*82 Decision will be entered for the respondent.
Held, petitioner corporation did not acquire "substantially all" of the assets of a sole proprietorship owned by a decedent, and was therefore not an "acquiring corporation" under section 461(a)(1) (D) or a "purchasing corporation" under section 474(a)(1)(A), I.R.C. 1939, as amended, so as to entitle it to use the earnings experience of the sole proprietorship in determining its excess profits credit.
*745 The Commissioner determined deficiencies in petitioner's income tax as follows:
| Year | Amount |
| 1952 | $ 1,468.67 |
| 1953 | 31,439.39 |
Petitioner contests the deficiency for 1953 and seeks a refund in the amount of $ 14,689.54 for 1952. The sole issue presently before the Court is whether petitioner is an "acquiring corporation" within section 461 of the 1939 Code, or alternatively a "purchasing corporation" within section 474, so as to entitle it to compute its excess profits credit by reference to the base period earnings experience of a sole proprietorship. A dispositive question in respect of this issue is whether petitioner acquired "substantially all" the properties of that proprietorship.
FINDINGS OF FACT
The facts stipulated by the parties are incorporated herein as part of these findings.
Frederic R. Harris, a licensed professional engineer, had formerly been an admiral in the United States Navy and had been*84 Chief of the Bureau of Yards and Docks during World War I. After leaving the Navy, and for many years, including the period from 1946 to the date of his death on July 20, 1949, he was actively engaged in the practice of civil engineering as an individual and sole proprietor, with offices in New York. The practice was a consulting engineering business, performing services for clients in making investigations, reports, drawings, specifications, estimates, tender documents for construction, and supervising construction. Admiral Harris was a man of great distinction, with outstanding reputation and ability in his field. He was held in particularly high regard in respect of waterfront construction and floating drydocks. His reputation and wide connections were important factors in obtaining business from clients. At the date of his death decedent owned approximately 29 United States patents, had 5 applications pending for United States Letters Patent, owned a French Patent and had applied to Turkey for a patent. These patents pertained to methods of design and construction of floating drydocks, graving drydocks, offshore drilling platforms and floating docks for flying boats or *85 seaplanes. Among his patents was one pertaining to the advance base floating steel sectional dock which permitted the repair of vessels at sea; another patent cut time of construction of graving docks from 9 or 10 years to 2 years. These patents were an important factor in the success of Admiral Harris' business. Extensive files maintained by him were also an important factor in the success of his business.
*746 In carrying on his business Admiral Harris had built up a substantial organization, and most of his key employees, of whom there were about six, had been with him from about 1939 or 1940 until the date of his death. During World War II his business occupied four floors of a building and a private office in another building; however, this space contracted considerably after the war. At the time of his death he and his sole proprietorship were working on six contracts, three with Jones & Laughlin Steel Corp. and one each with the Port of New York Authority, the New Jersey Turnpike Commission, and Armco International Corp.
The taxable net income of decedent's sole proprietorship for the calendar years 1946, 1947, 1948, and for the period from January 1, 1949, to July*86 20, 1949, was as follows:
| Taxable | |
| Year | net income |
| 1946 | $ 146,523.08 |
| 1947 | 36,740.88 |
| 1948 | 140,154.13 |
| 1/1/49 to 7/20/49 | 108,864.66 |
The balance sheet of decedent's proprietorship as of July 20, 1949, was as follows:
| Assets | |
| Cash | $ 83,695.70 |
| Accounts receivable | 29,297.42 |
| Investments in stocks | 1.00 |
| Investment in Harris Dechant Associates (partnership) | 79,417.48 |
| Furniture and fixtures | 1,336.47 |
| Total assets | 193,748.07 |
| Liabilities and Capital | |
| Liabilities | |
| Accounts payable -- Regular | $ 3,674.33 |
| Notes payable | 100,000.00 |
| Taxes payable | 17,672.38 |
| Expenses payable | 23,215.47 |
| 144,562.18 | |
| Capital | |
| Frederic R. Harris, capital account | 49,185.89 |
| Total liabilities and capital | 193,748.07 |
Harris-Dechant Associates was a Philadelphia partnership between the decedent and Frederick H. Dechant, organized on January 1, 1948, conducting business in Philadelphia. Frederick H. Dechant was not a partner of the professional engineering business conducted by the decedent, nor was Harris-Dechant Associates a part of the decedent's professional engineering business. In the decedent's individual income *747 tax returns, the income from Harris-Dechant Associates*87 (partnership) was separately set forth and was not included as part of the decedent's sole proprietorship income.
