Court Opinion

ID: 4608610
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:43:04.196567+00
Date Added: 2024-06-11T08:13:29.827613
License: Public Domain

WESTERN INDIANA GRAVEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Western Indiana Gravel Co. v. CommissionerDocket No. 23855.United States Board of Tax Appeals25 B.T.A. 654; 1932 BTA LEXIS 1476; February 29, 1932, Promulgated *1476 C. G. Maxwell, Esq., for the petitioner.  L. A. Luce, Esq., for the respondent.  MATTHEWS *654  The present proceeding arises upon a determination by the respondent of a deficiency in petitioner's income and profits taxes for the calendar years 1920 and 1921, of approximately $47,890.71.  The petitioner assigns as error, (1) the failure to include the value of certain contracts entered into between the petitioner and a certain railway company about March 1, 1916, in the computation of invested capital for 1920 and/or 1921; (2) that no deduction was allowed in the years in question by reason of the diminution in value of these contracts through the efflux of time or other causes; and (3) that the respondent denied to the petitioner special assessment under section 327 of the Revenue Acts of 1918 and 1921.  FINDINGS OF FACT.  The petitioner is a corporation, incorporated under the laws of Indiana on February 26, 1916, with a capital stock of $100,000.  The organizers and corporators of the petitioner were M. A. Neville, F. D. Coppock, C. E. Patty, Guy C. Baker and H. M. Brown.  Neville was, up to April, 1916, general superintendent of the Cincinnati*1477  Northern Railroad, a part of a system operated by the Cleveland, Cincinnati, Chicago and St. Louis Railroad, hereinafter referred to as the Railroad.  Prior to the time of the incorporation of the petitioner, the Railroad owned gravel pits, among others, at Lafayette and Terre Haute, Indiana.  These pits supplied the Railroad with the gravel necessary for ballast on its roadbeds.  The Railroad was advised by its counsel that it did not have the necessary powers to selll the surplus gravel in the market.  Coppock had operated two pits for the Railroad in Ohio, and had also made an investigation of the Railroad's pits at Terre Haute and Lafayette.  In Ohio he had used a method of washing out the clay and dirt from the gravel which was very successful.  Neville believed that the pits could be operated by outsiders who could supply the Railroad and sell the surplus, to the mutual advantage *655  of the Railroad and the operators.  Terre Haute and Lafayette are within about 25 miles of the Illinois line and both Neville and Coppock knew that Indiana and Illinois were planning extensive road building requiring gravel.  Coppock and Neville, about 1915, after calculating the cost*1478  of the project, based on the estimated amount of gravel in the pits, cost of washing it, etc., outlined to certain of the Railroad officials a plan for farming out the Lafayette and Terre Haute pits.  Such a project was acceptable to the Railroad, as it would give it a practically perfect hallast for the roadbed, was very economical and would give the Railroad an increase in freight revenue through the shipments of gravel sold in the market.  Neville and Coppock took in three associates, Patty, Baker and Brown.  Neville and Coppock carried on the whole negotiation for a contract with the Railroad and, with their associates, constituted, when the petitioner corporation was organized, the sole stockholders and directors of the new corporation.  The oral discussions between Neville and Coppock and the Railroad officials began in June, 1915, and resulted in a written proposal by Neville to Worcester, vice president of the Railroad, on January 10, 1916.  This letter was signed as follows: "The Western Indiana Gravel Company, by M. A. Neville." In this letter the writer proposed that the company install a dredging, screening and washing plant at both Terre Haute and Lafayette and pay*1479  the Railroad a certain amount per cubic yard for all material sold; that if furnish the Railroad with different grades of gravel at stated prices, in consideration of which the Railroad would lease the gravel land at these two places for a period of 10 years, allowing the company to sell 100,000 cubic yards from each pit each year, the Railroad to furnish all necessary tracks.  This proposal was referred by Worcester to Paquette, the Railroad's chief engineer, on January 21, 1916, for suggestions.  Paquette answered on January 27, 1916, stating that he thought the proposition was acceptable, but that it should be made more specific as to the amount of track construction involved.  He added: I think that, as to the Lafayette pit, the contract should carry a condition which would permit us to remove gravel and material from the pit with our own shovel should it be necessary * * *.  In the absence of such a provision, the contract might be construed as an absolute lease of property.  Worcester replied to Paquette on January 29, 1916, saying, in part: We should not agree to build any tracks for their washing and screening plant, or pit tracks, but I think we should let them use*1480  such tracks as we already have in there which I understand are our old pit tracks.  and suggesting that Paquette have a contract prepared.  *656  Paquette accordingly had contracts drawn, with his own modifications of the proposal, covering the two gravel pits at Terre Haute and Lafayette.  