Appeal of Chamberlain Medicine Co.

OPINION.

Sternhagen :

This appeal at the outset gave promise of presenting the interesting question of the application of the 25 per cent limitation in computing the invested capital of affiliated corporations. But in the light of the evidence that question disappears, for we can find no intangible property paid in for stock or shares, and hence no reason for considering the percentage limitation. The limitation is found in section 326, subdivision (a), paragraph (4), of the Bevenue Act of 1918, which is:

(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest.

Before the percentage limitation can be applied, the intangible property claimed must be bona fide paid for stock or shares.

The taxpayer claims the entire amount of $111,199.57 shown on the balance sheet of December 31,1893, as patents, copyright, trade-mark and good will. But this item appears on the balance sheet as a partial offset to an increase in capital stock — a capitalization of a self-assurance of value, a passive accretion to surplus, which had in no sense been “bona fide paid in for stock or shares.” The original capital stock of $160,000 was expressly issued for all of the assets of the business including its patents, copyrights, trade-marks, and good will- That the balance sheet of December 31, 1892, does not disclose such assets in the list may indicate that there were none in fact or that they were included within the other designated items. It does not indicate that they existed and were omitted when the articles of incorporation expressly mentioned them as being among the considerations for the issuance of the capital stock. The fact that the president of the corporation made an affidavit for use in this appeal in which he expressed the view that the partnership had a good will of a value of $140,000 is of little consequence.

Since the Commissioner has included in invested capital 25 per cent of the increased capitalization of $300,000, the invested capital should be recomputed by eliminating this amount, and the deficiency increased accordingly.