At the time of his death Admiral Harris owned all of the stock of petitioner corporation. He had organized it in 1930 as a New York corporation, and it was empowered to engage in the profession of civil engineering and naval architecture. However, it had been inactive for an undisclosed period up to the date of his death, and its assets at that time were comparatively inconsequential.
Upon Admiral Harris' death, his estate succeeded by operation of law to the entire interest in his sole proprietorship and to all of petitioner's capital stock. The decedent's executors, none of whom were licensed engineers, felt that they could not legally carry on the business of the sole proprietorship. However, since petitioner was authorized by law to carry on such business they determined to transfer the business operations of the sole proprietorship to it.
On August 10, 1949, 2 weeks after the appointment of the executors, at a special meeting of the petitioner's board of directors, the following resolution was adopted:
WHEREAS, the Executors of the Estate of Frederic R. Harris, *88 Deceased, have offered to transfer to this Corporation as of the close of business August 31, 1949 the professional business of civil engineering formerly conducted under the name of Frederic R. Harris by said decedent, including the good will thereof, all the accounts receivable of said business and all uncompleted contracts and orders on its books, so that the Estate can thereafter conduct said business under the corporate style, it is
RESOLVED, that this Corporation accept the aforesaid offer of the Executors of the Estate of Frederic R. Harris, Deceased and that the officers of this Corporation be, and they hereby are, authorized and directed to do such acts and sign such documents as may be necessary or desirable to carry out the purposes of this resolution.
None of the assets and none of the liabilities on the balance sheet of decedent's proprietorship were transferred to petitioner.
Petitioner acquired from decedent's proprietorship the contracts in process (not shown on the books of decedent), the files of the jobs in progress, the files of completed jobs, and reference material of various kinds and proposals on which decedent had been working at the time of his death. *89 Decedent's patents and applications pending for patents were "made available" to petitioner. Petitioner also took over decedent's staff of engineers, draftsmen, and clerical help. The proprietorship's furniture and fixtures were not transferred to petitioner but it continued to use them without paying for their use.
The intangibles petitioner acquired were valuable to petitioner in its selling efforts, for reference purposes in performance of work, in educating personnel and as background experience for the organization. The patents "made available" to petitioner were an important *748 factor in its business. Roughly 50 percent of the contracts petitioner received during the period August 1949 to December 1952, involved to some degree the various floating drydock patents "made available" to petitioner.
Petitioner did not issue any of its stock or securities to the transferors (executors) at the time of the transfer.
In 1949 and 1950 petitioner completed the six contracts in process at the date of decedent's death; the net profit on the contracts was approximately $ 27,279. During the period from 1950 through December 31, 1953, petitioner started an aggregate of 29 jobs for*90 six clients, all of which were formerly clients of the decedent. Petitioner's aggregate income, costs, and profits on such jobs, some of which were completed in subsequent years, were as follows:
| Income | Costs | Profits | |
| From 1950 through December 1952 | $ 2,096,404 | $ 1,820,793 | $ 275,611 |
| 1953 | 693,374 | 357,953 | 335,421 |
Petitioner's gross receipts and net income for the calendar years 1951, 1952, and 1953 as adjusted by respondent were:
| Gross receipts | Net income | |
| 1951 | $ 515,711.12 | $ 49,780.28 |
| 1952 | 1,516,905.30 | 81,947.22 |
| 1953 | 2,471,136.72 | 159,270.38 |
OPINION
In computing its excess profits credit for the taxable years petitioner corporation seeks to utilize the earnings experience of the decedent's sole proprietorship during the base period years, 1946-49. To achieve that result, it argues that it should be classified as an "acquiring corporation" under section 461 of the Internal Revenue Code of 1939, as amended, or alternatively, as a "purchasing corporation" under section 474 of the Code, as amended. We think that it has failed to establish qualification under either of these provisions.
