*1584 Special assessment denied for 1919, 1920 and 1921.
*840 This is a proceeding for the redetermination of deficiencies in income and profits taxes as follows: For the fiscal year 1919, $22,931.78; fiscal year 1920, $6,483.34; fiscal year 1921, $29,756.17. The petitioner seeks redeterminations on the following grounds: (1) An amount of $2,732.44 expense of repairs, should be allowed as a deduction from income in 1919; (2) an amount of $3,128.69 expense of repairs, should be allowed as a deduction in 1920; (3) an amount of $18,408.45 expense of repairs, should be allowed as a deduction in 1921; (4) a bad debt stated in the petition as $32,016.64, and amended upon motion by the petitioner, duly made and granted, to the amount of $27,016.64, should be allowed as a deduction from income in 1921; (5) a bad debt in the amount of $37,129.96, should be allowed as a deduction from income in 1921; (6) a bad debt in the amount of $18,658.25 should be allowed as a deduction from income in 1921; (7) *1585 with respect to all three of the taxable years, the profits taxes should be computed as provided in sections 327 and 328 of the Revenue Acts of 1918 and 1921.
At the hearing the parties stipulated that the deductions of $2,732.44 claimed in issue (1) and $27,016.64 claimed in issue (4) are correct and allowable deductions from income in 1919 and 1921, respectively. The petitioner expressly waived the second, third, fifth and sixth issues. The hearing thereupon proceeded pursuant to rules (62)(a) and (b) with respect to the sole remaining issue, the claim for special assessment.
*841 FINDINGS OF FACT.
The petitioner is an Illinois corporation, with principal office at Moline, and was engaged during the taxable years in the manufacture and sale of saddlery hardware and malleable iron castings.
The business here under consideration originated in Chicago in 1878, when it was started by an individual by the name of C. J. Cooper. In 1881 or 1882, a partner, E. C. Thomas, was admitted and thereafter the business was conducted by a partnership known as C. J. Cooper & Company. H. W. Cooper, a brother of C. J. Cooper, sometime thereafter purchased the interest of E. C. *1586 Thomas and was admitted into the partnership. The business was moved to Moline in 1888 and sometime thereafter H. W. Cooper purchased C. J. Cooper's interest in the firm. The business was then conducted in the name of its sole owner, H. W. Cooper, but C. J. Cooper remained in the employ of the concern. In 1907 the petitioner corporation was organized, under the name of H. W. Cooper Saddlery Hardware Manufacturing Company, for the purpose of taking over and of continuing the business. After the transfer of the assets and the issue of stock incident thereto, H. W. Cooper was the principal stockholder. At this time the outstanding capital stock was in the amount of $150,000 par value. The name of the corporation was changed in 1917 to Moline Iron Works.
At the time of the transfer of the assets to the petitioner the manufacture and sale of malleable iron castings was not a part of the business, the necessary castings being purchased from other manufacturers. The plant building, which had been constructed in 1902, was in size 285 feet by 50 feet, with four wings each 50 feet in length; the main building was one story, except that a portion 80 feet by 50 feet had a basement and*1587 two stories. There was a machine room, two building departments, a boiler room, an enameling department, office and shipping rooms, together with space for the storage of stock. Following issuance of the original stock and acquisition of the assets of the business, additional capital stock in the amount of $100,000 par value was issued in 1907 for cash at par value of the stock to provide funds for the financing of expanded operations and for the construction and equipment of an addition to the plant in the form of a foundry of castings. This foundry building was constructed in the dimensions of 80 feet by 400 feet. This building was built according to the plans and specifications of an architect employed for the purpose and by a contracting builder under bond. The furnaces and ovens, however, were built by the petitioner under the superintendence of its factory superintendent, at a cost approximating $7,000. It was known as Plant No. 2. It had a capacity of *842 5,000 tons per annum. Mistakes were made in the design and construction of the furnaces and ovens and they were torn out and new construction was built at a cost approximating $10,000. At first the foundry*1588 was employed in manufacturing the castings required in the saddlery hardware business of the petitioner. In the second year of its operation a start was made in taking in work for outsiders. Due to the advent of the automobile and a reduced use of horses, the saddlery business declined and this adverse development was met by the management in the expansion and development of the malleable iron castings manufacture until the latter is now the principal business of the petitioner.
