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, 109 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 per 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

for their respective corporations voted the stock. (Block Street Wharf & Warehouse Co., 2 B. T. A. 183.) Since, therefore, the control of the stock of the taxpayer was not in the same interests who owned and controlled the stock of the N Company this office advised the Income Tax Unit that those companies should be ruled not affiliated for the year under review.

Case XV.-Issues: The taxpayer was engaged in the production of articles for the Government under war contracts. The proposed overassessment arose in connection with a revaluation of inventories of materials acquired to produce the articles for the Government. The issue involved, therefore, was concerned with the propriety of the prices fixed by the unit in valuing the taxpayer's inventories.

Amount involved, proposed overassessment by the unit, 3x dollars; additional tax under audit in accordance with recommendation this office, 2x dollars.

The taxpayer's original returns did not reconcile with the books, the figures contained in the return being taken from other sources. This is particularly true with respect to inventories. The Income Tax Unit following a field examination revalued the inventories on a cost of replacement basis for all years. Based upon this revaluation of inventories the certificates of overassessment recommended by the unit were prepared.

This office reviewed the case and found that the materials inventoried were acquired for production under war contracts. The taxpayer was actually reimbursed in 1919 under the Dent Act for the entire cost of the material so acquired. This office therefore held that the inventories should be carried at cost and not at some other arbitrary figure. This valuation was in accordance with the provisions of section 203 of the revenue act of 1918. A reaudit of the case in accordance with the recommendation of this office resulted in a reduction in the overassessment of 5x dollars.

Case XVI.-Issues: The taxpayer in this case in preparing its original return valued inventories on a cost or market, whichever is lower, basis. The Income Tax Unit in auditing the case valued the inventories on a cost basis. The overassessment arising from this action was entirely due to the method of valuing inventories and this was the only issue in the case.

Amount involved, a dollars.

This case involved a point very similar to that encountered in Case XV. The taxpayer in this case was engaged in production of articles for the Government under war contracts. The materials purchased, however, for this Government contract production were in all respects standard and of the same general specifications as those acquired for the production of normal peace-time merchandise, and the taxpayer was engaged at the same time in the production of both Government contract goods and peace-time goods.

There was no method of allocating the goods purchased to Government contracts and to peace-time installations prior to the requisition of the raw materials for the particular jobs. The actual employment of the goods and allocation of the goods to the various types of jobs constituted the first appropriation which would earmark goods acquired for Government-contract purposes from the goods acquired for peace-time production. In view of this situa

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tion this office held that the taxpayer in accordance with its election should be permitted to inventory materials not appropriated to Government contracts upon a cost or market, whichever is lower basis. This method of valuation of inventories is in accordance with section 203 of the Revenue Act of 1918 and article 1584 of Regulations 62. The file was returned to the Income Tax Unit for reaudit in accordance with this recommendation, and the amended certificate prepared in accordance with this reaudit have not been returned to this office. Several conferences were held with the taxpayer in developing the difference between the method of production and operation of this company and other companies engaged in war manufacture.

Case XVII-Issues: This case involved the question of the proper method of computing tax for the first taxable period in 1918 where the taxpayer maintained its accounting records on a fiscal-year basis and had previously filed its returns on a calendar-year basis. Amount involved, a dollars.

Under the decision of the Board of Tax Appeals in the case of Henry D. Weed, 2 B. T. A. 84, the tax should have been computed in accordance with the provisions of section 226 of the Revenue Act of 1918 and not under the provisions of section 205. The Income Tax Unit, however, stated that the inventory at December 31, 1917 (although satisfactory for the purpose of closing the calendar year 1917 case), was not sufficiently accurate to determine the income for the first period ended in 1918. This office returned the case to the Income Tax Unit with the recommendation that the tax for the first period ended in 1918 be computed under the provisions of section 226 and that the income for this period be determined by allocating the fiscal-year income shown on the original books between the portion falling in the calendar year 1917 and in the first fiscal period falling in the year 1918. This adjustment of income permitted a computation of tax in accordance with the proper provisions of the Revenue Act and in accordance with the decision of the Board of Tax Appeals above cited. The resultant tax liability, although different from that indicated in the prior audit by the Income Tax Unit under section 205, did not change the amount of the proposed certificate of overassessment, as that amount was limited by the provisions of section 284 of the Revenue Act of 1926. Several conferences were held with the taxpayer in this case and the final audit has been acquiesced in by the taxpayer. The taxpayer was inclined to protest the previous audit of the case as not being in conformity with the decision of the Board of Tax Appeals in the Henry D. Weed case cited supra.

