*2395 1. Claim for special assessment on account of intangible assets acquired by a corporation at the time of its incorporation, but not capitalized, disallowed for lack of proof establishing such right.
2. A high rate of earning during an unusually prosperous year, alone, is not evidence of abnormalities warranting special assessment.
3. Respondent's adjustments of invested capital on account of unpaid Federal taxes for prior years, paid in the taxable year, approved.
*1360 This is a proceeding for the redetermination of a deficiency in income and profits tax for the fiscal year ended March 31, 1921, in the sum of $344.91, which the petitioner seeks to vacate, and further contends for allowance of its claim for refund of taxes paid in the sum of $32,000. Two issues are presented for determination, viz, (1) the right of petitioner to have its profits tax determined under the provisions of section 328 of the Revenue Acts of 1918 and 1921, and (2) the legality of the Commissioner's act in reducing petitioner's invested capital on account of taxes for*2396 prior years paid in 1920.
FINDINGS OF FACT.
The petitioner is a Virginia corporation and since its incorporation on April 3, 1896, has been engaged in the business of docking and undocking sea-going vessels applying for bunker coal at the piers owned by the Norfolk & Western Railway Co. at Lambert's Point in Norfolk Harbor, Virginia. It was so engaged during the taxable year.
The business of docking and undocking vessels at these piers is in no way connected with the process of coaling them, but is carried on through separate contracts made as and when needed by the officers *1361 of each boat requiring such service, and the individual operators of tugs in the harbor presenting themselves for employment at the time.
For more than ten years prior to the incorporation of the petitioner John Twohy, one of its organizers, had been in the employ of the Norfolk & Western Railway Co. in charge of its coal piers and the stevedores employed in the coaling of vessels at Lambert's Point. Taking advantage of the opportunity his position afforded him of gaining first contact with vessels in need of docking services, and the free use of the company's piers at which to tie tugs*2397 held in reserve for immediate use, Twohy, aside from his employment with the railway company, carried on a separate business of supplying vessels being coaled at these piers with such service. Evidence as to the terms of Twohy's contract of employment with the railway company, as well as to the details of his operating arrangement with his numerous associates interested in the side venture of docking and undocking vessels, is entirely lacking. However, in all, four tugs were employed, which were separately owned, in varying interests, by some thirty-three persons. No records were preserved to show the earnings from this business or disbursements to its shareholders during any of the years prior to the incorporation of the petitioner.
On April 3, 1896, the owners of the four tugs employed as hereinbefore mentioned by Twohy at Lambert's Point piers caused to be organized the petitioner, for the purpose of continuing the said business theretofore established by him through the agency of a corporation. These tugs on said date were valued by experienced and reliable appraisers at $83,200, and at such value were conveyed to the corporation in full payment of its capital stock which*2398 was fixed at this amount by its charter. The capital stock was divided into 832 shares of a par value $100of, each, of which 140 shares were issued to Twohy, who became the petitioner's first president. The remaining shares were issued to the other incorporators in accordance with their respective interests as determined by the agreed exchange value of their rights in the property conveyed to the corporation. No consideration was given to intangibles in payment of capital stock, and no stock was issued for intangibles. Twohy assumed control of the operation of petitioner's business after its organization and so continued until his death, which occurred in 1914, during which time the corporation prospered and added to its capital, from time to time, by sales of some stock and stock dividends accumulated profits until 1910, at which time its capitalized stock stood at $198,200. On January 1, 1912, this capitalization was reduced by one-half through the purchase by the corporation from the stockholders, for cash payable from undivided surplus in its treasury, 991 shares of the outstanding stock, which was retired and canceled. As thus reduced the capital stock of the petitioner*2399 remained up to *1362 and during the taxable year, although the value of its equipment and other assets remained unchanged.
During the years 1896, 1897, and 1898 this corporation, in connection with its business, was permitted to make use of the piers of the Norfolk & Western Railway Co. free of cost, but beginning January 1, 1899, and for the years following, a charge, which was increased from time to time as the business increased, was made by the railroad company for these privileges, the annual basis being as follows: From January 1, 1899, to April, 1917, $5,000; April, 1917, to January, 1921, $10,000; for the years 1921 and 1922, $20,000 and $24,000, respectively. The basis of the charge made by petitioner for docking services to vessels was a certain number of cents, or fraction thereof, upon the net registered tonnage of each. The rate per net ton charged prior to 1899 does not appear in evidence. However, in October, 1919, it was increased by one-half cent per ton over the prior prevailing rate, which established a new schedule at twice the amount charged in 1899, when the railway company put into effect its charge for the use of its piers.
The earnings and capital*2400 of this corporation during this and prior years were as follows:
| Earnings | Capital | |
| Calendar year 1911 | $13,594.68 | $234,427.85 |
| Calendar year 1912 | 27,792.69 | 116,447.43 |
| Calendar year 1913 | 21,453.20 | 126,786.16 |
| Jan. 1, 1914 to Mar. 31, 1914 | 6,342.07 | 120,682.16 |
| Fiscal year Mar. 31, 1915 | 27,932.63 | 122,883.31 |
| Fiscal year Mar. 31, 1916 | 39,807.83 | 129,038.95 |
| Fiscal year Mar. 31, 1917 | 58,476.68 | 158,476.68 |
| Fiscal year Mar. 31, 1918 | 67,192.66 | 157,254.30 |
| Fiscal year Mar. 31, 1919 | 26,248.06 | 99,169.51 |
| Fiscal year Mar. 31, 1920 | 15,142.83 | 95,451.63 |
| Fiscal year Mar. 31, 1921 | 71,314.56 | 98,711.17 |
The Commissioner, upon audit of petitioner's return for the taxable year, reduced its invested capital for that year by $25,963.23, on account of additional taxes for 1914, 1915, 1916, 1917, and 1918, paid during said year.
