*92 These are proceedings under Docket No. 20660, covering the years 1918 and 1919, and Docket No. 14583, covering the years 1920 and 1921, for the redetermination of deficiencies in income and excess-profits taxes as follows:
| 1918 | $7,992.69 |
| 1919 | 29,535.37 |
| 1920 | 64,013.84 |
| 1921 | 56,579.97 |
No error was assigned in respect of the deficiency determined for 1919. The error assigned with regard to each of the other years is identical, i.e., that the respondent has erroneously computed the petitioner's invested capital in that he has allowed an insufficient sum on account of capital paid in for stock.
The issues are closely related and both proceedings will be disposed of in one opinion. The facts were stipulated by the parties.
FINDINGS OF FACT.
The O'Sullivan Rubber Co. was organized under the laws of Maine on August 28, 1899, with a total authorized capital stock of $50,000 par value, consisting of 500 shares of the par value of $100 per share, all of which stock was issued*2475 in consideration of the receipt *93 by the corporation of moulds having an actual cash value of $8,200 and of certain patents.
On December 16, 1910, the O'Sullivan Rubber Co. was organized under the laws of Delaware and issued $1,000,000 par value of common stock and $575,000 par value of preferred stock in consideration of the receipt of all the issued capital stock of O'Sullivan Rubber Co., the Maine corporation, consisting of $50,000 par value. No other consideration was received by the Delaware corporation for the issuance of its stock and no other stock was ever issued by the Delaware corporation.
At the time the stock of the Maine corporation was acquired by the Delaware corporation the assets and liabilities of the maine corporation consisted of tangible and intangible assets, a large part of which consisted of good will. According to the books of the Maine corporation its assets were as follows:
| Assets | Liabilities | ||
| Patent rights | $ 41,800.00 | Notes payable | $ 100,000.00 |
| Moulds | 7,712.94 | Accounts payable | 17,468.66 |
| Furniture and fixtures | 854.45 | Reserve for freight | 5,072.35 |
| and discounts | |||
| Cash | 316,231.54 | Reserve for taxes | 2,000.00 |
| Notes recelvable | 13.35 | Reserve for interest | 216.66 |
| Accounts receivable | 84,044.72 | Capital stock | 50,000.00 |
| Inventory merchandise | 53,887.60 | Surplus | 329,786.93 |
| 504,544.60 | 504,544.60 |
*2476 The value of the Maine corporation's stock when acquired by the Delaware corporation was $700,000, and the net worth of the assets of said Maine corporation at such time was $700,000.
Thereafter, but prior to January 1, 1917, the Delaware corporation redeemed out of its earnings the preferred stock above referred to amounting to $575,000 par value.
The issued and outstanding stock of the Delaware corporation on March 3, 1917, consisted of $1,000,000 par value common stock.
On April 30, 1917, the petitioner was organized as a corporation under the laws of New York and issued its entire authorized capital stock, consisting of $4,000,000 par value, for all the outstanding stock of the Delaware corporation, consisting of $1,000,000 par value common stock.
Prior to January 1, 1918, all of the assets of the maine and Delaware corporations had been taken over by and were carried on the books of O'Sullivan Rubber Co., a New York corporation, the petitioner herein, although said corporations had not then been formally dissolved.
*94 The net earned surplus as of January 1, 1918, without adjustment for the income and excess-profits tax for the year 1917, as prorated, amounting*2477 to $44,012.73 and without adjustment on account of good will limitation as contended for by the respondent and shown in the detailed computations hereinafter set forth, is $1,023,264.34.
The net earned surplus as of January 1, 1920, without adjustment for the income and excess-profits tax for the year 1919, as prorated, amounting to $85,001.83, and without adjustment on account of good will limitation as contended for by the respondent and shown in respondent's detailed computation hereinafter set forth, is $1,137,048.44.
The net earned surplus as of January 1, 1921, without adjustment for the income and excess-profits tax for the year 1920, as prorated, amounting to $72,127.61, and without adjustment on account of good will limitation as contended for by the respondent and shown in respondent's detailed computation hereinafter set forth, is $1,096,422.72.
The sole question involved in these proceedings is the correct amount of invested capital to which the petitioner is entitled for the years 1918, 1920, and 1921.
