author: Littleton :

text:
    Lafayette-South Side Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4848, 7831.
    Promulgated September 7, 1927.
    1. The evidence in these proceedings is insufficient to show that control existed on the part of the petitioner sufficient to warrant affiliation during the period of liquidation of two other corporations the assets of which had been partially taken over by the petitioner.
    2. Where stock is specifically issued for tangible assets and by the same agreement good will is to be turned over to the same corporation without an issuance of stock or the payment of any other consideration therefor, the principle laid down in St. Louis Screw Cto., 2 B. T. A. 649, whereby an allocation of the stock between tangibles and intangibles was permitted, is not applicable.
    3. Paid-in surplus on intangibles denied. HeralcLDespatch Go., 4 B. T. A. 1096.

      John E. McClure, Esq., and Abraham Lowenhcmpt, Esq., for the petitioner.

      Henry Rmenel, Esq., for the respondent.
    The Commissioner determined deficiencies for 1919 and 1920 in the amounts of $158.97 and $8,983.68, respectively.
    FINDINGS OF FACT.
    Prior to 1915, there were in existence two Missouri corporations known as the Lafayette Bank and the South Side Bank, which were carrying on a banking business in the City of St. Louis, Mo. The Lafayette Bank had an authorized capital of $200,000, all of which was issued and outstanding. The South Side Bank had an authorized capital of $500,000, all of which was issued and outstanding.
    On January 14,1915, the Lafayette Bank and the South Side Bank entered into the following agreement having for its purpose the formation of a new bank to be known as the Lafayette-South Side Bank:
    Agreement, entered into between tbe Lafayette Bank, party of the first part, and the South Side Bank of St. Louis, party of the second part:
    Whereas, it is the desire of said parties that their business be transferred to a new banking corporation, to be known as the Lafayette-South Side Bank of St. Louis, it is therefore agreed by and between the parties as follows:
    I.
    The parties agree to form, or cause to be formed, a new banking corporation, under the laws of Missouri, under the name of “ Lafayette-South Side Bank of St. Louis,” and the Bank shall be located in the City of St. Louis. The amount of the capital stock shall be Eight Hundred Thousand Dollars ($800,000), divided into eight thousand shares of the par value of one hundred dollars ($100) each, full paid and non-assessable, and the New Bank shall have a surplus and undivided profits, as hereinafter stated. First party, through its nominees, shall subscribe for three thousand shares of the stock of the New Bank, and second party, through its nominees shall subscribe for five thousand shares. The Board of Directors shall consist of seventeen stockholders, and the following named shareholders shall constitute the board for the first year, viz:
    August A. Busch Chas. F. Betz
    Chas. Ehlermann C. W. Johnson
    Walter It. Medart Hy. Menzenwerth
    A.O. E. Meyer George F. Moore
    Joseph Pauly Chas. Schroeter
    Fred Widmann B.G. Brinkman
    Jos. A. Goettler F. C. Hahn and
    P. J. Pauly, Sr. Henry Ziegenhein;
    the seventeenth director to be named later by a majority of the sixteen above named. But in case of the death, disability, absence or refusal of any of them to act, the remaining persons above named shall select a substitute or substitutes. The corporation shall continue for fifty years and shall have all the powers which such banking corporations now have or may hereafter be authorized by law to have. The said corporation is hereinafter referred to as the “ New Bank ”; and the contracting parties are referred to as the “ old Banks.”
    The parties also agree to form, or cause to be formed, a realty company, under the laws of Missouri pertaining to manufacturing and business companies, Article YII, Chapter 33 of Revised Statutes of Missouri of 1909 and amendments thereto. The name of such corporation shall be “ Lafayette-South Side Realty Company ”, or such other name shall be adopted for such realty corporation as the incorporators may deem proper. Said corporation shall be located in the City of St. Louis. The amount of its capital stock shall be $8,000.00 divided into eighty shares, of the par value of $100.00 each, full paid and non-assessable. First party, through its nominees, shall subscribe for thirty shares of the stock of the Realty Company and second party, through its nominees, shall subscribe for fifty shares. The Board of Directors shall consist of Seventeen shareholders and the following named shareholders shall constitute the board for the first year, viz:
    August A. Busch Chas. F. Betz
    Chas. Ehlermann C.W. Johnson
    Walter R. Medart Hy. Menzenwerth
    A. C. F. Meyer George F. Moore.
    Joseph Pauly Chas. Schroeter
    Fred Widmann' B. G. Brinkman
    Jos. A. Goettler F. C. Hahn and
    P. J. Pauly, Sr. Henry Ziegenhein;
    the seventeenth director to be named later by a majority of the sixteen named above. But in case of the death, disability, absence or refusal of any of them to act, the remaining persons above named shall select a substitute or substitutes. The corporation shall continue for fifty years and shall be formed for the purpose of acquiring a banking house site and erecting a banking house thereon for the New Bank, to be formed as in the foregoing paragraph provided, and with the general powers of a realty corporation incorporated under said laws. The site to be selected shall be determined by the Board of Directors of said Realty Company, and if by the Board deemed advisable, such site shall front on South Broadway, not further north than Carroll Street nor further south than Russell Avenue.

