D. N. & E. Walter & Co. v. Commissioner

D.N. & E. WALTER & CO., INC., and WALTER REAL ESTATE CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

D. N. & E. Walter & Co. v. Commissioner

Docket No. 7618.

United States Board of Tax Appeals

10 B.T.A. 620; 1928 BTA LEXIS 4056;

February 10, 1928, Promulgated

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1. Value of good will acquired by D.N. & E. Walter & Co., Inc., at date of organization, determined for the purpose of invested capital.

2. Intangible property may not be included in invested capital as a paid-in surplus. Appeal of Herald-Despatch Co.,4 B.T.A. 1096">4 B.T.A. 1096.

3. Where a mixed aggregate of tangible and intangible property is acquired by a corporation with shares of capital stock, and the aggregate cash value of the property, at the date paid in, is greater than the aggregate par value of the shares of stock issued for such property, the stock must be deemed to have been issued for the two classes of assets in the same proportion that the cash value of each class bears to the total cash value of the assets at the date paid in. Appeal of St. Louis Screw Co.,2 B.T.A. 649">2 B.T.A. 649.

4. The Board will not assume jurisdiction of issues not properly raised in the pleadings. Appeals of Dixie Manufacturing Co., 1. B.T.A. 641, and Buffalo Wills-Sainte Claire Corporation,2 B.T.A. 364">2 B.T.A. 364.

5. Reduction by respondent of petitioners' invested capital for 1920, by the entire amount of additional taxes assessed and paid for 1915, 1916, and 1917, approved. Appeal of Hutchins Lumber & Storage Co.,4 B.T.A. 705">4 B.T.A. 705.

6. Reduction by respondent of petitioners' invested capital for 1920, by the entire amount of the deficiency found due for 1918, approved in principle; but the amount of the reduction is the deficiency determined under the prior decision of the Board for 1918.

7. Under the provisions of section 274(g) of the Revenue Act of 1926, the Board may consider such facts with relation to the taxes of other taxable years as may be necessary to redetermine correctly the amount of the deficiency for the year before us.

8. The evidence is insufficient to warrant the Board in disturbing the respondent's determination that petitioners were not affiliated corporations within the purview of section 240 of the Revenue Act of 1918.

W. W. Spalding, Esq., for the petitioners.

P. J. Rose, Esq., for the respondent.

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ARUNDELL

This proceeding was brought by the D.N. & E. Walter & Co., Inc., which seeks a redetermination of its income and profits taxes for 1920, for which year respondent has determined a deficiency of $957.77. The petitioner alleges error on the part of respondent (1) in failing to include in invested capital intangibles of the value of $268,777 paid in for shares of stock at date of organization, (2) in reducing invested capital as of January 1, 1920, by the amount of additional taxes asserted for 1915, 1916, and 1917, (3) in reducing invested capital as of January 1, 1920, by the amount of additional taxes asserted for 1918, and (4) in reducing invested capital by $55,089.21, on account of an alleged tax liability of $130,729.03 for 1919, prorated from the dates the several installments thereof became due and payable. On motion, duly granted, in which the D.N. & E. Walter & Co., Inc., was joined by the Walter Real Estate Co., the latter was entered as party petitioner to this proceeding and the petition amended to set forth as a further allegation of error that respondent failed to recognize the affiliation of the D.N. & E. Walter & Co., Inc., and the Walter Real Estate Co., and, accordingly, erroneously computed the tax liability of the former on the basis of its separate return. Much of the facts have been stipulated. It was also stipulated by the parties that the depositions taken in the case of D.N. & E. Walter & Co., Inc., Docket No. 4006, which involved the redetermination of that petitioner's tax liability for 1918, should be admitted as evidence in this proceeding.

FINDINGS OF FACT.

The D.N. & E. Walter & Co., Inc., is a corporation organized under the laws of California in 1896 to take over the business of the partnership of D.N. & E. Walter & Co., which had continuously since 1858 been engaged in the business of buying and selling carpets, rugs, curtains, draperies, and other household furnishings in San Francisco. The business of the partnership had become firmly established. It was a successful and stable enterprise. Its sales territory covered California, Washington, Idaho, Oregon, Nevada, and a portion of Arizona. The corporation, in exchange for all the assets of the partnership, including good will, issued to the members of the partnership, according to their respective interests therein, 648 shares of its capital stock of the par value of $1,000 per share. The corporation also assumed all the liabilities of the partnership. The value of the tangible assets in excess of the liabilities alone equaled the par value of the stock; that is, $648,000. The tangible assets and the liabilities of the partnership, as they appeared on its books, were set up on the books of the corporation, but no entry was ever made on the corporation books of any good will acquired from the partnership.

