*3753 The Commissioner's determination that the petitioner was not entitled to have any amount included in the computation of its invested capital from any date prior to the date of its charter is approved.
*635 The taxes in controversy are income and profits taxes for the taxable period July 7 to December 31, 1919, in the amount of $2,786.89. The petition alleges the following errors:
(1) The Commissioner erred in his determination for purpose of computation of invested capital (Schedule 2a(a) letter of December 18, 1924) that the investment of $2,399,900 received in cash payments on subscriptions to the capital stock of the taxpayer corporation began on July 7, 1919, instead of on June 1, 1919, so as to compute the invested capital on a basis of one hundred seventy-eight (178) days in the taxable period instead of two hundred fourteen (214) days.
(2) The Commissioner erred in determining in the computation of invested capital (Schedule 2a(a) Commissioner's letter of December 18, 1924) that the stock and assets*3754 indicated in said schedule under dates of August 8, 1919, August 12, 1919 and August 21, 1919 were acquired on these respective dates, instead of on July 1, 1919.
(3) The Commissioner erred in disallowing the following items as a part of invested capital (Schedule 2a(c) letter of December 18, 1924):
| (a) Niagara County Fruit Company | $70,574.48 |
| (b) Orchard & Investment Company | 6,971.86 |
| (c) Carney Investment Company | 1,500.00 |
(4) The Commissioner erred in deducting from invested capital as an inadmissible asset (Schedule 2a(d) letter of December 18, 1924) the following item:
| Orchard & Investment Company | $73,115.00 |
*636 FINDINGS OF FACT.
The petitioner was incorporated under the laws of the State of Delaware on July 7, 1919. Its principal office is in the City of Pittsburgh, Pa. It was organized for the purpose of acquiring the stock or the assets of a number of existing companies, and it did acquire some such stock and assets.
The Orchard & Investment Co., prior to July 7, 1919, received some cash, subscribed and paid for the purpose of purchasing the petitioner's stock. It also purchased certain properties and financed the operation*3755 of certain properties which its board of directors resolved was done or to be done for and on account of the petitioner which was later to be organized. It accounted to the petitioner for the operation of these various properties for the period from June 1, 1919, until the properties were actually turned over to the petitioner. The petitioner then reported certain gains and losses for the above period and computed its invested capital as if it had owned the stock or the assets of all of the various companies concerned from and after June 1, 1919.
The assets of the Niagara County Fruit Co. consisted of a lot of ground in Lockport, N.Y., on which stood a dwelling, a shed used for making barrels, and an apple storage building. The latter was 72 feet wide, 130 feet long, 50 feet high, and had a capacity of 40,000 barrels. It was constructed of heavy stone, was divided into rooms, was completely equipped with electric refrigerating apparatus, was served by two sidings connecting with different railroads, and was centrally located in the largest apple-producing district in eastern United States. This property as a whole had a fair market value on or about the time it was taken over*3756 by the petitioner of $120,000, exclusive of any good will. It had been acquired by the Niagara County Fruit Co. some years before 1919, and in the year 1919 was carried on the books at an amount which was $70,574.48 less than its fair market value. In accordance with an agreement with the stockholders of the Niagara County Fruit Co., certain appraisers were selected who valued the assets of the company at $120,000, subject to certain liabilities in an amount not over $7,500. In accordance with the aforementioned agreement, $112,500 par value of the petitioner's preferred stock, together with one-half share of common stock for every share of preferred stock, was transferred to the stockholders of the Niagara County Fruit Co. in exchange for their stock in the latter company. The Commissioner in this connection eliminated $70,574.48 from the petitioner's invested capital, as set forth below.
From an audit of the books and accounts of the Orchard & Investment Co. it was determined that on July 7, 1919, it had outstanding *637 capital stock of the par value of $122,000 and a surplus of $928.14. Some of the assets of this corporation were transferred to the petitioner on*3757 August 12, 1919. Among those assets which were not transferred on this date were 400 shares of stock of the United Fruit Co., and 100 shares of preferred stock of the Crucible Steel Co., which were carried on the books of the Orchard & Investment Co. at $73,115. One hundred shares of the United Fruit Co. stock were sold on August 20, 1919, for $17,476, and the remaining 300 shares were sold on August 22, 1919, for $53,528. The 100 shares of Crucible Steel Co. stock were sold on August 22, 1919, for $9,881. The transfer of the assets of the Orchard & Investment Co. to the petitioner was then completed and in October, 1919, the petitioner, in exchange for these assets, issued to the Orchard & Investment Co. $129,900 of its preferred stock, each share of preferred stock being accompanied by one-half share of common stock. At the same time it paid over to the Orchard & Investment Co. a small amount of cash as a balancing item. Shortly thereafter the Orchard & Investment Co. liquidated its assets and dissolved. The Commissioner eliminated $6,971.86 from the petitioner's invested capital, as set out below, this amount being the difference between $122,928.14, representing the par*3758 value of this corporation's stock plus the book surplus, and $129,900 par value of the preferred stock of the petitioner, which was exchanged for the assets of the Orchard & Investment Co. The Commissioner also eliminated $73,115 from the petitioner's invested capital, as set out below, this being the same amount at which the aforementioned stock of the United Fruit Co. and the Crucible Steel Co. was carried on the books of the Orchard & Investment Co.