Prior to the World War the change in business conditions due to the use of automobiles had resulted in the accumulation of a stock of saddlery hardware (finished goods) for which no sale was found, to the extent of 250 to 350 tons and, appearing at that time unsalable and obsolete, this stock although retained on hand, was not valued upon the inventories. Beginning in 1917, when the demands incident to war conditions depleted the stocks of hardware, the previously unsalable stock became valuable and was sold by the petitioner at good prices to parties other than the Government. The proceeds of the sales were included in income without deduction of original cost. The entire disposal of the previously*1589 unsalable stock was completed within two years after the signing of the armistice.
Lester E. Nutt became associated with the business in 1917, when he purchased the stock holdings of H. W. Cooper, who was growing old and desired to lessen his activities and responsibilities. However, H. W. Cooper continued in association with the business. Prior to the transfer of the Cooper stock to Nutt a dividend in the amount of $125,000 was declared and paid. The consideration paid by Nutt for the stock he acquired was based upon the book value thereof after payment of the dividend. In the fiscal year 1920 the outstanding capital stock was increased to $500,000, the additional stock being issued to provide funds for the construction and equipment of a new foundry building, known as Plant No. 3. Plant No. 3 had a capacity of 7,000 tons per year, but it did not become income-producing within the taxable years here under consideration.
In the regular course of the business, both before and after incorporation, hardware devices for use in saddlery were invented by employees; patents were taken out for these inventions, sometimes by the firm or corporation, at other times by the employees*1590 themselves. In either event the patents were made use of in the business in some instances in consideration of royalties. Upon information the petitioner acquired either the patents for the following prior inventions, or the right to use them: A hame attachment or trace connector, *843 patented in 1903 or 1904; an attachment at the other end of the trace known as a "Concord clip," patented in 1892 or 1893; a trace carrier, a saddle tree; a buckle.
During the period beginning in 1914 and ending in 1916, when the patent was issued, two employees, Creedon and Miles, invented, developed and patented in their own rights, a moulding machine. The expenses, including labor and materials, incident to the invention, development and patenting were paid by the petitioner and were charged off to profit and loss. It is not possible now to ascertain the amount of same. The moulding machine had valuable advantages over other makes of moulding machines, especially in facilitating and decreasing costs of production. These machines are still in use by the petitioner. The machines were manufactured by the corporation, and in addition to making use of them in its own foundries, the machines*1591 were sold to outsiders, including competitors of the petitioner, if they chose to purchase the machines. The use of the machines was not restricted to the manufacture of saddlery castings. During the taxable years the sales and cost of machines sold amount as follows: Fiscal year 1919, sales $9,965, cost of machines sold $6,435.71; fiscal year 1920, sales $42,735, cost of machines sold $28,071.63; fiscal year 1921, sales $22,742.50, cost of machines sold $15,767.89. The said "cost of machines sold" included labor, material, advertising and royalties paid to patentees. The aggregate sales, cost of goods sold and resulting gross profits of the petitioner during the taxable years amounted as follows:
| Item | Fiscal year | Fiscal year | Fiscal year |
| 1919 | 1920 | 1921 | |
| Sales | $895,869.58 | $1,221,090.37 | $1,168,903.97 |
| Cost of goods sold | 567,334.20 | 752.691.77 | 850.374.29 |
| Gross profit | 328.535.38 | 468.398.60 | 318,529.68 |
During the taxable years from 60 to 70 per cent of the sales of the petitioner were made in competition and at prices ranging from 20 to 40 per cent lower than the prices of its competitors. The remainder of the sales were of articles the*1592 prices of which the petitioner controlled and established. In these years the principal sales factor was the ability to make delivery of the goods. The making of sales at the low prices offered was optional with the petitioner and was adopted as a matter of business policy.
With respect to the business records and the books of account, the petitioner is not in possession of the records of the predecessor business conducted by H. W. Cooper prior to 1907. The original ledger of the petitioner covering the period from 1907 to July 8, 1911, is now in an incomplete condition in that some of the early pages are *844 missing and the journal containing the original entries from which the postings were made is also missing. For the first four years of operation by the petitioner corporation the profits, dividends paid and surplus were as follows:
| Fiscal year | Profits | Dividends | Surplus |
| paid | |||
| 1908 | $13,366.09 | $13,366.09 | |
| 1909 | 16,295.53 | 29,661.62 | |
| 1910 | 43,799.26 | $12,500.00 | 60,960.98 |
| 1911 | 32,175.76 | 15,000.00 | 78,136.74 |
| Less real estate account charged off | 2,567.37 | ||
| Balance | 75,569.37 |
In the original ledger two accounts headed*1593 "Foundry Account" and "Merchandise Account" were in part operating accounts and in part accounts reflecting lump-sum valuations of the fixed assets, machinery and equipment, inventories and possibly other assets. A trial balance of the original ledger on July 8, 1911, follows.
