*268 Decision will be entered under Rule 50.
1. The deficiency notice for 1941 tax was mailed July 31, 1945. The petition was filed October 23, 1945, and waivers were executed and filed extending the period for assessment to June 30, 1947. Held, the assessment is not barred by the statute of limitations.
2. In 1928 the Board of Tax Appeals held that the intangibles of this taxpayer at its organization in 1918 had a value of "at least $ 412,500," which was 25 per cent of the outstanding capital stock and the allowable limit under the statute therein involved. Held, that, since the statute herein involved prescribes no such limit, we are not now estopped from finding a value of such intangibles greater than $ 412,500.
3. Upon its organization in 1918 petitioner acquired for $ 1,000,000 of its common stock the right to use the name of Clarence Whitman, which had been used in an old and established business for many years and had acquired a high reputation with the dry goods commission trade. Held, the right to use the name and the good will incident thereto had a value of $ 500,000, when acquired in exchange for petitioner's common stock, which had no established market*269 value at that time.
*264 The respondent determined a deficiency in excess profits tax against the petitioner for the calendar year 1941 in the amount of $ 36,564.94.
The questions raised by the pleadings for our decision are:
(1) Whether the assessment of the proposed deficiency is barred by the statute of limitations.
(2) Whether petitioner is entitled to include in equity invested capital certain intangible assets (good will) acquired for its common stock of the par value of $ 1,000,000 in determining excess profits credit to be used in computing its 1941 income subject to excess profits tax, and if so, what is the value thereof.
(3) Whether the finding in Clarence Whitman & Sons, Inc., Docket Nos. 10316 and 15888 (1928), 11 B. T. A. 1192, is res judicata as to any value of good will paid for stock at the time of petitioner's organization.
FINDINGS OF FACT.
The petitioner is a New York corporation, with principal offices in New York City. It filed its income and excess profits tax returns for*270 the calendar year 1941 with the collector of internal revenue for the third district of New York on March 14, 1942.
On December 7, 1944, the taxpayer executed and filed with the collector Form 872, "Consent Fixing Period of Limitations upon *265 Assessment of Income and Profits Tax," extending the assessment period for the calendar year 1941 to June 30, 1946. On April 30, 1946, a similar consent was executed and filed by the taxpayer, extending the assessment period for the calendar year 1941 to June 30, 1947.
The petitioner is the corporation which was the petitioner in Clarence Whitman & Sons, Inc., Docket Nos. 10316 and 15888, officially reported in 11 B. T. A. 1192. That case involved income and excess profits taxes for the period from June 3, 1918, to December 31, 1918, and the calendar years 1919, 1920, and 1921. The par value of the stock outstanding during the taxable years therein involved was preferred, $ 650,000, and common, $ 1,000,000, a total of $ 1,650,000. Under the applicable statutes the limitation upon intangibles for invested capital purposes was 25 per cent of the par value of the stock outstanding during the taxable year. *271 In that case the Board found that the trade name and good will transferred to petitioner on June 3, 1918, for $ 1,000,000 par value of its common stock had a cash value at that time of "at least $ 412,500," and that cash was paid in for preferred stock in the amount of $ 650,000. It was the opinion of the Board that because of its manner of organization the intangibles could not be included in petitioner's invested capital, and, therefore, petitioner was entitled to relief under sections 327 and 328 of the Revenue Acts of 1918 and 1921. In the opinion the Board stated that the asset (good will) excluded was the "most substantial part" of petitioner's invested capital.
For several years prior to April 13, 1913, Clarence Whitman was engaged in the general dry goods commission business in the city of New York, at first individually and later in partnership with others under the firm name of Clarence Whitman & Co. He had built up an established business in white goods and fancy cotton goods, including blankets and laces, produced by mills in New England and Pennsylvania and sold under the Whitman name, which had acquired a very high reputation in the trade. The names of the mills*272 manufacturing the goods did not appear in the sale of the goods. Clarence Whitman & Co. collected the money due on sales, guaranteed credits, and helped the mills finance by endorsing their paper at the local banks. It also made up patterns and styles, determined colors, and helped the mills get the line ready for the market.
The partnership agreement provided in part that the firm name and good will should be and remain the property of Clarence Whitman.
The average annual net income of the partnership from June 30, 1908, to March 26, 1913, was approximately $ 308,000, and its average net tangible assets for the years ended January 30, 1908 to 1912, inclusive, consisting principally of cash, bills receivable, and accounts receivable, was approximately $ 829,685.90.
