18 T.C. 1255">*1255 The respondent determined deficiencies in excess profits taxes as follows:

The sole issue remaining, after other issues raised by the pleadings were agreed to be disposed of under Rule 50, is whether the petitioner is entitled to include the value of property received for its common stock for the purpose of determining its equity invested capital.

FINDINGS OF FACT.

The facts stipulated are so found.

Bard-Parker Company, Inc. (hereinafter referred to as the "old company" or "old corporation") was organized under the laws of New York in 1916. Its authorized capital stock of $ 10,000 consisted of 80 shares of 7 per cent nonvoting preferred stock of $ 50 par value and 120 shares of $ 50 par value common stock. Twenty shares of common stock were issued for cash; the remainder were issued for patents1952 U.S. Tax Ct. LEXIS 85">*87 and patent applications upon detachable-blade surgical knives invented and owned by Morgan Parker. The preferred stock was donated back to the corporation where it was held as treasury stock. Morgan Parker became the sole stockholder of the old company in 1923, and in 1925 he sold 30 shares of common stock to James White, retaining for himself the remaining 90 shares. An agreement, hereinafter referred to as the "Syndicate Agreement" was entered into on July 28, 1927, between Morgan Parker, the old company and other persons referred 18 T.C. 1255">*1256 to as "subscribers." A plan was formulated whereby detachable-blade scissors invented by Morgan Parker would be produced in a limited quantity by the old company which had been engaged in the manufacture and sale of detachable knife handles and blades to determine the best method of production and the probable commercial market. It was contemplated that a corporation would be organized to manufacture the scissors. The stock in the new corporation was to be issued for the scissors patents except for the required number of shares issued for cash for organizational purposes. All the preferred and 20 per cent of the common were to be donated1952 U.S. Tax Ct. LEXIS 85">*88 back to the treasury. Morgan Parker was to receive one-fourth of the remaining 80 per cent of common stock, a similar portion was to be given to the subscribers, and one-half to the old corporation. Morgan Parker agreed to convey to the prospective corporation all of the scissors patents and improvements thereon. The old company agreed to authorize the issuance of 7 per cent preferred stock of $ 100 par value to be sold to the subscribers and to use the proceeds in a special fund for the development of the scissors. The subscribers were given the election of converting their preferred shares into stock of the prospective corporation. The certificate of incorporation of the old company was amended to allow authorization of $ 50,000 of 7 per cent nonvoting preferred shares of $ 100 par value and to permit the old company to acquire stock in the contemplated corporation.

Subscriptions to the preferred stock of the old company, aggregating $ 50,000, were made by the subscribers, persons not previously interested in the old corporation. In 1928, J. W. B. Ladd was employed by the old company as a mechanical engineer and he engaged in inventive work upon the scissors resulting in improving1952 U.S. Tax Ct. LEXIS 85">*89 patents issued to Morgan Parker and himself. In March 1930 the development work had reached the stage where manufacturing could begin, but it was decided that the initial commercial venture would be in the small field of surgical scissors. It appeared advantageous commercially and economically to have the new corporation market the scissors under the name of the old corporation.

Accordingly, the stockholders of the old corporation, at a special meeting, expressed their desire to dissolve the old corporation and to sell the assets and distribute the proceeds. They passed resolutions on March 12, 1930, consenting to the formation of a new company of the same name and the dissolution of the old company, 15 days thereafter, as provided by section 22 of the Stock Corporation Law of New York. It was also resolved to have the directors sell the assets, good will, and corporate name of the old company to the new corporation. Preferred stock of the new corporation was to be received for the value of the physical assets and net worth, and 18 T.C. 1255">*1257 common stock of the new corporation aggregating a par value of $ 750,000 was to be taken in payment for all other property including good 1952 U.S. Tax Ct. LEXIS 85">*90 will and the right to use the corporate name. The new corporation, Bard-Parker Company, Inc. (hereinafter referred to as the petitioner), was incorporated in New York on April 8, 1930. The old company was automatically dissolved on April 24, 1930. The authorized capital stock of the new corporation was $ 1,950,000, consisting of 4,500 shares of $ 100 par value 7 per cent cumulative preferred and 150,000 shares of $ 10 par value common stock. The petitioner, through its directors, purchased the tangible assets of the old company from the liquidating directors of that corporation on April 28, 1930, for $ 209,300 par value preferred stock and the assumption of liabilities of $ 18,855.59. The intangible assets of the old company were purchased for $ 750,000 par value common stock of the petitioner. The memorandum of agreement states that the old company had been dissolved.

