*2691 1. INVESTED CAPITAL. - Petitioner corporation in June, 1918, increased its capital stock from $5,000 to $50,000 and the additional $45,000 of stock was issued to two individuals in exchange for an automobile sales agency contract which had been acquired by such individuals without cost. Held, that petitioner is precluded by sections 331 of the Revenue Acts of 1918 and 1921 from including in invested capital for 1920 and 1921 any amount on account of the contract so acquired.
2. ID. - Petitioner and an affiliated corporation for the years 1920 and 1921 included in their consolidated invested capital the total amounts of certain noninterest-bearing demand notes executed by two individuals owning all of the corporate stock, and received by the corporations in exchange for capital stock, no demand having been made for payment and such notes being used by the corporations only for credit purposes. Upon these notes the makers at times made voluntary payments. Held, that the action of respondent, in determining the deficiencies, in eliminating from invested capital all amounts representing such notes except the payments actually made thereon, from the dates when made, was*2692 correct and proper.
3. SPECIAL ASSESSMENT. - Upon the facts, held that there was no abnormality of capital or income shown entitling petitioner for 1920 and 1921 to special assessment under sections 327 and 328 of the Revenue Acts of 1918 and 1921.
*1276 Petitioner appeals from deficiencies in income and profits taxes of $10,698.70 for the calendar year 1920, and $6,614.80 for the calendar year 1921, determined and advised of by respondent on January 20, 1926.
By the errors assigned three general issues are raised:
(a) Petitioner's right to deduct, in computing net income, certain sums paid the collector of internal revenue, in each of the taxable years and representing interest and penalties in respect to income taxes for prior years.
(b) Its right to include in consolidated invested capital of itself, and an affiliated corporation, for the taxable years in question, the sum of $100,000 and the sum of $20,000, representing in each instance noninterest-bearing promissory demand notes in these amounts, received by these corporations in return*2693 for their capital stock.
(c) Its right to include in invested capital the sum of $45,000, representing the amount entered on its books on account of a Ford automobile agency contract acquired on June 13, 1918, for that amount of its capital stock at par.
*1277 Petitioner also raises as an alternative issue failure of respondent to compute the tax under sections 327 and 328 of the Revenue Acts of 1918 and 1921.
FINDINGS OF FACT.
Petitioner is a Wisconsin corporation with principal office at Milwaukee, and was organized on August 25, 1916, by L. A. Snetcamp and Fred Bodenhagen, Jr., with a total capital stock of $5,000 par value, and on that date acquired from these two individuals the assets and business of a partnership in which they had for several years carried on an automobile sales business. The consideration paid by petitioner for these assets was its entire capital stock, issued in equal amounts to these two parties with the exception of one share issued to an employee for qualifying purposes.
At approximately the same time that petitioner was organized, Snetcamp and Bodenhagen, as individuals, entered into a contract with the Ford Motor Car Co., under*2694 which they were given the right to buy and sell Ford automobiles in Milwaukee, and thereafter the petitioner corporation carried on business under this contract.
On June 13, 1918, petitioner increased its authorized capital stock to $50,000. The additional $45,000 of stock was issued in equal amounts to Snetcamp and Bodenhagen and as a consideration for this issue there was entered upon petitioner's books as an asset, in the sum of $45,000, the "Ford Contract" mentioned.
On June 23, 1919, petitioner's authorized capital stock was increased to $150,000 and the additional $100,000 of stock was issued in equal amounts to Snetcamp and Bodenhagen, in return for which these parties executed and delivered to petitioner 10 noninterest-bearing promissory notes signed by them jointly, and payable on demand, and the following entry was on that date made upon petitioner's minute book:
Upon motion duly made and seconded, it was resolved that stock in this company in the amount of $100,000 be issued to Louis A. Snetcamp and Fred Bodenhagen, Jr., and that their notes in said sum be accepted in payment of their stock subscriptions for said amounts; said notes to be payable on demand in the*2695 sum of $10,000 each, and to be drawn without interest.
