17 T.C. 171">*172 The respondent has determined excess profits tax deficiencies against the petitioner for the calendar years 1941 and 1942 of $ 11,624.36 and $ 85,459.52, respectively. The petitioner has abandoned a claim that the respondent erred in disallowing a deduction of $ 98,563.81 for the year 1942, for obsolescence of certain patents. The only question for determination is the correctness of the respondent's disallowance as equity invested capital of an amount claimed for property paid in for stock.

FINDINGS OF FACT.

The petitioner is a New York corporation, with its place of business in Syracuse, New York. Its business is that of manufacturing laundry machinery and cleaning equipment. It filed its income and excess profits tax returns for 1941 and 1942 with the collector for the twenty-first district of New York.

The petitioner was organized on December 4, 1915, with authorized capital stock of 3,000 shares of common stock, having a par value of $ 10 per share. Its capital was increased from time to time, until at December 31, 1925, its authorized1951 U.S. Tax Ct. LEXIS 113">*115 capital stock was 15,000 shares of common stock, having a par value of $ 10 per share, and 4,000 shares of preferred stock, having a par value of $ 100 per share. Outstanding at December 31, 1925, were 14,089 shares of common stock and 3,082 shares of preferred stock, which stock was held as follows:

G. A. Braun, P. N. Braun, A. R. Braun, and Priscilla E. Freiberger were the children of S. J. Braun.

The outstanding stock of the National Chemical Company, sometimes referred to herein as National Chemical, was held as follows:

17 T.C. 171">*173 The National Chemical Company was organized by S. J. Braun in 1896, in Toledo, Ohio, to market soda ash, and similar products, in standard packages. It moved its headquarters to Syracuse, New York, in 1905, to be near the Solvay Process Company, which1951 U.S. Tax Ct. LEXIS 113">*116 at that time sold its entire output of sesqui carbonate of soda to National Chemical Company. For almost twenty years the National Chemical Company continued in the business of marketing soda to the grocery and, in a larger volume, to the laundry trade. During this time its business increased and its operations were profitable. In the latter part of the period, its profits were seriously affected by competition and it sold its trade name "Prosperity," as applied to chemicals, to interests which later became Carmen Supply Company. In March of 1926, the Carmen Supply Company was one of the largest sellers of soda and chemicals to the laundry trade.

The petitioner at that time owned a number of patents and had patent applications pending. Its products were based fundamentally on patents granted to A. C. Austin, from whom, on some date not shown, they were purchased by G. A. Braun, A. R. Braun, P. N. Braun, and Mrs. S. J. Braun. The patents were five in number, the first having been issued on July 10, 1917, and the last on September 28, 1920. The petitioner operated under these patents on an unwritten royalty agreement with the Brauns providing for the payment to them of 3 per 1951 U.S. Tax Ct. LEXIS 113">*117 cent of all sales. Under this royalty agreement, the petitioner for the years 1922 to 1925, inclusive, paid the Brauns royalties as follows:

Under an agreement dated September 12, 1925, to pay royalties to C. O. Reeps, an inventor, G. A. Braun, A. R. Braun, and P. N. Braun acquired the rights of Reeps to certain patents and applications for patents. The patents and applications covered cabinets, apparatus for handling articles, and a "laundry price chart," all comprising a system of laundry operation. The agreement was to have a minimum term measured by the unexpired life of a patent issued on November 26, 1918, and a maximum life measured by the life of a patent, if and when granted, under an application filed April 18, 1925. The Brauns were to pay Reeps a royalty of $ 12.50 per cabinet or equivalent structrue manufactured by or for them, or sold by or for them. A minimum annual royalty of $ 1,250 was provided. Under an agreement with the Brauns, the petitioner assumed their obligations to Reeps, including the obligation to employ him at a salary of $ 15,0001951 U.S. Tax Ct. LEXIS 113">*118 per year.

17 T.C. 171">*174 On April 17, 1925, the petitioner entered into an employment and royalty agreement with Ernest O. Davis. The agreement was to run for 1 year from May 15, 1925, and provided that the employment should be in the nature of designing new machines or new mechanisms and devices to be manufactured by the petitioner. All machines, mechanisms and improvements which Davis might invent or devise pertinent to petitioner's products were to be assigned by him to the petitioner. He was to receive a salary of $ 5,000 a year, payable monthly, and, in addition, a royalty of 1 per cent of the selling price of each mechanism, device, or improvement devised by him while in the employ of petitioner, or embodied in any of its products, or sold as a separate article. The royalty payments were to be made for a period of 5 years after the petitioner should begin to market such article and were to be payable whether or not Davis remained in the employ of the petitioner after the termination of the 1-year period, and a minimum annual royalty of $ 2,500 was guaranteed.

