text:
    Gem Theatre Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9264.
    Promulgated. September 27, 1927.
    Item determined to be part of petitioner’s gross income.

      George H. Moore, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
    The Commissioner determined a deficiency in income and profits tax for the year 1921 in the amount of $6,532.39. The determination was made by the rejection of a claim filed by the petitioner for the abatement of $6,532.39, forming part of a larger assessment made by the Commissioner in October, 1924. The petitioner alleges that the Commissioner has erroneously increased its gross income for 1921 by $16,600 claimed to be money received by its individual stockholders from the sale of personal property oivned by said stockholders.
    FINDINGS OF FACT.
    The petitioner was a corporation organized in 1911, with a capital stock of $2,400, under the laws of the State of Illinois, It is now dissolved. During 1921 and until the date of its dissolution, the petitioner operated three motion picture shows in Cairo, Ill., one of which was known as the Gem Theatre. The Gem Theatre was advantageously located for the purpose and operated continuously. The other two theatres operated only part time. Prior to incorporation, Augustus Botto and A1 Meyers were engaged in the motion picture business as equal partners. With the exception of one qualifying share, the outstanding stock of the petitioner was owned one-half each by Botto and Meyers, who during 1920 and 1921, held the offices respectively of president and secretary-treasurer. Under date of April 26, 1921, a contract was made to sell the property of petitioner to I. W. Rodgers, and II. B. McFarling. At that time the Gem Theatre had been operated nearly 11 years. The first lease of the Gem Theatre property was a written lease dated May 16, 1910, naming Botto and Meyers as lessees, and containing a covenant against assigning or subletting without the written assent of the lessor.
    The report to the Secretary of State of Illinois made by Botto, Meyers and Alexander Wilson, as commissioners authorized to open books of subscription to the capital stock of the Gem Theatre Co., states that the total authorized capitalization was subscribed for and that the capital was paid in property appraised as follows:
    One moving picture machine; one spot light; one flood light; one mercury rectifier; one marble front; 512 chairs; electric wiring and fixtures; stage and scenery and five years lease on huilding known as 224 Mid 226 Eighth Street, Cairo, Illinois, for the sum of $2,400.00. (Italics ours.)
    This report was subscribed to on April 18, 1911, and filed with the Secretary of State on April 15, 1911.
    At the time of application for the corporate charter, it was the intention of Meyers to have the lease in question assigned to the corporation. At that time Botto and Meyers applied to the lessor to consent to the transfer of said lease to any corporation.
    The books of the petitioner were imperfectly kept in the early period of its operations and up until it commenced to make money. As early as 1911, however, the petitioner kept a record of receipts, deposits and disbursements. No separate account for the lease of the Gem Theatre property was kept on the petitioner’s books. From 1911 to 1921, the rent of the Gem Theatre lease was entered as an expense on the corporate books.
    Prior to the incorporation of the partnership business of Botto and Meyers, its bank account stood in the name of Botto & Meyers. For some years after the incorporation and as late as June 1, 1917, the bank accounts of the business remained in the name of Botto & Meyers. The receipts of the Gem Theatre Co. were deposited in these accounts. The principal account of the business was carried in the Alexander County National Bank of Cairo, Ill. About September 26, 1917, the Alexander County National Bank issued checks in the name of the Gem Theatre Co. and this practice was thereafter uniformly followed in all its bank accounts. The rent for the theatre lease during 1918, 1919, 1920, and 1921, was paid by checks of the petitioner. These checks were paid out of the petitioner’s funds. The lessors’ receipts, however, were always made in the name of Botto & Meyers.
    The lease was not considered by Meyers as a part of the corporation’s assets. It was appraised as part of the paid-in capital of the corporation as a formality to receive a charter from the State.
    The second lease on the Gem Theatre premises is dated August 31, 1916. It also names Botto and Meyers as lessees and contains a covenant against assigning or underletting without the written assent of the lessors. The term of this lease was from September 1, 1916, to September 1, 1919. The rental called for thereby was $120 per month until March 1, 1917, and $125 per month from March 1, 1917, to September 1, 1919. A notation on the back of said lease states that it is extended to September 1, 1922, at a rental of $140 per month.
    The material provisions of the contract to sell dated April 26, 1921, read as follows:
    Witnesseth: This contract made and entered into this 26th day of April 1921, by and between Gem Theatre Company, Augustus Botto and M Meyers of Alexander, Illinois, parties of the first part, and I. W. Rodgers of Butler County, Missouri, and H. B. McFarlmg of New Madrid County, Missouri, parties of the second part.
    For and in consideration of the stipulations hereinafter set out, parties of the first part hereby covenant and agree to sell, assign, convey and deliver to parties of the second part; the following property known as and used in connection with the Gem Theater in the City of Cairo, Illinois, where now situate, and which consists of the following, to-wit; the entire contents of the building, including the front wall of said building, stage, scenery, seats, ventilating wall and ceiling fans, picture machines, booth, screens, mercury arc rectifier, rheostadt, ticket booth and all other articles kept or used in connection with the operation of said Gem Theater, including everything in or belonging to said building with the specific exceptions of the ground, walls other than the front wall, floor, ceiling, roof and heating plant, toilet, wash basin and piano (Wurtlitzer) and to furnish and deliver to parties of the second part an assignable lease upon the building proper providing for a lease of said building for a term of not less than five years; at a rental of not to exceed $200.00 per month. Said lease to take effect on the 1st day of June 1921. It is further understood and agreed upon that in case parties of the first part should be unable to secure the lease as hereinbefore specified, then in that event, parties of the first part are to secure the most favorable lease upon said property possible and submit same for the approval of parties of the second part, but with the understanding that should such substitute lease not meet with the approval of parties of the second part then parties of the first part will within thirty days return to said parties of the second part any and all of the consideration of this contract that may have passed.
    Parties of the first part further covenant and agree to sell and deliver and assign a lease on the “ Kimmel Theater ” in the City of Cairo, Illinois, providing for a lease of said building for a term of not less than nine months (9) from June 10, 1921 and at a rental of not to exceed $200.00 per month and to include all the furniture and fixtures as well as other equipment now used in connection with the operation of said theater, to second parties, who assume all of the conditions of said lease.
    Parties of the first part further covenant and agree to sell and deliver an assignable lease to parties of the second part, on the Cairo Opera House, providing for a lease of said building and equipment used in connection therewith for a term of not less than two months from June 1st, 1921 and at a rental of not to exceed $150.00 per month.
    Parties of the second part for and in consideration of the stipulations herein set out and to he kept and performed by parties of the first part hereby agree to pay to parties of the first part the sum of One Thousand Dollars, the receipt of which is hereby acknowledged, to pay the additional sum of Twenty Pour Thousand Dollars upon the full compliance of the conditions of this contract by party of the first part, which shall be on or before the 1st day of June, 1921, at which time parties of the first part shall deliver undisputed possession to the foregoing premises, otherwise the payment to be with-held.
    Parties of the second part further agree to assume such existing contracts as parties of the first part may have with Film Companies, for the supply of films June 1st, A. D. 1921 and to reimburse parties of the first part for such deposits as they may have with said film companies; and provided further said deposits do not exceed the sum of $1500.00.
    It is mutually understood and agreed that final payment upon this contract is to be made at the Cairo National Bank and that in the event parties of the first part fail or refuse to comply with all of the terms and conditions of this contract on their part, then they shall at the option of the parties of the second part refund to said parties within ten days the $1000.00 paid to them at the time of the execution of this contract. Parties of the first part agree not to engage in the Motion Picture business either directly or indirectly for a period of five years (5) in the City of Cairo.
    It is further agreed and understood, that if the parties of the second part fail or refuse to pay over to the said parties of the first part, by tender of same at the office of the Cairo National Bank at Cairo, Illinois, the balance due of Twenty four thousand dollars ($24,000.00) on or before the 1st day of June A. D. 1921, this contract will become null and void, and said One Thousand dollars ($1000.00) shall be forfeited to said parties of the first part as liquidated damages.
    This contract is executed in duplicate, and each of the parties hereto has a copy, and all changes and erasures were made before signing.
    The total consideration paid by the purchasers, Eodgers and Mc-Farling, was $25,000, of which $1,000 was paid as earnest money when the contract was made. The assets sold by the petitioner in the Gem Theatre originally cost it $5,912.03 and had been depreciated by $3,304.22 in prior years, leaving a net depreciated cost of $2,607.81. The Commissioner included the entire profit derived from this sale in the gross income of the petitioner.
    The entire proceeds of the sale were deposited in the petitioner’s funds. The initial payment of $1,000 was made by two checks of $500 each, made payable to Botto and Meyers. The remaining $24,000 of the purchase price was paid as follows: On May 31, 1921, by check payable to Botto and Meyers for $16,666.66 and signed by Bodgers. This check was endorsed by Botto and Meyers, Gem The-atre, deposit to the Gem Theatre Co., and deposited in the bank account of the petitioner. On May 31, 1921, by check for $7,833.34, payable to Botto and Meyers, signed by McFarling. This check was endorsed Botto, Meyers, Gem Theatre. It was deposited in the bank account of the petitioner. These deposits were made by A1 Meyers. Said checks were deposited in the petitioner’s account in anticipation of an equal division between Botto and Meyers. Botto and Meyers made all deposits growing out of business dealings they had together in the bank account of the petitioner. All dealings Botto and Meyers had were on an equal basis.
    The profits made by the petitioner in 1918 were $14,801.64; in 1919, $14,572.62; and in 1920, $19,343.90.
    The contracts for films that were exhibited at the Gem Theatre were made in the name of Botto and Meyers.
    In procuring a new lease on the Gem Theatre Co., as required by the contract of April 26, 1921, Messrs. Botto and Meyers arranged with Oscar L. Herbert, one of the heirs of the Louis Herbert Estate, and in charge of the leasing of the property, for a cancellation of the existing lease on the premises and for a new lease between the Louis Herbert Estate and Bodgers and McFarling. By an indenture dated May 31, 1921, the Gem Theatre property was leased by the Herbert Estate to Bodgers and McFarling, from June 1, 1921, to June 1,1926, at a stipulated rental of $200 per month, with the privilege of a three-year extension at a fixed rental of $250 per month.
    Meyers considered the lease, film contracts, and the good will of himself and Botto to be worth about $22,500. Immediately after going out of the motion picture business,' Mr. Meyers could have secured a position at an annual salary of $10,000 as manager of a theatre.
    The certified copy of the articles of dissolution of the petitioner reads in part as follows:
    (3) The complete itemized list of all its corporate assets and property at the time of their distribution, were as follows:
    Cash on hand and in bank-$12,566.95
    All the corporate property and assets had been sold and turned into money, and was distributed among the stockholders as hereinafter set forth.
    (4) The date and manner of distribution of corporate assets and property were 'as follows: On October 1st, 1921, 10/20 to Alphonse Meyers, 9/20 to Augustus Botto and 1/20 to Alexander Wilson.
    It is hereby further certified that the debts of such corporation had been fully discharged and the assets distributed among the stockholders according to their respective rights.

