surplus account. This issue and decision resulted in a decrease in invested capital of 304x dollars. (e) The taxpayer issued certain dividends in scrip which it failed to deduct from invested capital in its original return. The bureau held that such dividends should be treated as the equivalent of cash and consequently should be deducted from invested capital. Article 1546 of regulations 45. The deduction on this account in invested capital was 168x dollars. (d) The taxpayer included in invested capital in its original return the values of certain stocks as they stood upon its books. Although these stocks were worth the amount stated on the books the taxpayer had acquired them at a lower price. The bureau eliminated the difference from invested capital, making a deduction of 20 dollars. (e) Prior to the profits-tax years the taxpayer transferred to the D Co. tangible assets, cash, and good will in exchange for 200 dollars of its stock. The tangible assets so transferred were worth 100 dollars, and the value of 100 dollars was placed on the good will. The D Co. was included in a consolidated return with the A Co. The 100 dollars good-will value was eliminated since this value was not proven. The case necessitated a study of the right to affiliation of a number of subsidiary corporations, a study of a reorganization in -, another reorganization a few years later, and several liquidations. All of these issues were complicated and required a study of much evidence relating to the accounts of the corporation, transactions and agreements, and corporate resolutions resulting in the reorganizations and liquidations, and also many decisions relating to these transactions under the income and profits tax laws. Case II.-Issue: (1) Inventory. 1918. 1919_ AMOUNTS INVOLVED 242 dollars This taxpayer at the end of the year 1916 discounted its inventory by the amount of 50x dollars, at the end of 1917 by the amount of 170x dollars, and at the end of 1918 by the amount of 150x dollars. These discounts in inventory were made by the former management of the corporation and the discounts were made by application of a certain percentage, so that in effect there was created a reserve for depreciation of inventory. After this method of statement of the inventories up to December 31, 1918, there was a change in the management of the corporation, and at December 31, 1919, there was no percentage or arbitrary discount of the inventories. The revenue agents at two times investigated the books of the taxpayer, and the revenue agents at first were of the opinion that the taxpayer should not be permitted to revise the inventories for all of the years so as to place them on one consistent basis. On the last report the revenue agent came to a different conclusion and was of the opinion that it was proper to restore all of the inventories to their true original basis; that is, without application of any percentage discount at any periods from January 1, 1917, to December 31, 1919. The case involved a study of the taxpayer's right under all the circumstances involved to a revision of all inventories for all of the profits tax years so that all of the profits tax years would be reported upon a consistent basis. The revision of inventory resulted in decreasing the cost of goods for 1917 about 120x dollars and increasing the income accordingly. It resulted in decreasing the income for 1918, 20x dollars. It resulted in decreasing the income for 1919, 150x dollars. This change in inventory resulted also in a change of statutory invested capital. After a study of the circumstances relating to the taking of the inventories and the decisions relating thereto, and the effect upon tax liability and the right of the Government to make additional assessments for any years involved, and the right of the taxpayer to overassessments for any of the years involved, it was decided that the taxpayer was entitled to a revision of all the inventories upon the one consistent basis. Case III.-Issue: (1) The installment basis of accounting and report of income. AMOUNTS INVOLVED 1918_. 51x dollars. 30x dollars. The taxpayer during the taxable year was a dealer in household furniture and conducted its business almost entirely upon the installment basis and sold its goods upon installment contracts. By section 1208 of the Revenue Act of 1926 the provisions of section 212 (d) of the Revenue Act of 1926 were made retroactive so as to apply in the computation of income upon the installment basis for taxable years under the acts of 1916, 1917, 1918, 1921, and 1924, subject, however, to any bar occurring by the statutory limitation upon claims properly applicable as to any of the taxable years. T. D. 3921 promulgates rules for the computation of income on the installment basis under the installment provisions of the revenue act of 1926 and prescribes that no payment received in a taxable year shall be excluded in computing the amount of income to be returned for the taxable year on the ground that they were received under a sale, the total profit from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income. The Income Tax Unit had prepared overassessments in this case in the total amount of 142x dollars for the three years 1918, 