*266 On or about April 1, 1913, Clarence Whitman & Co. was incorporated under the laws of the State of New York. The charter limited the life of the corporation to five years, which time could not be extended except upon the consent of 90 per cent in amount of its issued and outstanding capital stock.
On or about April 13, 1913, the partnership sold and transferred to Clarence Whitman & Co. all of its tangible property*273 and assets, with certain specific exceptions, in consideration of preferred stock to be issued to the partners in proportion to their interest in such assets. It also transferred "the good will and all letters patent, inventions, trade marks and trade names of the copartnership" for a consideration of $ 3,000,000, to be paid in common stock at its par value. As a part of the transaction Clarence Whitman entered into an agreement with the corporation that during its corporate existence, but not exceeding a period of ten years, it should have the exclusive right to use his name as a business name in connection with the textile commission or converting business within the United States and certain other parts of the world and that he would not use or permit the use of his name in connection with any other textile commission or converting business.
The business of Clarence Whitman & Co. was divided into various departments, such as the white goods department, the print goods department, the blanket department, and the lace department. The term "white goods" includes wash goods, print goods, piece goods, broadcloth, shirts, sheets, and pillow cases, etc. This end of the business of*274 Clarence Whitman & Co. constituted a substantial part of its sales. As late as 1918 the company's largest accounts were in the white goods end of the business.
The average annual net income of Clarence Whitman & Co. for the five-year period ended May 31, 1918, was approximately $ 284,000 and the average net tangible assets for the same period were approximately $ 1,262,000.
The stock in Clarence Whitman & Co. was largely held by the Sayles and Twining interests, which were the same, and the Whitman interests. As of 1918, and subsequent thereto, the Sayles and Twining interests in Clarence Whitman & Co. were, combined, greater than the Whitman interests. They had a clear majority of the ownership of the stock and the control of the company. This fact gave rise to the eventual split-up in 1918 and the organization of petitioner. It also permitted delays in the liquidation of Clarence Whitman & Co. which forced the Whitmans to borrow money for the financing of petitioner on such terms as the parties who furnished the money required. The first distribution in liquidation of Clarence Whitman & Co. was not made until January 1919, after the organization of petitioner.
*267 The*275 corporate charter of Clarence Whitman & Co. expired on March 31, 1918. It thereupon proceeded to liquidate its affairs.
The petitioner, Clarence Whitman & Sons, Inc., was organized on or about April 30, 1918, with an authorized capital stock of $ 5,000, consisting of 50 shares of the par value of $ 100 each, of which 5 shares were issued. The authorized capital stock of the petitioner was increased by unanimous consent of the stockholders on or about May 20, 1918, to 17,500 shares of the par value of $ 100 per share, divided into 2,500 shares of first preferred of the par value of $ 250,000, 4,000 shares of 7 per cent preferred of the par value of $ 500,000, and 10,000 shares of common of the par value of $ 1,000,000.
The first meeting of the board of directors of the petitioner was held on June 3, 1918. At that meeting a communication from Clarence Whitman was presented in which he offered to give the corporation the exclusive right to use the name of "Clarence Whitman" as a business name during the term of its corporate existence in consideration of the issuance to him of $ 1,000,000 par value of the common stock, and agreeing, if the offer was accepted, to purchase, at par, *276 for cash, $ 200,000 of the first preferred stock and $ 450,000 of the preferred stock of the petitioner. This offer was accepted by the petitioner on the same day.
As a part of the financing of petitioner, Clarence Whitman and his son, C. Morton Whitman, borrowed $ 360,000 from the banking firm of Brown Brothers & Co., of New York City. They also entered into an agreement to sell to certain parties (hereinafter referred to as the syndicate) $ 200,000 par value of the first preferred stock and $ 333,000 par value of the common stock for $ 200,000, in cash. This agreement, which was executed, provided that the $ 200,000 par value of first preferred stock would be repurchased at the end of 12 months at par, plus accrued dividends, in default of which the syndicate had the power to vote liquidation of the corporation. The $ 333,000 par value of common stock was to "be and remain" the property of the members of the syndicate, irrespective of such repurchase.
In order to protect the syndicate against default in the repurchase of the $ 200,000 par value of first preferred stock the Whitmans deposited with Brown Brothers & Co. the remaining $ 667,000 par value of petitioner's common stock*277 and certain securities, which were to be redelivered to them upon the repurchase from the syndicate of the $ 200,000 par value of first preferred stock at par, plus accrued dividends.
