Hartford-Empire Co. v. Commissioner , 43 B.T.A. 113 ( 1940 )

HARTFORD-EMPIRE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hartford-Empire Co. v. Commissioner

Docket Nos. 94788, 95673.

United States Board of Tax Appeals

43 B.T.A. 113; 1940 BTA LEXIS 845;

December 19, 1940, Promulgated

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1. In Hartford-Empire Co.,26 B.T.A. 134">26 B.T.A. 134, the question for decision by the Board was whether in computing allowances for the exhaustion of certain patents and applications for patents acquired by the petitioner from the Hartford-Fairmont Co. for the years 1923 to 1928, inclusive, the basis to be used was the cost of such assets to the predecessor corporation or their value on March 1, 1913. The Board held that the basis was the March 1, 1913, value. In that proceeding the parties filed a stipulation of facts which showed, among other things, that the petitioner had acquired certain "Empire" and "Howard" patents and applications for patents from other corporations at stated costs. There was no issue before the Board with respect to the proper allowance for exhaustion of the Empire and the Howard patents and applications for patents. The stipulation was incorporated in our opinion "by reference." Pursuant to the Board's opinion and stipulation filed, the deficiencies for the years in question were redetermined. The petitioner's tax liabilities for 1929, 1930, and 1931 were adjusted upon the same bases. In the determination of deficiencies for 1932, 1933, and 1934 the respondent has used as the basis for the allowance of exhaustion upon the Empire and the Howard patents and applications for patents not the costs stipulated in the prior proceeding but the cost thereof to the predecessor owners. The petitioner contends that the question of the proper basis for the allowance of exhaustion of these patents and applications for patents is res adjudicata. Held, that the question of a proper basis is not res adjudicata.

2. In 1922 the petitioner issued all of its shares of stock to three corporations, their shareholders, and creditors for patents and applications for patents and other assets of small value. Held, that there was a reorganization of the three corporations resulting in the formation of the petitioner corporation under the provisions of the Revenue Act of 1921; held, further, that the basis for the computation of exhaustion on the Empire and the Howard patents and applications for patents for the years 1932, 1933, and 1934 is the cost thereof to the predecessor owners.

Edgar J. Goodrich, Esq., Arthur T. Safford, Esq., and Norman E. Webster, C.P.A., for the petitioner.

Charles P. Reilly, Esq., for the respondent.

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SMITH

These proceedings, consolidated for hearing, involve income tax deficiencies for the years 1932, 1933, and 1934 as follows:

Docket No.	Year	Deficiency
94788	1932	$22,168.65
Do	1933	22,145.92
95673	1934	19,993.64

The principal question in issue is whether the petitioner is entitled for each of the years 1932, 1933, and 1934 to allowances for exhaustion of two groups of patents and applications for patents acquired by it in 1922 and 1923 upon the basis of their fair market value at the date of acquisition or their cost to the predecessor owners. The parties have stipulated that if allowances are to be made upon their fair market value at the date of acquisition the deductions claimed by the petitioner in its returns for 1932, 1933, and 1934 are correct; but that if the allowances are to be based upon the cost to the predecessor owners the computation of the allowances set out in the deficiency notices is correct. A subsidiary question relates to a deduction for each of the tax years of the full and correct amounts of petitioner's Federal capital stock tax liability and state income tax liability. It has been stipulated that this question will be adjusted in the Rule 50 settlement. By an amended answer the respondent claims such an increase in the deficiency for 1934 as results from allocating to 1933 a loss deduction of $26,396.29 which the respondent admittedly erroneously allocated to 1934.

These proceedings have been submitted to the Board upon the basis of the pleadings, a signed stipulation of facts (incorporated herein by reference), and the oral testimony of two witnesses.

FINDINGS OF FACT.

1. The petitioner is a corporation, organized under the laws of the State of Delaware on or about June 14, 1922, with its principal office at Hartford, Connecticut. It began business January 1, 1923. It was organized for the purpose of consolidating the ownership of independent but complementary devices and processes for feeding and for forming molten glass.

2. At the date of its organization its authorized capital stock consisted of 100,000 no par value common shares and 15,000 preferred shares of a par value of $100 each. The common stock had voting privileges on all matters. The preferred stock had voting privileges only on matters which were required by law for the validity of the corporate action.

3. The petitioner's taxable net income for 1932, 1933, and 1934, after giving effect to all adjustments agreed upon by the parties, but without allowance of any deduction to which petitioner may be entitled on account of amortization of the "Empire" and the "Howard" patents and before any adjustment of the deductions taken in the petitioner's returns for capital stock tax and state income tax liabilities, is as follows:

1932	$1,007,330.62
1933	1,044,887.37
1934	953,414.72

4. The Hartford-Fairmont Co. was a corporation organized on or about April 11, 1912, under the laws of New York, with its principal office at Hartford, Connecticut. It was organized for the primary purpose of inventing and developing devices and processes for feeding molten glass and for the commercialization thereof by the granting of licenses for their use. Until the transfer of its assets to petitioner herein as hereinafter mentioned, it was at all times the sole owner of certain patents and patent rights hereinafter referred to as the Fairmont patents and patent rights. It ceased business as of December 31, 1922, and was dissolved on January 7, 1929.

