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 therefore 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 for 1918 and 1919, in the respective amounts of 202x dollars and 173x 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 producewar 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,

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 x 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

appeals in those cases, but since the aggregate tax was not far different from the original single assessment, he agreed to withhold the appeals if the bureau would approve the certificate. This it was possible to do, after going into the merits of the case, and the certificate was approved. Before the refund was finally made, the commissioner acquiesced in the Mather Paper Co. case, so that it is probable that the allocation of tax will be hereafter revised.

Case 11: In the case of the M Company there was a certificate of overassessment for 16x dollars for the fiscal year ended June 30, 1918. The taxpayer filed seven returns for this year, four under the 1917 law and three under the 1918 law. The bureau made an audit in which it allowed a small change in depreciation but 17x dollars for amortization. Employees' bonuses were based on a percentage of profits and were accrued as liabilities at the end of the year, though not paid until the succeeding year. These deductions were adjusted upon that basis. Late in 1917, to avoid double taxation, its branch was separately incorporated, and the taxpayer sought to have the bureau ignore the corporate entity by having sales to the subsidiary regarded as consignments, through including goods shipped abroad in inventories instead of in sales. the bureau rejected and no appeal has been filed on the deficiency set up for the fiscal 1919 year, to which the decrease in income would inure, if the taxpayer's contentions were conceded. Special assessment was allowed for the fiscal 1918 year under section 210 of the 1917 law and section 327 of the 1918 law, based largely on failure to capitalize intangibles at incorporation in 1904. The data sheets were investigated as to choice of comparatives, and the audit was approved.

This

Case 12: During this particular month I had a conference here in the case of the M Company involving two charges against B amounting to 217 dollars, deducted from 1917 net income. This case involves amounts generally larger than other cases in the department. Its invested capital lies somewhere in excess of 125,000 dollars. It is impossible to determine the true amount, for various reasons.

At the conference above mentioned sundry other issues were discussed, and additional data were requested and later filed. The parent company had some y subsidiaries, engaged in the same or closely related businesses, and there were small certificates of overassessment to various subsidiaries. The major certificate was to the parent, for 1917, in the amount of 221x dollars, but was later reduced (pursuant to ruling here) to 211 dollars and reported to the congressional Joint Committee on Internal Revenue Taxation in 1927. Major adjustments in the case involved paid-in surplus claimed of 29,126x dollars on assets acquired by the subsidiary N Company, at organization in from the O Company, which claim was rejected in a memorandum by this office and is now involved in a suit pending in a district court; the proper treatment of intercompany interest; affiliations; so-called donations of sundry assets; contested claims for damages to plant and equipment and for services; the effect on invested capital of acquisition of subsidiary stocks at a discount; bond interest and discount; basis of determining gain or loss on land sales; losses; capital changes due to restatement of corporate surplus accounts, etc.; restoration of assets charged to expense in prior years; balancing of intercompany indebtedness accounts, etc. The audit as approved set up an excess-profits tax for 1917 of 851x dollars, but is subject to further reduction hereafter if the court suit is successful.

Case 13: This corporation engaged in the manufacture of munitions and before the United States entered the war had developed plants of great size and cost for the manufacture of supplies for foreign belligerents. Upon the entry of this country into the war, its plants were converted in part and supplemented by sundry additions. Its war work ceased soon after the armistice, but its peace-time activities required abandonment of many of the war-time facilities. Due to the fact that so many costs of plant were incurred prior to April 6, 1917, and therefore they were not subject to amortization, claim was made for deductions from gross income for loss of useful value. On assets acquired subsequent to April 6, 1917, there could have been prosecuted successfully a claim for technical amortization. The claim was thoroughly investigated by engineers and auditors in the field and in this city, and many briefs and exhibits, such as Government contracts and settlements, were submitted. The bureau held that claims against the Government were accruable in 1918, when contract deliveries were stopped, because expressly covered by existing contracts, although final settlements were not effected until after 1918. A deduction was allowed in 1918 for loss on a dividend distribution in securities at a lower market value

than the cost basis, in harmony with O. D. 262 (C. B. 1, 28, and A. R. R. 435, C. B. 4, 27). Another issue of major importance was the proper deduction for munitions taxes, according to the Supreme Court's decisions in the Anderson and Yale & Towne cases (T. D. 3839; 269 U. S. 422). Certificates of overassessment were approved for years 1915-1919, inclusive, aggregating 300 dollars.

I might add, also, that during the month I attended the conference with the taxpayer's agents on the M Company case for 1918 and 1919, but this case was Attorney A's and was not disposed of by me. One other case was returned because incomplete.

