*2624 1. The assets of the petitioner having increased in value from the date of incorporation to 1912, the petitioner was recapitalized in 1912 and each stockholder was given one share of common stock for each share of stock theretofore held, and given as a stock dividend two shares of common stock and two shares of preferred stock of the corporation. No property was paid in to the corporation, at the time of recapitalization, for the shares of stock thus issued as a stock dividend. Held, the invested capital of the corporation was not increased by the proceeding.
2. There were no abnormalities of invested capital or income warranting the determination of tax liability under the provisions of section 210 of the Revenue Act of 1917, and section 328 of the Revenue Act of 1918.
*201 These proceedings consolidated for the purpose of hearing and decision involve income and excees-profits taxes for 1917, 1918, 1919, and 1920 as follows:
| 1917 | $7,098.00 |
| 1918 | 12,406.61 |
| 1919 | 14,936.50 |
| 1920 | 1,351.12 |
*2625 *202 The first contention is that the invested capital of the petitioner for the years 1917, 1918, 1919, and 1920 should be increased to the extent of $1,485,000, representing par value and cash value of common stock issued for tangible property, the tangible property being the stock of the company outstanding prior to the exchange of stock for stock in 1913, which was duly authorized and carried out by appropriate directors' and stockholders' resolutions.
The second contention is that at the time of the financial reorganization in 1912 the petitioner acquired valuable intangible assets for which stock was issued, and which should be included in its invested capital for 1917, subject to the limitations of section 207 of the Revenue Act of 1917, at a value of $404,080 and should be included for the years 1918, 1919, and 1920 at a value of $505,100, subject to the limitations of section 326(a)(4) of the Revenue Act of 1918.
The third contention is that there existed in the capital and income of the petitioner for these four years abnormalities which entitled it to have its profits tax determined under section 210 of the Revenue Act of 1917, and under section 328 of the*2626 Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with principal office at Joliet, and was incorporated in June, 1907. In November, 1912, the directors of the company voted to sell the entire assets of the corporation, including good will, to a new corporation to be organized with a capital stock of $2,500,000. Subsequently, on December 21, 1912, the directors of the company met and rescinded this resolution for sale and passed another resolution recommending to the stockholders that a recapitalization be carried out whereby the old stock outstanding would be called in and exchanged and new stock of two classes issued therefor - preferred stock of $1,000,000 par value and common stock of a par value of $1,500,000, making the total stock outstanding after the recapitalization $2,500,000.
The stockholders of the company met on December 28, 1912, and by resolutions and appropriate proceeding ratified and approved the plan of recapitalization recommended in the directors' resolution of December 21, 1912. A part of the resolution adopted at the meeting of the stockholders read:
That the present outstanding stock of the Corporation consisting*2627 of five thousand shares of the par value of One Hundred Dollars each shall be deemed to be common stock and to be part of the One and One-Half Million dollars par value of common stock created by these resolutions, and such outstanding common stock shall be subject to the rights, preferences, privileges, disabilities, limitations and restrictions hereinbefore provided, and the certificates for such outstanding common stock shall be forthwith surrendered to the Corporation*203 and certificates for a like number of shares of the common stock created by these resolutions shall be exchanged therefor.
The minutes of the same stockholders' meeting also read in part:
On Motion regularly made and seconded, and by the affirmative vote of all the stockholders of the Company, the following resolution was adopted:
BE IT RESOLVED, by the stockholders of The Gerlach-Barklow Company, that the directors of this Corporation are hereby authorized to distribute the increased stock this day authorized by the stockholders, in equal prorata shares among the stockholders of record of this Company of date December 28, 1912, by way of a stock dividend upon the present outstanding stock.
*2628 Thereafter the directors of the corporation took the necessary steps to carry out the resolutions of the stockholders for the increase of capital stock. They first met and discussed the value of the assets with particular consideration of the law of Illinois to the effect that the stock must have assets behind it. They determined that the tangible assets of the corporation had then a value of approximately $1,000,000, which they allocated against the preferred stock issued, and that the intangible assets had a cash value on that date of $1,500,000, which they allocated to the common stock. The $1,500,000 was later adjusted through a correcting entry to $1,485,000.
In giving effect to the financial reorganization plan, the certificates for shares of common stock outstanding were surrendered by the stockholders and each stockholder received certificates for two shares of preferred stock and three shares of common stock for each share of the common stock theretofore held.
