*3585 1. A owned 52 per cent of the capital stock of a corporation, and B, C and D owned 42 per cent of the capital stock. On January 1, 1920, all of the assets of the corporation, except certain securities which were paid directly to A, were transferred to a new corporation, the petitioner, which issued all of its capital stock in exchange therefor, the capital stock so issued being divided 48 per cent to A, and 52 per cent to B, C, and D. Held, that the provision of section 331 of the Revenue Act of 1918, and section 331 of the Revenue Act of 1921, prohibits a new corporation from valuing the assets so acquired at a greater amount in computing its invested capital for the years 1920 and 1921 than the old corporation could have valued them in computing its invested capital.
2. Held, that the basis for computing depreciation of the assets so acquired by the petitioner from the old corporation is the value at the date of acquisition.
3. Rates for computing depreciation of assets, determined.
*159 This proceeding is for the redetermination*3586 of deficiencies in income and excess-profits taxes asserted by the respondent for the years 1920 and 1921 in the amounts of $12,665.86 and $954.58, respectively. The petitioner claims that the respondent erred in (1) applying the limitation of section 331 of the Revenue Act of 1918 in computing the petitioner's invested capital, and (2) in computing deductions for depreciation of leasehold, building, machinery and furniture.
FINDINGS OF FACT.
In 1906 one Nathan Deutsch owned the entire capital stock of the Monarch Electric & Wire Co., an Illinois corporation. This company was a predecessor corporation to the petitioner herein. In the latter part of 1906 Deutsch sold a 16 per cent interest in said company to each of three Schwab brothers, and retained for himself the 52 per cent controlling interest. Thereupon the Schwab brothers took over the active management of the company.
In the latter part of 1919 Schwab brothers began negotiating for the purchase of Deutsch's stock. Both parties dealt at arm's length, through their respective attorneys. An agreement, as of January 1, 1920, was finally perfected, by the terms of which the name of the old company was changed to Schwab*3587 Electric Co.; a new corporation, the petitioner, was organized and acquired all the assets, subject to the liabilities, of the Schwab Company, with the exception of $25,300 in Liberty bonds, which were paid direct to Deutsch; the new company, the petitioner, issued all of its authorized preferred stock, amounting to 48 per cent of the total authorized capital stock, to Deutsch, and the remaining 52 per cent, consisting of common stock, was issued to the three Schwab brothers. The preferred stock to Deutsch was to be retired by fixed annual payments, beginning April 1, 1923, and to be completed April 1, 1937. The preferred stock had voting rights.
The assets conveyed to the petitioner by the Schwab Company had a fair market value on January 1, 1920, as follows:
| Leasehold | $75,000.00 |
| Building | 300,000.00 |
| Machinery | 46,075.52 |
| Good will | 75,000.00 |
These assets were taken over by the petitioner at the above figures. The Schwab Company had carried the assets at a much lower valuation. No good will was carried as an asset on the books of the Schwab Company. The building had a useful life January 1, 1920, of about 23 years. The machinery and equipment had a useful*3588 life, averaged, of about 10 years.
The respondent computed the petitioner's invested capital upon the basis on which it stood on the books of the Schwab Company, *160 while the petitioner computed it so to include therein the fair market value of the assets acquired from the old corporation. The same difference exists as to the basis for computing depreciation of building, machinery and equipment.
OPINION.
MARQUETTE: It is the contention of the petitioner that the fair market value of the assets acquired by it from the old corporation is the amount at which they should be included in the petitioner's invested capital, and also the basis for computing the yearly allowance for exhaustion, wear and tear of the assets. It also claims that the allowance for exhaustion, wear and tear should be computed at the rate of 4 per cent for the building, and 10 per cent for machinery and equipment. The respondent urges that under section 331 of the Revenue Act of 1918 and section 331 of the Revenue Act of 1921, the assets can not be included in the petitioner's invested capital at any greater amount than they could have been included in the invested capital of the predecessor corporation.
*3589 As to the question whether section 331 of the Revenue Act of 1918 is applicable in computing the petitioner's invested capital, we are of the opinion that it does so apply. The petitioner corporation was organized for the very purpose of taking over the assets and succeeding to the business of the Schwab Electric Co. This was done by the issuance of capital stock of the petitioner. The stockholders of the petitioner were the identical individuals who held all the stock of the Schwab Company. The sole result of the reorganization was a change in the percentage of stock held by the four stockholders. None of the owners of Schwab Company stock withdrew and there were no new faces in the group which acquired the petitioner's stock. As we said in , "a 100 per cent interest in the property transferred to the corporation remained in the same individuals," and that statement applies here. The shifting of the percentages of stock ownership changed the voting power of the owners but still the interest and control remained in the same persons. *3590 ; . The determination of the respondent in this regard is approved.
It is alleged by the petitioner and admitted by the respondent that the assets acquired by the petitioner from the old corporation had at the date of acquisition the values set forth in the findings of fact. Therefore, regardless of the fact that under section 331 of the Revenue Acts of 1918 and 1921 the petitioner can not include those assets in its invested capital at a greater amount than they could have been included in the invested capital of the old corporation, nevertheless, *161 their cost in stock, i.e., the fair market value when they were acquired by the petitioner, is the proper basis for computing allowances for exhaustion, wear and tear. .
Upon consideration of the evidence relating to the rate at which depreciation of the depreciable assets should be computed, we are of the opinion that the petitioner's building had a useful life of not more than 25 years from January 1, 1920, and that allowance for depreciation should be computed at*3591 the rate of 4 per cent. The value of the leasehold, which is stipulated to have been $75,000 on March 1, 1920, should be spread over the remaining life of the leasehold beginning on that date. As to machinery and office equipment, the only testimony offered shows that they had an average useful life of 10 years on the date they were acquired by the petitioner. The allowance for depreciation of these assets should be computed at the rate of 10 per cent.
Reviewed by the Board.
Judgment will be entered under Rule 50.