*2232 1. Where petitioner scrapped one of its plants, but continued to own the land appurtenant thereto, including certain mineral deposits, held that it did not suffer a deductible loss by reason of any minerals remaining under the land.
2. Where tangible assets of two corporations were paid in for the stock of a new corporation, and where the values of such assets were at the time they were paid in determined by the officers of the two predecessor corporations, held that these values only should be allowed as paid-in invested capital rather than a value determined as of a date 15 months subsequent to the organization of the new corporation, especially where one of the predecessor companies had, prior to the consolidation, suffered a destructive fire and was rebuilt prior to the date of which the appraisal was made.
3. The inclusion in the invested capital of intangibles alleged to have been paid in for stock prior to March 3, 1917, denied because the value thereof was not proven; because it was not shown that such intangibles were paid in for stock; and because the par value of the outstanding shares of the corporation on March 3, 1917, is not shown.
4. Value of assets*2233 as of March 1, 1913, determined for depreciation purposes.
*832 The above proceedings were by order duly entered consolidated for hearing and decision. Docket No. 23120 involves the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921, in the respective amounts of $5,597.21 and $4,516.73. Docket No. 30506 involves the redetermination of deficiencies in income tax for the years 1922 and 1923 in the respective amounts of $2,361.89 and $7,507.49. The errors alleged in Docket No. 23120 are (a) failure to allow as a deduction for 1920 the undepleted portion of clay reserves at Elmira, N.Y., which were abandoned in the year 1920, and also failure to determine the March 1, 1913, value of clay reserves as previously determined by him; (b) failure to allow an increase in invested capital for the years 1920 and 1921 in the amount of a paid-in surplus as of the date of petitioner's organization, as shown by an appraisement made at the approximate date thereof in the amount of the excess value of*2234 physical assets above the stock issued therefor; (c) reduction of invested capital for the year 1920 for alleged insufficient depreciation sustained prior to January 1, 1920, such depreciation being computed on the value of fixed depreciable assets which had been the subject of a claim for paid-in surplus; and (d) failure to allow as an increase in invested capital the cost of capital improvements and betterments which had been charged to current expenses. In Docket No. 30506 the errors alleged are (e) failure to allow a reasonable amount of depreciation and failure to compute depreciation on the basis of the value of assets when acquired by petitioner at its organization, which values were in excess of the book values and for which a claim for paid-in surplus had been made; (f) failure to determine the March 1, 1913, value of depreciable assets for the purpose of computing depreciation; (g) failure to allow as a deduction for the year 1923 the net amount of a loss sustained by a fire; and (h) failure to allow as a deduction for the year 1923 the amount of a reasonable addition to a reserve for bad debts.
Respondent by amended answer filed in Docket No. 23120 alleges that he erred*2235 in computing depreciation for the years 1920 and 1921 on an excess valuation of petitioner's assets, which excess was in the sum of $53,634.48, being an excess value claimed by petitioner. At the hearing petitioner waived errors (g) and (h) and filed an amended petition to conform to the facts proven relative to the exclusion from invested capital of good will paid in at the date of petitioner's organization. From the evidence, certain stipulations between the parties, and from the pleadings, we make the following findings of fact.
FINDINGS OF FACT.
Petitioner is a corporation duly incorporated under the laws of New York, with its principal office at Horseheads, N.Y. Petitioner's *833 business consists of the mining of clay and the manufacture thereof into brick. It operated two mines and factories located in Elmira, N.Y., and Horseheads, N.Y., respectively. Petitioner was organized on January 19, 1910, and at that time took over, pursuant to the New York Corporation Law, the business conducted by two separate predecessor corporations, to wit, the Elmira Shale Brick Co. and the Horseheads Brick Co. (hereafter called respectively Elmira Company and Horseheads Company). *2236 The Elmira Company was established in 1880 and incorporated January 1, 1903. The Horseheads Company was established in 1870 and incorporated September 6, 1895. Each corporation at the date of the organization of petitioner had a capital stock of $50,000 issued and outstanding. The Elmira Company and the Horseheads Company were both close corporations. R. G. Eisenhart was virtually the Horseheads Company. He owned all except a few shares of its corporate stock. He owned about one-half of the stock of the Elmira Company and Phillip Weir held the other half of said stock, with the exception of about five shares each held by Weir's daughters for organization purposes. The plants of the two companies were about five miles apart. The books of