*3020 Respondent's action in reducing invested capital approved for failure to adduce sufficient evidence of the acquisition of good will in the amount alleged.
*148 This proceeding is for the redetermination of deficiencies in income and profits taxes of $3,179.17 for 1920 and $37.50 for 1921. The question presented is whether the respondent erred in reducing petitioner's invested capital for 1920 to $68,812.30, representing the amount paid by it for the one-fourth interest of Pater A. Welch in the partnership of Welch, Holme & Clark.
FINDINGS OF FACT.
The petitioner is a New Jersey corporation with its principal office in New York City, where it is engaged in handling raw materials for soap manufacturers.
The business acquired by petitioner originated in 1838, and until its incorporation in 1892 was operated as a partnership doing business under the firm name and style of Welch, Holme & Clark. The partners immediately preceding incorporation consisted of Andrew M. Sherrill and Moses E. Clark, owning a three-fourths interest in the business, *3021 and Peter A. Welch, who held the remaining one-fourth.
In February, 1892, the business was incorporated as the Welch, Holme & Clark Co., the present petitioner, with capital stock of $100,000, par value $100 per share. The capital stock was subscribed for as follows: Andrew M. Sherrill, 878 shares; Moses E. Clark, 120 shares; F. G. E. Mohrmann, one share; and Halcyon M. Close, one share. One share was issued to each of the incorporators for the purposes of organization and the remaining shares were issued as hereinafter set forth.
*149 At the first meeting of the incorporators resolutions were adopted authorizing the directors to acquire all the right, title and interest of Sherrill and Clark in the partnership, and also the one-fourth interest of Welch in the said partnership.
At a directors' meeting held on February 26, 1892, Sherrill and Clark submitted the following proposition:
To the WELCH, HOLME & CLARK COMPANY,
GENTLEMEN: We, the undersigned, ANDREW M. SHERRILL and MOSES E. CLARK, hereby offer to sell and transfer to you all of our right, title and interest in and to the copartnership business, assets and property of every kind, including the good will*3022 and firm name of the late firm of Welch, Holme & Clark of the City of New York, and our and each of our individual interests and good will in the line of business heretofore carried on by said firm, with the leases and leasehold interests in the offices and place of business of said firm, and to ourselves enter into the service of your company and to give our exclusive attention and care to the promotion of the business heretofore carried on by said late firm, for such salaries as we may become entitled to by resolution of the Board of Directors, or by the By-laws of your company, and in every way to promote the interests of your company and its business; and we and each of us expressly agree if this offer shall be accepted, that the undersigned Sherrill will not within five years, and the undersigned Clark will not within one year, engage in the business in which said late firm of Welch, Holme & Clark has been engaged or in any part thereof, within the City and County of New York, the Counties of Kings, Queens, Richmond or Westchester in the State of New York, or in the Counties of Hudson or Essex in the State of New Jersey. All of which we offer, in consideration of the issue of*3023 all the shares of the capital stock of your company, except for shares issued for cash heretofore, amounting to the sum of Ninety nine thousand six hundred dollars to the respective subscribers for such stock, as full paid stock, for the purchase of the aforesaid property, which is of the value of said capital stock.
Dated New York City, February 26th, 1892.
ANDREW M. SHERRILL.
MOSES E. CLARK.
This proposition was accepted by the directors as recorded in the following minutes.
WHEREAS, Messrs Andrew M. Sherrill and Moses E. Clark, the successors of the firm of Welch, Holme & Clark, have in writing offered to this company, to transfer to it their and each of their separate and individual interests and good-will in the business of the firm of Welch, Holme & Clark, and the leases of the office and place of business of the said firm, and the exclusive right to use the firm name as a part of the name of this corporation, exclusive of the separate interest of Peter A. Welch, in said firm property, and to give their exclusive attention and care to the promotion of the business of this company, for such salaries as they may be entitled to by the resolution of this board, or*3024 by the by-laws of the company, and to promote the interests of the company in every way in its business: and
WHEREAS, the said property so offered is necessary for the business of this company, and the said separate and individual interests are, in the opinion *150 of the members of this board and of all the stockholders of this corporation, well and reasonably worth the price for which it is offered:
Now Therefore, IT IS RESOLVED, that the aforesaid offer of the said Sherrill and Clark shall be and hereby is accepted, and the President and Treasurer of this Company are hereby authorized to accept and receive from them the proper and legal transfer of the said separate interests of said Sherrill and Clark in and to the property and assets aforesaid, and in payment thereof to issue to Andrew M. Sherrill and Moses E. Clark, the shares of the capital stock of this company subscribed by them respectively and not heretofore paid up in cash, to wit: Andrew M. Sherrill, 877 shares, Moses E. Clark, 119 shares, as fully paid up shares for said property purchased.
