panies. Prior to January 1, 1916, the father and son owned all the stock in the Lee S. Smith & Son Co. and the Lee S. Smith & Son Manufacturing Co. At that time they began the policy of allowing some of the employees to purchase stock to be paid for out of dividends, the stock to be returned upon their severing connections with the company, so that, in the year 1919, 18 per cent of the stock of the Lee S. Smith & Son Co. (taxpayer) was in the name of five employees, and 8 per cent of the common stock of the Lee S. Smith & Son Manufacturing Co. was in the name of four employees. The father did not take any stock in the Dental Company of America, but left this wholly to the son, W. L. Smith, who owned all the stock, except 16 per cent, which was sold to four employees under arrangements similar to those made by the other companies. The stock sold to employees of the Lee S. Smith & Son Co. was in accordance with written contracts, which specifically provided that it was to be paid for out of dividends and turned back if the employees left the company. Similar agreements were made with the employees of the other companies, except that the agreements were oral. In every instance where an employee left one of these companies, the stock was turned back in accordance with the agreement. A typical written agreement read as follows:

MEMORANDUM OF AN AGREEMENT

MADE and entered into this Fourth day of January, 1916, between Charles Petersen, of the Borough of Wilkinsburg, County of Allegheny and State of Pennsylvania, and Lee S. Smith, of the City of Pittsburgh, County and State aforesaid;

WITNESSETH, That for the consideration hereinafter mentioned, as well as other valuable consideration thereunto moving, the said Lee S. Smith hereby agrees to transfer to the said Charles Petersen two hundred forty (240) shares of the capital stock of Lee S. Smith & Son Co., a corporation of the State of West Virginia, the said transfer to be made immediately upon the signing of this agreement, and the said Charles Petersen agrees to pay the sum of Six Thousand ($6000) Dollars for the said capital stock, being the par value thereof, in the following manner:

By paying to the said Lee S. Smith all the dividends which shall be declared upon the said stock at the time they are paid by the Company until the dividends declared and paid thereon shall aggregate the sum of Six Thousand ($6000) Dollars, with the full and express understanding that the said Charles Petersen is not personally liable for the payment of any sum whatsoever, except the sum which shall be declared and paid from time to time as dividends on the said stock as aforesaid until the same shall aggregate the sum of Six Thousand ($6000) Dollars and that the unpaid balance thereof shall not bear any interest.

If the said Charles Petersen shall sever his connection with the said Lee S. Smith & Son Co., the said Lee S. Smith, his executors, administrators or assigns, may at his or their option take over the said two hundred forty (240) shares by paying to the said Petersen the book value thereof, less the amount

that shall be due thereon in accordance with the above agreement as to payment and the said Charles Petersen reserves the right to pay the said Six Thousand ($6000) Dollars or such part as shall remain due and unpaid in accordance with the above agreement at any time in cash.

It is also expressly understood and agreed that the certificate or certificates issued by the said Company for the said two hundred forty (240) shares of the capital stock and all transfers representing the same or any part thereof, until this agreement has been fulfilled, shall be marked as follows on the face thereof: "This certificate is issued and is subject to that certain written agreement made and entered into between the said Charles Petersen and Lee S. Smith, dated Pittsburgh, Pa., the Fourth day of January, 1916."

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals at Pittsburgh, Pa., this 19th day of April, A. D. 1916. (Italics ours.) In each instance, at the stockholders' meetings of the corporations, the stock held by the employees was voted in accordance with the desires of the Smiths.

3. The respective holdings of the stockholders in the three corporations in 1919 were as follows:

The three corporations occupied the same general offices, and the rental, telephone, and other office expenses were paid by the Lee S. Smith & Son Co. W. L. Smith was the general manager and dominating factor in all three companies. He directed the business policy and could hire and dismiss employees at will. He lent his personal credit to the three corporations to the extent of $50,000 each a year. When he organized the Dental Company of America to manufacture teeth, he caused the taxpayer, Lee S. Smith & Son Co., to drop an old-established and well-known brand of teeth in order to introduce and sell the new brand manufactured by the Dental Company of

America. The latter company made no profits, so in 1920 the said W. L. Smith bought in all the outstanding stock, sold the assets, and liquidated.

DECISION.

The deficiencies in the above appeals should be computed in accordance with the following opinion. Final determination will be settled on 15 days' notice, under Rule 50.

OPINION.

TRUSSELL: Congress, in considering the Revenue Act of 1918, recognized the fact that many corporations were closely affiliated in ownership and unity of management and control, and that the proper ascertainment of liability to income and profits taxes might necessitate the grouping of such corporations for the purpose of computing income and profits taxes. That portion of the statute relevant to these appeals is as follows:

SEC. 240. * * (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * (2) if substantially

all the stock of two or more corporations is owned or controlled by the same interests.