| Assets: | ||
| Advertising account | $350.00 | |
| Bills receivable | 3,159.13 | |
| Cash | 2,424.14 | |
| Insurance | 461.00 | |
| Foundry account | 161,302.69 | |
| Merchandise account | 179,186.12 | |
| Accounts receivable | 25,585.08 | |
| $372,468.16 | ||
| Liabilities: | ||
| Bills payable | 37,158.71 | |
| Accounts payable | 9,740.18 | |
| Net worth: | ||
| Capital stock | 250,000.00 | |
| Surplus | 75,569.27 | |
| 372,468.16 |
New books of account were opened on July 8, 1911, reflecting the assets and liabilities shown on the following trial balance drawn from the ledger:
| Assets: | ||
| Bank balance | $2,424.14 | |
| Saddlery Hardware Merchandise Inventory | 73,534.93 | |
| Saddlery Hardware Operating Inventory | 910.89 | |
| Saddlery Hardware Supply Inventory | 584.94 | |
| Saddlery Hardware Tools Inventory | 1,020.51 | |
| Saddlery Hardware Boxing & Labels Inventory | 1,569.72 | |
| Saddlery Hardware Office Supply Inventory | 240.10 | |
| Saddlery Hardware Machinery | 8,903.03 | |
| Saddlery Hardware General Equipment | $11,106.83 | |
| Saddlery Hardware Heating Plant | 3,885.20 | |
| Saddlery Hardware Furniture & Fixtures | 1,400.00 | |
| Saddlery Hardware Building | 34,369.97 | |
| Saddlery Hardware Land | 5,000.00 | |
| Saddlery Hardware Patterns | 8,300.00 | |
| Saddlery Hardware Electros and wood cuts | 800.00 | |
| Foundry Merchandise Inventory, Plant #2 | 39,866.12 | |
| Foundry Operating Inventory, Plant #2 | 6,179.74 | |
| Foundry Supply Inventory, Plant #2 | 317.97 | |
| Foundry Tools, Plant #2 | 207.49 | |
| Foundry Stationary, Plant #2 | 307.25 | |
| Foundry Machinery, Plant #2 | 2,788.63 | |
| Foundry General Equipment, Plant #2 | 42,107.13 | |
| Foundry Heating Plant, #2 | 4,953.96 | |
| Foundry Furniture & Fixtures, Plant #2 | 166.32 | |
| Foundry Building, Plant #2 | 59,494.39 | |
| Foundry Land, Plant #2 | 15,000.00 | |
| Foundry Patterns, Plant #2 | 115.50 | |
| Foundry Flasks and Bottom Boards, Plant #2 | 4,798.19 | |
| Notes Receivable | 3,159.13 | |
| Unexpired Insurance | 461.00 | |
| Advertising Account | 350.00 | |
| Accounts Receivable | 25,585.08 | |
| Patents and Good Will | 10,000.00 | |
| Outside Investments | 2,560.00 | |
| $372,468.16 | ||
| Liabilities: | ||
| Bills Payable | 37,158.71 | |
| Accounts Payable | 9,740.18 | |
| Reserve Fund | 6,500.00 | |
| Net Worth: | ||
| Capital Stock | 250,000.00 | |
| Surplus | 69,069.27 | |
| 372,468.16 |
*1594 *845 Beginning with the close of the year 1911, the petitioner followed a custom of inventorying all of its assets, fixed as well as current, making entries to profit and loss account to adjust the ledger account values to accord with the inventory values. The asset accounts were increased as follows:
| Foundry Building Account: | ||
| June 30, 1914 | $1,269.10 | |
| June 30, 1915 | 351.60 | |
| June 30, 1917 | 63.48 | |
| $1,684.18 | ||
| Saddlery Hardware Patterns: | ||
| July 10, 1912 | 200.00 | |
| June 30, 1914 | 352.00 | |
| June 30, 1915 | 105.00 | |
| 657.00 | ||
| July 10, 1912 | $129.57 | |
| July 10, 1912 | 129.57 | |
| July 8, 1913 | 41,49 | |
| June 30, 1914 | 32.60 | |
| June 30, 1915 | 42.87 | |
| June 30, 1916 | 15.00 | |
| $261.53 | ||
