H. R. Mallinson & Co. v. Commissioner ( 1929 )

H. R. MALLINSON & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ERIE SILK MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

H. R. Mallinson & Co. v. Commissioner

Docket Nos. 13718, 13719.

United States Board of Tax Appeals

14 B.T.A. 1124; 1929 BTA LEXIS 2978;

January 10, 1929, Promulgated

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1. Value of trade-marks, trade names and good will paid in for and with interest or shares in a partnership determined for invested capital purposes.

2. From the evidence determined that respondent computed the excess-profits tax for a fiscal year ended in 1917 rather than for a fiscal period ended in 1917.

3. Where a partnership, the parent of a consolidated group, is dissolved on June 1, 1918, being succeeded by a corporation, the group for the month of December, 1917, is entitled to the entire specific exemption and full invested capital allowed by section 203 of the Revenue Act of 1917.

J. C. Peacock, Esq., and C. E. Koss, Esq., for the petitioners.

Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent.

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MILLIKEN

H. R. Mallinson & Co., petitioner in Docket No. 13719, seeks a redetermination of the deficiencies asserted by the respondent for the fiscal year ended November 30, 1917, and the one-month fiscal period ended December 31, 1917, in the amounts of $32,789.02 and $3,483.94, respectively. In the case of the Erie Silk Mills, petitioner in Docket No. 13718, the respondent has determined an overassessment of $14,798.89 for the fiscal year ended November 30, 1917, and no deficiency for the one-month fiscal period ended December 31, 1917. The petitioners allege error on the part of the respondent (1) in failing to include in consolidated invested capital anyvalue for intangibles acquired by H. R. Mallinson & Co. prior to March 3, 1917; and (2) in failing to compute the excess-profits taxes for the fiscal year and period involved on the basis of the full invested capital and of the full specific deduction instead of prorating each by the same number of twelfths as the number of months in the fiscal year and period, respectively, fell within the year 1917. A third issue relating to the determination of the excess-profits tax for the fiscal year and period, under the provisions of section 210 of the Revenue Act of 1917, was reserved for a later hearing, if necessary, under Rule 62(a). The proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

H. R. Mallinson & Co., a partnership organized under the laws of New York and having its principal office at New York City, was engaged during the fiscal year and period under consideration in the manufacture and distribution of silks. The partnership was dissolved in 1918.

The Erie Silk Mills was during the fiscal year and period under consideration a Pennsylvania corporation, with its principal office at Erie, engaged in the manufacture of silks. All of the capital stock of the Erie Silk Mills was owned by the partnership of H. R. Mallinson & Co.

The business carried on by H. R. Mallinson & Co. was established in 1894 by a Mr. Newitter and M. C. Migel, who until 1900 conducted the business as a copartnership under the firm name of Newitter & Migel. In 1900 the business passed to the partnership of M. C. Migel & Co., with Moses C. Migel and Hiram R. Mallinson as partners. In 1914 Moses C. Migel retired from the firm of M. C. Migel & Co., and the business was continued under the same name by a new partnership composed of Hiram R. Mallinson and J. A. Migel. On January 1, 1915, J. A. Migel retired from the last mentioned firm, and, from that date until May 31, 1915, Hiram R. Mallinson continued the business as a sole proprietorship under the name of H. R. Mallinson & Co. On June 1, 1915, a new partnership was formed, composed of Hiram R. Mallinson and E. Irving Hanson, which took over the business of H. R. Mallinson & Co. and continued to conduct it until the partnership was dissolved on June 1, 1918, under the same firm name. It is the last mentioned partnership which is one of the petitioners in these proceedings.

By an assignment bearing date of February, 1915, and recorded in the United States Patent Office on March 1, 1915, M. C. Migel & Co. transferred and assigned to H. R. Mallinson & Co., the sole proprietorship, certain registered trade-marks and good will in connection with the business with which they were used. The following is a description of the trade-marks so transferred:

Date of issue	Number	Description
Feb. 18, 1908	67,746	Consisting of the word "MANDARIN," Class 42.
Feb. 18, 1908	67,747	Consisting of the word "MOTORA," Class 42.
Feb. 18, 1908	67,748	Consisting of the word "POGODA," Class 42.
July 19, 1910	78,890	Consisting of the words "MADAME BUTTERFLY," Class 42.
Mar. 21, 1911	81,282	Consisting of the word "TOURIST," Class 42.
Dec. 26, 1911	84,656	Consisting of the words "PUSSY WILLOW," Class 42.
Mar. 4, 1913	90,560	Consisting of the words "KISMET KLOTH," Class 42.
June 2, 1914	97,341	Consisting of the word "KORTEZ," Class 42.
June 2, 1914	97,342	Consisting of the word "ASTECH," Class 42.
June 2, 1914	97,343	Consisting of the word "MONTEZOMA," Class 42.
June 2, 1914	97,344	Consisting of the word "NAVAHO," Class 42.
Jan. 12, 1915	101,862	Consisting of the words "QUALITE 1830," Class 42.

