*2635 1. Held that petitioner comes within the provisions of section 331 of the Revenue Acts of 1918 and 1921.
2. Value of depreciable assets acquired by petitioner for stock determined.
3. Held that, for the fiscal years to which the Revenue Acts of 1918 and 1921 apply, the basis for calculation of depreciation in these proceedings is the cost of such assets to petitioner.
4. Held that under section 204(c) of the Revenue Act of 1924, the basis for calculation of depreciation on assets acquired by petitioner is the basis in the hands of the transferor of such assets.
*130 These are proceedings under Docket Nos. 16673, 24755, and 32327, duly consolidated for hearing and decision, for the redetermination of deficiencies in income and excess-profits taxes as follows:
| Docket No. | Fiscal year ending - | Deficiency |
| 16673 | Nov. 30, 1920 | $4,567.12 |
| Nov. 30, 1921 | 4,914.03 | |
| 24755 | Nov. 30, 1922 | 806.81 |
| 32327 | Nov. 30, 1923 | 1,192.23 |
| Nov. 30, 1924 | 785.99 | |
| Nov. 30, 1925 | 799.81 |
*131 *2636 The petition under Docket No. 16673 contains the following allegations of error:
(a) By reason of making an erroneous determination of the value of taxpayer's fixed depreciable asset as of the date of acquisition, the Commissioner erroneously disallowed the sum of $6,418.64 as a depreciation deduction for 1920 and $6,415.40 as a depreciation deduction for 1921.
(b) The Commissioner placed an erroneous valuation of $80,000 on the assets taken over by the taxpayer corporation as of the beginning of its business; whereas in fact the true and correct value of said assets was $123,463.43.
(c) The Commissioner erroneously deducted from invested capital the sum of $22,486.25, representing alleged intangibles; whereas in fact there were no intangibles whatsoever included in invested capital as computed by taxpayer.
The petition under Docket No. 24755 contains the following allegation of error:
(a) By reason of making an erroneous determination of the value of taxpayer's fixed depreciable assets as of the date of acquisition, the Commissioner has erroneously disallowed the sum of $6,422.02 as a depreciation deduction for 1922.
The petition under Docket No. 32327 contains the*2637 following allegation of error:
(a) The Commissioner has erroneously reduced the petitioner's deduction from gross income for the depreciation sustained during the taxable years 1923 to 1925, inclusive, by computing depreciation on an incorrect value.
At the hearing the respondent was granted leave to amend his answer to allege that the petitioner comes directly under section 331 of the Revenue Acts of 1918 and 1921.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal office at 417 Canal Street, New York City. It was organized in November, 1919, under the laws of New Jersey. On December 1, 1919, it took over the assets and liabilities of Philo-Selby Co., a *132 partnership. The business taken over was comprised of lithographing, steel and copperplate engraving, steel-die embossing, type printing, and binding. The partnership went out of existence as of November 30, 1919.
The journal register of petitioner contains the following statement:
In consideration of the entire authorized capital stock of the L. H. Philo Corporation, consisting of 800 shares at $100 ($80,000.00) L. H. Philo transfers the ownership of the business of Philo-Selby*2638 Company to L. H. Philo Corporation, consisting of the above values.
