*3767 1. Value of good will at the time acquired by the petitioner from a predecessor corporation determined.
2. Evidence insufficient to show that the petitioner is entitled to have the amount of its invested capital as determined by the respondent increased by amounts representing cash paid in for common stock, assessments paid in on common stock and an amount alleged to have been erroneously eliminated from surplus by petitioner on its books.
*612 These proceedings, which were consolidated for the purpose of trial and decision, are for the redetermination of deficiencies in income and profits taxes of $33,075.28, $14,362.52 and $6,172.42 for the fiscal years ended January 31, 1920, 1921, and 1922, respectively. The deficiencies result in part from the respondent having eliminated from invested capital an amount of $1,000,000 as representing *613 good will. The petition filed in Docket No. 9269 covers the fiscal years 1921 and 1922, and that in Docket No. 18119 covers the fiscal year 1920.
FINDINGS OF FACT.
*3768 The petitioner is a Delaware corporation with its principal office and place of business at Pittsburgh, Pa.
In 1869 a dry goods business was established in what is now a part of Pittsburgh, by a partnership of which Russell H. Boggs and Henry Buhl, Jr., were members. The business was continued and at some time prior to March 28, 1899, the firm came to be known as Boggs & Buhl, with Boggs and Buhl as the only members of the partnership.
In the early part of 1899 Boggs & Buhl, Inc., a New Jersey corporation, was organized and the assets and business of the partnership were transferred to the corporation, which operated a department store business.
In 1912, Boggs and Buhl retired from the active management of the business of the New Jersey corporation and were succeeded in that capacity by persons designated by the May Department Stores Co., which had acquired control of a majority of the stock. Although no longer in charge of the active management, Boggs and Buhl continued to have offices at the store and were available in an advisory capacity to those actively in charge.
Except as stated below, the store has always catered to the so-called high class and medium class*3769 trade and has sold only high class merchandise at a reasonable price rather than cheap goods of poor quality.
The May management upon taking charge expressed an intention to continue the policy previously followed by the store and did continue it for some months until the spring of 1913. At that time an experiment was decided upon and an attempt was made to increase sales and profits by catering to a cheaper or more popular class of trade in addition to the medium and high class trade. To carry out this plan an extensive advertising campaign was carried on and so-called high pressure methods were employed. Pressure was placed on "sales" at which "job lots," "seconds" and other cheap merchandise was offered. During the course of this experiment which continued until the latter part of November, 1915, the stock and assortment of medium and high class merchandise were not kept up as formerly. Many old customers came to the store and being unable to find the merchandise that they desired, made their purchases elsewhere and on that account many sales were lost. The old customers, however, did not stop coming to the store or making purchases there when they found what they desired. *3770 The cheaper class *614 of trade was not obtained in the volume that had been expected. Instead of an increase in sales and profits, there was a decrease and the experiment proved to be a failure. During the period of the May management the reputation of the store was not quite so good as formerly due to the introduction of a cheaper or lower grade of merchandise and a lessening of the stock of high grade merchandise. Neither the change of management from Boggs and Buhl to the May Department Stores Co. nor the experiment conducted under the management of that company involved many changes in the store's employees, as only very few employees left.
In the fall of 1915, Boggs and Buhl repurchased from the May Department Stores Co. the stock owned by it in the corporation of Boggs & Buhl, and on November 30, 1915, resumed active management of the business. About this time, the experiment initiated under the May management was abandoned. High pressure methods were discontinued and the old policy of catering to the high class and medium class trade by having for sale high class merchandise was resumed. In order to put the old policy into effect, the large accumulation of*3771 "seconds," "thirds," "left-overs" and other undesirable merchandise was sold at a sacrifice and in some instances at a small fraction of cost. Most of this undesirable merchandise was disposed of during the months of December, 1915, and January, 1916, which is one reason for the small profits for the fiscal year ending January 31, 1916.
