*3793 1. Provisions of section 331 held applicable and no increased amount can be included in invested capital either for tangibles or good will.
2. No deduction can be taken for a loss in the absence of facts showing ownership of the property by the petitioner.
3. Deduction for exhaustion of cost of building on leased property determined.
4. Deduction of legal expenses and disbursements allowed in part and disallowed in part.
*503 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921 in the amounts of $10,116.41 and $9,242.69, respectively. The questions at issue as to 1920 are: (1) A deduction for $3,543 for attorney's fees, (2) a deduction of $16,699.15 claimed as a loss, and (3) the reduction of invested capital by the respondent from $493,000 claimed to $341,250. The questions at issue as to 1921 are: (1) A deduction of $4,194.85 for rent, and (2) a reduction in invested capital similar to that in 1920. The reduction in invested capital*3794 in both years was on physical assets in the amount of $35,132.84, and on good will in the amount of $140,000.
FINDINGS OF FACT.
The petitioner is a New York corporation, incorporated in 1904, and has been engaged continuously since that date in the conduct of a retail coal business in New York City. On November 1, 1919, the petitioner had an authorized, issued and outstanding capital stock of 3,240 shares of a par value of $100 each, or a total of $324,000. On that date the petitioner contracted with two New York corporations, Central Bridge Coal Co. and Bunke & Meyer, Inc., as follows:
(1) The petitioner should increase its capital stock to $1,000,000.
(2) The stockholders of Central Bridge Coal Co. should exchange their stock, of a par value of $162,000, for an equal amount of stock in the petitioner.
(3) The stockholders of Bunke & Meyer, Inc., should exchange their stock of a par value of $162,000, for an equal amount of stock in the petitioner.
(4) The above exchanges should be made as of January 1, 1920.
The agreement was carried out according to its terms and on January 1, 1920, the petitioner owned all of the stock of Central *504 Bridge Coal Co. *3795 and Bunke & Meyer, Inc., and had outstanding 6,480 shares of a par value of $100 each, a total of $648,000. After January 1, 1920, no further business was transacted by Central Bridge Coal Co. or Bunke & Meyer, Inc. The assets of both companies were placed upon the books and balance sheets of the petitioner instead of the stock in those companies. On July 6, 1920, Bunke & Meyer, Inc., was dissolved and on March 7, 1921, Central Bridge Coal Co. was dissolved.
In placing the assets of the three companies on the books of the petitioner as of January 1, 1920, there was included $75,000 each on account of good will of Central Bridge Coal Co. and Bunke & Meyer, Inc., and $200,000 on account of good will of the petitioner. At the same time the tangible assets owned by the three companies were placed upon the petitioner's books at a sum of $52,577.62 in excess of the total amount at which such assets had been carried on the books of the companies.
The good will of the Central Bridge Coal Co. and Bunke & Meyer, Inc., was determined by allowing about $1.50 per ton on the basis of the average tonnage of business done by each for the years 1916, 1917 and 1918, and the good will of the*3796 petitioner was determined by allowing about $2 per ton on a similar basis. The average tonnage per year of each was as follows:
| Central Bridge Co | 56,730 |
| Bunke & Meyer, Inc | 52,461 |
| Weber-Bunke-Lange, Inc | 95,020 |
The increase in the book value of tangible assets as of January 1, 1920, was made as a result of an appraisal of such assets at or about that date by a committee of three, one director from each company, which committee placed a value upon the tangible assets of the three companies of $52,577.62 in excess of the amount at which they had been carried on the books.
The Central Bridge Coal Co., on land which it occupied under a lease dated April 15, 1905, and expiring May 1, 1920, had erected coal pockets and buildings. In order to secure a renewal of said lease for a year the company provided in the renewal lease that such improvements should revert to the lessor. In October, 1920, the Central Bridge Coal Co. assigned the lease to the petitioner. The petitioner deducted $16,699.15 from 1920 gross income on account of such improvements, claiming that amount as a loss. The respondent disallowed such deduction.
The petitioner procured a lease for the*3797 period August 1, 1919, to May 1, 1922, and erected on the premises a building at a cost of $8,389, which building, under the terms of the lease, reverted to the lessor at the expiration of the lease. The building was ready for use about *505 February, 1921. On May 1, 1922, the parties renewed the lease for a two-year period ended May 1, 1924. The petitioner deducted from its gross income in each of the years 1920 and 1921 one-half of the cost of the building of $8,389, so that the entire cost was extinguished by January 1, 1922. The respondent allowed the deduction for 1920 but disallowed it for 1921.