the two predecessor companies were accurately kept in that the entries truly represented what was received and what paid out, but no provision was made for depreciation or obsolescence. Capital items were sometimes charged to expense and nearly all installation was done by factory hands and charged to expense. The Horseheads plant had a production capacity of about one-third in excess of the Elmira plant and was more favorably situated in*2237 respect of clay deposits and shipping facilities. Upon the organization of petitioner there was issued $100,000 of its capital stock to the owners of the stock of the predecessor companies. The said capital stock was issued to stockholders of the predecessor companies 50 per cent each, share for share in equal proportions. Thereupon the petitioner acquired all of the assets and businesses of the predecessor corporations through their liquidation. In October, 1909, the Horseheads Company suffered a disastrous fire, which burned everything that was burnable except a clay shed north of and separate from the main plant, a blacksmith shop, and a part of the shed over one end of the kiln, a small part of which was saved. The clay shed was built about 1870, of brick and wood, and at the time of the fire some parts of it had rotted, the roof boards were poor and the roof leaked in some places; otherwise, it was in fairly good condition. The plant, except the said clay shed and blacksmith shop, was rebuilt. Almost all the reconstruction was done in the year 1910 and was completed about the middle of the summer of that year. Just prior to the *834 taking over of the assets of*2238 the two predecessor companies by petitioner and on January 19, 1910, the books of the Horseheads Company and the Elmira Company were adjusted. On the journals of the companies the following adjustments were made by which the assets of each company were reduced in the following amounts:
| Horseheads Company | |
| Real estate account | $1,106.20 |
| Construction account | 8,193.41 |
| Kiln account | 725.35 |
| Horses and carts account | 612.00 |
| Machinery account | 31,225.30 |
| Total | 41,862.26 |
| Elmira Company | |
| Real estate account | $2,883.84 |
| Machinery account | 5,455.08 |
| Horses and carts account | 125.00 |
| Total | 8,463.92 |
To equalize the value of the assets of the two concerns, the stockholders of the Horseheads Company paid into its treasury the sum of $10,000 shown in the following account. On the same day, January 19, 1910, the assets taken over from each company appeared in their respective books of account as follows:
| Elmira Shale Brick Co. | Horseheads Brick Co. | Total | |
| Balance sheets, Jan. 19, 1910 | |||
| ASSETS: | |||
| Real estate | $14,000.00 | $8,000.00 | |
| Construction | 5,000.00 | 8,000.00 | |
| Machinery | 16,300.00 | 11,400.00 | |
| Kiln | 10,000.00 | 12,000.00 | |
| Dryer | 4,000.00 | ||
| Horses and cart | 650.00 | 600.00 | |
| Office furniture | 50.00 | ||
| Cash | 10,000.00 | ||
| 1 Accounts receivable | 8,000.00 | 6,000.00 | |
| 58,000.00 | 56,000.00 | $114,000.00 | |
| CAPITAL: | |||
| Capital stock | 50,000.00 | 50,000.00 | 100,000.00 |
| Credit to stockholders (later transferred to capital) | 8,000.00 | 6,000.00 | 14,000.00 |
| 58,000.00 | 56,000.00 | 114,000.00 |
The foregoing book values were carried into the consolidation at the same figures without change.
The average production of bricks for the two companies from 1903 to 1909 was 17,026,742 bricks per year, and the average sales per year amounted to $110,847.21. The total production of petitioner for the years 1910 and 1911 was 12,664,183 bricks and 12,817,700 bricks, respectively.
Petitioner early in 1911 ordered an appraisal of certain of its assets by the American Appraisal Co. The appraiser's report is dated *835 April 28, 1911, and sets forth the purported sound value and reproduction costs of the assets appraised at April 28, 1911. The "sound values" shown in said appraisal were based upon the estimated cost of replacement new at the date of appraisal adjusted for depreciation. Depreciation was computed by the appraiser from the then appearance of the asset appraised and not on the time it had been used. The term "sound value," as used in said report, purports to*2240 show reproduction cost less such depreciation.
The appraisers inventoried all items from personal inspections, made a detailed examination of the property, prepared plat plans, measured each item and made computations of the quantity of materials, supplies, etc., in accordance with the standard methods used by the appraisers. Local costs for materials and labor were obtained by the appraiser. On January 24, 1924, a supplemental appraisal was made of the sound values of the brick kilns and other minor items at the Elmira and Horseheads plants as of April 28, 1911. The letter of the American Appraisal Co. accompanying said supplemental report states in part as follows:
In accordance with your commission, we have made an appraisal of, and submit herewith our report on certain units of your plant located at Elmira, New York, which were in existence April 28, 1911, as indicated by drawings prepared in connection with our former appraisal as of that date, but which were not included in the former report because of said units being excluded from insurance coverage.