The outstanding capital stock of D.N. & E. Walter & Co., Inc., during each of the years 1897 to 1900, inclusive, was of the par value of $718,000, and the par value of the stock outstanding at March 3, 1917, and January 1, 1920, was $750,000.

The net tangible assets in excess of the liabilities of the predecessor partnership at the beginning of each of the years 1886 to 1895, inclusive, and the net earnings from business operations for the same years, as shown by its books of account, and the percentages of return on the net tangible assets, represented by such earnings, are as follows:

Year	Net tangibles	Earnings	Percentage of return on tangibles
1886	$836,446.01	$91,177.57	10.9
1887	905,846.64	190,284.30	21.0
1888	1,044,647.18	182,000.74	17.4
1889	1,383,972.53	224,333.67	16.2
1890	1,231,308.15	158,435.28	12.9
1891	1,357,728.56	116,468.89	8.6
1892	980,742.21	119,666.04	12.2
1893	967,133.52	59,889.26	6.2
1894	920,243.49	46,055.78	5.0
1895	727,243.51	25,474.17	3.5
Total	10,355,321.80	1,213,785.70
Average	1,035,532.18	121,378.57	11.7

During the years 1893, 1894, and 1895 business conditions throughout the sales territory of the partnership were abnormal and unsettled due to the prevalence of a financial depression or panic. Credits were tightened, which resulted in the curtailment of sales, and losses, the like of which had not occurred to the partnership before this period of depression and has not occurred since that time, resulted from the financial embarrassment of customers to whom credit had been extended.

The partnership was composed of five members from 1886 to 1891 and of four members from 1892 to 1895. No salaries were paid to the partners from 1886 to 1895, inclusive. Reasonable compensation to each partner for services rendered the partnership during the period stated would have been $3,000 per annum.

The net tangible assets in excess of the liabilities of the D.N. & E. Walter & Co., Inc., at the beginning of the years 1897, 1898, 1899, and 1900, respectively, and the net earnings for these years, were as follows:

Year	Tangible assets	Earnings
1897	$782,620.00	$131,633.09
1898	849,633.09	54,209.00
1899	788,962.09	120,071.14
1900	858,733.23	138,760.80
Total	3,279,948.41	444,674.03
Average	819,987.10	111,168.51

The sales of the partnership for the four years immediately preceding the taking over of the business by the corporation were as follows:

Year	Sales
1892	$1,150,727.24
1893	952,430.56
1894	773,778.85
1895	881,032.48
Total	3,757,969.13
Average	939,492.28

The sales for the five years immediately succeeding the taking over of the business by the corporation were as follows:

Year	Sales
1896	$776,202.76
1897	885,346.80
1898	786,608.18
1899	959,655.22
1899	959,655.22
1900	1,211,485.86
Total	4,619,298.82
Average	923,859.76

The good will acquired by the D.N. & E. Walter & Co., Inc., from the predecessor partnership, with shares of capital stock, had an actual cash value at the date of acquisition of $225,000.

For several years prior to 1907 the partnership of McCann-Allen Co. was engaged in the business of interior decorating and furnishing in San Francisco. In 1907 the assets, including the good will and business of the said partnership, were purchased by the D.N. & E. Walter & Co., Inc. In addition to the sum paid by the D.N. & E. Walter & Co., Inc., for the tangible assets of the McCann-Allen Co., the former paid to the latter, specifically for the partnership good will, the sum of $10,000 cash. While this payment of $10,000 was receipted for by one of the partners, the money was turned into the partnership as its funds and used by the partnership in the liquidation of its obligations. Following the purchase of the partnership business one of the partners, William D. McCann, entered the employ of D.N. & E. Walter & Co., Inc., under written agreement, and continued in the petitioner's employ until some time in 1912. No part of the compensation received by McCann from the petitioner during his term of employment by the latter was turned over or by him paid to his former partner. The payment of the $10,000 for the good will of the McCann-Allen Co. was charged on the books of the D.N. & E. Walter & Co., Inc., to expense, concurrently with the payment, and has not since been restored to surplus.

