*3659 1. Value of assets acquired by petitioner determined for invested capital purposes.
2. Commissions paid by a corporation for the sale of its own capital stock held to have been erroneously deducted from invested capital.
*1216 The petitioner seeks a redetermination of its income and excess profits taxes for the period beginning August 21, 1919, and ending December 31, 1919, as to which the Commissioner has determined a deficiency of $14,666.10. It is alleged that the Commissioner erred (1) in excluding from invested capital a portion of the value of certain assets acquired from another corporation, (2) in excluding from invested capital $42,000, representing commissions paid to bankers for the sale of preferred stock, and (3) in the computation of the value of depreciable assets and the deduction for depreciation alowable thereon.
*1217 FINDINGS OF FACT.
The petitioner is a Massachusetts corporation, with its principal office at Boston, and is the successor to the assets and business of a former*3660 Massachusetts corporation of the same name, herein referred to as the old company.
The old company was incorporated in 1915, with an authorized capital stock of $300,000, divided into $125,000 common, $125,000 first preferred, and $50,000 second preferred. In August, 1919, Alfred E. Stockbridge, president and general manager, held $25,000 par value common stock, and Joseph L. Anthony, Robert M. Leach and George E. Wilbur, directors, held the remainder of all the stock. Anthony, Leach and Wilbur were also stockholders and directors of a competing corporation. Their interests in the competitive corporation suggested a possible violation of the law known as the Clayton Act (38 Stat. 730), and on the advice of counsel they determined it to be wise to withdraw from the old company. They expressed their willingness to do this on the basis of a return to them of their original investment, plus loans made to the company, which aggregated $341,450 in August, 1919. For approximately a year prior to August, 1919, the matter was discussed between Stockbridge, the three stockholders concerned and their counsel, Albert R. White. It was finally decided that a new corporation should be organized, *3661 with an authorized capital stock of $600,000, consisting of $100,000 common, $300,000 first preferred, and $200,000 second preferred, to take over the assets and continue the business of the old company, and Stockbridge was designated to handle the transaction. The plan adopted provided that the old company would transfer all its assets to Stockbridge, who in turn would transfer the same to the new company, the liabilities of the old company to be assumed by the new company. All the capital stock of the new company was to be issued and the first preferred stock sold on the market for cash. Anthony, Leach and Wilbur were to receive $200,000 cash and $141,450 par value second preferred stock of the new company for their interests in the old company, and Stockbridge was to receive the balance of the stock of the new company, after payment of organization expenses, for his interest in the old company and his services in completing the transaction.
Pursuant to the plan adopted Stockbridge in July, 1919, arranged with George A. Fernald & Co., Boston bankers, to sell the $300,000 first preferred stock of the new corporation, for a commission of 14 per cent, payable in cash and 5 per*3662 cent payable in second preferred stock of the new corporation. On August 12, 1919, the stockholders of the old company formally consented to the use of its name by the proposed new company and authorized the sale of all its assets *1218 to Stockbridge upon the receipt of $200,000 cash and $141,450 second preferred stock of the new company, all the debts of the old company to be assumed by the new company. On August 21, 1919, the petitioner was organized with an authorized capital stock of $600,000, divided into $100,000 common, $300,000 first preferred, and $200,000 second preferred. The board of directors of the petitioner, on the morning of August 22, 1919, authorized the acquisition of all the assets of the old company from Stockbridge and the assumption of all its debts, contracts and obligations, and authorized the issue of all its capital stock to Stockbridge as payment therefor.
Later, on the same day, August 22, 1919, all the interested parties, Stockbridge, Anthony, Leach, Wilbur, and representatives of the bankers, met at the offices of George A. Fernald & Co. and concluded the entire transaction. At that time certificates for all the capital stock of petitioner*3663 were issued, all instruments of conveyance and transfer were executed, and everything was done that was necessary to effect the transfer of all the old company's assets to the petitioner. A formal assignment of the personal property and a deed of the real property, improvements and appurtenances, from the old company to Stockbridge were then executed, and simultaneously therewith Stockbridge executed a formal assignment and deed of the same property to the petitioner, and both deeds were recorded at 11:21 a.m., August 23, 1919. (On August 23, 1919, the old company executed a quitclaim deed to Stockbridge of all the real property and appurtenances thereto previously conveyed, to make it clear that the petitioner and the old company were separate and distinct corporations.) At the same time, August 22, the bankers paid over a little less than $200,000, a portion of the proceeds from the sale of the first preferred stock and certificates for the stock sold were issued to the purchasers. The proceeds of this stock received from the bankers, together with a sum contributed by Stockbridge to make up the $200,000, were paid to Anthony, Leach and Wilbur, and $141,450 in second preferred*3664 stock was issued to them in payment for their interests in the old company. The bankers agreed to sell this second preferred stock for Anthony, Leach and Wilbur at par within three years. At a later date the bankers paid over to the petitioner the balance of the proceeds from the sale of first preferred stock. Forty-two thousand dollars, 14 per cent of the first preferred stock, was paid in cash to the bankers as part payment of commission on the sale of said stock, and charged on the books of petitioner to organization expense, and the balance of the commission agreed upon was paid in second preferred stock. The remainder of all the stock, second preferred and common, was issued to Stockbridge in payment for his interest in the old company and his services in completing the transaction.