The units referred to, the existence of which at that time is thus verified, comprise principally various buildings*2241 and brick kilns, but included also in this report are minor items such as office furniture and fixtures, wagons and harnesses, and horses and mules (information concerning the existence of which on April 28, 1911, has been furnished by you) and values of which are in accordance with our statistical records of values as of that date.
A similar statement appears in the appraisal report of the Horseheads, N.Y., plant.
The original appraisal working papers and plat plans referred to the items included in the supplemental appraisal. Pricings at the time were obtained and computations could be made later. Appraisers by personal inspection of the properties made adjustments for depreciation.
The sound value of the assets of petitioner located at Horseheads, N.Y., as appraised by the American Appraisal Co. as of April 28, 1911, is as follows:
| Line No. | Classifications | Grand total |
| Buildings | ||
| 1 | Construction | $39,946.20 |
| Kilns | ||
| 2 | Kilns | 29,914.84 |
| Equipment | ||
| 3 | Foundations for machinery and equipment | 4,937.46 |
| 4 | Steam power plant | 7,093.50 |
| 5 | Piping | 1,757.18 |
| 6 | Electric lighting plant | 118.90 |
| 7 | Electric lighting | 188.10 |
| 8 | Machinery, etc | 19,570.05 |
| 9 | Unused machinery | 32.00 |
| 10 | Shafting, etc | 1,789.79 |
| 11 | Pulleys | 444.05 |
| 12 | Belting | 506.84 |
| 13 | Spouting | 181.45 |
| 14 | Trucks, etc | 7,016.00 |
| 15 | Miscellaneous | 664.29 |
| 16 | Horses | 600.00 |
| 17 | Total of equipment, 3 to 16, inclusive | 44,899.61 |
| 18 | Grand total of lines, 1 to 2 and 17 | 114,760.65 |
*2242 *836 The sound value of the assets of petitioner located at Elmira, N.Y., as determined by the appraisal of the American Appraisal Co. as of April 28, 1911, is as follows:
| Line No. | Classifications | Grand totals |
| 1 | Railroad siding | $316.80 |
| Buildings | ||
| 2 | Construction | 11,896.85 |
| Kiln | ||
| 3 | Kiln | 12,670.23 |
| Equipment | ||
| 4 | Foundations for machinery and equipment | 1,542.37 |
| 5 | Steam power plant | 2,474.55 |
| 6 | Pipe and fittings | 839.74 |
| 7 | Machinery, etc | 4,135.00 |
| 8 | Unused machinery | 550.00 |
| 9 | Shafting, etc | 209.29 |
| 10 | Pulleys | 224.46 |
| 11 | Belting | 380.91 |
| 12 | Trucks, etc | 1,297.60 |
| 13 | Miscellaneous | 217.03 |
| 14 | Office furniture and fixtures | 50.00 |
| 15 | Horses and mules | 470.00 |
| 16 | Wagons and harness | 1,323.00 |
| 17 | Totals of equipment, 4 to 16 inclusive | 13,713.95 |
| 18 | Grand totals of lines 1, 2, 3 and 17 | 38,597.83 |
The foregoing appraisals show an estimated sound value of the assets appraised of $57,442.29 in excess of the value shown on petitioner's books as of the date of the appraisal. Respondent disallowed this excess as invested capital.
At the beginning of the taxable year 1920 the petitioner's capital and surplus, per its balance*2243 sheet, was $153,070.72.
*837 Respondent allowed depreciation for the years 1920 and 1921 on the value of so much of the above as constituted depreciable assets. For the years 1922 and 1923 respondent disallowed for depreciation purposes the following amounts:
| Construction account | $17,063.12 |
| Kiln | 17,776.72 |
| Machinery | 18,794.65 |
The books of petitioner up to and including the year 1916 did not properly reflect capital expenses. No provision was made therein for depreciation. Capital items were sometimes charged to expense and installation was generally charged to wages. Such items as lumber, hardware, machine shop work, gravel and cement were charged to expense, though applicable to capital items.
The books of petitioner contained the following items relative to additions to capital account during the period 1910 up to April 28, 1911:
| Horseheads | |
| Construction account | $14,803.08 |
| Kiln account | 138.12 |
| Machine account | 12,851.65 |
| Horses and carts account | 125.00 |
| Dryer | 4,574.78 |
| Total | 32,492.63 |
Elmira
The rates of depreciation allowed by respondent and not disputed by petitioner are as follows:
| Per cent | |
| Construction account | 5 |
| Kiln | 5 |
| Horses and carts | 16 2/3 |
| Machinery | 10 |
| Dryer | 5 |
| Office furniture | 10 |
*2244 The depreciable assets appraised by the American Appraisal Co., as shown above, had a fair market value on March 1, 1913, for the purpose of depreciation, of the amounts at which appraised as of April 28, 1911, less depreciation at the rates above set forth to March 1, 1913.
