*4194 Certain intangibles acquired by petitioner in 1898 were not acquired through the issuance of capital stock therefor, and, therefore, the limitations provided in section 326(a) with respect to intangibles paid in for stock are not applicable.
*84 The notice to the petitioner, dated June 30, 1925, from which the appeals for 1918 and 1919 were taken, showed the action taken by the Commissioner on abatement claims filed against additional income and profits tax assessed in 1920 as follows: 1918, abatement claim $108,590.02, allowed for $80,098.32 and rejected for $28,491.70; and 1919, abatement claim $88,439.83, allowed for $27,445.28 and rejected for $60,994.55. Appeal was also filed for 1917, which shows an overpayment of tax, and as to this year the petitioner concedes that the Board has no jurisdiction other other the extent to which a consideration of this year may be necessary to a determination of the deficiencies in the subsequent years. Likewise, an appeal was filed as to 1916, but the issue*4195 involved therein, inadequate depreciation, was waived by the petitioner at the hearing. The petitioner also waived its claim for additional depreciation for the other years on appeal. A separate petition was filed on account of 1920 which showed a deficiency of $39,387.60. The appeals were consolidated for hearing and decision.
FINDINGS OF FACT.
Prior to 1898, there were in existence various envelope manufacturing concerns operating as competitors. The business of the companies was badly disorganized and failures frequently resulted. Dean & Shibley, brokers and promoters of Providence, R.I., conceived the idea of consolidating these concerns into one envelope manufacturing company.
Accordingly, during the latter part of 1897 and the early part of 1898, Dean & Shibley acquired options for the purchase of the physical assets, patents, trade-marks and good will of the following envelope companies:
*85 Logan, Swift & Brigham Envelope Co., Worcester, Mass.
Whitcomb, Envelope Co., Worcester, Mass.
W. H. Hill Envelope Co., Worcester, Mass.Holyoke Envelope Co., Holyoke, Mass.
White Corbin Co., Rockville, Conn.
Plimpton Mfg. Co., Hartford, Conn.
Morgan*4196 Envelope Co., Springfield, Mass.
Springfield Envelope Co., Springfield, Mass.
P. P. Kellogg Co., Springfield, Mass.National Envelope Co., Waukegan (North Chicago), Ill.
On June 30, 1898, the petitioner was organized as a corporation under the laws of the State of Maine with an authorized capital stock of $5,000,000, of which $4,000,000 was preferred and $1,000,000 was common. In addition to securing options for the purchase of the various concerns, Dean & Shibley also procured contracts for the purchase of the stocks and bonds of the petitioner, substantially all of both to be delivered if, as and when the properties were turned over. The greater part of these contracts were with the individuals owning stock or interests in the separate companies. Dean & Shibley arranged with the Old Colony Trust Co., transfer agents of the petitioner where the transaction was to be effected, for the certification of their check for $4,499,500, which enabled Dean & Shibley to subscribe for the greater part of the preferred stock and three-fourths of the common stock in their own name, the stock to be issued to them or their appointees.
By resolution of its board of directors dated*4197 August 12, 1898, the petitioner voted to accept Dean & Shibley's subscription for $3,749,700 par value of preferred stock and $749,800 par value of common stock at par, the certificates to be issued to them or their appointees on payment in cash of the amount of said subscription.
On August 18, 1898, the parties met in the offices of the Old Colony Trust Co. where the transaction was substantially completed. Dean & Shibley delivered to the petitioner their certified check of $4,499,500 and the petitioner in turn ordered the Old Colony Trust Co., as transfer agent, to deliver the preferred and common stock to Dean & Shibley or their appointees in accordance with their subscriptions. Dean & Shibley directed the Old Colony Trust Co. to issue to the various persons and corporations who had subscribed to them for these securities, if, as, and when deliverable and they were accordingly issued direct. These subscriptions were payable at the Old Colony Trust Co., and Dean & Shibley instructed the Old Colony Trust Co. to credit their (Dean & Shibley's) account with the amount of these subscriptions which they (Dean & Shibley) had procured for the shares of the petitioner. Prior to this*4198 time, $500 in cash had been received from the original incorporators in payment *86 for three shares of preferred stock and two shares of common stock.
On August 12, 1898, and prior to the foregoing transaction, the petitioner adopted the following resolution:
That this corporation purchase of Messrs. Henry B. Dean and John A. Shibley, of Providence, Rhode Island, co-partners under the firm name of Dean & Shibley, for a price not exceeding six million, two hundred fifty thousand dollars, ($6,250,000.) all that certain property, assets, business and goodwill of each of the following named corporations, persons and firms respectively, which are described in and intended to be conveyed by their respective deeds and bills of sale, forms of which have been presented to this meeting, and which are to be executed and delivered to this company as the appointee of Messrs. Dean & Shibley, to wit: [There were then enumerated the various parties who were to transfer properties and the properties to be conveyed.]