An interest and/or control of over 50 per cent of the trade or business of the Delaware corporation remained in the same persons after the reorganization on*2478 April 30, 1917.
Good will was carried on the books of the New York corporation as of January 1 of each of the years 1918, 1920, and 1921, in the amount of $4,000,000. Good will amounting to $575,000 had previously been written off and charged against surplus by the predecessor (Delaware) corporation. The New York corporation continued the same set of books as was used by the Delaware corporation. The intercompany duplications arising by reason of the Delaware corporation's ownership of the stock of the Maine corporation have been adjusted in the surplus account shown in the computations with regard to 1918 hereinafter set forth.
The computation of invested capital for the year 1918 as contended for by the respondent is as follows:
*95 O'Sullivan Rubber Co. of New York, parent.
O'Sullivan Rubber Co. of Delaware, subsidiary and subparent.
O'Sullivan Rubber Co. of Maine, subsidiary.
| Calendar year | |||
| 1918 | |||
| Capital stock | $4,000,000.00 | ||
| Surplus and surplus reserves | |||
| (including restoration of | |||
| $ 575,000) | 1,023,264.34 | ||
| Total net worth before good will | |||
| adjustment (per books) | 5,023,264.34 | ||
| Deduction: Proration of 1917 taxes | 44,012.73 | ||
| Invested capital before good will | |||
| adjustment (per books) | 4,979,251.61 | ||
| Good will adjustment: Good will on | |||
| books of New York corporation | |||
| Jan. 1, 1918 | $4,000,000.00 | ||
| Addition: Restoration of amount | |||
| charged against surplus by | |||
| predecessor (Delaware) | |||
| corporation. (The New York | |||
| corporation continued to use | |||
| the same set of books.) | 575.000.00 | ||
| Total book value of good will, | |||
| Jan. 1, 1918 | 4,575,000.00 | ||
| Limitation of good will allowable | |||
| under sec. 326(a)(5) of revenue | |||
| act of 1918: 25 per cent of par | |||
| value of capital stock out- | |||
| standing ($4,000,000) at Jan. | |||
| 1, 1918 | $1,000,000.00 | ||
| (Not necessary to determine cash | |||
| value at this point as further | |||
| reduction must be made by | |||
| reason of the limitations of | |||
| sec. 331 of the revenue act of | |||
| 1918.) | |||
| Under sec. 331 the amount of the | |||
| good will allowable to the New | |||
| York corporation is limited to | |||
| the amount allowable to the | |||
| Delaware corporation computed | |||
| as follows: | |||
| Good will on books of Delaware | |||
| corporation Apr. 30, 1917 | 1,000,000.00 | ||
| Restoration of amount charged | |||
| against surplus | 575,000.00 | ||
| Total | 1,575,000.00 | ||
| Good will allowable: 25 per cent | |||
| of par value of capital stock | |||
| outstanding (1,000,000) as at | |||
| Mar. 3, 1917. (Sec. 326(a)(4) | |||
| of revenue act of 1918.) | 250,000.00 | ||
| Good will not allowable as shown | |||
| in letter dated Oct. 9, 1924 | 4,325,000.00 | ||
| Adjusted invested capital as | |||
| reflected in def. letter dated | |||
| Aug. 21, 1926 | 654.251.61 |
*2479 The computation of invested capital which the petitioner contends is correct for the year 1918 is as follows:
| Invested capital | ||
| 1918 | ||
| (a) Capital stock of petitioner | $4,000,000 | |
| Capital stock of Delaware corporation | 1,000,000 | |
| Stock of Delaware corporation issued for stock | ||
| of Maine corporation worth $700,000; invested | ||
| capital allowable on account of stock issued | $700,000.00 | |
| (b) Surplus and surplus reserves | 1,023,264.34 | |
| Total | 1,723,264.34 | |
| Adjustment for 1917 tax proration | 44,012.73 | |
| Total invested capital | 1,679,251.61 |
If it be determined as a matter of law that the stock of the Maine corporation, in consideration of the receipt of which the stock of the Delaware corporation was issued, should not be regarded as *96 tangible property for invested capital purposes, then the petitioner contends invested capital should be computed for the year 1918 as follows:
| Invested capital | |||
| 1918 | |||
| (a) Capital stock of petitioner | $4,000,000 | ||
| Capital stock of Delaware corporation | $1,000,000 | ||
| Stock of Delaware Corporation issued | |||
| for stock of Maine corporation | |||
| worth $700,000; invested capital | |||
| on account of this stock issue | |||
| limited to 25 per cent of capital | |||
| stock of $1,000,000 outstanding | |||
| Mar. 3, 1917 | $250,000.00 | ||
| (b) Surplus and surplus reserves | 1,023,264.34 | ||
| Total | 1,273,264.34 | ||
| Adjustment for 1917 tax proration | 44,012.73 | ||
| Total invested capital | 1,229,251.61 |
*2480 The computation of invested capital for the years 1920 and 1921 as contended for by the respondent is as follows:
O'Sullivan Rubber Company of New York, parent.