Additions to fixed asset accounts as shown by the books from April 28, 1911, to March 1, 1913, were as follows: real estate, Horseheads, July 27, 1911, $350; horses and carts, Horseheads, a horse on July 19, 1911, $50; horses and carts, Elmira, April 28, 1911, mules $265, April 29, 1911, mules $50; May 18, 1911, $55.50; construction, Horseheads, February 7, 1912, $60.73, October 2, 1914, $92; machinery, Horseheads from May 2, 1911, to December 16, 1911, $1,918.98, December *838 29, 1911, $39.33. The books also showed credits, generators sold May 13, 1915, $15 and one engine sold May 13, 1915, for $90.
Additions to fixed asset accounts from March 1, 1913, to January 1, 1920, according to taxpayer's ledger accounts were kiln #2, Elmira, started October 23, 1915, and completed January 1, 1916, at a cost of $3,000.
Prior to the year 1920 petitioner purchased and installed machinery and made capital*2245 expenditures which it charged to expense Said items are:
| March 31, 1913, purchased motor from General Electric Co | $629.55 |
| April 13, 1914, purchased blower from Garlock Packing Co. and B. T. Sturtevant & Co | 376.53 |
| March 24, 1916, purchased locomotive, J. D. Tate & Co | 1,050.00 |
| May 13, 1914, purchased blower, Sturtevant & Co | 140.00 |
| April 23, 1915, electrical wiring, purchased from Turner Electric Co | 500.00 |
| April 10, 1915, motor purchased from General Electric Co | 1,859.00 |
| Feb. 27 1912, purchased blower from American Blower Co | 346.59 |
| June 17, 1912, purchased clay machine from American Clay Machine Co | 400.00 |
| Total | 5,301.67 |
The above machinery and improvements were in existence on January 1, 1920, and the cost thereof was disallowed as invested capital by respondent.
Respondent calculated depreciation on the abandonment of the Elmira plant of $28,961.93, whereas the depreciation deducted on the petitioner's books was $17,827.51.
During the year 1920 petitioner scrapped its plant at Elmira, N.Y., and respondent allowed a loss by reason thereof in the amount of $14,771.95. At a time not shown either petitioner or the Elmira Company acquired about seven*2246 acres of land at Elmira, N.Y., containing clay deposits. Respondent allowed depletion on these deposits at the rate of 5 cents per thousand brick. At the time petitioner scrapped its plant at Elmira there remained about four acres of undepleted clay reserve.
OPINION.
MILLIKEN: 1 We will first discuss the issues raised in Docket No. 23120. All the issues asserted in the petitioner filed under this docket number, except that with respect to the clay reserve, relate to invested capital.
In its petition filed under Docket No. 23120, petitioner seeks a deduction of $1,986 for clay reserves at Elmira, alleged to have been abandoned in 1920, when the plant at that place was scrapped. This claim must be denied. In the first place, we do not know what *839 was the cost of the clay. In the petition, it is alleged that petitioner purchased 9 acres of land for the sum of $10,000, of which 7 acres consisted of a clay reserve. At the hearing petitioner introduced as its witness one who had been associated with petitioner and its predecessors for over 21 years in the capacity of general superintendent*2247 and secretary. This witness testified that there were 7 acres of clay land; that of this about 4 acres were untouched when the plant at Elmira was scrapped, and that these 7 acres cost $500 per acre. Thereafter, petitioner introduced as a witness a certified public accountant, who had made two visits to the plant - the first, a one-day stay in 1926, and the second, a later visit, the duration of which the witness could not remember. This witness testified:
Q. Have you also made an examination of the books and records and if so will you tell us what they show with respect to the acquisition cost of the clay lands at Elmira? You are reading now from a memorandum made after your examination of such books and records?
A. Yes. There were seven acres which cost in total $10,000. At the rate of 5 cents a thousand brick and calculating the number of available brick in the entire tract of seven acres, the clay portion of the clay lands amounts to $3,388, which is the cost of $484 per acre.