1919, and 1920. In the unit's preparation of those certificates of overassessment as first submitted to this office the unit had not included in income of any taxable year the amount of installment payments actually received in the taxable year when those installment payments were upon contracts the total profits from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income. After consideration of the circumstances relating to the taxpayer's change to installment basis and the taxpayer's brief and the revenue agent's reports and the schedules showing income of the taxpayer for each of the years involved, it was recommended that the unit make a further investigation of the profits realized upon the installment basis for each of the years 1918, 1919, and 1920, so as to ascertain definitely what profit was made upon cash collections in the years 1918, 1919, and 1920 upon contracts where the total profit was returned as income in years prior to change to the installment basis. The unit, upon the recommendation made, eliminated the overassessment for 1920 and found the overassessments for 1918 and 1919 to be 512 dollars and 30 dollars, respectively. The consideration of this case resulted in a saving of 612 dollars to the Government by reduction of the overassessments. Case IV.-Issues: (1) Amortization. (2) Reserve for depreciation. AMOUNTS INVOLVED 1919_ 141 dollars. The taxpayer claimed amortization in the total amount of 46 dollars. A total amortization was allowed by the amortization engineers in the amount of 26x dollars upon amortizable costs in the total amount of 51x dollars. Of the total amortization allowed 20x dollars was allocated to and allowed for the year 1918, and 6x dollars was allowed for the year 1919. The amortization was allowed upon two classes of amortizable property, (1) amortization allowed upon facilities employed in production contributing to the prosecution of the war, and (2) amortization allowed upon cost of facilities not completed in time for use in production of articles contributing to the prosecution of the war. A study of the method by which the amortization engineers determined the percentage of residual value in use to be 60 per cent was necessary in this case. The amortization engineers in this case had determined the residual value in use percentage by an unusual method. The percentage of residual value in use was determined by application of a trend line established by the growth of the postwar commercial use of the plant over the period January 1, 1921, to December, 1922. The trend line resulted in the use of a postwar production of an amount which was considerably in excess of the production which had actually been demonstrated by the actual use of the steel plant involved after March 31, 1919. The residual value percentage as determined was, it appeared, somewhat larger than the percentage which would have been computed if the percentage had been determined by use of the actual facts rather than by facts determined by the application of a trend line. The method of computation of residual value involved the consideration of rulings relating to the determination of value in use and involved consideration of the facts in the taxpayer's case so as to ascertain whether or not the method which had been adopted by the amortization engineers in this case had resulted in undue advantage to the taxpayer or not. The case involved particularly a study of a decision of the Board of Tax Appeals In re Manville Jenckes Co., 4 B. T. A., 765. The case involved also a study of the taxpayer's reserve for depreciation with regard to the determination of statutory invested capital. The taxpayer had, in making its return for the year 1919, increased its depreciation reserve by the amount of 14x dollars over the depreciation taken on the books. This increase as made by the taxpayer in the depreciation reserve resulted in a decrease in statu tory invested capital for the purpose of the profits-tax return which was made by the taxpayer for the reason that the Income Tax Unit had in adjustments of prior years ordered this increase in the depreciation reserve and the resulting decrease in statutory invested capital. The Income Tax Unit, after reconsideration for the purpose of this 1919 year, had revised the depreciation reserve with the result that there was added to the book depreciation reserve as additional depreciation prior to January 1, 1919, the amount of 5 dollars. The depreciation reserve has thereby been decreased 8 dollars and statutory capital similarly increased over the adjustments as had been made in the audit of the prior years. In the consideration of this adjustment of the unit it was necessary to examine the balance sheets of the corporation and the briefs of the taxpayer relating to the depreciable plant of the taxpayer and such rulings as relate to depreciation reserve and adjustment of a taxpayer's plant accounts, particularly A. R. M. 106. (C. B. 4, 390.) Case V.