The assets acquired from Sherrill and Clark were recorded in petitioner's books of account on March 1, 1892, as follows: *3025
| By Transfer Account, W.H. & C | $37,071.13 |
| Cash Account | 4,572.31 |
| Bills Receivable | 5,829.51 |
| Merchandise Account | 15,259.35 |
| Furniture & Fixtures | 1,300.00 |
| Horses, Trucks, & C | 3,880.00 |
| Produce Ex. certificates | 900.00 |
| Good Will a/c | 31,187.70 |
| 100,000.00 |
Petitioner's capital stock account was credited with $100,000 on March 1, 1892.
A second proposition with respect to the one-fourth interest of Peter A. Welch was submitted to the directors at their meeting on February 26, 1892, by John D. Wing. This proposition was as follows:
To the WELCH, HOLME & CLARK COMPANY,
GENTLEMEN: I, the undersigned, hereby offer to sell and transfer to you, all the undivided interest in the copartnership assets, business and property of the firm of Welch, Holme & Clark, heretofore doing business at Nos. 381 to 383 West Street in the City of New York, of Peter A. Welch one of the members of said firm, which was assigned and conveyed to Andrew M. Sherrill, another member of said firm, by said Welch, by bill of sale dated February 18th, 1892, and thereafter assigned and transferred to me by said Sherrill by his bill of sale dated February 18th, 1892, for the price of Sixty*3026 six thousand three hundred and fifty seven dollars and four cents, which sum may be secured to be paid to me by you by your sixteen promissory notes dated March 1st, 1892, as follows:
| Due September 1st, 1892 | $4,784.82 |
| Due March 1st, 1893 | 4,629.81 |
| Due September 1st, 1893 | 4,554.82 |
| Due March 1st, 1894 | 4,479.81 |
| Due September 1st, 1894 | 4,404.82 |
| Due March 1st, 1895 | 4,329.81 |
| Due September 1st, 1895 | 4,254.82 |
| Due March 1st, 1896 | 4,179.81 |
| Due September 1st, 1896 | 4,104.82 |
| Due March 1st, 1897 | 4,029.81 |
| Due September 1st, 1897 | $3,954.82 |
| Due March 1st, 1898 | 3,879.81 |
| Due September 1st, 1898 | 3,804.82 |
| Due March 1st, 1899 | 3,729.81 |
| Due September 1st, 1899 | 3,654.82 |
| Due March 1st, 1900 | 3,579.81 |
| 66,357.04 |
*151 And also that each of the said notes shall be endorsed by some individual of responsibility satisfactory to me, or shall be otherwise secured in manner satisfactory to me.
It is understood that I have not assumed any debts or liabilities of said firm, but all such debts and liabilities have been assumed by said Andrew M. Sherrill and Moses E. Clark, members of said late firm of Welch, Holme & Clark, and are payable out of the assets of said*3027 firm.
Dated New York February 26" 1892.