On May 8, 1916, the petitioner, Boggs & Buhl, Incorporated, was organized under the laws of Delaware with an authorized capital stock of $3,900,000, divided into 39,000 shares consisting of 26,000 shares of 7 per cent cumulative preferred stock and 13,000 shares of common stock. The shares of each class of stock had a par value of $100. The petitioner was formed to take over the assets of the New Jersey corporation and was incorporated under the laws of Delaware upon the advice of counsel who considered that the corporation tax laws of that State were more favorable than those of New Jersey. Common stock of the par value of $3,500 was issued at par and for cash paid in.
The following is a minute of the petitioner corporation dated June 14, 1916, relative to the issuance of its preferred stock and its common stock:
Upon motion is was unanimously*3772 resolved that the payment of all stock subscribed in this company be called forthwith. The President submitted the proposition of Boggs & Buhl, Inc., of New Jersey, to sell to this company all of its business and good will in the city of Pittsburgh, Pa., and all of its assets of every kind wherever located, including cash on hand and in bank, accounts and bills receivable and claims and credits of every kind, and all the leaseholds of such company, subject to the rents reserve and covenants in said leases, to be *615 paid and performed by the lessee, which rents and covenants this company is to assume and pay and perform for the sum of $3,900,000, payable as follows: $2,600,000 of 7 per cent capital cumulative preferred stock of this company, paying $1.75 per share dividends, commencing August 1, 1916, and quarterly thereafter, but no more, redeemable at 105 per cent. of par and accrued and unpaid dividends at any dividend paying date after January 1, 1936. In case of dissolution or winding up of the company, such preferred stock shall have the preference, up to par, of the assets of the company over the common stock; $1,296,500 in common stock of this company, such common*3773 stock to receive no dividends while any dividends on the preferred stock have accrued and remain unpaid. All surplus profits of the company after payment of the dividends on the preferred stock shall belong to the common stock. The balance of such consideration, amounting to $3,500 is to be paid in cash.
On July 31, 1916, the New Jersey corporation executed a bill of sale to be effective August 1, 1916, whereby it sold and transferred to the Delaware corporation all of its business, good will and "all of its assets of every kind wherever located, including cash on hand and in bank, accounts and bills receivable, and claims and credits of every kind wherever located, including cash on hand and in bank, accounts and bills receivable, and claims and credits of every kind and all the leaseholds of said company subject to the rents reserved and covenants in said lease to be paid and performed by lessee, which rents and covenants Boggs & Buhl, Inc. of Delaware, hereby covenants and agrees to assume and pay and perform."
The leaseholds transferred to the petitioner were four in number and covered the present location of the store, from which location the partnership, the New Jersey*3774 corporation and the petitioner, respectively, have conducted business since late in the 1870's or early in the 1880's. Three of the leases, either by express provision or by exercise of an option to renew, did not expire until 1948, and the fourth, covering a small parcel, was to expire in 1933.
At the time the assets of the New Jersey corporation were transferred to the petitioner, the books of account of the New Jersey corporation were not closed, nor was a new set of books opened by the petitioner, but the books of the New Jersey corporation were continued in use until the end of the fiscal year, January 31, 1917. The continuance in use of the books of the New Jersey corporation was in accordance with a resolution of the board of directors of the petitioner which recited as the reason for the continuance the fact that stock was not to be taken until the end of the fiscal year. Petitioner's common and preferred stock was issued on February 1, 1917.
On August 1, 1916, the date of the transfer of the assets of the New Jersey corporation to the petitioner, no good will was carried on the books of the New Jersey corporation, nor had good will been carried on its books since*3775 1905 when it "wrote off $1,000,000 of good will." The trial balance of the New Jersey corporation as of February 1, 1917, prior to giving effect to the sale of its assets showed *616 total assets of $4,359,277.66, including an item of good will and trade name of $1,000,000. Surplus and net worth were shown as $4,183,161.36 and the difference represented liabilities and reserves for bad debts and depreciation.
