Court Opinion

ID: 4604881
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:09.366262+00
Date Added: 2024-06-11T07:53:04.876547
License: Public Domain

SONORA PHONOGRAPH CO., INC., AND SONORA, INC., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sonora Phonograph Co. v. CommissionerDocket No. 7419.United States Board of Tax Appeals16 B.T.A. 1172; 1929 BTA LEXIS 2437; June 27, 1929, Promulgated *2437  1.  The mere fact that a mixed aggregate of tangible and intangible assets was paid in for stock and it is impossible to determine the respective values of the two classes of assets at the time of acquisition, is no ground for special assessment where a value for the mixed aggregate was allowed in invested capital equal to the par value of the stock issued therefor without any reduction on account of intangibles so acquired, and where it is not shown that the total value of the mixed aggregate exceeded the par value of the stock issued therefor.  2.  A contract may be advantageous in the sense that substantial profits were made thereunder, but where the evidence shows that the contract was entered into with mutual consideration on both sides and that the consideration given by the party claiming an abnormal condition on account of the value of the contract does not appear to have been less than a reasonable consideration, based on the profits which resulted therefrom, held that no basis for special assessment exists on account of such contract.  3.  The fact that section 331 of the Revenue Act of 1918 requires the exclusion of all assets from the invested capital of corporation*2438  A, one of the two members of an affiliated group, is no ground for special assessment when it is not shown that corporation B, the other member of the affiliated group, from which the assets passed, through the medium of an intervening stockholder, to corporation A, would have been entitled to special assessment had corporation A not been formed and the assets transferred thereto.  4.  Held that one of the petitioners against whom a delinquency penalty was determined is not subject to such penalty.  George E. Cleary, Esq., and Arnold Markel, C.P.A., for the petitioners.  Eugene Meacham, Esq., and C. E. Lowery, Esq., for the respondent.  LITTLETON*1173  This is a proceeding for the redetermination of a deficiency in income and profits tax of $85,836.71 for 1918 with respect to the Sonora Phonograph Co., Inc., and, as stated in the amended petition, a deficiency in income and profits taxes and delinquency penalty of $27,224.72 for 1918 with respect to Sonora, Inc.  The matters in controversy are whether the Commissioner erred (1) in refusing to determine the profits-tax liability of these corporations, which were affiliated in 1918, *2439  under the provisions of section 328 of the Revenue Act of 1918, and (2) in determining that Sonora, Inc., is subject to a delinquency penalty of 25 per cent.  With respect to issue No. 1, the trial of the case was limited to the question of whether the petitioners come within the purview of section 327.  FINDINGS OF FACT.  The petitioners are New York corporations, with their principal offices in New York City, and during 1918 were affiliated companies.  The name of the Sonora Phonograph Co., Inc., formerly was Sonora Phonograph Sales Co., and the name of Sonora, Inc., formerly was Sonora Phonograph Corporation.  While the petitioners during 1918 operated and filed their returns for that year under the names formerly used by them, the petition was filed in the names now used by them.  Hereinafter, the petitioners will be referred to by the names under which the returns were filed.  From about 1909 until 1912 an organization known as the Sonora Phonograph Co. was in operation and engaged in the manufacture of phonographs.  In 1912 the company went into bankruptcy and about the middle of that year its assets were sold under a court order to one Susan D. Brightson.  In January, *2440  1913, the Sonora Phonograph Corporation was organized and George E. Brightson, husband of Susan D. Brightson, became its president.  On January 27, 1913, the directors accepted an offer made to the corporation by Susan D. Brightson, whereby she agreed to sell to it all the assets purchased by her from the trustee in bankruptcy of the Sonora Phonograph Co., and such assets as she had subsequently acquired, for the sum of $25,000, to be paid by the corporation issuing to her or to her order 250 shares of the capital stock of the Sonora Phonograph Corporation, of a par value of $100 each.  Mrs. Brightson thereupon transferred to the corporation the assets mentioned in the offer, consisting of phonographs and parts, tools, machinery, office and shop fixtures and *1174  furniture, patents, patent rights and applications for patents, contracts, accounts receivable, good will and trade-marks, for which the corporation issued to her $25,000 par value of its stock.  No attempt was made to value separately the tangible and intangible assets thus acquired.  While some of the tangible assets could have been valued separately, the remainder of them largely depended for their value upon their*2441  use in connection with the intangible assets.  A value for this mixed aggregate of tangible and intangible assets, equal to the par value of stock issued therefor, was allowed in invested capital by the Commissioner without any reduction on account of the intangibles so acquired.  The Berliner patent, which practically controlled the entire phonograph industry, expired in 1912.  