      The balance of cash on hand, $12,566.95, mentioned in the above quoted extract from the articles of dissolution, was the balance left after counting in the proceeds of the sale for $25,000 at the closing of the petitioner’s bank accounts.
    I. W. Rodgers (one of the purchasers in the contract of April 26, 1921) had been in the motion picture business since 1896 and has had considerable experience in buying, selling and leasing motion picture theatre property. The physical equipment in the Gem Theatre had a fair market value at the date of sale of $6,000 or $7,000. All of the items of consideration on the part of the vendors contained in the contract to sell dated April 26,1921, were, taken as a whole, worth $25,000 to the vendees. The lease on the Gem Theatre property when acquired by Rodgers and McFarling, as above described, had no separate, bonus, or fair market value.
   OPINION.

Lansdon :

The issue raised by this proceeding is whether the total consideration of $25,000 paid by the vendees in 1921 as the result of the performance of a contract to sell dated April 26, 1921, represents gross income to the petitioner.

The profit resulting from the transaction was $22,392.19. The total consideration for the sale in question was $25,000. The petitioner claims that of said consideration, the amount of $16,660 represents the allocated sales price of property sold and belonging to its individual stockholders, Augustus Botto and A1 Meyers. In other words, the petitioner claims that its gross income has been erroneously increased by the sum of $16,660.

The determination of this case requires a careful analysis of the contract to sell dated April 26, 1921, in the light of all the evidence. The contract was made “by and between Gem Theatre Company, Augustus Botto and A1 Meyers, of Alexander County, Illinois, parties of the first part” and the named vendees as parties of the second part. The contract does not specify the ownership, as between the various parties of the first part, of the items involved and forming the subject matter of the transaction.

The proof adduced by the petitioner is incomplete in several particulars. No evidence was introduced regarding the covenants on the part of the individuals to sell and deliver to the vendees an assignable lease on the Kimmel Theatre and on the Cairo Opera House. We are not in a position to relegate these covenants to an insignificant role in the entire agreement. The contract to sell speaks for itself and contains a provision “that in the event parties of the first part fail or refuse to comply with all of the terms and conditions of this contract on their part, then they shall at the option of the parties of the second part, refund to said parties within 10 days the $1,000.00 paid to them at the time of the execution of this contract.” Mr. I. W. Rodgers, one of the vendees, testified that he could not intelligently segregate the separate values of the items forming the subject matter of the contract to sell.-

The provisions of the contract respecting the delivery by the vendors of a lease on the Gem Theatre property, called for a minimum term of five years and a maximum rental of $200 per month to take effect June 1, 1921, or for a substitute lease upon said property to be approved by the vendees. It is shown that the Gem Theatre had been operated on the premises in question close to 11 years, and that the lessors were all of Cairo, Ill., and knew that the property was being used in the motion picture business. Under these circumstances, the contract provision for a maximum rental of $200 per month indicates with reasonable definiteness the vendors’ conception of the fair rental value of the premises. On May 31, 1921, a new lease was executed between the owners and the vendees for a term of five years beginning June 1, 1921, at a rental of $200 per month, with the privilege of a three-year extension at a fixed rental of $250 per month. This indicates with reasonable definiteness the lessors’ conception of the rental value of the premises. The provisions of the contract to sell were thus fulfilled in this regard. It is difficult to perceive a bonus value applicable to the Gem Theatre lease acquired by the vendees on which a portion of the purchase price of $25,000 could be allocated on any sound basis.