The Carney Investment Co. owned an orange grove in Florida, which had been acquired from a number of different owners. At the time of the formation of the petitioner, an attorney was employed to examine and to make an abstract of the title to these properties. His fee was $1,500. The petitioner purchased the stock of the Carney Investment Co. and on the books of the former this fee was entered as part of the cost of the stock. The Commissioner eliminated it from the petitioner's invested capital as indicated below.
From May 14, 1919, through September, 1919, the petitioner's stock was being subscribed for or sold at $100 for one share of preferred and one-half share of common. The par value of one share of the petitioner's*3759 preferred stock was $100 and that of the common stock was the same.
The deficiency notice refers to Bureau letter dated December 18, 1924, for the details of the computation of the deficiency. In the letter of December 18, 1924, there is included a statement which *638 contains under the heading "Consolidated Invested Capital 1919" an "Explanation of Items Changed," which is, in part, as follows:
(a) Capital stock sold is prorated for invested capital purposes, as indicated below, on the basis of 178 days in taxable period:
| Date sold. | Consideration received. | Amount. | Days | Adjusted |
| effective. | average. | |||
| July 7, 1919 | Cash | $2,399,900.00 | 178 | $2,399,900.00 |
| Aug. 8, 1919 | Stock, Niagara Fruit Co | 112,500.00 | ||
| Do | Stock, F. P. Dutton | |||
| (Inc.) | 20,000.00 | |||
| Do | Assets, Crutchfield & | |||
| Woolfolk | 626,600.00 | 146 | 674,634.83 | |
| Do | Assets, Dutton Crate Co | 53,500,00 | ||
| Do | Assets, National Traffic | |||
| & Claim Co | 9,900.00 | |||
| Aug. 12, 1919 | Stock, Orchard Investment | |||
| Co | 129,900.00 | 142 | 103,622.47 | |
| Aug. 21, 1919 | Stock, Wells & Wade | |||
| Orchard Co | 104,000.00 | |||
| Do | Assets, T. H. Peppers Co | 159,600.00 | 133 | 326,447.75 |
| Do | Assets, Crutchfield, | |||
| Woolfolk & Clore | 173,300.00 |
*3760 (c) In the absence of proof of the cash value of the good will of the following companies, purchased with stock of your company, it is disallowed as a part of invested capital:
| Company. | Amount. | Acquired. | Adjusted average. |
| Niagara County Fruit Co | $70,574.86 | Aug. 8, 1919 | $57,886.93 |
| Orchard & Investment Co | 6,971.86 | Aug. 12, 1919 | 5,561.82 |
| Carney Investment Co | 1,500.00 | Dec. 31, 1919 | 8.42 |
| 63,457.17 |
(d) Section 326 of the Revenue Act of 1918 provides that there shall be deducted from invested capital, computed with regard to inadmissibles, a percentage thereof, equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year.
| Company. | Amount. | Acquired. | Days held. | Adjusted average. |
| Orchard & Investment Co | $73,115.00 | Aug. 12, 1919 | 142 | $58,327.70 |
OPINION.
MURDOCK: The answer denied that the value of the stock or assets of the Niagara County Fruit Co. exceeded $112,500, that the value of the stock or assets of the orchard & Investment Co. exceeded $129,900, that the value of the stock of the Carney Investment Co. exceeded $3,000, *3761 and stated as a proposition of law that a corporation can not have any invested capital prior to the beginning of its existence and in no case may property acquired for stock be included in invested capital in an amount in excess of its actual cash value at the time acquired. It also denied most all of the other material allegations of the petition. Counsel for the respondent *639 made no opening statement or oral argument and filed no brief, so that we have but meager information in regard to his position as to the matters in dispute.