The drafts were ready on February 8, 1916, when Paquette went over them very carefully, had final drafts typed out, approved them, and sent them "on their rounds" to other officers of the Railroad for approval.  It was the Railroad's custom never to prepare a contract until there was a substantial agreement with the other party, and in this case the matter had reached a point of agreement in the preliminary oral discussions between Paquette and Neville.  It was also the practice that all leases and contracts relating to property necessary to maintenance of the Railroad should be referred to the chief engineer, whose decision was generally conclusive and who put them in their final form.  Before execution by the Railroad a contract such as those here had to be approved by the general counsel in property matters, by the chief engineer in railroading matters, and generally by the chief engineer*1481  and general superintendent or general manager.  The present contracts went through the full course of executives.  The contracts in question, in accordance with the Railroad's practice, were not executed by the Railroad until they had already been executed by the petitioner.  The drafts were transmitted by the Railroad in a letter dated February 17, 1916, as follows: The Western Indiana Gravel Co., Van Wert, Ohio.  Gentlemen: I am enclosing original and duplicate drafts of contracts covering the installation of the gravel washing and screening plant and the operation and also the sale of material from this Company's pets [pits] at Lafayette and Terre Haute, Indiana.  Please have same properly executed and your signature properly attested, returning to me for execution on the part of this Company.  The five associates, Neville, Coppock, Patty, Baker and Brown, on February 18, 1916, met in Greenville, Ohio, and drew up articles of incorporation under the laws of Indiana.  Article 2, setting out the objects of incorporation, is as follows: The objects and purposes of this company are to carry on and transact the business of mining and taking from pits sand, gravel and*1482  stone, washing and screening the sand and gravel, and crushing the stone by means of machinery, and selling and delivering sand, gravel and crushed stone, and doing a general business in sand, gravel and crushed stone, and all things incident thereto.  Paquette's letter, addressed to the Western Indiana Gravel Company at Van Wert, Ohio, set out above, had not then reached the associates, but Neville knew from having seen the drafts of contracts in the chief engineer's office that the contracts would be concluded.  On February 26, 1916, a certificate of incorporation as the *657 Western Indiana Gravel Company, with a capital stock of $100,000, was issued to the five associates by the Secretary of State of Indiana.  On March 1, 1916, the petitioner corporation, through its president, Neville, and the Railroad, through its president, Smith, executed the four contracts, two licensing petitioner to operate the gravel pits and petitioner agreeing to furnish the Railroad ballast, one contract covering the pit at Terre Haute and one covering the pit at Lafayette, and the other two contracts licensing petitioner to sell gravel from the respective pits to third parties.  The contract*1483  with respect to the furnishing of ballast to the Railroad from the Lafayette pit, in which the Railroad is referred to as the party of the first part and the petitioner as the party of the second part, provides in part as follows: THIS AGREEMENT, made this first (1st) day of March, A.D. 1916, between The Cleveland, Cincinnati, Chicago and Saint Louis Railway Company, a corporation, organized under the laws of the States of Ohio and Indiana, as First Party, and The Western Indiana Gravel Company, a corporation, organized under the laws of the State of Indiana, as Second Party, WITNESSETH: * * * * * * the First Party licenses and permits the Second Party to operate, during the continuance of this agreement, the First Party's gravel pit at LaFayette, Tippecanoe County, Indiana, and upon the terms and conditions set forth the First Party's gravel pit at LaFayette, Tippecanoe County, Indiana, more fully described as follows: * * * 2.  The Second Party shall, at its own expense, construct and maintain the necessary roadway for the existing tracks at said gravel pit and for the additional tracks necessary in the operation of the said screening and washing plant to the satisfaction*1484  and approval of the First Party.  * * * 3.  The First Party shall, at its own expense, furnish the material for the track superstructure and the labor of laying and maintaining the same, except that it shall be the duty of the Second Party to keep the tracks serving the said washing and screening plant free from gravel, sand and other material which will form an obstruction to the safe use of the tracks.  * * * 9.  The Second Party hereby agrees to supply to the First Party, at its demand, ballast from said pit to the full capacity of the plant aforesaid in the proportion of sand and gravel required by the specifications of the First Party at fifteen cents (15??) per ton, f.o.b. cars at said plant; washed, screened gravel or washed, screened sand for concrete work, or a combination of washed, screened gravel and washed, screened sand in such proportions desired by the First Party, other than its specifications for ballast, at Twenty Cents (20??) per ton f.o.b. cars at said plant; crushed, screened and washed stone ballast in accordance with First Party's specifications at Thirty-five cents (35??) per ton, f.o.b. cars at said plant; a mixture of washed, crushed boulders and washed*1485  gravel ballast at a price which shall be determined by the proportionate amount of each material entering therein on the basis of the above prices.  