The liquidating directors of the old company listed the shareholders of that corporation and the number of preferred and common shares to be issued to each in payment of the tangible and intangible assets of the old company. The preferred shareholders of the old company received $ 50,000 par value in preferred1952 U.S. Tax Ct. LEXIS 85">*91 shares of the petitioner. The remaining $ 159,300 of the purchase price of the tangible assets was paid to the common stockholders of the old company in the ratio in which they owned stock of their corporation, 75 per cent or $ 119,475 par value to Morgan Parker and 25 per cent or $ 39,825 par value to James White. The common stock of the new corporation was issued in the same ratio, $ 562,500 par value to Parker and $ 187,500 par value to White.

On the same date the directors of the petitioner authorized the purchase of certain patents and applications, accepting an offer made by Harry B. Arden. These patents and applications purchased by the petitioner for $ 750,000 through Arden were owned by Morgan Parker. Arden, in completing the transaction, listed the persons to be issued the $ 750,000 par value of common stock in exchange for the patents. The reason for issuing the stock to others than the owner of the patent was said to be to induce those other persons to finance the syndicate. The subscribers to the $ 50,000 par value of the old company preferred stock were to receive 15,000 shares in this transaction. Morgan Parker was to receive 33,750 shares and James White was1952 U.S. Tax Ct. LEXIS 85">*92 to receive 11,250 shares. Frederic Bard, an attorney who acted for the syndicate, was to receive 14,750 shares as part of this transaction for the patents. Eugenia E. Ehnen, Frederic Bard's secretary, was to receive 250 shares. Frederic Bard retained only 4,000 shares of common stock, 750 shares being transferred to Morgan 18 T.C. 1255">*1258 Parker, 1,500 shares to J. W. B. Ladd, and 8,500 to the petitioner's treasury. Additional capital was obtained by petitioner through the installment sale for cash of $ 101,000 par value preferred stock principally to the original subscribers for preferred stock of the old corporation. Included in these sales were purchases by J. W. B. Ladd and the Crescent Manufacturing Company, who were not original subscribers. Gain or loss was not reported by petitioner or Morgan Parker from the transactions involving the purchase by petitioner of the old company's assets and Morgan Parker's patents.

J. W. B. Ladd received $ 50,000 par value in common stock of the petitioner for his services resulting in improvements to the detachable-blade scissors. An amendment of petitioner's charter reducing the authorized preferred stock from 4,500 to 4,000 $ 100 par value1952 U.S. Tax Ct. LEXIS 85">*93 shares and increasing the authorized common stock from 150,000 to 155,000 $ 10 par value shares, was made in order to make this distribution possible.

The Bard-Parker knives and blades were very successful in the surgical instrument field and by 1930 had excluded competition for that type of knife. Competition later developed but the petitioner successfully withstood the effects of this competition. The petitioner's detachable-blade scissors had advantages of economy and greater utility over other types of scissors. Other patents held by the companies during this period had not proved successful upon commercial exploitation.

The balance sheets of the old company for the years 1925 through 1929 may be summarized as follows:

1952 U.S. Tax Ct. LEXIS 85">*94 Dividends and net profit to surplus for the same years are as follows:

The petitioner's excess profits tax returns for the years in question included in its invested capital the full par value of its common stock. The notice of deficiency reduced invested capital in the amount of $ 1,550,000.