ATTORNEY C

The following report involves cases considered during a month. During the month there were considered and disposed of seven cases. These 7 cases involved a total of 32 overassessments and involved overassessments totaling $10,290,415.24. The cases considered by me during the month selected were not necessarily all finally disposed of in the general counsel's office during the same month.

Case 1.-Issues:

(1) Reorganization and merger.

(2) Liquidations of subsidiary corporations.

(3) Intangible value.

Twelve certificates of overassessment of the parent and subsidiaries were involved for the years 1912 to 1918, inclusive.

The A Company case for 1918 involved a determination of net income in the amount of 2,392x dollars and invested capital in the amount of 20,239x dollars. This determination of invested capital involves increase in capital totaling 5,043x dollars and decreases in capital totaling 1,409 dollars. The increases in capital and the decreases in capital involved a study of a number of issues and an examination of a large amount of written evidence respecting the issues. The following brief outline of the principal items which were investigated will illustrate the importance of the issues involved, the magnitude of the effect upon invested capital, and the difficulty in the comprehension of and decision on the issues.

(a) The A Company owned the stock of certain subsidiary companies which were liquidated in 1912 and 1913. There are a large number of decisions of the bureau relating to liquidations. The effect of decisions is that profit resulting from liquidations of subsidiary corporations is taxable income and that such taxable income resulting therefrom is includable in the surplus of the recipient. The study of liquidations involves particularly S. O. 131 (C. B. I-1, p. 18), and L. O. 1108 (C. B. III-1, p. 412). In making its original return the A Company did not include in its surplus the greater part of the profits on the dissolution of the subsidiary companies. These profits, which must be added to surplus and included in invested capital, amounted to 2,289x dollars in addition to the surplus shown on the original return. The consideration of this additional surplus involved a study of the balance sheets of the liquidated corporations, a consideration of the values in the property received on the liquidation, as well as the law issues relating to the right of inclusion of the

appreciation in property values of the liquidated subsidiaries at the time of their liquidation.

(b) The A Company made a number of arbitrary reductions in its good-will account totaling 1,387x dollars, principally at the dates of the sales of certain assets and the receipts of liquidation dividends from a subsidiary. Although the sales and the dividends resulted in large realized profits it failed to include them in its surplus account, but instead utilized these realizations of large profits to effect reductions in the book value of good will. The effect of these errors in the accounting practice was to reduce the account below the actual cost of the good will. Under the decision of the United States Supreme Court in LaBelle Iron Works v. United States (256 U. S. 377), the taxpayer was entitled to the actual cost of its good will and also to the profits on sales of assets as a part of invested capital. The restoration of the profits to surplus and the restoration of the goodwill account to its proper basis involved a careful study of the balance sheets of the corporation.

(c) The A Company acquired substantially all the common stock of two predecessors, the B Company and the C Company. Later the A Company acquired the preferred stock of the two predecessor corporations. In purchasing this stock the taxpayer was compelled to pay 1,001 dollars in excess of the par value of the stock purchased. It erroneously treated this 1,001x dollars as a loss and reduced its earned surplus. In accordance with article 867 of Regulations 65 the property acquired must be valued at the price paid therefor and accordingly there will be no loss sustained. The restoration of this amount to invested capital involved a study of the balance sheets and the transactions and agreements leading up to the consolidation. (d) There were numerous minor adjustments of errors in the taxpayer's accounts and tax returns, such as the adjustment of accrued assets and liabilities which caused an addition to invested capital of 13x dollars. Under section 326 (c) of the act of 1918 the taxpayer was required to deduct from invested capital a percentage thereof equal to the percentage which the amount of inadmissible assets is of the total amount of admissible and inadmissible assets. Correcttions of the taxpayer's capital due to this section 326 (c) required consideration of the inadmissibles deduction. This revision of the inadmissibles deduction resulted in reduction of that deduction by the amount of 348x dollars, thereby similarly increasing the statutory invested capital. This adjustment required consideration of the inadmissibles of the corporation.

The decreases in statutory invested capital in the amount of 1,409x dollars involved consideration of the following five items:

(a) The taxpayer, the present A Company, is a continuation of the A Company under a new name. In the A Company acquired more than 90 per cent of the outstanding shares of the B Company and the C Company. In accordance with the bureau's practice there was eliminated from invested capital the surpluses of the two companies whose stocks were acquired as of the date of acquisition. This resulted in a decrease in invested capital of 815 dollars.

(b) The taxpayer credited to surplus the value of certain stock dividends which it had received. Following the subsequent decisions in Eisner v. Macomber (252 U. S. 189), and in accordance with article 859, regulations 45, the stock dividends were eliminated from the