The Victor Talking Machine Co. owned this patent and under it completely dominated the phonograph industry.  The Sonora Phonograph Co. was the only independent company, and with the exception of the Victor, Columbia, and Edison Companies, was the only company that made phonographs prior to the expiration of the Berliner patent.  After the expiration of the Berliner patent in 1912, the Victor Talking Machine Co. had outstanding certain patents which were recognized as the most important patents in the phonograph industry and which, if the company were successful in having sustained, would have meant that no other phonograph company could have manufactured and sold what was then known as the enclosed horn machine.  Soon after the Sonora Phonograph Corporation began business in 1913, the Victor Talking Machine*2442  Co. instituted suit against it for alleged infringement of patents covering the enclosed horn, sounding boards, and other important elements in phonographs.  After the case had been pending for some time, negotiations were begun with the Victor Talking Machine Co. looking towards a settlement of the suit by the Victor Talking Machine Co. granting the Sonora Phonograph Corporation a license permitting it to operate under the patents.  While the Victor Talking Machine Co. at first refused to consider a settlement of the suit on this basis, it finally accepted it, and the litigation was adjusted and concluded.  As a result of this the Victor Talking Machine Co. on October 18, 1916, entered into a license agreement with the Sonora Phonograph Corporation permitting the latter to continue the manufacture of the machines it was then producing and providing for a royalty payable quarterly of 2 1/2 per cent of the gross receipts from sales of all talking machines by the Sonora Phonograph Corporation.  This royalty arrangement was modified on September 30, 1918, to provide for a royalty payment of $30,000 per annum in lieu of the percentage royalty, which was a reduction in the amount previously*2443  paid.  This license agreement, while nonexclusive in terms, was the *1175  only license agreement granted by the Victor Talking Machine Co., except certain cooperative licensing agreements with the Columbia Company.  The favorable character of the foregoing disposition of the pending litigation, from the point of view of the Sonora Phonograph Corporation, was that the suits were settled without the corporation being subjected to the risk of having the patents of the Victor Talking Machine Co. sustained as valid and it being determined that they had been infringed by the former company, or without the patents being declared invalid and thus open the field to every phonograph company.  Immediately after the making of the agreement, the Sonora Phonograph Corporation included in its advertisements a statement that the Sonora Phonograph was manufactured and sold under an agreement which permitted it to operate under the basic patents of the phonograph industry and that dealers selling it were safe from troublesome litigation.  Under the license agreement, large profits were earned by the Sonora Phonograph Corporation.  The agreement gave the customers of the Sonora Phonograph*2444  Corporation the right to handle that corporation's products without fear of being molested by the Victor Talking Machine Co., which theretofore had made various kinds of threats.  These threats had interfered with the business of the Sonora Phonograph Corporation by preventing it from getting many regular customers.  Prior to the making of the agreement, the Sonora Phonograph Corporation had found it very difficult to get the Victor dealers to handle Sonora phonographs because up to that time the Victor Talking Machine Co. had required its dealers to be exclusive Victor dealers and not sell any other make of phonograph.  After the making of the agreement, the Sonora Phonograph Corporation was able to get these dealers, who understood the music business better than any other dealers and who were the best and most important dealers in the country to handle the Sonora line of phonographs.  The fact that the agreement enabled the corporation to get the Victor dealers also enabled it to get other dealers that it had not been able to get before, and, as a result, it secured a great many large accounts from dealers who were not handling the Victor phonographs.  By having entered into the*2445  agreement, the Sonora Phonograph Corporation was enabled to break sales resistance on the part of dealers.  The agreement put the dealers in a receptive attitude and made them willing to listen to Sonora salesmen, which was something that they refused to do before.  On May 10, 1917, the Sonora Phonograph Corporation entered into an agreement with Jacob Schechter, whereby he acquired, *1176  among other rights (1) the exclusive right to distribute throughout the world all articles manufactured or produced by the Sonora Phonograph Corporation or by others for it during its existence, (2) all the patents and applications for patents owned by the corporation, (3) all trade-marks then owned by the corporation, together with any trade-marks, trade names or rights thereafter acquired by it, (4) all the corporation's rights in and to its agreements with suppliers of merchandise, (5) all the corporation's rights under agreements with jobbers and dealers.  