*2658 1. The petitioner's claim for additional invested capital denied.
2. Rate for computing allowance for exhaustion, wear and tear of furniture, fixtures and machinery, determined.
*61 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1920 in the amount of $2,865.73. The petitioner alleges that the respondent erred (1) in not including in the petitioner's invested capital any amount on account of intangibles acquired for capital stock; (2) in not allowing as a deduction from gross income an adequate amount for exhaustion, wear and tear of the petitioner's physical assets; and (3) in denying the petitioner special assessment.
FINDINGS OF FACT.
The petitioner is a corporation organized in September, 1915, under the laws of Massachusetts, with its principal office at Springfield. It is, and has been since it was organized, engaged in jobbing steel products and heavy hardware, such as structural steel, bolts, nuts and steel bars.
About 1886 one Charles C. Lewis organized a*2659 corporation under the laws of Connecticut, known as the Charles C. Lewis Co., which was, until September, 1915, engaged in jobbing steel products and heavy hardware, and during that time it built up a business which covered northern Connecticut, western Massachusetts, and the States of Vermont and New Hampshire. The net values of the tangible assets of the Charles C. Lewis Company of Connecticut at the beginning of each of the years 1910 to 1914, inclusive, as shown by its books, were as follows:
| 1910 | $125,148.43 |
| 1911 | 134,435.21 |
| 1912 | 130,487.58 |
| 1913 | 144,841.34 |
| 1914 | 160,415.53 |
| Average | 139,065.62 |
*62 The net earnings of the Charles C. Lewis Co. of Connecticut for the years 1910 to 1914, inclusive, were as follows:
| 1910 | $28,486.78 |
| 1911 | 13,552.37 |
| 1912 | 32,353.76 |
| 1913 | 29,074.19 |
| 1914 | 542.10 |
| Average earnings | 20,801.84 |
At a special meeting of the stockholders of the Charles C. Lewis Co. of Connecticut, held on June 4, 1915, the following resolution was adopted:
* * *
VOTED: That the corporation sell and transfer all the property, rights, and assets of whatever description, owned or possessed by this company at the time of*2660 the transfer, including the goodwill of the business carried on by it, to such person, firm or corporation, including any corporation that may be hereafter organized under the laws of Massachusetts for the purpose of taking over the assets of this corporation, and at such price and upon such terms and conditions and at such time as the President may deem expedient, and that the President be, and hereby is, authorized and empowered in the name and on behalf of this corporation, to execute, seal with the corporate seal, acknowledge and deliver any and all instruments of assignment, contract or writing whatsoever that may be necessary and proper to consummate the transfer or to carry into full effect this vote; to enter into, execute and deliver any contracts with any such Massachusetts' corporation respecting the payment of indebtedness of this corporation; and the President is further authorized to accept in payment of the purchase price, in whole or in part, stock of such Massachusetts' corporation, and to formulate and carry out any lawful plan for the exchange of stock in this corporation for stock in a Massachusetts' corporation, and to do any and all acts necessary and proper to*2661 transfer the assets and business of this corporation to a Massachusetts' corporation, and further that the President be, and hereby is, authorized and empowered to take any and all such action as may be necessary and proper to wind up the affairs of the corporation, distribute its assets in any lawful manner, and to effect a dissolution in accordance with the laws of the state of Connecticut.
VOTED: That the corporation assent to the use by Massachusetts' corporation which may be organized for the purpose of taking over the assets and business of this corporation, of the name of Charles C. Lewis Company and that the President be authorized to execute in the name and on behalf of this corporation any written consent required by the authorities of the Commonwealth of Massachusetts.
At a meeting of the petitioner's board of directors held on September 9, 1915, the following resolution was adopted:
VOTED that the corporation acquire of Charles A. Bemis all the stock in trade, fixtures and other property owned by The Charles C Lewis Company, a Connecticut corporation, and transferred by said corporation to said Bemis; and that, in consideration therefor, this corporation issue to*2662 said Charles A. Bemis two hundred and fifty (250) shares of the preferred stock and four hundred and ninety-eight (498) shares of the common stock of the corporation, said property to be received in full payment for said shares.