By a further assignment bearing date of February 4, 1915, M. C. Migel & Co. transferred and assigned to H. R. Mallinson & Co., the sole proprietorship, an application for the registration of its trademark "Khaki Kool" for woven fabric piece goods, bearing United States Patent Office serial number 83,298. The assignment was recorded in the United States Patent Office on February 12, 1915. Letters patent for this trade-mark were issued on December 13, 1915.

In addition to the trade-marks above listed, M. C. Migel & Co. owned at least one other trade-mark, known as "Indestructible Voile," which was registered in 1906, and which was transferred to H. R. Mallinson & Co.

Moses C. Migel, of the predecessor partnership of M. C. Migel & Co., was the pioneer among those engaged in the silk industry in the production and marketing of woven silk fabrics under trade names. No other in that industry had marketed trade-marked products prior to 1915. With the introduction to the silk trade of products under trade names, M. C. Migel & Co., through advertising and intensive cooperation work with its retailers, endeavored to acquaint the public with the characteristics of its various trade-marked goods, and to teach it to ask for such goods by their various trade names. So successful were these endeavors that other manufacturers tried to imitate these goods and to market them under the trade names of M. C. Migel & Co., and manufacturers of other, though dissimilar products, such as candies and face powders, attempted to market their lines under the same trade names. In some cases, the manufacturers of imitated goods resorted to trade names which so closely resembled the trade names of M. C. Migel & Co. as to be misleading to the unsophisticated and unobserving buyer. All of these infringements upon the trade names of M. C. Migel & Co. were resisted by litigation, some 12 or 14 suits for infringement being instituted, and all being adjudicated favorably to that firm.

Of the trade-marks owned by M. C. Migel & Co., "Pussy Willow" was regarded as the most valuable and important. Next in value and importance was "Indestructible Voile." The products manufactured under these trade names were marketed at home and very extensively abroad. The trade name "Pussy Willow" was given to a fabric then known in the trade as radium silk, and "Indestructible Voile" to a chiffon. There were many fabrics, known by these descriptions being manufactured, many of them of the same construction and appearance as "Pussy Willow" and "Indestructible Voile," and of equal weight and quality, but they were bringing approximately 25 per cent less, speaking of retail selling prices, than goods marketed under the trade names mentioned.

M. C. Migel & Co. were the leaders in the industry in bringing out new weaves, such as novelty or woven pattern silks. The quality of texture of these goods, and the originality and ingenuity expressed in the patterns, were such that they were continually referred to in the trade as the equal of the dress silks made on hand looms by the French manufacturers in Lyons, who are notable for their handloom silks, which are considered the best quality of silk dress goods made anywhere in the world.

All of the trade-marks of M. C. Migel & Co. were well known to the trade, and the products offered under such trade-marks were regarded as of the highest quality.

On May 25, 1915, Hiram R. Mallinson, then conducting the business, which until January 1 of the same year had been carried on by M. C. Migel & Co. as a sole proprietorship under the firm name and style of H. R. Mallinson & Co., entered into a partnership agreement with E. Irving Hanson, which, so far as material to the issues in these proceedings, reads as follows:

ARTICLES OF COPARTNERSHIP, made and entered into this 25th day of May, Nineteen hundred and fifteen, between HIRAM R. MALLINSON, of the Borough of Manhattan, City of New York, party of the first part, and E. IRVING HANSON, of the same place, party of the second part.

FIRST. - The parties hereto hereby agree to form, and hereby do form, a copartnership, for the purpose of carrying on the business now conducted by the party of the first part under the name and style of H. R. MALLINSON & CO., said copartnership to commence on the first day of June, Nineteen hundred and fifteen, and to continue for a period of five years thereafter.

SECOND. - The name of said copartnership shall be H. R. MALLINSON & CO.

THIRD. - The party of the first part shall contribute to the capital of said copartnership all the assets of said business of H. R. Mallinson & Co., subject to its liabilities, as the same shall be on the first day of June, 1915, which assets shall include the good will of said business, the stock of the Erie Silk Mills now owned by the party of the first part, all merchandise (manufactured and unmanufactured), real estate, book accounts, moneys in bank, machinery, orders on hand, trademarks, trade names, and copyrights.

There shall be credited to the capital account of the party of the first part the total value of the assets of said business as the same shall be upon the inventory and accounting thereof to be had on the 31st day of May, 1915, after deducting the amount of the liabilities of said business as the same shall be on that day, which liabilities shall include any indebtedness owing to Moses C. Migel.