In view of the terms of the application for its charter, followed by occupation of the premises and carrying on of the business by the petitioner, we are of the opinion that the lease of the Gem Theatre property was either assigned or sublet to the petitioner, as between the petitioner and Augustus Botto and Al Meyers. Lincoln Furniture Co. v. Bornstein (1926) 135 Atl. 83; Emery v. Hill (1893) 67 N. H. 330; 39 Atl. 266. Cf. In re Lindy-Friedman Clothing Co. (1921) 275 Fed. 453. However, no evidence was introduced to show that the lessor had any knowledge of the breach of the covenant against assigning or underletting. The lessor was therefore always in a position to declare a forfeiture of the lease, and the acceptance of the petitioner’s checks in payment of the rent, without actual knowledge of the breach, did not constitute a waiver of the covenant. Emery v. Hill, supra; German-American Savings Bank v. Gollmer (1909) 155 Cal. 683; 102 Pac. 932; Boston, C. & M. R. R. v. Boston & L. R. R. (1888) 65 N. H. 393; 23 Atl. 529. Cf. Gulf, C. & S. F. Ry. Co. v. Settegast (1891) 79 Tex. 256; 15 S. W. 228; Jackson v. Knight (1917) 194 S. W. 844. Under these circumstances, although petitioner could have defended its possession of the premises as against a stranger, it could not recover damages thereunder for loss of future profits or for anything dependent upon the future for its value. Bass v. West (1900) 110 Ga. 698; 36 S. E. 244, 247. An assignment of a lease made in violation of a statutory provision or a covenant in the lease can be taken advantage of only by the landlord for whose benefit alone the provision is made, and he may waive such provision. Thompson on Real Property, vol. 2, pp. 473-474. The existing lease on the premises at the time the contract to sell was executed had been extended to September 1, 1922. If any portion of the consideration of $25,000 is attributable to the cancellation of the existing lease on Gem Theatre property, it would seem that such portion belonged to the petitioner and not to its stockholders.

A consideration of the entire contract leads to the conclusion that the principal factor inducing the sale and the consideration of $25,000 paid by the vendees was the demonstrated earning power of the Gem Theatre Co. from the operation of its three theatres, over and above a reasonable return on the investment in tangible property. Although the so-called good will of the petitioner, in the sense just explained, is not specifically mentioned as such in the contract as being a subject matter of sale, nevertheless, in effect, that is what the vendees acquired as the result of the transaction. Supplementing and bearing directly upon this phase of the transaction was the covenant by the “ parties of the first part ” not to engage in the motion picture business either directly or indirectly for a period of five years in the City of Cairo, Ill. Each of the parties of the first part was bound by this condition; that is, not only Augustus Botto and A1 Meyers, but also the petitioner itself. It would seem even more essential to eliminate the petitioner with the name Gem Theatre Company ” from the competitive field in Cairo than to remove its stockholders and officers from such competition. The petitioner in its evidence and brief apparently proceeded on the assumption that Messrs. Botto and Meyers were the only parties concerned in the covenant against competition. That assumption does not seem reasonable under the circumstances.

The most reasonable view of the transaction in question would seem to be that substantially all of the $25,000 purchase price was paid for assets belonging to the business of the petitioner. ÜSTo evidence has been introduced and no basis suggested by which the value of the elimination of the individuals, Augustus Botto and A1 Meyers, from competition in the Cairo field could be even approximated.

Judgment will be entered for the respondent

Considered by Steknhagen, Green, and Arttndeel.


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    Stratton Grocery Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7645.
    Promulgated September 27, 1927.
    1. Under the evidence, held that no profit was realized by petitioner on sale of its good will in 1919.
    2. Value of good will disallowed in computation of invested capital, under section 331, Revenue Act of 1918.