The aforementioned contract between Schechter and the Sonora Phonograph Corporation provided, among other things, that: The purpose of this agreement being to insure to SCHECHTER as such exclusive distributor, a continued source*2446  of supply of all goods manufactured, produced or controlled by the SONORA CORPORATION, or by others for and on its behalf, AND WHEREAS, all of the patents owned or which may be hereafter acquired by the SONORA CORPORATION, by these presents, are sold, assigned and transferred to SCHECHTER, - the SONORA CORPORATION reserving only the right and privilege to manufacture under the same for SCHECHTER, - it is understood that SCHECHTER shall only avail himself of the right to sell and use articles manufactured thereunder, and shall not avail himself of the right to manufacture under the same, excepting only that in case the SONORA CORPORATION should at any time refuse to manufacture said or any of said articles for SCHECHTER, or should it neglect or fail so to do, or in any other respect fail to perform and carry out this agreement, then and thereupon SCHECHTER, at his election, may avail himself of the sole and exclusive privilege to make and manufacture, or to have made and manufactured on his behalf, said phonographs, talking machines, and parts therefor, and all other goods, under any of the patents, trade-marks and trade-names above referred to, or otherwise.  * * * The agreement*2447  provided that Schechter should be allowed a minimum discount of 65 per cent of the list price on all goods sold, with an additional discount of 2 per cent on all bills paid by the 15th of the month following the delivery of goods.  It was contemplated by the parties that the Sonora Phonograph Corporation should earn from 2 to 2 1/2 per cent net on the goods sold to Schechter and that if necessary the discounts should be adjusted so that the net profits would not exceed 2 1/2 per cent of the sales.  Schechter agreed to purchase and pay for at least $600,000 of goods for the last seven months of 1917, $1,500,000 of goods for each of the years 1918 and 1919, and larger amounts in later years.  The agreement also provided for its assignment by Schechter to a corporation which he proposed to organize.  The proposed corporation, the Sonora Phonograph Sales Co., was incorporated in May, 1917, and the first meeting of the stockholders and incorporators was held on June 1, 1917.  At this meeting an offer from Schechter on behalf of himself and others to assign to the Sonora Phonograph Sales Co. the contract of May 10, 1917, with *1177  the Sonora Phonograph Corporation, was accepted. *2448  The consideration for the transfer was to be 60,000 shares, or $6,000,000 par value, of the capital stock of the Sonora Phonograph Sales Co., of which amount $1,200,000 par value was to be transferred to the treasury of the Sonora Phonograph Sales Co. to be sold for the purpose of procuring additional working capital for that company.  Schechter had been acting as counsel for the Sonora Phonograph Corporation since 1913, and in accepting the contract from that corporation and transferring it to the Sonora Phonograph Sales Co. for stock, he acted in a fiduciary capacity, in large part, for stockholders in the Sonora Phonograph Corporation.  On June 1, 1917, temporary certificates for the stock of the Sonora Phonograph Sales Co. were issued as follows: NameCertificate No.Number of sharesTreasury Sonora Phonograph Sales Co., Inc112,000George E. Brightson238,400Waldo G. Morse37,680Jacob Schechter41,152John L. Lotsch576860,000Of the foregoing individuals, George E. Brightson was president and one of the principal stockholders in the Sonora Phonograph Corporation, and Waldo G. Morse and Jacob Schechter were likewise stockholders*2449  in the same company.  The two corporations had the same officers and were affiliated for income and profits-tax purposes in 1918.  During 1917 the Sonora Phonograph Sales Co. made six sales of its stock for cash $75at per share.  None of the sales were for more than 70 shares.  In May, 1918, 5,000 shares of the stock were sold to George E. Brightson, president of the company, for $375,000, or at the rate of $75 per share, payable $25,000 in cash during the month of May, and the remainder payable by a series of notes bearing 4 per cent interest and maturing over a period of from 3 to 30 months.  The net sales and the amounts expended for advertising from February 1, 1915, to May 31, 1917, and net profits from February 1, 1915, to December 31, 1918, of the Sonora Phonograph Corporation, were as follows: Net salesAdvertisingNet profitsFebruary 1, 1915, to January 31, 1916$538,290.03$24,689.90$113,917.35February 1, 1916, to January 31, 19171,342,413.6174,149.18206,896.35February 1, 1917, to May 31, 1917619,014.7939,604.03February 1, 1917, to December 31, 191756,118.05January 1, 1918, to May 31, 191814,659.89June 1, 1918 to December 31, 191832,354.95*2450 *1178  The sales, amounts expended for advertising, and net profits of the Sonora Phonograph Sales Co. from June 1, 1917, to December 31, 1918, were as follows: Net salesAdvertisingNet profitsJune 1, 1917, to May 31, 1918$2,336,263.21$144,224.16$41,040.64June 1, 1918, to December 31, 19181,902,776.15122,855.97155,693.74The tangible and intangible assets of the Sonora Phonograph Corporation on the following dates were carried on its books at the amounts indicated: Tangible assetsIntangible assetsFebruary 1, 1915$41,343.80Patents and good will$25,000.00January 31, 1916136,375.53Patents and good will3,000.00January 31, 1917343,498.32Patents3,600.00The tangible and intangible assets of the Sonora Phonograph Sales Co. on the following dates were carried on its books at the amounts indicated: Tangible assetsIntangible assetsMay 31, 1918$729,565.64Contract with Sonora PhonographCorporation$5,100,000.00Treasury stock211,475.00December 31, 1918884,859.38Contract with Sonora PhonographCorporation5,100,000.00Treasury stock211,875.00December 31, 19191,246,100.45Contracts with Sonora PhonographCorporation5,311,012.03Treasury stock82,555.00*2451  The Sonora Phonograph Sales Co. and Sonora Phonograph Corporation reported in their returns for 1918 invested capital of $1,911,137.25 and $248,945.53, respectively, or a total of $2,160,082.78.  