10.  The First Party agrees to give to the Second Party an equitable share of its orders for ballast and concrete material for use in the territory contiguous *658  to said gravel pit, provided the quality of material is equal to and the cost per yard is as favorable as that of other dealers.  11.  It is understood and agreed that in the event of damage to the roadway of the First Party, or for any other reason, it is expedient or necessary to procure material from said pit, the First Party shall have the right, without compensation to the Second Party, to remove all necessary material from the said gravel pit with its own equipment, or, if requested by the First Party, the Second Party, with its own equipment, shall load such material in cars of the First Party, and the First Party shall pay to the Second Party the actual cost of loading such material plus ten per cent. (10%).  12.  The Second Party in all of its operations hereunder shall be regarded as an independent contractor, and it assumes and agrees to protect the First*1486  Party from all liability and expense on account of claims, suits and costs growing out of or connected with such operation by it and its employes, provided, however, that the First Party shall not be relieved hereby from liability for its own negligence and that of its servants and employes.  13.  It is understood and agreed that this agreement shall be in full force and effect for a period of ten (10) years from the date hereof.  After the expiration of said ten (10) years this agreement shall remain operative and continue in force from year to year, subject, however, to termination by either party giving the other party sixty (60) days' notice in writing of its intention so to do.  14.  It is agreed and understood that, in the event the land occupied by the Second Party with its plant under this agreement, is needed by the First Party for the development of its own facilities or the operation of its business, the First Party shall have the right to terminate this contract upon ninety (90) days' notice, upon equitable terms, considering at such time the investment in and value of the Second Party's plant for such operations, but excluding any consideration of future profits, and, *1487  if the parties cannot agree upon such terms, the same shall be ascertained by arbitration as provided in Article Sixteen (16) hereof.  The contract also provided that the second party should erect a complete gravel screening and washing plant of a certain capacity.  The contract with respect to the Terre Haute pit is identical in terms with the above.  The essential portions of the contract licensing the petitioner corporation to sell to third parties gravel from the Lafayette pit are as follows: WHEREAS, the parties hereto have this date entered into a contract for the installation of a gravel washing and screening plant in and for the operation of First Party's gravel pit located at LaFayette, Tippecanoe County, Indiana; NOW, THEREFORE, in consideration of the covenants and agreements to be kept and performed, the First Party licenses and permits the Second Party to sell to parties other than the First Party material from its said gravel pit aforesaid in consideration of the payment to the First Parth of Three Cents (3??) per cubic yard for material so disposed of, payable immediately upon the removal of the material, upon the following terms and conditions: 1.  The Second*1488  Party in all of its operations hereunder shall be regarded as an independent contractor, and it assumes and agrees to protect the First Party from all liability and expense on account of claims, suits and costs growing out of or connected with such operation by it and its employees, provided, however, *659  that the First Party shall not be relieved hereby from liability for its own negligence and that of its servants and employes.  2.  It is understood and agreed that this agreement shall be in full force and effect for a period of ten (10) years from the date hereof.  After the expiration of said ten (10) years this agreement shall remain operative and continue in force from year to year, subject, however, to termination by either party giving the other party sixty (60) days' notice in writing of its intention so to do.  3.  Upon failure of the Second Party to remove a minimum of the One Hundred (100) cars of gravel, sand and crushed boulders from said pit during any period of six (6) consecutive months, it is understood and agreed by the parties hereto that a failure so to do shall be construed as a cessation of operation of Second Party's plant, and, in such event, the*1489  First Party shall have the right to terminate this contract and either or all of the three (3) contracts dated March 1st, 1916, one of which provides for the installation of a gravel washing and screening plant and the operation of the First Party's gravel pit at LaFayette, Indiana, and the other two of which provide for the furnishing by the Second Party to the First Party of gravel, sand and crushed boulders from the Terre Haute, Indiana, gravel pit and the operation of said pit and the removal of material therefrom.  