      M. M. AsKbaugh, Esq., and Edward ¡S. Elliott, O. P. A., for the petitioner.

      G. H. Gurl, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $25,291.08. This deficiency results in part from the action of the Commissioner in adding to the reported income of petitioner the sum of $50,000 as profit on the sale of good will, and in reducing the invested capital of the petitioner, as reported in its return, by disallowing the sum of $50,000, representing the value of certain good will acquired from its predecessor. The correctness of the Commissioner’s action, in respect of the two items mentioned, constitutes the sole controversy involved herein.
    FINDINGS OF FACT.
    Petitioner is a Tennessee corporation, with its principal office at Memphis. It was organized in June, 1918, under the name of Saunders-Stratton Grocery Co., with an authorized capital stock of $500,000, and shortly thereafter the name was changed to Stratton Grocery Co.
    Prior to the organization of petitioner, the L. M. Stratton Co., a corporation, was engaged in the jobbing business in Memphis, dealing in food products. The business was first established as a partnership by L. M. Stratton and R. D. Warren in 1904, with a capital of $100. It was incorporated as the L. M. Stratton Co. in February, 1908, and in 1909 had a capital stock of $50,000, one-half of which was owned by L. M. Stratton. After its incorporation, L. M. Stratton was president of this company.
    Prior to the organization of petitioner, there was also another corporation in Memphis known as the Saunders-Blackburn Grocery Co., which was engaged in the business of selling groceries at wholesale on the mail-order plan, and was owner of the Piggly Wiggly stores in that city. Clarence Saunders was president of the last-named corporation, and owned a controlling interest in it. Saunders personally originated the Piggly Wiggly system of merchandising and obtained patents and trade-marks covering its operation. He then sold franchise rights to others in different parts of the country to operate stores on this plan. Later, he organized a Tennessee corporation known as Piggly Wiggly, Inc., and transferred to it the right to operate stores under the Piggly Wiggly system. The capital stock of Piggly Wiggly, Inc., was owned by the Saunders-Blackburn Grocery Co.
    Prior to June, 1918, Stratton had become associated with Saunders and was assisting him in the development of the Piggly Wiggly idea, with a view to its expansion into a national system of retail chain grocery stores.
    Stratton and Saunders, desiring to consolidate their interests and respective companies, entered into a contract on June 15, 1918, providing for the organization of the Saunders-Stratton Grocery Co. The new corporation was to take over the assets of the L. M. Stratton Co. and the Saunders-Blackburn Grocery Co., issue its stock for the net worth of each, and, in addition thereto, issue stock in the amount of $50,000 par value to the stockholders of each of said companies in exchange for their good will and franchise rights. This contract was duly carried out according to its terms, and petitioner thus acquired, in addition to other assets, the good will of the L. M. Stratton Co. at a cost of $50,000 par value of stock, and the good will and Piggly Wiggley franchise of the Saunders-Blackburn Grocery Co. at a like cost of $50,000 par value of stock. The total amount of $100,000 was thereafter set up on the books of petitioner as “ Good will and Piggly Wiggly franchise.” At the time of its organization, more than 50 per cent of the capital stock of petitioner was acquired by and issued to the stockholders of the L. M. Stratton Co. The contract which resulted in the organization of petitioner, after providing for issue of its stock in payment for the assets of the two consolidated companies, provided:
    It is further understood that the Treasury stock remaining is to be sold at par by the Officers who may be elected by the Saunders-Stratton Grocery Company.
    It was expected that approximately $200,000 of the stock of the new company would be issued to the stockholders of the L. M. Strat-ton Co. for its assets, and that approximately $150,000 of stock would be issued to the' stockholders of the Saunders-Blackburn Grocery Co. for its assets, and that the balance of the stock of the authorized issue of $500,000, would be sold at par to others. However, when the inventory was taken, it was found that the tangible assets of the Saunders-Blackburn Co. amounted only to $81,500, and it became necessary to sell the remaining stock in order to provide working capital for petitioner. It was found to be impracticable to sell the stock to outsiders on account of the restrictions imposed by the Capital Issues Committee during the war period. Because of these facts the stock was taken by the stockholders of the L. M. Stratton Co. thereby increasing the amount of petitioner’s stock acquired by them to more than 50 per cent of the total authorized issue. In 1919, after removal of the war-time restrictions on the transfer of stock, the former stockholders of the L. M. Stratton Co. reduced their holdings of petitioner’s stock below 50 per cent.
    At the time of the sale of its assets to the Saunders-Stratton Grocery Co., the L. M. Stratton Co. had a capital stock of $100,000, of which L. M. Stratton owned $37,500.
    After the consolidation of their companies, Stratton and Saunders were in frequent conference with regard to the future development of the Piggly Wiggly system, and on November 10, 1919, made a verbal agreement for the sale of the assets of the Stratton Grocery Co., petitioner herein, to a new corporation, to be organized under the name of Piggly Wiggly Stores, Inc. In this transaction, Strat-ton, who owned 691 of the 5,000 shares of the capital stock of petitioner corporation and who was its president, represented petitioner, and Saunders represented the proposed new corporation. Saunders did not at that time own any of petitioner’s stock. The verbal agreement reached on November 10, 1919, between Stratton and Saunders was made subject to ratification by the stockholders of petitioner, was subsequently reduced to writing, duly ratified, and the written contract was thereafter executed under date of November 29, 1919. Piggly Wiggly Stores, Inc., was organized on November 18, 1919, as a Virginia corporation. The written contract referred to expressly provided for the sale by petitioner to the Piggly Wiggly Stores, Inc., of the following assets:
    (1) All of the salable merchandise contained in stores then operated by petitioner in Memphis under the Piggly Wiggly system, in accordance with inventory to be taken on December 26, 1919; (2) all store fixtures used in said Piggly Wiggly stores; (3) contract with Piggly Wiggly corporation for right to operate stores under the Piggly Wiggly system, “ the contract to be transferred upon the valuation of $100,000;” (4) all leases for store buildings then occupied by stores operated under the Piggly Wiggly system; (5) salable merchandise and warehouse and delivery equipment located in the wholesale warehouse used by petitioner, to the amount of $390,-000 according to inventory as of January 1, 1920; (6) all issued and outstanding stock of the Madison Bread Co. of the par value of $15,000, together with'the lease of the premises occupied by that company; and (7) lease on the warehouse occupied by petitioner under a 10-year rental contract. The said assets were to be paid for in cash and with stock of the Piggly Wiggly Stores, Inc.

      Pursuant to the contract of November 29, 1919, petitioner transferred and delivered on December 26, 1919, and January 2, 1920, to the Piggly Wiggly Stores, Inc., substantially all of its stock of merchandise, delivery equipment, leases, good will, franchise rights, and also its organization of employees, consisting of approximately 100 men, with a few minor exceptions. Petitioner retained its accounts receivable, cash on hand, Liberty bonds, a small amount of merchandise purchased but not paid for, and one or two trucks, which, together with the proceeds from the sale of its other assets to Piggly Wiggly Stores, Inc., comprised a total value of approximately $600,000. After the sale and transfer of its assets to the Piggly Wiggly Stores, Inc., petitioner had no facilities remaining with which to carry on business.
    The verbal agreement of November 10, 1919, between Stratton and Saunders was reached in the City of Washington. Shortly thereafter Stratton returned to Memphis and reported to his brother, A. C. Stratton, vice president of petitioner, and to his other associates in the company, the matter of the proposed sale of petitioner’s assets to the new corporation. A. C. Stratton did not desire to become a part of the organization of the new corporation, and on or about November 20, 1919, instituted negotiations looking to the consolidation or merger of petitioner (to be effected after transfer of its business and assets to the Piggly Wiggly Stores, Inc.) with the W. C. Early Co., another wholesale grocery corporation then operating in the City of Memphis. As the result of such negotiations, L. M. Stratton, representing the Stratton Grocery Co., and W. C. Early and L. Y. Williamson, representing the W. C. Early Co., entered into a written contract under date of November 25, 1919, providing for a consolidation of the two companies as of December 31, 1919. Under the terms of this contract it was agreed, among other things, that the Stratton Grocery Co. would as soon as possible amend its charter so as to change its name to Early-Stratton Co., and increase its authorized capital stock from $500,000 to $1,000,000. It was further agreed that the Stratton Grocery Co. would purchase the merchandise, fixtures and leases of the W. C. Early Co. “ on cost and market bases ” to be determined by inventory, and would pay to the last named company $50,000 for its good will. This contract was carried out, and W. C. Early became chairman of the board of directors of the Early-Stratton Co., L. M. Stratton became president, and A. C. Stratton became vice president and general manager.
    The W. C. Early Co., prior to its merger with petitioner, had conducted a business materially different from that of petitioner and had an entirely different clientele. It operated a wholesale grocery business on long-time credit, and used traveling salesmen to secure orders. It had acquired the exclusive sale of a large number of popular brands and had a business established on these brands. It also handled a line of feeds, hay, and grain. After the merger, A. C. Stratton, as vice president and general manager, had active management of the Early-Stratton Co., while L. M. Stratton, who had been elected vice president of the Piggly Wiggly Stores, Inc., was actively engaged in the development of that business from its organization up to July 20, 1920, when he resigned. He did not maintain a desk in the office of the Early-Stratton Co. for more than a year after it was organized. The Early-Stratton Co. continued the business which had formerly been operated by the W. C. Early Co. for approximately 27 years, using its books and accounts, and substantially the same organization, equipment, and methods. It also continued the business in the office and warehouse formerly occupied by the W. C. Early Co.
    The Stratton Grocery Co., prior to the sale of its assets to the Piggly Wiggly Stores, Inc., had operated a wholesale and retail grocery business on the mail-order plan, selling for cash. Its principal customers were the Piggly Wiggly Stores, which it owned.
    Petitioner sold, transferred, and delivered to the Piggly Wiggly Stores, Inc., for a consideration of $100,000, the good will which it had theretofore acquired by purchase from the L. M. Stratton Co. for $50,000 and the good will and Piggly Wiggly franchise, which it had theretofore acquired from the Saunders-Blackburn Grocery Co. for $50,000.
   OPINION.

