Watab Paper Co. v. Commissioner

WATAB PAPER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Watab Paper Co. v. Commissioner Docket Nos. 24773, 28082, 38685, 41733, 46076, 51387. United States Board of Tax Appeals 27 B.T.A. 488; 1932 BTA LEXIS 1060; December 30, 1932, Promulgated *1060 1. INVESTED CAPITAL - APPLICABILITY OF SECTION 331, REVENUE ACTS OF 1918 AND 1921. - Where one person is the owner of all the stock of one corporation at the time it transfers its assets to a newly organized corporation and after the transfer is the owner of only 22 per cent of the voting stock of the new corporation and owns none of the preferred stock, section 331 is not applicable and the new corporation (petitioner in this proceeding) is entitled to have its invested capital computed under section 326 of the Revenue Acts of 1918 and 1921, free from the limitations imposed by section 331 of said acts. 2. DEPRECIATION, EXHAUSTION AND OBSOLESCENCE - APPLICABILITY OF SECTIONS 204(a)(7), REVENUE ACT OF 1924 AND 1926 AND SECTION 113(a)(7), REVENUE ACT OF 1928. - Under the facts enumerated under headnote 1, above, sections 204(a)(7) of the Revenue Acts 1924 and 1926, and section 113(a)(7) of the Revenue Act of 1928, are not applicable and petitioner has the right to have depreciation computed on its depreciable property for the years 1924 to 1928, inclusive, based on its fair market value at the time of its transfer to petitioner and not on the basis of cost to the transferor corporation, *1061 as determined by respondent. 3. GOOD WILL VALUATION. - There is no specific rule for the determination of the value of good will. Each case must be considered and determined in the light of its own particular facts. Held, on the facts of the instant case, petitioner has not shown itself entitled to the valuation claimed by it for good will and contracts separate from the valuation given it for tangible assets paid in for stock. 4. INVESTED CAPITAL - SHOULD NOT BE REDUCED BY TENTATIVE TAX DETERMINED BY RESPONDENT. - Respondent was in error in reducing invested capital for 1921 by $41,559.57, alleged to represent a tentative tax. This error, however, was more than offset by another error made in petitioner's favor and the net result is essentially correct and ought not to be disturbed. James P. Gossett,22 B.T.A. 1279, followed. 5. CAPITAL EXPENDITURES NOT DEDUCTIBLE AS BUSINESS EXPENSES. - In 1923 petitioner paid $6,700 royalties in settlement of a suit against it by the owner of a patent for infringement. Of this amount $4,348.91 was paid in settlement of claims against petitioner's predecessor, Watab Pulp & Paper Company. This latter amount was*1062 a capital expenditure incurred by petitioner as a part of the consideration for assets acquired and was not deductible as a business expense. 6. LOSSES ON SALE OF PLANT ASSETS. - The burden of proof is on petitioner to prove claimed losses resulting from the sale of plant assets and this burden is not sustained by the introduction in evidence of petitioner's income tax return for the year in which loss was claimed, without further evidence of the cost basis of such plant assets. Richard S. Doyle, Esq., and Charles D. Hamel, Esq., for the petitioner. Mason B. Leming, Esq., for the respondent. BLACK *489 These proceedings involve deficiencies determined against the petitioner as follows: Year Deficiency June 4 to Dec. 31, 1920 $89,222.08 [1921] 26,987.52 [1922] 13,646.08 [1923] 14,176.80 [1924] 17,989.20 [1925] $21,520.09 [1926] 20,147.08 [1927] 16,687.97 [1928] 24,471.46 These proceedings were consolidated for hearing. The principal errors complained of are (1) erroneous computation of invested capital for the period June 4 to December 31, 1920, and for the calendar year 1921, in failing to include in invested capital*1063 the actual cash value of property paid in for stock or shares, and erroneously applying section 331 of the Acts of 1918 and 1921, and for the year 1921 in reducing earnings available for dividends and the retirement of capital stock by $41,559.57, alleged to represent a tentative tax; (2) insufficient allowances for exhaustion, wear and tear and obsolescence of tangible property used in the trade or business during all the taxable years involved in this proceeding. Other errors alleged will be referred to in the opinion. FINDINGS OF FACT. The petitioner, Watab Paper Company, is a corporation organized under the laws of Delaware, in April, 1920, and has its office and place of business at Sartell, Minnesota. Its principal business is now and was during the taxable years the manufacture and sale of pulp and paper, dealing in lumber and timber lands, and the development and sale of water and electrical power. The authorized capital stock was 20,000 shares of first preferred stock of the par value of $100 per share, amounting to $2,000,000, and 12,000 shares of second preferred stock of the par value of $100 per share, amounting to $1,200,000, and 40,000 shares of common stock*1064 of no par value. The holders of preferred stock of either class did not have the right to vote. The petitioner is the successor of the Watab Pulp & Paper Company, which will be hereinafter referred to as the "old" company, *490 and the petitioner as the "new" company. The old company was a Minnesota corporation organized in 1905 for the purpose of manufacturing pulp, newsprint and other papers. Its mill and plant were established at Sartell, Minnesota. During 1919 and 1920 the capital stock of the old company consisted of 2,500 shares of preferred and 10,500 shares of common stock, all of the par value of $100 per share and all of which was issued and outstanding except 65 1/2 shares of common which were held in the treasury. In 1919 and 1920 John C. Shaffer was the owner of a chain of newspapers in Chicago and the Middle West and, being desirous of producing and controlling his own supply of newsprint paper, endeavored to purchase the stock of the old company. In August and September, 1919, he procured options on all the preferred stock and approximately 85 per cent of the common stock, to purchase the same at $150 per share. The options ran to November 15, 1919, and*1065 it was provided that in