Thus, we find it alleged in the petition that the 9 acres cost $10,000; that the only witness who was connected with petitioner testified that the 7 acres of clay land cost $500 an acre, or*2248 $3,500, and last, a certified public accountant, who testified that the 7 acres of clay land cost $10,000. From the above we are unable to determine cost. Neither do we know whether this land was purchased prior or subsequent to March 1, 1913, and if purchased prior thereto, we are not informed as to its market value on that date. There is no evidence that this clay reserve was abandoned in 1920, whatever may be the intended meaning of the word "abandoned." The one witness who was conversant with what was actually done, the secretary and manager of the company, did not testify on this issue. The only testimony in which the word "abandoned" appears is that of the certified public accountant, who did not visit the Horseheads plant until 1926, or six years after the scrapping of the Elmira plant, and who does not appear to have seen the Elmira plant. To the question, "From the time of acquisition to 1920, which was the year that the Elmira plant lands were abandoned, how many acres were added to the Elmira clay lands?," he answered "None." The allegation in the petition is not that petitioner abandoned the lands which it owned at Elmira, but that it abandoned undepleted clay reserves*2249 in the land. There is nothing in the record which in the slightest degree indicates that petitioner did not own the land and the clay therein throughout the taxable year. In fact, in the brief filed in its behalf, petitioner admits that it did not abandon the "surface of the land." How it could abandon what was underneath the surface and still own the *840 surface is incomprehensible. While petitioner did scrap its plant at Elmira in 1920, it still owned the real estate. In , on a quite similar state of facts, we denied a similar deduction, saying:
It is well settled that title to real property can not be lost by abandonment alone. 1 Corpus Juris, 10. In Ruling Case Law, p. 2, section 2, it is stated:
"The characteristic element of abandonment is a voluntary relinquishment of ownership, whereby the thing so dealt with ceases to be the property of any person and becomes the subject of appropriation by the first taker."
In the case of East Tennessee, Judge Lurton, who delivered the opinion of the court, said:
"Precisely what is meant by 'an abandoned' *2250 legal title is hard to define. If it is the valid legal title, it is inconceivable how it can be abandoned."
* * *
* * * Losses from dealing in real or personal property, growing out of the ownership thereof, are deductible only when ascertained and determined upon an actual, completed, and closed transaction during the taxable year, and are not sustained through the mental processes by which a taxpayer determines that the property is worthless and charges it off on its books, while it still retains the title to the property itself.
We now approach the question of invested capital. The pertinent provisions of the Revenue Act of 1918 are as follows:
SEC. 326. (a) That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section):
(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 tangible property at the time paid in is shown to the*2251 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; not including surplus and undivided profits earned during the year;
(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest;
Petitioner seeks to have included in its invested capital the sound value of the assets shown by the appraisements of April 28, 1911, and January 24, 1924. The amounts shown by such appraisements are claimed as the true cash value of the tangibles "bona fide paid in" for petitioner's capital stock as of the date of petitioner's organization on January 19, 1910, which was about 15 months prior to the date of the first appraisal. This was the date of which the appraisals fixed the value and determined that the*2252 assets were in existence. In discussing this question we are forced to take cognizance *841 of two vital facts - first, that just prior to the consolidation the Horseheads Company had suffered a disastrous fire, and, second, that the consolidation was effected on the basis of equality of value of the assets of the two predecessor companies.
It is shown by the evidence that a clay shed erected in 1870, which was separate from the main plant, and a blacksmith shop also so situated, were not touched by the fire. With these exceptions, all else that could burn except a small part of the roof over the kiln was burned. We may here state that the kiln could not burn but that it was damaged by the fire. On the questions of the effect of the fire and the basis of consolidation, but one witness testified, and he was petitioner's secretary, to whom we have referred. Being asked whether certain machines went through the fire, he said:
Q. They had gone through the fire? A. Everything had gone through the fire.Q. Was their condition then - they had been repaired after the fire in 1910, that is, in 1910 was a time after the fire they had been repaired at the time this consolidation*2253 occurred. Is that correct?
A. No, your Honor, I would not say that. Q. They had not been or had they been?A. At the beginning of January 1, 1910, repair work was started and in progress. I would not know whether one thing at the beginning of 1910 had been done on the pans. They were working at this or that, as the weather permitted in the open winters and snow and things in the air, we will say on the first of January, was not a permissible time to do outside work and get up any building and make repairs on the damaged machine, so that the first of January, 1910, would find little left at the plant, only damaged machines and relics of the fire, because it was in winter.
Again he testified:
Q. Have you mentioned substantially everything that was there now at the Horseheads plant? I am thinking of things now of substantial value.
A. Your Honor, there were all kinds of tools and small items in the building that was all consumed, shovels and picks. You might find something here and there, but after a fire it cleans up.
Q. It was practically destroyed by fire?A. Yes, at the beginning of January, all we had, these wrecks of machines and what the fire*2254 could not burn.
The same witness testified:
Q. Immediately after the fire, or at January 19, 1910, which was during the following year, was there, I repeat, on January 19, 1910, a brick machine room?
A. Immediately after the fire there was darn little there outside of the north clay shed. We started rebuilding what was there on any particular specified day - I can't recall on January 20, where they had the machine room - I know we were rebuilding, but what was there on any day or time, I could not recall the whole thing. It was not completed until the summer was half over, before the plant was rebuilt and ready for operation.