Trammell:

The controversy in this proceeding raises two issues: (1) Did petitioner realize a profit of $50,000 on the sale of its intangible assets in November, 1919, and (2) is petitioner, under the provisions of the Revenue Act of 1918, entitled to have the good will acquired by it from the L. M. Stratton Co. included in the computation of its invested capital at a valuation of $50,000 ?

With respect to the first issue, petitioner contends that, notwithstanding the formal provisions of the written contract of November 29, 1919, it was intended thereby that it should sell, and that it did in fact sell, to the Piggiy Wiggly Stores, Inc., for a consideration of $100,000, the good will acquired by it from the L. M. Stratton Co. at a cost of $50,000, and the good will and Piggly Wiggly franchise acquired from the Saunders-Blackburn Grocery Co. at a like cost of $50,000, and that hence no profit was made on this transaction. Respondent contends that, under the express provisions of the written contract, petitioner sold to the vendee corporation for $100,000, the Piggly Wiggly contract or franchise only, which it had theretofore acquired at a cost of $50,000, and retained its good will, thus realizing a profit of $50,000, which amount respondent added to the reported income of petitioner.

Petitioner issued its stock of the par value of $50,000 to each of its two predecessor corporations, or' stock of a total par value of $100,000, for the good will acquired by it. No controversy is raised with respect to the value of the stock. At the hearing, respondent specifically admitted that petitioner paid $100,000 for its good will, and thus in effect that the stock was worth par.

It being uncontroverted that petitioner acquired at a cost of $100,000 the good will of its predecessor corporations, together with the Piggly Wiggly franchise, under the circumstances set out in our findings of fact, it remains to be determined whether petitioner sold its combined good will and the Piggly Wiggly franchise for $100,000, or whether' it retained the good will and sold only the franchise.

At the hearing, after introducing in evidence the written contract, petitioner offered oral testimony in support of its contention. Thereupon, respondent objected to the admission of such testimony on the grounds that the contract was free from any ambiguity and should speak for itself, and that its terms could not be modified, changed or explained by parol evidence. We have heretofore had occasion to consider this question, and have held that such evidence as between the Government and one of the parties to the contract is competent and admissible. Appeal of Converse & Co., 1 B. T. A. 742; Appeal of Arthur B. Grover, 3 B. T. A. 508.

L. M. Stratton, who was then president of petitioner and on its behalf signed the contract in question, testified as follows:

Q. Mr. Stratton, what was the intention of the parties to this contract as to the transfer of the good will of the Stratton Grocery Co. to the Piggly Wiggly Stores, Inc.?
A. It was to transfer at the same price at which it was acquired, from the L. M. Stratton Co. and the Saunders-Blaekburn Grocery Co. the item of good will and franchise rights we had on our books to the Piggly Wiggly Stores, Inc.
*******
Q. Was the amount of $100,000 referred to in paragraph 3 of the contract the same amount as was paid by the Stratton Grocery Co. for the good will of the L. M. Stratton Co. and the Saunders-Blaekburn Grocery Co.?
A. It was.
Q. Was it intended that that amount of $100,000 should cover exactly the same good will as was previously acquired in that way?
A. It was.

Without regarding this testimony as conclusive, we find, upon further examination of the evidence, corroborative facts which irresistibly lead to the same result. The Supreme Court of the United States has laid down the proposition that good will is inseparable from the business in connection with which it was created. In Metropolitan Bank v. St. Louis Dispatch, Co., 149 U. S. 436-451, Mr. Chief Justice Fuller, speaking for the court, at page 446, said:

Undoubtedly, good will is in many eases a valuable thing, although there is difficulty in deciding accurately what is included in the term. It is tangible only as an incident, as connected with a going concern or business having locality or name, and is not susceptible of being disposed of independently.

Again in the case of Sawilowsky v. Brown, 288 Fed. 533, the Circuit Court of Appeals, Fifth Circuit, said:

Good will and trade-names or trade-marks connected with a business are destroyed by a sale of the business without the good will and trademarks * * *.

To the same effect also In re Jaysee Corset Co., 201 Fed. 179.

The undisputed evidence shows that petitioner sold, transferred and delivered to the Piggly Wiggly Stores, Inc., its stock of merchandise, its delivery equipment, retail stores, fixtures, and the lease on its business premises. It also transferred to the vendee practically its entire organization of employees, including its president, who had been largely instrumental in building up its good will. Thus, having divested itself of the means of carrying on its business, it ceased to be a going concern, to which good will could attach. Having sold and transferred its business, to which the good will was inseparably attached, it follows-that the good will went with it, whether or not such good will was specifically included in the purchase price. It is immaterial that petitioner later changed its name, acquired the business of another going concern having an entirely different clientele, and thereafter operated such business at a new and different location.

But it is contended by the respondent that even though petitioner intended and attempted to sell its good will to the Piggly Wiggly Stores, Inc., it nevertheless retained its good will by reason of the fact that it acquired the assets of the W. C. Early Co. and thereafter operated a somewhat similar business at a different location.

The facts show that on November 10, 1919, when L. M. Stratton and Saunders reached their verbal agreement in Washington for the sale of petitioner’s assets to the new Piggly Wiggly Corporation, the negotiations for the purchase of the Early Company had not been started, nor were they in contemplation. Upon the return of L. M. Stratton to Memphis and after he had informed his brother, A. C. Stratton, of the proposed sale of petitioner’s assets, the latter, some days thereafter, instituted the negotiations which led to the contract between petitioner and the W. C. Early Co. While it is true that this contract was actually signed four days prior to the date on which the written contract was signed for the sale of petitioner’s assets to the Piggly Wiggly Corporation, it was the intention of the parties that the contract with the Early Company should not be carried out until after the completion of the transfer of petitioner’s business to its vendee. The money to be paid by petitioner for the Early assets was to come from the proceeds of the sale of its business to the Piggly Wiggly Corporation. After the transaction had been completed, petitioner possessed substantially only liquid assets, consisting principally of stocks, bonds, and money in bank, of the total value of about $600,000. These assets were then used by petitioner to carry out its obligations under the Early contract. At that time, petitioner had divested itself of all the facilities of a going concern, and with the exception of the assets received from the sale of its business, retained only its corporate franchise. With the assets of the principal part of which it received from the sale of its business, it acquired another business. An appreciable time intervened during which petitioner was not a going concern in the sense that it possessed a business to which good will could attach. It was no longer operating the business in connection with which its good will had been created. That. business, as a going concern, consisting of a plant, equipment, fixtures, stock of merchandise, an established location, a large force of trained employees, and the goad will which attached to all these elements as a whole, was then owned, in the possession of, and being operated by the Piggly Wiggly Stores, Inc.

In Washburn v. National Wall Paper Co., 81 Fed. 17, 20, the court said:

If good will be a “ parasite,” it is a “ parasite ” of the business from which it sprung, not of the mere machinery by which that business was conducted.

In the light of all the facts and circumstances disclosed by the evidence, we are satisfied that it was the intention of the parties that petitioner should sell and that Piggly Wiggly Stores, Inc., should purchase, at a valuation of $100,000, the same intangible assets which petitioner had theretofore acquired at a like cost. Accordingly, no profit was realized by petitioner, and respondent erred in adding the sum of $50,000 to petitioner’s income for the taxable year involved herein.