This commercial contract contains a paragraph as to termination identical with paragraph 13 of the ballast contract above.  The commercial contract for the Terre Haute pit is identical in language with the Lafayette commercial contract, except that as to material disposed of by the petitioner from the Terre Haute pit the Railroad is to be paid 5 cents per cubic yard.  Upon the incorporation of the petitioner the common stock of $100,000 of a par value of $100 was subscribed as follows: SharesM. A. Neville330F. D. Coppock300C. E. Patty300H. R. Brown50Guy C. Baker20The capital stock was increased on March 3, 1916, by $100,000*1490  of preferred stock in 1,000 shares of $100 each.  At a meeting of the board of directors on that same date, the following proposition made by the five corporators was accepted by the corporation: That they would sell, transfer, turn over and assign to the Western Indiana Gravel Company, all their right, title and interest in and to a certain contract held by them with the Big Four Railroad Company for certain gravel mining privileges at Terre Haute and LaFayette, and for certain gravel contracts and orders placed with the Big Four Railway Company; also, the patent rights to certain gravel mining and washing machinery; also, certain local gravel contracts at Terre Haute and LaFayette, Indiana; also, certain business secrets peculiar to the washed and screened gravel industry, for the sum of One Hundred Thousand Dollars ($100,000.00), the same to be paid for in common and preferred stock of said Western Indiana Gravel Company, in *660  proportions of Fifty Thousand Dollars ($50,000.00) each, the same to be issued to said individuals in the following proportions, to-wit: M. A. Neville, common stock $16,500 Preferred stock $16,500 F. D. Coppock, common stock 15,000 Preferred*1491  stock 15,000 C. E. Patty, common stock 15,000 Preferred stock 15,000 H. R. Brown, common stock 2,500 Preferred stock 2,500 Guy C. Baker common stock 1,000 Preferred stock 1,000 On March 6, 1916, the petitioner's board of directors authorized the corporation to execute a contract between itself and Neville, Coppock, Patty, Brown and Baker, by which the latter, "having paid for 50 per cent of the purchase price thereof by turning over to the said party of the second part all their right, title and interest in and to certain gravel mining privileges and contracts," were authorized to execute their individual notes for the balance, except Neville, who, having spent $5,000 in promoting petitioner corporation, was allowed to give his note for $28,000 instead of $33,000.  Under the provisions of the same agreement, Neville was to become president and general manager and remain so for ten years.  This agreement was executed on the same day.  It was stipulated by the parties to the present proceeding that the invested capital of the petitioner, not including any value which the Railroad gravel contracts might have had, was for 1920, $67,052.43; 1921, $122,201.22.  The borrowings*1492  of petitioner for the years 1920 and 1921 were as follows, the figures being cumulative and showing the total borrowings outstanding at the end of each month noted: Month19201921JanuaryNone.$10,000FebruaryNone.10,000March$40,00040,000April60,00065,000May65,00075,000June70,00085,000July$70,000$95,000August60,00095,000September35,00080,000October10,00055,000NovemberNone.30,000DecemberNone.25,000The average amount outstanding monthly in 1920 was $34,166, and in 1921, $55,416.  The amounts so borrowed were used in the ordinary conduct of the business, such as pay rolls, repairs, machinery and equipment, and were deposited to the petitioner's account in the bank and checked out in the ordinary course of business.  In December, 1920, and January, 1921, however, the petitioner bought for $20,000 the stock of the Warsaw Sand & Gravel Company.  The evidence is not clear whether all of this sum was paid from borrowed money.  The petitioner very seldom took notes from its customers and never discounted them.  Its regular terms were thirty days net.  Petitioner *661  gave its note to the banks*1493  for loans and did not pledge its accounts receivable.  In 1920 the total interest paid by the petitioner, as shown by its return, was $2,347.66.  The interest paid in 1921 by the petitioner, as shown by its return, was $1,396.83.  Petitioner's accounts receivable and notes receivable for 1920 and 1921 were as follows: AccountsNotesMonth1920192119201921JanuaryNone.$43,018.36None.$2,500.00FebruaryNone.36,131.79None.2,500.00March$1,832.1830,354.44$168.992,500.00April23,173.2845,633.41138.992,500.00May48,968.3766,046.13123.992,500.00June78,172.1287,495.40None.2,500.00July99,417.89118,872.94None.2,500.00August113,319.42167,269.39None.None.September94,314.05159,142.262,500.00None.October100,640.98145,566.392,500.002,498.31November89,939.31127,790.492,500.002,498.31December77,502.34105,528.352,500.00None.Petitioner's productive season lies between May and November, a fact which tends to explain the trend of the above tables.  OPINION.  MATTHEWS: This proceeding involves three principal questions: (1) whether the value*1494  of the four contracts executed on March 1, 1916, between the petitioner and the Railroad Company is includable in petitioner's invested capital; (2) whether a deduction may be allowed petitioner in respect of exhaustion of the same contracts; and (3) whether the petitioner's condition in 1920 and 1921 was such as to entitle it to special assessment under section 327.  