It is understood that no valuation shall be placed upon the good will, trademarks, trade names, orders on hand or other intangible assets of said firm (except book accounts) but that the amount of the capital account of the party of the first part shall be determined solely on the value of the tangible assets and book accounts of said business.

Inasmuch as all the stock of the Erie Silk Mills is owned by the party of the first part, the assets of that corporation shall be considered as if they were assets belonging to the business of the party of the first part, and will be taken over by said new firm as part of the assets of said new firm.

FOURTH. - The party of the second part shall contribute to the capital of said copartnership such amount as may stand to his credit upon the books of the present business of H. R. Mallinson & Co. on the 31st day of May, 1915.

FIFTH. - Said copartnership shall assume all the liabilities of said business of the party of the first part as they shall be on the first day of June, 1915, and shall also assume any indebtedness which may be owing to Moses C. Migel, and shall also assume each and every obligation to Moses C. Migel mentioned and referred to in the agreement between the party of the first part and Moses C. Migel, bearing date the 27th day of September, 1912.

SIXTH. - Each of the parties hereto shall be entitled to receive interest at the rate of six per cent per annum on the amount of his capital contribution, which shall be charged as an expense of the business and may be withdrawn semiannually.

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TWELFTH. - The party of the first part shall be entitled to receive seventy per cent, and the party of the second part shall be entitled to receive thirty per cent, of the net profits of the business of said copartnership, and the losses which may be suffered by said firm shall be borne by the parties hereto in the same proportion.

In determining the amount of profits to be divided between the parties hereto, there shall first be deducted from the net profits of the business the amount paid to the employees of the firm who are entitled to a share of the profits or to bonuses, and also the amount which Moses C. Migel shall be entitled to receive out of the net profits, and the balance shall be divided between the parties hereto as hereinbefore provided.

* * *

FOURTEENTH. - In the event of the death of the party of the second part before the end of the term of the copartnership, the business shall be continued by the party of the first part until the next ensuing date fixed herein for the semi-annual stock taking of the firm, and on that date an account of stock shall be taken and a balance sheet struck in the same manner and upon the same basis as hereinbefore provided for at the end of each six months period; the amount appearing upon said balance sheet to the credit of the deceased partner shall then be paid to his personal representatives by the party of the first part giving to such personal representatives six promissory notes, each for one-sixth of such amount, and payable respectively, with interest, at six per cent, per annum, in one, two, three, four, five and six months after the amount thereof shall be determined, and upon such payment being made all the assets and effects of the business, including all trade-marks, trade names, good will of said business and the sole right to use the name 'H. R. Mallinson & Co.' or such other name as may then be used by said corpartnership, subject to the payment of the debts and obligations of the firm shall belong absolutely to the party of the first part.

FIFTEENTH. - In the event of the death of the party of the first part during the period of the copartnership, the personal representatives of the party of the first part shall have the right to a continuance of the copartnership for such portion of the balance of the copartnership term as they may desire, and in the event of their determination to so continue the copartnership they shall give written notice to the party of the second part, with thirty days after their appointment as such personal representatives. In such event, such personal representatives shall have the right to participate in the conduct of said business, but during the balance of the term of said copartnership the drawing accounts hereinbefore fixed for the parties hereto shall be divided equally between the said personal representatives and the party of the second part, so that each shall receive one-half of the total amount of the drawing accounts fixed herein for the parties hereto, and from and after the semi-annual stock taking and inventory succeeding the death of the party of the first party the profits of said copartnership shall be divided equally among the personal representatives of the party of the first part and the party of the second part.

Upon the expiration of the time fixed by said personal representatives in case they shall determine to continue said copartnership, or after the death of the party of the second part in case said personal representatives shall not determine to continue said copartnership, the said copartnership and the business conducted by it shall be liquidated by the party of the second part and the personal representatives of the party of the first part.

In case, after the expiration of the time fixed by the personal representatives of the party of the first part for the continuance of the copartnership, or if after the death of the party of the first party his personal representatives shall determine not to continue the copartnership, the party of the second part shall determine to continue the business theretofore conducted by the copartnership, individually or through a copartnership of which he shall become a member, or through a corporation of which he shall be a stockholder, and should he make arrangements satisfactory to the personal representatives of the party of the first part for the purchase of the interest of the party of the first part in said business, he shall be permitted, should he so desire, to use the firm name of H. R. Mallinson & Co., in connection with said business, and in the event of such purchase of the interest of the party of the first part by the party of the second part the trade-marks belonging to said firm shall become the absolute representatives of the party of the first part for the interest of the party of the representatives of the party of the first part for the interest of the party of the first part or his personal representatives in such trademarks.

SIXTEENTH. - Upon the termination of the copartnership, by expiration of the term, the good will of the business and all trademarks, trade names, copyrights, orders on hand and all other intangible assets (excepting book accounts) of the firm, shall belong equally to and be the joint property of the parties hereto irrespective of their proportionate interests in said copartnership at such time.

