*3507 Upon the evidence held that petitioner failed to establish the basis for the determination of the gain derived or loss sustained upon the sale, in 1920, of assets which it acquired at organization.
*559 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes for the year 1920 in the amount of $2,453.56, asserted against the Dental Company of America in Docket No. 11474, and $3,002.76 asserted against Lee S. Smith & Son Co., in Docket No. 21982. The deficiency in Docket No. 21982 asserted by the respondent includes the deficiency attributable to the income of both companies upon the assumption that they were affiliated in 1920, and were entitled to file consolidated returns. The only issue is whether the Dental Company of America realized a loss upon the sale of its assets in 1920.
FINDINGS OF FACT.
The Dental Company of America was incorporated in May, 1917, under the laws of the State of West Virginia, to manufacture artificial teeth. On incorporation it issued*3508 $94,371.21 par value of its total capital stock of $100,000 to W. Linford Smith, in exchange for plaster casts and molds, master molds, secret formulae for porcelain used in the manufacture of teeth, and patents on the manufacture of artificial teeth. The remainder of the capital stock was issued to Smith for $5,628.79 cash. W. Linford Smith is now dead.
Prior to incorporation the business had, for about two months, been conducted by W. Linford Smith, as an individual. Smith had acquired the molds from a person who had obtained them from the Dental Protective Society, a company which had gone out of business. He acquired certain equipment, some formulae and two or three patents from the Stuart Dental Mfg. Co., about March, 1917. Smith developed some of the formulae himself. Smith had invested about $25,000 in stock in the Stuart Dental Mfg. Co., and by assuming a note for about $5,000 which that company had outstanding, he acquired all their assets.
The profits of the Dental Company of America were $5,063.69 for the portion of 1917 that it was in existence; $13,697.35 for 1918; $8,342.98 for 1919; and $1,903.58 during the portion of 1920 that it was in existence, not taking*3509 into consideration the sale of capital assets in 1920.
In 1920, the Dentist Supply Co. acquired all of the assets of the Dental Company of America for $57,201.15. An inventory of the assets was made but this was given to the purchaser. The Dental Company of America sold because it could not afford to spend the additional money that would have been necessary to meet the competition in manufacturing platinum pin teeth. The Dentist Supply Co. bought out the petitioner in order to put a competitor out of *560 business. At the time of the sale, W. Linford Smith entered into an agreement whereby he was required to refrain from entering into the business of manufacturing teeth for a period of years. He was also to receive certain royalties from the purchaser.
Outside of the $5,628.79 original cash investment and the assets acquired for $94,371.21 of stock, there was no further investment by the stockholders of the company, and its capital and surplus subsequent to organization were built up out of earnings. The capital and surplus were as follows:
| At organization in 1917 | $100,000.00 |
| January 1, 1918 | 105,063.69 |
| January 1, 1919 | 116,642.55 |
| January 1, 1920 | 129,086.24 |
*3510 The respondent, in determining the gain or loss sustained during 1920 upon the sale of the assets of the Dental Company of America, allowed $52,560.05 as the cost of certain assets and applied depreciation of the same in the amount of $3,994.81. He failed, however, to allow any value for the assets acquired by the petitioner at organization.
OPINION.
SIEFKIN: The only issue in this proceeding is whether, in the computation of the gain or loss resulting from the sale of the capital assets of the Dental Company of America, any amount of cost is properly attributable to certain molds, patents, casts, formulae and equipment paid in to the said company at organization for capital stock.
These assets were acquired in 1917, and the basis for determining the gain derived or loss sustained upon the sale of assets acquired after March 1, 1913, is governed by section 202(a) (2) of the Revenue Act of 1918 which provides:
In the case of property acquired on or after that date, the cost thereof; or the inventory value, if the inventory is made in accordance with section 203.
The amount of depreciated cost attributable to the other assets sold, and the amount of the total sales*3511 price, are not at issue here. The respondent has failed to allow any value for the assets acquired at organization.
A witness who was the bookkeeper for W. Linford Smith before the organization of the petitioner, who helped appraise the assets acquired by the petitioner at organization, and who became the treasurer of the petitioner, testified that the assets had a value, at acquisition by the petitioner, of $90,000 to $100,000. He testified that he did not know anything about the formulae transferred and *561 did not go into detail in stating what assets were transferred. Considering the doubtful qualifications of the witness to state an opinion of the value of the assets, some of which he was unfamiliar with, and the fact that he went into no detail as to the basis for his valuation, we are of the opinion that his testimony is not entitled to sufficient weight to overcome the presumption of the correctness of the respondent's determination.
The fact that $5,628.79 par value of stock of the petitioner was issued to Smith for cash is not indicative of the value of the stock, since Smith acquired all of the stock. Nor is the value of the stock established by the earnings*3512 of the petitioner subsequent to organization.
In view of all the evidence, we must hold that the petitioner has failed to show any definite amount of value at acquisition attributable to the molds, patents, casts, formulae and equipment, and consequently he has failed to establish a basis for determining the gain derived or loss sustained upon the sale thereof in 1920.
It is admitted in the answer that the respondent erred in denying to the petitioner, Dental Company of America, the right to file a consolidated return with Lee S. Smith & Son Mfg. Co., and Lee S. Smith & Son Co.
Judgment will be entered under Rule 50.