At February 18, 1926, the only active patents upon which royalties were being paid by the petitioner were the Reeps and1951 U.S. Tax Ct. LEXIS 113">*119 Austin patents.

Thirteen and one-half acres of land adjacent to that owned by the petitioner were owned personally by S. J. Braun. Part or all of this property would be required by the petitioner in the event of any large expansion of its manufacturing facilities.

Under date of February 3, 1926, the members of the Braun family and National Chemical entered into an agreement with Ford, Bacon & Davis, Inc., engineers, of New York City, looking to reorganization of the petitioner. On March 25, 1926, the agreement of February 3 was amended. By the agreement, as amended, the Brauns and National Chemical agreed to amend petitioner's charter so as to change its authorized capital from the above-described $ 10 par value common stock and $ 100 par value preferred stock to 70,000 shares of Class A Common stock and 130,000 shares of Class B Common stock, both without nominal or par value, or to organize a new corporation with the same authorized capital for the purpose of acquiring the business and assets of the petitioner. The Class A and Class B shares were to have equal rights with respect to dividends and otherwise, except that (1) Class B shares were to have no voting power, except 1951 U.S. Tax Ct. LEXIS 113">*120 as to the increase or decrease of the amount of authorized Class B stock and with regard to the sale of property, rights and franchises of the corporation as an entirety; (2) in the case of a stock dividend, the dividend on both Class A and Class B stock was to be in Class B stock; and (3) in case of an increase in the authorized stock, the right to subscribe for additional Class A stock was to be vested solely in the holders of Class A stock, but the right to subscribe to additional Class B stock was to be vested ratably in the holders of Class B and Class A stock.

17 T.C. 171">*175 The Brauns and National Chemical were to cause to be called, surrendered or cancelled all of the petitioner's current issue of capital stock, both common and preferred, and were to cause to be transferred to petitioner the above-described land belonging to S. J. Braun. They were also to cause to be transferred to the petitioner all patents, licenses and rights relating to any article then manufactured by the company, or to any similar or related article which might be manufactured, which were then owned or controlled by them, or any of them. In return for the stock to be called, surrendered, or cancelled, and1951 U.S. Tax Ct. LEXIS 113">*121 the land, patents, and patent rights to be transferred to the petitioner by or at the instigation of the Brauns and National Chemical, the petitioner was to issue 40,000 shares of its new Class A Common stock and 30,000 shares of its new Class B Common stock. Ford, Bacon & Davis, Inc., was to purchase or cause to be purchased the remaining 30,000 shares of Class A stock, and 40,000 shares of the Class B stock, and to pay therefor the sum of $ 1,400,000.

The agreement further provided that the parties should deposit the entire 70,000 shares of Class A Common stock with a New York trust company under a voting agreement, for a period of 5 years. There were to be five voting trustees, two of whom were to be S. J. Braun and G. A. Braun; one was to be Fred R. Ford, of Ford, Bacon & Davis, Inc.; another, Walter H. Lippincott, selected by Bioren & Company, to which Ford, Bacon & Davis, Inc., had agreed to sell one-half of the 30,000 shares of Class A stock which it was to acquire; and the fifth trustee was to be Stewart F. Hancock, the attorney for petitioner, whose successor was to be selected by the joint vote of the other four trustees, and was to be a citizen of Syracuse, New York.

1951 U.S. Tax Ct. LEXIS 113">*122 The Brauns and National Chemical Company agreed that for a period of one year from April 1, 1926, they would hold and not sell, except through Ford, Bacon & Davis, Inc., the 30,000 shares of Class B stock to be assigned to them, and upon request, to extend that agreement for a further period of 6 months, upon the understanding, however, that they might sell up to 5,000 shares at not less than $ 30 per share to persons agreeing to hold the stock subject to the agreement, and that they would, in case of violation, protect the market at $ 30; that they might sell up to 3,000 such shares to employees; that they would grant an option to Ford, Bacon & Davis, Inc., to purchase at any time up to April 1, 1927, 10,000 shares of Class B stock at $ 30 per share and would not sell any part of the 40,000 shares of Class A stock to be received by them without first giving Ford, Bacon & Davis, Inc., a reasonable opportunity to purchase such stock from them at the same price and upon the same terms at which it could be sold to others.

At the outset, the directors of the corporation were to be nine in number, the Brauns having the right to nominate five and Ford, Bacon & Davis, Inc., the right to 1951 U.S. Tax Ct. LEXIS 113">*123 nominate four.

17 T.C. 171">*176 The forms of all papers and documents involved were to be subject to the approval of Charles E. Hotchkiss, representing Ford, Bacon & Davis, Inc., and Stewart F. Hancock, representing the Brauns and National Chemical.