*842 Testifying as to the effect which the fire had on the consolidation, this witness stated:
Q. Were any of the assets written off as a result of the fire at the Horseheads plant?
A. I think the accounts were readjusted in this particular; the amount of value to offset the Elmira stock covered an item of $10,000 cash in the Horseheads accounts extra which would assist in placing things back even with the Elmira concern. I am speaking now about 1910, January 1910, which I assume is the point you are driving at.
Q. Yes, sir. Was*2255 that cash actually paid in?
A. It was put on deposit at the First National Bank at Horseheads.
Q. Who put it in?A. R. G. Eisenhart, as treasurer of the Horseheads Brick Company and he was the Horseheads Brick Company largely.
Q. He put in $10,000?A. He had to, because he suffered a fire loss, and the Elmira would have taken a burned down plant to off-set what they had, without evening up for an adjustment for share for share between them, and that was the understanding, that they were to have $10,000 with the salvage of the old plant and $10,000 cash to balance the value between plant and plan otherwise Horseheads would be figured on a higher valuation than Elmira.
It thus appears that the men who had long owned and managed these two plants and who were thoroughly conversant with their true values determined that the deal should be made on a fifty-fifty basis, and that by reason of the fire the then existing assets of the Horseheads plant, although it had a larger capacity and was the more favorably situated of the two, were worth $10,000 less than the assets of the Elmira Company, and that to equalize these values this sum was paid in by Horseheads' principal*2256 stockholder. This testimony also explains the write-off of values on the books of the old companies. The certified public accountant, who personally knew nothing of these facts, testified that the write-off of machinery was in his opinion excessive, forgetting that these concerns were established in 1870 and 1880, respectively, and that one was incorporated in 1895 and the other in 1903, and that neither had made any allowance on their books for depreciation or obsolescence. He further stated that the write-off of real estate was improper, since real estate could not depreciate. What the market value of such real estate was when paid in to petitioner in 1910 does not appear; further, we do know that the clay reserves were being actually exhausted by depletion year by year. It is pertinent to point out that petitioner does not now question the value of the real estate agreed upon between the parties. We do know, however, that these were the values fixed by men of experience in the business and who were dealing in arm's length. The fact that these values appear in round numbers instead of being carried out in the final decimals does not affect our conclusion that the values set*2257 up at the date of the consolidation were *843 the true cash values of the assets paid in. While cost may be set out in detail, values are generally estimated in round numbers.
While petitioner, in the brief filed in its behalf, has assailed these various amounts as not being truly representative of the cash value of the various assets paid in for stock, it does not deny that the consolidation was effected on the basis of equality of the value of the assets. The stockholders of each predecessor company were to pay in practically the same amount in value and were to receive precisely the same amount of the capital stock. This equality would be utterly destroyed if we accept appraisals as showing the cash value of the assets of the two companies as of January 19, 1910, when they were paid in for stock. Adjusting the values of the Elmira plant agreed upon between the parties by substituting the appraised values for the agreed values, we find that the total value of the assets paid in by that company would be the sum of $60,597.83, and deducting from this the additions made between January 19, 1910, and April 28, 1911, as shown by the books, in the sum of $2,076.08, we find*2258 the net value of the assets paid in of $58,521.75, or only $521.75, in excess of the value agreed upon between the parties. On the other hand, making similar adjustments of the value of the assets of the Horseheads Company, we find that the appraised values, plus the value of real estate, plus cash paid in, plus accounts receivable, less additions shown by the books to have been made between January, 1910, and April 28, 1911, would amount to the sum of $106,268.02. It thus appears that if we accept the appraisals as showing the value of assets in existence on January 19, 1910, the result would be that the assets paid in by the Horseheads Company were of nearly double the value of the assets paid in by the Elmira Company.
We are asked by petitioner to hold that the stockholders of the two predecessor companies, who were men who had been long connected with the management of these concerns and were thoroughly conversant of the values not only of their respective plants, but of both plants, and who were dealing on the basis of equality of value of assets, were so ignorant of the true value of their plants that one paid in nearly twice the value paid in by the other. We are requested*2259 to hold that the value of "only damaged machines and relics of the fire" at Horseheads in January, 1910, was equal to the value of the rebuilt and reconstructed plant appraised in April, 1911. We are unable to make such determination. Nor are we helped by the showing of the books that about $32,000 was expended in the reconstruction. On this point, the books are of little help. Petitioner has taken pains to point out that these books do not reflect all capital expenditures. It may well be that wages of those who helped to construct the plant were charged to expense. Petitioner has asked *844 us to find and we have found that such items as lumber, hardware, gravel and cement, though applicable to capital items, were charged on the books to expense. So far as we are informed, this may account for at least a part of the difference between the agreed price and the appraisal. However this may be, the fact remains that all that was in existence at the date of the consolidation was the real estate, one old clay shed, one blacksmith shop and fire wreckage. On the question of the value of the assets of the two predecessor companies in their condition on January 19, 1910, we*2260 have no evidence except the values placed upon them by the parties themselves, and this we accept. Petitioner had, as of the date of its organization, a paid-in surplus of $14,000.