5. The Empire Machine Co. is and was at all times herein mentioned a corporation organized, about July 1909, under the laws of Maine. It was organized for the primary purpose of inventing and developing devices and processes for forming molten glass and for the commercialization thereof by the granting of licenses for their use. Until the transfer of its patents, patent rights, and about $73,000 worth of machines, parts, and tools to the petitioner as of December 31, 1922, in the transaction hereinafter mentioned, it was at all times the sole owner of certain patents and patent rights hereinafter referred to as the Empire patents and patent rights.

6. The petitioner was organized pursuant to an agreement by certain persons for its formation. The agreement was not put in writing until after the corporation's charter had been issued. The formal agreement, hereinafter referred to as the formation agreement, was dated October 6, 1922.

7. By 1922 the inventions of the Hartford-Fairmont Co. and of the Empire Machine Co. were largely used commercially by glass manufacturers under licenses. The ownership of these inventions was transferred as of December 31, 1922, to the petitioner, which acquired equitable title to all of the assets of the Hartford-Fairmont Co. through acquisition of all of its stock in exchange for petitioner's stock and the subsequent transfer of all of its assets, and acquired title to all of the patents, patent rights, and other assets of the Empire Machine Co. (except its stockholdings in the American Blank Co. and a certain contract between the Empire Machine Co., Corning Glass Works, General Electric Co., and American Blank Co., dated January 1, 1921) by issuing its stock to the Empire Machine Co. in exchange for said patents and patent rights and other assets. The acquisition by the petitioner of the stock of the Hartford-Fairmont Co. and the patents and patent rights and other assets of the Empire Machine Co. as of December 31, 1922, was pursuant to the formation agreement dated October 6, 1922, heretofore mentioned.

8. The following is an abstract of the relevant portions of the formation agreement:

(a) The agreement was executed between the Hartford-Fairmont Co., the Empire Machine Co., all the stockholders of the Hartford-Fairmont Co. (being the Beech-Nut Packing Co., Monongah Glass Co., and 17 individuals), and all the stockholders of the Empire Machine Co. (7 individuals).

(b) The parties agreed to cooperate in organizing a new corporation, the petitioner, under the laws of Delaware.

(c) All the stockholders of the Hartford-Fairmont Co. agreed that as soon as the petitioner should be incorporated and organized they would assign to it all shares held by them of common and preferred stock of the Hartford-Fairmont Co. in exchange for stock of the petitioner fully paid and nonassessable; that for every share of Hartford-Fairmont Co. preferred stock the stockholders should receive one share of the preferred stock of the petitioner; that for every share of common stock of the Hartford-Fairmont Co. said stockholders should receive 12.7 shares of common stock of petitioner.

(d) The Empire Machine Co. and all the stockholders thereof agreed that when the petitioner was incorporated and organized, and when the Empire Machine Co. had received the agreement of petitioner to reimburse it for any payments which it might thereafter be obliged to make for maintaining in force existing foreign patents or foreign applications, the Empire Machine Co. would assign and deliver to petitioner, in such items or lots and at such times as might be designated by the petitioner, all the assets of the Empire Machine Co., excepting (1) the stockholdings of the Empire Machine Co. in the American Blank Co.; and (2) a certain contract between the Empire Machine Co., Corning Glass Works, General Electric Co., and American Blank Co., dated January 1, 1921.

(e) The Empire Machine Co. and its stockholders all further agreed that the Empire Machine Co. would transfer to petitioner without charge (subject to any then existing encumbrances) all future inventions or patent rights thereafter controlled or developed by the Empire Machine Co., and execute documents necessary to effect such transfer.

(f) Upon the execution of the formation agreement, and when the exchange of petitioner's stock for Hartford-Fairmont Co. stock had been made, the petitioner and its stockholders, as consideration for the above covenants of the Empire Machine Co., agreed to deliver to the Empire Machine Co. 45,000 shares of the common stock of the petitioner fully paid and nonassessable.

(g) All the stockholders of both the Hartford-Fairmont Co. and Empire Machine Co. agreed upon receiving the common stock of the petitioner to retransfer to the petitioner, without consideration, 10 percent of the respective amounts of such common stock so received. This was for the express purpose of placing in the treasury of petitioner 10,010 shares (the 10 shares arising from the consolidation of fractional shares) of petitioner's common stock for the purpose of being sold to the employees of the petitioner in the discretion of its directors.