| Electros, Saddlery, June 30, 1915 | 757.54 | |
| Saddlery Hardware Machinery: | ||
| June 30, 1916 | 349.50 | |
| June 30, 1917 | 1,497.90 | |
| 1,847.40 | ||
| Saddlery Equipment: | ||
| July 10, 1913 | 504.77 | |
| June 30, 1916 | 105.39 | |
| 610.16 | ||
| Foundry Equipment: | ||
| July 10, 1912 | 7,750.54 | |
| July 10, 1914 | 95.93 | |
| June 30, 1915 | 523.42 | |
| June 30, 1916 | 52.38 | |
| June 30, 1917 | 404.19 | |
| 8,826.46 | ||
| Furniture & Fixtures, Saddlery: | ||
| July 10, 1912 | 106.00 | |
| 14,750.27 | ||
| Furniture & Fixtures, Foundry: | ||
| July 10, 1912 | 11.48 | |
| July 10, 1913 | 31.00 | |
| June 30, 1914 | 141.89 | |
| 184.37 | ||
| Apparent error by Commissioner | 3.56 | |
| Total | 14,938.20 |
*1595 *846 The assets accounts were decreased as follows:
| Land, Saddlery: | ||
| July 10, 1912 | $115.00 | |
| July 10, 1913 | 110.40 | |
| June 30, 1914 | 105.80 | |
| June 30, 1915 | 101.20 | |
| June 30, 1916 | 96.60 | |
| $529.00 | ||
| Land, Foundry: | ||
| July 10, 1913 | 17.61 | |
| June 30, 1914 | 422.04 | |
| June 30, 1915 | 11.00 | |
| June 30, 1916 | 10.50 | |
| 461.15 | ||
| Buildings, Saddlery: | ||
| July 8, 1913 | 7.00 | |
| June 30, 1914 | 39.75 | |
| June 30, 1915 | 2.92 | |
| June 30, 1917 | 160.04 | |
| 209.71 | ||
| Buildings, Foundry: | ||
| July 8, 1913 | $56.64 | |
| June 30, 1916 | 31.01 | |
| $87.65 | ||
| Saddlery Patterns: | ||
| July 8, 1913 | 10.30 | |
| June 30, 1917 | 1,811.00 | |
| June 30, 1918 | 2,000.00 | |
| 3,821.30 | ||
| Foundry Patterns, June 30, 1917 | .13 | |
| Electros, Saddlery: | ||
| July 10, 1912 | 52.14 | |
| July 10, 1913 | 113.88 | |
| June 30, 1914 | 70.00 | |
| June 30, 1916 | 46.91 | |
| June 30, 1917 | 152.50 | |
| June 30, 1918 | 500.00 | |
| 935.43 | ||
| 6,044.37 | ||
| Saddlery Hardware Machinery: | ||
| July 8, 1913 | 185.00 | |
| June 30, 1914 | 302.25 | |
| June 30, 1915 | 52.50 | |
| 539.75 | ||
| Foundry Machinery: | ||
| July 8, 1913 | 876.04 | |
| June 30, 1914 | 300.20 | |
| June 30, 1915 | 10.00 | |
| June 30, 1916 | 199.64 | |
| June 30, 1917 | 563.00 | |
| 1,948.88 | ||
| Saddlery Equipment: | ||
| June 30, 1914 | 834.28 | |
| June 30, 1915 | 96.74 | |
| June 30, 1917 | 188.58 | |
| 1,119.60 | ||
| Foundry Equipment, July 8, 1913 | 7,342.61 | |
| Furniture & Fixtures, Saddlery: | ||
| July 10, 1913 | 143.00 | |
| June 30, 1914 | 55.00 | |
| June 30, 1915 | 29.00 | |
| June 30, 1918 | 279.00 | |
| June 30, 1918 | 25.00 | |
| 531.00 | ||
| Furniture & Fixtures, Foundry: | ||
| June 30, 1916 | 50.19 | |
| June 30, 1916 | 22.39 | |
| June 30, 1917 | 7.87 | |
| 80.45 | ||
| 17,606.66 |
*1596 *847 With respect to patents and good will, charges on the original ledger, aggregating $604.45 were first debited to the account headed "Patents" and were then charged off to profit and loss account. A *848 book value of $10,000 was entered upon the ledger opened in July. 1911, in an account headed "Patents and Good Will." Subsequently patent expenditures in an aggregate of $815.45, consisting mainly of payments to patent attorneys for their services or for patent office fees, were first debited to the account and then charged off to profit and loss account during the period from 1911 to 1919, inclusive.
