13 T.C. 559">*559 The respondent has determined the following deficiencies in income tax, declared value excess profits tax, and excess profits tax for the taxable years 1942, 1943, 1949 U.S. Tax Ct. LEXIS 63">*64 and 1944:

The sole question herein concerns the amount petitioner is entitled to include in computing its equity invested capital for 1942 and subsequent years as the value of property and assets of a business, including good will, acquired by the petitioner in 1925.

Facts necessary to the disposition of issues raised in the petition relating to the petitioner's deductions for depreciation in 1943 and 1944 have been stipulated by the parties. Petitioner does not contest any part of the deficiency in income tax determined by the respondent for 1942 nor various minor adjustments made by the respondent in its tax liability for the years 1943 and 1944.

The facts stipulated by the parties are hereby found and, in so far as necessary to the disposition of the issue herein, are incorporated in our findings of fact.

FINDINGS OF FACT.

Petitioner is a corporation, organized under the laws of Ohio, with its principal office in Cleveland, Ohio. At all times material to the issue herein its books of account were maintained and its income1949 U.S. Tax Ct. LEXIS 63">*65 tax, 13 T.C. 559">*560 declared value excess profits tax, and excess profits tax returns were prepared and filed on an accrual basis. Its Federal tax returns for the years ended December 31, 1942, 1943, and 1944, were filed with the collector of internal revenue for the eighteenth district of Ohio, at Cleveland, Ohio.

From 1911 until April 23, 1925, a business, consisting principally of the manufacture and sale of automatic shock absorbers, was conducted by Claude H. Foster as a sole proprietorship, under the name of the Gabriel Manufacturing Co. On April 20, 1925, Foster offered to sell the business and all of its appurtenant assets to Otis & Co., a Cleveland investment banking firm, or to a corporation to be formed by Otis, for $ 4,000,000 in cash, plus all Federal taxes which Foster would be required to pay because of the transaction, and the agreement to give 1,000 shares of the class B voting stock of the new company to four executives of the Foster organization.

Petitioner communicated his offer to sell in a letter to Otis, dated April 20, 1925, which reads in part as follows:

* * * I now offer to sell this business to you, but only upon the terms and conditions that are laid down1949 U.S. Tax Ct. LEXIS 63">*66 in this letter. I am making these conditions because I desire that the management of the company shall be in the hands of certain individuals in order that the management and policies which I have built up shall be continued. I am further anxious that the public shall be offered an opportunity to buy stock at a price which in all probability will return to the stockholders the total amount of their investment during the next five years. I am also, as a matter of friendship with your firm, entering into this transaction with you without competitive bidding, and it is my desire that your profits should be limited to whatever I consider a reasonable amount.

* * * ^*

* * * I hereby offer to turn over to you or a company to be formed by you the business in the condition outlined above, and also the real estate located in Cleveland which is now occupied by the factory. It is understood that none of the service stations, whether in Cleveland or elsewhere, nor the Canadian Company are included in this sale. This sale includes all present American and Foreign patents covering the devices manufactured or owned in connection with the product manufactured by the American Company and also 1949 U.S. Tax Ct. LEXIS 63">*67 all applications for such patents. The Canadian Company, however, shall retain any patents and patent rights which it now enjoys in Canada. I understand that it is your plan to have the business taken over by an Ohio corporation, which shall have authorized 200,000 shares of no par value stock, of which 198,000 shares shall be Class "A" stock, and 2,000 shares shall be Class "B" stock. Both classes of stock shall be identical in all respects, except that the Class "B" stock shall have the sole voting rights. The Class "A" stock shall be offered to the public at [a price] not to exceed $ 25.00 per share, and you will use your best efforts to sell it at this price by means of a public offering throughout the United States. Of the 2,000 shares of Class "B" stock you will give 1,000 shares as I direct to the following members of my organization: George H. Ralls, David Benjamin, John F. Gibler, and Rudolph J. Ketz. The remaining 1,000 shares of Class "B" stock shall be held by the firm of Otis and Company. * * *

I agree to remain in charge of the business as heretofore until December 31, 1925, at a salary of $ 2,000.00 per month. The price of said business shall be 13 T.C. 559">*561 $ 4,000,000.001949 U.S. Tax Ct. LEXIS 63">*68 to me in cash, it being understood that such price includes inventory of raw material, work in process and finished product at actual cost, accounts receivable and cash on hand to the amount of $ 150,000 as of the close of business on April 30th, 1925, and that the balance of such purchase price is attributable to real estate, plant and equipment, patents and good will.