9. The values of the patents, patent rights, and other assets of the Hartford-Fairmont Co., and of the patents, patent rights, and other stated assets of the Empire Machine Co. (transferred to the petitioner) were appraised by the officers of the Hartford-Fairmont Co., of the Empire Machine Co., and of the petitioner. The patents and patent rights and other stated assets of the Hartford-Fairmont Co. were appraised at the values at which they stood on the books of that corporation on December 31, 1922, namely, $2,870,742.29, and at that value were set up by the opening entries on petitioner's books. The patents, patent rights, and other stated assets of the Empire Machine Co. were appraised at 45/55 of the appraised values of the net assets of the Hartford-Fairmont Co., or $2,349,173.55, and at that value were set up by the opening entries on petitioner's books. Both purchases were made for considerations paid in no par value stock of the petitioner.

10. After the completion of the aforesaid purchases as at December 31, 1922, the Hartford-Fairmont Co. ceased to transact any business except that of completing the transfer of its assets to its successor, petitioner herein. The company was dissolved on January 7, 1929. The Empire Machine Co., however, did not cease to transact business. It has continued its business to the present, except as to the patents and other assets which it transferred to the petitioner.

11. The transfer of stocks.

(a) On November 29, 1922, in pursuance of the formation agreement of October 6, 1922, the petitioner issued and delivered to the stockholders of the Hartford-Fairmont Co. 54,991 shares of petitioner's common stock, being 12.7 shares of said stock in exchange for each of the then total of 4,330 shares outstanding of the Hartford-Fairmont Co.

(b) Also, on November 29, 1922, petitioner issued and delivered to the Empire Machine Co. 45,000 shares of petitioner's common stock, likewise in pursuance of the formation agreement.

(c) Finally, nine shares of petitioner's common stock, being the residue resulting from fractional shares in the above mentioned 12.7% exchange ratio, were transferred by agreement to one of the Hartford-Fairmont Co. stockholders. The total issued common stock of petitioner was 100,000 shares. The transfers above set forth are summarized as follows:

	Shares
To Fairmont stockholders in exchange	54,991
To Empire Machine Co	45,000
Residue transferred	9
Total	100,000

(d) On or before January 6, 1923, the Hartford-Fairmont Co. stockholders transferred to petitioner all of the Hartford-Fairmont Co.'s outstanding capital stock, being 4,330 shares. Of these, although all owned by the petitioner, 10 shares were by its direction recorded, one share each, in the names of 10 individuals, directors of petitioner, to qualify them as directors of the Hartford-Fairmont Co., but these individuals had no beneficial or equitable interest therein.

12. When the petitioner acquired the stock of the Hartford-Fairmont Co. and then took over the assets of that company it also assumed its liabilities, among which were notes totaling $361,000, payable in cash or preferred stock of that company or its successor. These notes were held, and petitioner apid tnem by issuing therefor to the noteholders an equal amount in par value of preferred stock of petitioner on October 2, 1922, as follows:

To creditors who were stockholders of Hartford-Fairmont Co-	1,985 1/2 shares
To creditors who were not stockholders of the Hartford-Fairmont Co	1,624 1/2 shares

In addition to the above, and at the same time, petitioner issued 290 shares of its preferred stock in payment of warrants held by certain stockholders of the Hartford-Fairmont Co. and 40 shares in payment of warrants held by creditors who were not stockholders of the Hartford-FairmontCo.

13. The basis for depreciation or amortization of the patents and patent rights which the petitioner acquired from the Hartford-Fairmont Co. is not in dispute. In Hartford-Empire Co.,26 B.T.A. 134">26 B.T.A. 134, the parties agreed that the transaction whereby the petitioner acquired the patents and patent rights from the Hartford-Fairmont Co. was a transaction whereby the cost basis for depreciation or amortization of those assets carried over to the petitioner with the term for depreciation on those patents and patent rights beginning August 27, 1918, and continuing for 17 years thereafter.

14. The howard Automatic Glass Feeder Co. (hereinafter called Howard Co.), was a corporation organized under the laws of Pennsylvania on February 20, 1917, and engaged in the business of inventing and developing machines, devices, and processes for the feeding of molten glass, obtaining patents thereon, and commercializing the same by leasing and licensing thereof.

By assignment of February 21, 1923, carrying out option contracts of June 23 and September 29, 1922, the petitioner acquired all of the various patents and patent rights of the Howard Co. (through the Hartford Special Machinery Co. which acted merely as petitioner's agent or "straw man" as was necessary because of existing exclusive and other licenses previously granted by the Howard Co.). The consideration for the acquisition of such assets by the petitioner was the payment of $50,300 in cash and the issuance to the Howard Co. stockholders of 4,497 shares of the petitioner's 8 percent preferred stock, which shares were issued and delivered on October 13, 1922. Thereafter, the Howard Co. ceased this field of business, though it continued in existence for the purposes of winding up its affairs until dissolved on June 17, 1926.

15. On the basis of the market value of the assets acquired by petitioner from the Hartford-Fairmont Co. as appraised, as set out in paragraph 9 above, and set up on petitioner's books, petitioner's common stock when issued had a value of $52.20 a share and the preferred stock when issued had a market value $100of a share.