Case XVIII.-Issues: The issue involved in this case was the propriety of a redetermination of amortization after March 3, 1924, the date mentioned in section 234 (a) (8) of the Revenue Act of 1921. Amount involved, amount allowed by unit, none; amount claimed by taxpayer, a dollars.

This case was forwarded to this office in connection with the taxpayer's protest that the amortization should not now be redetermined in view of the provisions of the Revenue Act of 1921. It was found by this office after a review of the entire file that the taxpayer's case had not been closed on March 3, 1924, and in fact was not closed at the present time. The amount of amortization therefore had never been determined finally, and the present inquiry into the proper

amortization deduction was not in the nature of a redetermination but was in the nature of the usual investigation leading up to a determination of the proper deduction allowable. The case was therefore returned to the Income Tax Unit with a recommendation that the amortization feature be considered on its merits and the case closed in accordance with the findings of the Income Tax Unit. It is impossible to state at the present time whether the review of the amortization under the decision of the Board of Tax Appeals in the Manville Jenckes case will result in an additional tax liability or a refund.

ATTORNEY B

In response to your request for a statement of the cases handled by me during a typical month I have prepared the following data. It is my experience with these cases, involving overassessments, that few of them can be disposed of as originally submitted, but most of them require conferences, submission of additional data, and sometimes audit revisions. This results, among other things, in work being done on a particular case at different times, and it often happens that a case may be almost completely worked up in a period of time preceding the month when recorded as disposed of here.

The following indicates the difficulty of some of the cases:

Case 1: M partnership and A, a partner. When previously before this office there was a certificate of overassessment to the partnership for 1917 in the amount of 58x dollars and to the individual partner a certificate for 55 dollars. Upon consideration here this office returned the record to the Income Tax Unit for further consideration. Thereafter a revised audit was made, the result of which was to reduce the partnership overassessment from 58 dollars to 54x dollars, and the overassessment of 55x dollars to the individual was converted to a deficiency of some 25x dollars. Our office action in this particular month was to approve the revised certificate to the corporation. The overassessment was due chiefly to allowance of additional depletion deductions and was based upon a field agent's report.

Case 2: M Company. This case was first submitted on a certificate of overassessment for the fiscal year ended March 31, 1918, in the amount of 3x dollars. The reduction in tax was due to allowance of depletion, under the 1917 law, on the March 1, 1913, value of a leasehold (which action was later confirmed by the United States Supreme Court decision in the case of Lynch v. AlworthStephens Co., T. D. 3690), and the allowance of special assessment under section 210 of the 1917 act and section 327 of the 1918 act. This office ruled against the allowance of special assessment in a memorandum, and the revised certificate of overassessment approved in this month was for 20 dollars.

Case 3: A. This individual was a stockholder in the X Company and so received a distribution in liquidation in January, - This transaction has received much consideration in the department, in connection with other participating stockholders. It was found necessary to obtain additional data in the case of A as to certain other losses claimed on disposition of securities. also a further field agent's report, with reference to the X liquidation transactions. In this month the case received consideration upon a revision of the audit, partly based upon memoranda from this office, but the audit has since been further revised, based upon the additional data furnished this year, and is not yet closed. The certificate last proposed was in the amount of 124 dollars for the taxable year.