* * * *

It is also understood that in the event the auditor's report and verification prove substantially as represented in this offer and that you fail to enter into the contract provided for in this offer by May second, 1925, at four o'clock P. M. of said day, and that you fail to comply fully with the payment of $ 4,000,000.00 in cash net to me by said time, and that you fail to comply with all the other obligations herein imposed upon you, I shall in such event have the right to declare this contract and offer canceled by mailing notice addressed to you in the Cuyahoga Building, Cleveland, of such intention to cancel this contract and offer. It is also understood that the payment to me of said sum of $ 4,000,000.00 cash net to me is not in any manner conditioned upon or postponed to the incorporation of said proposed1949 U.S. Tax Ct. LEXIS 63">*69 Ohio corporation nor conditioned upon nor postponed to the authorization of such proposed stock.

Foster's offer was accepted by Otis and, pursuant to that agreement, on April 23, 1925, petitioner was incorporated under the laws of the State of Ohio as "The Gabriel Snubber Manufacturing Company," with capital stock consisting of 50 shares of class A stock and 50 shares of class B stock. Both classes of stock were alike in all respects except that all voting power was vested in the class B stock. Its articles of incorporation stated that the amount of capital with which the corporation was to begin business was $ 500. On the same date, the entire 100 shares of class A and class B stock were subscribed for at $ 25 per share.

On April 24, 1925, there was presented to the board of directors of the petitioner an offer from Otis to transfer to the petitioner all of the property, assets, and good will of the business which Otis had agreed to purchase from Foster. Under this offer, which was accepted by the petitioner on the same date, petitioner agreed to the following conditions:

In consideration therefor you shall, if you accept this offer -- (a) repay to the undersigned in cash all1949 U.S. Tax Ct. LEXIS 63">*70 amounts advanced or which may be advanced for charter fees, accountants' and attorneys' fees, appraisals, certificates, stamp taxes, and other expenses incident to the organization of your Company and issuance of its stock; (b) increase your authorized capital stock to 200,000 shares of no nominal or par value, of which 198,000 shares shall be designated as Class A without voting power, and 2,000 shares shall be designated as Class B possessing the sole voting power of the Company. All of such increase of capital stock shall be issued to the undersigned or to its nominees as fully paid and nonassessable. Conveyances, assignments and transfers of the property and business as a going concern shall be made as promptly as possible, and in any event not later than May 2nd, 1925.

On April 25, 1925, the authorized capital stock of the petitioner was increased to 198,000 shares of class A no par common stock and 2,000 13 T.C. 559">*562 shares of class B no par common stock, as provided for in its agreement with Otis, and its capital was increased to $ 1,000,000.

On April 27, 1925, Otis offered for sale and sold the entire 198,000 shares of class A stock to the general public on a "when issued" 1949 U.S. Tax Ct. LEXIS 63">*71 basis at $ 25 per share.

On May 2, 1925, the business and assets agreed to be sold by Foster were transferred directly to the petitioner at the request of Otis and pursuant to the terms of the contracts. Petitioner took all of the purchased assets on its books as of May 1, 1925, at a net value, over and above liabilities assumed in connection with the transfer, of $ 1,529,783.29, which included $ 1 only as a nominal valuation of the good will purchased. On or about the same date, 197,950 class A shares and 1,950 class B shares were issued to Otis or its nominees in exchange for such assets. Seven shares of class B stock were issued in the names of the seven persons who became the directors of the petitioner, two of whom were members of Otis & Co., and a stock certificate for 1,993 shares of class B stock was issued in the name of Otis & Co. Foster received in payment for the business and assets which he transferred to the petitioner $ 4,358,705.70, of which amount $ 358,705.70 represented Federal taxes on the sale. There was also transferred to the four members of the Foster organization, pursuant to the terms of the contract between Foster and Otis, 1,000 shares of the petitioner's1949 U.S. Tax Ct. LEXIS 63">*72 class B stock, which shares had a fair market value of $ 25 per share. All money realized by Otis from the sale of petitioner's class A stock above the $ 4,358,705.70 paid to Foster was retained by Otis. Incident to the marketing of the class A stock, Otis expended approximately $ 200,000 in sales commissions.