Following this the promissory notes in question were entered in petitioner's notes receivable account and were included in the asset accounts of the balance sheets and statements furnished by petitioner to its bank for the obtaining of additional credit for loans and upon this additional showing of resources petitioner's line of credit was increased from $40,000 to $80,000. Petitioner used considerable money in its business and borrowed the necessary funds from its bank. The notes in question were never discounted at the bank or otherwise disposed of and no demand for their payment was made *1278 upon the makers by petitioner. However, voluntary payments were jointly made upon these notes by the makers as follows:
| June 30, 1921 | $15,500 |
| June 30, 1922 | 12,50 |
| Total | 28,000 |
In 1925 Snetcamp bought out Bodenhagen's interest in petitioner and assumed his indebtedness thereon, and thereafter effected a reorganization of petitioner whereby the unpaid balance of $72,000 of the notes referred to was canceled, the $45,000 representing the Ford agency contract was written off petitioner's books, all of the*2696 capital stock was returned to petitioner and canceled, and 1,500 shares no par value stock were authorized which were all issued to Snetcamp.
On April 20, 1920, to meet the needs of petitioner corporation in financing purchasers of Ford cars, Snetcamp and Bodenhagen incorporated, under Wisconsin law, the Northwestern Finance Co., with an authorized capital of $50,000, of which $25,000 was issued in equal amounts to these two individuals in return for $5,000 cash paid in by them and two joint promissory noninterest-bearing demand notes for $10,000 each, and the following entry was made on the minutes of that company on that date:
Upon motion duly made and seconded, the following resolution was unanimously adopted: Whereas, said Louis A. Snetcamp and Fred Bodenhagen, Jr., have paid to this company the sum of $5,000 in cash for stock issued to them in said amount, and have agreed to pay for the balance of their stock subscriptions by giving their promissory notes to this company in the sum of $20,000 payable on demand, without interest; and whereas, the Directors of this Company, are fully satisfied with the financial responsibility of said Louis A. Snetcamp and Fred Bodenhagen, *2697 Jr.
NOW THEREFORE, Be it resolved that this corporation accept the promissory notes of said Louis A. Snetcamp and Fred Bodenhagen, Jr., so executed, in full payment and satisfaction of their stock subscriptions and that the officers of this company be and are hereby authorized and directed to accept said promissory notes so executed in full payment thereof.
These notes were not discounted by the Northwestern Finance Co. or otherwise disposed of and no demand was made for their payment. Payments were voluntarily made on these notes by Snetcamp and Bodenhagen, as follows:
| July 1, 1921 | $3,100 |
| Dec. 12, 1922 | 3,000 |
| Dec. 14, 1922 | 3,000 |
| Dec. 31, 1924 | 2,000 |
| Aug. 31, 1925 | 3,000 |
| 14,100 |
Petitioner and its affiliated corporation filed consolidated returns for the two taxable years in question and in both these years, in computing invested capital, included at their face value the notes *1279 given petitioner in the sum of $100,000 and the affiliated company in the sum of $20,000, and included for those years in the sum of $45,000 the Ford agency contract as an asset acquired at that cost. Respondent in determining the deficiencies appealed from excluded*2698 the promissory notes in question, except to the extent of payments made thereon, these being included from the dates when made. Respondent disallowed the entire amount included as representing the Ford contract.
For the calendar year 1920 petitioner in computing taxable income deducted the amount of $147.75, interest paid in that year on its prior year's income tax, and for the calendar year 1921 deducted $100.10 as interest and $31.98 as penalties paid in that year in respect to its income tax for the prior year. These deductions were disallowed by the respondent and upon the hearing it is stipulated by the parties that in so far as the deductions representing interest are concerned petitioner is entitled to make the deduction, any that as to the penalty of $31.98 the disallowance by the respondent was proper.
OPINION.
TRUSSELL: In respect to the first issue it is insisted by petitioner that the Ford agency contract was the personal property of Snetcamp and Bodenhagen and was not a part of the assets transferred to petitioner on organization in exchange for all of its $5,000 of authorized capital stock, and although the petitioner enjoyed the privileges of the contract*2699 from that time until June, 1918, it was still the property of these two individuals and was exchanged by them at that time for the additional $45,000 of stock issued. It is insisted that the contract is a tangible asset which had a value of $45,000 in 1918, and is subject to inclusion in invested capital in that amount.