The material facts respecting the second issue are admitted. Petitioner acquired the good will of the L. M. Stratton Co. subsequent to March 3, 1917, to wit, in 1919. It paid $50,000 par value of stock for such good will. At the time of organization, the stockholders of the L. M. Stratton Co. acquired, and for some time thereafter retained, more than 50 per cent of petitioner’s stock. Thus, an interest or control in the good will, amounting to more than 50 per cent, remained in the same persons. The provisions of the Revenue Act of 1918, applicable to these facts, are contained in section 331, the pertinent part of which reads as follows:

Sko. 331. In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1017, if 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, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received; * * *

Petitioner in its brief states that while it can not be denied that the stockholders of the L. M. Stratton Co. did acquire more than a 50 per cent control in its stock, such acquisition resulted from the regulations imposed by the Capital Issues Committee, a Governmental agency, and placed it in a position whereby it is being made to suffer at the hands of another branch of the Government. Petitioner then argues that such a situation was never intended in the administration or enforcement of any Federal law, and suggests that this Board has ample power and discretion to correct such a condition.

With this contention we are unable to agree. We find in the Revenue Act of 1918, no exception to the provisions of section 331, and we can not read into the law an exception not by express provision or fair implication contained therein. The facts hereinabove set out come squarely within the purview of section 331. It follows, therefore, that in determining the invested capital of petitioner for the year 1919, the good will which was transferred to it by and which it received from the L. M. Stratton Co. can not be allowed a greater value than would have been allowed the former owner, if such asset had not been so transferred.

There is no evidence before us to show what value, if any, would have been allowable under said Revenue Act in computing the invested capital of the previous owner of said asset, if it had not been transferred to petitioner. Accordingly, we must approve the action of respondent in respect of this item.

Reviewed by the Board.

Judgment will he entered on 15 days’ notice, wnder Rule 50.


author: Littleton :

text:
    Appeal of Sentinel Publishing Co., Successor to Curtis B. Johnson Publishing Co.
    Docket No. 5712.
    Promulgated September 27, 1927.

      'Where in 1911 one corporation issued its capital stock for the entire capital stock of another corporation, such stock acquired is tangible property under section 325 of the Revenue Act of 1918, and the subsequent liquidation of such acquired capital stock and the merger of such corporation into the taxpayer has no effect in computing invested capital nor does it change tangible assets into intangible assets for the purpose of such computation.

      E. E. Shelton, Esq., for the petitioner.

      Alva 0. Baird, Esq., and A. H. Willy, Esq., for the Commissioner.
    The Commissioner determined a deficiency in income and profits tax of $6,454.71 for the calendar year 1918 as a result of his denial in part of the claim for the abatement of a jeopardy assessment of an additional tax of $12,755.67, assessed in February, 1924. Petitioner claims that the Commissioner erred in excluding from invested capital the amount of $155,921.18 upon the ground that that amount represented intangibles acquired by petitioner for capital stock. Petitioner claims that tangible and intangible property of the value of $338,-273.55 was acquired by its predecessor, the Curtis B. Johnson Publishing Co., from the Knoxville Sentinel Co., in exchange for tangible property, to wit, the entire capital stock of the Knoxville Sentinel Co. and that, therefore, the limitation provided in section 326 (a) (4) of the Revenue Act of 1918, with reference to intangibles acquired for stock does not apply. Petitioner also claims that the collection of the additional tax assessment for the calendar year 1918 is barred by the statute of limitation of five years.
    The invested capital issue stated above was before the Board in the appeal of this petitioner, Docket No. 2756, reported in 2 B. T. A. 1211, involving the calendar year 1919, wherein the Board approved the determination of the Commissioner that the provisions of section 326 (a) (4) were applicable for the reason that sufficient information had not been presented to the Board showing the manner in which the petitioner acquired the tangible and intangible assets of the Knoxville Sentinel Co., that is, the petitioner failed to establish to the satisfaction of the Board that the intangible assets of the Knoxville Sentinel Co. had not been acquired for its stock.
    BINDINGS OB BACT.
    Petitioner is a Tennessee corporation with principal office at Knoxville, where it is engaged in publishing a daily newspaper. It is successor to the Curtis B. Johnson Publishing Co., which was incorporated on December 11, 1912, with a capital stock of a par value of $100,000 and shortly thereafter acquired all of the tangible and intangible assets of the business .of the Knoxville Sentinel Co., which had been engaged for many years in publishing the Knoxville Sen-tine^ a daily newspaper.