the event the options were exercised, 25 per cent of the purchase price should be paid on the date of election and that Shaffer should give his promissory notes for the balance, with 6 per cent interest, payable on or before four months after date. The notes were to be deposited in the Continental and Commercial Trust & Savings Bank of Chicago, Illinois, with the stock as collateral. Prior to the date of expiration of the options Shaffer realized that he did not have the money necessary to make the first payment of $426,000 required on November 15, 1919. He thereupon consulted with D. E. Town, who was a close business associate of his chain of twenty-five years standing and general manager of his chain of newspapers. In trying to assist Shaffer to raise the necessary funds to meet the required payment of $426,000 due on November 15, 1919, Town approached S. E. Thomason, business manager of the Tribune Company, publishers of the Chicago Tribune, and obtained from that company the sum of $275,000 as a part of the funds required by Shaffer to meet his payments. The terms of this agreement with the Tribune Company, referred to in the contract as the "company, *1066 " were in part as follows: "SHAFFER" represents to the "COMPANY" that he has acquired an option to purchase the eighty-five per cent (85%) of the common stock of the Watab Pulp & Paper Company of Sartel, Minnesota, at the price of One Hundred Fifty Dollars ($150.00) per share, in accordance with the terms of a certain option contract, a true and correct copy of which is attached hereto, as "Exhibit A"; that upon the exercise of the aforesaid option "Exhibit A" by him (Shaffer), and the payment of approximately Four Hundred Twenty-six Thousand Dollars ($426,000.00) due thereunder, he will be thereupon in a position to assume full management and control and do and perform all the acts hereinafter set forth which said "SHAFFER" agrees to have performed by the said "COMPANY"; provided, however, that the said "SHAFFER" represents that upon the payment to him of the sum of Two Hundred Seventy-five Thousand Dollars ($275,000.00) *491 hereinafter referred to, he will be in a position to procure, effect and cause to be executed the contract described in paragraph numbered "2" hereinafter set forth. * * * Said "SHAFFER" has made the aforesaid representation for the purpose of inducing*1067 the "COMPANY" to buy 2037.4 tons of newsprint of the 2,500 tons herein described at the price of One Hundred Thirty-five Dollars ($135.00) per ton, F.O.B. Sartel, Minnesota, and of procuring for the "PAPER COMPANY" a contract for the sale of newsprint upon advantageous terms suitable and agreeable to the "PAPER COMPANY." The "COMPANY" relying upon the aforesaid representations is desirous of purchasing from "SHAFFER" said newsprint paper and an interest in said "PAPER COMPANY" upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) the receipt of which is hereby mutually acknowledged and in further consideration of the mutual promises of the parties hereinafter set forth, it is mutually agreed as follows: 1. Immediately upon the payment by the "COMPANY" of the sum of two Hundred Seventy-five Thousand Dollars ($275,000.00) hereinafter stipulated, "SHAFFER" shall forthwith apply said payment in accordance with the provisions of said option agreement (Exhibit A) and do and perform such other acts and things as may be necessary to exercise said option in such manner as will secure to "SHAFFER" the full benefit of said*1068 option contract. 2. "SHAFFER" shall thereupon assume control of the management of said "PAPER COMPANY" to the end that said "PAPER COMPANY" shall immediately begin the performance of the provisions of this contract and of the contract provided for in paragraph "2" hereof. [Here follows an agreement on the part of Shaffer to secure the sale and delivery to the Tribune Company by the Watab Pulp and Paper Company of 2,500 tons of standard white newsprint paper at an agreed price.] 3. The "COMPANY" shall have and retain a first lien, upon "SHAFFER'S" equity in the stock of the "PAPER COMPANY" purchased under the terms of the option agreement (Exhibit A) until, (1) the newsprint paper herein contracted for to be sold and delivered to the "COMPANY" by the "PAPER COMPANY" has been completely delivered, or (2) the unearned balance, if any, of the said Two Hundred Seventy-five Thousand Dollars ($275,000.00) arising out of any failure to deliver the aforedescribed tonnage, has been refunded. 4. By way of additional and further consideration for the payment by the "COMPANY" to the said "SHAFFER" of the sum of two Hundred Seventy-five Thousand Dollars ($275,000.00) herein stipulated*1069 for, the said "SHAFFER" agreed to transfer and assign to S. E. THOMASON, Business Manager of the "COMPANY", twenty-five per cent (25%) and to WARREN CURTIS, JR., President of The Ontario Paper Company, Seven and one-half per cent (7 1/2%) of his (SHAFFER'S) equity in the said "PAPER COMPANY" over and above the purchase price of its common and preferred stock and its outstanding bonds, and agrees to transfer to the said S. E. THOMASON and WARREN CURTIS, JR., respectively, stock or other securities fully aggregating and representing such equity in the said "PAPER COMPANY" after so much of said stock or other securities as are necessarily employed in financing the purchase price of the present stock and bonds of the "PAPER COMPANY" has been finally determined and paid over. 5. It is the intention of the parties that "SHAFFER" will acquire possession of the common stock, preferred stock and outstanding bonds of the mill at *492 a price of approximately Two Million Three Hundred Thousand Dollars ($2,300,000.00). To obtain this sum "SHAFFER" will procure securities of the "COMPANY" to be issued and sold. It is the equity in the "COMPANY" over and above this amount, which is*1070 referred to. Said THOMASON is to assist in the financing of said securities to the best of his ability. * * * 8. In consideration of the aforesaid representations and covenants of the said "SHAFFER", the "COMPANY" agrees to deliver to the said "SHAFFER" its check in the sum of Two Hundred Seventy-five Thousand Dollars ($275,000.00) to the order of the Continental and Commercial Trust & Savings Bank as Trustee under the terms of the option agreement (Exhibit A), and thereupon upon the said "SHAFFER" agrees to do and perform all acts necessary to the full and complete performance by him of the terms of the said option (Exhibit A) and the terms and conditions hereof. Thomason assigned all of his interest under the contract to the Tribune Company. In accordance with the contract the Tribune Company advanced $275,000 to Shaffer, which, with other funds supplied by Shaffer, was applied on the 25 per cent payment of the purchase price of the stock under option due November 15, 1919. Shaffer paid $426,000 and on the same date gave his notes in the aggregate sum of $1,269,900, with interest at the rate of 6 per cent per annum, payable on or before 4 months thereafter, in payment*1071 of the balance due on the stock. The notes, with the stock as collateral, were deposited with the Continental and Commercial Trust & Savings Bank of Chicago, Illinois, as trustee. During his negotiations Shaffer had been assured that the remaining 15 per cent of the common stock of the old company could be purchased at $150 per share. This remaining outstanding stock consisted of 1,646 1/2 shares of common and was owned or controlled by E. W. Decker of Minneapolis, who refused to sell for $150 a share. Shaffer, in December, 1919, purchased this block of stock for $265 a share or a total of $436,322.50. This made him the purchaser of all the outstanding capital stock of the old company except 65 1/2 shares of common stock which were held in the treasury of the corporation. Shaffer and Town attempted to secure assistance from banks and investment houses in Chicago and made further negotiations with the Tribune Company for financing the payment of Shaffer's notes given in payment of the stock, but their efforts were unsuccessful. On account of his failure to finance the proposed deal successfully, Shaffer determined to convey his rights to his friend and associate, D. E. Town. *1072 To accomplish this, Shaffer made the following written assignment and transfer to Town: CHICAGO, March 5, 1920. Mr. D. E. TOWN, DEAR SIR: I own or control the entire capital stock of the Watab Pulp & Paper Company. In payment for a portion of the stock I have given my notes for $1,269,900, plus interest, due March 15, 1920. I am unable to finance the *493 company at the present time. It would be exceedingly injurious to me if my notes, now with the Continental and Commercial Trust & Savings Bank, are not paid at maturity. I will assign to you all of my stock and all of my interest in the Watab Pulp & Paper Company on condition - (1) You will see that my notes, now with the Continental and Commercial Trust and Savings Bank, aggregating $1,269,900. Plus interest, are paid at maturity. (2) You will deliver to me a second security of some class of the refinanced company equivalent at par to all of the expense that I have incurred in connection with acquiring control of the Watab Company, plus an amount of the above described securities at par sufficient so that the market value of the securities I receive are equivalent to these expenses. Yours truly, JOHN*1073 C. SHAFFER. For many years Town had Known Lee Olwell, an official of the National City Company of New York, and on March 3, 1920, he wrote a letter to that Company presenting the proposition to it. In his letter to the National City Company, Town outlined and suggested a plan for a bond issue by the old company, secured by a first mortgage, to provide funds to retire then outstanding bonds of the old company and to liquidate in part the outstanding Shaffer notes. After investigation by the National City Company, it decided to advanced the necessary funds to pay the Shaffer notes, but it was decided to organize a new corporation to take over and operate the properties of the old company, instead of financing the old company. The contract between Town and the National City Company looking to the financing of the purchase of the stock of the old company and the organization of the new company to take over its assets was in part as follows: Whereas, Town now owns or controls $250,000 par amount of the preferred stock and $1,043,450 par amount of the common stock of the Watab Pulp & Paper Company, a corporation organized under the laws of Minnesota (hereinafter called the "Old Company"), *1074 being all of the issued and outstanding preferred and common stock of the Old Company; and Whereas, John C. Shaffer has heretofore given his notes in the aggregate principal amount of $1,269,900 in payment of the balance of the purchase price of all of the preferred stock of the Oil Company and a portion of the common stock thereof, which notes are dated November 15, 1919, and due March 15, 1920, at the Continental and Commercial Trust and Savings Bank, with interest at the rate of six per cent per annum from date. The preferred and common stock of the Old Company for which said notes are given as payment has been deposited with the Continental and Commercial Trust and Savings Bank as collateral for said notes; and Whereas, the said John C. Shaffer has agreed to assign to Town all his interest in and to the preferred and common stock of the Old Company on condition that Town will secure the payment of the said notes of John C. Shaffer, aggregating $1,269,900 and interest, when the same mature on March 15, 1920; and Whereas, the City Company is willing to finance Town in consideration of the delivery to it of certain securities of the corporation hereinafter referred to; now, *1075 therefore, *494 This Agreement Witnesseth: 1. The City Company will loan to Town on March 15, 1920, in time to take up the said notes to John C. Shaffer above referred to, the sum of One Million Two Hundred Sixty-nine Thousand Nine Hundred Dollars ($1,269,900) plus interest on said sum from November 15, 1919, at six per cent per annum, being a total sum of One Million Two Hundred Ninety-five Thousand Two Hundred Ninety-eight Dollars ($1,295,298). 