At the same meeting on August 12, 1898, this further resolution was adopted:
That of the purchase price of said property, Four million two hundred fifty thousand dollars, *4199 ($4,250,000) thereof be paid in cash, and the balance in bonds of this Company to be issued pursuant to vote of the stockholders, passed August 9th, 1898, and the Treasurer is hereby authorized to pay said amount of cash out of the Treasury of the Company to said Dean & Shibley, or their order.
Accordingly, on August 18, 1898, the United Stated Envelope Co. delivered to Dean & Shibley at the Old Colony Trust Co. its check for $4,250,000 and issued to Dean & Shibley or their appointees its first mortgage bonds in an aggregate amount of $2,000,000. Thereupon, the properties, assets, business and good will of the 10 envelope companies were conveyed and transferred on August 18, 1898, to the United States Envelope Co. as appointee of Dean & Shibley. By appropriate deeds and bills of sale, the officers and directors of and the persons beneficially interested in the 10 envelope companies transferred and conveyed all of the assets, including the good will, of the said companies to the United States Envelope Co. as appointee and grantee of Dean & Shibley, and at the same time either executed a separate agreement or included a provision in the bill of sale whereby they agreed not to enter*4200 into a competitive business for a period of five years.
The general account of Dean & Shibley on the books of the Old Colony Trust Co. for August 18, 1898, shows checks and deposits by Dean & Shibley on that date of the following amounts:
| Checks | Deposits |
| $2,846,422.00 | $438,000.00 |
| 4,499,500.00 | 103,465.60 |
| 2,595,685.00 | |
| 4,286,698.63 | |
| 7,345,922.00 | 7,423,849.23 |
*87 The item of $4,286,698.63, shown in the foregoing deposits, is made up of the check of $4,250,000 made payable to Dean & Shibley by the petitioner on account of the assets of the various companies, an amount of $18,198.63 which is described in the next paragraph of these findings, and an additional amount of $18,500.
The bills of sale of personal property provided that these assets and the businesses of eight of the concerns should be taken over as of January 1, 1898, of one of the concerns as of April 18, 1898, and the other as of July 1, 1918. On August 15, 1898, petitioner accepted an offer of Dean & Shibley to pay them (Dean & Shibley) $18,198.63 in consideration for the retention by the petitioner of the profits of the various concerns from the date as of which the properties*4201 were purchased to the date when the properties were turned over to the petitioner. The offer of Dean & Shibley stated that under existing arrangements these profits were to be collected by the petitioner for account of Dean & Shibley. The offer, which was accepted, permitted the petitioner to retain these profits and provided that they should become a part of petitioner's surplus for use in the payment of dividends. A further condition of the offer which was likewise accepted was that during the first year of petitioner's operations dividends should be paid upon a quarterly instead of a semiannual basis.
Additional evidence was furnished as to entries made on account of Dean & Shibley's check to petitioner of $4,499,500, as follows:
1. The certified check account of the Old Colony Trust Co. was charged with a certified check on August 18, 1898, in the amount of $4,499,500.
2. The petitioner deposited the check for $4,499,500 with the Old Colony Trust Co. on August 18, 1898, and received credit therefor.
3. The account of the petitioner on the books of the Old Colony Trust Co. on August 18, 1898, shows a deposit on that day of $4,499,500.
4. The journal of the petitioner*4202 records a payment on August 18, 1898, by Dean & Shibley of $4,499,500 for the said preferred and common shares of capital stock of that company.
5. The "Capital Stock Account" of the petitioner shows the issuance of preferred and common stock to Dean & Shibley as follows: July 21, 1898, preferred, $300 and common, $200; and August 18, 1898, preferred, $3,749,700 and common, $749,800, or a total of $4,500,000.
6. The account of petitioner with "Dean & Shibley" shows a sale to Dean & Shibley on August 18, 1898, of three shares of preferred and two shares of common stock for $500 and 37,497 shares of preferred and 7,498 shares of common stock for $4,499,500.
The statement of the financial condition of the Old Colony Trust Co. at the close of business on August 17, 1898, showed that that company had more than sufficient resources in the nature of loans, investments and cash to cover the certified check of $4,499,500.
Upon the carrying out of the resolution of the petitioner for the acquisition of the various properties of the 10 concerns, asset accounts *88 were set up on the books of the petitioner in the amount of $3,014,119,27 on account of tangible assets which*4203 were carried in this amount on the books of the companies whose assets were purchased, and in the amount of $3,235,880.73 on account of "Good-will, Trade Marks and Patents."
The outstanding capital stock of the petitioner on January 1, 1917, and March 3, 1917, was $4,750,000.
OPINION.
LITTLETON: The only issue in this case is whether at the date of organization of the petitioner the intangibles which it then acquired were paid in for stock.