*63 VOTED that the corporation acquire of The Charles C. Lewis Company, a Connecticut corporation, all its bonds, stock and other securities, notes, accounts and bills receivable, cash on hand or in bank, goodwill of the business formerly carried on by the said Connecticut corporation, and all other rights, actions, causes of action and property whatsoever owned and possessed by the said Connecticut corporation excepting the property conveyed by it to Charles A. Bemis; and, in consideration therefor, that this corporation assume and agree to pay all notes and accounts payable and all other liabilities of the Connecticut corporation other than capital stock liability, and that the president be and she hereby is authorized and empowered, on behalf of this corporation, to enter into any writing with the said Connecticut corporation which may be necessary and proper in order to fully carry out the purposes of this vote.
VOTED that the corporation issue*2663 two (2) shares of its common capital stock for cash at par.
* * *
The opening entries made on the petitioner's books were as follows:
| SEPTEMBER, 1915. | ||||
| 1915 | ||||
| Sept. 10 | 63 | Subscription | $200.00 | |
| 1 | To Capital Stock - Common | $200.00 | ||
| Sept. 1 | 58 | Personal Property | 74,800.00 | |
| 251 | To C. A. Bemis - Vendor | 74,800.00 | ||
| Net Assets - Late the property of the | ||||
| C. C. Lewis Co. (Conn. Corp) acquired | ||||
| from them by Bill of Sale dated Sept. | ||||
| 10, 1915. | ||||
| Sept. 1 | Sundries | |||
| 58 | To Personal Property | 227,004.54 | ||
| Gross Assets Acquired - | ||||
| 46 | Lyman Street Fixtures | 6,789.23 | ||
| 45 | Liberty Street Equipment and Fixtures | 6,831.81 | ||
| 57 | Overland Car | 1,050.00 | ||
| 34 | Auto Truck | 2,150.00 | ||
| 47 | Merchandise Inventory - estimated | 100,144.95 | ||
| 53 | Office Supplies - Estimated | 200.00 | ||
| 49 | Notes Receivable - Detail on file | 2,397.34 | ||
| 30 | Accounts Receivable - detail on file | 90,627.20 | ||
| 64 | Union Trust Co., Balance on deposit | 10,775.52 | ||
| 37 | Chapin National Bank - Balance on | |||
| deposit | 1,402.82 | |||
| 35 | Cash | 344.03 | ||
| 40 | Individual Underwriters | 500.00 | ||
| 39 | Equity in Turners Falls Real Estate | 2,500.00 | ||
| 66 | West Springfield Real Estate | 325.00 | ||
| 43 | Interest Prepaid - Detail on File | 239.38 | ||
| 41 | Insurance Prepaid - Detail on file | 727.26 | ||
| Sept. | 58 | Personal Property | 97,939.03 | |
| To Sundries | ||||
| Liabilities and Reserve Accrued - | ||||
| 11 | Notes Payable - Detail on file | 60,273.38 | ||
| 3 | Accounts Payable - Detail on file | 16,844.14 | ||
| 5 | Athol Savings Bank - Mortgage Interest | |||
| accrued | 229.17 | |||
| 7 | Boston and Albany Railroad Rent and | |||
| Steam Accrued - Detail on file | 1,053.92 | |||
| 9 | Interest Accrued - Detail on file | 194.16 | ||
| 13 | Taxes Accrued - Detail on File | 555.10 | ||
| 92 | Reserve for Doubtful Accounts - Detail | |||
| on file | 18,589.16 | |||
| 95 | Reserve for Organization Expense | 200.00 | ||
| Sept. 1 | 58 | Personal Property | 54,265.51 | |
| 104 | To Surplus | 54,265.52 | ||
| Excess of Assets acquired over | ||||
| Liabilities Assumed. |
*2664 The values assigned in said opening entries to the several items of property listed were the book values of said property as shown by the books of the Charles C. Lewis Co. of Connecticut.