*1219 At the instance of the bankers an appraisal of the land, plant, machinery, and equipment was made during the latter part of 1919. There was employed for the purpose an appraisal engineer, who had had seventeen years' experience in such work and had made appraisal valuations of a like kind for a number of large industrial concerns. This engineer, with his assistants, spent two*3665 or three weeks at the plant, where he was given free access to the entire plant and all records, and made a detailed appraisal and valuation of every item of land, plant, machinery and equipment. The property appraised, which was included in the assets of the old company transferred to the petitioner, and the fair value thereof in August, 1919, as determined by the appraisal, were as follows:
| Sixteen acres of city land | $41,639.60 | |
| Fifteen buildings | 262,775.00 | |
| Machinery | 57,242.84 | |
| Patterns and Flasks: | ||
| 3,400 Wooden patterns | $129,325.00 | |
| 7,150 Metal patterns | 124,650.00 | |
| 6,200 Flasks | 50,140.00 | |
| 304,115.00 | ||
| Miscellaneous Shop equipment | 34,878.92 | |
| Office furniture and fixtures | 6,506.50 | |
| Automobiles, salesmen's samples electrotypes, signs, etc | 5,000.00 | |
| 712,157.86 |
The land consisted of the parcels upon which the buildings stood and the yards around the factory. The buildings consisted of an office and factory buildings, from one to three stories high and of varying dimensions. They were principally of steel and brick construction, with stone foundations, and were fully equipped with electric power and light, plumbing, gas and fuel piping, *3666 furnaces, boilers, elevators, and in one building, overhead trolleys, switching system, cranes, cupola and compressed air. The machinery consisted of milling machines, boring machines, drilling machines, presses, grinders, tumbling mills, tumbling barrels, punch presses, hand drills, pulleys, hangars, shafting, grinding heads, special drills, bench lathes, floor lathes, electric motors, air drills, saws, planers and trams. The patterns consisted of wooden and metal patterns of each unit entering into the construction of completed stoves and furnaces of the various types and designs built by the petitioner, and the flasks consisted of wooden frames, with iron and hardware fittings, of varying dimensions, with a bottom and top boards, into which sand is put and a mould made for the various units from the patterns. Such patterns and flasks are necessary equipment for the manufacture of stoves. The miscellaneous shop equipment consisted of shop benches, casting racks, brick racks, miscellaneous stoves used as workmen's samples, drop lights, reflectors, pattern *1220 racks, clothes lockers (metal and wood), storage bins, air compressors, boilers, testing equipment, hoists, fire*3667 apparatus, hand trucks, scales and miscellaneous articles necessary for shop equipment (but not including any equipment considered with the buildings). The office furniture and fixtures consisted of the equipment of the offices at both Taunton and Boston, Mass.
The respondent determined that the assets acquired by the petitioner could not be included in invested capital at a value greater than the cost thereof to it and fixed the cost of such assets to the petitioner upon the basis of the consideration paid to the owners of the bulk of the old company's stock. Since Anthony, Leach and Wilbur received for their interests only their original investments in stock and loans made to the old company, the respondent determined that Stockbridge's interest was worth only the par value of his stock and the loan made to the old company, and that the value of the assets did not exceed the sum of these two amounts. He accordingly computed petitioner's invested capital as follows:
| For the interests of Anthony, Leach and Wilbur: | ||
| Cash paid | $200,000.00 | |
| Second preferred stock (New Co.) at par | 141,450.00 | |
| $341,450.00 | ||
| For the interest of Stockbridge: | ||
| Common stock (Old Co.) at par | 25,000.00 | |
| Note | 5,000.00 | |
| 30,000.00 | ||
| 371,450.00 | ||
| Add: | ||
| Receipts from sale of first preferred stock | 58,000.00 | |
| Total invested capital for full year | 429,450.00 | |
| Invested capital for taxable period (4 11/31 months) | 155,848.79 |
*3668 OPINION.