16. In Hartford-Empire Co.,26 B.T.A. 134">26 B.T.A. 134, the question submitted to the Board was the correct amount of the allowance for exhaustion of patents and applications for patents acquired from the Hartford-Fairmont Co. for the years 1923 to 1928, inclusive. In connection therewith the parties filed a stipulation of facts with the Board which reads in part as follows:

24. Costs of Howard Patent Rights.

The costs of the Howard inventions, patent applications and patents contracted for in June 1922 and acquired by the Petitioner on February 21, 1923 (including those listed in Section 14) were as follows:

Purchase price January 1, 1923	$500,000.00
Additional expenses of purchase:
At January 1, 1923	469.84
During year ending December 31, 1924	7,428.75
Total Cost of Howard Patent Rights	507,898.59

25. Costs of Empire Patent Rights.

The costs of the Empire inventions, patent applications and patents contracted for in October, 1922, and acquired by the Petitioner on December 19, 1922 (including those listed in Section 15) were as follows:

Purchase price January 1, 1923	$2,274,348.05
Additional expenses of purchase:
During year ended December 31, 1923	2,703.14
Total Cost of Empire Patent Rights	2,277,051.19

The stipulation above referred to opens with the statement that it is "for the purpose of expediting the settlement of the above-entitled cases." In our report we referred to the stipulation of facts filed with the Board and said that it "is incorporated herein by reference as our findings of fact, but for the purpose of reporting our decision a brief summary of the stipulated facts will suffice." The recomputation of the deficiency under Rule 50 was made in accordance with the stipulation of facts filed and the Board's decision was entered thereon.

17. In the present deficiency notices the respondent has disallowed, for each of the years 1932, 1933, and 1934, $133,944.19 representing the depreciation on the Empire patents claimed as a deduction and $27,817.56 representing depreciation on the Howard patents claimed as a deduction.

18. The parties have stipulated:

(a) In the event the Board decides that petitioner's right to deductible amortization on the Empire and the Howard patents and patent rights and the bases, terms, and amounts thereof are matters of resadjudicata or estoppel as petitioner contends, then the deductions therefor claimed by petitioner on its returns for the years here involved are correct.

(b) In the event the Board decides that the issues respecting petitioner's claim for deductions on account of amortization on the Empire and the Howard patents and patent rights are not controlled by res adjudicata or estoppel, and that the transactions whereby petitioner acquired said assets constitute tax-free exchanges as determined in the deficiency notices, then the computation of said amortization allowances, as set out in the deficiency notices, is correct.

(c) In the event the Board decides that the issue respecting petitioner's claim for deductions on account of amortization on the Empire and the Howard patents and patent rights is not controlled by res adjudicata or estoppel but that the transactions whereby petitioner acquired said assets do not constitute statutory tax-free exchanges, as determined in the deficiency notices, then the deductions therefor claimed by petitioner on its returns for the years here involved are correct.

19. No determination recognizing taxable gain or deductible loss to the Empire Machine Co. on the transaction whereby the patents and patent rights of the Empire Machine Co. were transferred to the petitioner for common stock of the petitioner was reported by the Empire Machine Co. or made by the respondent.

20. No determination recognizing taxable gain or deductible loss to the Howard Automatic Glass Feeder Co. or to its stockholders on the transaction whereby the patents and patent rights of the Howard Co. were transferred to the petitioner for preferred stock of the petitioner and $50,300 cash was reported by the Howard Co. or its stockholders or made by the respondent, but the stockholders of the Howard Co. paid tax as required upon liquidation distributions received by them from the Howard Co. (including the $50,300 cash), and upon moneys received in redemption of the preferred stock of the petitioner issued to them as aforesaid. (All of the preferred stock of the petitioner was redeemed during the years 1923 to 1929 at par or at a premium.)

OPINION.

SMITH: The question for decision in these proceedings is whether the petitioner is entitled to deduct, from the gross income of each of the years 1932, 1933, and 1934, $133,944.19 representing depreciation on the Empire patents and $27,817.56 depreciation on the Howard patents. The petitioner has claimed and been allowed in its tax returns like amounts for depreciation on the Empire and the Howard patents for each of the years 1923 to 1931, inclusive. The allowance was taken upon the costs of the patents and patent rights to the petitioner as stipulated in Hartford-Empire Co.,26 B.T.A. 134">26 B.T.A. 134, which involved deficiencies determined for the years 1923 to 1928, inclusive. Petitioner has assumed that this was the correct basis for the computation of the allowance and the respondent has not questioned the correctness of the basis in the audit of the petitioner's returns for those years. For the taxable years before us the respondent contends that the petitioner is not entitled to allowances for depreciation based upon the values of patents and patent applications as of January 1, 1923, but upon the basis of cost to the predecessor owners. The respondent contends that the petitioner for years prior to 1932 has claimed and been allowed greater amounts for depreciation in respect of the Empire and the Howard patents than it was entitled to under the law; that it has already more than recovered the basis through deductions for depreciation; and, hence, that it is not entitled to any further deductions.

It is the position of the petitioner herein that the question of the proper basis for the computation of the allowances is res adjudicata; that the question has already been decided by the Board in Hartford-Empire Co., supra.