Respondent reduced the invested capital of the D.N. & E. Walter & Co., Inc., by the sums of $145.44, $32.80, and $5,646.43 for additional income and profits taxes assessed against the petitioner for 1915, 1916, and 1917, respectively, by the further sum of $9,517.63 for additional taxes for 1918; and by the further sum of $55,089.21 on account of an alleged tax liability for 1919 of $130,729.03, prorated from the dates the several installments thereof became due and payable. In computing invested capital for 1919 respondent did not include therein any value for the good will acquired by the petitioner, with shares of capital stock, from its predecessor, or any value for the good will acquired by the petitioner from the McCann-Allen Co. in 1907, and for which it paid $10,000 cash; nor did he include any value for shares of the Panama Pacific International Exposition Co. stock. The additional taxes for 1915, 1916, and 1917 were paid on or about September 25, 1920, after notice and demand therefor had been received from the collector. Petitioner appealed to this Board from respondent's determination of additional taxes of $9,517.63 for 1918, and, at the date of the hearing in this proceeding, final determination of the tax liability for that year, under the Board's decision, had not been made.

At January 1, 1920 and 1921, the outstanding capital stock of the D.N. & E. Walter & Co. and the Walter Real Estate Co. was owned as follows:

At January 1, 1920
	D.N. & E. Walter & Co., Inc.		Walter Real Estate Co.
Name of stockholder	Shares	Per cent	Shares	Per cent
Moritz Walter	175	23.34	2	1.56
(Brother of David N. and Isaac N. Walter; father of Edwin J., Henry, and Rose J. Walter; brother-in-law of Hanna Walter; uncle of John I., Edgar, Clarence R., and Herbert Walter, Marian W. Sinton, Adele W. Heller, and Rosa Meertief.)
Edwin J. Walter	140	18.67	10	7.81
(Son of Moritz Walter.)
Henry Walter			10	7.81
(Son of Moritz Walter.)
Rose J. Walter			10	7.81
(Daughter of Moritz Walter.)
Isaac N. Walter	75	10.00	1	.78
(Brother of David N. and Moritz Walter; husband of Caroline Walter; father of John I. and Edgar Walter and Marion W. Sinton; brother-in-law of Hanna Walter; uncle of Edwin J., Henry, Rose J., Clarence R., and Herbert Walter, Adele W. Heller, and Rosa Meertief.)
Caroline Walter	100	13.33	20	15.63
(Wife of Isaac N. Walter.)
John I. Walter	70	9.33	4	3.13
(Son of Isaac N. and Caroline Walter; husband of Florence Walter.)
Florence Walter	70	9.33
(Wife of John I. Water.)
Edgar Walter			3	2.34
(Son of Isaac N. and Caroline Walter.)
Marian W. Sinton			8	6.25
(Daughter of Isaac N. and Caroline Walter.)
Hanna Walter			20	15.63
(Wife of David N. Walter; mother of Clarence R. and Herbert Walter, Adele W. Heller, and Rosa Meertief.)
Clarence R. Walter			12	9.39
(Son of Hanna Walter; husband of Rosalie N. Walter; father of Dorothy, Rosalie, and Mildred Walter.)
Dorothy Walter			2	1.56
(Daughter of Clarence R. and Rosalie N. Walter.)
Rosalie Walter			2	1.56
(Daughter of Clarence R. and Rosalie N. Walter.)
Mildred Walter			2	1.56
(Daughter of Clarence R. and Rosalie N. Walter.)
Adele W. Heller			11	8.59
(Daughter of Hanna Walter; wife of Moses Heller; and mother of Ruth W. Shainwald and Walter D. Heller.)
Moses Heller			1	.78
(Husband of Adele W. Heller; father of Ruth W. Shainwald and Walter D. Heller.)
Walter D. Heller			1	2
1.56
(Son of Moses and Adele W. Heller.)
Ruth W. Shainwald			2	1.56
(Daughter of Moses and Adele W. Heller.)
Rosa Meertief			4	3.13
(Wife of Abraham Meertief; mother of Hanna M. Schwabacher.)
Hanna M. Schwabacher, Isaac N. Walter, and Moritz Walter as trustees and pledgees of stock standing in the names of the following employees			2	1.56
H. F. Dirlam	15	2.00
Emanuel Lewis	20	2.67
Lawrence Bachman	15	2.00
Julius Rosenthal	10	1.33
Walter C. Lewis	50	6.67
S. J. Ackerman (employee)	50	6.67
Total	750	100.00	128	100.00