It is the partnership created by the foregoing agreement which is one of the petitioners in these proceedings.

In accordance with the provisions of the third article of the above quoted agreement, Hiram R. Mallinson contributed to the capital of the copartnership all of the good will, trade-marks, and trade names of the business of H. R. Mallinson & Co., the sole proprietorship. The trade-marks and trade names so contributed by Mallinson comprised all of those which he had received from M. C. Migel & Co. by the assignments of February 4, 1915, and about 25 or 30 others which had been registered with the Silk Association of America, but not with the United States Patent Office.

The good will, trade-marks, trade names, and other intangibles paid in to petitioner partnership by Hiram R. Mallinson were not recorded on the partnership books of account until 1917. In that year, E. Irving Hanson, in order to protect his interest in the intangible assets of the partnership, and after securing the consent of his partner, Hiram R. Mallinson to do so, directed the bookkeeper to open an account on the partnership books for the intangibles and to record those assets at a value of $1,000,000. In February, 1917, an account was opened on the partnership books under the caption "Trade Marks, Copyrights, Patents, etc.", with a charge thereto of $1,000,000.

At the time of the organization of petitioner partnership, H. R. Mallinson & Co. was generally recognized as the outstanding manufacturer and distributor of silk goods in the United States. As the sole proprietor of the business, H. R. Mallinson had continued the business policies inaugurated by M. C. Migel & Co.; had made further development of the trade-marks and trade names of the business; had continued the production and distribution of the same high quality goods which had brought M. C. Migel & Co. to the forefront as the leader in the industry; and had expanded the market for these goods, both at home and abroad.

The annual earnings of the businesses of the partnership of M. C. Migel & Co. and of the sole proprietorship, H. R. Mallinson & Co., for the five and one-half years next preceding the organization of petitioner partnership, after the deduction of all advertising expenses and partners' salaries, were as follows:

Year ended November 30, 1910	$78,000
Year ended November 30, 1911	109,000
Year ended November 30, 1912	74,000
Year ended November 30, 1913	164,000
Year ended November 30, 1914	85,000
Six months ended May 31, 1915	64,000

The average tangible assets employed in the businesses during the five and one-half year period shown above were $501,107.11.

The annual earnings of the businesses of the partnership of H. R. Mallinson & Co. and of the successor corporation, for the five and one-half years next succeeding the date of organization of petitioner partnership, were as follows:

Six months ended November 30, 1915	$103,000
Year ended November 30, 1916	752,000
Year ended November 30, 1917	463,000
Year ended November 30, 1918	306,000
Year ended November 30, 1919	1,988,000

The average of tangible assets employed in the businesses during the five and one-half year period shown above was $2,136,050.04

The actual cash value of the intangibles paid in to the partnership of H. R. Mallinson & Co. on June 1, 1915, by Hiram R. Mallinson for an interest in the said partnership was, at the date of payment, $365,000.

The excess-profits-tax liability of the petitioners for the fiscal year and period under consideration was determined by the respondent upon the basis of a consolidated return. That tax liability was determined upon the basis of a consolidated invested capital which did not include any value for the intangibles paid in to the petitioner partnership by Hiram R. Mallinson.

In a letter addressed to petitioner, H. R. Mallinson & Co., by the Income Tax Unit, under date of January 8, 1923, bearing symbols "IT:SA:CR:D-JSB," and signed "E. H. Batson, Deputy Commissioner, by S. Alexander, Head of Division," advising that petitioner that its returns and those of its affiliated company had been examined, appear, among others, the following statements:

Returns examined
Company	Years	Forms
H. R. Mallinson & Co., New York, N.Y. (fiscal year November 30)	1917	1065-1102
Erie Silk Mills, Erie, Pa. (calendar year)	1917	1031-1103

SCHEDULE 1. - Consolidated net income 1917
Net Income as corrected in Revenue Agent's Report dated May 25, 1921:
H. R. Mallinson & Company, for fiscal year ended Nov. 30, 1917	$474,092.61
Erie Silk Mills for calendar year ended Dec. 31, 1917	43,821.19
Total		$517,913.80
Deduct:
One-twelfth of net income of H. R. Mallinson & Company, attributable to Dec. 1916 and not subject to excess profits tax	$39,507.72
One-twelfth of net income of Erie Silk Mills attributable to Dec. 1917	3,651.76	43,159.48
Consolidated net income for excess profits tax purposes for 11-month period ended Nov. 30, 1917		474,754.32
Consolidated invested capital, $1,370,043.98 X 11/12		1,255,873.65

In this letter the excess-profits-tax liability for the fiscal year ended November 30, 1917, was computed upon the basis of a consolidated net income of $474,754.32, a consolidated invested capital of $1,255,873.65, and eleven-twelfths of the specific deduction of $6,000, or $5,500.