The petitioner's assets included furniture and fixtures, cutting machinery, and wooden and steel racks for storage. The average useful life of these assets was not to exceed ten years.
*64 The respondent, upon audit of the petitioner's income and profits-tax return for the year 1920, determined that the petitioner's invested capital was $340,487.67, consisting of capital stock in the amount of $75,000 and surplus in the amount of $265,487.67. No amount was included in invested capital on account of good will. The respondent allowed the petitioner a deduction for exhaustion, wear and tear of its furniture, fixtures, machinery and equipment, computed at the rate of 5 per cent.
OPINION.
MARQUETTE: The petitioner claims that in September, 1915, it acquired in exchange for its capital stock, all of the assets of the Charles C. Lewis Co. of Connecticut, which consisted of tangible property of the value of $129,265.51, and good will of the value of $64,510.60, and that it is entitled*2665 to include in invested capital on account of such good will the amount of $18,750. The petitioner arrives at the value of the good will by taking the average net earnings of the Connecticut corporation for the years 1910 to 1914, inclusive, allowing a return of 8 per cent for the average net book value of the tangible assets, and capitalizing the remainder of said earnings at the rate of 15 per cent. Having thus determined the value of the good will the petitioner computes the part thereof, which it claims should be included in its invested capital, as follows:
| Tangible assets | $129,265.51 |
| Good will | 64,510.60 |
| Total assets for which stock issued | 193,776.11 |
| Percentage for tangible assets | 66.71% |
| Percentage for intangible assets | 33.29% |
| 100.00% | |
| 66.71% of $75,000 (Capital stock) | $50,032.50 |
| 33.29% of $75,000 | 24,967.50 |
| Amount allowed for intangibles under section 326 | |
| (a)(4) of the Revenue Act of 1918 | 18,750.00 |
| Tangible assets paid in for stock | 50,032.50 |
| Intangible assets paid in for stock | 18,750.00 |
| Paid-in surplus | 79,233.01 |
Assuming that the petitioner is correct in its contention that the good will of the Connecticut corporation was of the value*2666 claimed, which, however, it is not necessary for us to decide in view of the state of the record, we are unable to find any basis for determining to what extent such good will should be included in invested capital. There is nothing in the record to show the original capital of the petitioner or the par value of the stock which was issued for the assets of the Connecticut corporation. Furthermore, we have no *65 evidence other than the books of the Connecticut corporation relative to the fair market value of the tangible assets of that company at the date they were acquired by the petitioner. The evidence shows that the respondent has determined that the petitioner's invested capital for 1920 was $340,487.67 and on the record we find no basis for disturbing that determination.
At the hearing the respondent admitted that the allowance for exhaustion, wear and tear of the petitioner's furniture and fixtures should be computed at the rate of 10 per cent, and on the evidence we are of opinion that the allowance for exhaustion, wear and tear of the petitioner's machinery and equipment should be computed at the same rate.
The petitioner has also attempted to show that it*2667 is entitled to additional depreciation on an extension to a building erected on leased property, and to deduct as an expense the amount of $2,341.34 expended in 1920 in constructing a loading platform on land which it leased from month to month. These items are not covered by the pleadings, the petitioner having alleged that the respondent erred in computing the allowance for wear and tear of its physical assets in that he "* * * allowed a rate of 5%, representing wear, tear, exhaustion and/or obsolescence of taxpayer's machinery and fixtures; that an adequate allowance representing this deduction should be at the rate of 10%." Furthermore, we are unable to determine from the record what amount the respondent has allowed as a deduction from income on account of the building extension and the loading platform in question. The additional deductions claimed are denied.
The petitioner also alleges that it is entitled to have its profits tax computed under section 328 of the Revenue Act of 1918. This claim is denied by the respondent and the petitioner has introduced no evidence to support it. As to this issue we must affirm the respondent.
Judgment will be entered under Rule*2668 50.