pany, limited, a subsidiary corporation, owned by THE TRIBUNE, for the sale of 6,367 tons of newsprint paper in accordance with the copy of such contract, which is attached hereto and made a part hereof as Exhibit "C".

SECOND: Immediately upon the completion of the reorganization of WATAB, Town shall cause to be delivered to THE TRIBUNE, or according to its order. 16% of the common stock of the reorganized Watab Company immediately to be issued as hereinbefore recited.

THIRD: THE TRIBUNE will secure and deliver to Town, releases properly executed by Thomason and Curtis, releasing all their respective claims to an equity in the "Paper Company" arising out of the contract, Exhibit “A”, or otherwise.

John C. Shaffer's notes, with interest, in the total sum of $1,295,298, were paid March 15, 1920, with funds furnished by the National City Company in accordance with its contract with Town. All of the stock was thereupon transferred to Town or his nominees and new certificates issued in his name, except eight shares for qualification purposes for directors. Eight employees and officials of the old company were elected as directors and Town was elected president. The stock certificates thus issued were all turned over to the National City Company as collateral to Town's note for $1,295,298. None of the stock in the old company was ever in the names of John C. Shaffer, Carroll Shaffer, the Tribune Company, Lee Olwell, or the National City Company.

On May 10, 1920, the old company redeemed all of its preferred stock in the sum of $250,000 together with some accrued dividends, the proceeds of which were paid over to the National City Company and credited on Town's note. The articles of incorporation of the petitioner, the new company, were filed April 14, 1920, and organization meetings were held, at which Town was elected president. The provision of the Town-National City Company contract for $2,000,000 of common stock divided into shares of $25 par value each was changed to 40,000 shares without par value.

At a meeting of the board of directors of the new company (petitioner) held on June 1, 1920, Town offered to transfer to the new company all of the assets of the old company, including good will. and to accept in payment therefor (1) $1,000 in cash to be paid to Town; (2) payment of the expenses of the transfer; (3) assumption by the new company of the debts of the old company, including $325,000 first mortgage bonds; (4) delivery to the order of the National City Company of $1,162,000 of the first preferred stock of the new company, $100,000 of second preferred stock and 10,000 shares of common stock, without par value; (5) delivery to John C. Shaffer of 1,078,100 second preferred stock; (6) delivery to the Tribune Company of 4,800 shares of common stock; (7) delivery

to D. E. Town of 8,600 shares of common stock; (8) delivery to Carroll Shaffer of 6,600 shares of common stock. Town's proposal was accepted by the new company and the old company conveyed all of its assets to petitioner by deeds of conveyance and bills of sale on June 4 and July 28, 1920. Thereupon, petitioner's preferred, second preferred and common stock were issued as follows:

The following table shows the stock ownership of the old and new companies for the two periods, (1) that between March 15 and June 4, 1920, and (2) that after June 4, 1920:

The tangible property conveyed to petitioner by the old company in 1920 consisted of all of the land, water power rights and construction, buildings, dam and equipment, and all of the land, plant site, timber lands, buildings, machinery and appliances owned by the old company at that time, together with all the current assets of the old company.

The following is a detailed statement of the assets which we find were conveyed to petitioner by the old company and the actual cash value thereof at the time they were conveyed, taking into consideration the reserve for depreciation of $66,824.52 hereinafter enumerated under liabilities:

The following is a table of the liabilities of the old company which the petitioner assumed in the purchase of the assets:

The cost to the Watab Pulp & Paper Company of its depreciable assets, so transferred to the taxpayer, was as follows:

Against the above assets, the Watab Pulp & Paper Company had set up reserves for depreciation as at June 3, 1920, in the following amounts:

Other assets, transferred at the same time, and the cost of the same

to the Watab Pulp & Paper Company, were as follows:

Plant site and real estate including village lots and flowage rights. 147, 844. 17

The Watab Pulp & Paper Company did not carry on its books as an asset at the time of the transfer of assets, any item of good will. The net income of Watab Pulp & Paper Company, as shown by its books, for the 5-year period immediately preceding the transfer of assets to petitioner, was as follows:

Restored to income on account of installation of new water wheels and barker in years 1917, 1918, 1919 (petitioner's ex. 129)

Less: Additional depreciation allowed by respondent in 1917, 1918, 1919, 1920 (petitioner's ex. 129).

Net additions to income_.

Total net income_-_

Average annual net income for the five years 1916 to 1920, inclusive___.

550, 357.02

686, 782. 22

2, 423, 257. 96

$89, 302. 62

6, 546. 12 82, 756. 50

2, 506, 014. 46

$501, 202.89

It is upon this showing of income that petitioner bases its claim for good will and contracts transferred to it of a value of $750,000. As is the usual custom of paper mills, both the old company and the new company operated day and night continuously, except Sundays. For the taxable years 1920 to 1923, inclusive, respondent used the following values for computing depreciation:

Petitioner does not complain of these values, but complains that the rate of depreciation allowed by respondent was too low.

For the years 1924 to 1928, inclusive, the respondent changed the basis for allowances for depreciation, wear and tear, and obsoles

cence from the values above given to the cost of the depreciable assets to the old company. This was upon the theory that 80 per cent of the stock of the petitioner was owned by the former owners of the old company and that under section 204 (a) (7) of the Revenue Acts of 1924 and 1926, and section 113 (a) (7) of the Revenue Act of 1928, this new basis was required.

The amounts of depreciation allowed by respondent to petitioner for the years 1924 to 1928, inclusive, the values of depreciable assets upon which they were based, and the composite rates to which such deductions are equivalent, are shown by the following table:

The rates of depreciation applied to the depreciable assets on the books of petitioner, taken in the returns, and the rates of both depreciation and obsolescence claimed in these proceedings, are as follows:

1 The additions to machinery and equipment account since June 4, 1920, have been depreciated at the rate of 71⁄2 per cent, instead of 10 per cent.

The rate of depreciation on water power construction was computed by the petitioner at 15 per cent until the year 1924, when it was reduced to 8 per cent following a conference with the revenue agent.

Reasonable rates of depreciation, including obsolescence, which should be used in computing petitioner's allowance for depreciation and obsolescence in each of the taxable years, we find to be as follows: