*2173 Value of tangible assets taken in payment of capital stock, determined for invested capital purposes.
*1127 The respondent asserted deficiencies in income and profits taxes for the years 1919, 1920, and 1921, against petitioner, in the aggregate of $24,199.76, of which only $6,924.90 is involved in this appeal. The petitioner alleges that the respondent erred (1) in reducing its invested capital for the years in question, and (2) in his determination of allowable deductions on account of depreciation for the years in question. The parties have stipulated that the value found to be correct for invested capital purposes shall be the basic value for determining depreciation.
FINDINGS OF FACT.
The petitioner is an Oklahoma corporation, engaged in the operation of laundries in Oklahoma City. It was organized June 2, 1912, with a capital of $150,000, paid for by assets taken over from four laundry companies which were merged in the corporation. Following the organization of petitioner, the names of these companies and the cash value which was assigned to*2174 their assets taken over were set up on its books as follows:
| Name | Tangible assets | Good will | Stock issue |
| Palace Laundry | $39,091.26 | $8,908.74 | $48,000 |
| King Laundry | 25,261.99 | 4,738.01 | 30,000 |
| White Swan Laundry | 28,489.48 | 8,510.52 | 37,000 |
| New State Laundry | 28,271.60 | 6,728.40 | 35,000 |
| 121,114.33 | 28,885.68 | 150,000 |
*1128 For a number of years prior to June 1, 1912, the business of the four companies affected by this merger had been conducted at a loss, and it was though by their respective owners that their economic problems could be solved by the reduction of operating expenses and the elimination of competition through consolidation. With this object in mind, these men agreed to organize petitioner and to convey to it their respective plants, business and good will for the fixed price, in stock for each, as shown in the above table. The value of the tangible assets conveyed by each company was roughly estimated to be as is shown in the tabulation and the difference between their valuation and the purchase price in stock was attributed to good will. In addition to the assets taken over from the four companies merged, the petitioner, to*2175 reduce competition, purchased at a cash expenditure of $21,000, the business, plants, equipment, and good will of the Model Laundry, Inc., and certain other small concerns that either were or had been engaged in operating laundries in Oklahoma City. Each conveyance of these laundry concerns contained, as a part of the consideration, a stipulation binding the seller to refrain from engaging, directly or indirectly, in the laundry business in Oklahoma County for periods ranging from three to five years, respectively. In making up its property account as of June 1, 1912, the petitioner added the $21,000 paid for the purchase of plants not in the merger, to its stock issue of $150,000, paid to the owners of the absorbed corporations, and set the same upon its books at $171,000.
In July, 1913, petitioner caused an inventory, based upon an estimated sale price value as of said date, to be made of all its physical assets, the result of which it entered upon its books in 1914. This inventory showed physical assets valued at $104,447.59, to which petitioner made additions from year to year and took depreciation on its books up to and including the taxable years in question. In auditing*2176 petitioner's returns for 1919, 1920, and 1921, the respondent adopted the values set forth in the aforesaid inventory as correctly reflecting its invested capital on June 1, 1912, the date of its incorporation. The basis thus employed by respondent resulted in a reduction of the amount claimed in the returns for the years in question.
Upon being advised of respondent's determinations in respect to its invested capital at the date of its incorporation, the petitioner *1129 thereupon employed a firm of auditors to make a retrospective appraisal of all of its assets, as of June 1, 1912, for the purpose of determining their true value for invested capital purposes on the date they were received by it in payment for stock. In making such appraisal the auditors adopted the inventory of June 1, 1913, from which they first eliminated all items acquired after June 1, 1912. With the list thus corrected, they then ascertained the cost price of each and every item appearing thereon at the date of its purchase from the manufacturers. To the cost they added freight and installation charges, which total they then depreciated to the basic date. The result of this appraisal indicated*2177 a total value of all physical assets taken over by the petitioner on June 1, 1912, of $138,693.35. The actual cash value of the petitioner's tangible property, bona fide paid in for stock, at the time of its organization on June 1, 1912, was $121,114.33.
OPINION.
LANSDON: The single issue for our determination here is the actual cash value of the tangible property which the petitioner acquired in payment of its capital stock.
