 | 18,883.39 | Do. |
| 1900 | 12,716.19 | (1) | 19,963.66 | 14,955.80 | Do. |
| 1901 | 12,717.95 | (1) | 15,582.42 | 12,049.29 | ($3,422.35) |
| 1902 | 15,307.98 | (1) | 8,424.56 | 14,468.54 | (4,495.75) |
| Total | 67,081.41 | (1) | 70,413.82 | 68,373.87 | (7,918.10) |
The respondent determined that the petitioner's invested capital for the fiscal year ended February 28, 1921, was $449,148.95, set forth*3157 as follows:
| Capital stock shown on balance sheet | $1,000,000.00 | |
| Less: Treasury stock | 21,100.00 | |
| 978,900.00 | ||
| Surplus as shown by balance sheet | 217,904.48 | |
| Total | 1,196,804.48 | |
| Deductions: | ||
| 1. Preceding year's tax prorated | $1,658.21 | |
| 2. Dividends | 5,069.59 | |
| 3. Surplus adjusted by revenue agent | 145,765.89 | |
| 4. Good will | 593,400.00 | |
| Total deductions | 745,893.69 | |
| Balance | 450,910.79 | |
| 5. Inadmissibles | 1,761.84 | |
| Invested capital adjusted | 449,148.95 |
*891 As an explanation for the deduction of good will the respondent in his deficiency letter stated:
4. The item good will has been disallowed as the value has not been substantiated.
OPINION.
GREEN: The petitioner has alleged and attempted to prove that at the time it was incorporated, in 1902, it acquired from the predecessor company good will of a certain value. The evidence does not show that it ever acquired any of the assets of the Golding & Sons Co. It does show, however, that it issued its entire capital stock for 995 shares of the stock of the old company. This is an entirely different thing from acquiring the assets. See *3158 .
In the above-mentioned case the taxpayer in 1907 issued all of its stock for the stock of three other corporations. Thirteen days later, it being the owner of all the stock of the other companies, proceeded to liquidate two of them by taking over their assets and surrendering and canceling the stock. The assets thus acquired consisted of approximately one-third tangibles and two-thirds intangibles. For invested capital purposes the Commissioner reduced the intangibles to the limitation provided by section 326(a)(4) of the 1918 Act. In disallowing the deficiency we held that the asset to be valued was the stock of the old companies, which was tangible property and not subject to the limitation. To the same effect see .
From the foregoing it is apparent that the petitioner has proceeded upon the wrong theory, that is to say, it proceeded upon the theory that it acquired the assets of the old company at the date of organization, when as a matter of fact it acquired the capital stock *892 of that company. The record does not disclose*3159 the theory upon which the respondent proceeded. We know he has allowed the amount of $449,148.95 as invested capital for the year in question. It is reasonable to assume that a part of this amount represented the value, as determined by him, of the stock of the company acquired. In any event the burden is upon the petitioner to prove by competent evidence that the respondent erred in his determination of the deficiency. . This it has failed to do, and, accordingly, judgment must be for the respondent.
Even looking at the case from the petitioner's point of view, the evidence is wholly insufficient to sustain its allegation. The earnings from the East Liverpool branch were not proven and without such proof the earnings from the other plants become practically worthless as an element of determining value, for so far as we know losses may have been sustained by the former sufficient to wipe out the earnings of the latter. Furthermore, no evidence was offered as to the average tangible assets of the old company for the five years immediately preceding reorganization and there was no proof as to what a*3160 reasonable percentage of earnings on such tangible assets would have been.
Judgment will be entered for the respondent.
Footnotes
1. Not shown. ↩