VAN FOSSAN: The petitioner was incorporated to take over the assets and business of a former corporation of the same name, to enable three stockholders of the old company to withdraw their interests from the business. Because of the possibility that their stock holdings were in violation of the Clayton Act, those stockholders desired to withdraw from the old company and were willing to surrender their entire interests for an amount equivalent to their cash investments in the company. Stockbridge, the remaining stockholder of the old company, and the moving spirit in its management, undertook to carry out the plan adopted for the accomplishment of the objects desired. He caused the petitioner to be incorporated and arranged for the sale of its first preferred stock for cash. All the assets of the old company were transferred and conveyed to Stockbridge in consideration *1221 of $200,000 cash and a portion of the second preferred stock of petitioner, which was received by Stockbridge from the petitioner. Stockbridge transferred and conveyed all the assets of the old company to the petitioner in consideration of $200,000 cash, $200,000 second preferred stock*3669 (less the amount paid to bankers for commission on sale of first preferred stock) and $100,000 common stock. In accordance with the plan adopted, Stockbridge paid the agreed cash and stock to the three stockholders of the old company for their interests and retained the balance of petitioner's stock for his interest and his services in completing the transaction. The entire transaction was completed at one time and carried out as a single deal. The transfer and conveyance of the assets to Stockbridge, the transfer and conveyance of the same assets by Stockbridge to the petitioner, the issue of certificates of petitioner's stock and the passing of the considerations for each transfer and conveyance were all simultaneous acts.
The respondent urges that the intervention of Stockbridge in the chain of title to these assets brings into operation section 331 of the Revenue Act of 1918, contending that since the old company transferred the assets to Stockbridge individually, he was the owner of the entire interest therein; that the subsequent transfer of the assets to the petitioner was from Stockbridge as an individual; and that the latter transfer was a reorganization of a business*3670 in which an interest or control of 50 per cent or more remained in the same person, Stockbridge. This position of the respondent rests entirely upon the form of the transaction and disregards the substance. The evidence clearly shows the real nature and effect of the dual transfer and the intention of the parties. The transfer to Stockbridge was merely for the purpose of facilitating the transfer of the assets from the old company to the petitioner. Stockbridge did not participate in the transaction in his individual capacity, but acted merely as the medium for the transfer of the assets from the old company to the petitioner, which was the real and only object of the whole transaction. Stockbridge did not acquire the assets for himself. His title thereto was only momentary at most. He transferred all the assets to the petitioner at the same time that they were transferred to him, the two transfers were executed simultaneously, and the only consideration paid for the assets at any time was paid by the petitioner. The entire transaction was in substance a direct transfer from the old company to the petitioner, with Stockbridge acting as the agency through which the transaction*3671 was consummated. We are of the opinion that the computation of petitioner's invested capital is not limited or affected by the provisions of section 331 of the Revenue Act of 1918.
The petitioner contends that the value of the assets acquired by it at the time of acquisition exceeded the cash and par value of the *1222 capital stock paid and issued therefor, and that the actual value of such assets should be included in invested capital. Section 326(a) of the Revenue Act of 1918 provides that invested capital means:
(1) Actual cash bona fide paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in-surplus; * * *
(3) Paid-in or earned surplus and undivided profits; * * *
The petitioner relies upon an appraisal of a portion of the assets*3672 acquired to establish the actual cash value thereof at the date of acquisition, accepting as correct the respondent's valuation of the remaining assets. The appraisal was made in the latter part of 1919, by a competent and qualified engineer, who testified at the hearing to the value of the assets determined by him upon the appraisal and this testimony is the only evidence of value offered by the petitioner. The exact date of this appraisal is not disclosed, but it appears to have been carefully and thoroughly made at approximately the time of the formation of the new company. The respondent elected to rest his case on section 331 of the Revenue Act of 1918, did not cross examine the witness or offer any affirmative proof to impeach the accuracy of the values testified to or the credibility of the witness. Respondent also relies on the sale by the retiring stockholders as establishing the best measure of value of the assets. With this position we can not agree. That sale was made under circumstances somewhat comparable to a forced sale. It was not a typical, representative or openmarket sale and is not a fair criterion of value. Thus the testimony of this witness stands as*3673 the best evidence of value of petitioner's assets.
We are of the opinion that this testimony demonstrates that petitioner's assets had an actual cash value equal to the amount claimed by petitioner and that respondent was in error in excluding the sum of $229,221.99 from invested capital.
The record in the case does not enable us to identify the specific items of property involved in the issue as to depreciation. Apparently the rates of depreciation are not contested. However, we have found the value at time of acquisition of the property included in the appraisal and so far as the same items are involved, depreciation should be recomputed in accordance therewith.
The only issue remaining to be considered is whether or not the respondent erred in excluding from invested capital an item of $42,000, which the petitioner alleges represents commissions paid to the bankers upon the sale of its first preferred stock. Substantially *1223 the same question was before the Board in , and we there discussed fully the underlying principles. Following the reasoning of the Simmons case, we hold that respondent was in error in reducing*3674 invested capital by the amount paid out in commissions. The entire amount received in payment for stock properly went into invested capital. The fact that the commissions were immediately paid out would not, of itself, reduce invested capital.
Judgment will be entered on 15 days' notice, under Rule 50.