The $ 200,000 par value of the first preferred stock of petitioner which had been purchased by the syndicate was repurchased by the Whitmans, $ 100,000 par value on or about November 10, 1919, and $ 100,000 par value on or about April 6, 1920, at the par value thereof.
*268 During 1920 and 1921 petitioner repurchased from the syndicate 3,288 shares of its common stock which the syndicate had acquired from Clarence Whitman and C. Morton Whitman as compensation for its services in the financing and organization of petitioner. This stock was repurchased, after extended negotiations, at approximately $ 63 per share, $ 58 of which represented the price of the stock and the balance dividends at the rate of 6 per cent from July 1, 1920, to date of payment. In this transaction Brown Brothers & Co. acted as agents for the owners of the stock. Forty-two shares of the common stock held by Frederick B. Schell, a member of the syndicate, were not repurchased until about 1925.
The earned surplus applicable*278 to the petitioner's common stock on November 15, 1920, was approximately $ 28 per share. The price at which petitioner reacquired the 3,288 shares of its common stock involved dividing with the syndicate holders their proportionate share of the accumulated profits.
In financing the petitioner the Whitman interests were under great compulsion in that it was vitally necessary to their business interests that a new corporation be formed so that the value of the name Clarence Whitman might not deteriorate through nonuse. It was therefore possible for the syndicate to impose its own terms for advancing the necessary moneys to finance petitioner. The so-called purchases of stock were not made with any idea of investment, but were in the nature of loans with adequate security, and the transfer of common stock was in the nature of a bonus for the loan.
Upon the dissolution of Clarence Whitman & Co., its successor, "The American Bleached Goods Company," which continued to be located at the same address, took over the white goods end of the business and retained the majority of the employees. Upon its organization petitioner took over the accounts of Esmond Mills, Stevens Manufacturing *279 Co., and Wilkes Barre Lace Co., formerly held by Clarence Whitman & Co., but, other than the Whitmans, only a few salesmen went over to it. The petitioner acquired no tangible assets of any importance from Clarence Whitman & Co. Petitioner's accumulated earnings and profits as of January 1, 1941, were $ 634,665.72.
Petitioner's common stock had no established market value at the time of its issuance in 1918.
For many years prior to the organization of petitioner in 1918 the name "Clarence Whitman" had been associated with a very successful business in the merchandising of white and fancy cotton goods and had acquired a high and valuable reputation in the commission merchandising business. The right to use that name and the good will acquired by petitioner in 1918 in exchange for $ 1,000,000 par value of its common stock had a value of $ 500,000.
*269 OPINION.
In the assignments of error set out in the petition it is alleged that the Commissioner erred in failing to determine that the assessment of the proposed deficiency is barred by the statute of limitations. No proof was offered at the hearing in support of petitioner's allegation and no basis appears in the record for *280 raising this issue. The facts show that waivers were executed by petitioner and filed with the collector of internal revenue extending the period for assessment of income and excess profits tax for the calendar year 1941 to June 30, 1947. The deficiency notice was mailed July 31, 1945, and the petition was filed October 23, 1945. It is obvious therefore that assessment is not barred by the statute of limitations and we so hold.
In its excess profits tax return for the calendar year 1941 the petitioner computed its excess profits credit under section 718 of the Internal Revenue Code. It claimed an equity invested capital of $ 2,304,665.72, consisting of cash paid in for stock, $ 670,000, accumulated earnings and profits, $ 634,665.72, and intangible property, paid in for stock, having a value or cost basis at the time paid in of $ 1,000,000, on which it computed an excess profits credit of $ 147,805.58.
The applicable statutes and regulations are set out in the margin. 1
*281 *270 In the notice of deficiency the respondent determined the petitioner's excess profits credit under the income method as provided in section 713 of the Internal Revenue Code. He determined the net aggregate base period excess profits net income to be $ 350,712.72 on which he computed an excess profits credit of $ 83,294.27. In his explanation of adjustments he says:
Since you have failed to substantiate the amount of your equity invested capital which you claimed under the provisions of section 718 of the Internal Revenue Code, your excess profits credit has been determined under the income method as provided in Section 713 of the Internal Revenue Code.
The petitioner contends that the intangibles paid in for its common capital stock had a value in excess of $ 1,220,000 on June 3, 1918, when so paid in; and since the cash paid in for the stock and accumulated earnings at the beginning of the taxable year are ascertainable it is entitled to compute its equity invested capital under the provisions of section 718 of the Internal Revenue Code.