      III.
    First party, for and in payment of tlie three thousand shares of the New Bank to be subscribed for by its nominees, shall pay to the said Lafayette-South Side Bank of St. Louis, at the time of its corporation, either in cash or other net assets of the character and value hereinafter defined, the sum of $468,000.00 over and above liabilities; and second party, for and in payment of the five thousand shares of the New Bank to be subscribed for by its nominees, shall pay to the said Lafayette-South Side Bank of St. Louis, at the time of its incorporation', either in cash or other net assets of the character and value hereinafter defined, the sum of $780,000.00, over and above liabilities; making, for the said Lafayetto-South Side Bank of St. Louis, net assets of $1,248,000.00 and corresponding credits as follows:
    Capital Stock_$800, 000
    Surplus Fund- 400, 000
    Undivided Profits_ 48, 000
    The New Bank shall not be formed until the new* banking house is ready for occupancy, and the transfer of assets in payment for subscriptions shall not be made until the incorporators are ready to execute the Articles of Incorporation of the New Bank; but the New Bank shall be formed within eighteen months from the date hereof (unless the completion of the building is unnec-sarily retarded by strikes, accidents, or other causes beyond the control of the parties hereto), otherwise this agreement shall be void.
    In lieu of all cash, or together with cash, in an amount sufficient to make up and pay for said subscriptions, either party may turn over such of its bank credits, bonds, stocks, real estate located in the City of St. Louis (but not elsewhere), real estate loans, mortgages, notes, bills of exchange, drafts or other securities, negotiable, or non-negotiable, lawfully held and owned by it, in its own right absolutely, at the date of such incorporation of the New Bank, including interest items accrued to that date, all of an actual and guaranteed value at date of incorporation of the New Bank, equal to the amount of cash in lieu of which such other assets are to be substituted. And the cash and other assets so to be turned over by the Lafayette Bank, the first party, must be $468,000.00 in excess of all its liabilities which the New Bank may agree to assume, and the amount of cash and other assets so to be turned over by the South Side Bank of St. Louis, the second party, must be $780,000.00 in excess of all its liabilities which the New Bank may agree to assume.
    First party shall appoint a committee of two to represent it, and second party shall appoint a committee of two to represent it, and either party has power from time to time to substitute other members of the committee in lieu of those first appointed. The two committees shall constitute a joint committee, and from and after the date when this agreement is ratified by two-thirds of the stockholders of each Bank, and until the turning over of the assets of the New Bank, the joint committee and each of the members thereof shall have free access to enter the premises of the parties hereto and examine all books, papers, accounts and other assets of every kind and character to the parties belonging, and all collateral and other securities held by the parties and all reports pertaining to the credit of customers, and all reports of the Bank Commissioner or Examiners of the State Banking Department and of the St. Louis Clearing House Association or its Examiners. And the members of the joint committee shall, at about the date of the incorporation of the New Bank, and as of that date, determine the assets and the fair market value of all assets so to be turned over in lieu of cash, and no assets which, in the opinion of any one of the four members of the joint committee, are not fully worth the book valuó thereof as carried on the books of the Bank shall be taken over by the New Bank, except at a value unanimously agreed upon by the members of the joint committee. But if any asset thus questioned is one which, from the standpoint of prudent banking, ought to be acquired by the New Bank and is claimed to be of a value greater than book value, and the four members of the joint committee cannot agree upon such value, then the Chief Examiner of the St. Louis Clearing House Ass’n. shall determine whether the New Bank ought to take over such assets and at what value, and his decision shall be final and conclusive upon all parties and thereupon the same shall be taken over by the New Bank at the valuation so determined by him, provided the party owning such asset is willing to turn it over at that value, otherwise the same shall not be turned over to the New Bank.
    In the event the Chief Examiner of the St. Louis Clearing House Association should refuse to perform the duties required of him under this or under any other paragraph of this agreement, then the President of the St. Louis Clearing House Association shall designate some one else to act in the place and stead of the Chief Examiner,. and the person so appointed by him shall have all the powers herein entrusted to the said Chief Examiner.
    Except as in this agreement otherwise provided, either old Bank may reserve to itself any asset belonging to it which its committee does not wish to turn over to the New Bank at book value or at the value fixed by the said Chief Examiner, but in that event cash is to be put in, in lieu of the assets so reserved.
    It is further understood that if the assets of one of the old Banks as unanimously accepted and approved by the joint committee amount to more than the amount which such old Bank is required to pay or turn over to the New Bank as hereinbefore provided, then such old Bank may select from the assets thus approved such of them as it may desire to turn over to the New Bank, thus giving the old Bank the choice of determining the assets to be contributed as its share of the Capital, Surplus and Undivided Profits and Contingent Fund and to be so paid in and delivered by said Bank to the New Bank.
    IY.
    . In addition to the cash and other assets to be assigned to the New Bank, as hereinbefore provided, said Lafayette Bank and said South Side Bank of St. Louis shall each also assign and turn over to the New Bank cash "and other assets (and in case assets other than cash are transferred, and same are to be approved, valued and accepted in the manner hereinbefore provided) of the value of one hundred thousand dollars ($100,000.00), in the case of each Bank, as a Guarantee Fund to cover any and all losses, bad debts, discrepancies and shortages subsequently appearing with reference to assets conveyed by said respective Banks to said New Bank.
    One of said funds of $100,000.00 shall be credited on the books of said New Bank to an account to be called “ Special Reserve Fund No. 1, for Contingent Losses, Lafayette Bank Assets ”; and the other fund of $100,000.00 shall be credited in a similar manner to an account to be called “ Special Reserve Fund No. 2, for Contingent Losses, South Side Bank of St. Louis Assets.” Each of said Special Reserve Funds shall be credited annually with interest at the rate of five per cent per annum upon the average balance, to the credit of said fund during the preceding year, and such interest shall be added to the Guarantee Fund. Any loss, bad debt, discrepancy or shortage, accruing or discovered within three years from the date of the incorporation of said New Bank, with respect to any assets assigned or conveyed to said New Bank by said Lafayette Bank (or any renewals or extensions thereof as hereinafter provided), shall be charged to said Special Reserve Fund No. 1, whenever so directed by the Board of Directors of the New Bant, and any loss, bad debt, discrepancy or shortage accruing or discovered within three years from the date of the incorporation of said New Bank with respect to any assets assigned or conveyed to said New Bank by said South Side Bank of St. Louis (or any extensions or renewals thereof as hereinafter provided), shall be charged to said Special Reserve Fund No. 2, whenever so directed by the Board of Directors of the New Bank.