2. Town will give to said Company his non-negotiable note in the principal amount of One Million Two Hundred Ninety-five Thousand Two Hundred Ninety-eight Dollars ($1,295,298), payable thirty (30) days after demand, with interest at six (6) per cent per annum. Town will cause to be delivered to the City Company as collateral for his note all of the issued and outstanding preferred and common stock of the Old Company, free from any and all liens or legal or equitable claims. The City Company will cause the certificates for stock of the Old Company, so delivered to it as collateral, to be transferred into the names of nominees of Town. Town will cause the nominees to endorse the certificates in blank and redeliver them to*1076 the City Company. 3. As soon as Town is in control of the Old Company he will cause the Old Company to redeem and retire the $250,000 of its preferred stock at par, which amount shall be paid to and received by the City Company, and applied by it as a credit on Town's note for $1,295,298. 4. Town will cause to be organized under the laws of Delaware a corporation to be known as the Watab Paper Company (hereinafter called the "New Company"), which shall be capitalized as follows: [Here follows a statement of proposed capitalization.] 5. Town will cause to be transferred to the New Company all of the assets, rights, and good will of the Old Company upon the assumption by the New Company of all of the liabilities of the Old Company, including the Old Company liability under its mortgage dated February 10, 1912, under which there are now outstanding $325,000 principal amount of bonds. 6. Upon the transfer of the property of the Old Company to the New Company, Town will cause the New Company to deliver: (a) To the City Company $1,162,000 par amount of the First Preferred Stock, $100,000 par amount of the Second Preferred Stock, and $500,000 par amount of the Common Stock*1077 of the New Company; (b) To John C. Shaffer $1,075,000 par amount of the Second Preferred Stock; (c) To Town $1,000,000 par amount of the Common Stock. * * * 7. Upon receipt of the City Company of the securities referred to in the foregoing paragraph 6, the City Company will cancel and deliver to Town his said note for $1,295,298, together with any interest accrued thereon, and the City Company will deliver to the New Company all of the stock of the Old Company in the hands of the City Company as collateral to said note. 8. The City Company will not demand payment of Town's note for $1,295,298 or interest thereon until, in the judgment of the City Company, Town has had reasonable opportunity to perform his obligations under this contract. * * * The contract of November 15, 1919, between Shaffer and the Tribune Company, hereinbefore set out, provided that the old company would make a contract to sell and deliver to the Tribune Company *495 2,500 tons of newsprint paper at $135 per ton, and that Shaffer would transfer to S. E. Thomason, business manager of the Tribune and Warren Curtis, Jr., certain percentages of his equity in the stock of the old company. The*1078 old company never signed the contract for the sale of the 2,500 tons of paper and no transfer of interest in the stock of the old company was made by Shaffer to Thomason and Curtis as agreed upon. Only 1,123 tons of paper were delivered to the Tribune Company and its subsidiaries, which resulted in controversies between the Tribune, and Shaffer and the old company. In order to protect Shaffer from liability and to settle further controversy, John C. Shaffer, Town and Carroll Shaffer (son of John C. Shaffer) on March 15, 1920, entered into the following written agreement: That Whereas, John C. Shaffer has heretofore assigned to D. E. Town all of his interest in certain stock of the Watab Pulp & Paper Company, subject to the conditions mentioned in said assignment; and Whereas, D. E. Town will control two-thirds of the issued common stock of a corporation to be organized to take over the property of the Watab Pulp & Paper Company (hereinafter called the "New Company"), now therefore This Agreement Witnesseth: 1. D. E. Town will cause to be delivered to Carroll Shaffer one-half of any common stock that D. E. Town may receive in the New Company. 2. D. E. Town and Carroll*1079 Shaffer, to the extent of the value of their ownership in the common stock of the New Company, agree to protect and save harmless John C. Shaffer against any claim by the Tribume Company, by S. E. Thomason, or by Warren Curtis, Jr., to any share in John C. Shaffer's equity in the said corporation to be organized, and against any claim of the Tribune Company under the contract between John C. Shaffer and the Tribune Company dated November 15, 1919. On March 15, 1920, Town made a tender for John C. Shaffer to the Tribune Company of $185,895 in settlement of all claims against Shaffer. This amount represented the difference in the value of the newsprint agreed to be delivered by Shaffer and the amount which had been delivered under the Shaffer-Tribune contract. The tender was refused by the Tribune Company because there was no stock offered with it. The Tribune Company contended it was entitled to some common stock under the original agreement. To keep the tender good the money was deposited in the Continental and Commercial Trust & Savings Bank to the credit of the Tribune Company and subject to its order. On March 29, 1920, the Tribune Company accepted the sum tendered and*1080 on April 9, 1920, the Tribune Company, the old company, John C. Shaffer, Town, and Thomason entered into a written agreement of settlement, which provided, among other things, as follows: FIRST: Upon the execution and delivery of this agreement WATAB shall execute and deliver to THE TRIBUNE its contract with the Ontario Paper Company, *496 limited, a subsidiary corporation, owned by THE TRIBUNE, for the sale of 6,367 tons of newsprint paper in accordance with the copy of such contract, which is attached hereto and made a part hereof as Exhibit "C". SECOND: Immediately upon the completion of the reorganization of WATAB, Town shall cause to be delivered to THE TRIBUNE, or according to its order, 16% of the common stock of the reorganized Watab Company immediately to be issued as hereinbefore recited. THIRD: THE TRIBUNE will secure and