Certain secondary questions arise which can be disposed of in the consideration of the major issues.  As to the first question, invested capital, the controlling provisions of the 1918 and 1921 Revenue Acts (which in these respects are identical) are set out by footnote. 1*1495 *662  The statute requires that the property be "bona fide paid in for stock or shares," in order to be included in invested capital.  The petitioner contends that this requirement is met by the transfer of the rights under the contracts by Neville and his associates in exchange for stock of the corporation under the corporate resolution of March 3, 1916; and that the rights had a value at that time equal to the par value of the stock issued therefor, or $100,000.  On the evidence we are of the opinion that the associates held in their individual capacities no rights in these contracts which they could have transferred to the petitioner corporation on March 3, 1916.  It is necessary here to call attention to but a few facts to sustain this conclusion.  The letter of January 10, 1916, in which Neville and his associates made the offer to the Railroad, is signed "Western Indiana Gravel Company, by M. A. Neville." The Railroad's letter of February 17, 1916, submitting the contracts to Neville and his associates, is addressed to the Western Indiana Gravel Company; and in all four contracts the second party is designated as "The Western Indiana Gravel Co., a corporation organized*1496  under the laws of the State of Indiana." That letter requested that the contracts be executed and returned to the Railroad, "for execution on the part of this company." It appears as a settled policy of the Railroad that it would sign a contract only after an agreement had been reached and the other party had already signed.  Neville, having seen the completed drafts of the contracts in the chief engineer's office, proceeded on February 18 to incorporate himself and his associates as the Western Indiana Gravel Company.  The certificate of incorporation was issued by the State of Indiana on February 26.  The execution of the contracts by the petitioner took place a few days later, on March 1.  We are unable to perceive, on this evidence, that any valid, legally binding contract between the five associates and the Railroad Company existed prior to the formal execution of the four contracts on March 1 by the petitioner corporation.  Summarized, the facts clearly show that the five associates, through Neville and Coppock, had reached a general understanding with *663  officials of the Railroad Company, in particular Worcester and Paquette, with respect to the two gravel beds; *1497  that this understanding finally crystallized into a definite written offer by Neville in the name of the Western Indiana Gravel Company; that this offer was considered and modified in some respects by the Railroad Company; that the Railroad Company submitted formal contracts to the associates, which may be considered in view of the modifications a counteroffer; and that these contracts were accepted and executed by the Western Indiana Gravel Company, a corporation, acting through its agent and president, M. A. Neville, and at the same time, but not until then, accepted and executed by the Railroad.  On these facts we find no prior contract between the Railroad and the associates which the latter could assign to the new corporation, as they attempted to do by the resolution of March 3; and there was, of course, no such assignment.  The only contracts were those executed by the petitioner corporation on March 1.  The present case is very similar on its facts to , decided by the United States District Court for the Western District of Pennsylvania, the principal differences being that in the Kaufmann case, the*1498  taxpayers had concluded before incorporation an agreement for a lease and the terms of that agreement provided for the creation of a corporation, with a certain paid-in capital, etc., and which should, and did, become the lessee.  The contentions of the taxpayer, that the value of the lease should be included in its paid-in surplus and that a deduction should be allowed for the lease's exhaustion, are substantially the same as here.  The court in that case said: The facts in this case do not disclose that anything of value was paid in to the corporation in connection with this alleged lease.  The incorporators themselves bargained for this lease to be made to the corporation.  They did not assign the lease to the corporation; in the promotion and organization of the corporation the lease was provided for.  * * * There was nothing paid in to this corporation by anybody, so far as this lease was concerned.  The parties themselves negotiating for the lease had in contemplation that it could be performed only by the corporation; and the corporation acquired the lease not by assignment but by direct grant from the Oliver Estate.  The shareholders in the corporation really contributed*1499  nothing of value to the corporation so far as this lease is concerned.  The position we have taken is supported by the Circuit Court of Appeals, 4th Circuit, in . The views we have taken here, and those expressed by the 4th Circuit are in entire accord with the Supreme Court in the case of  (388) * * *.  