It was understood that the petitioner would desire to call upon Ford, Bacon & Davis, Inc., "for assistance in its development and operations to such extent and upon such compensation" as might be mutually agreed upon.

Ford, Bacon & Davis, Inc., was to make a study and survey of the petitioner's business, operations, and finances, and in case it was not satisfied with its findings as to the condition of the company and its prospects and should not, for that or any other reason, make payment of the $ 1,400,000 for the Class A and Class B stock on or before April 1, 1926, or other date agreed upon, the agreement was to be void and without obligation of either party to the other.

It was also agreed and understood that for the purpose of retiring at $ 110 per share the approximately $ 68,000 of preferred stock owned outside the Braun family and National Chemical Company, "or Knecht Gottlieb," the Brauns and National Chemical were to be permitted to1951 U.S. Tax Ct. LEXIS 113">*124 use the net earnings of the petitioner from January 1, 1926, to the date on which Ford, Bacon & Davis, Inc., should make its purchase of Class A and Class B stock.

Upon examination into the affairs of the petitioner, Ford, Bacon & Davis, Inc., found the condition of petitioner to be such that it agreed to proceed with the plan, the plan decided upon being that of continuing the petitioner and changing its authorized capital stock, rather than that of organizing a new corporation to acquire the petitioner's assets and business.

At a special meeting, held on April 9, 1926, the petitioner's stockholders adopted a resolution reciting that its authorized capital stock was $ 550,000, divided into 15,000 shares of common stock, having a $ 10 par value, and 4,000 shares of preferred stock, having a par value of $ 100 per share; and further, that of the common stock, 14,089 shares were outstanding. Also, that it was "considered desirable and for the best interests of the corporation and its stockholders to change all of the previously authorized number of shares with par value issued or unissued into an increased number of shares without par value and to classify the said increased number1951 U.S. Tax Ct. LEXIS 113">*125 of shares without par value." It was then resolved that the previously authorized shares "be changed into an increased number of shares without par value, to wit, 200,000 shares without par value." And it was further resolved "that said 200,000 shares without par value shall be classified so that 70,000 shares shall be Class A Common stock and 130,000 shares shall be of Class B Common stock," and that the designations, preferences, privileges and 17 T.C. 171">*177 voting powers be as outlined in our findings above. The rates at which new Class A and Class B Common shares were to be issued for the old common stock were specified. It was then:

Resolved that the capital of the corporation shall be at least equal to the sum of the aggregate par value of all issued shares having par value, plus the aggregate amount of consideration received by the corporation for the issuance of shares without par value, plus such amounts as, from time to time by resolution of the Board of Directors, may be transferred thereto, and be it further

Resolved that the authorized shares without par value that are not to be substituted for previously outstanding shares may be issued and sold from time to time for such1951 U.S. Tax Ct. LEXIS 113">*126 consideration as the Board of Directors may, from time to time, fix; and authority is hereby conferred on the Board of Directors so to fix the consideration, * * *

No provision was made at the stockholders' meeting of April 9, 1926, for the issue of Class A and Class B shares for the outstanding preferred stock. But at a special meeting of the board of directors, held on April 13, 1926, a letter was presented, signed by S. J. Braun, Sophie Braun, G. A. Braun, National Chemical, A. R. Braun, P. N. Braun, and Priscilla E. Freiberger, proposing that in payment of $ 234,300 for redemption of 2,343 shares of preferred stock owned by them, they "purchase" 11,715 shares of Class B Common stock. A resolution was adopted, accepting the proposal and authorizing the issuance of the 11,715 shares of Class B stock, pursuant to the offer made.

At the same meeting, S. J. Braun submitted an offer to accept in full payment for the 13 1/2 acres of land adjacent to the property of the petitioner, 3,375 shares of Class B Common stock. It was reported at the meeting that the land had been appraised by the Syracuse Realty Board appraiser and by independent real estate dealers and that they had reported1951 U.S. Tax Ct. LEXIS 113">*127 that the property was worth $ 67,500. By resolution adopted, the offer of S. J. Braun was accepted.

On April 12, 1926, S. J. Braun, as president of National Chemical Company, signed a document reciting that for and in consideration of one dollar and other good and valuable considerations, National Chemical sold, assigned and transferred to petitioner "its right to use the trade name 'Prosperity' in connection with the marketing of machinery" and quitclaimed any and all rights it might have in the word "Prosperity" "as a trade mark for machines, particularly garment and laundry machinery." The instrument also recited the release of any and all claims National Chemical might have against the petitioner for the past use of the trade name "Prosperity." At a special meeting of the petitioner's board of directors on April 13, 1926, the above assignment was by resolution adopted, "received and placed on file."