The following is the resolution adopted on July 7, 1916, by the board of directors of the petitioner corporation:
The President announced that the corporation was in need of working capita and that in his judgment provisions should be made for the securing of this money from the stockholders instead of borrowing the money. On motion duly made, seconded and carried, its was resolved that each common stockholder be asked to pay into the Treasury of the corporation the sum of $20 upon each share of the common stock of the corporation and that upon payment of the sum, $260,000, which will be realized in this way, the treasurer of the corporation is instructed to make proper entry upon the books of the corporation, reducing the assets of good will by such amount of $260,000; *3776 and upon motion duly made and seconded and carried, the treasurer is further instructed to transfer $40,000 from the earnings of the corporation during the fiscal year of 1916 in a similar manner, thus providing additional working capital of $300,000, and reducing the value of good will of the corporation from $1,300,000 to $1,000,000.
In pursuance to the foregoing resolution, there was paid in to the petitioner during the months of August, October, and November, 1916, $260,000, representing $20 per share on the petitioner's authorized common stock of the par value of $1,300,000.
In pursuance to that portion of the above quoted resolution relating to the reduction of good will, a journal entry under date of January 31, 1917, was made charging good will $1,000,000 and crediting surplus in the same amount, "to set up as an asset estimated actual value of good will and trade name of Boggs & Buhl Co." Another journal entry was made whereby surplus was charged $3,900,000, cash was credited $3,500,000, preferred capital stock was credited $2,600,000 and common capital stock was credited $1,296,500, representing "stock and cash paid in full settlement of purchase of assets of New Jersey*3777 corporation as per minutes of June 14, 1916, said stock being issued to the respective parties entitled thereto as recited in New Jersey minute book."
On August 1, 1916, as well as at all other times since the establishment in 1869, the store and business involved in this proceeding have had a high reputation for integrity, honesty and fair dealing, not only among the buying public but among manufacturers, jobbers and others. The business has been known as one of the foremost in its line in Pittsburgh ever since it was established, and it has been patronized by the best customers in the city. In many instances prominent families as well as others have been customers at the store for two and three generations and in some instances the fourth generation. The name Boggs & Buhl has been before the public *617 continuously since 1869. On August 1, 1916, and for many years prior thereto, the store had a national reputation among merchants. The store on August 1, 1916, was drawing its trade from the City of Pittsburgh and the surrounding country within a radius of 50 miles and from a population of about 1,200,000.
Subject to the exceptions to be noted hereafter, the following*3778 is a statement of the net profits, net sales, percentage of profit to net sales, net tangible assets, and percentage of profits to net tangible assets of the business from the year ended January 31, 1895, to January 31, 1924:
| Net profits | Net sales | Percentage of profit to net sales | Net tangible assets | Percentage of profit to net tangibles | |
| PARTNERSHIP | |||||