In Bouvier's Law Dictionary it is stated:

The doctrine of res judicata is plain and intelligible, and amounts simply to this, that a cause of action once finally determined, without appeal, between the parties, on the merits, by a competent tribunal, connot afterwards be litigated by a new proceeding either before the same or any other tribunal; Foster v. The Richard Busteed,100 Mass. 409">100 Mass. 409, 1 Am. Rep. 125">1 Am.Rep. 125.

In Sand Springs Railway Co.,31 B.T.A. 392">31 B.T.A. 392, the Board said at page 394:

The doctrine of res judicata is so well fixed in the law that no useful purpose could be served here by further discussion. Cromwell v. County of Sac,94 U.S. 351">94 U.S. 351, 352, and 353; New Orleans v. Citizens Bank,167 U.S. 371">167 U.S. 371; Southern Pacific Railroad Co. v. United States,168 U.S. 1">168 U.S. 1; United States v. Moser,266 U.S. 236">266 U.S. 236; Tait v. Western Maryland Railway Co.,289 U.S. 620">289 U.S. 620, 623; Mary Haller,26 B.T.A. 395">26 B.T.A. 395; Charles P. Leininger,29 B.T.A. 874">29 B.T.A. 874; Portage Silica Co.,29 B.T.A. 881">29 B.T.A. 881; Edwin J. Marshall,29 B.T.A. 1075">29 B.T.A. 1075.

Our inquiry, therefore, is as to the propriety of its application in bar of the pending proffer of evidence.

Since the parties to both proceedings are the same, but the causes of action different, the decision in the former cases is a bar here, if, and only if, "the point or question to be determined in the latter action is the same as that litigated and determined in the original action." Tait v. Western Maryland Railway Co., supra.

The question here is whether the basis for the computation of depreciation on the Empire and the Howard patents was judicially determined by the Board in the proceeding at 26 B.T.A. 134">26 B.T.A. 134.

The parties to the prior proceeding conceded that the basis for depreciation of the assets acquired by petitioner from the Hartford-Fairmont Co. was the same in the hands of petitioner as it had been in the hands of the Hartford-Fairmont Co. The only issue for decision by the Board in that connection was whether that basis was the cost of those assets to the Hartford-Fairmont Co. or their fair market value on March 1, 1913. The petitioner's basis for depreciation on the assets acquired from the Empire Machine Co. and the Howard Co. was not in issue in that case, nor was the question whether the acquisition of assets from any one of the three companies by the petitioner constituted a reorganization of nontaxable exchange. Quite naturally in the recomputation of the deficiencies under Rule 50 the parties took cognizance of the agreement which they had made between themselves with respect to the correct amount of depreciation on the Empire and the Howard patents and the Board entered the agreed upon computation as its decision in the case.

The petitioner contends that in Arthur Curtiss James,31 B.T.A. 712">31 B.T.A. 712, we held that a stipulation of facts filed by the parties in a prior proceeding made the question in the subquent proceeding res adjudicata. But in that case the question in issue before the Board was the amount of earnings or profits of the Phelps-Dodge Corporation accumulated since February 28, 1913, on hand and available for dividends on January 1, 1918. That was the precise question raised by the pleadings in the case of the same taxpayer, 13 B.T.A. 764">13 B.T.A. 764. Since the Board had adjudicated that question by its decision in the earlier case (albeit the decision was entered pursuant to a stipulation of the parties), the Board held that the plea of res adjudicata was well taken. The James case differs from the instant proceedings in that here we have for the first time the question of the proper depreciation allowance on the Empire and the Howard patents. It was not raised by the pleadings in the proceeding at 26 B.T.A. 134">26 B.T.A. 134, and, consequently, was not adjudicated by the Board in that proceeding.

An earlier judgment is conclusive only as to the precise facts, rights, questions or issues adjudicated in the earlier case that are again facts, rights, questions or issues presented for adjudication in the second case. Charles P. Leininger,29 B.T.A. 874">29 B.T.A. 874; D. F. Strickland,32 B.T.A. 804">32 B.T.A. 804; Terre Haute Electric Co.,33 B.T.A. 975">33 B.T.A. 975, 983; (C.C.A., 7th Cir.), 96 Fed.(2d) 383; Hanby v. Commissioner (C.C.A., 4th Cir.), 67 Fed.(2d) 125; Tait v. Western Maryland Railway Co.,289 U.S. 620">289 U.S. 620.

The res adjudicata plea of the petitioner can not be sustained.

The petitioner further submits that, wholly aside from the application of res adjudicata, the respondent is at this time estopped to deny that the petitioner is entitled to deduct the same amount of amortization on the Empire and the Howard patents for the years in question as has been allowed for years prior to 1932. It states, and the respondent does not deny, that the respondent was in possession of the same facts with respect to the computation of the amortization allowance for the prior years as for the taxable years; that therefore the respondent can not equitably at this time reverse his position with respect to the basis for the allowance of amortization on the Empire and the Howard patents.