deliver to Town, releases properly executed by Thomason and Curtis, releasing all their respective claims to an equity in the "Paper Company" arising out of the contract, Exhibit "A", or otherwise. John C. Shaffer's notes, with interest, in the total sum of $1,295,298, were paid March 15, 1920, with funds furnished by the National City*1081 Company in accordance with its contract with Town. All of the stock was thereupon transferred to Town or his nominees and new certificates issued in his name, except eight shares for qualification purposes for directors. Eight employees and officials of the old company were elected as directors and Town was elected president. The stock certificates thus issued were all turned over to the National City Company as collateral to Town's note for $1,295,298. None of the stock in the old company was ever in the names of John C. Shaffer, Carroll Shaffer, the Tribune Company, Lee Olwell, or the National City Company. On May 10, 1920, the old company redeemed all of its preferred stock in the sum of $250,000 together with some accrued dividends, the proceeds of which were paid over to the National City Company and credited on Town's note. The articles of incorporation of the petitioner, the new company, were filed April 14, 1920, and organization meetings were held, at which Town was elected president. The provision of the Town-National City Company contract for $2,000,000 of common stock divided into shares of $25 par value each was changed to 40,000 shares without par value. *1082 At a meeting of the board of directors of the new company (petitioner) held on June 1, 1920, Town offered to transfer to the new company all of the assets of the old company, including good will, and to accept in payment therefor (1) $1,000 in cash to be paid to Town; (2) payment of the expenses of the transfer; (3) assumption by the new company of the debts of the old company, including $325,000 first mortgage bonds; (4) delivery to the order of the National City Company of $1,162,000 of the first preferred stock of the new company, $100,000 of second preferred stock and 10,000 shares of common stock, without par value; (5) delivery to John C. Shaffer of 1,078,100 second preferred stock; (6) delivery to the Tribune Company of 4,800 shares of common stock; (7) delivery *497 to D. E. Town of 8,600 shares of common stock; (8) delivery to Carroll Shaffer of 6,600 shares of common stock. Town's proposal was accepted by the new company and the old company conveyed all of its assets to petitioner by deeds of conveyance and bills of sale on June 4 and July 28, 1920. Thereupon, petitioner's preferred, second preferred and common stock were issued as follows: Class Date Certificate No. Name Shares First preferred June 9, 1920 [1] William Keller of National City Co 11,620 Second preferred do 1-69 John C. Shaffer 10,781 Do do [70] William Keller of National City Co 1,000 Common June 15, 1920 [1] do 10,000 Do do [2] The Tribune Co 4,800 Do do [3] D. E. Town 4,000 Do do [4] do 2,600 Do do [5] Lee E. Olwell 2,000 Do do [6] Carroll Shaffer 4,000 Do do [7] do 2,600 *1083 The following table shows the stock ownership of the old and new companies for the two periods, (1) that between March 15 and June 4, 1920, and (2) that after June 4, 1920: (Table omitted) The tangible property conveyed to petitioner by the old company in 1920 consisted of all of the land, water power rights and construction, buildings, dam and equipment, and all of the land, plant site, timber lands, buildings, machinery and appliances owned by the old company at that time, together with all the current assets of the old company. The following is a detailed statement of the assets which we find were conveyed to petitioner by the old company and the actual cash value thereof at the time they were conveyed, taking into consideration the reserve for depreciation of $66,824.52 hereinafter enumerated under liabilities: Assets Value Cash $105,585.60 Accounts receivable, customers 653,230.06 Finished products 53,859.50 Storeroom inventory 409,003.42 Prepaid insurance 6,375.61 Liberty bonds 73,520.00 Spur track 2,173.77 Canadian lands 3,179.01 Minnesota timber lands 259,388.00 Factory furniture and fixtures 22,825.00 Machinery and equipment 1,299,988.67 Office furniture and fixtures 5,127.36 Brick buildings $522,527.39 Frame buildings 61,879.61 Miscellaneous construction and outside equipment 49,590.00 Dwellings 34,417.21 Water power construction 282,734.52 Plant site 15,040.00 Water power rights 300,000.00 Organization expenses of petitioner (treated as a capital expenditure on its books) 32,245.16 *1084 *498 The following is a table of the liabilities of the old company which the petitioner assumed in the purchase of the assets: Liabilities Amount Accounts payable $149,859.89 Account due D. E. Town 1,000.00 Pay roll accrued 21,641.37 Bond interest accrued 13,440.01 Account due Shaffer $61,060.94 Reserve for depreciation 66,824.52 Reserve for Federal taxes 58,458.27 Bonds (old company) 325,000.00 The cost to the Watab Pulp & Paper Company of its depreciable assets, so transferred to the taxpayer, was as follows: Item Cost Machinery and equipment $883,298.04 Brick buildings528,830.49 Frame buildings 22,089.04 Frame dwellings 29,211.48 Water power construction 321,350.39 Furniture and fixtures - office 6,226.76 Sundry plant equipment $15,988.96 Machine room roof 12,294.65 Wood room 21,079.83 Ventilators 23,152.74 Total 1,863,522.38 Against the above assets, the Watab Pulp & Paper Company had set up reserves for depreciation as at June 3, 1920, in the following amounts: Item Amount Machinery and equipment $396,251.19 Brick buildings 118,918.22 Frame buildings 7,492.16 Frame dwellings 3,576.70 Water power construction 283,545.35 Furniture and fixtures 3,409.49 Sundry plant equipment $11,356.73 Machine room roof 2,981.46 Wood room 5,362.21 Ventilators 7,256.23 Total 840,149.74 *1085 Other assets, transferred at the same time, and the cost of the same to the Watab Pulp & Paper Company, were as follows: Liberty bonds $73,520.00 Timber lands 166,316.21 Canadian lands 3,179.01 Spur track 2,173.77 Plant site and real estate including village lots and flowage rights 