Under date of December 1, 1919, opening entries were made in the journal register of petitioner. This shows a debit entry of $129,729.49. The following credits were listed:
| Accounts payable | $6,266.06 |
| Stock | 80,000.00 |
| Notes payable | 20,000.00 |
| Paid-in surplus | 23,463.43 |
| Total | 129,729.49 |
| The debits shown were: | |
| Cash | $11,935.11 |
| Petty cash | 150.00 |
| Notes receivable (A. F. Hardy) | 50.00 |
| Accounts receivable | 19,806.53 |
| Insurance A | 194.03 |
| Insurance B | 27.97 |
| Investments | 1,459.80 |
| Raw material | 25,032.10 |
| Supplies | 725.13 |
| Steel dies | 8,169.57 |
| Steel and copper plates | 2,494.47 |
| Rolls, shelves, etc | 847.74 |
| Stones for engraving | $452.57 |
| Engraving on stones | 5,928.35 |
| Type and electrodes | 1,022.19 |
| Machinery | 16,457.50 |
| Tools and appliances | 605.20 |
| Shop furniture and fixtures | 2,900.94 |
| Office furniture and fixtures | 3,205.30 |
| Zinc plates | 3,632.05 |
| Zinc transfers | 24,632.94 |
| Total | 129,729.49 |
The amount of cash and petty cash listed was on hand December 1, 1919. It was carried over from the partnership books.
The note for $50 was collected. Very few of the accounts receivable*2639 were uncollectible. The value of the accounts receivable was about the amount shown. The receivables were carried over from the books of the partnership.
"Insurance A" was insurance on petitioner's own property. "Insurance B" was insurance on property of petitioner's customers. Both amounts listed above represented the unearned portion of the insurance carried over from the books of the partnership.
The item "Investments" represents International Nickel Co. stock. The amount shown in the statement represents its market value as of that date. It was carried over from the books of the partnership.
*133 "Raw materials" consisted of flat paper. None of it was obsolete. It was listed at cost. It was carried over from the books of the partnership.
"Supplies" consisted of oils, colors, paints and inks.
Notes payable, $20,000, were paid as follows:
| March 1, 1920 | $5,000 |
| June 1, 1920 | 5,000 |
| Aug. 31, 1920 | 5,000 |
| Nov. 26, 1920 | 5,000 |
Thomas S. Doyle, an employee of the partnership, at the instance of Philo, one of the members of the partnership, made an appraisal, in the fall of 1918, of the property of the partnership, because Philo intended*2640 buying out the interest of Selby. He found that all the property listed on the books was in place and in good working order. The working materials had always been kept in good order and in the appraisal he included them at cost. The then market value of such machinery was such as to offset depreciation which had already been charged against the original cost values on the books of account.
The value of the assets on or about November 30, 1919, was as follows:
| Steel dies | $8,169.57 |
| Steel and copper plates | 2,494.47 |
| Rolls, etc | 847.74 |
| Stones | 452.57 |
| Engravings on stones | 5,928.35 |
| Type and electros | 1,022.19 |
| Tools and appliances (machinery and motors) | 17,062.70 |
| Shop furniture and fixtures | $2,900.94 |
| Office furniture and fixtures | 3,205.30 |
| Zinc plates | 3,632.05 |
| Zinc transfers | 24,632.94 |
| Total | 70,348.82 |
The valuations were made as assets of a going concern. In the latter part of 1919 it took three or four months to obtain new machinery and the secondhand machinery was held at such a high price that it was not advisable to buy it.
The item "steel dies" listed above includes a total of 3,017 dies. Dies are made for each individual order - as a rule*2641 for letterheads, cards, etc., but not for wedding announcements and very seldom for business announcements. The dies made for letterheads are sometimes used for work other than originally intended, as, for instance, a particular scroll or design. In the case of business announcements there are often follow-up orders to take care of some forgotten people to whom the customer wishes to send one of the announcements.
Wedding announcements and business announcements were engraved on copper plates and not on dies.
In all cases where orders were taken for wedding announcements, the cost of engraving on copper plates was charged to expense of each order and was not taken into the assets of the company. Consequently, these engravings were not listed in the appraisal.
*134 All dies were included in the appraisal at cost. The dies listed in the appraisal are not obsolete. At least 95 per cent of them are used for reorders.
Steel and copper plates were made for customers who have stayed with the Philo concern for a long period of time and they were all of permanent use to those customers. The percentage of reorders from them is as great as is the percentage of reorders*2642 from the steel dies.