The term "invested capital" as used in the various revenue acts, is defined by the acts themselves as the "actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment." The property in this case was the assets of the four companies merged, and the time of payment was the date of the merger, or the organization of petitioner, when it came into possession of the assets.
Three valuations have been put in evidence. The first is shown as that part, not assigned to good will, of the sale price fixed by the owners of the four companies merged before the organization and for which credit was given to the incorporators in payment of stock. This value was fixed and set up on petitioner's*2178 books at $121,114.33. The second valuation was the result of an appraisal which the petitioner caused to be made of all its physical assets one year after its incorporation, by an audit company, which determined the cash sale value of petitioner's assets on June 1, 1913. The third valuation was the result of a retrospective appraisal made on May 5, 1925, whereby the petitioner sought to determine the actual value of its tangible assets as of June 1, 1912, the date it took the same over in payment of its capital stock. This value was fixed at $138,693.35.
In respect to the first mentioned valuation, it is not contended by either of the parties that it was anything more than a rough estimate of the cash value of the property taken over. It did, however, in the aggregate, represent the price which all of the parties agreed should *1130 be assigned to the tangible assets when taken into the company and paid for in stock, and is the only evidence we have as to what the organizers of petitioner, who were both sellers and purchasers, believed them to be worth for said purpose at that time. The respondent adopted the valuations established by the appraisal made June 1, 1913, as*2179 the basis of his determination of petitioner's invested capital on the basic date, while the petitioner contends that the retrospective appraisal made in 1925 correctly fixed the value of its assets for said purposes on said date. It is very clear that the determinations of this last mentioned appraisal can not be accepted as correctly establishing the value of petitioner's invested capital on the date of its organization. The evidence shows that the method employed in this appraisal sought only to establish the depreciated cost of these assets to June 1, 1912, rather than the cash value on said date. We have previously held that the original cost of properties acquired separately and at different times, can not be considered in determining their combined value, for invested capital, when they are subsequently taken over by a new corporation. . We have also found that properties, after consolidation under conditions that add to their economic development, may have a greater sale value than when separately owned; and, therefore, have greater value for invested capital purposes when paid in to a corporation. *2180 . We think the facts in this case may well bring it within this last mentioned rule, and that the assets of these several corporations, when assembled for employment under a single management, as shown here, had a sale value that should not be limited to the sums total or aggregate selling prices that might be obtained from the separate sales of the various plants, or parts of plants included in the whole. The basis adopted by the Commissioner was established by the cash sale price of the different plants as of June 1, 1913, method, while the values contended for by the petitioner were obtained by the method of original cost price per unit, plus freight and installation charges, depreciated to June 1, 1912. We do not think that the valuations contended for in either of these cases correctly reflect the petitioner's invested capital on June 1, 1912, when measured by the actual cash value of these assets to this corporation at the time it took them over. The testimony as to the facts attending the organization of the petitioner show that prior to the incorporation the owners of the four companies agreed that they would sell their*2181 respective businesses to the new corporation for the sum total of $150,000. Under the circumstances it can hardly be contended that good will, as an asset, figured in the purchase price. However, the parties agreed, for accounting purposes, to ascertain the actual value of the physical *1131 assets to be conveyed to the corporation. They appointed a committee for this purpose, and this committee decided that these physical assets were worth the sum of $121,114.33. This value was assigned to these assets on the date that the corporation took them up on its books and issued its capital stock in payment therefor. The committee which determined these values was made up of the officers of the several corporations selling, and while their work of appraisal was not attended by the detailed survey usually made by experts, yet for practical purposes, it is evident that these officers knew these values without exhaustive examinations. Concerning this appraisal, one of these officers testified at the hearing that "we put down the figures for what we thought was the physical values, and then added them when we were through."
We think, in view of the appraisal made one year later, *2182 which found that these assets then had an aggregate sale price, if sold separately, of $104,447.59, and the retrospective appraisal made in 1925, which determined their depreciated cost at date of petitioner's organization to be $138,693.35, that this first appraisal, made by the committee prior to the merger, under the circumstances fairly established the actual cash value of these assets when assembled and delivered over to the petitioner for invested capital purposes, and therefore adopt the same as the correct basis of our determination. This appraisal fixed the value of these tangible assets at $121,114.33, which we find to be the correct measure of the petitioner's invested capital on the basic date.
Decision will be entered under Rule 50.