      The assets of the Knoxville Sentinel consisted, of a large amount of tangible property in the way of machinery and equipment necessary in the publication of a daily newspaper of wide circulation. Its assets also included franchises, good will, subscription contracts, advertising contracts, accounts and bills receivable, etc. The capital stock of the Knoxville Sentinel, consisting of $100,000 par value, was closely held, two thirds, or 666% shares, being owned by George F. Milton of Chattanooga, who was engaged in publishing a daily newspaper at that place known as the Chattanooga News, and the other one-third, or 838% shares, being owned by Curtis B. Johnson of Knoxville, who was engaged in the publication of a daily newspaper known as the Knoxville Sentinel. These two individuals also owned all of the stock of the Chattanooga News Co. in the same proportion as above stated. The operations of the Knoxville Sentinel had been and were in 1912 profitable and the stock of that company had a cash value far in excess of par.
    Some time prior to November, 1912, George F. Milton proposed to sell to Curtis B. Johnson the stock owned by him in the Knoxville Sentinel Co. upon the basis of a value for all of the capital stock of that company of $338,273.55, or $338.27 a share. Curtis B. Johnson decided to acquire Milton’s stock at the price mentioned but he did not personally have sufficient cash available to close the transaction, whereupon he proposed to eight of his closest friends, Frank M. Haynes, T. C. Chapman, H. M. Johnston, Wiley M. Morgan, J. D. Clinton, H. L. Baker, T. J. Clark, and A. J. Bussell, who were familiar with the assets and business of the Knoxville Sentinel, that they join with him in purchasing Milton’s stock and become the owners of an interest in said stock in proportion to the amount of money advanced by them for the purpose. To this proposition they agreed and came forward with the amount of cash needed by Curtis B. Johnson to make the purchase. It was agreed and understood between Curtis B. Johnson and his associates that the purchase from Milton of his stock in the Knoxville Sentinel should be carried out in the name of Curtis B. Johnson alone and that, after the transaction had been completed and all of the stock of the Knoxville Sentinel acquired, a new corporation known as the Curtis B. Johnson Publishing Co. would be organized and its entire capital stock of $100,000 par value issued to the parties in interest in exchange for the entire capital stock owned by them in the Knoxville Sentinel, it being a part of the plan that the Curtis B. Johnson Publishing Co. should later take over the assets and the business of the Knoxville Sentinel. Accordingly, on November 26, 1912, Curtis B. Johnson on behalf of himself and his associates entered into a contract with Milton for the purchase of the stock of the latter. So much of the contract as is pertinent to the issue here involved follows:
    That Roe and in Consideration of the payments hereinafter provided, the transfer of stocks hereinafter provided and the mutual agreements and undertakings hereinafter provided, the party of the first part has agreed and does hereby sell and deliver unto the party of the second part all of the shares of stock owned by the party of the first part in the Knoxville Sentinel Company, a corporation organized and existing under the laws of Tennessee, with its principal office at Knoxville, Tennessee, basing the value of said Knoxville Sentinel Company at $250,000.00, which includes its franchises, good will, subscriptions, advertising contracts, machinery, accounts receivable, and all other assets of every kind and character whatsoever, excepting, however, the obligations now due to the said Knoxville Sentinel Company by the Chattanooga News Company, a corporation under the laws of Tennessee, at the price of $166,666.67, for the two-thirds interest of the party of the first part in the shares of stock of said Knoxville Sentinel Company, which sum of $166,666.67 party of the second part hereby agrees to pay to the party of the first part as follows:
    First: Cash on completion of this contract and on delivery of said certificates of stock, receipt of which is hereby acknowledged_$40, 000. 00
    Second: One note for $22,166.67 of even date herewith, due thirty days after date with 6% interest after date signed by the party of the second part as principal and by H. M. Johnston, S. M.
    Johnston, David C. Chapman, and Frank M. Haynes, as sureties_ 22,166. 67
    Third : One note for $22,500.00 of even date herewith due sixty days after date with 6% interest from date signed by party of of the second part as principal, and by H. M. Johnston, S. M. Johnston, David C. Chapman, and Frank M. Haynes, as sureties_ 22,500.00
    Fourth : All of the shares of stock belonging to party of the second part in the Chattanooga News Company of the par value of $30,666.67 to be transferred to the party of the first part at the value of_ 32, 000. 00
    Fifth : $50,000.00 of first mortgage bonds secured by deed of trust on the franchises, good will, and all tangible property of the Knoxville Sentinel Company which bonds shall bear interest at 6% per annum, payable semi-annually, and shall be payable as to principal as follows: $5,000 due in five years, and $5,000 due every year thereafter until the full amount is paid, with the provision that said bonds may be retired in whole or in part on any interest payment date before maturity, said deed of trust to contain substantially the same provision as that of the Chattanooga News Company, said $50,000.00 of bonds to be the only first mortgage bonds on said property_ 50, 000.00
    Making the total of- 166, 666. 67
    As part of the consideration hereof, it is further agreed as follows:
    1st: That party of the second part shall cause the Knoxville Sentinel Company to transfer to party of the first part, all debts due the Knoxville Sentinel Company by the Chattanooga News Company including checks, overdrafts, open accounts, and all other claims and accounts of every, kind whatsoever, and that the said Knoxville Sentinel Company shall release party of the first part from all obligations as endorser, surety, or guarantor of said Knoxville Sentinel Company, and shall hold party of the first part harmless on account of any and all liabilities growing out of his connection with the management of said Knoxville Sentinel Company while he was connected therewith.
    2nd: Party of the second part shall cause said Knoxville Sentinel Company to pay all notes on which party of the first part is now liable as endorser or surety for it, or shall so arrange said notes at their maturity as to release party of the first part from any liability whatever thereon in such manner as shall be satisfactory to party of the first part.
    3rd: The party of the second part shall cause the personal accounts of the party of the first part, and Mrs. Geo. F. Milton, and Mrs. Sarah IT. Milton, with the Knoxville Sentinel Company, to be balanced on the books of the company.
    4th: Party of the first part shall cause the account of party of the second part with the Chattanooga News Company up to and including November 30th, 1912, to be paid to party of the second part and shall cause said account to thereupon be balanced in full.
    5th: Party of the second part agrees that a certain note executed by party of the first part for $2,250 November 20th, 1912, due ninety days after date now held by the Union Bank of Knoxville, Tennessee, endorsed by Knoxville Sentinel Company, and secured by notes of the party of the second part and stock of the Knoxville Sentinel Company, which $2,250 note is an obligation of the Knoxville Sentinel Company, shall be paid or so arranged as to release the collateral thereto attached and relieve party of the first part of liability thereon.
    6th: The party of the first part shall cause the Knoxville Sentinel Company and party of the second part to be released from any and all liability of whatsoever character, whether as surety or endorser, of notes, accounts or other obligations, made or created by party of the first part or by the Chattanooga News Company, and that he will cause party of the second part to be released from all obligations of every kind, whether by bank endorsement or otherwise, which were incident to the conduct of the Chattanooga News Company and will hold party of the second part harmless on account of any and all liabilities growing out of his connection with the management of the Chattanooga News Company while he was connected therewith. * * *
    This contract was carried out and Curtis B. Johnson and his associates paid Milton in cash or its equivalent $338.27 a share for the stock and thereupon became the owners of all of the capital stock of the Knoxville Sentinel. Subsequently, on December 11, 1912, the Curtis B. Johnson Publishing Co. was organized under the laws of the State of Tennessee and issued its entire capital stock, consisting of 1,000 shares of the par value of $100 each, to Curtis B. Johnson and his associates in exchange for the entire capital stock of the Knoxville Sentinel of a like number of shares and like par value. Said stock of the Curtis B. Johnson Publishing Co. was issued to these individuals in proportion to their then stock interest in the Knoxville Sentinel, as follows :
    Shares
    Curtis B. Johnson- 637y2

    Frank M. Haynes- 100
    T. C. Chapman- 100
    H. M. Johnston_ 100

      Shares
    Wiley Tj. Morgan. W crc
    J. D. Clinton_ M W
    H. L. Baker_ M to
    T. J. Clark_ M
    A. J. Russell-Ol