18 T.C. 1255">*1259 OPINION.

Before proceeding to the principal issue we would first observe that petitioner's objection to the pleadings is not well founded. The rules of the Court do not require respondent to plead affirmatively in his answer, his reasons for disallowing the par value of petitioner's common stock as equity invested capital. Moreover, if, at the hearing or on brief a different reason is relied on than is found in the notice of deficiency or other communications, the petitioner is without basis for objection if surprise is disclaimed by the petitioner and if the facts relied upon are in the record. Standard Oil Co., 43 B. T. A. 973,1952 U.S. Tax Ct. LEXIS 85">*95 affd. 129 F.2d 363. The petitioner disavowed surprise at the hearing, and the facts upon which the respondent predicates his argument are of record.

It is petitioner's position that it is entitled to include in its equity invested capital under section 718 (a) (2) of the Internal Revenue Code, ¹ $ 1,550,000 as the value of property purchased by the issuance of its common stock of par value of that amount. Equity invested capital, under the terms of the statute, includes property previously paid in for stock in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. Section 718 (a) is concerned with money and property paid in. J. W. B. Ladd, the mechanical engineer who helped to improve and develop the scissors, received $ 50,000 par value common stock of the petitioner for his services. The services, however valuable, are neither money nor property nor is their value known. Upon this basis, therefore, no inclusion within equity invested capital is warranted in respect to Ladd's services since neither money nor property was paid in. Palomar Laundry, 7 T.C. 1300.

1952 U.S. Tax Ct. LEXIS 85">*96 The basis of property specified by section 718 (a) (2) is the cost of the property under the provisions of section 113 (a), I. R. C., ²1952 U.S. Tax Ct. LEXIS 85">*97 except 18 T.C. 1255">*1260 in the instances there specified. It is the respondent's contention that exceptions under section 113 (a) are applicable here. One argument is based upon the proposition that the transfer of assets to petitioner was an intercorporate exchange constituting a reorganization. The transfers to the petitioner occurred in 1930, and the provisions of the Revenue Act of 1928 are applicable thereto. Section 112 (i) (1) (B) of the Revenue Act of 1928 ³ defining a reorganization, is relied upon by respondent. If such a reorganization occurred, there is no recognition of gain or loss to the transferor under the provisions of section 112 (b) (4) of the Revenue Act of 1928. ⁴

The assets, good will, and corporate name of the old company were transferred for petitioner's stock on April 28, 1930. Immediately thereafter control of the new company was vested in the stockholders of the old company. One further element required to meet the definition of a reorganization under section 112 (i) (1) (B) is that 1952 U.S. Tax Ct. LEXIS 85">*98 the transfer must be made by a corporation. The petitioner argues that the transfer of assets could not be made on April 28, 1930, by the old corporation for it went out of existence on April 24, 1930, under the provisions of New York statutes. The exchange of assets for stock was carried out by the liquidating directors of the old corporation and the mere intervention of an agency between old and new corporation does not preclude a reorganization. Mark Kleeden, 38 B. T. A. 821. The liquidating directors in this instance were as much a conduit for the delivery of assets as were the stockholders in Richard H. Survaunt, 5 T.C. 665, affd. 162 F.2d 753. There can be little doubt that the stockholders of the old corporation wished to have the manufacture of knives and the new scissors carried on by the same interests under the same trade name. The principal reason for the entire transaction was the exploitation of the scissors patents. The dissolution of the old 18 T.C. 1255">*1261 company was but a step in the preconceived plan to bring about the manufacture and sale of the knives and new scissors under1952 U.S. Tax Ct. LEXIS 85">*99 the name of Bard-Parker. This would be accomplished by taking advantage of the provisions of section 22 of the Stock Corporation Law of New York. By this means the assets, good will, and corporate name of the old company could be retained by the petitioner. The scissors patents could also be obtained from Morgan Parker and exploited as an additional asset.

The parts of a reorganization must be considered as a whole rather than separately. Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179">315 U.S. 179. For this reason, the transfer of the old company's assets and good will must be deemed to have been made by the corporation within the meaning of section 112 (i) (1) (B) of the Revenue Act of 1928. The respondent must be sustained upon his contention that the transfer of the old corporation's assets for petitioner's stock constituted a reorganization and that the exchange was carried out in pursuance of the plan of reorganization. Applying the provisions of section 112 (b) (4) of the Revenue Act of 1928, no gain or loss is to be recognized on this transfer and the basis of the assets and good will of the old corporation to petitioner, under section1952 U.S. Tax Ct. LEXIS 85">*100 113 (a) (7), I. R. C., is the same as in the hands of the old corporation.