JNO. D. WING.The minutes record the following action by the directors with respect thereto:
Said offer was read by Messrs. Close and Mohrmann, the Directors present, and after due consideration and discussion, on motion of Mr. Mohrmann, duly seconded, the following preamble and resolution were unanimously adopted:
WHEREAS, Mr. John D. Wing has in writing offered this company to transfer to it all the undivided interest in the copartnership assets, business and property of the firm of Welch, Holme & Clark, heretofore doing business at Nos. 381 to 383 West Street, in the City of New York, which belonged to Peter A. Welch, one of the members of said firm, which was assigned and conveyed to Andrew M. Sherrill, another member of said firm by said Welch, by bill of sale dated February 18, 1892, and thereafter by said Sherrill assigned and transferred to said Wing, by his bill of sale dated February 18th. 1892, copies of which bill of sale are herewith submitted, all for the price of Sixty six thousand three hundred and fifty seven dollars and four cents ($66,357.04) to be secured to be paid by the sixteen (16) promissory notes of this*3028 company to bear date March 1st. 1892, for the amounts and to become due on the dates, as follows:
| Due September 1st. 1892, for | $4,784.82 |
| Due March 1st. 1893 | 4,629.81 |
| Due September 1st. 1893 | 4,554.82 |
| Due March 1st. 1894 | 4,479.81 |
| Due September 1st. 1894 | 4,404.82 |
| Due March 1st. 1895 | 4,329.82 |
| Due September 1st. 1895 | 4,254.82 |
| Due March 1st. 1896 | 4,179.81 |
| Due September 1st. 1896 | 4,104.82 |
| Due March 1st, 1897 | 4,029.81 |
| Due September 1st. 1897 | 3,954.82 |
| Due March 1st. 1898 | 3,879.81 |
| Due September 1st. 1898 | 3,804.82 |
| Due March 1st. 1899 | 3,729.81 |
| Due September 1st. 1899 | 3,654.82 |
| Due March 1st. 1900 | 3,579.81 |
| 66,357.04 |
WHEREAS, the said property and interest so offered is necessary for the business of this company, and is in the opinion of the members of this board, and of all the stockholders of this company, well and reasonably worth the price for which it is offered:
Now Therefore, IT IS RESOLVED, that the aforesaid offer of the said Wing be and hereby is accepted, and the President and Treasurer of this company are hereby*3029 authorized to receive and accept from said Wing the bill of sale and transfer in the form herewith submitted to the separate interest which belonged to Peter A. Welch in and to said property and assets of Welch, Holme & Clark, and in payment thereof to execute the notes of this company as above specified, and deliver the same to said Wing, after procuring such endorsement thereon as may be necessary as above provided.
On motion of Mr. Mohrmann duly seconded, it was ordered that the two aforesaid offers for the sale of property to this company, with the respective resolutions adopted relative thereto, be spread upon the record and minutes of the proceedings of this meeting.
The President submits to the board and reads the following documents relating to the transfer to the company of the title of the property in the assets of the firm of Welch, Holme & Clark, as ordered by the foregoing resolutions:
1. Memorandum of agreement between P. A. Welch, A. M. Sherrill and M. E. Clark, for the dissolution of the firm of Welch, Holme & Clark, and settling and adjusting the accounts of the firm, and authorizing the transfer of the assets.
2. Proposed bill of sale by A. M. Sherrill*3030 and M. E. Clark to this company, assigning and transferring to the company all of their individual separate interests in the firm assets exclusive of the separate interest of Peter A. Welch.
3. Proposed bill of sale by Peter A. Welch to Andrew M. Sherrill, of all his separate interest in and to the firm assets of Welch, Holme & Clark, other than claims charged to profit and loss on the books of account and claims in process of collection.
4. Proposed bill of sale of the same assets and interest of Peter A. Welch in and to the said firm, by said Sherrill to John D. Wing.
5. Proposed bill of sale by John D. Wing to this company, assigning and transferring to the company all of the same assets and interest as the last preceding proposed bill of sale.
After the same had been read by the members of the board present, on motion of Mr. Mohrmann, duly seconded, the aforesaid several instruments in writing were duly approved as to their form and terms, and the president was ordered and directed to cause the said instruments to be all duly executed, and when duly executed, to accept the delivery thereof for and on behalf of this company, and the President and Treasurer of the*3031 company were further ordered and directed on like motion to issue proper certificates of stock, and promissory notes of the company, as called for in the aforesaid resolutions, and to do all other matters and things necessary and requisite to be done in completing the said purchases of assets as hereinbefore directed.