The petitioner contends in support of its first and second allegations of error that it was a corporation de facto on and after June 1, 1919, and that therefore $2,399,900 alleged to have been received in cash payments on subscriptions to its capital stock should be included in its invested capital for the year on the basis of 214 days instead of 178 days, and that for the purpose of the computation of its invested capital, it should be held to have received certain stock and assets on July 1, 1919, instead of on certain dates in August of the same year, as determined by the Commissioner. Inasmuch as there was no attempt made to show, *3762 and we are unable from the evidence to determine, the dates upon which cash payments on subscriptions to the petitioner's capital stock were received or the dates upon which stock and assets of other organizations were transferred to the petitioner, it is unnecessary to determine whether or not the petitioner was a corporation de facto or an association prior to July 7, 1919, and whether, if it were either, it would be entitled to include any amount in the computation of its invested capital from a date prior to July 7, 1919, the date of its charter.
Only one witness was called. He testified that each of the organizations, whose stock or assets were acquired later by the petitioner, reported its operations for income-tax purposes up to and including May 31, 1919, in its individual capacity, and that the petitioner, in a consolidated return, reported the result of all operations of the different units on and after June 1, 1919. He further testified, in this same connection, that the books of the separate units were closed as of May 31, 1919, and on the basis of the condition of the various units as of that date, the petitioner exchanged its stock for either the assets or the*3763 stock of these organizations. We have not found facts from these statements because the witness also testified that certain assets of the Orchard & Investment Co. were retained by that corporation and sold in August, 1919, at a profit, which profit inured to the benefit of the stockholders of that corporation in the final transfer of the assets of that corporation to the petitioner, so that in this instance, at least, the above-mentioned general statements of the witness were incorrect. This witness also stated in general terms that beginning on June 1, 1919, some of the companies operated as if the petitioner were then functioning as a corporation and as if they were units of that corporation, and that the Orchard & Investment Co. acted as trustee for the petitioner from and after that date. But after a careful consideration of all the testimony, we are not at all convinced that a corporation de facto, or an association, *640 within the meaning of section 1 of the Revenue Act of 1918, existed prior to July 7, 1919. We affirm the action of the Commissioner contested in the petitioner's first and second allegations of error.
The petitioner exchanged $112,500 par value*3764 of its preferred stock, together with one-half share of common stock for every share of preferred stock with the stockholders of the Niagara County Fruit Co. for their stock in the latter company. The answer merely denies that this latter stock had a value in excess of $112,500, and in the light of the evidence in this case we see no reason to hold that its value was any less than this amount. Furthermore, the evidence indicates that no good will of this company was purchased by the petitioner through this exchange. Consequently, the Commissioner was in error when he disallowed as a part of invested capital the amount of $70,574.48 which he described as "Niagara County Fruit Co."
The petitioner exchanged $129,900 of its preferred stock, each share of preferred stock being accompanied by one-half share of common stock, for certain assets of the Orchard & Investment Co. The answer merely denies that these assets had a value in excess of $129,900. The petitioner seeks to have them included in the computation of invested capital at $129,900. The Commissioner, on the other hand, has disallowed as a part of invested capital, $6,971.86, this amount being the difference between $122,928.14, *3765 representing the par value of this corporation's stock plus the book surplus, and $129,900, the par value of the petitioner's preferred stock exchanged for these assets. As set forth in our findings of fact, certain of these assets were sold for more than their book value and the gain from this sale inured to the benefit of the Orchard & Investment Co. and was recognized by the petitioner in the exchange of stock for assets. Consequently, the Commissioner was in error when he disallowed $6,971.86 as part of the invested capital for the reason that it represented good will of an unproven value and also when he reduced the petitioner's invested capital on the ground that $73,115 represented inadmissible assets of the Orchard & Investment Co. transferred to the petitioner. In regard to the latter item it was shown to our satisfaction that the assets in question were sold by the Orchard & Investment Co. and the cash received from this sale was transferred to the petitioner instead of the assets themselves.
The evidence in regard to the $1,500 eliminated from the petitioner's invested capital in connection with the acquisition of the stock of the Carney Investment Co. is insufficient*3766 to convince us that this item was improperly eliminated from the computation of the petitioner's invested capital. The amount seems to have been paid to an attorney for an examination of the title to certain real *641 property, but we do not know who paid it, or the circumstances under which it was paid.
Judgment will be entered on notice of 15 days, under Rule 50.