OPINION.
LANSDON: Petitioner claims a right to special assessment under the provisions of section 328 of the Revenue Acts of 1918 and 1921, upon the ground of abnormalities affecting its invested capital and income during the taxable year. The abnormalities in invested capital, it claims, result from its taking over at the time of*2401 its organization a going business of great value, built up by John Twohy who, in connection therewith, enjoyed a virtual monopoly of the business of docking and undocking vessels at the coal piers from which he operated; and further claims that the good will built up by Twohy *1363 in these prior operations and his friendly relations with his employer, the railway company which owned the piers, by reason of which the petitioner enjoyed free use of its facilities during the first two years of its operations and preferences thereafter, were valuable assets which it acquired and which contributed to its earnings.
The record is deplorably lacking in evidence upon which we can come to any satisfactory conclusion as to the extent of the business carried on by John Twohy, which the petitioner took over, or the legal rights by which he enjoyed the advantages petitioner values so highly, and for this reason it is impossible to determine what weight, if any, should be assigned to such as income-producing factors in petitioner's business. But one witness, N. M. Osborne, president of petitioner, testified as to these matters. From him we learn that Twohy was employed by the Norfolk*2402 & Western Railway Co. but upon what basis, or with what special rights with reference to the use of these piers we are not informed. In addition to this employment the witness, referring to Twohy, says: "He also managed the two boats and docking and towing around the piers." No further attempts are made to enlighten us as to what Twohy did in this last mentioned connection, although the witness assures us that by reason of his relationship with the owner of the piers he enjoyed a "virtual" monopoly of the business. No records were preserved of this business and the only suggestion in aid of an estimate of the income from it is the statement of this witness, who owned an interest in one of the tugs, that "my recollection of its is we were generally paid around 30 to 40 per cent." This statement, of course, is too indefinite to be of value for any purpose, even though the witness had made known the frequency of such payments and the value of his interest, which he did not, and argument will not supply that which the evidence fails to establish. The only facts which we find satisfactorily established in the record in connection with the actual business carried on by Twohy and taken*2403 over by the petitioner are that in said business he, Twohy, employed four tug boats, and that on April 3, 1896, those boats were capitalized by petitioner at a vaiue of $83,200. There was a going business of some kind, of course, taken over by the petitioner, but the facts concerning it, as hereinbefore stated, are so meager as to be almost nil, and whatever good will, if any, attached to it, was purely personal to Twohy. This seems too clear for serious argument. It was because of Twohy's daily presence on the docks when the vessels applied for coal and were assigned to berths that enabled him personally to book the business for himself or the petitioner. He could with equal freedom, even after the formation of the petitioner, have continued in this business on his own account or delivered it to a competitor of petitioner, since there is no evidence of a contract between Twohy *1364 and petitioner binding him to its service, or limiting his freedom to contract with others. The petitioner, therefore, acquired nothing by way of good will. *2404 ; ; ; ; . A fortiori, business secured through a monopoly can not be attributable to good will. .
The most that the petitioner acquired, according to the record, upon its organization, in addition to the four tugs valued at $83,200, was the services of an experienced executive in the person of Twohy, whose friendly relationship with his employer enabled it to secure certain advantages and privileges at the piers. In these advantages it at no time, however, prior to 1899, could claim a vested property right; neither could it so claim in the services of Twohy, since he was in no way bound to it through contract within the rule recognized in the Viscose Co. appeal, , and other cases cited by petitioner in its brief, had his qualifications and value to it been such as to bring him within the classifications established in those cases.
The record shows that by far the greatest earnings*2405 made by the petitioner have been since the death of Twohy, and under its present management. The petitioner has wholly failed to sustain its allegations in respect to this assignment of error, and the action of the respondent thus challenged is, therefore, approved.
The abnormality claimed by petitioner as affecting its income for the taxable year is not established by the record. The reduction of its capital by one-half, under the circumstances shown, in no way affected, one way or the other, the capital actually employed in its business, since it merely amounted to disbursement of deferred dividends which had theretofore been added to its capital, but never used or needed in the business. The earnings for the year in question were materially in excess of those ordinarily produced in previous years, but there is no evidence to show that it is the result of abnormal conditions respecting either capital or income. It would rather seem, from all facts shown here, to be the normal result of a well managed business which has prospered on account of favorable conditions. In these circumstances there is no abnormality within the rule sought to be applied, and the determination of*2406 the respondent in so holding is approved. ; ; .
The remaining assignment of error challenges the act of the respondent in reducing its invested capital for the taxable year by the amount paid by it during said year on account of additional taxes for prior years. The issue raised by the petitioner respecting *1365 this assignment of error was decided adversely to its contention by the Board in , and other cases since, consistently followed. By virtue of the authority of these decisions, the action of the respondent in respect to this error is approved.
Decision will be entered for the respondent.