Pursuant to the acceptance of Wing's proposal the corporation executed the 16 promissory notes in the amounts and with the due dates provided for in the resolutions adopted by the directors. The notes were executed in favor of Wing and were endorsed by Sherrill. *153 Separate entries were made on petitioner's books of account for each note, all of which were credited to the bills payable account. The entry for the first note, which is typical of the entries for each of the others except as to due date and amount, was as follows: "March 1, 1892, A. M. Sherrill, due Sept. 1st, 1892, $4,784.82." The offsetting entry was a debit to the good will account as follows: "March 1, 1892, Bills Payable, $66,457.04," the difference of $100 being unaccounted for, except as a credit entry to bills payable dated November 5, 1891. The notes were regularly retired by the*3032 corporation, the last one being retired in December, 1899, prior to its due date March 1, 1900. The book entries representing the retirement of each note were debits to the bills payable account and credits to cash account.
The petitioner included in invested capital for 1920, $31,187.70 for good will acquired in exchange for its capital stock, and $68,812.30 as good will acquired for cash. The respondent allowed $25,000 of the amount paid in for stock and excluded the remainder from invested capital. For 1921 the respondent increased petitioner's net income by $375, representing interest on Belgian bonds.
OPINION.
MORRIS: The sole question presented for our consideration is whether the respondent erred in reducing the petitioner's invested capital for 1920 by $66,357.04, representing the amount paid by it for the one-fourth interest of Peter A. Welch in the partnership of Welch, Holme & Clark. The reduction of invested capital in controversy appears in respondent's deficiency notice and also in the petitioner's allegation of error as $68,812.30, which amount we find, from the evidence and statement of counsel, to be erroneous.
It is true that the petitioner acquired*3033 certain assets, including $31,187.70 of good will, representing the three-fourths interest of Sherrill and Clark in the partnership of Welch, Holme & Clark, for $100,000 of its capital stock, and furthermore, that Welch's interest, according to the evidence before us, was not included as a part of that transaction, but it is inconceivable to us that Welch, the owner of the remaining one-fourth interest in the partnership, owned only an intangible asset in the form of good will, which was acquired, as the petitioner contends, from Welch's assignee for $66,357.04. Welch, we must assume, for there is nothing before us to the contrary, was a general partner and an unqualified owner of one-fourth of all the assets of the partnership of which he was a member, including tangible as well as intangible property. It is, therefore, appropriate to inquire, in the absence of a clear record of the transaction, just how Welch became the owner of $66,357.04 of the partnership's good *154 will, which is in addition to good will amounting to $31,187.70 acquired by the petitioner from Sherrill and Clark in consideration of its capital stock, and furthermore, what happened to the tangible assets*3034 which belonged to Welch, as the one-fourth owner of all the assets of the copartnership. The minutes of the stockholders' meeting recording the terms and conditions of the transactions with Welch's assignee recite that the undivided interest "which belonged to Peter A. Welch" was purchased by the petitioner for $66,357.04, payable in promissory notes. There is no direct evidence that the partnership of Welch, Holme & Clark was the possessor of good will to the extent claimed, nor is there any satisfactory evidence that the amount in question represents good will. In fact, on the contrary, the documentary evidence indicates to us that the sum in question was paid for the undivided interest of Welch in the partnership, which must have included something other than what the petitioner is urging as good will. The mere fact that this amount was carried in the good will account by the petitioner is not conclusive nor is it sufficiently pursuasive to satisfy us that it actually represented good will, particularly in view of the other circumstances evidenced by the record from which we must draw other and more logical conclusions.
Petitioner's counsel contends further that since the*3035 sum of $66,357.04 was actually paid and since that amount was reflected in its surplus account on January 1, 1920, that the respondent should have included said amount in invested capital as earned surplus. In answer to this contention it is only necessary to say that the issue as defined by the pleadings, to which we must confine ourselves, is the existence or nonexistence of good will and the failure to prove as alleged must be fatal.
For failure to adduce sufficient evidence of the acquisition of good will in the amount alleged, the findings of the respondent must be approved.
The deficiency of $37.50 asserted by the respondent for 1921 has been conceded by the petitioner.
Judgment will be entered for the respondent.