In a letter addressed to petitioner, H. R. Mallinson & Co., by the Income Tax Unit, under date of April 16, 1925, bearing symbols "IT:CR:D-JT," and signed "J. G. Bright, Deputy Commissioner, by L. T. Lohman, Head of Division," appear, among others, the following statements:

Returns examined
Name of company	Fiscal periods	Form
H. R. Mallinson & Co., 136 Madison Avenue, New YorkN.Y.:
Eleven months fiscal period	1917	1065-1102
One month fiscal period	1917	1065-1102
Erie Silk Mills, Erie, Pa	1917	1031-1102

CHEDULE 1. - Net income 11-months period ended November 30, 1917
Net income as disclosed by Bureau letter dated Jan. 8, 1923	$474,092.61
As corrected	457,190.02
Net deductions	16,902.59

Consolidated net income
Net income as corrected:
H. R. Mallinson & Co	$457,190.02
One-twelfth of net income applicable to December, 1916	38,099.17
		$419,090.85
Erie Silk Mills	43,967.37
One-twelfth applicable to the following period	3,663.95
		40,303.42
Consolidated net income		459,394.27
Consolidated invested capital
As reported by Bureau letter dated Jan. 8, 1923		$1,370,043.98
As corrected		1,418,539.22
Net increase		48,495.24
Consolidated invested capital for year 1917		1,418,539.22
Eleven-twelfths applicable to the period ended Nov. 30, 1917		1,300,327.62

SCHEDULE 8. - Consolidated net income 1-month period ended December 31, 1917
Net income as corrected:
H. R. Mallinson & Co., corrected net income for the 6-months period from Dec. 1, 1917, to May 31, 1918	$192,249.87
Of which one-sixth is applicable to December, 1917		$32,041.64
Erie Silk Mills:
Income for calendar year 1917 as shown by schedule (1) revised of letter for 1917, 1-month period		3,663.95
Consolidated net income for excess-profits tax purposes		35,705.59
Consolidated invested capital corrected		1,827,533.42
One-twelfth applicable to the (fiscal) 1-month period ended Dec. 31, 1917		152,294.45

In this letter the excess-profits-tax liability for the fiscal year ended November 30, 1917, was computed upon the basis of a consolidated net income of $459,394.27, a consolidated invested capital of $1,300,327.62, and eleven-twelfths of the specific deduction of $6,000, or $5,500. The excess-profits-tax liability for the one-month period ended December 31, 1917, was corputed upon the basis of a consolidated net income of $35,705.59, a consolidated invested capital of $152,294.45, and one-twelfth of the specific deduction of $6,000, or $500.

In a letter addressed to petitioner, H. R. Mallinson & Co., by the Income Tax Unit under date of September 18, 1925, bearing symbols "IT:E:SM-JPD-25675-25676," and signed by J. G. Bright, Deputy Commissioner, petitioner was advised as follows:

An audit of your income and excess profits tax returns for the fiscal year ended November 30, 1917 and the one-month period ended December 31, 1917, has resulted in the determination of a deficiency in tax of $36,272.96, as shown in Bureau letter dated April 16, 1925.

This letter contains, among others, the following statement:

Year	Deficiency in Tax	Overassessment
Fiscal year ended Nov. 30, 1917; H. R. Mallinson & Co	$32,789.02
Erie Silk Mills		$14,798.89
One-month period ended Dec. 31, 1917:
H. R. Mallinson & Co	3,483.94
Erie Silk Mills

In the deficiency letter petitioner H. R. Mallinson & Co., was advised as follows:

An audit of your income and excess profits tax returns and the returns of the Erie Silk Mills (an affiliated company) for the fiscal year ended November 30, 1917 and the one-month period ended December 31, 1917, has resulted in the determination of a deficiency in tax of $36,272.96 as shown in Bureau letter dated April 16, 1925.

The deficiency letter contained the following further statement:

Year	Deficiency in Tax	Overassessment
Fiscal year ended Nov. 30, 1917: H. R. Malinson & Co	$32,789.02
Erie Silk Mills		$14,798.89
One-month period ended Dec. 31, 1917:
H. R. Mallinson & Co	3,483.94
Erie Silk Mills	None.
Totals	36,272.96	14,798.89

OPINION.