The respondent contends that when we look through the form to the substance of the transaction, the petitioner acquired intangibles through the issuance of stock therefor, and, therefore, the limitations provided in section 326(a)(4), Revenue Act of 1918, with respect to property so acquired, should be applied. On the other hand, the petitioner contends that its stock was not issued for the properties of these various companies which were acquired, but there were, in fact, two separate and distinct transactions, as follows:
(a) The issuance of 37,497 shares of preferred and 7,498 shares of common stock for cash, $4,499,500, and
(b) The purchase by the petitioner of the assets (both tangible and intangible) of the ten envelope companies*4204 for $4,250,000 cash and $2,000,000 of its bonds;
and that, therefore, its intangibles would not be subject to the limitations provided in the section of the statute referred to above. No question is raised as to the value of the intangibles when acquired, the whole question being as to their manner of acquisition.
It is, of course, true that upon the completion of the transaction in question the petitioner had issue its stock and had acquired assets, but from this can we say that therefore the assets were paid in for stock? The transaction through which the assets were transferred to the petitioner was a transaction between the petitioner and Dean & Shibley and not between the petitioner and these several companies. The record does not show, nor is any contention made, that Dean & Shibley were in any sense the agents of either the petitioner or these vendor companies. That the petitioner, a corporation, was an entity separate and distinct from its stockholders, is so well established that discussion thereof is unnecessary. *4205 . The transaction in question took place in 1898, long before an excess-profits tax could have been remotely contemplated and, therefore, it can not be said that the method pursued was availed of for purposes of tax *89 evasion. See . We have, therefore, the situation where the petitioner, in its corporate capacity, entered into a contract for the issuance of its stock to two individuals for cash and also entered into a separate contract under which it purchased certain assets for cash and bonds. Both contracts were made pursuant to corporate resolutions, and both contracts were carried out as authorized. To say that form should be disregarded and substance only considered to the end that the two contracts and the two transactions become one contract and one transaction, would be taking a position which we regard as untenable. The Board said in :
The argument that we must regard substance and not form is elusive, for its adoption leaves us confronted with the equally difficult task of distinguishing*4206 form from substance.
In these proceedings the parties were seeking to effect the incorporation of the petitioner in such a manner that it would conform to the laws of the State where it was being incorporated and also have the petitioner come into ownership of the assets of the several vendor companies. There was "form" involved in each transaction, but there was likewise "substance," which was equally important. Cf. .
At the hearing, some point was made of the circumstances surrounding the certification of the check by the Old Colony Trust Co. on behalf of Dean & Shibley and whether there was cash or collateral back of this transaction. While the record fails to show what the arrangement was between the bank and the brokers, there is positive evidence to the effect that the check was properly certified by the bank and that the bank had ample funds with which to meet the obligation which was thereupon imposed upon it. When, therefore, the corporation issued its stock for this check, it would be idle to say that such stock was not being issued for the equivalent of cash or that such stock was being issued for assets*4207 which this check was later used to acquire. Not only was each transaction complete in itself, but each transaction partook of a form and regularity which we can not ignore and say that because the money which was received upon the issuance of the stock was used to acquire assets, the two transactions were one.
The Board has had cases before it on other occasions where the taxpayers were seeking to have included in their invested capital intangibles which came to them at the date of incorporation, but which, for reasons similar to these which actuated this petitioner in adopting its particular form of organization, were shown not to have had stock issued therefor. ; ; . *90 In these cases we denied the contention advanced that these taxpayers be allowed to say that something was done which was contrary to the acts and expressed intentions of the parties, stating in the Rubens case that:
The parties themselves deliberately and with unmistakable clearness chose to have the tangible property alone paid in for capital*4208 stock and the intangible property separately treated. This was their manifest intention and it was legally fulfilled. The fact that a subsequent revenue law makes their choice less fortunate to them than it might otherwise have been and imposes upon the corporation a greater tax than if another course had been adopted, can not serve to justify an interpretation of the transaction at variance with the clear language of the instruments by which it was performed.
In the instant case the method adopted by the petitioner was fortunate, and it would be inconsistent to deny to it the benefits which flow to it on account thereof. The rights and liabilities of the parties were fixed by the contracts and agreements which the parties entered into in order to bring about the ends sought, and we must determine the petitioner's tax liability on this basis, and not on the basis of a course of procedure not adopted, which might have accomplished the same result, and which would have resulted in a greater tax to the Government under statutes which could not have been foreseen at that time.
In view of the foregoing, the Board is of the opinion that the transactions in 1898 through which the*4209 petitioner acquired the assets of the several envelope companies in question were not transactions wherein stock was issued for these assets, and, therefore, the limitations provided in section 326(a)(4), Revenue Act of 1918, with respect to the acquisition of intangibles for stock, are not applicable.
Judgment will be entered on 10 days' notice, under Rule 50.