O'Sullivan Rubber Company of Delaware, subsidiary and subparent.
O'Sullivan Rubber Company of Maine, subsidiary.
| Calendar Year | |||
| 1920 | 1921 | ||
| Capital stock | $4,000,000.00 | $4,000.000.00 | |
| Surplus | 935,190.62 | 920,037.11 | |
| Surplus reserves | 201,857.82 | 176,385.62 | |
| Total net worth before good will | |||
| adjusted (per books) | 5,137,048.44 | 5,096,422.73 | |
| Deduction: Respective proration | |||
| of 1919 and 1920 taxes | 85.001.83 | 72,127.61 | |
| 5,052.046.61 | 5,024,295.12 | ||
| Good will adjustment: Good will on | |||
| books of New York corporation, | |||
| Jan. 1, 1920, and Jan. 1, 1921 | $4,000,000.00 | ||
| Addition: Restoration of amount | |||
| charged against surplus by | |||
| predecessor (Delaware) | |||
| corporation (the New York | |||
| corporation continued the use | |||
| of the same set of books) | 575,000.00 | ||
| Total book value of good will | 4,575,000.00 | ||
| Deduction: Adjustment for Delaware | |||
| corporation's acquisition of | |||
| stock of Maine corporation | |||
| (elimination of intercompany | |||
| duplications arising from sub- | |||
| consolidation) | 95,275.94 | ||
| Good will account as adjusted | |||
| Jan. 1, 1920, and Jan. 1, 1921 | 4,479,724.06 | ||
| Limitation of good will allowable | |||
| under sec. 326(a)(5) of revenue | |||
| acts of 1918 and 1921: 25 per | |||
| cent of par value of capital | |||
| stock outstanding ($4,000,000.00) | |||
| at Jan. 1, 1920, and Jan. 1, 1921 | 1,000,000.00 | ||
| (Not necessary to determine cash | |||
| value at this point as further | |||
| reduction must be made by reason | |||
| of the limitations of sec. 331 | |||
| of the revenue acts of 1918 and | |||
| 1921.) |
*2481 *97
| Under sec. 331 the amount of the | |||
| good will allowable to the New | |||
| York corporation is limited to | |||
| the amount allowable to the | |||
| Delaware corporation computed as | |||
| follows: | |||
| Good will on books of Delaware | |||
| corporation Apr. 30, 1917 | $1,000,000.00 | ||
| Restoration of amount charged | |||
| against surplus | 575,000.00 | ||
| Total | 1,575,000.00 | ||
| Deduction: Adjustment for | |||
| acquisition of Maine | |||
| corporation's stock | 95,275.94 | ||
| Good will account as adjusted | |||
| Apr. 30, 1917 | 1,479,724.06 | ||
| Good will allowable: | |||
| Good will acquired for cash | 104,724.06 | ||
| Good will acquired for stock, 25 | |||
| per cent of par value of capital | |||
| stock outstanding ($1,000,000) | |||
| as at Mar. 3, 1917 (sec. | |||
| 326(a)(4) of revenue acts of | |||
| 1918 and 1921 | 250,000.00 | ||
| Total allowable | 354,724.06 | ||
| Good will not allowable as shown in | |||
| def. notice dated Feb. 12, 1926 | $4,125,000.00 | $4,125,000.00 | |
| Adjusted invested capital as shown | |||
| in def. letter | 927,046.61 | 899,295.12 |
The computation of invested capital which the petitioner contends is correct for the years 1920 and 1921 is as follows:
| Invested capital | ||||
| 1920 | 1921 | 1920 | 1921 | |
| (a) Capital stock of | ||||
| petitioner --- | ||||
| $4,000,000.00 | ||||
| Capital stock of | ||||
| Delaware corporation | ||||
| --- 1,000,000.00 | ||||
| Stock of Delaware | ||||
| corporation issued | ||||
| for stock of Maine | ||||
| corporation worth | ||||
| $700,000; invested | ||||