The respondent determined their consolidated invested capital to be $692,625.29.  In doing so he eliminated, among other things, an amount of $1,310,625 on account of intangibles acquired by Sonora Phonograph Sales Co. under the contract of Schechter with the Sonora Phonograph Corporation.  The amount of $1,310,625 represented 25 per cent of the combined capital stock outstanding of the petitioners.  The respondent determined the consolidated net income of the petitioners to be $249,810.19, and the war-profits and excess-profits-tax liability to be $142,038.13.  On March 15, 1919, there was filed with the collector of internal revenue at New York, N.Y., a "Tentative Return and Estimate of Corporation Income and Profits Taxes and Request for Extension of *1179  Time for Filing Return." In the space at the top of the form for the taxpayer's name appeared the name "Sonora Phonograph Sales Company." In the body of the form after the printed words "Estimated amount of tax" appear the*2452  typewritten words "Consolidated with Sonora Phonograph Corp. $40,000." This was the only tentative return filed by either of the petitioners, who had the same officers.  On June 16, 1919, the Sonora Phonograph Corporation filed a separate return for the calendar year 1918, showing its income and invested capital in detail, and the Sonora Phonograph Sales Co. also filed a separate return for the calendar year 1918, showing its income and invested capital in detail.  June 15, 1919, was Sunday, and the returns were filed the following day.  A penalty of 25 per cent of the tax reported on the return of the Sonora Phonograph Corporation, or $6,249.23, was assessed, but in January, 1927, the amount was abated.  The Commissioner has determined that the petitioners were affiliated during 1918, and has determined their tax liability on a consolidated basis.  In determining the deficiency in tax here involved against the Sonora Phonograph Corporation, he also determined a 25 per cent penalty of $10,444.33.  OPINION.  LITTLETON: The first error assigned is that the Commissioner refused to determine the profits tax of the petitioners under the provisions of sections 327 and 328 of the Revenue*2453  Act of 1918.  As the basis of this assignment of error, the petitioners contend that three grounds exist which would bring them within the provisions of section 327 and, therefore, entitled them to have the tax computed as provided in section 328.  We will consider these contentions in the order in which the events occurred which gave rise to the facts on which they are based.  First, it is urged that special assessment should be granted for the reason that in 1913, at the date of the organization of the Sonora Phonograph Corporation, this corporation issued stock, having a par value of $25,000, for a mixed aggregate of tangible and intangible assets whose separate value at that time could not be satisfactorily determined.  What the total value of these assets was is not shown, though it does appear that they were acquired from a trustee in bankruptcy shortly prior to the time when they were paid in to the corporation for stock, and there is some evidence to the effect that the price paid to the trustee in bankruptcy was the same as the par value of the stock issued therefor.  It further appears that a value for the mixed aggregate of tangible and intangible assets equal to the par*2454  value of the stock issued therefor was allowed in invested capital by the Commissioner, without any reduction on account of the intangibles so acquired.  *1180  Under such circumstances, we fail to see where a basis for the application of the special assessment provisions exists.  As we understand the intendment of these sections, it is to grant taxpayers relief - not to increase the tax on account thereof.  For example, in the case of an acquisition of a mixed aggregate of tangibles and intangibles for stock, and where the value as an aggregate was shown but it was not possible to make a segregation as between the two classes, an injustice might be done where all or any part of the value was ascribed to intangibles, for the reason that the limitations prescribed by section 326 with respect to the acquisition of intangibles with stock would apply and might thereby cause an excessive reduction in invested capital, but where the Commissioner has seen fit to allow the total mixed-aggregate-acquisition cost without any reduction on account of intangibles which were acquired, and it has not been shown that there was error in his action, we fail to see where there is occasion to invoke*2455  the special assessment provisions or that the taxpayers have cause for complaint.  Cf. . The next ground urged is that special assessment should be granted, for the reason that a contract of substantial value was acquired in 1916, which was an important income-producing factor in 1918, but which was not reflected in invested capital for such year, thereby producing an abnormal condition.  