    Said Special Reserve Fund shall remain on deposit as Guarantee Funds as aforesaid for three years from and after the date of incorporation of the New Bank, and during said period the New Bank shall not permit either of the parties, or anyone claiming through or under them, to withdraw the said funds or any part thereof, nor the interest thereon, except by credits against the same when arising as aforesaid. But at the end of said period of three years the amount remaining to the credit of said Special Reserve Fund No. 1 (after further reducing the same by losses, bad debts, discrepancies or shortages, actual or contingent, for which said Lafayette Bank may then be liable), shall be paid to the said Lafayette Bank or to its order or assigns. And at the end of said period of three years the amount remaining to the credit of said Special Reserve Fund No. 2 (after further reducing the same by losses, bad debts, discrepancies, or shortages, actual or contingent, for which said South Side Bank of St. Louis may then be liable), shall be paid to the said South Side Bank of St. Louis or to its order or assigns. Amounts then retained to cover contingent liabilities or losses of the old Banks shall bear interest at the same rate and in the same manner as above provided, but the same shall be paid over to the old Banks respectively entitled to the same whenever the contingent liability has been satisfied, released or defeated. But no deduction shall be made from the Special Reserve Fund of either Bank for “ contingent ” liabilities, at the end of said three years, unless such contingent liabilities are then in litigation.
    Real estate, bonds, stocks, debentures and other securities of that nature assigned or conveyed to the New Bank are to be guaranteed to the New Bank, by the Bank transferring the same, to be at the date of transfer of the value then agreed upon, and all loss, if any, in value thereafter, shall be borne by the new Bank and all appreciation in value shall belong to the New Bank; but losses thereafter, occasioned because of any defect in title, shall be guaranteed to the New Bank and made good' by the old Bank.
    Real estate loans, mortgages, notes, bills of exchange, special tax bills, drafts or overdrafts are to be guaranteed to the New Bank to be of the value at which the same are to be taken over, and if any losses actually occur thereafter within three years from the date of the incorporation of the New Bank in the collection of any of such assets (or renewals or extensions thereof as hereinafter provided), such losses are to be borne by the Bank which tranar ferred the same, and said Bank guarantees the New Bank against any sucn loss. Losses occurring after said three year period shall'be borne by the New Bank. Assets charged off against the Special Reserve Fund shall be turned over to the Bank which transferred the same to the New Bank, at date of such charging off. The deposit of such Special Reserve Fund as such collateral guaranty shall not be deemed as a release of the old Bank from liability on its guaranty with respect to any loss or losses, occurring within the three year period, in excess of such Special Reserve Fund.
    No renewal or extension, however, shall be granted by the New Bank except at the risk of the New Bank, unless the old Bank which transferred such asset to the New Bank requests such renewal or extension, and if any actual loss occurs within the three-year period, with respect to renewal paper renewed at the request of either old Bank, the loss shall be borne by the old Bank, but if such loss occurs thereafter the loss shall be isorne by the New Bank.
    V.
    If, at the date of the valuation of the assets of the respective Banks, preliminary to the incorporation of the New Bank, it appears that either Bank will not be able to turn over to the New Bank, in cash or other acceptable assets, the amount hereinbefore agreed to be put by it (the Lafayette Bank $468,000.00 and $100,000.00 Special Reserve Fund, and the South Side Bank of St. Louis $780,000.00 and $100,000.00 Special Reserve Fund), then the other Bank may correspondingly reduce the payment to be made by it for account of capital stock, surplus and undivided profits; that is to say, on the basis hereinbefore provided each party was to pay in, for capital stock, surplus and undivided profits, the sum of $156.00 per share for the shares subscribed for it, and therefore if the amount in cash and other assets which can only be so contributed by either party be less than $156.00 per share, the amount to be paid in per share by the other party shall be similarly reduced.
    VI.
    From the date of the incorporation of the New Bank, and when it has been authorized by the Bank Commissioner to engage in business, the parties hereto agree to turn over to the New Bank the good-will of their banking businesses and the customers thereof, so far as the New Bank may desire them; and to enable the New Bank to become fully possessed of such good-will and forever afterwards to enjoy the same, the parties hereto agree that they will not, at any time thereafter, engage in any branch of the banking or safe-deposit business, except to liquidate their remaining assets and distribute them to their stockholders, and they agree to wind up their affairs and to procure a dissolution of their charters whenever their affairs have been wound up, and not later than five years from the incorporation of the New Bank. The parties also agree that they will take steps, at the time of the incorporation of the New Bank or thereafter, to change their corporate names so that they will not have a corporate name similar in any respect to the name of the New Bank; but unless such change of corporate name be required by the State Bank Commissioner, the contracting parties shall not change their corporate names prior to the incorporation of the New Bank, nor shall they change their corporate names after the incorporation of the New Bank except at the request of the New Bank; and neither of the contracting parties shall be requested by the New Bank to change its corporate name unless the New Bank makes such request of both the contracting parties.
    After the incorporation of the New Bank, all mail matter, telegrams, etc., addressed to either of the old Banks, shall be turned over to the New Bank in the first instance; and if the same pertain to matters in which the New Bank is in no wise interested, then such communication shall be turned over to the old Bank to whom they were addressed; it being the intention of this agreement that the New Bank shall succeed to all the business of the old Banks, although receiving only assets to the extent hereinbefore provided, and it being distinctly understood that the New Bank is to assume none of the liabilities of the old Banks, except those herein expressly assumed by the New Bank.