147,844.17 *499 The Watab Pulp & Paper Company did not carry on its books as an asset at the time of the transfer of assets, any item of good will. The net income of Watab Pulp & Paper Company, as shown by its books, for the 5-year period immediately preceding the transfer of assets to petitioner, was as follows: Net income per books [1916] $276,746.42 [1917] 310,417.63 [1918] 272,086.53 [1919] 326,868.14 Jan. 1 to June 1, 1920 550,357.02 June 1 to Dec. 31, 1920 686,782.22 Total 2,423,257.96 Adjustment by respondent: Restored to income on account of installation of new water wheels and barker in years 1917, 1918, 1919 (petitioner's ex. 129) $89,302.62 Less: Additional depreciation allowed by respondent in 1917, 1918, 1919, 1920 (petitioner's ex. 129) 6,546.12 Net additions to income 82,756.50 Total net income 2,506,014.46 Average annual net income for the five years 1916 to 1920, inclusive $501,202.89 *1086 It is upon this showing of income that petitioner bases its claim for good will and contracts transferred to it of a value of $750,000. As is the usual custom of paper mills, both the old company and the new company operated day and night continuously, except Sundays. For the taxable years 1920 to 1923, inclusive, respondent used the following values for computing depreciation: Asset Period June 4 to Dec. 31, 1920 (see petitioner's Ex. 5) Calendar year 1921 - reproductive cost Dec. 31, 1920, plus additions Calendar year 1922 - reproductive cost Dec. 31, 1921, plus additions Calendar year 1923 - reproductive cost Dec. 31, 1922, plus additions Buildings $719,883.66 $720,319.06 $725,253.70 $727,082.70 Water power construction 440,355.83 441,698.18 441,980.54 442,906.23 Machinery and equipment 1,691,956.60 1,754,975.98 1,744,440.20 1,805,418.64 Office furniture and fixtures 6,106.75 7,395.95 7,946.43 8,565.63 Cores 43,556.04 43,556.04 43,556.04 43,556.04 Frame dwellings 36,888.25 37,620.09 37,658.17 37,709.52 Frame buildings 3,377.54 Additions to sundry plant and equipment 4,093.57 Petitioner does not complain of*1087 these values, but complains that the rate of depreciation allowed by respondent was too low. For the years 1924 to 1928, inclusive, the respondent changed the basis for allowances for depreciation, wear and tear, and obsolescence *500 from the values above given to the cost of the depreciable assets to the old company. This was upon the theory that 80 per cent of the stock of the petitioner was owned by the former owners of the old company and that under section 204(a)(7) of the Revenue Acts of 1924 and 1926, and section 113(a)(7) of the Revenue Act of 1918, this new basis was required. The amounts of depreciation allowed by respondent to petitioner for the years 1924 to 1928, inclusive, the values of depreciable assets upon which they were based, and the composite rates to which such deductions are equivalent, are shown by the following table: Year Cost to old company plus additions Allowances made in deficiency letter Deductions equivalent to composite rate of - Per cent [1924] $2,131,583.84 $60,852.30 2.8544 [1925] 2,147,470.33 57,315.62 2.6689 [1926] 2,308,415.98 60,920.35 2.6390 [1927] 2,361,427.74 65,225.57 2.7621 [1928] 2,377,895.13 71,164.42 2,9927 *1088 The rates of depreciation applied to the depreciable assets on the books of petitioner, taken in the returns, and the rates of both depreciation and obsolescence claimed in these proceedings, are as follows: Assets Percentage of depreciation taken on books Percentage of depreciation taken in tax returns Percentage of depreciation and obsolescence claimed in these proceedings Machinery and equipment 1 [10] Brick buildings [5] Frame buildings [5] Water power construction 2 [8] Dwellings [5] Miscellaneous construction [5] Furniture and fixtures, office [5] Furniture and fixtures, factory [10] Reasonable rates of depreciation, including obsolescence, which should be used in computing petitioner's allowance for depreciation and obsolescence in each*1089 of the taxable years, we find to be as follows: Item Rate Per cent Machinery and equipment 7 1/2 Brick buildings [3] Frame buildings [4] Water power construction [7] Dwellings [4] Miscellaneous construction [5] Furniture and fixtures [5] *501 The Eibel Process Company made a claim against petitioner for infringement of certain patent rights. Petitioner denied its liability, but after a decision of the United States Supreme Court in , upholding the claims of the Eibel Process Company to the patent, the petitioner paid $6,636.24 on March 1, 1923, in total settlement of the claim. Respondent refused to allow $4,348.91 of this as a deduction because incurred by the old company prior to June 4, 1920. OPINION. Invested Capital. BLACK: Petitioner's first assignment of error is that respondent erred in computing petitioner's invested capital for the period June 4, 1920, to December 31, 1920, and for the calendar year 1921, by failing and refusing to include in invested capital the actual value of the property paid in for stock or shares, but on the contrary gave*1090 effect to the limitations prescribed in section 331 of the Revenue Acts of 1918 to 1921, and computed petitioner's invested capital on the basis of costs to the old company, the Watab Pulp & Paper Company, of assets transferred by it to petitioner. We think this assignment of error must be sustained. In our judgment, under the facts set out in our findings of fact, section 331 of the Revenue Acts of 1918 and 1921, printed in the margin, 1 is not applicable in this proceeding. We think the situation which we have before us in the instant case is similar in many features to the facts in , in which we held that section 331 was not applicable. In the Leffingwell Rancho Co. case, the contract which the Leffingwell Rancho Company had with the East Whittier Rancho, looking to the organization of a new company to be known as Leffingwell Rancho Company, and providing how and to whom the capital stock of the new company should be issued, was not essentially different in principle to the contract which Town had in the instant case with the National City Company, by which the National City Company advanced Town the money to purchase*1091 all the stock