Cf. . We hold, therefore, that there was here no such paying in of property for shares as to bring that property within the purview *664  of the statute for purpose of inclusion in the petitioner's invested capital.  The petitioner's second contention is that a deduction of $10,000 a year for ten years should have been allowed by way of exhaustion of the value of the contracts upon acquisition.  As the contracts cost the petitioner nothing, there is no basis for an exhaustion allowance.  We come now to the third issue, whether the petitioner is entitled to special assessment under section 328 of the Revenue Acts of 1918 and 1921, by reason of its coming within one of the categories of section 327. *1500  The relevant portion of the last named section (identical in the two acts) is set out by footnote. 1The petitioner rests its claim to special assessment on two grounds: (1) borrowed capital; (2) the exclusion of the value of the contracts in question.  We shall consider them in this order.  The invested capital of petitioner, not including any value the gravel contracts might have had, was for 1920, $67,062.43; and 1921, $122,201.22.  The peak of the petitioner's borrowings was always reached in midsummer and the peak of its accounts receivable for both years was also reached in the same*1501  months, the rise and fall of both accounts being explained by the fact that petitioner's productive season lay between May and November.  But mere proof of borrowings does not prove an abnormality.  We are not told by the petitioner that the relation of borrowed money to invested capital here shown is unusual in the gravel business, and, in the absence of such evidence, there is nothing upon which we may base an opinion that the use of borrowed money in these amounts created an abnormality.  ; ; ; ; and . It remains to decide whether the exclusion from invested capital of the value of the four contracts in itself creates an abnormality.  It is perfectly clear, at the outset, that the mere statutory exclusion of an asset from invested capital does not of itself justify special assessment.  *1502 ; W. E. Beckmann Bakers'& *665 ;; ; . Engrafted on this rule, however, is the exception adopted in , where the asset excluded for statutory reasons is a substantial part of its capital and productive of a very substantial part of the taxpayer's income.  ; ; . But the petitioner can not avail itself of this exception, for in the above cases the asset excluded for statutory reasons was paid in for stock, and while the asset was not part of the invested capital, as defined by the statute, it was nevertheless an unrecognized capital asset largely productive of the petitioner's income, so that its exclusion would result in abnormality.  Such is not the case here.  The contracts were not paid in for stock, *1503  so that the petitioner has not met the first condition of its claim.  ; . Moreover, the petitioner did not have a patent right or even a leasehold.  The most that it had was a mere contract right which the Railroad might terminate on ninety days' notice, "upon equitable terms, considering at such time the investment in and value of the second party's plant for such operations, but excluding any consideration of future profits." The value of that right has not been established.  The petitioner here is attempting to attribute to the contract the value of future profits which might or might not be realized, and which, even if realized, would result not wholly from the contract itself, but also from the petitioner's labor and its capital invested in physical equipment.  We can not find in this situation any abnormality.  As we said in Coca-Cola Bottling Works of Pittsburgh, 1. B.T.A. 267, with respect to a contract (excluded for invested capital purposes) for bottling and selling Coca-cola in a given territory: *1504  * * * The profits they realize in a given year are the result of the existence of these contracts, but whether they do realize profits is dependent upon factors outside of the contracts, such as management of the concern, business method pursued, zeal with which they push the business, capital investment necessary for carrying on the business, etc.  And where the full capital which is invested in the business and which is necessary for its operation is recognized for invested capital purposes, we do not think an abnormality exists because there has not been taken into consideration a value which may attach to the contract under which the profits were realized, but which represents no investment on the part of the petitioner.  Cf. ; ; ; and . *666  Cf. ; . We find no reason, therefore, to allow petitioner the benefit of assessment under sections 327 and 328 of the*1505  revenue acts.  Judgment will be entered for the respondent.Footnotes1. SEC. 325. (a) That as used in this title - The term "intangible property" means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property; The term "tangible property" means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property; * * * SEC. 326. (a) That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section): * * * (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * * * * * (5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided,↩ That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year; * * * 1. SEC. 327.  That in the following cases the tax shall be determined as provided in section 328: * * * (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328.  * * * ↩