A brief recital of the pertinent facts will make the contention clear.  Some three or four years prior to 1916 the Victor Talking Maching Co. brought certain suits against the Sonora Phonograph Corporation for alleged infringements of patents held by the former company.  Finally, the litigation was compromised under an agreement in which the aforementioned suits were withdrawn and an agreement was entered into under which the Sonora Phonograph Corporation was permitted to operate, with specified restrictions, under certain patents owned by the Victor Talking Machine Co.  This last-named agreement provided for the payment by the Sonora Phonograph Corporation of a royalty of 2 1/2 per cent of its gross receipts from the sale of talking machines. *2456  The contract proved profitable to the Sonora Phonograph Corporation.  What the petitioners contend is that because this contract was an important income-producing factor in their business and was not recognized among its assets at any cost or value, an abnormal situation existed, which requires the application of the special assessment provisions.  With this we can not agree.  In the first place, we fail to see where this contract occupied any different status from the usual contracts which are commonly entered into by business concerns and which prove advantageous.  It seems to have been entered into under arms' length conditions; at least, the evidence would indicate *1181  that the Sonora Phonograph Corporation was not so situated that it could require more than it gave under the contract.  It was the Victor Talking Machine Co., the dominant and strongest concern in the talking machine field, which brought the suits which were compromised at the instigation of the Sonora Phonograph Corporation.  At first the Victor Company refused to consider the withdrawal of the suits and the execution of this license agreement.  The apparent reason for this attitude was that the Victor*2457  Company was not unaware of the strength of its position.  A witness testified that "the Victor Talking Machine Company was very strong about their position, and maintained at all times most strenuously the validity of their patents." The president of the Sonora Phonograph Corporation testified that he was anxious to have the suits discontinued and that he knew it was impossible to show that the Victor Company did not have rights under their patents.  Under such circumstances, it seems hardly reasonable to say that the contract represented a large bonus value to the Sonora Phonograph Corporation in excess of the annual royalties which it was required to pay; that is, that the royalties required to be paid were less than should have been paid and therefore an excess or bonus value existed in the contract.  This is further emphasized by the fact that after the Sonora Phonograph Corporation had operated successfully for a time under the contract, and prior to its expiration, the Victor Company consented to a change and reduction in the amount of royalty payments.  The logical deduction to be drawn from petitioners' position, should it be sustained, is that the party who had brought the*2458  suits and apparently was in the stronger position with respect thereto, was willing to give the other party a $1,000,000 advantage in order that it might accede to the request of the latter party to withdraw the suit.  We do not think the evidence establishes such a fact.  Certainly, in view of the conditions under which it was negotiated and the relative position of the parties, it would require more proof than we have to show that any capital value is being excluded on account thereof, much less the $1,000,000 value which was referred to in testimony.  A contract may be advantageous in the sense that the person holding the same is able to realize good profits therefrom, but when this contract cost nothing other than the covenants entered into, which were mutual, the consideration on one side being the payment of certain stipulated royalties and on the other side the permission to operate under certain patents, we fail to see the existence of abnormal conditions which the special assessment provisions were intended to remedy.  In no sense does statutory invested capital recognize a value attaching to such a contract, even when paid in to a corporation after negotiation, unless it*2459  is shown that a bonus value attaches thereto, and we do not *1182  think that an opposite result may be reached by recourse to the relief provisions.  The third contention is that the ownership by the Sonora Phonograph Sales Co. in 1918 of the Schechter contract which was paid in for stock at the time of its organization in June, 1917, but whose value may not be included in invested capital because of the provisions of section 331 of the Revenue Act of 1918, gave rise to an abnormal condition which justifies the application of the special assessment provisions.  The contract in question was entered into on May 10, 1917, between Jacob Schechter, acting in a fiduciary capacity in large part for stockholders of the Sonora Phonograph Corporation, and the Sonora Phonograph Corporation.  Under the terms of the agreement, which contemplated the formation of a corporation to do the things which Schechter nominally obligated himself to do, Schechter was given the exclusive right to distribute the products of the Sonora Phonograph Corporation.  