Electros were made for stock legal forms and there was no change in the general wording of them from year to year. The steel and copper plates and the electros are of full value even after their initial runs have been completed.
All plates were included in the appraisal at cost.
The lithographic stone is planed and polished and is then engraved. It is then a "master" and from it impressions are made on transfer plates. The stones can be used any number of times. The transfer plate is the one actually used for printing. All engravings on stone are made to order but there are often times that they can be used in part or in whole on other jobs. If the engraving is obsolete, the stone can be repolished and reengraved. About 95 per cent of the lithographic orders are repeat orders. The appraisal did not include any value for engravings for special orders. These were charged to the expense of the particular order.
The various items of machinery, motors and furniture ordered by petitioner were purchased at various times and it is impossible to determine the dates.
Zinc plates receive the engravings from the stones. These plates and the transfers*2643 on them were included in the appraisal. If the plates are not used again the transfers thereon may be erased and the plates is ready for another transfer.
Steel dies, steel and copper plates, engravings on stone, electros, zinc plates and zinc transfers could be sold to the customer direct, if not to another concern in the same line of business as petitioner. About 95 per cent of the various kinds of plate, engravings, electros and transfers that were taken over from the partnership by the petitioner were used appreciably by the petitioner.
OPINION.
SIEFKIN: The petitioner contends that for each of the years in controversy the respondent erred in determining the cost value of depreciable assets upon which to compute the allowable deductions for depreciation. No question as to the rate of depreciation was raised. With regard to the fiscal years ended November 30, 1920, and November 30, 1921, the petitioner raises error as to the value for invested *135 capital purposes allowed by respondent for assets paid in for capital stock.
The evidence discloses that the petitioner was organized in November, 1919, and took over the business formerly conducted by the Philo-Selby*2644 Co., a partnership. Evidence was introduced indicating that Philo, one of the members of the partnership in 1918, intended buying out the interest of Selby, the other member of the partnership. A statement upon the books of the petitioner indicates that Philo did, in fact, buy out Selby's interest, and that he, Philo, turned over all the assets formerly belonging to the partnership to the petitioner for its entire authorized capital stock, consisting of 800 shares at $100 par value per share.
Section 331 of the Revenue Acts of 1918 and 1921 provides:
In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received; * * *.
It is evident, then, that the petitioner*2645 may not include in its invested capital any greater value for the assets which it received than Philo, himself, would have been allowed to include. Since we have no evidence as to the value which would have been allowable to Philo, the respondent's determination must be upheld.
The evidence discloses that depreciable assets of a value of $70,348.82 were paid in to the petitioner for capital stock. We have held that under the Revenue Acts of 1918 and 1921, the basis for the calculation of depreciation is the cost to the taxpayer. Docket No. 32327 refers to the fiscal years 1923, 1924, and 1925, but the record does not disclose when such fiscal years began or ended. We are not informed as to the basis used by the respondent in determining depreciation, but upon the redetermination, depreciation for the fiscal years ended November 30, 1920, November 30, 1921, November 30, 1922, the fiscal year 1923, and that part of the fiscal year 1924 which comes under the provisions of the Revenue Act of 1921, should be computed upon a basis of $70,348.82.
The Revenue Act of 1924 provides in part:
SEC. 203. (h) As used in this section and sections 201 and 204 -
(1) The term "reorganization" *2646 means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its *136 stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
* * *
SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, *2647 then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * *.
* * *
(c) The basis upon which depletion, exhaustion, wear and tear, the obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, * * *.
It is clear that immediately after the transfer of the assets in question to the petitioner an interest of more than 80 per cent in such property remained in Philo. The basis for the calculation of depreciation upon such assets therefore should be the same as it would be in the hands of Philo. Since we are not informed as to that basis, the determination of the respondent with regard to depreciation for the fiscal year 1925 and that part of the fiscal year 1924 which is covered by the Revenue Act of 1924, must be approved.
Judgment will be entered under Rule 50.