That portion of the statute (section 461(a)(1)(D)) upon which*91 petitioner primarily relies defines an "acquiring corporation" to mean a "corporation which has acquired * * * substantially all the properties of a partnership 1 in an exchange to which section 112(b)(5) * * * is applicable." (Italics supplied.) And, for its alternative contention, petitioner urges that it qualifies as a "purchasing corporation" under section 474, which defines that term to mean a corporation which, before December 1, 1950, acquired in a transaction other than one described in section 461(a) "substantially all of the properties (other than cash) * * * of a business owned by a sole proprietorship." (Italics supplied.) Thus, neither of the foregoing sections would be *749 applicable to petitioner unless it has shown that it acquired "substantially all" of the properties of Admiral Harris' sole proprietorship, 2 and we think it has failed to do so on this record.
*92 We note at the outset, as stipulated by the parties, that "None of the assets reflected on the balance sheet of the sole proprietorship as of July 20, 1949 * * * was transferred to the petitioner." Petitioner seeks to avoid the consequence of the foregoing by contending in substance that the most important assets of the proprietorship did not appear on the balance sheet, that it in fact acquired such additional assets, and that they constituted "substantially all" of the assets of the sole proprietorship. For present purposes, we may accept petitioner's position to the effect that what is "substantially all" is a matter to be determined from the facts and circumstances in each case, that among the elements to be considered are the nature of the properties retained and the purpose of their retention, and that the retention of assets, particularly liquid assets, in order to discharge liabilities of the transferor would not preclude a holding that it acquired "substantially all" of the assets of the proprietorship if it in fact acquired all of its important business assets. Cf. R. & J. Furniture Co., 20 T.C. 857">20 T.C. 857, 864, reversed on another issue 221 F. 2d 795*93 (C.A. 6); Faigle Tool & Die Corp., 7 T.C. 236">7 T.C. 236, 243; Milton Smith, 34 B.T.A. 702">34 B.T.A. 702, 705; Rev. Rul. 57-518, 2 C.B. 253">1957-2 C.B. 253, 254. The difficulty with that position is that we cannot find on this record that petitioner acquired "substantially all" of the assets of the sole proprietorship even after taking into account those assets that did not appear on the balance sheet.
In considering whether petitioner corporation acquired "substantially all" of the assets of Admiral Harris' sole proprietorship within the meaning of sections 461 and 474, it must be remembered that these provisions relate to an excess profits tax where resort is had to the earnings experience of a predecessor organization in order to measure normal earnings of the successor. Accordingly, whatever meaning the words "substantially all" may have in a different context (cf. Helvering v. Stockholms &c. Bank, 293 U.S. 84">293 U.S. 84, 86-88; Helvering v. Morgans, 293 U.S. 121">293 U.S. 121, 128; Sax Rohmer v. Commissioner, 153 F. 2d 61, 65 (C.A. *94 2)), they must be construed here so as to give effect to the statutory purpose of requiring that the successor corporation carry on substantially the same business as that of the predecessor organization 3 in order that the earnings experience of that predecessor may furnish a fair standard of normal earnings for the successor.
