a question was raised as to the elimination of such profits from invested capital, although the taxpayer later conceded the applicability of the limitation in section 331 of the 1918 act, but this office has not yet conceded that such profits (approximating 250 dollars) should be excluded from profits tax in 1918 (and therefore for all years) by being included in January 1, 1918, inventories.

3. The taxpayer has challenged the bureau's right to redetermine amortization under such recent board decisions as that in the case of Manville Jenckes Co., 4 B. T. A. 765. Subordinate points have been discussed, such as the proper facilities subject to amortization, and, prior to the decision by the board in the G. M. Standifer Construction Corporation case, 4 B. T. A. 525, what companies had established a proper basis for such allowance.

4. Reduction of invested capital for prior year's Federal income and profits taxes, in accordance with article 845, Regulations 45. The issue was later settled by section 1207 of the Revenue Act of 1926, contrary to the taxpayer's contentions, and the case of Guaranty Construction Co., 2 B. T. A. 1145. See also Russel Wheel & Foundry Co., 3 B. T. A. 1168.

5. Restoration to invested capital of 200 x dollars for patents that expired prior to 1917. The Income Tax Unit recognized this claim as good will emerging from patent values, but this office has not yet recognized the claim, on authority of such decisions as the Union Metal Manufacturing Co., 1 B. T. A. 395; Winsor & Jerauld Manufacturing Co., 2 B. T. A. 22; Northwestern Steel & Iron Corporation, 6 B. T. A. 119; Dexter Folding Co., 6 B. T. A. 655; Lee Hardware Co. v. United States, T. D. 3883; La Belle Iron Works v. United States, T. D. 3181 and 256 U. S. 377; and T. D. 3877.

6. Loss of 93 x dollars claimed on lands purchased to establish a power site, which attempt, due to adverse legislation and loss of a Supreme Court decision, proved abortive. The Income Tax Unit conceded this claim but this office has not yet done so, relying upon such decisions as A. J. Schwarzler Co., 3 B. T. A, 535, and Fred C. Champlin, 1 B. T. A. 1255. The loss was claimed for when the Supreme Court's mandate came down. Incidental issues arose such as the drop in value of the riparian lands, the subsequent history of the powersite project, and the basis of valuation on condemnation proceedings.

7. A loss of 29x dollars was claimed for the cost of certain manufactured articles seized as contraband upon the high seas in neutral vessels by a belligerent in 1914, and later thrown into prize court. The latter's decision was adverse to the taxpayer, which conducted its defense in the name of another, and it was established that the loss was not definitely determined until the court's decision in Preliminary investigation was necessary to determine whose loss it was, the amount, and when actually sustained.

8. The deduction for franchise taxes of the State of X. This issue involved the proper amount and the year when deductible. Additional data were supplied to enable a decision on the issues, based upon the cases of Jamestown Worsted Mills, 1 B. T. A. 659, S. M. 4499A, V-1 C. B. 56; Alpha Portland Cement Co., 230 N. Y. 48.

9. An invested capital adjustment of 754 dollars through acquisition of the stock of the subsidiary N Company. The unit first proposed to eliminate this item, and was sustained in a memorandum by this office. The taxpayer asserted that it never had been afforded a right to be heard on this issue, however, and submitted argument, briefs, and additional data. It contended that article 867, Regulations 45 and T. D. 2662 (as to this point) are invalid and contrary to law. Subsequently data were furnished to establish the market value of the assets of the subsidiary at acquisition of its stock, within about 125 dollars of the amount of capital claimed. The taxpayer relied upon such decisions as Regal Shoe Co., 1 B. T. A. 896, and Union Petroleum S. S. Co. v. Edwards, 7 Fed. (2d) 301.

10. Discussion was had regarding the affiliations under the 1917 law, since the consolidated group included corporations producing things with no connection, superficially examined. After receipt of additional data the taxpayer established close economic connection of certain doubtful corporations so that now the taxpayer and the department are in agreement.

11. Sundry errors were found in the mechanical end of the audit that are not of major importance.

Case 10: In the case of M Company, the bureau had split up a consolidation as returned, and as the commissioner had not acquiesced in the Mather Paper Co. decision, 3 B. T. A. 1, there was an overassessment of 24x dollars to this member of the former group, with corresponding deficiencies to the other three members of the group. The taxpayer's agent came to Washington bringing

Amount involved, overassessment recommended by Income Tax Unit, 54x dollars; approved by this office, 51x 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 sustained 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 of 57x 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, 44x 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 subpoenaed 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 XIII-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, 672 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 for the cost of redeeming coupons for 1921.

The Income Tax Unit, after a review of all the evidence, and based 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, 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.

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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 per cent of the total issue.

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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 situa60481-27-VOL. III- -6