of the old company and by which Town agreed to organize a new company to acquire the assets of the old company, and agreed that all the first preferred stock and part of the common stock of the new company should be issued to the National City Company. *502 Also, the several other contracts made by Town in acquiring the stock of the old company did not impair his ownership of the stock of the old company when finally acquired on March 15, 1920. As an upshot of these several steps detailed in our findings of fact, Town became the owner on March 15, 1920, of*1092 all the stock of the old company. It is true he had to place the stock thus acquired as collateral with the National City Company to secure the payment of the money which the National City Company advanced him to buy the stock, but that did not constitute the National City Company a stockholder of the old company. The National City Company was never at any time a stockholder in the old company, as its contract rights related exclusively to stock in the new company, which it was seeking to acquire and this was issued to it promptly after the reorganization and thereupon Town's note was canceled. The pledge of the stock in the old company as collateral to Town's note did not deprive Town of his rights as a stockholder as to voting or otherwise. ; . Town, who owned all the stock of the old company when the transfer of the assets from the old company to the new company took place, owned only 22 per cent of the voting stock of the new company and none of the preferred stock when the transaction was completed, and hence we hold that under these circumstances section 331 does not apply and*1093 petitioner is entitled to have its invested capital computed under the provisions of section 326 of the Revenue Acts of 1918 and 1921, without reference to the limitations prescribed by section 331 of said acts. ; . Respondent, as authorities for his contention that section 331 is applicable, cites , and ; affd., . We think these cases are distinguishable on their facts from the instant case. In the Shipowners & Tugboat Co. case, the evidence showed that the common stock of the old company was bought up by Robert J. McGabie, not for himself, but for the associates whom he represented, and the stock which was issued in his name was held for the account of others. Therefore, we held that when the stock of the new company was distributed to these others for whom McGabie held the stock of the old company, in the same proportion as was their beneficial interest in the stock of the old company, section 331 applied. *1094 In the instant case there is no evidence that Town was buying the common stock of the old company for the account of others. It is true that the Tribune Company, John C. Shaffer, and Carroll Shaffer had certain claims against Town which were to be satisfied with stock of the new company, upon the organization *503 of the new company, but it seems to us that these claims did not impair Town's ownership of the common stock of the old company when he finally acquired all of it in March 15, 1920, by paying off in full John C. Shaffer's notes with money which had been advanced him by the National City Company. These transactions did not make Town a mere nominee holder of the common stock of the old company such as was Robert J. McGabie in the Shipowners & Merchants Tugboat Co. case. In the instant case John C. Shaffer completely assigned his rights in the stock of the old company to Town, and no longer held any claim on it. His claim was for reimbursement of the money which he had expended in the transaction, by having issued to him second preferred stock in the refinanced company. In the Sheaffer Pen Co. case, supra, all the common stock at first issued was issued*1095 to the stockholders of the old company in proportion to their holdings of stock in the old company, and they were in complete control of the new company. Under such circumstances, we held that section 331 was applicable. Later on, other common stock was issued and sold to new stockholders, and we held that this later issued stock had nothing to do with determining whether or not section 331 was applicable. We have no such facts present in the instant case. For the reasons above stated, we think the Shipowners & Merchants Tugboat Co. and Sheaffer Pen Co. cases are not applicable, and on the issue of the applicability of section 331, we hold for petitioner. Depreciation. Petitioner's next contention is that the basis for determining gain or loss, depreciation, exhaustion, and obsolescence of the properties acquired by petitioner on June 4, 1920, from the old company, is the fair market value thereof on that date and these allowances are not subject to the limitations prescribed by section 204(a)(7) of the Revenue Acts of 1924 and 1926, and section 113(a)(7) of the Revenue Act of 1928, and that respondent erred in using as a basis for computing depreciation, exhaustion*1096 and obsolescence, for the years 1924 and 1928, inclusive, the cost of such properties to the transferor corporation (old company). For the same reasons which we have already given as to why section 331 of the Revenue Acts of 1918 and 1921 is not applicable to the facts of this proceeding, we hold that section 204(a)(7) of the Revenue Acts of 1924 and 1926, and section 113(a)(7) of the Revenue Act of 1928, are not applicable. The latter provisions have to do with the determination of gains and losses, and depreciation, exhaustion and obsolescence, whereas section 331 has to do with the determination of invested capital, but the language of the sections is very much the same, *504 except as to the percentage of ownership of stock required to determine the question of control. In section 331, the amount of ownership of interest or control required to determine the applicability of the section is 50 per cent or more, whereas in the latter acts, having to do with determination of gains or losses, depreciation, etc., the amount of ownership of stock required to determine control is 80 per cent or more. On the issue as to the applicability of section 204(a)(7) of the 1924 and*1097 1926 Acts, and section 113(a)(7) of the 1928 Act, in