At January 1, 1921
	D.N. & E. Walter & Co., Inc.		Walter Real Estate Co.
Name of stockholder	Shares	Per cent	Shares	Per cent
Moritz Walter	175	23.34	2	1.56
Edwin J. Walter	135	18.00	10	7.81
Henry Walter			10	7.81
Rose J. Walter			10	7.81
Isaac N. Walter	75	10.00	1	.78
Caroline Walter	100	13.33	20	15.63
John I. Walter	65	8.67	4	3.13
Florence Walter	70	9.33
Edgar Walter			3	2.34
Marian W. Sinton			8	6.25
Hannah Walter			20	15.63
Clarence R. Walter			12	9.39
Dorothy Walter			2	1.56
Rosalie Walter			2	1.56
Mildred Walter			2	1.56
Adele W. Heller			11	8.59
Moses Heller			1	.78
Walter D. Heller			2	1.56
Ruth W. Shainwald			2	1.56
Rosa Meertief			4	3.13
Hannah M. Schwabacher			2	1.56
Isaac N. and Moritz Walter as trustees of stock standing in name of employees:
H. F. Dirlam	15	2.00
Emanuel Lewis	20	2.67
C. L. Maples	10	1.33
Lawrence Bachman	15	2.00
Julius Rosenthal	10	1.33
Walter C. Lewis	10	1.33
S. J. Ackerman (employee)	50	6.67
Total	750	100.00	128	100.00

All of the capital stock of the D. N. & E. Walter & Co., Inc., standing in the names of its employees, was purchased by the latter under written agreements which, except for the names of the parties, amounts, and figures, were similar in their terms, and of which the following is an illustration:

THIS AGREEMENT made this 21st day of January, 1919, between I. N. Walter of San Francisco, California, and Moritz Walter, of the City of New York, State of New York, Trustees, and Julius Rosenthal, of San Francisco, California, hereinafter called Purchaser

WITNESSETH:

Whereas the Trustees have agreed to sell and the Purchaser has agreed to buy 5 shares of the capital stock (plus 5 shares EL INW) of the D. N. & E. Walter & Company, a California Corporation;

Now therefore in consideration of the above sale and purchase, and in consideration of the mutual protection of the parties hereto, it is agreed by and between the above mentioned Trustees and Purchaser that the sale of the said 5 shares of the capital stock of D.N. & E. Walter 7 Company plus 5 shares EL INW is made on the following conditions:

I.

That in the event of the termination of said Purchaser's employment with D.N. & E. Walter & Company, or in the event of the death of said Purchaser, the Trustees covenant and agree to purchase the said 5 shares plus 5 shares EL INW from the Purchaser, his heirs, representatives or assigns, on demand of the said Purchaser, his heirs, representatives or assigns and the said Purchaser covenants and agrees for himself, his heirs, representatives or assigns, on demand of the Trustees, their heirs, representatives or assigns, to sell to the Trustees, their heirs, representatives or assigns, and to no one else, the said 5 shares of capital stock plus 5 shares EL INW. The price shall be based on the book value of the capital stock of said corporation as of the first day of January preceding such sale, less the annual dividend on said 5 shares of capital stock plus 5 shares EL INW paid thereafter, and plus the estimated net earnings on said shares to the date of said sale, or in the event that there shall be a loss to the date of said sale, the loss on said 5 shares plus 5 shares EL INW shall be estimated and substracted.

II.

The Purchaser, while employed by D.N. & E. Walter & Company covenants and agrees not to sell, assign, pledge, hypothecate, transfer or give power of attorney to vote or agree to sell, assign, pledge, hypothecate, transfer or give power of attorney to vote, in any way, shape or manner, the said 5 shares of capital stock plus 5 shares EL INW without first offering them for sale or pledge to the Trustees, their heirs, representatives, or assigns at a price to be ascertained as above set forth.

IN WITNESS WHEREOF the said parties have executed these presents this 21st day of January, 1919.

(Signed) ISAAC N. WALTER,

(Signed) MORITZ WALTER,

Trustees.

(Signed) JULIUS ROSENTHAL,

Purchaser.

During 1920 the directors of the petitioners were as follows:

D.N. & E. Walter & Co.