The business as conducted by Foster from 1920 until April 30, 1925, realized net sales and net profits, before taxes, in the following amounts:

The Federal income tax rate in effect on net income of corporations during the entire year 1925 was 12 1/2 per cent.

The net assets, exclusive of good will, employed by Foster in the business from 1920 to April 30, 1925, were as follows:

13 T.C. 559">*563 During the week1949 U.S. Tax Ct. LEXIS 63">*73 ended May 1, 1925, 30,600 shares of petitioner's class A stock were traded on the New York Curb Exchange at prices ranging from a low of 26 to a high of 27 1/8.

Following the petitioner's acquisition on May 2, 1925, of the assets of the business previously operated by Foster, it continued the business of manufacturing automobile snubbers and shock absorbers. During the eight months ended December 31, 1925, and the years 1926, 1927, 1928, and 1929, petitioner's net profits and dividends after payment of Federal taxes were as follows:

On February 20, 1940, the name of the petitioner was changed to "The Gabriel Company."

The parties have stipulated that for the purposes of computing petitioner's deductions for depreciation, the cost of assets purchased by the petitioner from William H. Miller on November 1, 1943, was $ 240,000, consisting of $ 150,0001949 U.S. Tax Ct. LEXIS 63">*74 in cash and 30,000 shares of petitioner's stock. The parties have agreed that $ 70,000 of the cost shall be allocated to good will and $ 170,000 to certain depreciable items of machinery, equipment, and furniture, and have stipulated the manner in which the $ 170,000 cost is to be allocated among such assets.

Petitioner's Federal tax returns for the years ended December 31 1943 and 1944, disclosed the following tax liability:

The tax liabilities disclosed on the petitioner's returns for 1943 and 1944 were paid as follows:

13 T.C. 559">*564 Adjustments of the assessments made upon petitioner's original returns were made on findings of overassessments arising out of renegotiation proceedings and claims for amortization of war facilities. 1949 U.S. Tax Ct. LEXIS 63">*75 Subsequent to the mailing of the notice of deficiency, the petitioner filed a waiver consenting to the assessment of a deficiency for the year ended December 31, 1943, in the sum of $ 7,569.29. A deficiency in that amount for 1943 was assessed by the respondent, with interest of $ 1,899.78, and was thereafter paid by the petitioner on June 17, 1948.

In its 1942 excess profits tax return, petitioner claimed equity invested capital in the amount of $ 5,106,204.26, consisting of $ 106,204.26 representing money and $ 5,000,000 representing property paid in for stock, paid-in surplus, or contributions to capital. In the notice of deficiency, the respondent determined that petitioner's equity invested capital as of the beginning of 1942 was $ 4,464,909.96. The decrease of $ 641,294.30 was explained in the notice of deficiency as follows:

Taxpayer has included a larger amount for good will than it had actually paid for.

OPINION.

The sole question presented herein concerns1949 U.S. Tax Ct. LEXIS 63">*76 the amount petitioner may include in computing its equity invested capital under section 718 (a) of the Internal Revenue Code¹ as representing the value of the property and assets of a business, including good will, which was acquired by the petitioner in 1925.

Petitioner views the transaction whereby it acquired Foster's business as one involving a purchase 1949 U.S. Tax Ct. LEXIS 63">*77 of the business by Otis & Co. from Foster and a subsequent exchange of the business property by Otis to the petitioner for the petitioner's capital stock. Basing its arguments on this interpretation of the transaction, petitioner contends that the issue is resolved to one of fair market value, either of the 13 T.C. 559">*565 petitioner's stock issued in exchange for the property, or of the property at the time of its acquisition. (See section 718 (a) (2), supra, and Regulations 112, section 35.718-1. ²)

1949 U.S. Tax Ct. LEXIS 63">*78 The respondent, on the other hand, held in the notice of deficiency that the maximum amount includible in the petitioner's equity invested capital for the property acquired is $ 4,358,705.70, and he claims that any amount in excess of this sum should be disallowed as representing brokerage commissions realized by Otis on the resale of the petitioner's stock.