There were also to be transferred to him certain rights in patents, trade-marks, agreements with suppliers of merchandise, agreements with jobbers, *2460  etc., but the general essence of the contract seems to have been the separation of the manufacturing and sales functions heretofore carried on by the Phonograph Corporation, so that the manufacturing end of the business would continue to be carried on by the said Phonograph Corporation and the sales and distribution features would be taken care of by the Sales Company.  Shortly after the acquisition of the agreement, the Sales Company was formed with a capital stock of a par value of $6,000,000, and in the acceptance of the offer from Schechter to the Sales Company for the assignment of the contract it was specified that the entire capital stock should be issued for the contract, but that stock of a par value of $1,200,000 would be transferred back to the treasury to be sold for the purpose of supplying additional working capital.  Of the remaining $4,800,000 par value of stock, $3,840,000 was issued to the president of the Phonograph Corporation, and at least the greater part of the balance of the stock was issued to other stockholders of the Phonograph Corporation.  What connection, if any, there was between the one stockholder in the Sales Company, who was not shown to have been*2461  likewise a stockholder in the Phonograph Corporation, and the other stockholders of the Phonograph Corporation, or the Phonograph Corporation itself, we are not advised.  There was, however, no money or property consideration, other than a nominal consideration of one dollar, paid by Schechter or the Sales Company to the Phonograph Corporation for whatever passed under the contract in question, and when we consider the further facts as to the relationship of the parties and the affiliated status of the two corporations, *1183  we think it fair to say that there was little, if anything, added to the business unit as a result of the execution of the contract and the formation of the Sales Company other than would have occurred had a sales or distribution agency been formed without the formation of the second corporation.  Certainly, there is nothing in the comparative net earnings of the Phonograph Corporation for the year preceding the transaction in question and the combined net earnings of the two corporations for the succeeding year which would reflect any appreciable increase in value on account of the paying in of the contract.  Under such circumstances, does the exclusion*2462  of whatever value attached to this contract which was paid in for stock of the Sales Company give rise to an abnormal condition which would bring the petitioners within the provisions of section 327?  We think not.  Had the contract not been executed and had the Sales Company not been formed, the Phonograph Corporation could not have had the benefit, for invested capital purposes, of the values here contended for on a statutory basis and, in so far as statutory invested capital is concerned, the situation is no different because of what transpired.  While this is not a case where one affiliated corporation transferred assets to another member of the same group, and thus resulted in there being nothing added to the group, it is a case closely analogous where assets which were owned by one corporation passed to the became the assets of an affiliated corporation which was formed with the same officers and apparently substantially the same stockholders, thus bringing about a situation where the assets of the group are essentially the same as the assets of the first corporation prior to the formation of the second corporation.  To recognize an abnormality of this nature would be tantamount*2463  to saying that in a case where a corporation has built up good will or become possessed of intangibles without a statutory investment therein which could not be recognized under section 326, it is permissible to invoke section 327 in order to give effect to what section 326 specifically denies.  We do not think this was ever intended; certainly not unless an exceptional and abnormal situation exists where some very great values are being excluded, and we are not satisfied that this is true in the case before us.  Whatever intangibles are being excluded here do not represent any substantial statutory investment - at least we have not been shown facts which would warrant such a conclusion - other than the payment in to the Sales Company, where whatever values existed are being excluded by section 331, and as we said in : * * * It can not be consistently said that the statute excludes the item from invested capital and at the same time treats such exclusion as so abnormal as to be the ground for relief by special assessment.  *1184  An exception to the foregoing rule may be said to have been made in *2464 , and , but those situations were clearly distinguishable from the one at bar, since there the assets excluded were of such a large percentage that the very assets on which the life of the business depended were being excluded, which is not shown to be the case here.  In the situation before us, we have an affiliated group where no exclusion is being made on account of the principal corporation, which apparently parted with nothing in the formation of the Sales Company which was recognizable for invested capital purposes, and while all assets are being excluded as to the Sales Company, the exclusion is from one member of an affiliated group with the recognizable values on account of these assets shown in the other member of the group.  That some value of intangibles is not being recognized is no more groun for special assessment than unrecognized appreciation on account of tangibles.  