As a result of the recapitalization of the corporation in 1913, intangibles consisting of good will, patents, and trade-marks were appreciated on the books of account in the amount of $1,480,991.37 (carried*2629 on the books of account for the years 1917, 1918, 1919, and 1920 at $1,474,991.36), and tangibles were appreciated in the amount of $194,657.32. Approximately one-half of the preferred stock was redeemed at par during the years 1914 to 1917, inclusive. A 7 per cent dividend has always been paid on the preferred stock. At the time of issuance early in 1913 it had a cash value of $100 per share. The common stock had at that time a cash value of $50 per share.
The net income and net tangible assets of the petitioner as shown by its books of account were as follows:
| Year | Net income | Year ended | Net tangible assets |
| Jan. 31, 1909 | $45,104.81 | Jan. 30, 1908 | $171,700.00 |
| Jan. 31, 1910 | 59,102.35 | Jan. 31, 1909 | 245,104.81 |
| Dec. 31, 1910 | 78,190.15 | Jan. 31, 1910 | 292,207.16 |
| Dec. 31, 1911 | 143,152.79 | Dec. 31, 1910 | 480,897.31 |
| Dec. 31, 1912 | 135,093.42 | Dec. 31, 1911 | 602,250.10 |
| Dec. 31, 1913 | 156,898.83 | Dec. 31, 1912 | 719,843.52 |
| Dec. 31, 1914 | 136,933.19 | Dec. 31, 1913 | 866,162.15 |
| Dec. 31, 1915 | 98,112.75 | Dec. 31, 1914 | 744,742.09 |
| Dec. 31, 1916 | 133,007.64 | Dec. 31, 1915 | 694,484.84 |
| Dec. 31, 1917 | 138,317.70 | Dec. 31, 1916 | 680,914.48 |
*204 *2630 The following statement shows the net income and invested capital for the petitioner for the years indicated below, as determined by the Commissioner:
| Year | Net income | Invested capital |
| 1917 | $138,317.70 | $814,060.56 |
| 1918 | 134,266.38 | 830,077.83 |
| 1919 | 202,393.55 | 833,014.80 |
| 1920 | 251,706.82 | 740,303.81 |
The petitioner was at December, 1912, one of the three or four leading art calendar publishing concerns in the United States. It had prior to that date introduced the "DeLuxe" calendar, which was novel and which revolutionized the calendar business. Other companies followed this new type of calendar and it was exceedingly popular with the buying public. The petitioner had on that date an excellent reputation for quality of production, integrity of management, and fair dealing with its customers. The majority of its customers since its organization in June, 1907, gave it orders for calendars year after year. The calendar business is usually steady and stable. The average order ranged from $50 to $80. The company sold its product in 1912 and during the years 1917, 1918, 1919, and 1920 in every State of the United States, the Dominion of Canada, Mexico, Cuba, *2631 Australia, New Zealand and Great Britain and other English speaking countries. During 1912, and during the taxable years 1917 to 1920, inclusive, the petitioner had in its employ experienced calendar officers and an artist, Zula Kenyon, whose art pictures reproduced on calendars were very popular.
The company also had many copyrights during the years 1917 to 1920, inclusive, the cost of which had been charged to expense. Copyrights were taken out yearly. A great majority of the copyrights, however, had a value in years subsequent to their acquisition and many of the copyrights acquired by the company immediately after its organization are still used by them for its calendar line at the present time.
In addition to the "DeLuxe" calendar, the company developed calendars by the gelatine photogravure process and then colored them by hand, utilizing for this process principally black and white pastel pictures made by Zula Kenyon. The calendars produced by this process were called "water color line" and the sales from this source were substantial in the years 1917, 1918, 1919, and 1920. The cost of producing this process was charged to expense in years prior to 1917.
In computing*2632 deficiencies for the years 1917 to 1920, inclusive, the Commissioner rejected the claim of the petitioner for the inclusion in invested capital of the appreciation in the value of its intangibles *205 and tangibles placed upon its books of account in 1913. He also denied petitioner's application for computation of its excess-profits tax for the year 1917 under section 210 of the Revenue Act of 1917, and its applications to have its excess-profits taxes for the years 1918, 1919, and 1920 determined under the provisions of section 328 of the Revenue Act of 1918.
OPINION.