On April 8, 1926, a three-way contract between the petitioner, Ernest Davis, and the three Brauns, A. R., P. N., and G. A. Braun, was 17 T.C. 171">*178 executed. Under the contract, all prior agreements theretofore existing between the parties were terminated and superseded by the new agreement. 1951 U.S. Tax Ct. LEXIS 113">*128 By the new agreement, Davis relinquished his rights to royalties prescribed under any previous agreement. The petitioner agreed to hire Davis for a period of 5 years, at a salary of $ 8,500 a year, payable monthly. Except for the increased salary Davis was to receive and the fact that he would not receive royalties on subsequent inventions, the terms of his employment were substantially the same as before. The Brauns agreed to sell Davis 250 shares of Class B stock they were to receive in the reorganization of petitioner for $ 5,000, or $ 20 per share, payable $ 1,000 annually for 5 years, without interest. In the event Davis should die before the end of the 5-year period, the stock was to be delivered to his estate and any unpaid notes were to be cancelled. The Brauns also agreed that, upon request from Davis, they would purchase the said 250 shares of Class B stock at $ 30 per share at any time during the 5-year period and after 18 months from the date of the agreement. The Brauns were to hold the stock as collateral security for the payment of the $ 5,000, but in the event Davis should become permanently disabled before the end of the 5-year period, they were to deliver 1951 U.S. Tax Ct. LEXIS 113">*129 the stock to him without further payment. In the event the employment contract should be broken by the petitioner and the salary payable to Davis thereunder should be discontinued, the Brauns agreed to deliver the stock to Davis at the end of the 5-year period, without further payment. Davis agreed not to sell the stock within 18 months from the date of the contract. By resolution adopted by the petitioner's board of directors on April 13, 1926, the contract between the petitioner, the Brauns, and Davis was approved, ratified, and confirmed.

On April 8, 1926, C. O. Reeps entered into two contracts: one with G. A. Braun, A. R. Braun, and P. N. Braun, and another with the three Brauns mentioned and the petitioner. Under the contract with the Brauns, Reeps agreed to cancel his prior agreement of September 12, 1925, and to the discontinuance of royalty payments or other payments thereunder. The Brauns agreed to sell to Reeps from the Class B stock they were to receive in the reorganization of petitioner 1,000 shares for $ 20,000. Reeps was to give his promissory note, payable in 5 years, with interest. In the event of his death before the expiration of the 5-year period, the Brauns1951 U.S. Tax Ct. LEXIS 113">*130 were to deliver the stock to his estate without further payment. In the other contract, the petitioner agreed to employ Reeps for a period of 5 years, at a salary of $ 15,000 a year. The Brauns agreed to finance a selling agency of laundry machinery in Chicago, Illinois, up to $ 20,000, and to appoint Reeps as general manager for a period of 5 years, Reeps to have one-quarter interest therein. Reeps agreed to act as general manager of the selling agency and to accept one-quarter of the net 17 T.C. 171">*179 profits as his compensation. The intent of the parties was declared to be that approximately one-half of Reeps' time would be required in the Chicago territory in the interest of the petitioner. Under date of April 12, 1926, the three Brauns executed a formal assignment to the petitioner of all their rights and interest in the Reeps patents and applications for patents. On April 13, 1926, the petitioner's board of directors, being advised of the agreement between the Brauns and Reeps and of the formal assignment to it by the Brauns of the Reeps patents and applications for patents, by resolution adopted, approved, ratified and confirmed the agreement of April 8, 1926, between petitioner, 1951 U.S. Tax Ct. LEXIS 113">*131 the Brauns, and Reeps.

By formal assignments dated April 12, 1926, P. N. Braun, Mrs. S. J. Braun, G. A. Braun, and A. R. Braun transferred and assigned the Austin patents and all rights therein to the petitioner.

S. J. Braun acquired the 25 shares of petitioner's outstanding common stock which was held by others than the members of the Braun family and National Chemical. Pursuant to the agreement to reorganize petitioner, the Brauns and National Chemical then surrendered or caused to be surrendered for cancellation all of the capital stock of the petitioner, both common and preferred.

By resolution adopted at a special meeting of the petitioner's board of directors, held on April 13, 1926, the offer of Ford, Bacon & Davis, Inc., to subscribe for 40,000 shares of Class B Common stock and 30,000 shares of Class A Common stock and to pay therefor $ 1,400,000 was accepted and approved, and the proper officers were directed to execute and issue certificates for the said shares to Ford, Bacon & Davis, Inc., or its nominees, upon receipt of the $ 1,400,000. Prior to the issuance of the stock, Ford, Bacon & Davis, Inc., had agreed to sell 15,000 shares, or one half, of the Class A Common1951 U.S. Tax Ct. LEXIS 113">*132 stock which it was to acquire. The 15,000 shares of Class A stock were issued to persons designated by Bioren & Company. Ford, Bacon & Davis, Inc., received $ 29 per share for the stock. It also sold to Bioren & Company 15,000 shares of Class B stock at the same price.