What the value of the unrecognized intangibles here was, we do not consider it necessary to determine, since we are not convinced that an abnormal situation exists on account thereof. *2465  Certainly, the evidence we have as to a few sales of a small number of shares of the Sales Company's stock in 1917 does not establish this fact, nor the sale of a substantial number of shares in 1918 to the president and principal stockholder of the Sales Company, payment being made in small part in cash, but largely in notes.  It is true that by allowing a fair return on tangibles there is an excess value shown which might be attributable to a value attaching to intangibles or which might reflect merely a high return on the normal invested capital, in which latter case no ground for special assessment exists.  Suffice it to say that we are not satisfied that an abnormality exists, on account of this exclusion, for which relief may be obtained under the special assessment provisions.  The remaining question is whether the Sonora Phonograph Corporation is subject to the delinquency penalty determined by the respondent.  The petitioners contend that the tentative return on Form 1031 T filed on March 15, 1919, was sufficient to secure an extension of time for filing the returns of both corporations and not for only one of them, the Sonora Phonograph Sales Co., as determined by the*2466  respondent.  Printed in the body of the tentative return in question is the statement "Note - A parent company may make a tentative return and pay the first installment of tax on behalf of all its subsidiaries without apportioning the tax among them until the completed return is filed." Following this are the printed words "Estimated amount of tax," after which was typed "Consolidated with Sonora Phonograph Corp., $40,000." Following this is a notation indicating that a remittance *1185  for $10,000 by check or draft was made therewith.  On June 16, 1919, instead of submitting a consolidated return for themselves, the petitioners each filed separate returns in which they set out in detail their income and invested capital.  The respondent determined that the petitioners were affiliated during 1918, and there is here no question as to the correctness of such determination.  The procedure outlined in article 651 of the preliminary edition of Regulations 45, released on March 5, 1919, which provided that a corporation desiring an extension of time for filing its return should submit to the collector before the time for filing the return a tentative return and estimate on Form*2467  1031 T, accompanied by a remittance of not less than one-fourth of the estimated amount of income, war-profits and excess-profits taxes for the taxable year, was in effect when this tentative return was filed.  That Form 1031 T provided that a parent company might make a tentative return on behalf of its subsidiaries and pay the first installment of their taxes without apportioning the tax among them.  We think, under the facts and circumstances, that the tentative return here involved was a tentative return for the two corporations and the extension granted applied equally to both.  While the respondent in his determination of the deficiencies here involved determined that the Sonora Phonograph Corporation was subject to a delinquency penalty, the evidence shows that in January, 1927, and more than a year after the determination and the filing of the petition in this proceding, he abated the delinquency penalty of $6,249.23 formerly assessed against the corporation and taken into consideration in determining the deficiency against it.  In a stamp on the return relating to the abatement of the penalty appears the statement "Penalty assessed in error.  Extension granted, affidavit*2468  attached to claim." Apparently the amount of $6,249.23 was abated for the reason that it had been assessed in error because of an extension having been granted.  While no admission or concession was made by the respondent either at the hearing or in his brief as to the correctness of his action in abating the amount of $6,249.23, it is in conformity with our opinion that the tentative return was for both corporations and that the extension of time granted applied to both of them.  Since an extension of time was granted for the filing of the Sonora Phonograph Corporation's completed return, we do not think the corporation is subject to the delinquency penalty determined by the respondent.  Reviewed by the Board.  Judgment will be entered under Rule 62(c).TRAMMELL *1186  TRAMMELL, dissenting: The petitioners contend that the contract including the assets which Schechter acquired from the Sonora Phonograph Corporation and transferred to the Sonora Phonograph Sales Co. for $4,800,000 par value of its capital stock had a value of more than $1,000,000 at the time paid in, which, but for the provisions of section 331 of the Revenue Act of 1918, would be included*2469  in invested capital to the extent of their actual value, but not exceeding the amount of $1,310,625, or 25 per cent of the par value of the combined outstanding capital stock of the petitioners at the beginning of the year.  They also contend that, since the contract and the assets acquired thereunder were not reflected in invested capital, there resulted an abnormal condition which brings them within the purview of section 327.  The contract in question gave the Sonora Phonograph Sales Co. exclusive right to distribute the products of the Sonora Phonograph Corporation throughout the life of that corporation.  