Isaac N. Walter

Moritz Walter

John I. Walter

Edwin J. Walter

S. J. Ackerman

Walter Real Estate Co.

Isaac N. Walter

Moritz Walter

Clarence R. Walter

John I. Walter

Moses Heller

During 1920 the officers of the petitioner corporations were as follows:

Office	D.N. & E. Walter & Co.	Walter Real Estate Co.
President	Isaac N. Walter	Isaac N. Walter.
Vice president	Moritz Walter	Clarence R. Walter.
	John I. Walter
	E. J. Walter
Treasurer	S. J. Ackerman	John I. Walter.
Secretary	Emanuel Lewis	John I. Walter.

During the year under consideration the routine business of the Walter Real Estate Co. was handled by the employees of the D.N. & E. Walter & Co., Inc., without compensation to the latter, or to the employees of the latter, for services rendered.

The respondent's determination of the tax liability of the D.N. & E. Walter & Co., Inc., for 1920 is based upon that petitioner's separate return and without regard to an affiliation, if such existed, with the Walter Real Estate Co. In computing the invested capital of the D. N. & E. Walter & Co., Inc., respondent did not include therein any value for the good will acquired by the petitioner, with shares of capital stock, from its predecessor.

OPINION.

ARUNDELL: As to the first issue, the D.N. & E. Walter & Co., Inc., contends that it acquired good will from the predecessor partnership of the value of $268,777, which it is entitled to have included in its invested capital, as a paid-in surplus, and that respondent erred in his determination of the tax liability for 1920 in failing to so include it. Respondent entered a general denial to petitioner's contentions.

Succeeding to the business of the partnership of D. N. & E. Walter & Co. in 1896, the petitioner, bearing the same name, came into possession of an established business which for 38 years had been a successful enterprise. Founded in 1858, the business had been conducted under the same management, without change in business policies, continuing to market the same commodities, and with a uniformly satisfactory record of earnings and high return on the investment. Its sales territory covered all of the Pacific and a portion of the Rocky Mountain States. The evidence is that the reputation of the business for fair dealing was of the highest, and that the commodities which it handled were of the best grade. It appears further that with the acquisition of the business, there passed to the petitioner valuable agency rights which gave it a virtual monopoly on the products of certain eastern manufacturers who were leaders in their lines.

Two witnesses, both members of competitor firms which had enjoyed business relations with petitioner's predecessor and who were familiar with the business as it was being conducted in 1896 and prior thereto, testified as to the reputation of the partnership for business integrity, the desirable character of its clientele, and the high class of commodities in which it dealt. Both because of their knowledge of the affairs of the partnership and their long experience in the same line of business, are qualified to give opinion evidence as to the value of the good will which passed to the petitioner in 1896. One of these witnesses has been engaged in the same line of business in San Francisco for the past 55 years, as a member of a nationally known business organization. The other had conducted a similar business in the same city for 10 years prior to 1896. The first testified that had he, acting for his organization, sought to purchase the petitioner's business in 1896, he would have been willing to have paid $250,000 for the good will. The latter expressed the opinion that the good will of petitioner's business in 1896 was worth in the neighborhood of $250,000.

For the ten years immediately preceding incorporation, the earnings of the business represented a return of 11.7 per cent on the net tangible investment. During the last three years of this period the business was hampered and retarded by a financial depression or panic; credits were tightened, which resulted in the dropping off of sales; and losses were sustained through the financial embarrassment of customers to whom credit had been extended. As one of the petitioner's officers stated, more time was devoted to the collection of accounts than to making sales. The situation was further complicated by the prevalence of a railroad strike which made it difficult to get merchandise shipments through from the East. If these three years be disregarded as abnormal and not representative of the normal level of profits, as indeed they should under the facts of this case, the earnings of the partnership represent a return of approximately 14 per cent on the net tangible investment. Analysis of the earnings of the petitioner for the four years immediately succeeding incorporation shows a like return on the net tangibles. Taking the evidence as a whole, we are of the opinion that the actual cash value of the good will acquired by the petitioner from the predecessor partnership was, at the date of acquisition, $225,000.