MILLIKEN: Petitioners complain of respondent's action in failing to include in the consolidated invested capital any value for the intangibles alleged to have been purchased by the petitioner partnership from Hiram R. Mallinson prior to March 3, 1917. Petitioners allege that the partnership of H. R. Mallinson & Co. bona fide purchased the intangibles used in connection with the business of H. R. Mallinson & Co., the sole proprietorship, from Hiram R. Mallinson, for and with interests or shares in the said partnership; that the intangibles so acquired had an actual cash value at the date of purchase of not less than $431,100.13; and that such intangibles should be included in the consolidated invested capital in accordance with the provisions of section 207 of the Revenue Act of 1917. Respondent denies that any intangibles were bona fide purchased by the petitioner partnership prior to March 3, 1917, for and with interests or shares in the said partnership; and, though he conceded at the hearing that the intangibles used in connection with the business of H. R. Mallinson & Co., the sole proprietorship, were not without value at the time of organization of petitioner partnership, he denies that those intangibles had an actual cash value at the date of the alleged purchase of the amount claimed therefor by the petitioners. Thus, the first issue to be disposed of raises two questions of fact: (1) Did the petitioner partnership, H. R. Mallinson & Co., bona fide purchase from Hiram R. Mallinson, prior to March 3, 1917, for and with interests or shares in the partnership, the intangibles used in connection with the business of H. R. Mallinson & Co., the sole proprietorship, and, if so, (2) what was the actual cash value of such intangibles at the date of purchase?

We have not been favored with a brief in behalf of the respondent, but it appears, from oral statements of counsel at the hearing, that he takes the position that the transfer to petitioner partnership by Mallinson of all the intangibles used in connection with the business which he conducted as a sole proprietorship, under the name and style of H. R. Mallinson & Co., as a part of his contribution to the capital of the new partnership, constituted a gift and not a bona fide purchase by the partnership for and with interests or shares therein. Thus, there appears to be no question as to the ownership of these intangibles by the petitioner partnership, and the first question is narrowed to the inquiry as to whether the petitioner partnership came into ownership of these intangibles by way of a gift from Mallinson, or through a bona fide purchase thereof for and with interests or shares in the partnership.

The respondent justifies his position in respect of the character of the transaction by which petitioner partnership came into ownership of the intangibles in question upon his own interpretation of one lone paragraph appearing in the third article of the partnership agreement, which reads as follows:

It is understood that no valuation shall be placed upon the good will, trademarks, tradenames, orders on hand or other intangible assets of said firm (except book accounts) but that the amount of the capital account of the party of the first part [Hiram R. Mallinson] shall be determined solely on the value of the tangible assets and book accounts of said business.

Reading this lone provision of the agreement without reference to its other provisions, the respondent, by some manner of reasoning, reaches the conclusion that Mallinson contributed the intangibles to petitioner partnership without any consideration therefor and as a mere gift. We find nothing in the quoted language of the agreement to justify the conclusion reached by the respondent. Under the provisions of the partnership agreement, both Mallinson and Hanson obligated themselves to make certain contributions to the capital of the partnership, which, in the case of Mallinson, was to include all of the intangibles of the business which he was conducting as a sole proprietorship, and to render certain services in the conduct of the business of the new partnership. The interest of each partner was fixed with due regard for their respective capital contributions and the obligations and undertakings which they respectively assumed. The quoted language of the agreement contains no negation of the obligation of Mallinson to transfer all of the intangibles of the sole proprietorship, nor of Mallinson's right to an interest in the partnership, in consideration of such transfer and the obligations which he assumed under the agreement. Nowhere in the record is there the slightest indication that Mallinson's contribution to the capital of the partnership, or any part of it, was intended or considered to be a gift on the part of Mallinson. On the other hand, the contract by virtue of which the partnership came into the ownership of these intangibles indicates quite clearly that in consideration of the transfer to the partnership by Mallinson of all of the assets, tangible and intangible, of the sole proprietorship, he was to have an interest of 70 per cent in the partnership. When the quoted provision of the agreement is read in conjunction with all others that precede or follow it, its meaning becomes clearly apparent. The agreement provides that in determining the earnings available for distribution to the partners there should be deducted interest equivalent to 6 per cent of the capital accounts of the partners, which was to be credited to the capital accounts of the latter; and it seems clear that the quoted language was inserted in the agreement with the intent to place a limitation on the amount of interest which would annually be credited to Mallinson. We are of the opinion that the intangibles paid in to petitioner by Mallinson were purchased by the petitioner partnership for and with interests or shares in said partnership, and that they may be properly included in the consolidated invested capital of petitioners for the fiscal year and period under consideration.

