Before MAJOR, Chief Judge, DUFFY and SWAIM, Circuit Judges.
This is an action for a refund of excess profits taxes and interest paid for the fiscal year ended April 30, 1942. The facts were stipulated. The district court found the issues favorable to the government.
The questions presented for determination are: (1) whether for the purpose of computing taxpayer's invested capital under § 718, Internal Revenue Code, 26 U.S.C.A. § 718, for excess profits tax purposes for the fiscal year ended April 30, 1942, taxpayer's invested capital should be reduced by the fair market value (as taxpayer contends) or by the cost (as the government contends) of property taxpayer exchanged in prior years for shares of its own stock which it thereafter retired; (2) whether taxpayer's exchange of common stock of H. A. Woods, Inc. and Gillis Drug Company on January 11, 1932, for stock of Woods-Gillis Corporation was accomplished pursuant to a plan of reorganization as defined in § 112(i) (1) of the Revenue Act of 1932,*fn1 and that the exchange then made came within the scope of § 112(b) (3) of that Act,*fn2 so that there would be no recognizable loss to plaintiff on the transaction; and (3) whether the Commissioner correctly allocated taxpayer's basis on the H. A. Woods, Inc. and Gillis Drug Company common stock as between the Woods-Gillis preferred and common stock received on the January 11, 1932, exchange.
Prior to January 1, 1926, several members of the Leich family, as a partnership, had conducted a wholesale drug business at Evansville, Indiana, under the firm name Charles Leich and Company. As of January 1, 1926, the partnership acquired all of the capital stock (250 shares par value $100) of H. A. Woods Drug Company, which operated certain retail drug stores in Evansville. In July, 1927, the name of the company purchased was changed to H. A. Woods, Inc.
On September 1, 1928, the partnership was succeeded by a corporation, Charles Leich and Company, the plaintiff herein, which had an authorized capitalization of 2,500 shares of 6% cumulative preferred $100 par value stock, and 15,000 shares of no par value common stock. For the assets of the partnership plaintiff issued 10,000 shares of its common stock. Included in the assets was the common stock of H. A. Woods, Inc. which on September 1, 1928, had a basis in the hands of plaintiff of $204,671.41.
On February 18, 1929, plaintiff altered and enlarged its capital structure to 75,000 shares of common no par value stock, and 5,000 shares of 7% cumulative, Series A or Series B, preferred $100 par value stock. As of March 5, 1929, plaintiff issued 40,000 shares of its new no par common stock in exchange for 10,000 shares of its old no par common stock, and it made sales of its new stock to underwriters, as follows:
12,511 shares common stock. $127,900.00
2,221 shares of series A 7% preferred at par, less discount 203,174.00
The plaintiff used the proceeds thereof in part as follows:
Redemption of 194 shares of its old 6% preferred,
then outstanding $20,176.00
Acquisition of Cline-Vick re- tail drug stores
operated in Illinois 183,781.61
Acquisition of Wilhelm Drug Co. retail drug store at
Carbondale, Illinois, for cash 12,836.19
Liquidation of purchase mon- ey obligations upon stock
of H. A. Woods, Inc 83,535.45