| Year ending: | |||||
| Jan. 31, 1895 | $286,903.23 | $3,017,161.59 | .5 | $1,295,620.51 | 22.2 |
| Jan. 31, 1896 | 379,956.60 | 3,377,697.23 | 11.2 | 1,577,776.51 | 24.0 |
| Jan. 31, 1897 | 340,665.27 | 3,385,110.64 | 10.0 | 1,668,152.54 | 20.4 |
| Jan. 31, 1898 | 362,680.60 | 3,523,542.99 | 10.3 | 1,720,532.22 | 21.0 |
| Jan. 31, 1899 | 338,260.92 | 3,680,847.42 | 9.2 | 1,893,792.16 | 17.9 |
| Total for 5-year period | 1,708,466.62 | 16,984,359.87 | 8,155,873.94 | ||
| NEW JERSEY CORPORATION | |||||
| Year ending: | |||||
| Jan. 31, 1900 | 434,456.56 | 4,365,701.54 | 9.9 | 2,123,206.56 | 20.5 |
| Jan. 31, 1901 | 513,040.50 | 4,976,689.52 | 10.3 | 2,413,747.06 | 21.2 |
| Jan. 31, 1902 | 607,991.15 | 5,534,701.24 | 11.0 | 2,729,238.21 | 22.2 |
| Jan. 31, 1903 | 719,267.88 | 6,148,102.34 | 11.7 | 2,976,006.09 | 24.1 |
| Jan. 31, 1904 | 601,615.64 | 6,370,653.88 | 9.4 | 3,174,083.24 | 18.9 |
| Jan. 31, 1905 | 484,696.96 | 6,257,745.91 | 9.7 | 3,241,318.74 | 14.9 |
| Jan. 31, 1906 | 547,795.61 | 5,911,754.71 | 9.2 | 3,602,614.30 | 15.1 |
| Jan. 31, 1907 | 647,643.36 | 6,229,236.35 | 10.3 | 3,988,697.66 | 16.2 |
| Jan. 31, 1908 | 576,942.94 | 6,393,708.84 | 9.1 | 4,039,867.13 | 14.3 |
| Jan. 31, 1909 | 400,268.35 | 5,699,602.62 | 7.0 | 4,117,835.48 | 9.7 |
| Jan. 31, 1910 | 571,543.90 | 6,260,683.87 | 9.1 | 4,267,239.31 | 13.4 |
| Jan. 31, 1911 | 539,944.07 | 6,259,834.02 | 8.6 | 4,301,347.14 | 12.5 |
| Jan. 31, 1912 | 517,941.52 | 6,134,024.77 | 8.4 | 4,349,462.19 | 11.9 |
| Jan. 31, 1913 | 348,299.68 | 5,576,957.27 | 6.2 | 2,649,166.75 | 13.2 |
| Jan. 31, 1914 | 203,200.03 | 5,879,901.68 | 3.4 | 2,188,567.10 | 9.3 |
| Jan. 31, 1915 | 180,797.00 | 4,916,378.37 | 3.7 | 2,369,364.10 | 7.6 |
| Jan. 31, 1916 | 5,333.75 | 4,639,506.60 | .1 | 2,609,805.86 | .2 |
| Jan. 31, 1917 | 369,824.97 | 5,346,944.31 | 6.9 | 3,183,161.36 | 11.6 |
| Total for 18-year period | 8,270,603.87 | 102,902,127.84 | 58,324,728.28 | ||
| DELAWARE CORPORATION | |||||
| Year ending: | |||||
| Jan. 31, 1918 | 445,435.33 | 5,589,337.54 | 8.0 | 3,444,596.69 | 12.9 |
| Jan. 31, 1919 | 682,377.30 | 6,356,647.18 | 10.7 | 3,845,662.28 | 17.8 |
| Jan. 31, 1920 | 1,419,130.00 | 8,432,609.44 | 16.8 | 4,817,941.15 | 29.4 |
| Jan. 31, 1921 | 698,772.96 | 10,226,737.74 | 6.8 | 4,792,011.33 | 14.6 |
| Jan. 31, 1922 | 433,437.31 | 9,024,906.44 | 4.8 | 4,859,866.97 | 8.9 |
| Jan. 31, 1923 | 556,598.22 | 8,970,284.24 | 6.2 | 5,165,430.97 | 10.8 |
| Jan. 31, 1924 | 733,756.72 | 9,927,177.76 | 7.4 | 5,504,328.24 | 13.3 |
| Total for 7-year period | 4,969,507.84 | 58,527,700.34 | 32,429,837.63 |
*3779 The amount of net profits shown for the years 1895 to 1899, during which time the business was conducted as a partnership, was determined without making deduction or allowance for salaries or compensation for services rendered by the partnership.
*618 The amount of $2,649,166.75 shown above as net tangible assets for 1913 does not include an amount of $850,000 representing the difference between $975,000 paid from June 22, 1912, to January 9, 1913, by the New Jersey corporation to the treasurer of the May Department Stores, and $125,000 received therefrom during the same period. The $850,000 was carried for some time on the books of the New Jersey corporation as an account receivable and shown as an asset in the balance sheet for 1913. This indebtedness of $850,000 of the May Department Stores Co. to the New Jersey corporation was, together with other indebtedness, canceled by a resolution of the board of directors of the New Jersey corporation adopted October 27, 1913.