Pursuant to the understanding between the Brauns and Ford, Bacon & Davis, Inc., Schuyler C. Stivers and Frank W. Potts were elected secretary, and treasurer and assistant secretary, respectively.

Of the 40,000 shares of Class A stock and 30,000 shares of Class B stock which were to be issued by the petitioner upon the surrender for cancellation of its old capital stock and for the real estate above mentioned and the patents, licenses and rights as described in the agreement of February 3, 1926, which were to be transferred and assigned to the petitioner, 1,000 shares of Class B stock were issued directly to C. O. Reeps, and 250 shares to Ernest O. Davis, pursuant to the agreements above described. 250 shares of Class B stock were issued to C. K. 17 T.C. 171">*180 Cimiarik, the petitioner's plant manager, under an agreement between him and the Brauns, whereby he was to pay $ 20 per share for the stock. 2,000 shares of Class1951 U.S. Tax Ct. LEXIS 113">*133 B stock were issued to Stewart F. Hancock, 1,000 shares of which were acquired by him from National Chemical at $ 22 per share. 500 shares of Class B stock were issued to W. J. Bourke, who had purchased them from National Chemical at $ 25 per share. 500 shares of Class B stock were issued directly to E. T. Eshelman, a Syracuse banker, who purchased them from National Chemical for $ 30 per share. 250 shares of Class B stock were issued directly to M. V. White, a Syracuse banker, who purchased them from National Chemical at $ 30 per share. 100 shares of the Class B stock were issued directly to C. L. Baxter, a Syracuse insurance agent, who purchased them from the National Chemical at $ 30 per share. The entire 40,000 shares of Class A stock and the remainder of the 30,000 shares of Class B stock were issued to the Brauns and National Chemical.

On April 15, 1926, the Brauns, National Chemical, and Ford, Bacon & Davis, Inc., entered into a formal voting trust agreement, pursuant to the terms of the agreement of February 3, 1926, whereunder the 70,000 shares of Class A Common stock were deposited with the trustees and voting trust certificates were issued therefor. These certificates1951 U.S. Tax Ct. LEXIS 113">*134 provided that the holders thereof were to receive the dividends which might thereafter be declared and paid upon the stock deposited. They placed the voting powers of the stock in the voting trustees.

Ford, Bacon & Davis, Inc., prior to issuance of the stock certificates, sold 10,000 shares of Class B stock to Earl G. Childs, a Syracuse broker, at $ 30 per share. It similarly sold 1,000 shares and 500 shares, respectively, of Class B stock to Ernest I. White and Horace White, of Syracuse, at $ 30 per share.

On April 15, 1926, immediately after the recapitalization of the petitioner, Potts, the newly elected treasurer, submitted a report giving his analysis of the intangibles received by the company as a part of the recapitalization and recommended that the said intangibles be set up on the books by a credit to surplus in the amount of $ 1,000,000.

The basis to Reeps for his rights in patents and patent applications which were transferred to the petitioner in connection with the reorganization was $ 2,000. Similarly, the basis to the members of the Braun family for the Austin patents was $ 10,000.

In reporting their income for 1926, neither the Brauns nor National Chemical Company1951 U.S. Tax Ct. LEXIS 113">*135 treated the recapitalization transaction as a transaction which would give rise to recognizable taxable gain.

The petitioner in reporting its equity invested capital in its excess profits tax returns for the years 1941 and 1942, included $ 2,800,000 "as representing the cash, old stock and land, and $ 1,000,000 as representing 17 T.C. 171">*181 the intangibles and good will." The respondent in his determination of the deficiencies herein eliminated from equity invested capital the $ 1,000,000 claimed as representing intangibles and good will.

OPINION.

Briefly stated, the issue is as to the amount to be included in equity invested capital, under section 718 (a) (2) of the Internal Revenue Code, ¹ for the property paid in for stock in the 1926 recapitalization. It is there provided that property paid in for stock, as paid-in surplus, or as a contribution to capital, shall be included in equity invested capital "in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange." The parties are in accord to the effect that the unadjusted basis for the property paid in is to be determined under the provisions of section 113 (a) (7) of the Code, ² and is the cost of the1951 U.S. Tax Ct. LEXIS 113">*136 property to the petitioner, unless the property was acquired by it "in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them," in which case the basis for the property is the same as it was in the hands of the transferors. They are also in accord that the 1926 recapitalization was a reorganization within the meaning of the statute, wherein a reorganization is defined to mean "a recapitalization."