The ledger opened in 1911 was continued in use down to the taxable years substantially in the form reflected by the trial balance shown above immediately after opening. Summarized balance sheets taken from the ledger reflected the following net assets:
| Item | June 30, 1918 | June 30, 1919 | June 30, 1920 |
| Sundry tangible assets (net) | $526,534.42 | $446,973.40 | $773,485.73 |
| Patents and good will | 3,157.25 | ||
| Liberty bonds | 35,135.50 | 3,585.50 | |
| Investments | 4,683.00 | 4,683.00 | 4,683.00 |
| Deferred charges | 2,085.08 | 2,686.99 | 1,758.77 |
| Total | 571,595.25 | 457,928.89 | 779,927.50 |
| Capital stock | 250,000.00 | 250,000.00 | 500,000.00 |
| Surplus and undivided profits | 321,595.25 | 207,928.89 | 279,927.50 |
| Total | 571,595.25 | 457,928.89 | 779,927.50 |
*1597 In the returns filed by the petitioner deductions were taken for salaries paid to officers in the following aggregates: For 1919, $23,436.59; for 1920, $82,749.87; for 1921, $30,499.68. These deductions have been allowed by the respondent.
H. W. Cooper as president was paid in 1919 a salary of $5,000 per annum plus a bonus of 10 per cent thereof. He was the former sole owner of the business.
C. J. Cooper, brother of H. W. Cooper, as vice president, was paid in 1919 a salary of $3,000 per annum plus a bonus of 10 per cent thereof.J. J. Creedon as treasurer, was paid in 1919 a salary of $3,000 per annum plus a bonus of 10 per cent thereof. For 1920 his salary and bonus amounted to $19,916.59; for 1921, $6,999.84. In the two latter years he was a vice president. He had been associated with the business since 1878 and, as stated elsewhere herein, was the inventor of a number of patented specialties handled or used by the petitioner in its business.
H. W. Cooper, Jr., as secretary, was paid in 1919 a salary of $3,000 per annum, plus a bonus of 10 per cent thereof.
L. E. Nutt, as vice president and general manager, was paid in 1919 a salary of $5,000 plus a bonus of*1598 10 per cent thereof. He acted in the same capacities in the following years, being paid in 1920, $32,333.32 and in 1921, $15,000. During the period from 1912 to 1916, inclusive, he was associated with Velie Manufacturing Company, *849 receiving a salary of $7,500 per annum. After resigning from this connection and prior to purchasing stock of the petitioner, he received various offers of employment from other manufacturers at salaries running from $12,000 to $20,000 per annum.
J. J. Miles as treasurer was paid in 1920 a salary and bonus aggregating $18,000, and in 1921, $4,999.92.
One Dorman, as secretary, was paid in 1920 a salary and bonus aggregating $12,499.96, and in 1921, $3,499.92.
The bonus referred to above for 1920 was a lump sum amounting to $65,000, which was prorated to the several officers and was in consideration of their ordinary services to the business and their extraordinary services in connection with the construction of Plant No. 3.
The invested capital claimed in the returns filed by the petitioner and the adjustments thereto by the respondent in determining the deficiencies follow.