| capital allowable on | ||||
| account of stock issued | $700,000.00 | $700,000.00 | ||
| (b) Surplus | $935,190.62 | $920,037.11 | ||
| Surplus reserves | 201,857.82 | 176,385.62 | ||
| 1,137,048.44 | 1,096,422.73 | |||
| Adjustment for pre- | ||||
| ceding year's tax | ||||
| prorated | 85,001.83 | 72.127.61 | ||
| 1,052,046.61 | 1,024,295.12 | |||
| Invested capital | ||||
| allowable on account | ||||
| of surplus | 1,052,046.61 | 1,024,295.12 | ||
| Total invested capital | 1,752,046.61 | 1,724,295.12 |
*2482 Under respondent's theory of sub-consolidation eliminations, there were intercompany duplications arising by reason of the Delaware corporation's ownership of the stock of the Maine corporation, amounting to $95,275.94.
If it be determined as a matter of law that the stock of the Maine corporation, in consideration of the receipt of which the stock of the Delaware corporation was issued, should not be regarded as tangible property for invested capital purposes, then the petitioner contends *98 invested capital should be computed for the years 1920 and 1921 as follows:
| Invested capital | ||||
| 1920 | 1921 | 1920 | 1921 | |
| (a) Capital stock of | ||||
| petitioner --- | ||||
| $4,000,000.00 | ||||
| Capital stock of | ||||
| Delaware corporation --- | ||||
| $1,000,000.00 | ||||
| Stock of Delaware | ||||
| corporation issued | ||||
| for stock of Maine | ||||
| corporation worth | ||||
| $700,000; invested | ||||
| capital on account | ||||
| of this stock issue | ||||
| limited to 25 per | ||||
| cent of capital stock | ||||
| outstanding Mar. 3, | ||||
| 1917 | $250,000.00 | $250,000.00 | ||
| (b) Surplus | $935,190.62 | $920,037.11 | ||
| Surplus reserves | 201,857.82 | 176,385.62 | ||
| 1,137,048.44 | 1,096,422.73 | |||
| Adjustment for | ||||
| preceding year's | ||||
| tax prorated | 85,001.83 | 72,127.61 | ||
| 1,052,046.61 | 1,024,295.12 | |||
| Invested capital | ||||
| allowable on account | ||||
| of surplus | 1,052,046.61 | 1,024,295.12 | ||
| Total invested capital | 1,302,046.61 | 1,274,295.12 |
*2483 The petitioner filed its income-tax returns for the calendar years 1918, 1920, and 1921 with the collector of internal revenue at New York, N.Y.
OPINION.
PHILLIPS: These proceedings have been submitted upon stipulated facts. They were first submitted upon the theory that the Board was called upon to determine the consolidated invested capital of a group of three corporations of which the petitioner was one. Subsequently a further stipulation was filed to the effect that prior to January 1, 1917, all of the assets of the Maine and Delaware corporations had been taken over and were carried on the books of the petitioner, although such corporations had not been formally dissolved.
The stipulated facts are still insufficient to permit us to determine fully the proper invested capital which might be allowed. They are sufficient, however, to establish that the amount allowable is not less than that contended for by petitioner in its alternative computations, viz, $1,229,251.61 for 1918, $1,302,046.61 for 1919 and $1,274,295.12 for 1920, subject to such adjustments for the tax liability of preceding years as may be caused by this decision. They are insufficient to establish*2484 any greater amount.
Reviewed by the Board.
Decisions will be entered under Rule 50.