This brings us to the question as to the actual cash value of the intangibles in question at the date of purchase, June 1, 1915. Petitioner contends that this value was at least $431,100.13, and, in support of the minimum value claimed, offers the testimony of E. Irving Hanson, who was one of the partners of petitioner partnership, and evidence as to the earnings and as to the tangible assets employed in the business for the five-year period immediately preceding the organization of the partnership, and for the five-year period immediately following that event. That these intangibles had a very considerable value at the date they were acquired by petitioner partnership seems clearly apparent from the evidence. The very favorable conditions existing in the business, the extent of the development of the intangible properties used in connection therewith, and the position the business and its owners had attained in the silk industry through the high standard of quality which they had maintained in their products at the date the business and all its assets were acquired from Hiram R. Mallinson, are all set out in the findings of fact and need not be repeated here. All of these favorable factors reflect a very considerable value existent in the good will, trade-marks, and trade names of the business. We are not prepared, however, to accept the opinion expressed by the witness Hanson as to the value of the intangibles, at the date of acquisition, which he estimated to have been $1,000,000. Certainly the earnings of the business for the five and one-half year period immediately preceding the acquisition by the petitioner partnership of the intangibles do not reflect any such value. The average earnings of this period amounted to $104,363.64, while the average tangible assets employed in the business during the same period amounted to $501,107.11. The average earnings represent a return of approximately 20 per cent on the average tangibles for the period referred to. Were the value of the intangibles to be fixed at $1,000,000, the average earnings of the period would represent a return of less than 10 per cent on the intangibles, without any return on the tangible assets. To put it another way, assuming that 8 per cent represented a fair return on the tangible assets during the period referred to, there would be excess earnings attributable to the intangibles of $64,275.07, which would represent a return of only 6.42 per cent on the basis of an intangible value of $1,000,000, which is much less than the assumed fair return on the tangible assets. The occasions are rare when prudent business men will invest their funds in intangible properties of the character here under consideration, with all the risks and hazards that such investments involve, with the expectation, based upon the past history of the business, of realizing a return upon such investment less than that which might be reasonably anticipated upon the tangible properties.

There is testimony in the record that this was very stable business, justifying a lower rate per cent of capitalization of excess earnings to determine the value of the intangible properties. This testimony, however, is not supported by the record of earnings of the business. During the six-year period preceding the date of purchase, we find severe fluctuations in the earnings, with the peculiar condition present of the earnings reaching the maximum and minimum quite regularly in alternate years. For the period stated, the earnings were as follows:

Fiscal year	Amount
1910	$78,000
1911	109,000
1912	74,000
1913	$164,000
1914	85,000
1915	167,000

There is no explanation in the record of the reasons for these wide fluctuations in earnings, and their almost rhythmical swing back and forth, in alternate years, between maximum and minimum limits.

There is this further thought in connection with the testimony of the witness Hanson as to the value of the intangibles at the date of purchase. It was Hanson who, in February, 1917, after consultation with his partner, Mallinson, directed that the intangibles of the business be recorded on the partnership books at the value of $1,000,000. At the time this entry was made, the petitioner partnership had been organized and doing business for 18 months. The earnings for the first six months amounted to $103,000 and were considerably larger than those of three full years in the five-year period preceding the date of purchase. The earnings for the first full fiscal year amounted to $752,000, which was more than four and one-half times the largest earnings of any one of the five preceding years. Such had been the experience of the partnership when the intangibles were recorded on the books in February, 1917; and it is but a logical assumption that the partners, in determining the value to be recorded on the books for the intangibles, gave due consideration to the very large increase in earnings, and that the value determined upon, at that time, reflected their best judgment as to the then value in the light of all existing circumstances and conditions. There is at least no evidence that the intangible value recorded on the books in February, 1917, was intended to reflect the value of the intangibles at the date of purchase, June, 1915.

As to the subsequent earnings of the business, we need but say that there is no evidence which warrants giving consideration to them in an attempt to determine the actual cash value of the intangibles at the date of purchase. If the large earnings realized in subsequent years were reasonably to be anticipated at the date of purchase, that fact has not been established by the evidence. The evidence justifies no broader conclusion than that the business might have reasonably been expected to produce net earnings equivalent to those which had been realized during the five-year period preceding the date of purchase.

Considering that past history of the business, the record of development of its trade-marks and the trade names, the development of world-wide markets for its products, the reputation of the business for the production of commodities of high quality and for fair dealing, the favorable comparison of its trade-marked products with the products of foreign manufacturers generally recognized throughout the world as the leaders in the industry, the position of prominence in the industry to which the business and those connected with it had attained, and the record of earnings of the business prior to the date of its purchase by the petitioner, we are of the opinion that the actual cash value of the intangible properties purchased by the petitioner partnership from Hiram R. Mallinson, for and with interests or shares in the said partnership was, at the date of purchase, $365,000.