Nowhere does it appear that the respondent has in any wise misled the petitioner to its detriment in the determination of the basis upon which the amortization allowances should be made. The simple facts are that in the returns for years prior to 1932 the transferors, the Hartford-Fairmont Co., Empire Machine Co., and Howard Co., all proceeded upon the theory that the transfers of assets made by those companies to the petitioner, effective as of January 1, 1923, were tax-free exchanges involving them in no tax liability. The respondent acquiesced in such claims. The petitioner claimed that the basis for the computation of amortization on the Empire and the Howard patents was a fair market value of the patents and applications for patents transferred to the petitioner as at January 1, 1923. The respondent acquiesced in such claim. We do not see, however, how the respondent is in any wise foreclosed from the computation of the correct amount of the amortization allowance for the taxable years 1932, 1933, and 1934 by such acquiescence. The theory of equitable estoppel has no application to this case. See James Couzens,11 B.T.A. 1040">11 B.T.A. 1040, 1147.

The petitioner further submits that even though its plea of res adjudicata and of equitable estoppel is not sustained, the basis for the computation of the amortization allowance is the fair market value of the patents and applications for patents on January 1, 1923; that under the provisions of the Revenue Act of 1921 the transactions by which the Empire Machine Co. and Howard Co. transferred assets to the petitioner were taxable transactions and that the basis to the petitioner for the amortization allowance is therefore the fair market value of the assets acquired.

The basis for depreciation of property for the years 1932 and 1933 is to be found in the Revenue Act of 1932 and the basis for 1934 in the Revenue Act of 1934. The pertinent provisions of the acts are identical. Therefore, reference will be made only to the 1932 Act.

Section 114 of the 1932 Act provides that the basis for depreciation of property shall be the basis provided in section 113 for determining gain or loss on sale or disposition of such property. Section 113(a) provides in part as follows:

(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. - If the property was acquired after December 31, 1917, by a corporation 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, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock of securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.

(8) PROPERTY ACQUIRED BY ISSUANCE OF STOCK OR AS PAID-IN SURPLUS. - If the property was acquired after December 31, 1920, by a corporation -

(a) by the issuance of its stock or securities in connection with a transaction described in section 112(b)(5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities) * * *

* * *

Then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Section 112(b)(5) provides:

(b) EXCHANGES SOLELY IN KIND. -

* * *

(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and inmmediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

It is quite clear that (1) if the acquisition by the petitioner of the Empire and the Howard patents and patent rights was in a transaction of the type described in section 112(b)(5), even though the consideration for the transfers of the propertirs included money, in addition to stock of the petitioner, or (2) if the acquisition was in connection with a reorganization and after the transfer of the property an interest or control of 50 percent or more remained in the transferors, or any of them, then, in either event, the basis for depreciation is the same as it would have been in the hands of the transferors, adjusted for the amount of gain or loss recognized to the transferors upon such transfers under the Revenue Act of 1921. In our opinion the transactions here under consideration fit within not merely one but both of the above requirements.

It is admitted that no gain or loss was recognized to the transferors, the Empire Machine Co. and the Howard Co., for the year in which the transfers were made. The respondent contends that such nonrecognition of gain of loss to the transferors was entirely prroper under the Revenue Act of 1921.

Section 202 of the 1921 Act provides in part:

(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -

* * *

(3) When (A) a person transfers any property, real, personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any such property to a corporation, and immediately agter the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer. For the purposes of this paragraph, a person is, or two or more persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

As to the mraning of the term "reorganization" as used in section 202(c)(2) of the 1921 Act, that paragraph provides:

(2) * * * The word "reorganization," as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form, or place or organization of a corporation (however effected); * * *

We consider first the question whether the exchanges of assets made by the stockholders of the Hartford-Fairmont Co. and by the Evpire Machine Co. and the Howard Co. for shares of stock of the petitioner in 1922 were tax-free exchanges as claimed by the transferors and allowed by the respondent. The facts bearing upon this issue are that the petitioner issued all of its common stock (100,000 shares) in the acquisition of all the shares of stock of the Hartford-Fairmont Co. and of most of the assets of the Empire Machine Co. Under the formation agreement the petitioner assumed the liabilities of the Hartford-Fairmont Co. The net value of the assets of that company is arrived at as follows:

Assets		$3,758,470.50
Less depreciation reserves and liabilities:
Total of depreciation reserves	$460,479.42
Due Empire Machine Co.	17,548.79
Notes payable	361,000.00
Due employees	48,700.00
		887,728.21
Assets (net)		2,870,742.29

The outstanding notes of $361,000 were payable in cash or preferred stock of Hartford-Fairmont Co., or its successor. The petitioner acquired these notes from the noteholders by issuing in exchange therefor 3,610 shares of its own preferred stock.

Included in the amount "Due employees $48,700" listed as a liability of the Hartford-Fairmont Co. were warrants in the amount of $33,000. The warrant holders were employees of that company and most of them were also stockholders. The petitioner acquired these warrants by issuing to the warrant holders in exchange for their warrants 330 shares of the petitioner's preferred stock.