      It is also expressly understood that the offices of the old Banks, until fully liquidated and dissolved, shall he kept in the banking rooms of the New Bank, in such space as may be allotted to them by the New Bank, but no rent shall be charged to the old Banks, nor shall they be compelled to pay the New Bank any other compensation growing out of the keeping of their offices in the banking rooms of the New Bank, nor for clerical services, if any are furnished by the New Bank in assisting the old Banks in the liquidation of their affairs. The New Bank, may, however, permit or require the old Banks to withdraw their offices to some other location. While the offices of the old Banks are maintained at the banking rooms of the New Bank, neither of the old Banks shall be permitted to put up any sign on the building to indicate that it is located at said premises, and the officers, directors and stockholders of the old Banks shall have access to the premises only during such reasonable business hours as the New Bank may direct.
    YII.
    The present leasehold, held by the South Side Bank of St. Louis, on its banking house, northwest corner of Broadway and Pestalozzi Street, expiring May 1, 1915, and which is to be renewed for five years, shall be assigned to the New Bank, but the same shall not be valued as an asset of any value; the New Bank shall assume all the covenants on the part of the lessee and shall hold the lessee harmless therefrom.
    The New Bank is not to acquire the office, banking or safe deposit fixtures of either old Bank, except as may hereafter be mutually agreed upon, nor is any valuation to be placed on “ good-will,” “ business ” or “ going value ” of either Bank, nor on its books of account, card system, or stationery. The books of account, card systems, etc. in so far as they pertain to assets transferred to the New Bank, shall be turned over to the New Bank, but no value shall be placed thereon.
    The amount invested by each of the old Banks, in the stock of the Realty Company above referred to, or in loans or advances to said Realty Company, shall be accepted at its cost or face value by the New Bank, plus accrued interest at five per cent, and the joint committee shall have no power to place a higher or lower value on such investments.
    The present site of the Lafayette Bank at Broadway and Park Avenues, shall be taken over by the New Bank at a valuation of $20,000.00, for the fee simple title, free from liens or encumbrances.
    VIII.
    Except as herein otherwise provided, the New Bank shall not assume any liabilities whatsoever of either of the old Banks, except as follows: The New Bank is to assume liability for such current deposits, savings deposits, special deposits, cashier’s chocks, certified checks, certificates of deposit, drafts or other bills of exchange, re-discounts, overdrafts, acceptances and accrued interest owing by each old Bank, as are shown on its books and statement of assets and liabilities at date of transfer but for none others; and, as already stated, 'the assets to be contributed by the Lafayette Bank shall exceed all its said liabilities by $468,000.00, in addition to which it is to put up the Special Reserve Fund of $100,000.00, and the assets to be contributed by the South Side Bank of St. Louis shall exceed all its liabilities by $780,000.00, in addition to which it is to put up the Special Reserve Fund of $100,000.00.