At the hearing petitioner amended its petition and sought the inclusion in its invested capital of the value of intangibles alleged to have been paid in for stock at the date of its organization. It requests us to find that the average earnings of the predecessor companies for the years 1903 to 1909, inclusive, amounted to $30,944.63 per year. We have no competent evidence before us upon which to base such a finding. Petitioner's secretary gave it as his recollection that the net earnings of the two companies prior to consolidation would average about $20,000 per year, and although he had repeatedly stated that he was not competent to value the assets, item by item, he stated that in his judgment on the basis of earnings the business of the two companies were worth about $200,000. That this witness had no true conception of the term "net earnings" is shown by the following testimony, given in response to questions as to what he considered net earnings and dividends:
A. Yes. If I owned all the*2261 stock in the company and I was the company and the company was me, I can take it out as dividends or salaries. You can call it earnings, dividends or salary. What is the difference?
Two other witness, who took part in making the appraisals but who had no other personal knowledge relative to the matter, in answer to hypothetical questions based on supposed earnings of $20,000 per year, also testified that the sum of $200,000 was the fair value of the business. In order to make this testimony worth while, it remained for petitioner to establish the basis of his hypothetical question, that is, the true net earnings of the constituent companies. For this purpose it placed on the stand the certified public accountant to whom we have referred, and he filed in evidence a statement showing "the average earnings [not net earnings]" of the two predecessor companies for the six years prior to the consolidation to be in the amount of $30,944.63, of which he attributed the sum of $11,163.12 to the Elmira Company and $19,781.51 to the Horseheads Company. He testified that he compiled his statement from the *845 books but on cross-examination it developed that his statement did not*2262 reflect the earnings shown by the books, but his own private opinion of what the books should have shown. In appeared that two stockholders were receiving salaries of $50 and $100 per month, respectively, and were paid at the end of certain years larger amounts, ranging from $5,000 to $8,000, which were charged on the books as "special salaries." Without any knowledge as to why these charges were made, this witness took the liberty of attributing these items not to expenses but to earnings. The books were produced at the hearing and were there available and this witness could easily have told the Board what the books actually showed and then have explained to the Board why the earnings should be increased by other items, leaving it to the Board to decide whether his contentions were right or wrong. He did not have the right to substitute his judgment for the judgment of the Board. In arriving at the above estimate of earnings, this witness made no allowance for depreciation. In the absence of competent proof as to earnings, we are unable to find any value for the intangibles of either of the predecessor companies.
There is a further obstacle to the inclusion in invested capital*2263 of good will or other intangible values, if such values in fact existed, and that is that there is no evidence before us which in the least indicates that any intangible was paid in at the date of organization or at any other time for the stock of petitioner. It was not until the hearing was well advanced that it occurred to petitioner's counsel to make such a claim. In this state of case the burden rests heavily upon petitioner to establish, among others, two pertinent facts - first, that such intangibles were bona fide paid in for stock, and, second, the par value of the total shares of stock of petitioner outstanding on March 3, 1917.
There is no evidence whatever on the second requirement.
With respect to the first requirement, it is not shown that petitioner issued its stock for a mixed aggregate of tangibles and intangibles. See . The set-up on petitioner's books on January 19, 1910, shows that the stock of petitioner was issued solely for tangibles. It further appears that the plant of Horseheads Company was the older; had the greater production capacity; was the better situated, and, according to the statement filed*2264 by the certified public accountant, had average annual earnings nearly double the earnings of Elmira Company. In this state of affairs, it would seem that if good will had been paid in for stock, a larger part of the stock issued would have been allocated to the stockholders of Horseheads Company. What actually happened was that the tangibles only were valued and paid in and that *846 it was the judgment of all concerned that the tangibles of Horseheads Company were worth $10,000 less than those of Elmira Company, and to equalize this difference the principal stockholder of Horseheads Company paid in $10,000 in cash. The stockholders of both companies were concerned only with the value of tangibles and only tangibles were paid in for capital stock.