As of January 1, 1923, the petitioner acquired all of the assets of the Howard Co., consisting of patents, patent rights, and contract rights valued at $500,000. As consideration therefor it paid $50,300 cash and issued 4,497 shares of its preferred stock.

It will thus be seen that the petitioner issued all of its common and preferred stock outstanding at January 1, 1923, in the acquisition of assets from the Hartford-Fairmont Co., Empire Machine Co., and Howard Co., and in the acquisition of the notes payable and warrants which the Hartford-Fairmont Co. had outstanding.

The petitioner contends that the noteholders and warrant holders of the Hartford-Fairmont Co. were not transferors within the meaning of the statute; also that the assets of the Howard Co. were acquired in a separate transaction from that relating to the acquisition of the assets of the Hartford-Fairmont Co. and Empire Machine Co., and, accordingly that it can not be held that there was a reorganization of the three companies mentioned within the meaning of the Revenue Act of 1921.

The respondent submits that the recipients of all of the issued common and preferred stock of the petitioner were transferors; that they transferred assets to the petitioner for shares of stock of the petitioner; and that such transferors correctly claimed, in 1922, that they had exchanged such assets for shares of stock of the petitioner in tax-free exchanges.

We are of the opinion that there is no merit in the contention of the petitioner that the noteholders and warrant holders of the Hartford-Fairmont Co. were not transferors within the meaning of the taxing statute. The notes and warrants were clearly property. We think that they fall in the same category as any other property, as, for instance, patents and applications for patents.

The petitioner further contends that the acquisition by it of the Howard Co.'s assets was separate and distinct from the acquisition of the shares of stock of the Hartford-Fairmont Co. and of the assets of the Empire Machine Co. It is true that the rormation agreement is silent with regard to the proposed acquisition of the Howard Co.'s assets. It is also true that negotiations for the acquisition of the assets of all three companies were going on at the same time. That the acquisition by the petitioner of the assets of the Howard Co. was a part of a plan for the formation of the petitioner is indicated by the following statement from the "Agreement for Purchase of Stock of Howard Automatic Glass Feeder Co." entered into on June 23, 1922:

WITNESSETH THAT:

Section 1. WHEREAS, the said Fairmont Company and interests associated with it are now in the course of organizing under the laws of the State of Delaware, a new corporation which shall be called the Hartford-Empire Company, hereinafter referred to as the Hartford Company, which Company, it is intended, shall take over the majority of stock of said Fairmont Company and the majority 0f the assets of the Empire Machine Company, a corporation organized under the laws of the State of Maine, * * *

The petitioner corporation had an authorized capital of 100,000 no par value common shares and 15,000 preferred shares of a par value of $100 each. The formation agreement was concerned only with the acquisition of assets of the Hartford-Fairmont Co. and Empire Machine Co. for the 100,000 no par value common shares. It is apparent, however, that a part of the preferred shares was for the acquisition of other properties. In fact, 3,940 shares of the preferred stock had been issued to the noteholders and warrant holders of the Hartford-Fairmont Co. prior to the date of the formation agreement and 4,497 shares of the preferred stock were issued to the Howard Co. only a few days agter the date of such agreement and in fulfillment of the agreement of the petitioner with that company dated June 23, 1922. It is furthermore to be noted that the petitioner was organized to consolidate the ownership of independent and complementary devices and processes for feeding and forming molten glass. The acquisition of the Howard Co.'s patents and applications for patents was necessary in carrying out the plan. In its brief the petitioner states that "petitioner had to buy the Howard patents at whatever cost and was forced to pay the price Howard regarded as their full market value." The Howard Co. was unquestionably a transferor of property to the petitioner. Where several transfers are made pursuant to a plan it is not even necessary that the several transfers be effected simultaneously. Portland Oil Co. v. Commissioner, 109 Fed.(2d) 479. In that case was involved the question whether after a transfer wherein no gain or loss was recognized the transferee corporation was entitled to a stepped-up basis upon the transferred property. The transfer occurred in 1929. The tax year in which the stepped-up basis was sought was 1931. The new corporation in that case had acquired a certain valuable contract from the old corporation for bonds of the new company and 75 percent of its stock. No gain or loss was recognized by the old corporation, but the shareholders reported their gains on the liquidation distributions when the old corporation was liquidated and dissolved. The other 25 percent of the stock of the new company had been previously issued for cash to the wives of the stockholders of the old corporation. Relying on section 113(a)(7) of the Revenue Act of 1928, the new company contended that, because the old corporation had only a 75 percent interest in the new company, it was not limited to the old company's basis for the property transferred. The court, however, found it unnecessary to consider section 113(a)(7) of the Revenue Act of ns 112(b)(5) and 113(a)(8) of the statute. The court held that the wives' payment of cash to the new corporation for its stock must be considered as one transaction with the old corporation's transfer of the contract; that the cash was "property"; and that therefore there was a transfer by the wives and the old corporation to the new corporation for all its stock (100 percent), and, therefore, the transferors, taken collectively, were in control of the new corporation. Similarly, here, the acquisition by the petitioner of the Hartford-Fairmont Co. stock, of the Empire patents, of the Howard patents, and of the Fairmont notes and warrants were all steps in a single plan The owners of these assets were transferors of property to the petitioner and they were the owners not only of 80 percent of the common and preferred shares of the petitioner but of 100 percent.