In the year 1920 the petitioner paid for attorney's fees and disbursements in connection therewith the sum of $3,543. One-half of this amount, or $1,771.50, represented legal services in connection with the reorganization.
Prior to January 1, 1920, the stockholders of Bunke & Meyer, Inc., were John Meyer and Barbara Bunke. On January 1, 1920, each received 810 shares of stock in the petitioner company. Prior to January 1, 1920, the stockholders of Central Bridge Coal Co. were Charles Esdorn, Fred Kothe, John Bunke and William F. Weber. January 1, 1920, Charles Esdorn*3798 received 540 shares, Fred Kothe received 540 shares, John Bunke received 270 shares and William F. Weber received 270 shares of stock of the petitioner. After the exchange, January 1, 1920, William F. Weber had 1,350 shares in the petitioner, before that he had 1,080 shares. After the exchange John Bunke had 730 shares in the petitioner, before that he had 270 shares.
OPINION.
SIEFKIN: The first question is whether any appreciation in value of assets and good will can be included in the invested capital of the petitioner from January 1, 1920, because of the transaction which became effective on that date. The petitioner became the owner of all the shares of Central Bridge Coal Co. and Bunke & Meyer, Inc., by exchanging an equal par value of its own shares out of increase in capital stock. From that date the petitioner treated the assets of the other two companies as its own and operated their businesses as branches of its own business. The petitioner placed upon its books the assets of the other two companies rather than the shares of stock which it owned. If we consider the situation as one in which the petitioner, in effect, acquired the assets, we can not disregard the*3799 fact that the equity of stockholders in all of such assets was in the same hands that it was prior to January 1, 1920, and section 331 of the Revenue Acts of 1918 and 1921 applies and prevents any increase of invested capital based upon values on January 1, 1920, since the evidence shows that "an interest or control in such trade or business or property of 50 per centum or more remains in the same persons or any of them."
If we consider that the situation is only that three corporate entities continued, as before, and that the only legal change, so far *506 as the evidence discloses, is a change in stock ownership, it is equally clear that invested capital can not be increased. In either event, the action of the respondent in that respect was correct and we need not comment upon the evidence introduced to prove the values of tangibles and good will at January 1, 1920, except to say that opinion evidence of good will that totally disregards location of a retail coal yard as having any value is to be considered with some doubt.
2. We next consider the deduction from income of $16,699.15. This amount is alleged to be the value of buildings and coal pockets lost to the petitioner*3800 as the result of a lessor's insistence, upon a renewal of a lease, that the renewal lease should provide that such improvements became the property of the lessor at the expiration of the new lease. Although the renewal lease was assigned to the petitioner in October, 1920, there is no evidence, except as set forth in connection with the discussion of the preceding issue, tending to show that the buildings and coal pockets became the property of the petitioner. The only evidence is that the petitioner bought the stock of Central Bridge Coal Co., but entered the assets of that company on its books instead of the stock. We are not able to say that the improvements in question legally became the property of the petitioner, or, if so, in what manner. It may be that, if all the facts were before us, we could conclude that an informal liquidating dividend was received by the petitioner, such dividend consisting of all the assets of the Central Bridge Coal Co. We might further speculate that such a transaction gave rise to a gain or loss under certain circumstances. But such conclusions or speculations are useless in the absence of all the facts and, as the evidence before us does not*3801 show that the property ever became that of the petitioner, or, if so, in what manner, we must approve the respondent's action in disallowing the deduction.
3. The respondent says that his action in allowing a deduction in 1920 of one-half of $8,389, the cost of a building built on leased land was correct, but contends that the remaining one-half should be spread over three years, the lease having been extended for two years from May 1, 1922. The petitioner, however, says that it should have the remaining one-half in 1921. Neither position seems entirely correct to us. At the beginning of the year 1920, the lease had two years and four months to run and the cost of the building should be deducted upon that basis in the years 1920 and 1921. At the end of the year 1921 there should still remain four twenty-eighths of the total cost unextinguished, since the evidence before us does not show that at that time the petitioner had any information which would lead him to believe that a renewal of the lease was probable. The deductions for 1920 and 1921, on account of this item, therefore, should be computed upon the basis indicated above.
*3802 *507 4. The parties have agreed that $1,771.50 of legal expenses and disbursements were in connection with the reorganization and we, accordingly, upon the authority of , affirm the respondent's determination as to that much of the payment, and the evidence showing that the remainder was a proper item of expense, allow that amount as a deduction.
Judgment will be entered upon 15 days' notice, under Rule 50.