*1107 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the amounts of $2,703.93 and $2,327.36, respectively. The only question involved is whether petitioner in each of said years is entitled to have its taxes assessed under the provisions of section 328 of the Revenue Acts of 1918 and 1921, respectively.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of California and at first bore the name of Staats-Macy Co. It was organized in 1916 to take over the insurance and real estate business of the William R. Staats Co. The name of the corporation was subsequently changed to the William Wilson Co., which is the petitioner in this case. At the time of the organization of the original company, stock of the par value of $90,000 was issued for assets, segreated and valued as follows:
| Cash | $10,000.00 |
| Furniture, fixtures, and autos | 1,490.18 |
| Employer's notes | 4,259.82 |
| Insurance agencies, real estate, contracts and good will | 74,250.00 |
| Total assets | 90,000.00 |
*2528 These assets had a value fully equal to the amount of capital stock issued for them and it has been so stipulated between petitioner and respondent.
In view of the fact that the insurance and real estate contracts and good will constituted intangible assets paid in for stock, the Commissioner limited the amount included in invested capital to 25 per cent of the capital stock, in accordance with section 326(a)(4) of the Revenue Acts of 1918 and 1921. Under this provision of law, the respondent, in 1920 and 1921, excluded from invested capital the sum of $51,750, representing the excess of the stock issued for intangible assets (insurance agencies, real estate contracts and good will) over 25 per cent of the par value of the total stock outstanding on March 3, 1917 ($74,250 - $22,500 ($90,000)/4).
*1108 These intangibles were the principal assets of petitioner and were its main income-producing factors, producing in 1920 and 1921 more than 50 per cent of the gross and net income of petitioner.
The respondent's findings of net income, invested capital, and computation of tax are as follows:
| Year | Net income | Invested capital | Profits tax | % 3-1 | Total tax | % 5-1 | % 1 to 2 |
| 1920 | $ 60,402.76 | $84,438.99 | $18,832.52 | 31.17 | $22,789.54 | 37.72 | 71.53 |
| 1921 | 30,533.51 | 100,714.24 | 5,973.40 | 19.56 | 8,377.57 | 27.43 | 30.3 |
*2529 Petitioner, in making its returns for 1920 and 1921, considered all the assets acquired by it upon incorporation in 1916 as being tangible assets, and computed income, invested capital, and taxes as follows:
| Year | Net income | Invested capital | Profits tax | Per cent | Total tax | Per cent |
| 1920 | $60,402.76 | $138,088.77 | $15,828.15 | 26.2 | $20,085.61 | 33 |
| 1921 | 30,533.51 | 146,892.06 | 3,387.45 | 11.07 | 6,050.21 | 19.8 |
The amount of income rendered by the petitioner and that found by respondent for the respective years is the same. The difference in the computation of the tax results from the exclusion by the respondent of $51,750 intangibles under the provisions of section 326(a)(4) of the Revenue Acts of 1918 and 1921.
Petitioner had no Government contracts in 1920 or 1921.
OPINION.
BLACK: In this case the only question involved is whether or not the petitioner has a right to have its tax assessed under the provisions of section 328 of the Acts of 1918 and 1921. Petitioner claims three grounds for assessment under section 328. First, low salaries paid to its officers; second, several years' profits realized in one year on a real estate development; *2530 third, the exclusion by the Commissioner of large income-producing intangible assets from its invested capital.
With reference to the last-named contention, petitioner contends that on account of the fact that the respondent excluded a large part of its capital stock from invested capital under section 326(a)(4), such exclusion constitutes abnormality. From the examination of the facts in this case we find that when petitioner was incorporated in 1916, the amount of its capital stock which was issued was $90,000 and of this capital stock $74,250 was issued in payment of insurance agencies, real estate contracts, and good will. The facts clearly show that these intangible assets which were given in payment of said *1109 amount of stock were worth the full amount of the face value of the stock. Section 326(a)(4), however, says that in a case of this kind the Commissioner of Internal Revenue shall only allow as invested capital for these intangibles an amount not to exceed 25 per cent of the total amount of the capital stock of the corporation. The petitioner does not contend that the respondent has made any error in arriving at invested capital under section 326(a)(4), *2531 but contends that on account of the exclusion thereby of a large amount of its producing invested capital, an abnormal condition was created by which it is entitled to have its income and excess-profits tax for 1920 and 1921 assessed under the provisions of section 328. The principle on which petitioner relies is supported by the decisions in ; ; and .
In the , we permitted the petitioner to have its taxes assessed under section 328 of the Revenue Acts of 1918 and 1921, notwithstanding the Commissioner had allowed the taxpayer the full amount of invested capital for intangibles permitted by section 326(a)(5) of the Acts of 1918 and 1921. That case seems to be in point to the one now under consideration.
The exclusion of intangibles under section 326(a)(4) must be such as to create an abnormal condition. Where, as here, the assets excluded are the most substantial part of the taxpayer's earning assets and are the principal contributing factors in the production of taxable income of*2532 the petitioner, it is our opinion that such an abnormality exists.
On account of what we have said in the foregoing opinion, it is unnecessary to discuss the other grounds which the petitioner urged as reasons for special assessment under section 328.
Reviewed by the Board.
Decision will be entered under Rule 62(c).