*1822 The petitioner held not to be entitled to special assessment for the years 1920 and 1921.
*600 This is a proceeding for the redetermination of deficiencies in income and profits tax for 1920 and 1921 in the respective amounts of $2,889.82 and $2,291.37. The only allegation of error stated in the petition is that the respondent erred in refusing to assess the petitioner for the years 1920 and 1921 under section 328 of the Revenue Acts of 1918 and 1921, respectively.
FINDINGS OF FACT.
The petitioner is a Massachusetts corporation conducting a department store business in Boston. It was organized July 27, 1916, with a capital stock of $200,000, consisting of 2,000 shares of a par value of $100 each. It succeeded to the going business of the Raymond Syndicate, a Maine corporation, which had conducted a department store in Boston for many years. The Maine corporation was organized in 1893 or 1894. It had an authorized capital stock of $50,000 and a paid-in capital stock of $31,130 at December 31, 1915. It was engaged in buying stores of people*1823 going out of business, bankruptcy stocks, and surplus stocks of merchandise from manufacturers. The stocks were brought to its store in Boston and spread upon tables to which customers had access. The corporation had developed various trade slogans, among which were "Sold out to Raymonds"; "Yours truly"; "Where U Bot the Hat," etc. The net income of the predecessor corporation for the years 1910 to 1915, as shown by its tax returns, was as follows:
| 1910 | $10,570.81 |
| 1911 | 13,912.99 |
| 1912 | 12,581.39 |
| 1913 | $9,063.13 |
| 1914 | 10,702.32 |
| 1915 | 51,080.00 |
On February 14, 1915, George Raymond, the founder and owner of the business, died. For a period the business was operated by *601 Raymond's widow. There had long been in the employ of the corporation one Frank I. Dorr, who, after Raymond's death, took an active interest in the business. Near the close of 1915 or early in 1916, Dorr negotiated with Mrs. Raymond for the purchase of the capital stock of the Maine corporation and in April, 1916, Dorr, with some associates, agreed to pay $200,000 for the total capital stock, practically all of which was held by Raymond's widow. In April, 1916, the transfer was*1824 consummated. The price of $200,000 was based upon the inventory balance of the merchandise plus about $22,000 for the fixtures of the store.
The new owners decided to incorporate under the laws of Massachusetts and on August 1, 1916, the petitioner issued its $200,000 of stock in payment for the assets of the Maine corporation, which consisted of "the business of The Raymond Syndicate together with the good will of said business in entirety." No part of the purchase price was allocated to good will or any other of the enumerated intangible assets, the $200,000 being divided into $150,000 for merchandise and $50,000 for cash. At the time of the transfer, the stockholders in both corporations were identical, but at the time of the acquisition of the stock of the Maine corporation in January the new stockholders were wholly different from the old.
The petitioner used the same slogans which had been used by the predecessor corporation and in addition developed new slogans, such as "The Democratic Store." Dorr had original ideas of advertising and developed a form of advertising which was decidedly unique. Some of the features of this advertising were:
(a) The consistent homely*1825 type and simple set-up;
(b) The reiteration of the outlandish slogans;
(c) Identification of publicity with merchandising methods so that the public would come to know the kind of store, rather than the merchandise;
(d) Vernacular, homely like the store itself;
(e) Understatement in regard to merchandise, amounting almost to abuse in some instances;
(f) Deprecation of public for crowding store, being too greedy, making trouble, etc.
The following are samples of advertising used:
ONLY A STORE
for the sale of merchandise for all the people, that's all. Merely a STORE, not a lottery, but a STORE, the result of years' hard work catering to the interests of the people. No odd prices to deceive, no stamps, no tinsel show. No catchpenny schemes of any nature. No bad charge accounts (for you to pay for), no Dandy fixtures, (bot on the installment plan), no expensive delivery system, no P.M.'s to clerks who force you to buy unusable merchandise, no turn-over men, so that you can't get out with a whole shirt if you don't buy; no fancy expressions, no hired brains, no high-salaried wall flowers; nothing to pay *602 for but the goods you buy, upon the express condition*1826 that every article in this store shall be marked down if we ever find it marked higher than it is somewhere else, regardless of the thousands of bargains always to be found in this
ONLY A STORE
Part of the above is reproduced from copy used in May, 1916. It is not only flattering but highly amusing to note the Proudstores all trying to get on the Band Wagon, but it is just as impossible for a HIGHBROW to operate a DEMOCRACTIC store as it is for an Autocratic person to suddenly become Democratic.
According to all modern Hot Air methods these Overcoats should be exploited as having been marked down from the Lord knows where to a figure showing an enormous loss and exhibiting the trytobenice advertiser as operating his business for charitable purposes only. Funny ain't it what benevolent critters some people suddenly become when they have merchandise to sell? Funny ain't it why a Democratic store can't afford to sell goods at a loss?
53 complete stores sold out to Raymond's in 1918, averaging one a week and one to spare, and now we propose to clean up what's left of 'em at prices that will startle the Highbrows and yet make a profit on every piece. More about this later.
*1827 We understand the Solider Boys who saved the world from the inhuman Hun are refused employment in many places on account of wearing the uniform. I would like to express my opinion of the object dressed in human clothes who would refuse employment to one of these boys, but if I did it would probably be unprintable, sowhatstheuse. Come in here, Boys we'll take care of you. We consider the uniform and Boys both a credit to this Democratic store.
Expenditures of the Raymond Syndicate, Inc., for advertising from 1916 to 1921, inclusive, were as follows:
| 1916 | $16,004.82 |
| 1917 | 42,447.69 |
| 1918 | 90.447.13 |
| 1919 | $125,017.96 |
| 1920 | 243,620.32 |
| 1921 | 298,992.13 |
Comparative figures of the Raymond Syndicate, Inc., for the years 1916 to 1921, inclusive, are as follows:
| Tax year | Invested capital | Sales | Net income |
| 1916 1 | $200,000.00 | 1,189,278.60 | $151,080.00 |
| 1917 | 248,453.32 | 1,679,155.21 | 89,597.96 |
| 1918 | 261,490.52 | 2,785,501.90 | 113,285.68 |
| 1919 | 310,203.26 | 4,595,975.03 | 416,443.51 |
| 1920 | 587,604.17 | 6,461,724.28 | 326,331.86 |
| 1921 | 672,055.44 | 6,352,487.67 | 275,829.76 |
*1828 The respondent granted special assessment in the determination of the petitioner's excess-profits tax for 1918 and 1919 but denied special assessment for the years 1920 and 1921.
*603 OPINION.
SMITH: The only question in issue in this proceeding is whether the petitioner is entitled to special assessment for the years 1920 and 1921 under the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921. Section 327 of the Revenue Act of 1918 provides in part:
That in the following cases the tax shall be determined as provided in section 328:
* * *
(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively;
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation*1829 an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
Section 327 of the Revenue Act of 1921 is to the like effect.
The petitioner claims that there was an abnormality in its invested capital in both the years 1920 and 1921 by reason of the fact that (1) the $200,000 of invested capital beginning in 1916 does not take into account the value of the intangibles of the predecessor corporation; and (2) that a very valuable good will was built up during the years 1916*1830 to 1919, inclusive, by advertising, which was not reflected in the invested capital if computed under the provisions of the taxing act.
Witnesses for the petitioner testified as to the value of the good will of the predecessor corporation on January 1, 1916. In the opinion of some of these witnesses, the good will had a value equal to the value of the inventory, although one of these witnesses testified that he did not know the value of the inventory. His estimate was based largely upon the proposition that the Raymond store was well known in Boston and in New England through the slogans that had been used for many years and that people, especially working people, resorted to the store for bargains.
*604 Even if the good will of the predecessor corporation had a large value at the time Dorr and his associates purchased the stock of the Maine corporation in April, 1916, we are not persuaded that the value of all of the assets purchased was in excess of the price paid therefor by Dorr and his associates. There was apparently no element of gift from the former owner of the corporation to Dorr and his associates. The earnings of the corporation over a period of years prior*1831 to 1916 are not impressive. The earnings for 1915 under the advertising sponsored by Dorr were much larger than in any preceding year. But the evidence does not warrant a finding that the total value of the assets of the Maine corporation was in excess of $200,000, the amount paid for all of the capital stock of that corporation by Dorr and his associates in April, 1916. The corporation appears to have been doing a profitable business early in 1916. It was contemplated by Dorr and his associates upon the purchase of this stock that a Massachusetts corporation would immediately be organized and the assets of the Maine corporation would be paid into it for the capital stock of that corporation. We can not find that there was any increase in the good will of the Maine corporation from April to August, 1916. The Massachusetts corporation was organized with a capital stock of $200,000 and the record does not warrant a finding of fact that the value of the assets of the Maine corporation paid in to the petitioner in exchange for its capital stock was substantially in excess of $200,000. We are of the opinion, therefore, that there was no such abnormality in invested capital in 1916*1832 as would warrant a finding that the assets paid in to the petitioner corporation in exchange for its shares of stock were worth more than the par value of the stock, and we are of the opinion that special assessment for 1920 and 1921 is not warranted upon that ground.
The second contention of the petitioner is that a good will of great value was built up during the years 1916 to 1919, inclusive, which was in no wise reflected in the invested capital of the petitioner for the years 1920 and 1921. Competent witnesses testified as to the value of the good will which had been built up by the large expenditures for advertising during the years 1916 to 1919. It is to be noted, however, that all of the payments for the advertising were treated as expenses upon the petitioner's books of account. In no case were they capitalized. The advertising was for the sale of merchandise then on the petitioner's shelves. Even though a good will resulted from that advertising, we think that that did not create an abnormality in the invested capital. Many stores which conduct large advertising campaigns create a valuable good will which, under the provisions of the taxing statute, will not ordinarily*1833 be reflected *605 in the invested capital determined under the provisions of the taxing acts. There is, however, nothing abnormal in this fact. A condition that is common to many corporations does not create such an abnormality in invested capital as warrants the application of special assessment for the purpose of determining tax liability.
The facts in this case appear to be simply that the petitioner through unique advertising had large profits in the years 1920 and 1921. The provision of the statute is that section 327(d) -
* * * shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital * * *.
If there was any abnormality in the invested capital, it is such as results from the normal application of the statute. In our opinion it was not the intention of Congress that the special assessment provision should have application to such a case as is presented herein.
Judgment will be entered for the respondent.
Footnotes
1. Combined figures of petitioner and predecessor. ↩