      IX.
    It is further understood that the shares of stock of the New Bank which each of the old Banks is to get, are to be immediately turned over by it, under appropriate resolutions to be adopted by its Board of Directors and stockholders, to its lawful stockholders, authorizing or ratifying this agreement, on the basis hereinafter mentioned, and such stock as non-assenting stockholders refuse to take, shall be sold by the old Bank and the proceeds shall be held by it as a fund to satisfy the claims of such non-assenting stockholders. The capital stock of the Lafayette Bank being $200,000.00 its stockholders shall receive one and one-half shares of stock of the New Bank in partial liquidation on account of each one share of Lafayette Bank stock. The capital stock of the South Side Bank of St. Louis being $500,000.00, its stockholders shall receive one share of stock of the New Bank in partial liquidation on account of each one share of South Side Bank of St. Louis stock.
    X.
    If the New Bank should be required to defend any action, whether at law or in equity, which may be brought against it, by any minority stockholder of one of the old Banks, or by any person claiming to have been wrongfully deprived of his rights as a stockholder, and who refused to authorize or ratify this agreement, any judgment which may be recovered against the New Bank, together with the expenses incurred by it in defending such action, shall be refunded to it by the Bank of which such litigant was or claimed to be a stockholder,' and the amount thereof may be deducted by the New Bank from the Special Reserve Fund of such old Bank.
    If the aggregate number of shares held by non-assenting shareholders of either old Bank, amounts to more than fifty shares in number, the old Bank shall be required to put up with such New Bank, at date of incorporation, such additional separate collateral security as will be sufficient to protect the New Bank against any liability to such non-assenting shareholders.
    XI.
    The New Bank shall cause the following officers to be elected:
    August A. Busch President
    A. C. F. Meyer First Vice-President
    B. G. Brinkman Second Vice-President.
    F. O. Hahn Cashier
    Otto J. Gossrau Assistant Cashier
    B. J. Bloemker Assistant Cashier
    In the event of the death, disability or refusal to act, of any of the said officers, the Board of Directors of the New Bank, shall fill such office.
    All legal matters pertaining to the carrying out of this agreement, the organization of the New Bank and the transfer of the business and assets of the old Banks to the New Bank, shall be referred to the law firm of Schnur-macher & Rassieur, and their fees for services in this connection shall be borne by the New Bank; but services rendered for either of the old Banks in connection with their other affairs, or in connection with their liquidation and dissolution, shall be paid for by the Bank employing them. Any matter of dispute arising under this agreement, with respect to the true and correct interpretation of any of its terms, shall be referred to said attorneys, whose decision thereon shall be final and conclusive as to all parties.

      XII.
    This agreement shall not become binding on either party, unless, on or before March 1, 1915, at least two-thirds of the stockholders of each of the old Banks have in writing approved and ratified this agreement; nor if, in any proceeding, either Bank is permanently enjoined from carrying out this agreement; nor if the State Banks Commissioner refuses to permit the old Banks, or either of them, to make such transfers or refuses to permit the New Bank to commence business.
    The foregoing agreement was ratified by all of the stockholders of the Lafayette Bank by the following trust agreement entered into on January 14, 1915:
    Agreement, entered into between the undersigned, who are stockholders of the Lafayette Bank, as parties of the first part, P. J. Pauly, Sr., B. G. Brink-man, and P. 0. Hahn, Trustees, as parties of the second part, and said Lafayette Bank as party of the third part, Witnesseth :
    1. First parties agree to assign and deliver their certificates of stock (representing the number of shares of said Bank hereinafter set opposite their names), to said Trustees, who shall cause the same to be transferred on the books of the corporation and canceled, and new certificates for said shares shall be issued in the names of the Trustees. Such shares shall be held by the Trustees upon the trusts hereinafter mentioned, but they may cause certificates for two shares each to be issued to such persons as they may select, to qualify them as directors of said Lafayette Bank.
    The Trustees shall issue to each subscriber a trust certificate or certificates for the shares deposited by him, which certificate shall be substantially in the following form;
    Trust Oertieicate
    No_ St. Loins, Mo._, 191_
    The undersigned Trustees hereby certify that they hold in trust for_ shares of the capital stock of the Lafayette Bank, upon the trusts set forth in a certain agreement, dated January 14, 1915, entered into between certain stockholders of said Bank, the undersigned as Trustees and the said Bank. Attached to said agreement and therein referred to', is an agreement, entered into between the Lafayette Bank and the South Side Bank of St. Louis, providing for the amalgamation of said banks and the formation of a New Bank, under the name of Lafayette-South Side Bank of St. Louis.
    In the event of the formation of the Lafayette-South Side Bank of St. Louis, as in said agreement provided, the holder hereof will be entitled to one and one-half shares of the stock of said New Bank for each one share of the stock of said Lafayette Bank now held in trust for him, and to his pro rata of the amounts paid out by the said Lafayette Bank in liquidation. Dividends which may be paid by the said Lafayette Bank prior to the incorporation of the New Bank shall, as and when the same are collected by the Trustees, be paid by them to the trust certificate-holders, registered on the trust certificate books of the Trustees. No other distribution will be made to certificate-holders except upon the presentation of the certificate by the holder for endorsement thereon of the amount to be distributed. The shares deposited in trust will be returned to the holder hereof or his transferee in the event such New Bank is not formed within the time fixed in said agreement, or in the event of the rescission of said agreement for the amalgamation of said Banks, but only upon surrender of this certificate, properly endorsed.