Before proceeding with the disposition of the second issue in this case, it is necessary to dispose of a controversy which arose between the parties during the hearing, as to whether the deficiency asserted by the respondent for the period ended November 30, 1917, is a deficiency in respect of the taxes for a full fiscal year of 12 months or for a fiscal period of 11 months. Counsel for respondent indicated a desire to amend the answer filed in this cause and strike certain admissions. Counsel for the petitioner agreeing that the admissions made in the answer filed should conform to the facts obtaining, stated, "we can straighten it out by having everything in the record". We will therefore determine the question on the evidence of record. The point is a very important one, for if it be decided that the deficiency is in respect of the tax for a full fiscal year of 12 months, no change in the tax liability as determined by the respondent will result, for, though the precise method used by the respondent in determining the tax liability is not that prescribed by the statute, the result is the same. On the other hand, if it be decided that the deficiency is in respect of the tax for an 11-month period, then the method used by the respondent for determining the excess-profits-tax liability of the period may be contrary to the decision of the United States Court of Claims in .

In the petition it is alleged as follows:

3. The taxes in controversy are profits taxes for the 11 months fiscal period ended November 30, 1917, and the 1 month fiscal period ended December 31, 1917, and are more than $10,000, to-wit: approximately $36,272.96.

The foregoing allegation was admitted by the respondent in his answer.

When the peculiar taxing status of partnerships under the Revenue Act of 1917 is recognized, and consideration is given to the statements contained in the deficiency notice and in the audit letters issued by the respondent prior to the mailing of the deficiency notice, it is readily comprehensible that the petitioner could make this pleading in absolute good faith and the respondent could answer in similar good faith, and yet the parties entertain different views as to whether the deficiency is in respect of the taxes of a full fiscal year of 12 months or a fiscal period of 11 months.

Under the Revenue Act of 1917, a partnership, as such, was liable for an excess-profits tax only. The respondent held that the petitioners were affiliated and determined their tax liability upon the basis of a consolidated return. The accounting period of the petitioner partnership was a fiscal year ending November 30, 1917, while that of petitioner corporation was the calendar year; and, since the partnership was the parent or principal reporting company, the partnership's fiscal year was adopted by the respondent as the basis for the determination of the tax liability of the consolidated group. Section 200 of the Revenue Act of 1917 provides that in the case of a taxpayer having a fiscal year ending in 1917, "the tax for such taxable year shall be that proportion of the tax computed upon the net income during such full fiscal year which the time from January first, nineteen hundred and seventeen, to the end of such fiscal year bears to the full fiscal year." Instead of using the computation outlined in the statute, the respondent, as is evident by the audit letters upon which the deficiency notice is based, computed the tax upon the basis of eleven-twelfths of the consolidated net income for the fiscal year, eleven-twelfths of the consolidated invested capital, and eleven-twelfths of the specific deduction of $6,000 provided by section 203(b) of the Revenue Act of 1917. Had the respondent proceeded to determine the tax liability in the manner outlined in section 200, that is, by taking eleven-twelfths of the tax computed upon the basis of the net income of the full fiscal year, the full invested capital and the full specific deduction, he would have obtained no different result than that which he reached by the method he followed; but, in that event, no controversy could have arisen as to whether the deficiency is in respect of the tax of a full fiscal year or a fiscal period of 11 months.

The petitioners would hold the respondent to his answer to the petition, in which case it may be that the tax liability would be determined upon the basis of the consolidated net income, as determined by the respondent, which is but eleven-twelfths of the net income of the full fiscal year ended November 30, 1917, and the full invested capital and specific deduction, which, according to the decision in , is the proper method for determining the excess-profits tax under the Revenue Act of 1917 for a period of less than 12 months. The audit letters and the deficiency notice, however, show that respondent's deficiency determination is in respect of the taxes of a full 12-month period and not a short fiscal period of 11 months. In view of what has already been said, and as the evidence clearly shows the situation to be such, we are constrained to hold that the deficiency determination of the respondent, for the period ended November 30, is in respect of the tax liability of a full fiscal year of 12 months and not in respect of the tax liability of a shorter period, and, in that case, the decision in , is not applicable in computing the tax liability of that year. Since it produces the same result as the method outlined in the statute, we see no objection to the method used by the respondent in computing the tax liability for the fiscal year ended November 30, 1917.

Respondent has determined the excess-profits-tax liability of the petitioners for the one-month period ended December 31, 1917, upon the basis of a consolidated net income of $35,705.59, a consolidated invested capital of $152,294.45, and a specific deduction of $500. The invested capital of $152,294.45 is but one-twelfth of the full consolidated invested capital, as determined by the respondent, and the specific deduction of $500 is but one-twelfth of the specific deduction of $6,000 allowed domestic partnerships by section 203(b) of the Revenue Act of 1917.

Petitioner partnership was dissolved on June 1, 1918, and succeeded by a corporation. Such fact brings this case squarely within the decision of the United States Court of Claims in the case of , which was followed by this Board in , and within the provisions of Treasury Decision No. 3848. The excess-profits-tax liability should be recomputed upon the basis of the full invested capital and the full specific deduction allowed by section 203 of the Revenue Act of 1917.

These proceedings will be restored to the General Calendar for further hearing pursuant to Rule 62(a).