We need not consider the value of this asset nor the question as to whether it is tangible or intangible, for the record shows it to have been acquired without cost by Snetcamp and Bodenhagen and to have been assigned by them to petitioner subsequent to March 3, 1917, in exchange for $45,000 of petitioner's total authorized capital stock of $50,000, and consequently barred from inclusion in invested capital in any amount by the limitation of sections 331 of the Revenue Acts of 1918 and 1921.
In respect to the action of respondent in excluding from invested capital of these affiliated companies the unpaid balances of noninterest-bearing demand notes given in exchange for stock, petitioner insists that the Wisconsin statutes do not prohibit the issuance of stock in exchange for promissory notes and that the notes had an actual value as the markers were solvent*2700 and accordingly these affiliated corporations were entitled to include them in invested capital at their *1280 face value, at which they were entered in the corporate books. Petitioner cites , and other decisions of the Board in which promissory notes given for stock were permitted to be included in invested capital. However, in all these cases the transactions were ones in good faith of interest-bearing, merchantable notes, paid in for shares, where the parties to the transactions understood that the notes received would be discounted, or enforced by the corporation, when due, and represented upon receipt assets of the corporations the values of which would be realized upon without regard to interests other than those of the holders.
We have had occasion in several instances to pass upon the propriety of the inclusion in invested capital of noninterest-bearing notes given in exchange for stock. In , and , we held that such notes could not be included in invested capital of the corporations receiving them. In *2701 , a case similar in essential features to the one now before us and in which, as in the present one, it was insisted by the petitioner that the acceptance of promissory notes for stock was permitted by the state law applicable and that this fact coupled with the fact of financial solvency of the makers of the notes was decisive of the issue as to the propriety of their inclusion in invested capital, we said:
The fact that a South Dakota corporation may issue shares of stock upon the basis of notes given by the stockholders in payment therefor, is not decisive of the issue in the case at bar. The question is whether the notes were bona fide paid in for shares of stock. The evidence shows that the makers of the notes were responsible for their payment; also that the notes were used in some instances as security in the borrowing of money. The notes were noninterest-bearing and the evidence does not show what their discounted value might be at the date received by the corporation. The evidence also shows that when the notes matured they were not paid, but were renewed by other noninterest-bearing notes running for a period of five years, *2702 and that these notes were never paid. We think that this negatives the idea that they were bona fide paid into the corporation within the meaning of the statute. Although the corporation was in need of money and had to borrow from the bank, it did not discount the notes at the bank but at the most used them as a basis for credit. The action of the respondent in excluding the face value of the notes from invested capital is approved.
In the case before us it is insisted that the makers of the notes were solvent. We are not satisfied from the evidence that this was a fact but even were it true, such condition, in view of the fact that no demand for payment was made by the corporation, although it needed money and was borrowing money from the bank upon which it paid interest while the notes were paying none, and that it merely used the notes for the purpose of increasing its apparent net assets for *1281 credit purposes, merely strengthens the impression that the notes were given and received with the understanding that payment would not be enforced by petitioner. Under the circumstances shown we think that the exercise of such forbearance was understood and agreed upon*2703 at the time the notes were given and it was intended that the makers should only make payments upon them voluntarily at such times as suited their convenience, and we hold that the action of respondent in including in the consolidated invested capital of these affiliated corporations only the amounts actually paid upon these notes, and from the dates on which such payments were made, was correct and proper.
In respect to the alternative issue of the failure of respondent, upon his elimination from invested capital of all amounts representing the Ford contract and the notes in question, to compute the tax under sections 327 and 328 of the Revenue Acts of 1918 and 1921, it is noted that counsel for petitioner in his opening statement at the hearing, by limiting the controversy to the two issues heretofore discussed, implies that such issue is withdrawn. There was no proof upon the hearing directed specifically to this issue and it is not discussed or mentioned in petitioner's brief. It may, however, be said that the proof introduced upon the other issues does not indicate an abnormality of capital or income, in the taxable years in question entitling the petitioner to such relief.
*2704 It is agreed and stipulated by the parties that petitioner is entitled to certain deductions for the taxable years as set out in the findings and representing interest payments made on delinquent prior years' taxes. The deficiency should be corrected by allowance of these deductions.
Judgment will be entered pursuant to Rule 50.