It appears from the record that on June 3, 1918, petitioner sold $ 200,000 par value of first preferred stock and $ 450,000 par value*282 of its preferred stock to Clarence Whitman for $ 650,000 in cash. It also acquired from Clarence Whitman the exclusive right to use his name in its business for $ 1,000,000 par value of its common stock. The Commissioner determined that petitioner was not entitled, for equity invested capital purposes, to any value for good will on account of the acquisition of the name "Clarence Whitman" for use in its business.
Under the applicable statutes the equity invested capital is determined as the sum of (1) money paid in for stock, or as paid-in surplus, or as a contribution to capital; (2) property paid in for stock, or as paid-in surplus, or as a contribution to capital; and (3) the accumulated earnings and profits as of the beginning of the taxable year. There is no dispute as to the $ 650,000 paid in for preferred stock, nor is the amount of accumulated earnings and profits ($ 634,665.72) at the beginning of the calendar year questioned.
*271 The primary question, therefore, is whether the respondent erred in refusing to include in petitioner's equity invested capital the value, if any, of good will acquired in exchange for $ 1,000,000 par value of its common stock.
Section *283 718 (a) (2) of the code provides that such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange, i. e., the cost of such property. The regulations provide that where the basis to the taxpayer is cost and stock was issued for the property, the cost is the fair market value of the stock at the time of its issuance, but if the stock has no established market value the property paid in for the stock shall be included, in determining the net worth, at its fair market value at that time.
Petitioner further contends that the doctrine of res judicata requires that we find a value of at least $ 412,500 under the decision of the Board of Tax Appeals in Clarence Whitman & Sons, Inc., 11 B. T. A. 1192. Therein the Board found that the value of the trade name "Clarence Whitman," when acquired by Clarence Whitman & Sons, Inc. (the petitioner therein and also the petitioner here) was "at least $ 412,500." Petitioner argues that in fact we are precluded from finding a value of less than $ 650,000, which was the amount of cash paid in for stock, because the opinion in that case refers to the intangible*284 assets as "the most substantial part of its capital" and "the principal contributing factor in the production of taxable income of the petitioner."
The respondent contends that the petitioner has failed to support its claimed value of the trade name "Clarence Whitman" or to show that it had any value on June 3, 1918, when acquired by it. He argues that the common stock was of such a speculative character that it was necessary to give $ 333,000 par value of the stock as a bonus to secure a loan of $ 200,000 for one year and that this fact indicates it had little or no value when issued.
In support of the claimed value of $ 1,220,996.27 the petitioner submitted evidence of the net income of Clarence Whitman & Co., for the four-year period ended May 31, 1918, and it arrived at its claimed value of the good will acquired in exchange for its common stock by allocating to the tangible assets 8 per cent of the average yearly net income and capitalizing the balance at 15 per cent. See Toledo Newspaper Co., 2 T.C. 794">2 T. C. 794.
In applying this formula, however, to the instant case, the petitioner does not take into account the important fact that it is not a successor*285 to all the assets and business of Clarence Whitman & Co. Cf. Premier Packing Co., 12 B. T. A. 637; Four Twelve West Sixth Co., 7 T.C. 26">7 T. C. 26. It is true that petitioner did succeed to the name "Clarence Whitman" and upon organization took over the accounts of Esmond Mills, Stevens *272 Manufacturing Co. and Wilkes Barre Lace Co. But the white goods end of the business of Clarence Whitman & Co. did not go over to petitioner -- it continued under the name of the American Bleached Goods Co. and retained most of the employees of Clarence Whitman & Co. In fact, only the Whitmans and a few salesmen went over with petitioner upon its organization and none of the tangible assets were transferred to petitioner. The fact that a substantial part of the good will did not go to petitioner is evidenced by the fact that Clarence Whitman & Co. in its income tax returns for the years 1918, 1919, and 1920 (during its period of liquidation) claimed good will for invested capital purposes in the amount of $ 2,917,500. Moreover, we have no record of the trade-marks or trade names used in the business or any evidence of the good will *286 attaching to the various accounts or departments incident to the business, all of which were a part of the good will of Clarence Whitman & Co.
In Rainier Brewing Co., 7 T. C. 162, we said, "The petitioner insists that the good will, as mathematically computed under an approved formula, represents the value of the trade names. Good will is an intangible, and just what goes into the cauldron to make up the sum of its ingredients is somewhat difficult to determine, but it would seem clear that the value of the trade names was not the full content of good will value attached to the business of petitioner's predecessor * * *."