| Item | Fiscal year 1919 | Fiscal year 1920 | Fiscal year 1921 |
| Capital | $250,000.00 | $250,000.00 | $500,000.00 |
| Surplus and undivided profits | 321,595.25 | 207,928.89 | 279,927.50 |
| Capital stock and surplus at beginning of year | 571,595.25 | 457,928.89 | 779,927.50 |
| Addition for stock issued during year (averaged | 148,979.72 | ||
| Deduction for dividends during year (averaged) | 160,136.97 | 100,138.34 | 33,358.19 |
| Deduction for prior year taxes | 51,382.38 | ||
| Invested capital claimed in return | 411,458.28 | 506,770.27 | 695,186.93 |
| Adjustments by respondent: | |||
| Correction of deductions for dividends | Deduct 5,273.99 | Add 49,542.66 | Add 5,587.14 |
| Correction of addition for stock issued | Add 9,080.94 | ||
| Correction of deduction for prior year taxes | Deduct 62,476.41 | Deduct 105,143.14 | Deduct 72,326.37 |
| Subtotals | 343,707.88 | 460,250.73 | 628.447.70 |
| Appreciation subsequent to July, 1911, disallowed | Deduct 14,938.20 | Deduct 14,938.20 | Deduct 14,938.20 |
| Inventory adjusted | Deduct 12,867.40 | ||
| Patents and good will restored | Add 6,842.75 | Add 10,000.00 | Add 10,000.00 |
| Depreciation restored | Add 399.74 | Add 2,804.98 | Add 6,137.13 |
| 1919 capital items restored | Add 5,854.35 | ||
| Patterns restored | Add 1,806.00 | ||
| Additions restored | Add 8,319.32 | ||
| Hospital items restored | Add 956.00 | ||
| Invested capital allowed | 323,144.77 | 463,971.86 | 640,727.95 |
*1599 The net income and the profits taxes under section 301 of the respective statutes have been determined by the respondent in the following amounts:
| Item | Fiscal year 1919 | Fiscal year 1920 | Fiscal year 1921 |
| Revised net income | $247,369.25 | $330,339.67 | $201,729.10 |
| Profits tax | 124,947.71 | 105,553.44 | 44,210.87 |
*850 Questions relative to the liability of the petitioner for Federal income and profits taxes first arose in 1918. The profits that for the fiscal year 1918 was determined by the respondent pursuant to section 328 of the 1918 Act and section 210 of the 1917 Act, but upon what grounds does not appear. The petitioner made application to the respondent for determination of its profits taxes for the taxable years pursuant to section 328 of the respective statutes, at one time in the ensuing negotiations receiving assurances that the requested determination would be made. In determining the deficiencies the respondent has denied the right of the petitioner to special assessment as claimed.
OPINION.
TRAMMELL: In the redetermination of the deficiencies due effect will be given the stipulation of the parties with respect to issues 1 and 4*1600 referred to in the preliminary statement. Issues 2, 3, 5 and 6 having been abandoned by the petitioner, the action of the respondent with respect thereto is affirmed. This leaves as the sole question to be decided whether the petitioner is entitled to have its tax assessed under the provisions of section 328 of the Revenue Acts of 1918 and 1921. In this respect the petitioner contends that invested capital can not be determined because it is impossible to determine the value of assets paid in for stock at the time of the organization of the corporation in 1907, and thus the petitioner comes within section 327(c). The respondent apparently determined the invested capital by allowing the par value of the stock with adjustment for earned surplus to be considered in the taxable year.
The formula adopted by the petitioner, that is, capital stock and earned surplus, is manifestly not in accordance with the statute which requires that the cash value of tangible property paid in for stock and the cash value of intangibles paid in for stock subject to certain limitations, should be included. If, however, by the method which the Commissioner used he has in fact satisfactorily determined*1601 invested capital and that determination, regardless of the formula or method used is not shown to be erroneous and in fact is the same as if the Commissioner had used other and more appropriate terminology in stating how he determined invested capital, and it further appears that he has given the taxpayer the benefit of all invested capital it could under any circumstances be entitled to by the application of section 326, in our opinion, this would not bring the case within section 327(c).
In 1907 about the time of the organization of the corporation, stock to the extent of $100,000 par value was sold for cash at par. This would indicate that certainly the corporation had no capital *851 or assets at that time which were not capitalized. It seems clear that if the assets had exceeded the par value stock would not have been sold for cash at par at approximately that time, and the fact that stock sold for cash at par would indicate that the value of assets was fairly represented by the par value of the stock. From all the record discloses the sale of this stock for cash was an arm's-length transaction and represented the actual value of the stock.
It may well be that*1602 the petitioner had developed in the course of its long business career prior to 1907 a substantial amount of good will, but this evidently was reflected in the value of the stock which was sold for cash and this sale was at par.