Case 4: M Company. The years 1917 and 1918 were involved here, and the year 1917 had previously been considered in a recommendation by the old Committee on Appeals and Review and in a memorandum by this office. The certificate for 1917 was for 16x dollars and that for 1918 was 17 dollars. Errors were found in the audit, and a conference was held with the Income Tax Unit auditor and the taxpayer's representative, at which the latter agreed to revision of the allowances for depreciation and for obsolescence of certain assets, and the record was returned to the unit on a memorandum. The case was later returned

here for approval of the revised audit, which showed a net increase in tax for the period from 1913 to 1920, inclusive, of 6x dollars.

Case 5: X Company and Y Company. These two corporations filed consolidated return for 1918, but later were ruled not affiliated, under the rulings of the department then in effect, which adhered to legal and not actual stock control. Upon resubmission of the audit upon a separate basis, due to the commissioner's acquiescence in board decisions sustaining actual control in lieu of legal control, it became necessary to reexamine the affiliation feature. Duplicate assessments had been made but only one was paid. There was also some doubt as to the collectibility of the unpaid assessment, and the Board of Tax Appeals. decision in the case of Mather Paper Co., 3 B. T. A. 1, relative to allocation of tax was at first not acquiesced in by the commissioner. The taxpayer's attorneys and agents were invited here for a conference, and as a result thereof an agreement was made to allow affiliation and by filing a new waiver to increase the tax collectible by something like 25 dollars, although final action on the case did not come before me.

Case 6: M Company. This concern had been much considered in the department, with particular reference to its invested capital and the application of the limitation on intangibles. This was the subject of a memorandum by this office. The record here contained certificates of overassessment for 86x dollars. for 1918 and for 17 dollars for 1919. Questions arose as to the depreciation or amortization of leaseholds, particularly those with extension periods. Hearings were afforded the taxpayer's general counsel and copies of leases were brought down from New York. Upon consideration of this additional data the unit's adjustment was found to be correct and the certificates of overassessment were approved.

Case 7: M Company. This case contained a certificate of overassessment for 8x dollars for the year 1918, which was the result of allowing special assessment under section 327 of the 1918 act. Upon consideration of the case in this office, in connection with others similar, it was held that special assessment grounds did not exist and the overassessment was disallowed.

Case 8: M Company. This case contained a certificate of overassessment for 5 dollars for 1918, based upon allowance of special assessment under section. 327 of the Revenue Act of 1918. This was another of the cases considered with regard to the basis for allowance of relief, and it was decided that proper grounds did not exist in this case. The certificate of overassessment was there-fore disallowed.

Case 9: M Company. This case is one that had received much consideration. in the department for a number of years. Our office approved an audit adjustment in January, through approval of certificates of overassessment for1918 and 1919, in the respective amounts of 202x dollars and 173 dollars. Thereafter, in the taxpayer asked for the allowance of additional amortization on facilities disallowed as expense deductions, and for reallocation of the amortization allowance in accordance with a change in the regulations, with particular reference to facilities not completed in time to produce war articles. Then numerous briefs were filed and a number of conferences were held in which many other points were raised. The audit was revised for 1917, 1918, and 1919 and resubmitted to this office for approval of certificates of overassessment for 1917 and 1918 in the respective amounts of 78x dollars and 326 dollars. After receipt of briefs here and a number of conferences with the taxpayer's representatives there was prepared here in this month an informal memorandum to the unit covering various issues. Since that time, however, due to additional briefs and conferences, that memorandum has subsequently been revised.

Among the major issues in case 9, that have been considered here, are the following:

1. Proper treatment of intercompany profits in inventories at January 1. 1917, with respect to invested capital, and as to determination of net incomesubject to excess-profits tax and the net income subject to the 2 and 4 per cent normal tax. This point was considered in an interpretative ruling, S. M. 3384,. C. B. IV-1, 277.

2. Proper treatment of intercompany profits in inventories at January 1, 1918, both from the standpoint of invested capital and computation of the net income, subject to the 12 per cent normal tax and to the profits taxes. S. M. 1530, III-1 C. B. 307, made a ruling as to such inventories, from the standpoint only of net income subject to the 12 per cent income tax. Subsequently,