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sales price during the postwar period, where the assets were sold and by the value in use where the assets were retained, which yalue in use was computed in accordance with the method approved by the Board of Tax Appeals in the Manville Jenckes Co., 4 B. T. A. 765. As the claim for the allowance was filed within the period indicated in section 1209 of the Revenue Act of 1926 and the deduction was determined in accordance with the provisions of section 234 (a) (8) of the Revenue Act of 1918, the allowance appeared proper and this office approved the reduction in income arising therefrom. The original computation of amortization was resubmitted to the unit and checked by the bureau engineers to verify the fact that the computation was in accordance with the Manville Jenckes decision. The final allowance as approved by this office was, therefore, in accordance with the rulings and regulations approved at the date of the scheduling of the certificate of overassessment. The principal difficulty in the review of this case was encountered in connection with the reconciliation of the income shown by the return with that shown by the company's books and that shown in the present audit of the case. A detailed statement of the adjustments resulting in the overassessment was prepared for the attention of the Joint Committee on Internal Revenue Taxation.

Cases VII and VIII.Issues: These companies were audited in connection with the M Company involved in Case VI, and were affiliated with that company during the year under review. The issues involved were the same as those involved in that case, except that they arose in connection with a different year from that for which the overassessment in that case was prepared.

Amount involved, N Company, 8x dollars; O Company, 5x dollars.

As above stated, these two companies were affiliated with the taxpayer in Case VI during the year under review. The same error in connection with consolidated inventories was discovered for the year 1918 as existed for the year 1919. The use of the weightedaverage method of valuation adopted by the taxpayer was rejected by the Income Tax Unit and, based upon a field examination, the inventories at the beginning of the year were increased 1,050x dollars and at the end of the year increased 223. dollars. This revision of inventories resulted in a net reduction of income of 827x dollars. As the inventories used in the present audit of the case were valued in accordance with the provisions of section 203 of the Revenue Act of 1918 and article 1582, Regulations 45, the net reduction in income arising therefrom appeared proper and was approved by this office. The income for the fiscal year 1918 was also reduced by the allowance of a deduction for amortization. For the reasons stated in connection with Case VI, this office approved the reduction in income arising out of the allowance of amortization. These adjustments to income resulted in the overassessments in favor of both of the abovenamed subsidiary companies of the taxpayer in Case VI.

As the overassessments, together with interest, exceeded $75,000, a memorandum was prepared reconciling the income shown on the original return with the income shown in the present audit for the attention of the Joint Congressional Committee on Internal Revenue Taxation. As stated in connection with case VI, the preparation of this memorandum involved considerable trouble in view of the discrepancies between the incomes reported on the books on the original return and in the final bureau audit.

Case IX.-Issues: This taxpayer was engaged in the production of articles for the Government under war contracts. In 1919 it received an award in final settlement and the question involved is concerned with the proper method of reporting income during the years 1918 and 1919 received both from operations under the war contracts and from the award in final settlement.

Amount involved, proposed by unit, 74 x dollars; approved by this office, 40 x dollars.

The award received by the taxpayer under the Dent Act has been held by this office to be income from Government contracts taxable in 1919 at 1918 rates. This decision was in accordance with the holding of the Board of Tax Appeals in the case of A. B. Kirschbaum, 5 B. T. A. 65. The taxpayer had, however, reduced the valuation of inventories of materials held for Government contracts from the cost of such materials to a very low figure, claimed to represent the market at December 31, 1918. In view of the fact that these materials were held for production under Government contracts, and in view of the fact that in the settlement of 1919 cash reimbursement was made to the extent of cost for these materials, this office returned the case to the Income Tax Unit recommending that the materials be included in the closing inventory for 1918 at cost rather than the lower market figure. This recommendation was in accordance with the consistent decisions of this office in similar cases. The result of the reaudit of the case in accordance with the recommendation of this office was a net reduction in the overassessment proposed in the amount of 33 x dollars. The taxpayer was afforded several conferences in this case and considerable research was necessary in order to meet the objections to the proposed method of valuing inventories advanced by the taxpayer.

Case X.—Issues: The audit of this case principally concerned a restatement of income and tax liability in accordance with the installment sales provisions of the Revenue Act of 1926, which were made retroactive to cover the year 1919, for which year the present overassessment was proposed.