Petitioner seeks to have the whole of the good will value included in invested capital as a paid-in surplus. The net value of the tangible assets received from the partnership was equal to the par value of the stock given in exchange for all of the partnership assets. Good will is intangible property, section 325(a), Revenue Act of 1918; and intangible property may not be included in invested capital as a paid-in surplus, . Petitioner acquired, with shares of stock, a mixed aggregate of tangible and intangible assets of a total cash value of $873,000. The par value of the shares of stock given in exchange for these assets was $648,000. The stock must be deemed to have been issued for the two classes of assets in the same proportion that the cash value of each class bears to the total cash value of the assets. . The value of good will, $225,000, represents 25.773 per cent of the total value of the assets. Therefore, of the total par value of the stock issued for the assets of the partnership, 25.773 per cent thereof, or $167,009.04, is deemed to have been issued for the good will. Since the lower of the three limitations prescribed by section 326(a)(4) of the Revenue Act of 1918 under which good will may be included in invested capital, is, in this case, the par value of the stock issued therefor, the petitioner is entitled to have the good will included in invested capital in the amount of $167,009.04.

The second issue relates to respondent's reduction of invested capital of the D.N. & E. Walter & Co., Inc., by the sums of $145.44, $32.80, and $5,646.43, for additional taxes for 1915, 1916, and 1917, respectively. In the petition the petitioner sets forth as facts in support of the allegation of error that these additional taxes "were paid on September 15, 1920, which was within the due date of said taxes as indicated by the notice and demand for the payment of the taxes by the Collector of Internal Revenue"; and that "the taxpayer had the use of and did use this amount in its business until it was paid to the Collector on September 15, 1920." As a proposition of law, petitioner sets forth that these taxes "did not become due and payable until September 15, 1920," and that they "should not be deducted in their entirety from invested capital for 1920, but should be prorated from the due date of payment, namely, September 15, 1920, and only the prorated amount (108/366 of $5,824.67) or $1,718.75 deducted." This issue, apparently, has been entirely abandoned by the petitioner, for nothing was said at the time of the hearing, and nothing is contained in the brief filed subsequently, in respect thereof. On the other hand, petitioner, without amendment of its petition, seeks to inject an entirely new issue which involves solely the merits of the assessment of these additional taxes. Respondent, in his brief, objects to the introduction of a new issue, and rightfully so. We may not assume jurisdiction of issues not properly raised in the pleadings. , and . Respondent's action in reducing invested capital for 1920 by the entire amount of additional taxes found due and assessed for 1915, 1916, and 1917, is sustained upon authority of ; and .

The third issue relates to respondent's reduction of invested capital of the D.N. & E. Walter & Co., Inc., by the sum of $9,517.63 for additional income and profits taxes for 1918. The petition sets forth that this reduction of invested capital is wrong since the tax has not been assessed, and final determination of the tax liability for that year had not been made, at the time of filing the petition, under the Board's decision in Docket No. 4006 (). For the reason stated in the decision on the preceding issue, the respondent's action is sustained in principle; but the amount by which invested capital should be properly reduced is the deficiency as determined under the Board's decision in Docket No. 4006.

The fourth issue relates to respondent's reduction of invested capital by $55,089.21, on account of an alleged tax liability of $130,729.03 for 1919, prorated from the dates the several installments thereof became due and payable. Petitioner contends that respondent erred in his determination of the tax liability for 1919 in that he failed to include in invested capital for the year the following items:

(1) Ten thousand dollars representing the cost of stock of the Panama Pacific International Exposition Co. owned by the taxpayer throughout the year 1919, but improperly charged off the books prior thereto; (2) $10,000 representing the cash paid on October 31, 1907, for the good will of the business of W. D. McCann. On that date this taxpayer purchased the business of W. D. McCann and paid him $10,000 in cash for the good will of his business, which amount was erroneously charged off on the taxpayer's books at the date of the payment in 1907; (3) $268,777, representing the cash value of assets (good will) paid in for stock or shares in excess of the par value of the stock issued therefor.

Under the provisions of section 274(g) of the Revenue Act of 1926, we may consider such facts with relation to the taxes of other years as may be necessary to correctly redetermine the amount of the deficiency for the year before us.

As to the first alleged error in respondent's determination of the tax liability for 1919, there is no evidence that petitioner owned stock of the Panama Pacific International Exposition Co. during 1919.

As to the second alleged error, the evidence conclusively shows that petitioner acquired the business and good will of the McCann-Allen Co., a partnership, in 1907, which business it was continuing to operate during at least a portion of the year 1919; and that in addition to the sum paid for the tangible assets of the McCann-Allen Co., petitioner paid specifically for the good will, the sum of $10,000 cash. We hold that respondent erred in failing to include this item of good will in invested capital for the purpose of determining the petitioner's tax liability for 1919.

As to the third alleged error, we have previously, in our decision on the first issue for 1920, found that petitioner issued capital stock of the par value $167,009.04 for the good will of its predecessor which had an actual cash value, at the date of acquisition, of $225,000. For the reasons stated in our decision on the first issue, we hold that petitioner is entitled to include the good will acquired from its predecessor in the invested capital for 1919 in the amount of $167,009.04.

Evidence was submitted by petitioner, during the hearing, of the payment of $5,000 to Baldwin and Howell, real estate agents, for securing a lease on a certain property in San Francisco, Calif., and of the loss, in 1919, of the good will acquired from the McCann-Allen Co. by reason of abandonment of the business acquired from the latter company. The purpose of submitting this evidence was apparently to establish errors on the part of respondent in failing to include in invested capital for 1919, the unamortized fee paid to Baldwin and Howell for securing the lease, and in failing to allow a deduction for 1919 on account of the loss of good will, previously acquired from the McCann-Allen Co., incident to the abandonment, in that year, of the business acquired from the latter company. But these are matters which are not raised by the pleadings, and the petitioner has made no offer to amend its petition to bring them properly before the Board. For this reason we express no opinion in respect of these matters. , and

The last issue is whether petitioners were affiliated throughout the year 1920 and are entitled to have their tax liability for that year determined upon the basis of a consolidated return. We do not need to decide whether control of the capital stock of D.N. & E. Walter & Co., Inc., owned by its employees, vested in Isaac N. Walter and Moritz Walter, as Trustees, as contended by petitioner and now admitted by respondent in his brief. Assuming this to be true, the record then discloses that only 28.91 per cent of the capital stock of the Walter Real Estate Co. outstanding at January 1, 1920, and 1921, was owned by the same persons who owned or controlled 90.67 per cent of the capital stock of D. N. & E. Walter & Co., Inc. It may be said that the full extent to which the evidence goes is to show that the officers and directors of the two corporations were substantially the same; that 90.67 per cent of the capital stock of D.N. & E. Walter & Co., Inc., was owned or controlled by the Walter family; that all of the stock of the Walter Real Estate Co. was owned or controlled by the Walter family; and that there were intercompany transactions carrying no burden of compensation. But there were members of the Walter family who owned 71.09 per cent of the stock of the Walter Real Estate Co. who neither owned or controlled any of the stock of D.N. & E. Walter & Co., Inc. Was the stock of the Walter Real Estate Co. which they owned controlled by the owners of the other 28.91 per cent of the stock of that company and the persons who owned or controlled 90.67 per cent of the stock of the D.N. & E. Walter & Co., Inc.? The question is unanswered by any evidence of record; hence, the presumption is entitled to prevail that the record owners of the stock of the Walter Real Estate Co. are the actual owners and exercise the control of same. . The mere fact of family and business relationship standing alone is insufficient to constitute control or warrant persons standing in such relationship constituting the same interests, Appeal of Goldstein Bros. ; and intercompany transactions of the absence of them, without the necessary stock ownership or control as provided in the statute, is not sufficient to permit or require affiliation. . The petitioners have failed to establish affiliation, within the purview of the statute, for 1920; and respondent's action in computing the tax liability of each upon the basis of their separate returns is sustained.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.

GREEN concurs in the result.

STERNHAGEN (Dissenting in part)

STERNHAGEN, dissenting in part: It seems to me incorrect to include in earned surplus the $10,000 said to be represented by good will purchased in 1907 from the partnership of McCann-Allen Co. The petitioner wrote this off as expense when it was purchased and now in effect affirmatively asserts not only that this write-off was error but that the good will has been an asset ever since and was actually an item of earned surplus at the beginning of 1919. The proof consists only in the purchase in 1907 of all the partnership assets, the payment of $10,000 for the alleged good will, and its charge-off. For all that appears from the evidence the charge-off in 1907 was in accordance with fact and good accounting. Upon what evidence then is the alleged good will shown to be a part of the assets of the corporation in 1919 so as to be properly "restored" to earned surplus? None that has been discovered, and I know of no presumption to take its place.

MURDOCK concurs in this dissent.