SMITH: The first contention made by the petitioner is that through a recapitalization in 1912 there were paid in to it tangible assets consisting of $500,000 par value of common stock for which it issued $1,000,000 par value of preferred stock and $1,500,000 par value of common stock. It is its contention that the shares of stock thus paid in (of a par value of $500,000) had a cash value of $2,500,000, which amount should be included in invested capital. If this contention be denied by the Board, the petitioner, nevertheless, claims that the value of the intangible assets of the corporation in 1912 had*2633 a value of at least $750,000 which value was paid in for shares of stock and which amount should be included in invested capital. The respondent has rejected the claim of the petitioner to the inclusion of any part of the amounts mentioned.
Whatever may have been the intention of the board of directors of the petitioner corporation in November, 1912, to create a new corporation under the laws of New Jersey and to pay in to that corporation in exchange for its capital stock the capital stock of the petitioner then outstanding, the evidence of record clearly shows that this was not done. The petitioner was organized in 1907. All that happened in 1912 and 1913, relating to its recapitalization, was that under authority obtained from the State of Illinois it increased the outstanding capital stock from $500,000 to $2,500,000, $1,000,000 of which was issued as preferred stock and $1,500,000 as common stock. The stockholders of the corporation turned in their shares of stock in exchange for a like number of shares of the common stock of the same corporation and received a stock dividend of two shares of preferred stock and two shares of common stock for each share of stock theretofore*2634 held. The testimony of the witnesses is clear that the stockholders contributed no additional amount of two shares of the corporation as a result of the recapitalization. The corporation had the same amount of assets after the recapitalization as it had before.
Section 207 of the Revenue Act of 1917, and section 326 of the Revenue Act of 1918, define what may be included in invested capital in computing the excess-profits tax. Only the value of property paid in to a corporation, plus earned surplus, may be included in *206 invested capital. No contention is made that the respondent has refused to include in invested capital all amounts originally paid in to the corporation by the stockholders in exchange for shares of stock. The contention of the petitioner is simply that as a result of the recapitalization of the corporation in 1912 and 1913 the statutory invested capital was increased. We can see no merit in this contention. In , the Board held that where a corporation secures an amendment to its charter by means of which its authorized capital stock is increased, issues this stock for stock of a like par value of*2635 a corporation which held its stock, liquidates the latter corporation, and cancels its own stock which the latter held, there is not thereby anything paid in to the corporation. This decision of the Board was affirmed by the Court of Appeals of the District of Columbia in . See, also, , and .
The second contention of the petitioner, that there should be included in invested capital the value of intangible assets claimed to have been acquired in 1912, stands on no better plane than its first contention. The claim is not sustained.
The third contention of the petitioner is that it is entitled to have its profits taxes for the years 1917, 1918, 1919, and 1920 determined under the special assessment sections of the revenue acts applicable to those years because of abnormal conditions affecting its invested capital and income in said years. The first point it makes is that under the determination of the tax liability by the Commissioner there is not reflected in invested capital the*2636 appreciation in the value of its assets, principally good will. We have no doubt from the evidence that by 1912, and also by 1917, a valuable good will had been built up. We are of the opinion, however, that this is not an abnormal condition in the case of any prosperous, well managed corporation, especially one engaged in a business of the character of that conducted by the petitioner. The invested capital of the petitioner was not abnormal by reason thereof.
A further contention for special assessment is that the petitioner in 1912 had a contract with one of its officers by which he agreed to serve it for a period of five years at a stipulated salary, and with another officer by which he agreed to serve the corporation for a period of three years. These contracts had expired prior to 1917. The evidence does not prove any cash value for the contracts in 1912, and if it did it would be immaterial. A further point is made that the petitioner had a valuable contract with Zula Kenyon by which she gave her exclusive services to the corporation for a period of years. The evidence shows that a contract was entered *207 into with Zula Kenyon in 1911, which was modified in*2637 1912, and which was renewed a number of times subsequent thereto. There is nothing to indicate that Zula Kenyon was not paid fair compensation for her services or that the contract had a monetary value. It may have been good business on the part of the petitioner to secure and retain the services of this artist. We do not see, however, that there was any abnormality in invested capital or in income growing out of the several contracts which the petitioner had with her.
It is also contended that the cost of copyrights and of developing certain processes were charged to expense in past years and that those amounts were not reflected in invested capital. The amounts thus charged to expense are not shown by the record, nor is it established that the amounts could not be shown. Neither is the value of the copyrights or of the process shown. We conclude from the entire record that there was no abnormality in invested capital or income for the taxable years which warrants the determination of excess-profits-tax liability under the provisions of section 210 of the Revenue Act of 1917, and section 328 of the Revenue Act of 1918.
Reviewed by the Board.
Judgment will be entered*2638 for the respondent.