In our opinion the earnings of Clarence Whitman & Co. do not constitute a proper basis for comparison. The name of Clarence Whitman did not embrace the full content of good will value of Clarence Whitman & Co., and petitioner's computation, based on the formula A. R. M. 34, does not reflect the good will value of the intangible assets acquired by petitioner June 3, 1918, in exchange for $ 1,000,000 par value of its common stock. However, the evidence submitted by petitioner does establish that Clarence Whitman had built up a very *287 successful business in white and fancy cotton goods, blankets, laces, etc., which had been marketed under his name for many years by the partnership prior to 1913 and by Clarence Whitman & Co. from 1913 to 1918, when the name was acquired by the petitioner. During this long period it had come to be known to the trade and the stability of the business to which it was attached had been established. There is no doubt that it had acquired a tremendous good will value which was in large part acquired by the petitioner. It was a substantial part of petitioner's capital investment and, obviously, the largest contributing factor in stabilizing and building up its business. From the record before us it is our opinion the intangible asset acquired by petitioner June 3, 1919, in exchange for $ 1,000,000 par value of its common stock had a value of $ 500,000. We hold, therefore, that in computing its equity invested capital for the purpose of its excess profits tax the *273 petitioner may include as property paid in for stock intangibles in the amount of $ 500,000.
We have carefully considered the argument of both parties as to the issue of res judicata. In Clarence Whitman & Sons, Inc., supra,*288 the Board of Tax Appeals found as a fact that "the trade name and good will transferred to petitioner on June 3, 1918, had a cash value at that time of at least $ 412,500." The opinion states that "the evidence fully sustains a value in excess of $ 412,500, the amount claimed by the petitioner, which is 25 per cent of the par value at which intangibles paid in for stock might be included in invested capital." It is obvious from the facts and decision in that case that the Board did not find the value of the intangibles as of June 3, 1918, but only a value to the extent of the requirements of that case. We think the issue of res judicata falls when considered in the light of the statutory requirement and the Board's rationale in relation thereto. We hold, therefore, that we are not estopped from finding the value of the assets in question and, since the value found is greater than $ 412,500, the question of whether we could find a value less than that amount becomes moot.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 712. [I. R. C.] EXCESS PROFITS CREDIT -- ALLOWANCE.
(a) Domestic Corporations. -- In the case of a domestic corporation which was in existence before January 1, 1940, the excess profits credit for any taxable year shall be an amount computed under section 713 or section 714, whichever amount results in the lesser tax under this subchapter for the taxable year for which the tax under this subchapter is being computed. * * *
SEC. 714. [I. R. C.] EXCESS PROFITS CREDIT -- BASED ON INVESTED CAPITAL.
The excess profits credit, for any taxable year, computed under this section, shall be the amount shown in the following table:
If the invested capital for the The credit shall be: taxable year, determined under Section 715 is: Not over $ 5,000,000 8% of the invested capital. Over $ 5,000,000, but not over $ 10,000,000 $ 400,000, plus 6% of the excess over $ 5,000,000. Over $ 10,000,000 $ 700,000 plus 5% of the excess over $ 10,000,000. * * * *
SEC. 718. [I. R. C.] EQUITY INVESTED CAPITAL.
(a) Definition. -- The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b) --
(1) Money paid in. -- Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital;
(2) Property paid in. -- Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. * * *
* * * *
(4) Earnings and profits at beginning of year. -- The accumulated earnings and profits as of the beginning of such taxable year.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property * * *
SEC. 30.718-1 [Regulations 109]. Determination of daily equity invested capital -- money and property paid in. -- * * *
If the basis to the taxpayer is cost and stock was issued for the property, the cost is the fair market value of such stock at the time of its issuance. If the stock had no established market at the time of the exchange, the fair market value of the assets of the company at that time should be determined and the liabilities deducted. The resulting net worth will be deemed to represent the total value of the outstanding stock. In determining net worth for the purpose of fixing the fair market value of the stock at the time of the exchange, the property paid in for such stock shall be included in the assets at its fair market value at that time.
If stock having no established market value is issued for intangible property, and it is necessary to determine the fair market value of such property, the following factors, among others, may be taken into consideration in determining such value: (a) The earnings attributable to such intangible assets while in the hands of the predecessor owner; and (b) any cash offers for the purchase of the business, including the intangible property, at or about the time of its acquisition. A corporation claiming a value for intangible property paid in for stock should file with its return a full statement of the facts relating to such valuation.
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