Since intangibles can not be allowed in an amount in excess of the par value of the stock issued therefor; since it has not been shown that intangibles had actual existence or value, or that they were paid in for stock; and since we are not informed as to the amount of petitioner's stock outstanding on March 3, 1917, we are compelled to hold that petitioner's invested capital should not be increased by reason of any intangible*2265 assets. See , and Daily Pantagraph, Inc. v.United States, decided by the Court of Claims, June 10, 1929.
It appears that at the date of organization petitioner had a surplus of $14,000. Since this amount was paid in for shares of stock it can not be reduced by depreciation or depletion. This is not true of earned surplus. Earned surplus may be reduced by depreciation and depletion. See , and cases cited. Cf. .
We are unable to afford petitioner any relief with respect to the additions to the fixed assets account shown by petitioner's books for the period April 28, 1911, to March 1, 1913, as set forth in our findings of fact, since we are not informed of what action respondent took with respect to them. For all we know, respondent may have allowed all such items in invested capital. So far as we are advised, respondent accepted all capital items shown on the books. The capital items which we have found to have been charged on petitioner's books to expense, which we have found respondent disallowed, *2266 and the total sum of which is $5,301.67, should be charged to capital account, with proper reflection in surplus. Since it does not appear that these items represent paid-in surplus, they are subject to depreciation and should be included in surplus at their depreciated value.
Petitioner invites our attention to the fact that its capital and surplus, as shown by its books as of the beginning of the year 1920, amounted to the sum of $153,070.72 and asserts that such surplus should not be reduced, except it be affirmatively shown that the books did not truly represent the true facts. It also asserts error on the part of respondent in that he computed depreciation on the abandoned Elmira plant at $28,961.93, whereas petitioner's books show depreciation in the amount of only $17,827.51. It further complains that surplus should not be reduced by any depreciation, since it claims depreciation was met and equaled by repairs. The evidence of record is insufficient to bear out the last statement. With respect *847 to the reduction of surplus and the increase in depreciation, it is sufficient to say that petitioner not only admits, but charges, that its books did not correctly*2267 represent its capital assets, and it is further clear that at least until 1916 the petitioner's books made no provision for depreciation or obsolescence. Petitioner admits the correctness of respondent's depreciation rates and is now seeking a larger depreciation by reason of the inclusion of higher values of depreciable assets. Its position with respect to depreciation before March 1, 1913, and subsequent thereto is as inconsistent as is its position with reference to what constitutes net earnings prior and subsequent to that date.
Respondent's affirmative plea in its amended answer to the effect that he erred in allowing depreciation for the years 1920 and 1921 on an excess valuation of $53,634.48 we will discuss in connection with petitioner's alleged error in Docket No. 30506.
All the issues raised by the petitioner in Docket No. 30506 which have not been waived, relate to depreciation. The first of these issues brings up again the values found in the appraisals by the American Appraisal Co. We rejected these appraisals in so far as invested capital was concerned, for the reason that the appraisal of the Horseheads plant as of April, 1911, when it had been reconstructed, *2268 does not disclose the true value of the fire wreckage which existed in January, 1910. We accepted the values placed upon both plants by the books of petitioner because they were determined by the men interested and who were thoroughly conversant with the values of their own assets. The difference between the agreed value at the date of organization and the appraised value of the Elmira plant, taking into consideration adjustments between the date of organization and that of appraisals, was only about $500, and we accepted the agreed value for the reason that we were not fully informed of all that occurred between January, 1910, and April, 1911. On the other hand, we feel assured that the assets appraised in April, 1911, were in fact in existence on that date. When we compare the values of the Elmira assets, as determined by the appraisals, with those agreed upon by the parties 15 months before, and when we add to the agreed value the capital expenditures as shown by the books, remembering that the books did not disclose all the capital expenditures, we feel assured that the appraised value of the Elmira plant represented the true "sound values" of the assets of that plant as of*2269 the date of appraisal. The appraisals of the assets of the Horseheads plant were made at the same time and by the same men. The appraisal of the Elmira plant shows that the appraisal is fairly representative of value, and for this reason we accept the appraisal of the Horseheads plant as showing true sound value of the assets of *848 that plant on April, 28, 1911, when the plant was fully reconstructed. We are further of opinion, under all the facts of these proceedings, that the fair market value of these assets on March 1, 1913, would be equal to the appraised values, less depreciation at the rates proposed by respondent and not disputed by petitioner, and which are disclosed in our findings of fact.
Petitioner is entitled to a deduction for depreciation on the values shown by the appraisals. This disposes adversely of the contentions made by respondent's answer in Docket No. 23120 and of all the issues raised by the petitioner in Docket No. 30506.
Judgment will be entered under Rule 50.