Amount involved, recommended by Income Tax Unit, 5x dollars; approved by this office x dollars.

The audit by the Income Tax Unit was found after review by this office not to conform with the provisions of articles 42-46, inclusive of Regulations 69, section 1208 of the Revenue Act of 1926. The prior bureau audit excluded from income that portion of the receipts during the taxable year representing profit reported as income for prior years. The present audit of the case is in accordance with the above articles of Regulations 69 and the provisions of T. D. 3921, which provide that no payment received during the taxable year should be excluded in computing the amount of income to be returned on the ground that it was received under a sale, the total profit from which was returned as income during the taxable year or years prior to the change by the taxpayer to the installment basis of reporting income.

Case XI.-Issues: The overassessment in this case is due to a reduction in income by the allowance of amortization in the amount of 62 dollars and the restoration to invested capital of accounts previ. ously charged off of 57x dollars.

Amount involved, overassessment recommended by Income Tax Unit, 54x dollars; approved by this office, 51« dollars.

The amortization loss in this case is the difference between the depreciated cost of assets acquired for the production of articles contributing to the war and the sales price of the property during the postwar period. The taxpayer's case was not closed on March 3, 1924, and therefore the allowance of the war loss sust ined in connection with amortization was held proper by this office.

In the prior audit of the case the Income Tax Unit restored to invested capital 80x dollars, the amount paid in reduction of a mortgage on the taxpayer's property and charged to expense on the books. This office recognized that the payments on the mortgage debt constituted capital expenditures but returned the case to the Income Tax Unit for an apportionment of the expenditures between depreciable and nondepreciable property. Depreciation on the buildings partly covered by the mortgage was then deducted from the restored payments and the net capital investment at the beginning of the taxable year 572 dollars was restored to statutory invested capital. This adjustment of the case appeared proper and the overassessment prepared as a result of the inclusion of this item in invested capital and the allowance of the amortization deduction was approved. Several conferences were held with representatives of the taxpayer and additional information was submitted to establish the proportion of the capital expenditures properly allocable to the depreciable property.

Case XII.-Issues: The certificates of overassessment in this case are principally certificates abating large additional taxes assessed in 1924. The tax paid by the company aggregates y dollars, and to this extent the proposed overassessment represents a refund. The net refund arises out of the allowance of depletion and depreciation, the abatement out of an amended audit in accordance with the actual facts concerning the taxpayer's earnings.

Amount involved, proposed by Income Tax Unit, 45x dollars; approved by this office, 4Āx dollars.

The taxpayer and its affiliated subsidiary companies owned some mining properties, but from the field examination of the books and the claims filed by the receivers in bankruptcy the corporation was principally a stock-jobbing enterprise. The returns filed by the companies were very involved and could not be audited from the information contained therein. The first field examiner was refused information by the company, the officers informing him that the books were sent to a foreign country at the end of each year in order that they might not be available in the event they were subpænaed by the United States courts. The examining officer went to the stock exchange and prepared a report based upon the income which the company had stated to the stock exchange had been earned in each year. This income was apparently padded in order to aid stock sales and was largely composed of the receipts derived from the sale of stock rather than from the sale of minerals. A subsequent examination was made by the Income Tax Unit and from the records which were then made available it became evident that the taxpayer (ignoring depletion) earned a very small income, approximately equaling the total income reported earned on the original returns. The present overassessments to the extent of the large additional taxes were therefore due to the exclusion from income of receipts from stock sales. This reduction in income is in accordance with the provisions of Article 563, Regulations 45 and therefore the overassessment to that extent was approved by this office.

The additional depletion allowed by the Income Tax Unit wiped out the entire income and the proposed overassessment refunded the tax originally paid. The allowance of the deduction for depletion appeared proper in view of the bureau findings that the deduction represented the actual loss sustained by the taxpayer from that source during the years under review.

However, the audit by the Income Tax Unit did not allocate the original tax in accordance with the provisions of section 240 of the Revenue Act of 1918 and the decision of the Board of Tax Appeals in the Mather Paper Co. case, 3 B, T. A. 1. The file was returned to the Income Tax Unit for reaudit in this connection. The case has not been returned to this office; but approximately two-thirds of the overassessment of net tax paid on the original return will be barred, as no claims were filed within the statutory period. As in the case with most bankruptcy files, the reconciliation of the income and capital shown on the original return with that shown in the present audit of the case was extremely difficult. The returns were not properly filed in the first instance and the returns, books, and present audit, being compiled from different sources, were difficult to reconcile.

