*2937 1. SPECIAL ASSESSMENT - ABNORMALITY. - Where the petitioner was the holder of a valuable contract, and also developed a paint-printing process subsequently patented, which were the principal factors contributing to the production of income, and the contract can be included in invested capital at only a nominal figure, and the patent was not included at all, an abnormality results which entitles petitioner to a special assessment under section 328 of the Revenue Acts of 1918 and 1921.
2. ISSUE. - An issue argued in brief for petitioner, but not raised in the pleadings, will be disregarded.
*719 The respondent determined deficiencies in income and profits taxes of $193 for 1920 and $274.36 for 1921, and in seeking a redetermination the petitioner alleges that the respondent erred in denying its application for a special assessment under sections 327 and 328 of the Revenue Acts of 1918 and 1921. On motion of the respondent it was ordered that the hearing be confined to the issues defined in subdivisions (a) and (b) of*2938 Rule 62 of the Board's rules of practice.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office and place of business at 300 South Racine Avenue, Chicago, Ill. It is engaged in the printing business, specializing in color printing.
Justin Rothschild is the president and principal stockholder of the petitioner. For about twenty-five years prior to 1919 he had been in the printing and colortype business and for many years was connected with the American Colortype Co. as secretary and sales manager.
Rothschild was desirous of starting his own business and as a preliminary thereto in the fall of 1918, obtained from Sears, Roebuck & Co. a contract to do certain color printing for their catalogues for a period of three years. This contract was in the form of a letter from S. L. Rosenfels, advertising and publicity manager of Sears, Roebuck & Co., to Rothschild individually, and provided for the printing of 16 to 20 pages of color inserts in each issue of the regular catalogue, and 4 pages in each flyer issue. There were two regular catalogues each year and two flyers. The price was to be $2.40 per 2 thousand pages and was to fluctuate according*2939 to the price of labor. Sears, Roebuck & Co. were to furnish the plates and paper and Rothschild was to furnish ink and perform the work. It cost Rothschild nothing to secure this contract.
After obtaining this contract Rothschild severed his connection with the American Colortype Co., and in order to perform his contract obtained a lease on a building for 10 years and entered into a contract with the Miehle Press Co. for the purchase of 8 printing presses for the sum of $120,000, of which he paid $15,000 in cash.
Rothschild estimated and believed that the Sears, Roebuck & Co. contract would amount to approximately $750,000 and that the profit *720 thereon would be from $225,000 to $250,000, and so stated to friends and associates whom he consulted relative to the formation of a corporation and their purchase of stock therein. On January 6, 1919, the petitioner was organized with a capital stock of $156,000, of which $140,000 was preferred stock and $16,000 was common stock. The preferred stock was all subscribed and paid for in cash as follows: Rothschild, $70,000; Henry Bosch, $40,000; Cohn and Wormser, $30,000; and the $16,000 of common stock was issued to Rothschild*2940 in consideration of the assignment of the Sears, Roebuck & Co. contract by him to the petitioner. The lease on the building was assigned by Rothschild to petitioner, as was also his contract of purchase of presses with the Miehle Press Co., which petitioner assumed and paid in cash and reimbursed Rothschild for the $15,000 payment made by him.
At the organization and beginning of business, petitioner had no contracts other than that of Sears, Roebuck & Co., but Rothschild had verbal promises of orders from Anheuser-Busch, Bellas-Hess, Hess, Wrigley, Loose-Wiles Co., and others, which were subsequently carried out. Rothschild was of the opinion at date of incorporation of petitioner that the Sears, Roebuck & Co. contract was worth $225,000 to $250,000, but same was assigned to petitioner upon advice of counsel that if transferred at a nominal value it would eliminate any question of Rothschild being taxes upon a basis of full value for the contract. The contract was not exclusive, as at the same time Sears, Roebuck & Co. was giving similar contracts to about six other color printers and was dealing with about twenty ordinary printing concerns. There were no preferential features*2941 about the contract, but it was the usual contract relating to this class of work, except that it was for a longer period than usually contracted for and was given before Rothschild had his shop in operation.
Rothschild was the president and manager of petitioner and attended to all sales, for which he received no commission.
The original contract with Sears, Roebuck & Co. was performed and completed in 1922, but was extended for one and one-half years. Under the original contract, petitioner received $735,733.19 at a cost of performance of $531,507.67, giving it a net profit of $204,225.72.
In 1919 Rothschild devised an improved method of printing paint samples, which was cheaper and more satisfactory than that formerly in use. This device was used by petitioner and a patent was obtained by one of its employees for its benefit. By the use of this process petitioner, during the years 1919-1922, did $193,717.87 of paint-printing jobs at a net profit of $62,266.01. In addition to the Sears, Roebuck & Co. contract work and the patint jobs, petitioner did work for Wrigley Chewing Gum, Anheuser-Busch, Bellas-Hess & *721 Co., National Cloak & Suit Co., Montgomery & Ward, *2942 Phillipsborn, Calumet Baking Powder, Fred Harvey, and others.
The total business done by petitioner during 1919-1922 is as follows:
| 1919 | 1920 | 1921 | ||||
| Amount | Per cent of gross sales | Amount | Per cent of gross sales | Amount | Per cent of gross sales | |
| Gross sales | $280,209.61 | $773,304.01 | $560,509.10 | |||
| Sears, Roebuck & Co | 147,391.44 | 52 | 257,721.47 | 33 | 199,291.02 | 35.5 |
| Paint jobs | 27,762.73 | 9 | 78,689.57 | 10 | 38,508.26 | 06.7 |
| 61 | 43 | 42 |
For the taxable years the net profits and percentages thereof were as follows:
| 1920 | 1921 | |||
| Amount | Percentage | Amount | Percentage | |
| Net profits | $145,419.92 | $97,018.73 | ||
| Sears, Roebuck & Co | 71,493.77 | 49 | 55,130.43 | 56 |
| Paint jobs | 30,736.98 | 21 | 11,986.69 | 12 |
| Other work | 43,189.17 | 30 | 29,901.61 | 32 |
For 1920 petitioner's profits tax was computed on an invested capital of $194,208.43 and a net income of $145,899.34. The invested capital included the capital stock of $156,000, being $140,000 preferred and $16,000 common, the balance of $38,208.43 being earned surplus.
For 1921 the computation was made on an invested capital of $326,405.70 and net*2943 income of $97,018.75. The invested capital included capital stock $156,000, earned surplus $165,829.94, and the balance resulting from sales of additional capital stock.
Rothschild was paid at the rate of $8,000 per year for 1919, and for subsequent years his salary was $30,000 per year. Petitioner was allowed special assessment under section 328 for 1919, but it was denied by respondent for 1920 and 1921.
OPINION.
MILLIKEN: The only error raised in this proceeding is the refusal of the respondent to grant the application of petitioner to have its profits tax determined pursuant to the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921. The hearing in this proceeding *722 was further limited to the issues defined in subdivisions (a) and (b) of Rule 62 of our rules of practice.
Petitioner claims that it falls within section 327 and is entitled to have its tax computed under section 328 because of abnormal conditions affecting its capital and income. It is urged that a substantial part of its income resulted from the Sears, Roebuck & Co. contract which it received from Rothschild for a nominal consideration and the full value of which, by reason*2944 of the manner of organization of petitioner, may not be included in the computation of invested capital. It is also urged that an abnormality results by reason of the use of paint-printing device which produced substantial income in the years and bears no relation to the invested capital structure of petitioner.
The fact that assets may be used in business which may not be included in invested capital is not in and of itself sufficient basis to warrant recourse to sections 327 and 328 for the computation of the tax. See . The exclusion must be such as to create an abnormal condition affecting capital or income. The facts in each case must be weighed to ascertain if such an abnormality exists. An exclusion from invested capital or effect on income may in a given case be of no relative significance. We pass therefore to endeavor to ascertain if an abnormality is presented in the case at bar justifying recourse to sections 327 and 328.
It is obvious that the Sears, Roebuck & Co. contract and the paint-printing device were of great value to the petitioner, and during the years under consideration were the principal income-producing*2945 factors in the business. In 1919 they produced 61 per cent of the business; in 1920, 43 per cent; in 1921, 42 per cent. For the taxable year 1920 they produced 70 per cent of the net profits, and for 1921 they produced 68 per cent.
According to the computation of the respondent, the petitioner's net income for 1920 was 75 per cent on its invested capital and in 1921 was 29 per cent.
We have been presented with a great deal of evidence and cogent arguments tending to show that this contract was of the value of exceeding $200,000 and that the paint-printing device was of the value of $60,000 to $75,000. In the computation of profits taxes the contract was capitalized at $16,000 only, and no valuation was placed on the paint-printing device. The Sears, Roebuck & Co. contract was of much greater value than $16,000. It was petitioner's most valuable asset and petitioner was organized primarily to perform this contract. The contract and paint-printing device produced more than two-thirds of the net profits for the taxable years, and in 1920 the receipts from the contract were 16 times the valuation *723 placed upon it and the profits derived therefrom were 4.4 times said*2946 valuation; in 1921 the receipts were 12 times the valuation and profits 3.4 times the valuation.
We do not attempt to fix a definite value for the contract. We know that the contract and the paint-printing device were the main income-producing factors and that they were both practically excluded from invested capital, and accordingly we conclude that an abnormality exists in both capital and income and that a hardship will result without the benefit of a comparative assessment. See .
Counsel for petitioner argued in his brief that petitioner had proved the value of the Sears, Roebuck Co. contract to be $200,000 and that, under section 234(a)(7) of the Act of 1918, it was entitled to an allowance of $66,666.66 for exhaustion each year. This question was not raised by petitioner in its petition or assigned as error, nor was the issue raised elsewhere in the pleadings or the evidence. Under the circumstances this question will be disregarded and our decision will be confined to that of the right to special assessment.
Further proceedings will be had under Rule 62(c) and (d).