The petitioner also contends that the amounts of stock received by the transferors were not in substantially the same proportions as their interests in the property before the transfer. We think, however, the evidence shows that they were. The basis for determining this fact is the value of the assets at the date of transfer in comparison with the value of the stock received by each transferor. United Carbon Co. v. Commissioner, 90 Fed.(2d) 43. The following table shows the value of the assets to each transferor (or group of transferors) at the time of the transfer, the percentage of each in the total assets transferred to the petitioner, the percentage of stock in the petitioner corporation received by each in the exchange, and the differences between the percentages of interest before and after:

			Shares of Hartford-Empire Co. stock issued
Transferors	Value of assets at time of transfer	Percentage of total	Common	Preferred	Value of Hartford-Empire Co. stock issued to transferors (common stock, $52.20; preferred stock, $100)	Percentage of total	Difference between percentages
							Percent
(1) Group of stockholders of Hartford-Fairmont Co	$2,870,742.00	46.954	54,991		$2,870,742.00	47.344	+0.390
(2) Group of noteholders of Hartford-Fairmont Co	361,000.00	5.905		3,610	361,000.00	5.954	+.049
(3) Group of warrant holders of Hartford-Fairmont Co	33,000.00	.540		330	33,000.00	.544	+.004
(4) Empire-Machine Co	1,349,173.00	38.423	45,000		2,349,173.00	38.742	+.319
(5) Howard Automatic Glass Feeder Co	500,000.00	8.178		4,497	449,700.00	7.416	-.762
Total	6,113,915.00	100.000	99,991	8,437	6,063,615.00	100.000	0

Had it not been for the fact that the Howard Co. received $50,300 in cash as part consideration for the transfer of its assets to the petitioner there would be an absolute equivalence between the percentage of the total assets of each transferor and the percentage of the value of the shares received by each. The respondent argues that under the opinion of the court in United Carbon Co. v. Commissioner, supra, the value of the assets transferred by the Howard Co. should be reduced from $500,000 to $449,700, in which case there would be an absolute equivalence between the two columns of percentages in the above table. We think, however, that the variation in percentage by including the value of the Howard assets at $500,000, which was the agreed purchase price, makes the substantial equivalence required by the statute.

Even if the transaction by which the petitioner acquired the shares of stock of the Hartford-Fairmont Co. and assets of the Empire Machine Co. be treated separately from that by which it acquired the assets of the Howard Co. we nevertheless think that the amortization allowance on the "Empire" and "Howard" patents is subject to the provisions of section 113(a)(7) of the Revenue Acts of 1932 and 1934, for after the transfer of the former the transferors of the Fairmont-Hartford Co. stock and of the assets of the Empire Machine Co. had more than a 50 percent interest in the stock of the petitioner and, since the petitioner acquired substantially all of the assets of the Howard Co., those assets were acquired in a reorganization of that company. (See sec. 202(c)(3), Revenue Act of 1921.)

It is clear that under the provisions of the Revenue Acts of 1932 and 1934 it was not the intention of Congress that transferees acquiring assets on a tax-free exchange should be entitled to compute depreciation upon a different basis from that of the transferors. If this were so a taxpayer would receive taxable income which would be offset by allowances for depreciation, and, hence, never subject to income tax. The Revenue Acts of 1932 and 1934 are specific that a transferee receiving property in a tax-free exchange shall not have a stepped-up basis for the purpose of allowances for depreciation. See Fairbanks Court Wholesale Grocery Co. v. Commissioner (C.C.A., 7th Cir.), 84 Fed.(2d) 18, affirming Durand-McNeil-Horner Co.,30 B.T.A. 769">30 B.T.A. 769; certiorari denied, 299 U.S. 582">299 U.S. 582; Portland Oil Co. v. Commissioner, supra.In the Fairbanks Court Wholesale Grocery Co. case the statutory provision relied upon by the court is section 204(a)(7) of the 1924 Act, which section corresponds with section 113(a)(7) of the 1932 Act except that the 80 percent control required by the 1924 Act is changed to 50 percent in the 1932 Act. The court in its opinion stated: "We think it was the purpose of the section in question to prevent any so-called 'stepped-up' basis of valuation where no substantial amount of new capital was introduced."

In accordance with the stipulations of the parties, the petitioner is not entitled to any deduction for amortization of the patents and patent rights acquired by it from the Empire Machine Co. and the Howard Co. for the years 1932, 1933, and 1934.

Reviewed by the Board.

Decisions will be entered under Rule 50.