the matter of the determination of depreciation and obsolescence, we held for petitioner. Petitioner does not complain of the values used by respondent in computing depreciation for the years 1920 to 1923, inclusive. In fact petitioner concedes that these values were higher than those claimed by petitioner in this proceeding, but petitioner contends that the rates of depreciation, exhaustion and obsolescence used by respondent in computing the allowance for depreciation in said years were much too low. In our findings of fact we have determined what would be reasonable rates of depreciation to apply to the different classes of depreciable property which petitioner acquired from its predecessor, plus subsequent additions made thereto by petitioner. These rates of depreciation should be used by respondent in redetermining the deficiencies for each of the taxable years involved in this proceeding and the basis of cost used in figuring depreciation should be the fair market value, in this case the actual cash value as found by us, of depreciable property at the time it was acquired by petitioner, June 4, 1920, increased by the*1098 additions made by petitioner since the date of acquisition, concerning which additions there seems to be no controversy between petitioner and respondent. Valuation of Good Will. Petitioner contends for a valuation of good will and contracts transferred by the old company to the new company of $750,000 and that this should be included in invested capital as provided in section 326 of the applicable revenue act. The old company carried nothing on its books for good will and contracts, but, after the old company transferred its assets to the new company, petitioner set up on its books $750,000 as representing the value of good will and contracts acquired from the old company. There is no specific rule for the determination of the value of good will. Each case must be considered and determined in the light of its own particular facts. . *505 We have given petitioner a liberal valuation of the tangible assets transferred to it by the old company in June, 1920, based upon the fact that the business which petitioner took over was a prosperous, going concern. The testimony as to the value of these assets at the time of*1099 transfer was largely based upon the fact that the business was a prosperous, going concern. No doubt if it had not been for this fact the valuations fixed by the witnesses would have been considerably lower. We feel that the valuations which we have fixed on the tangible assets include adequate allowance for good will acquired with them, and that the evidence does not justify us in separately valuing good will and contracts, as petitioner contends. We hold against petitioner on this issue. Tentative Tax. Petitioner complains that respondent erred in reducing invested capital for 1921 by the amount of $41,559.57 for tentative tax, and cites ; ; and . Respondent concedes that his action in this respect was error, but alleges, however, that in the same deficiency letter he applied $42,962.65 of current earnings of that year to the retirement of the capital stock in the same year, thereby increasing invested capital to that extent out of surplus earned during the taxable year. Respondent*1100 alleges that this was error on his part in petitioner's favor. ; . Respondent alleges that the first error above cited made against petitioner is more than offset by the one made in its favor, and that the net result is essentially correct and ought not to be disturbed. . An examination of the record sustains the respondent in the above contention, and we hold against petitioner on this assignment of error. Eibel Royalty Claim. For several years both the old company and petitioner used on paper machine No. 1 certain pitched wire attachments which infringed patent rights of the Eibel Process Company. After litigation which established the rights of the patentee, petitioner made a settlement March 1, 1923, by which it paid $6,636.24 to the patentee; $4,348.91 of this was paid for infringement by the old company and the balance for infringement by petitioner. The latter amount was allowed by the respondent as a deduction for 1923, but the $4,348.91 was disallowed. The action of respondent in this respect is approved*1101 as the amount disallowed was a liability of the old company *506 assumed by the petitioner in the purchase of assets, and was in the nature of a capital expenditure. . Loss on Sale of Assets. Petitioner in its return for 1925 claimed a loss of $3,113.10 on the sale of plant assets. Respondent disallowed $1,918.50 of this claim and allowed the balance, which action petitioner alleges was erroneous. The difference between the amount claimed by petitioner and that allowed by respondent arises from the difference in the cost basis used in computing the loss. Petitioner claims as cost the appraised or fair market value of the property on June 4, 1920, at the time conveyed to petitioner, and respondent the actual cost to the old company. No evidence on this point was introduced other than petitioner's income tax return for 1925, which is insufficient to set aside the determination which has been made by the respondent. Petitioner's income tax return is a self-serving declaration and may not be accepted as proof of the loss, merely because it is claimed. *1102 . The petitioner has not sustained its burden of proof in respect to the amount of loss claimed on this item. . Reviewed by the Board. Decision will be entered under Rule 50. TRAMMELL: I agree, with the exception of the exclusion of good will. Footnotes 1. The additions to machinery and equipment account since June 4, 1920, have been depreciated at the rate of 7 1/2 per cent, instead of 10 per cent. ↩ 2. The rate of depreciation on water power construction was computed by the petitioner at 15 per cent until the year 1924, when it was reduced to 8 per cent following a conference with the revenue agent. ↩ 1. SEC. 331. In the case of the reorganization, consolidation, or change or ownership of a trade or business, or change of ownership of property, after March 3, 1917, 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. ↩