The separate transfer of the scissors patents from Morgan Parker to the petitioner corporation occurred at the same time as the reorganization. Morgan Parker, through Harry B. Arden, transferred the patents on the scissors to the petitioner for $ 750,000 par value common stock of the petitioner corporation. All the stock was not, however, transferred to Parker but was distributed to other persons and the petitioner's treasury. Morgan Parker received $ 345,000 par value common shares of the petitioner which constituted less than half the stock issued for the patents. The respondent contends that section 112 (b) (5) of the Revenue Act of 1928 ⁵ applies to this transaction, and that the situation is similar to that found in Clyde Bacon, Inc., 4 T.C. 1107. Section 113 (a) (8), I. R. C., ⁶1952 U.S. Tax Ct. LEXIS 85">*102 would then become applicable to 18 T.C. 1255">*1262 this acquisition of property and no gain or loss would be recognized under section 112 (b) (5). The provisions of section 112 (b) (5) require the transferor of the property to be in control ⁷ of the corporation immediately after the transaction. 1952 U.S. Tax Ct. LEXIS 85">*101 Morgan Parker, the owner of the patents transferred, did not possess the required 80 per cent ownership of stock in the petitioner to qualify under this provision. Following the reorganization and the transfer of patents to petitioner, Morgan Parker held $ 907,500 par value common stock of a total of $ 1,550,000, and he also held $ 119,475 par value preferred stock of a total of $ 209,300 par value preferred stock.

The respondent takes the alternative positions that either Parker received the petitioner's stock and directed issuance to the recipients, or, that the persons receiving the shares acquired an interest in them by the 1927 Syndicate Agreement, and the shares were issued for those interests. However, the agreement completing the scissors patents transaction called for the issuance of the stock to the various persons there set forth, in full payments of the patents. The shares were issued, not to Parker nor to persons as his nominee, but to others in their own right, presumably for past services or aid. It cannot be said that Morgan Parker received the stock. Mojonnier & Sons, Inc., 12 T.C. 837. Nor can it be said that the recipients of the stock acquired1952 U.S. Tax Ct. LEXIS 85">*103 their interests under the 1927 agreement, for some of the persons who received stock as a result of the transfer of the patents were not parties to that agreement which merely required Parker to convey the patents to the prospective corporation. The respondent's contention must fail in regard to the application of section 112 (b) (5) of the Revenue Act of 1928. Section 113 (a) (8), I. R. C., which is the pertinent provision of the statute with regard to the acquisition of property by the issuance of stock is inapplicable here as an exception to the rule that the cost is the basis of the property.

The cost basis of the patents was the fair market value of the stock issued in exchange therefor. In the absence of other indicia, the value of petitioner's stock must be determined to be the equivalent of the fair market value of the assets for which it was exchanged. 18 T.C. 1255">*1263 Mojonnier & Sons, Inc., supra.This becomes the cost basis of the patents in the petitioner's hands.

The scissors patents for which the petitioner exchanged $ 750,000 par value common stock, was the basis for the creation of the new company. The detachable-blade knife invented 1952 U.S. Tax Ct. LEXIS 85">*104 by Morgan Parker, which also was to be manufactured by the petitioner, had already proved a success in the surgical field. The manufacture and sale of a similar product by the same group under the same corporate name associated with the knives created reasonable prospects of profitable exploitation of the scissors patents. Other patents exploited in the past had proved disappointing, but higher hopes were held for the scissors although no established market existed for them. It was also hoped that the scissors would possess commercial value in other than surgical fields. Considering all the factors, we are of the opinion that the fair market value in 1930 of the scissors patents transferred to petitioner, was $ 300,000.

The valuation reached is the cost of the property paid in for the stock and as the basis of the property it provides the amounts to be included in equity invested capital.

Decision will be entered under Rule 50.