There is evidence that at the time of the organization of the corporation certain patents were acquired. If there patents had materially increased the value of assets, they undoubtedly would have been reflected in the sales price of stock for cash in 1907. It may well be that the Commissioner did actually determine the value of assets paid in for stock in 1907. It is not shown that he did not. He may have considered the stock sales as fixing the values of assets. We think, in the absence of explanation or evidence to the contrary, that it does. Certainly, there is no evidence to show that the invested capital should be greater than that determined by the Commissioner or that any values have in fact been omitted. We also think that the stock sale to Nutt in 1917 at book value of assets, indicates that the corporation did not have any substantial values in its assets not capitalized. This fact also has application to assets acquired since organization. *1603 We do not think that so far as the assets turned in for stock at the time of the organization of the corporation are concerned, any ground is shown to bring this case within section 327(c).
Another ground assigned for special assessment is that certain employees, two in number, invented, developed and patented a moulding machine. The expenses incident to this invention from 1914 to 1916 were paid by the petitioner and charged to profit and loss and it is now impossible to ascertain the amount of those expenditures. penditures. This moulding machine had valuable advantages over other makes of moulding machines. It facilitated the production and reduced the cost thereof. These machines are still in use by the petitioner. The machines were manufactured by the corporation for its own use, but they were also sold to competitors and others who desired them. The petitioner made profits on the sale of these machines in 1919 of approximately $3,500; in 1920 of approximately $16,000; in 1921 of approximately $7,000. These profits from an uncapitalized asset are not shown to have been such a proportionate part of the total income as to amount to an abnormality of *852 income. *1604 The expenditures are not shown to have been of such a substantial amount as to constitute an abnormality of capital. Nor do we think that the use of the machine itself created an abnormality. The value of these machines is not shown, or even the approximate value. Competitors and others had the right to purchase the machines if they had seen fit to use them in their own businesses, and having this right, the petitioner by the use thereof would not have an abnormal advantage over its competitors. An abnormal situation, therefore, respecting capital is not shown by the exclusion of this patent from invested capital.
The question is, is the inability to compute the amount of expenditures made by the petitioner in acquiring its patents, including the moulding machine, or the use thereof, sufficient to bring the petitioner within the provisions of section 327 on the ground that invested capital could not be determined. There were only two men working on this machine and the invention and the record does not disclose even approximately the amount of expenditures in connection therewith. If it was only a small amount, relatively speaking, we do not think it would be sufficient. *1605 We think that the provisions relating to the inability to determine invested capital must be read in the light of reason and the failure to determine the amount of the cost of some asset, if that cost is small and does not materially affect income or capital, special assessment would not be authorized. For instance, if certain office furniture were made by employees and charged to expense, if the expenditure in any event was a very small amount, the fact that the exact amount could not be determined would not entitle the petitioner to special relief. On the other hand, it is to be observed that the petitioner apparently paid royalties to its employees for the use of the moulding patent. There is no evidence that the patents were assigned to the petitioner or that they belonged to the petitioner by virtue of the payment of labor and material incident to the invention and development thereof. It is to be observed also that the principal sales factor during the taxable years was the ability to make delivery of goods. There was great demand and a small supply. This factor may have entered very largely into the large profits made.
Another factor which is claimed to be the basis*1606 for assessing the tax under section 328 is the fact that during the taxable years there was accumulated stock to the extent of from 250 to 350 tons of saddlery hardware that had been considered obsolete in previous years which had not been included in capital and was sold at good prices. We do not know to what extent any of this hardware was sold during the taxable years nor the price at which sold. It appears *853 that this accumulation of saddlery hardware began to be sold in 1917 on account of war conditions and demands. Since this property began to be sold in the beginning of 1917, we do not know what quantity of it was sold in 1917 or in 1918 prior to the beginning of the fiscal year 1918. It may well be, for all the record discloses, that most of these goods were sold in 1917 when the unusual demand arose or in the fiscal year before us, but we do not know whether the sales were substantial in amount or how these sales compared in income received with the total income received from other sources. We would not be warranted, therefore, in holding that this transaction created an abnormal condition of income or capital.
Another ground for special assessment was the*1607 contention that the officers' salaries were low during the taxable years. The compensation of the officers is set out in our findings of fact. We are unable to determine that this factor was such as to abnormally affect the income for these years.
For the foregoing reasons it is our opinion that the evidence does not disclose that the petitioner has brought itself under any of the provisions of section 327 and therefore is not entitled to have its profits tax assessed under the provisions of section 328.
Judgment will be entered under Rule 50.