A careful reading of the contract between Foster and Otis & Co., the terms of which we have set forth at some length in our findings, leads us to the conclusion that what was envisioned was a transaction between three parties, Foster, Otis & Co., and a newly organized corporation which later became known as the Gabriel Co., the petitioner herein. Foster was to sell his business to petitioner for $ 4,000,000, plus the amount of Federal income tax he would be required to pay covering his profit on the sale, which tax turned out to be $ 358,705.70, thus making the total sum to be received by Foster in cash $ 4,358,705.70. In addition, 1,000 shares of petitioner's class B voting stock were to go to the four executives who were members of the Foster organization. Petitioner was to acquire the money with which to pay Foster by the1949 U.S. Tax Ct. LEXIS 63">*79 sale of its class A stock which, under the terms of the contract, was to be sold to the public on terms dictated by Foster in his contract with Otis & Co. Otis & Co. was to underwrite the transaction and and was to retain for itself by way of a commission the difference between what was paid to Foster for his business and what the stock was sold for to the public. The transaction was a single one and must be viewed as a whole. West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77; Halliburton v. Commissioner, 78 Fed. (2d) 265; Bassick v. Commissioner, 85 Fed. (2d) 8.

The transaction was carried out as planned. From the sale of its class A stock petitioner never received any money as such, but the proceeds of the sale were used to pay Foster, and petitioner received by direct conveyance from Foster the latter's business. While petitioner's class A stock alone was sold to the public for $ 4,950,000, Otis & Co., pursuant to the agreement of the parties, retained all over the amount necessary to pay Foster.

13 T.C. 559">*566 The law is now well settled that where a broker1949 U.S. Tax Ct. LEXIS 63">*80 purchases stock at a discount for resale on its own account rather than acting as an agent of the issuing company in marketing securities, only the amount received by the corporation from the broker is includible in its equity invested capital regardless of the price ultimately secured for the stock by the broker upon resale to the public. Simmons Co., 8 B. T. A. 631; affd., 33 Fed. (2d) 75; certiorari denied, 280 U.S. 588">280 U.S. 588; American Business Credit Corporation, 9 T.C. 1111, 1118; Cleveland Graphite Bronze Co., 10 T.C. 974, 986, 987; Warner Co., 11 T.C. 419, 434; cf. Palomar Laundry, 7 T.C. 1300.

The nature of the transaction between Foster and Otis & Co. is carefully spelled out in the contract of April 20, 1925. The stock of the new company was to be sold to the public at $ 25 per share and no more. The management of the new company was to be in the executives of the old Foster organization, who were to receive 1,000 shares of class B stock, which constituted 50 per cent1949 U.S. Tax Ct. LEXIS 63">*81 of the voting stock of the new company. The underwriting commissions of Otis & Co. were fixed and limited by Foster. Unless each and every term of the contract was followed, Foster reserved the right to cancel the contract. This transaction was in no sense an outright sale of Foster's business to Otis & Co. but, on the contrary, Otis & Co. was simply the underwriter, purchasing and reselling petitioner's stock on its own account and not as the petitioner's agent.

It follows from what we have stated that the petitioner is entitled to include in its equity invested capital the amount of $ 4,358,705.70, representing cash paid by Otis on behalf of the petitioner in securing Foster's business and assets and, in addition, the sum of $ 25,000 which we have determined to be the fair market value of the 1,000 shares of class B stock which were transferred to the four Foster executives.

In view of the interpretation which we have placed upon the transaction in question and our treatment of the issue, we think it is unneccessary to consider in this opinion the petitioner's proposals that the assets acquired should be valued under the principles set out in Regulations 112, section 35.718-1, 1949 U.S. Tax Ct. LEXIS 63">*82 supra, or A. R. M. 34, 2 C. B. 31.

Decision will be entered under Rule 50.