Among other things, it gave to the Sonora Phonograph Sales Co. patents, trademarks, trade names, the entire selling end of the business, and provided it with an established sales organization and outlet for the products and furnished it with an established source of supply for merchandise.  Unquestionably, these were valuable assets so far as the Sonora Phonograph Sales Co. was concerned.  This contract and the assets were transferred to Schechter for and in behalf of himself and others, some of whom were the stockholders of the Sonora Phonograph Corporation who acquired*2470  them with the view of forming another corporation to carry on the sales end of the business.  It is not shown that all of the stockholders of the Sonora Phonograph Corporation partook in this transaction and there is nothing to show that it amounted to a distribution of dividends, either liquidating or otherwise.  If the stockholders of the Sonora Phonograph Corporation had received the assets transferred in accordance with the stockholdings, it would have amounted to a distribution and a closed transaction which would have fixed a basis for valuation and inclusion in invested capital, subject to the effect of section 331.  Such assets could have been included in invested capital at the value as of the time received in distribution by the stockholders.  If this had been the case, doubtless this controversy would not have arisen.  The corporations then would have been affiliated by virtue of the stock ownership by the same individuals in the same proportion.  But this fact is not shown by the record.  All the record discloses is that some of the stockholders acquired the assets and transferred them to the sales corporation.  They acquired them without cost, and consequently there is*2471  under section 331 no basis for the inclusion thereof in invested capital.  The fact that the corporations *1187  were affiliated in 1918 is not material.  Conditions as to stock ownership might have been materially different in 1917, when the assets were transferred.  The record before us presents simply a question, as both parties to this controversy concede, of the exclusion of the value of assets from invested capital by the operation of section 331.  This is not a case where one affiliated corporation transferred assets to another corporation in the group, leaving the group in the same situation as it was before.  The consolidated invested capital of the affiliated group is made up of the invested capital of the corporations separately determined, with eliminations for duplication.  ; . Here there would be no duplication in so far as this transaction is concerned.  It was not an intercompany transaction, but one between individuals and the sales company.  Since we can not find that the transfer of the contract and assets by the Sonora Phonograph Corporation*2472  to the individuals constituted a distribution, that transaction does not establish a cost basis of the assets to the individuals.  They were acquired by the individuals without monetary consideration, and for this reason, only, can not under section 331 be included in invested capital of the company.  Does the exclusion of the value of the contract and assets result in an abnormality within the meaning of the statute?  The question to be determined in order to answer the question is, Were the assets excluded by this means of substantial value over and above the amount at which they were included in invested capital and were they a material income-producing factor?  During 1917 cash sales of Sonora Phonograph Sales Co. stock were made at $75 per share and in 1918 George E. Brightson, who was president of both companies, purchased 5,000 shares at $75 per share, making payment partly in cash and partly in notes.  If these stock sales be taken as indicative of the value of the rights and assets acquired under the contract, the value thereof would be $3,600,000, which was substantially more than $1,310,625, the maximum amount that could have been included in invested capital but for*2473  the provisions of section 331.  The earnings in comparison with the tangible assets would indicate a value of the intangibles of approximately $900,000.  It is not necessary here, however, to determine the exact value of the intangibles further than that they were substantial in amount as compared with the allowed invested capital.  The very purpose for which the Sonora Phonograph Sales Co. was organized was to take over the contract and assets.  It had no other assets.  The sales contract and the other intangible assets included *1188  thereunder were the source of its income and as these assets clearly had a substantial value, which could not be included in invested capital, it is my opinion that there was such an abnormality in the capital as to entitle the petitioners to have their profits-tax liability determined under the provisions of section 328.  See ; . On the other hand, if the transfer of the assets and contract to the sales corporation be entirely ignored, and it be treated as if they had not been transferred, on the theory that it was a transfer*2474  within an affiliated group of corporations, it is my opinion that the fact that patents, trade-marks and trade brands and other assets of an intangible nature, of such substantial value as the evidence discloses, built up or acquired by the phonograph corporation, were excluded entirely from invested capital, brings the case within section 327(d).