1951 U.S. Tax Ct. LEXIS 113">*137 In its return the petitioner, in reporting equity invested capital, included $ 2,800,000 "as representing the cash, old stock and land." The patents, applications for patents, and rights therein were included 17 T.C. 171">*182 in an item of $ 1,000,000 "as representing the intangibles and good will." The respondent did not disturb the item of $ 2,800,000, but disallowed or eliminated the $ 1,000,000 item in its entirety. Abandoning the method by which it determined and reported equity invested capital in making its return, the petitioner now claims that the 40,000 shares of Class A stock and the 30,000 shares of Class B stock issued to the Brauns, National Chemical, Reeps, and Davis, or their nominees, were in their entirety issued for property paid in as of the date of issue; that the fair market value of those shares at the date of issue was $ 30 per share, or a total of $ 2,100,000; that such fair market value represented the cost of the property paid in for the stock so issued; that on the facts and under section 113 (a), such cost is the unadjusted basis of the property paid in, the amount of which is includible therefor in equity invested capital, under section 718 (a) (2); and that1951 U.S. Tax Ct. LEXIS 113">*138 the $ 2,100,000, plus the $ 1,400,000 in cash paid in for stock by Ford, Bacon & Davis, Inc., and its associates, or $ 3,500,000, instead of the $ 3,800,000 claimed on its return, represents the amount includible in equity invested capital as capital and property paid in for stock. There is, of course, no question here as to the inclusion in equity invested capital of the $ 1,400,000 in cash paid in for stock by Ford, Bacon & Davis, Inc., and its associates. ³

The short answer to the petitioner's present claim is that the only property paid in in the 1926 recapitalization as capital or added capital which had any basis to it, under section 1131951 U.S. Tax Ct. LEXIS 113">*139 (a) (7), supra, or any other section of the Code, was the real estate and the patents, applications for patents and rights comparable in character. While the old shares did constitute property in the hands of the Brauns and National Chemical, by whom they were paid in, so to speak, for new shares, the petitioner in so far as the old shares were concerned had no newly received or acquired property whatever in its assets after the exchange. The old shares ceased to exist and the only change was that after their surrender and the new shares were issued, the petitioner's capital stock liability was represented by the 40,000 shares of Class A stock and the 30,000 shares of Class B stock, rather than the old shares of common and preferred stock. In short, after the exchange the petitioner in so far as the old shares were concerned had added to its assets zero property and there could not therefore be any amount to represent the unadjusted basis of zero property, as would have to have been the case if any additions were to be made 17 T.C. 171">*183 to equity invested capital, under section 718 (a) (2), supra. See and compare Crean Brothers, Inc., 15 T.C. 889.1951 U.S. Tax Ct. LEXIS 113">*140

Approaching the problem from another angle, it is evident that but for the land, patents, applications for patents and rights, the property of the petitioner having a basis for gain or loss was exactly the same after the recapitalization as it was before. Such being the case, there is no way, so far as we can see, and the petitioner has not undertaken to demonstrate a way, by which such a claim of some amount to represent a basis for the old stock paid in could rest upon anything other than the property and assets which it already had. That such a theory is without merit is at once apparent. The petitioner was not a new or different corporation, and we know of no provision of the Code nor any plausible theory, in the case of the recapitalization of a corporation, which would in any way require an adjustment or change in the basis to the petitioner of properties which it already owned at the time of such recapitalization. Most obvious, however, is the fact that the assets already owned were not paid in for the new shares issued in the recapitalization.

As to the real estate formerly belonging to S. J. Braun, we have no problem. So far as appears, that real estate was included 1951 U.S. Tax Ct. LEXIS 113">*141 in the equity invested capital item of $ 2,800,000 reported by the petitioner "as representing the cash, old stock and land," and as to that item the respondent in his determination of deficiency made no change. Accordingly, our problem is narrowed to that of determining the amount equal to the petitioner's unadjusted basis for determining loss upon sale or exchange of the patents, applications for patents and rights. As stated above, the parties are agreed that the unadjusted basis is to be determined under section 113 (a) (7), supra, and was their cost to petitioner, unless it be found that immediately after their transfer to the petitioner "an interest or control in such property of 50 per centum or more remained in the same persons or any of them," in which case, their unadjusted basis was the same as it was in the hands of the transferors.