Following the organization of the petitioner corporation and about the first part of 1917, Boggs and Buhl sold to J. F. McCandless, who became connected with the business in 1883, but who retired during*3780 the time the business was under the May management, 1,500 shares of the petitioner's preferred stock at par, or $100, and 1,000 shares of the common stock at $20 per share. McCandless, who became vice president and treasurer of the petitioner corporation, was permitted to select about 40 of petitioner's employees who had been with the business from 10 to 30 years, most of them continuously during that time, to whom were offered the opportunity of purchasing stock at the same price that McCandless purchased his. None of the employees, however, acquired as much stock at McCandless.
In its returns for the years involved in these proceedings, the petitioner reported invested capital for the taxable periods as follows:
| Year ending - | Amount |
| Jan. 31, 1920 | $4,656,303.66 |
| Jan. 31, 1921 | 5,482,187.27 |
| Jan. 31, 1922 | 5,661,000.25 |
| Effective invested capital Feb. 1, 1921, to Dec. 31, 1921 | 5,189,250.22 |
In computing the above amount, there were included among other items $2,600,000 and $1,300,000 representing the petitioner's outstanding preferred stock and common stock, respectively.
The respondent determined the petitioner's invested capital to be as follows:
| Year ending - | Amount |
| Jan. 31, 1920 | $3,619,137.63 |
| Jan. 31, 1921 | 4,486,036.31 |
| Jan. 31, 1922 | 4,613,682.44 |
*3781 Among the reductions made by the respondent in the invested capital reported by the petitioner for the respective years was that of $1,000,000 representing good will.
*619 OPINION.
TRAMMELL. The errors alleged in the petitions and the amendments thereto and not abandoned at the hearing are as follows: (1) The respondent erroneously eliminated from invested capital for the fiscal years 1920, 1921 and 1922 the sum of $1,000,000, which sum represents a portion of the value of the good will of the petitioner acquired with stock, (2) the respondent erroneously failed to allow as cash invested capital the sum of $3,500 paid in for common stock at or about the time of organization, $260,000 as cash contributions to the corporation paid in by stockholders shortly after organization and in the year 1916, and the sum of $40,000 erroneously eliminated from surplus by the petitioner on its books.
With respect to the first assignment of error, the petitioner contends that the good will it acquired from the New Jersey corporation had on August 1, 1916, the date of acquisition, the fair and reasonable value of at least $1,000,000, while the respondent contends that the good will*3782 had no value.
We have a fairly definite picture of the business from its inception and especially from 1895 down to August 1, 1916, the date as of which the value of the good will is in controversy. While the sales and profits of the business experienced a material decline during the period beginning with the year ended January 31, 1913, and continuing through the year ended January 31, 1916, we are unable from the facts before us to conclude that the good will of this business, which had been in existence for almost 50 years and which during that time had been favorably known, had no value in 1916 when the present corporation took over the business. In addition to the facts set forth in our findings with respect to the business and earnings, we have the testimony of witnesses qualified to express opinions on the value of the good will. The evidence shows that the business on August 1, 1916, had a very substantial good will. From a consideration of all the evidence we are of the opinion that the good will had an actual cash value of at least $600,000 at the time of acquisition, and that the petitioner is entitled to include it in its invested capital at this amount.
With*3783 respect to the contention that the invested capital should be increased by $303,500, we are of the opinion that the petitioner is entitled to include as a part of its invested capital cash amounting to $3,500 paid in for common stock, the $260,000 cash paid in as an assessment on common stock and also any earned surplus or undivided profits that it may have had from earnings of preceding years. However, there is nothing to show that the respondent in his determination of invested capital eliminated these items. We *620 are unable to determine from the evidence that the petitioner's invested capital as determined by the respondent does not already include these items. In the absence of evidence showing that the items have not already been included in invested capital, the petitioner's contention must be denied.
Judgment will be entered on 15 days' notice, under Rule 50.