Case X111.Issues: The overassessment originally proposed by the Income Tax Unit was due to the allowance of a deduction from income for additions to reserve for unredeemed premium coupons.

Amount involved, overassessment proposed by unit, 67x dollars; amount approved by this office, none.

It has been the policy of the taxpayer from 18 to issue coupons with certain classes of its products, these coupons being redeemable in premiums. In all years prior to 1921 the taxpayer alleged that it deducted from gross income the cost of redemption of coupons actually redeemed each year without reference to the year of the issue of the coupons. No liability appeared on the books at any time prior to the close of 1921 for unredeemed coupons. At the end of 1921 the taxpayer estimated that it would redeem 60 per cent of all coupons issued, and on that basis set up out of income a reserve

the cost of redeeming coupons for 1921. The Income Tax Unit, after a review of all the evidence, and based

а upon the taxpayer's experience in prior years, fixed the percentage of coupons redeemed at 56.6 and set up a reserve for unredeemed coupons as at December 31, 1920, out of surplus to cover the liability existing on that date. Since the taxpayer had taken a deduction based upon the 60 per cent redemption, the audit, in accordance with the finding that the percentage of coupons redeemed was 56.6, should have resulted in additional income. The error in the bureau computation was found after review by this office to be in the assumption that a portion of the reserve constituted the sole addition for 1921. The taxpayer was afforded a conference and furnished this office with journal entries and data explaining the entire transaction as entered on the company's books. The case was returned to the unit and an audit, in view of the additional information, resulted in an additional tax liability of approximately 2x dollars. As the certificate of overassessment had previously been scheduled, this office

advised the Income Tax Unit to remove the certificate from schedule and assess the additional tax liability.

Case XIV.—Issues: The entire proposed overassessment resulted from an audit of the taxpayer and the N Company on a consolidated basis for the year 1921. The propriety of consolidation was the point involved in this case.

Amount involved, overassessment proposed by Income Tax Unit, 112x dollars; additional tax as result of review by this office, 1090 dollars.

The audit on the basis of consolidation resulted in the overassessment proposed by the unit. On a nonaffiliated basis there was a taxable income for the taxpayer which resulted in an additional tax liability of 109x dollars. The loss of the N Company could not be offset against the income of the taxpayer, as the companies were held not affiliated, so the net saving in tax by the audit in accordance with the recommendation of this office was 221x dollars.

With respect to the facts involved it was noted in the review by this office that the voting stock of the taxpayer was owned by a number of companies. These companies are separate corporations unrelated as between themselves and are owned more than 50


cent by interests which would be classed, from an ownership standpoint, as

minority” so far as the remainder to the group of related companies is concerned. These companies sell their products through six agencies. These agencies are corporations and are owned individually, so that on a proprietorship basis they are not affiliated among themselves or with any of the companies. The agencies are, however, each represented by a principal stockholder who is active in the management of the business. These officers vote through proxies all of the stock of the N Company owned by the various agency corporations. There is no allegation in the file that these officers of the agencies vote the stock as a unit. The ownership of the stock is distributed unequally among the six agencies and that owned by each agency appears to have been voted by proxy by the principal officer in such company.

These same officers of the six agencies have been created trustees under a voting-trust arrangement by which the stock of the taxpayer owned by the companies is placed under unified control. Thus the affiliation of the corporation with the N Company is based by the unit on the fact that the same six individuals vote the stock of the N Company by virtue of proxies and the stock of the taxpayer by virtue of the voting trust. There is no identity of stock ownership to any material extent between the companies, the minorities through ownership appearing from the information now in the file to exceed 80 per cent of the total issue.

In view of the holdings of the Board of Tax Appeals in the case of Parker Sheet Metal Works, 3 B. T. A. 608, and Watsontown Brick Co., 3 B. T. A. 85, this office held that a mere majority ownership would not suffice to establish affiliation and that control of the business did not establish control of stock. The control contemplated by the act is control of voting rights. (Baird Machine Co., 2 B. T. A. 89, and cases cited therein.) It was apparent that the same individuals as officers of the agencies did not vote the stock of the N Company owned by the agencies in their own right. The control of the stock belonged to the agencies but not to the officers who as agents

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