The facts being as they are, it is our conclusion that an interest or control in such property of 50 per centum did remain in the same persons or any of them. Except as to voting rights, the Class A shares and Class B shares were in all respects equal and the beneficial ownership of the corporation and its properties after the issue of1951 U.S. Tax Ct. LEXIS 113">*142 the new stock was actually the same for a share of Class B stock as it was for a share of Class A stock. Lumping the two classes of stock together, the beneficial interest immediately after the transfer of the property and the payment of the $ 1,400,000 was 50 per centum in Ford, Bacon & Davis, Inc., and its associates, and 50 per centum in the Brauns, National Chemical Company, Reeps, and Davis. The petitioner would 17 T.C. 171">*184 have us say, however, that as to the patent rights of Reeps and Davis the transactions in which they participated looking to the transfer thereof to the petitioner were separate and apart from the reorganization, to the end that though the said patents and patent rights were acquired by the petitioner "in connection with" the reorganization, it be held that the Brauns, and not Reeps and Davis, were the transferors. As to the acquisition of the 1,250 shares of Class B stock by Reeps and Davis, the petitioner, on the other hand, takes exactly the contrary position and argues that those transactions were part and parcel of the reorganization, to the end that the Brauns and National Chemical at no time immediately or at any other time after the transfer could1951 U.S. Tax Ct. LEXIS 113">*143 be said to have had an interest of 50 per centum in the property transferred since the 1,250 shares acquired by Reeps and Davis would have to be included to make up the interest of 50 per centum. The facts show that the transactions whereby the patents, applications for patents and rights were transferred to the petitioner, were a part of and were essential and prerequisite to the effecting of the reorganization. Even though in some respects they have the appearance of being separate transactions, the facts show that they were in truth interrelated and not susceptible of being broken down into separate and distinct transactions. They were three-way transactions with considerations flowing to and from all of the parties, to the end that the petitioner, as a part of the consideration for the issuance of the 40,000 shares of Class A stock and the 30,000 shares of Class B stock should receive any and all rights and interest which Reeps, Davis and the Brauns had in the patents and applications for patents; that Reeps and Davis were to receive the stock set over and contracted for and the other accompanying considerations; and that the Brauns and National Chemical should have all of 1951 U.S. Tax Ct. LEXIS 113">*144 the 40,000 shares of Class A stock and the remaining 28,850 shares of Class B stock. The fact that some side considerations might have passed between Reeps, Davis, and the Brauns is not, in our opinion, of any moment for the purposes here. The fact is that before the transactions in question, which were part and parcel of the reorganization, the Brauns, Reeps, and Davis had and owned rights and interests in the patents and applications for patents, and after the transactions, the patents, applications for patents and all rights therein belonged to the petitioner, while the Brauns, National Chemical, Reeps, and Davis had an interest of 50 per centum in them through the ownership of the 40,000 shares of Class A stock and the 30,000 shares of Class B stock which had been acquired by them. See and compare Independent Oil Co., 6 T.C. 195; Muskegon Motor Specialties Co., 45 B. T. A. 551, affd. 134 F.2d 904; Bankers Farm Mortgage Co., 1 T.C. 406, affd. 145 F.2d 772; Hazeltine Corporation, 32 B. T. A. 110, affd. 1951 U.S. Tax Ct. LEXIS 113">*145 89 F.2d 513.

17 T.C. 171">*185 We do not understand that for the purposes here any significance is attached to the fact that other sales of Class B stock were made by the Brauns and National Chemical, pending completion of the reorganization, and that the Class B shares so sold were issued directly to the purchasers. In any event, however, those transactions were independent of and had no relation to the reorganization and did not deprive the Brauns, National Chemical, Reeps, and Davis of the 50 per centum interest immediately after the reorganization, as determined above. Samuel Insul, Jr., 32 B. T. A. 47; Evans Products Co., 29 B. T. A. 992.

Having concluded that immediately after the transfers an interest of 50 per centum in the property remained in the same persons or any of them, it becomes unnecessary to determine the troublesome question here presented as to control, the determination of which question would require consideration of the effect of the differences between the voting rights of the Class A and the Class B shares of stock; the interposition, at or shortly after the reorganization, 1951 U.S. Tax Ct. LEXIS 113">*146 of the voting trust, wherein two of the voting trustees were named by the Brauns, two by Ford, Bacon & Davis, Inc., and its associates, and the fifth was Hancock, attorney for the petitioner, who had, in some phases of the transactions by which the reorganization was effected, been named as representing the Brauns; also the effect, if any, of the fact that at the outset the petitioner's board of directors was to be composed of nine members, five of whom were to be named by the Brauns and National Chemical, and four by Ford, Bacon & Davis, Inc., and its associates.

Except for such conclusions as may be drawn from the facts showing the nature and character of the properties, the use to which they were put and the part they were playing in the petitioner's business operations at the time of the 1926 recapitalization, there are no facts on which one might conjecture or speculate as to the basis of the transferors for the transferred properties. Unless, therefore, the facts are such that some allowance must be made under the doctrine of Cohan v. Commissioner, 39 F.2d 540, we must resolve the question of transferors' basis against petitioner for failure1951 U.S. Tax Ct. LEXIS 113">*147 of proof.