*750 What were the assets of the sole proprietorship which the corporation acquired? The record shows that the corporation acquired (a) six contracts in process, (b) a well-trained organization, (c) files of jobs in progress as well as of completed jobs, together with files of reference material and proposals on which the decedent had been working at the time of his death, and (d) a certain amount of goodwill. Apart from patents, *95 upon which we will comment shortly, it acquired no other assets of the proprietorship. It received no physical assets, other than the foregoing files, no liquid assets, and no intangibles other than those noted above.
One important asset of the proprietorship was goodwill. The business had been built up by Admiral Harris, a man of outstanding reputation and ability as an engineer having wide personal contacts with potential clients. The proprietorship was his and his alone. It was he who dominated the enterprise. Of course it is to be expected that some of the goodwill generated by Admiral Harris "rubbed off" on his organization. And while it is clear that petitioner acquired a certain amount of goodwill of the proprietorship -- indeed its clients during 1950-53 were exclusively former clients of the proprietorship -- we think it equally clear that it did not acquire all of it. The proprietorship's goodwill included the live participation of Admiral Harris, the dominant figure in the enterprise. It is a fair inference that the presence or absence of the Admiral meant a significant difference in goodwill and potential profits. Although superficially similar, the base period*96 entity (sole proprietorship) did not represent substantially the same business with the same profit potential as the corporation, and its profits experience in the base period is not a fair measure of normal earnings for the corporation. We are fully satisfied that the petitioner corporation did not acquire substantially all of the goodwill that the proprietorship had with the Admiral in charge.
An additional factor in this case relates to the patents owned by Admiral Harris. The evidence shows that these patents were a significant factor in the success of his sole proprietorship. Yet there is no proof that these patents were ever transferred to the petitioner. The record does show that they were "made available" to it, whatever that may mean. We express no opinion as to whether this consideration alone would preclude the operation of the statute, but when it is taken in conjunction with the fact that none of the balance sheet assets were transferred to petitioner and in conjunction with our conclusion in relation to goodwill we think it clear that petitioner has failed to establish that it acquired "substantially all" the assets of the proprietorship. We hold that neither section*97 461 nor section 474 is applicable here.
*751 In view of the foregoing, it becomes unnecessary to consider other possible grounds for supporting the Commissioner's determination. The Commissioner has argued that, in any event, the interposition of the estate between the decedent's sole proprietorship and the corporation is fatal to petitioner's position, citing S. Klein on the Square, Inc., 14 T.C. 786">14 T.C. 786, 790-792, affirmed on another ground 188 F. 2d 127 (C.A. 2), certiorari denied 342 U.S. 824">342 U.S. 824, and E. T. Renfro Drug Co., 11 T.C. 994">11 T.C. 994, affirmed 183 F. 2d 846 (C.A. 5), certiorari denied 340 U.S. 930">340 U.S. 930. 4 We do not pause to examine the validity of possible distinctions between those cases and the case at bar pressed upon us by petitioner, nor do we find it appropriate to reconsider the Klein case in the light of alleged factual distinctions and in the light of a dissenting opinion in the Court of Appeals in the Renfro case, as urged by petitioner.
*98 Decision will be entered for the respondent.
Footnotes
1. Section 461(f) provides that for the purposes of section 461(a)(1)(D)↩ "a business owned by a sole proprietorship shall be considered a partnership."
2. The Government has pointed out a possible distinction between sections 461 and 474 in that the parenthetical clause "(other than cash)" appears only in section 474, thus making the requirements of section 461↩ even more stringent. We do not pass upon the validity of this distinction, because we think that petitioner has failed to qualify even under the more liberal of the two possible interpretations in this respect.
3. For purposes of the reorganization provisions it may well be that similar considerations would be pertinent. Cf. R. & J. Furniture Co., 20 T.C. 857">20 T.C. 857, 864, reversed on another ground 221 F. 2d 795↩ (C.A. 6).
4. Nor do we pass upon the question whether section 474 might be inapplicable by reason of the nontaxable character of the transfer to petitioner. Cf. Rev. Rul. 54-120, 1 C.B. 168">1954-1 C.B. 168↩, 169.