The history of the taxpayers in the instant appeals is interesting. One Lee S. Smith, in the year 1866, established himself in business as a selling agency for dental supplies. In the course of time his son, W. L. Smith, became associated with him and then the business was conducted as a partnership until it was incorporated in 1915 as Lee S. Smith & Son Co. Prior to this date, however, and in the year 1912, the two Smiths had caused to be organized another corporation, known as the Lee S. Smith & Son Manufacturing Co., all of the stock of which was then owned by the two Smiths. This company manufactured dental supplies. Gradually, owing to advancing age, the elder Smith relaxed his personal control and influence in the business until, in 1917, the son, W. L. Smith, was the dominating factor in both corporations. In that year W. L. Smith caused to be incorporated the Dental Company of America and established said company in the business of manufacturing other dental supplies. We thus have presented the original business of Lee S. Smith & Son Co., selling agents of dental supplies, the Lee S. Smith & Son Manufacturing Co., making certain dental supplies, the Dental Company of America, making other dental supplies, and the parent company controlling and supervising the activities of all and being the exclusive selling agents of the products of the two manufacturing companies.

As shown in the findings of fact, all of the stock of all of these companies is owned by Lee S. Smith and his wife, W. L. Smith,

and several employees of the different companies. This Board has held in the Appeals of Hagerstown Shoe & Legging Co., 1 B. T A. 666, and Schloss Brothers Co., 1 B. T. A. 581, that the ownership of all the stock of two or more corporations by the principal stockholders and employees whose stock is controlled by them is an ownership or control of substantially all the stock by the same interests. See Appeal of Hamilton & Chambers Co., 1 B. T. A. 694. We are, therefore, of the opinion that not only are the two taxpayers named in these appeals affiliated, but that these two taxpayers, together with the Lee S. Smith & Son Manufacturing Co., should all be placed in one affiliated group and their tax liability determined upon the basis of a consolidated return.

Docket No. 2888.

APPEAL OF STEINBACH CO.

Submitted June 12, 1925. Decided January 16, 1926.

1. Taxpayer may include in its statutory invested capital, as paid-in surplus, the proved value of tangible property paid in to a corporation in excess of the par value of its outstanding stock.

2. Unextinguished cost of demolished assets allowed as a deduction from gross income.

3. Depreciation allowed on assets acquired by way of paid-in surplus.

4. Invested capital must be reduced by the amount of the cost

to a corporation of the acquisition of its own stock.

W. A. Staub, C. P. A., H. A. Tufel, Esq., and C. J. McGuire, Esq., for the taxpayer.

Ellis W. Manning, Esq., for the Commissioner.

Before STERNHAGEN, LANSDON, GREEN, and Love.

This is an appeal from the determination of a deficiency in income and profits taxes. The taxable periods involved are the fiscal years ended January 31, 1919, 1920, 1921, and 1922. For the years 1919, 1921, and 1922 the deficiencies are $3,934.89, $6,671.34, and $488.95, respectively, or a total amount of $11,195.18. For the year 1920 the Commissioner admits an overassessment of $5,871.81. The taxpayer concedes that the deficiency in the amount of $6,671.34 for the year 1921 is correct. The total deficiency in controversy is in the amount of $4,423.84.

FINDINGS OF FACT.

1. The taxpayer is a New Jersey corporation with its principal place of business at Asbury Park, where it conducts a department store. It was incorporated in 1897 as the successor of a sole pro

prietorship, which had been established by John Steinbach about 1872.

2. At February 1, 1919, the taxpayer had 4,000 shares of common and 5,350 shares of preferred stock outstanding of the par value of $100 per share. At that date John Steinbach owned 3,892 shares of the common and 3,248 shares of the preferred stock. His combined holdings of common and preferred shares represented 76 per cent plus of the taxpayer's total outstanding capital stock. The remaining outstanding stock, in the respective amounts of 108 and 2,102 shares of common and preferred, was owned by A. C. Steinbach and Walter Steinbach, sons of John Steinbach.

3. Prior to February 1, 1919, the buildings in which the taxpayer conducted its operations, the land occupied by such buildings, and the furniture and fixtures used in the business of the taxpayer were owned by John Steinbach and occupied by the taxpayer as a tenant. 4. As early as 1917, John Steinbach, then a man of advanced years, evidenced, through conversations with his sons, a desire to relinquish his active control and retire from the business. The means of bringing about the change of ownership and control were discussed at various times throughout 1917 and 1918, and culminated on February 8, 1919, when, at a meeting of taxpayer's board of directors, John Steinbach submitted to the board two definite offers which, when accepted, would bring about the desired change. The first offer provided that said Steinbach would convey to the taxpayer "the real estate in the City of Asbury Park, owned by him, and now occupied by the company for its business, together with all the personal property appurtenant thereto, for the sum of $300,000, from which price the company might deduct the amount due on his debit balance as the same appears on its books, and which amounts to $239,765.17, as of February 1, 1919." The balance of the purchase price, to wit, $60,234.83, was to be paid in cash and securities of companies other than the taxpayer. The second offer provided that said Steinbach would sell to the taxpayer "all of his shares of common stock therein, now consisting of 3,892 shares and also 1,748 shares of his preferred stock in this company, in consideration of an annuity to be paid him by the company, during his lifetime, in the sum of $6,083.33 per month." 5. Both of the above offers were accepted by the taxpayer's board of directors, and under the terms thereof became effective as of February 1, 1919. Immediately after the transfer to the taxpayer of the real property with its appurtenances and the shares of stock described in the second offer, all of which real and personal property was transferred simultaneously, said John Steinbach's sole interest in the taxpayer was represented by 1,500 shares of preferred stock out of 3,602 shares then outstanding and not in the corporate treasury.