-Issues: (1) Affiliation. (2) Inventory. The taxpayer is affiliated with a number of corporations for the taxable year. The principal question of affiliation related to the M Corporation. This corporation had been excluded for all of the years. The taxpayer prior to 1920 acquired about 50 per cent of the capital stock and the taxpayers, together with the minority stockholders, placed all of the capital stock of the M Corporation in trust with five trustees under a voting trust agreement for a period of five years. The trustees were five in number, two to be appointed by the taxpayer and two to be appointed by the minority stockholders of the M Corporation and the remaining one to be mutually agreed upon. The taxpayer did not under the trust agreement secure control of all the capital stock of the M Corporation, since two of the trustees at all times represented the minority stockholders. In the consideration of this affiliation issue it was necessary to consider the facts presented in the taxpayer's briefs relating to the ownership of stock and to consider the decisions of the office relating to the affiliation question, and particularly decisions of the Board of Tax Appeals in Isse Koch & Co. (Inc.), 1 B. T. A. 267 and In re Appeal of R. A. Tuttle Co., 1 B. T. A. 1219. In computing the closing inventory for the year 1920 the taxpayer reduced the closing inventory by an amount of 100x dollars as an arbitrary discount. The report for the year 1920 was made upon the basis of closing inventory after deduction of this arbitrary reduction of 100x dollars. Upon audit of the 1920 return the bureau eliminated the 100 dollars deduction of closing inventory and thereby decreased the cost of goods sold for 1920 and increased net income for 1920 by a similar amount. In the determination of net income for the year 1921 the opening inventory for 1921 was increased by the amount of 100 dollars, since the opening inventory for the computation of cost of goods sold, as was the basis of the income reported for 1921, reflected also the 100 dollars arbitrary reduction. The opening inventory for 1921 was thereby made consistent with the closing inventory for 1920. This readjustment for the years 1920 and 1921 resulted in a restatement of the cost of goods sold and the income for each of those years upon the correct basis under article 1582 of regulations 62. Case VI.-Issues: (1) Distribution of income of trust estates taxable under section 219. (2) Dividends received from M Company, dividend distribution, and earnings available for distribution. (3) Loss sustained. Fourteen certificates of overassessment in favor of five individuals were involved. Additional taxes for three years against an estate were involved. The certificates of overassessment to the individuals and the additional taxes to the estate resulted from a readjustment as between the individual beneficiaries and the trust estate. The individual beneficiaries had returned all the income on their returns, both that which had been in fact distributed to them and that which was undistributed by the trust estate. B died in the year 1915, and left a will whereby after certain specific bequests he bequeathed all the rest of his property to certain trustees upon certain trusts mentioned in article 9 of his will. The manner in which the residual trust estate was to be divided or distributed depended upon the situation existing at the time of his death. At his death B left surviving him his wife, C, and more than one child, and the distribution of the residual trust estate was accordingly governed by certain articles of the will. According to this distribution, 2x per cent of the whole trust estate was devised absolutely to the testator's wife, C, and a was devised to the D Bank for the use of C, his wife. The remaining 60 per cent of the trust estate was directed to be held by the trustee for the benefit of each and all of the children and grandchildren per stirpes. The 60 per cent of the estate which was directed to be held for the benefit of the children was distributable in part to each child or the child's children as the child became certain ages. The portion of the 60 per cent of the trust estate distributable to each male beneficiary was distributable in certain parts to him when he became certain ages and were so distributable absolutely to him. The portion of the 60 per cent which was distributable to each female beneficiary was distributable to her absolutely in certain parts as she became certain ages and was distributable to her in certain parts as she became certain ages indirectly as a trust to the D Bank for her benefit. The D Bank therefore became a trustee of separate trust estates for each female child beneficiary, and in accordance with another provision of the will the D Bank also became a trustee for a separate trust for C. The net income of all the separate trusts held by the D Bank for the female beneficiaries was distributable in quarter-year payments to the respective beneficiaries. Since this net income from these separate trusts held by the D Bank was distributable without any question or condition the income from the separate trusts was taxable to the separate beneficiaries and were so taxed in the adjustment. The trust estate held, however, in each year certain portions of the shares distributable to the male beneficiaries and certain portions of the shares distributable to the female beneficiaries, the corpus of which had not been distributed and the income of which was not |