    Total_1, 000
    The makers of the notes to Milton as part of the consideration for his stock were entirely solvent and said notes were the equivalent of cash.
    Shortly thereafter the Curtis B. Johnson Publishing Co. acquired the business and assets of every description, tangible and intangible, of the Knoxville Sentinel Co. and caused that company to be dissolved and its stock surrendered. The Curtis B. Johnson Publishing Co. thereafter carried on the business theretofore conducted by the Knoxville Sentinel. Some cash and notes were paid in to the Curtis B. Johnson Publishing Co. at the time or shortly after its organization but such transactions are not in question here.
    After the transaction with Milton had been closed Curtis B. Johnson and his associates, being closely associated, gave little or no consideration to the matter of the value of the stock of the Knoxville Sentinel exchanged for the stock of the Curtis B. Johnson Co. or to the value of the assets of the Knoxville Sentinel, the thought uppermost in their minds being to have the Curtis B. Johnson Publishing Co. issue its stock to the parties in interest in proportion to their stock interest in the Knoxville Sentinel Co. and to have the Curtis B. Johnson Publishing Co. take over the assets and business of the Knoxville Sentinel Co. and carry on the same business as had theretofore been carried on. Curtis B. Johnson and Wiley L. Morgan were in charge of the operations of the company. The actual cash value of the stock of the Knoxville Sentinel Co. at the time acquired by the Curtis B. Johnson Publishing Co. in exchange for its stock was $388,273.55. When the Curtis B-Johnson Publishing Co. took over the assets and business, and assumed the liabilities of the Knoxville Sentinel Co., no attempt was made to revalue such assets but the books of the Knoxville Sentinel Co. were continued as they had theretofore been kept by the Sentinel Company without change. The Curtis B. Johnson Publishing Co. subsequently issued $50,000 in bonds but this transaction is not material here.
    In its return for the calendar year 1918, which was filed with the Collector of Internal Revenue for the District of Tennessee on June 13, 1919, under an extension granted by the Commissioner, petitioner showed a tax of $18,041.04, which was duly paid, and in such return petitioner claimed invested capital on account of the tangible and intangible assets acquired from the Knoxville Sentinel Co. of $338,-273.55. Upon audit of the return the Commissioner held that the assets of the Knoxville Sentinel Co. had been acquired by petitioner in exchange for its capital stock and excluded from petitioner’s invested capital the amount of $155,921.18. The amount claimed through the application of the 25 per cent limitation, as provided in section 326 (a) (4) of the Revenue Act of 1918, petitioner claims as error. Upon the basis of this determination the Commissioner in his computation mailed to the petitioner on January 24, 1924, upon the basis of which he made a jeopardy assessment, asserted a deficiency of $12,755.67. Due to the approaching expiration of the statute of limitation the Commissioner on January 24, 1924, advised the petitioner that “ It is deemed expedient by this office that the above tax be assessed immediately without giving the usual thirty days notice as provided in section 250 (d) of the Revenue Act of 1921, and that a claim be filed by you to protect your interests in the matter. Therefore the Bureau will entertain a claim in abatement if filed within ten days after receipt of notice and demand from the Collector of Internal Revenue for your district, in accordance with the provisions of Article 1006 of Regulations 62.” The additional tax of $12,755.67 was assessed in the latter part of January or early in February, 1924. On March 3, 1924, the Curtis B. Johnson Publishing Co. executed a claim for the abatement of the jeopardy assessment and filed said claim with the collector of internal revenue at -Nashville, Tenn., on March 4, 1924. The collector demanded a bond for the tax assessed and accordingly, on May 11,1925, petitioner executed a bond. On June 17, 1925, the Commissioner, upon consideration of petitioner’s abatement claim, determined that petitioner’s profits tax for 1918 should be computed under the provisions of section 328 of the Revenue Act of 1918. He made such computation and determined thereby that petitioner’s correct tax liability for the year 1918 was $24,495.75 instead of $20,796.71 as assessed by him upon the original return and on the February, 1924, Special Jeopardy Assessment List, thereby allowing petitioner’s abatement claim of $6,300.96, and determined the deficiency for the calendar year 1918 to be in the amount of $6,404.71. From this determination of June 17, 1925, the petitioner, within 60 days thereafter, instituted this proceeding for the redetermination of such deficiency. On November 10, 1926, the petitioner and the Commissioner executed the following document entitled “Income and Profits Tax Waiver” as follows:
    In pursuance of the provisions of existing Internal Revenue Laws Curtis B. Johnson Publishing Company, a taxpayer of 71¡0 Gay Street, Knoasville, Tennessee, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1918 under existing revenue acts, or under prior revenue acts.
    This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1927, and shall then expire.
    The Sentinel Publishing Co., Successors to The Cuktis B. Johnson Publishing Co.
    By Wiley L. Mokgan, V. P. & G. M.

    D. H. Blaib, Commissioner.
    No suit in court or distraint proceeding lias been instituted by the Commissioner against this petitioner for the collection of any additional tax for the calendar year 1918.
   OPINION.

Littleton :

The first issue involved in this proceeding was before the Board in the Appeal of Sentinel Publishing Co., Docket No. 2756, reported in 2 B. T. A. 1211. The evidence in that proceeding consisted of depositions of certain witnesses and the testimony contained therein did not disclose the manner in which the Curtis B. Johnson Publishing Co. acquired the assets and business of the Knoxville Sentinel Co. The testimony in that proceeding was to the effect that cash and the equivalent of cash was paid in to the Curtis B. Johnson Publishing Co. for its stock of the par value of $100,000. It was not brought out in such deposition just how the transaction between Curtis B. Johnson and his associates, and the Curtis B. Johnson Publishing Co., was handled and nothing was disclosed by the record as to how or in what manner the Curtis B. Johnson Publishing Co. acquired the assets of the Knoxville Sentinel Co. For that reason the Board approved the Commissioner’s determination wherein he applied the limitation specified in the provisions of section 826 (a) (4) of the Revenue Act of 1918 in determining the amount to be included in invested capital on account of the tangibles and intangibles acquired for stock. We were compelled to do that because we were without sufficient information to enable us to hold that the intangible assets of the Knoxville Sentinel Co. were not acquired by the Curtis B. Johnson Publishing Co. for its stock. This deficiency in the evidence in the former proceeding relating to this issue has been supplied in this proceeding. Canyon Lumber Co., 4 B. T. A. 940.

There appears to be no dispute as to the cash value of the stock of the Knoxville Sentinel Co. paid in to the Curtis B. Johnson Publishing Co. for its stock or that the tangible and intangible assets of the Knoxville Sentinel Co. were not also worth at least $338,-273.55. The evidence shows that the stock of the Knoxville Sentinel Co. had a cash value of $338 a share at the time it was acquired by the Curtis B. Johnson Publishing Co. in exchange for its stock and at the time such stock was surrendered and canceled and the Knoxville Sentinel Co. dissolved and its assets taken over by the Curtis B. Johnson Publishing Co. The Curtis B. Johnson Publishing Co. issued its stock for tangible property, to wit, stock of the Knoxville Sentinel Co., and later dissolved that company and took over the tangible and intangible assets of the company, which form the basis of the invested capital claimed. The cost of the assets of the Knoxville Sentinel Co. to the Curtis B. Johnson Publishing Co. was $338,273.55 and these assets, although to a large extent intangibles, were not acquired by the Curtis B. Johnson Publishing Co. in exchange for its capital stock and the limitation on intangibles acquired for stock, as provided in section 326 (a) (4), therefore, did not apply in this case. Regal Shoe Co., 1 B. T. A. 896, and Merchants National Bank v. Commissioner, 6 B. T. A. 1167. Petitioner is, therefore, entitled to include in invested capital the full amount of $338,273.55 on account of assets acquired from the Knoxville Sentinel Co. and the Commissioner erred in excluding any portion of that amoimt on the ground that it represented intangibles acquired by petitioner for its stock .

The petitioner, although it did not expressly waive the issue, stated in the petition relating to the statute of limitation, did not urge it at the hearing or in its brief, and we therefore have no information as to the theory upon which this claim is based. Cf. Joy Floral Co. v. Commissioner, 7 B. T. A. 800.

In the original petition filed petitioner claimed that it was entitled to a credit of $4,167.24 against its tax for 1918 and that it is therefore entitled to a refund of tax for that year, but .nothing was said concerning this issue at the hearing or in the brief filed and no testimony was offered in regard thereto from which the Board could make any determination as to whether the petitioner is entitled to such credit even if it should be held that the Board has jurisdiction so to do. In view of the failure of the petitioner to submit any evidence or to make any claim at the hearing in respect to this issue, we conclude that it decided to waive this claim before the Board.

Reviewed by the Board.

Judgment will he entered on 15 days’ notice, under Rule 50.