All of the so-called Reeps patents, except one, had been issued to Reeps, and presumably covered inventions by Reeps. The patent excepted was issued on November 26, 1918, to Henry Rousset. Whether or not the patent covered an invention of Rousset, Reeps, or someone else, we do not know. At any rate, it had come into Reeps' possession in some unknown manner and for an undisclosed consideration. The other patents involved had been issued to Reeps in 1923 and 1925. He also had some applications for patents pending. His original contract with the Brauns for the use of the patents was dated September 17 T.C. 171">*186 12, 1925, and carried an agreement to pay royalties of $ 12.50 per cabinet or equivalent structure manufactured or sold by or for the Brauns -- in reality, however, by the petitioner, which had assumed the Brauns' contract. A minimum annual royalty of $ 1,250 was provided. The record contains no evidence, either directly or indirectly, as to Reeps' basis for the said patents and patent applications. That they were of some value in the manufacture of laundry machinery and equipment, is, we think, apparent from the evidence. Except for the Rousset patent, the patents1951 U.S. Tax Ct. LEXIS 113">*148 were issued to Reeps within two years or less prior to his licensing agreement to the Brauns. We think it reasonable to assume that they did have some cost to him. As to the interest of the Brauns in the patents, those interests were, so far as appears, immediately set over and assigned to the petitioner, and there is no way of knowing that to the Brauns they had any cost or other basis other than the royalty obligation which had been assumed by the petitioner. Applying Cohan v. Commissioner, supra, and bearing heavily against the petitioner, whose burden it was to produce the proof of Reeps' basis for the patents and patent applications, and of any interest therein owned by the Brauns, it is our conclusion, and we have so found, that their basis to the transferors was $ 2,000.

As to Davis, we have even less evidence. So far as appears, any patents which had been issued covering creations by Davis or any creations covered by pending applications for patents, had been issued to and were pending in the name of the petitioner. It may be assumed, we think, that all of his work with respect to any patents or patent applications was done as an employee1951 U.S. Tax Ct. LEXIS 113">*149 of the petitioner, for which he had been receiving a salary of $ 5,000 a year. Presumably, the petitioner bore all of the costs of his work. It is to be noted also that his contract or agreement covering his work was directly with the petitioner, and not with or through the Brauns. In that situation, we are unable to conclude on the evidence before us that the patents and patent applications of Davis had any cost or other basis to him.

The Austin patents belonged to members of the Braun family. They had been acquired by purchase but the date of their purchase is not known, neither do we know what was paid for them. They had been used for a number of years by the petitioner under an unwritten royalty agreement equal to 3 per cent of all sales, and for a period of 4 years preceding the recapitalization, the average annual royalty payment was $ 27,661.75. That fact, plus the fact that the petitioner's products were based fundamentally on these patents, gives some indication that they were of substantial value at the time of the recapitalization. It does not follow, however, that the amount of the royalties paid were necessarily an indication of the quantum of their value. The1951 U.S. Tax Ct. LEXIS 113">*150 February 3 agreement between Ford, Bacon & Davis, Inc., and the Brauns 17 T.C. 171">*187 shows that Ford, Bacon & Davis, Inc., thought that the royalty contract was as to the petitioner burdensome and disadvantageous. The elimination of that contract was one of the conditions made by Ford, Bacon & Davis, Inc., to its participation in the recapitalization. We do not know anything about the patents at the time they were acquired by the Brauns, and, as stated, there is no evidence whatever as to their purchase price. There is no showing that at the time of the purchase their importance or value had to any extent been established by their use. Presumably, they were acquired by the Brauns by outright purchase since in contrast with the agreement with Reeps there was no agreement by the Brauns to pay royalties over to anyone. On the basis of the facts which we do have, it is our conclusion that they must have had some cost to the Brauns. We are unable, however, to say that at the time of their purchase by the Brauns they could have commanded, or did command, a price which would even approach that which they might have commanded at a later date. So far as we know, they were at the time of1951 U.S. Tax Ct. LEXIS 113">*151 purchase unproven and wholly untried. Applying the doctrine of Cohan v. Commissioner, supra, and bearing heavily on the petitioner, whose burden it was to produce the evidence, it is our conclusion, and we have so found, that the basis of the patents in the hands of the Brauns, the transferors, was $ 10,000.

As for the trade name "Prosperity," the evidence is not sufficient to indicate the substance or significance of the assignment of the trade name to the petitioner by National Chemical. Apparently the trade name "Prosperity" in so far as it related to laundry machinery had originated with National Chemical and had been used by the petitioner during all, or a portion, of its existence. The document executed by S. J. Braun, as president of National Chemical, on April 12, 1926, is to all appearances a quitclaim deed. Whatever the scope of the right or rights assigned by the document, there is nothing whatever in the record to indicate that to National Chemical they had any basis for determining loss to it upon their sale or exchange.

Decision will be entered under Rule 50.