
    FRANK H. STEWART ELECTRIC CO. v. THE UNITED STATES
    [No. F-299.
    Decided February 20, 1928]
    
      On the Proofs
    
    
      Income and, excess-profits taxes; good will as inwested capital; “ payment tona fide therefor specifically as such.” — On a finding by the court that plaintiff, upon its organization, issued no stock for good will as such, which it seeks to have included in invested capital for the purpose of determining its income and excess-profits taxes for the years 1917-1920, petition for a refund of taxes computed on such a basis is dismissed.
    
      The Reporter's statement of the case:
    
      Mr. K. N. Parkinson for the plaintiff. Mr. George G. Oher, jr., was on the brief.
    
      Mr. Dwight E. Borer, with whom was Mr. Assistant Attorney Generad Herman J. Galloway, for the defendant.
    
      The court made, special findings of fact, as follows:
    I. Plaintiff, the Frank H. Stewart Electric Company, is a corporation organized and existing under the corporation law of 1874 of the State of Pennsylvania, with its principal place of business at 35-39 North Seventh Street, Philadelphia, and has been located there s,ince its formation in 1904.
    II. Plaintiff is engaged in the wholesale and retail electrical supply business and has been continuously so engaged since its formation. It was incoi'porated to and did succeed the wholesale electrical supply business which had been conducted by Frank H. Stewart as an individual, at the same address, continuously from 1894 to 1904.
    III. Frank H. Stewart, the predecessor of the plaintiff corporation, during the ten years in which he had been engaged in business prior to the incorporation of the plaintiff herein, had acquired good will which was valuable.
    IY. In 1904 Frank H. Stewart, then in business as aforesaid, contemplating the organization of a corporation to take over the same, consulted an attorney with reference to his right to receive capital stock of the proposed corporation in return for the good will of his business. The attorney advised him that the Pennsylvania statutes did not specifically set forth that stock could be issued for good will and that if it were attempted the application for the charter might be held up. The attorney also advised him that he could transfer certain letters patent which he owned, being Letters Patent No. 627215, for handles and adjusters for electric lights; No. 656431, for cord adjusters for electric lights; and No. 39786, being a trade-mark for an electric-light support, for 500 shares of the capital stock of the corporation. The articles of incorporation provided for 1,000 shares of the pax-value of $100 each, of which 500 shares were common stock and 500 shares preferred stock. Four hundred shares of the pi-eferred stock were to be issued to Frank H. Stewart, “ trading as Frank H. Stewart & Company,” for the stock of electrical supplies, furniture and fixtures, and book accounts then belonging to said Frank H. Stewart, and the articles further provided that 500 shares of the common stock subscribed for by Frank H. Stewart “ are to be issued to Frank H. Stewart as full-paid capital stock not liable to any further calls or assessments in consideration of the assignment and conveyance by said Frank H. Stewart to this corporation at the pr,ice and consideration of $50,000 ” of the letters patent and trade-mark above mentioned. These patents and trade-mark were duly transferred to the corporation at the value of $50,000, which was credited to Frank H. Stewart, and his account was debited with the 500 shares of common stock. No stock was issued for good will as such. Several years after the transfer of the patents to the corporation, and about 1907, a resolution was adopted by the board of directors ordering that the patents of the company carried on its books be thereafter inventoried as worthless, owing to the action of the board of underwriters in condemning their use. Capital stock could have been issued in return for good will transferred to a corporation.
    V. Plaintiff filed income-tax returns for the years 1917 to 1920, both inclusive. The correctness of the amount of said taxes was disputed by the Commissioner of Internal Revenue and a final recomputation of the tax was made by the commissioner, and the tax as shown by this final recomputation was paid by plaintiff.
    VI. Plaintiff made claim for refund as required by law and the same was denied by the Commissioner of Internal Revenue.
    VII. If the allowance for good will as claimed by plaintiff herein is made the plaintiff is entitled to a judgment of $6,168.11.
    The court decided that plaintiff was not entitled to recover.
   Campbell, Chief Justice,

delivered the opinion of the court:

This is a suit for refund of income and excess-profits taxes for the years 1917 to 1920, inclusive. Having paid the taxes, application for refund was made by plaintiff and overruled by the Commissioner of Internal Revenue. The claim is (1) that Frank H. Stewart, predecessor of the plaintiff corporation, had developed a good will of large value; (2) that plaintiff acquired the good will so developed by Mr. Stewart and issued $50,000 of its capital stock at par for such good will, and is therefore entitled to have that amount included in its invested capital,” as provided in the acts in question, and (3) that the good will- was acquired for stock issued “ bona -fide and specifically therefor.” The defense does not question the fact that Mr. Stewart, who was a pioneer wholesale dealer in electrical supplies, had been engaged in that business for many years in Philadelphia and enjoyed a reputation for business integrity as well as for the quality of products handled, and that accordingly there was a valuable good will of that business, but it does deny that good will, passed to the corporation within the meaning of the taxing acts, or that the corporation made payment “ bona -fide therefor specifically as such ” in money or in its capital stock. The principal question, therefore, is whether the corporation issued capital stock to the amount of 500 shares or less for the good will of the business of the predecessor so as to justify its inclusion as part of. invested capital within the meaning of the applicable statutes. Section 207 of the war revenue act of 1917, 40 Stat. 306, section 326 of' the revenue act of 1918, 40 Stat. 1092. For the purposes of the case it is only necessary to refer to the act of 1917, section .207 of which, defining invested capital, provides that “(3) (b) the good will, trademarks, trade brands, the franchise of a corporation or partnership, or other intangible property shall be included as invested capital if the corporation * * * made payment bona fule therefor specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will * * * bona fide purchased, prior to March third, nineteen hundred and seventeen * * * for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per cent of the total * * * shares of the capital stock of the corporation, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, andi in case of issue of stock therefor not to exceed the par value of stock par.” The act of 1918 restricts the value of intangibles to be included in invésted capital to 25 per cent of the total shares instead of 20 per cent as in the act of 1917. The plaintiff corporation was incorporated in 1904. While it was in process of organization Mr. Stewart inquired of his attorney whether he could subscribe for or receive capital stock of the corporation in return for the good will of the business which he regarded as valuable, and it was valuable. He was advised that under the Pennsylvania statute he could not thus pay for capital stock, and further that an attempt to do so might-result in delay in effecting the intended incorporation. At the same time Mr. Stewart was advised by his attorney that he could pay for the amount of stock that he contemplated receiving as the value of good will by transferring to the corporation two designated patents and a trade-mark then owned by him. This latter course was adopted. The patents and the trade-mark were duly transferred to the corporation, and in return therefor 500 shares of stock were issued to Mr. Stewart. No stock was issued for good will as such. The corporation’s books showed the account of Mr. Stewart as credited with the patents and trade-mark at the value stated and as debited with the corresponding amount of stock. The good will which the statute authorizes to be included in invested capital is that for which payment has been made bona -fide, “ specifically as such,” or good will 'bona -fide purchased prior to named dates. The reasons for requiring such items as good will, trade-mark, trade brands, or franchises to be paid for specifically as such in estimating invested capital are obyious. The shares of stock were issued for patents. None were issued for good will as such. If Mr. Stewart had sold his holding in the corporation or had opened a store in his individual name in the same neighborhood it is clear that the corporation could not have complained that the good will of his individual business had been paid for in stock. The burden is upon the plaintiff to show that the stock was issued for good will, and it has failed to make the necessary proof. The petition should be dismissed. And it is so ordered.

Moss, Judge; Geaham, Judge; and Booth, Judge, concur.  