      This certificate is negotiable, but the Trustees will not he required to recognize the validity of any transfer hereof unless in writing endorsed hereon, and then only upon surrender of this certificate, properly endorsed, whereupon this certificate will he cancelled and a new trust certificate will be issued to the transferee.
    _ shares

      Trustees.

    (Endorsement:)
    (Assignment)
    I hereby assign to_my rights in_•_shares of the shares of the Lafayette Bank referred to in the within trust certificate and my rights to that extent, as beneficiary of the trust; and I authorize the Trustees to cancel this certificate and to issue new trust certificates in lieu thereof.
    _, 191-

    Witness :

    2. In case of the transfer of any trust certificate, the transferee, by the acceptance of such transfer, accepts the provisions of the trust agreement and becomes bound thereby, the same as if he had signed the agreement as one of the parties of the first part.
    3. The parties of the first part hereby give their full consent to the transfer by the Lafayette Bank to the proposed New Bank, the Lafayette-South Side Bank of St. Louis, of all its assets, or so much thereof as may be required under the provisions of the agreement entered into between the Lafayette Bank and the South Side Bank of St. Louis, bearing even date herewith, a copy of which agreement is hereto attached. And the parties of the first part, for themselves and their assigns, hereby ratify the action of the Lafayette Bank in entering into said agreement; and they authorize the trustees to vote said stock in favor of any resolution necessary to ratify the said agreement or to carry it out.
    4. When such sale of the business and assets of the Lafayette Bank is made and the certificates of stock of the New Bank are issued to the Trustees, the Trustees shall cause to be issued to each of the parties of -the first part certificates for one and one-half shares of the New Bank on account of each one share of the Lafayette Bank, contributed by him and transferred to the Trustees, all as in said agreement for the amalgamation of the two Banks provided.
    5. If such New Bank is formed, as in said agreement provided, the Lafayette Bank shall thereafter cause its remaining assets to be liquidated and reduced to cash as speedily as practicable, and shall make distribution thereof to its stockholders; and the Lafayette Bank shall sell any and all assets not otherwise collectible, in order to secure the cash required for distribution purposes. When and as the Trustees receive such distribution from the old Banks, they, the Trustees, shall likewise make distribution thereof among the trust certificate holders, according to their respective interests, without priority or preference to any of them. Dividends which may be paid by the old Bank, prior to the incorporation of the New Bank, shall, as and when the same are collected by the Trustees, be paid by them (or by the Bank for the account of the Trustees), to the trust certificate holders registered on tire trust-certificate books of the Trustees.

      6. Upon the final distribution of all assets of said Lafayette Bank, the Trustees shall cause the said corporation to be dissolved and the certificates of stock, held by the Trustees to be cancelled.
    7. In case of the death of any of the Trustees, or in case of the resignation of any of them, the holders of a majority in amount of outstanding trust certificates may, by instrument in writing, appoint a new Trustee to fill the vacancy. Until such appointment is made, the remaining Trustee shall have full power to act. And upon any and all matters, a majority of the Trustees shall have full power to act. The Trustees may choose one of their number as Secretary and he shall thereupon be authorized, in behalf of the Trustees, to sign their names to trust certificates and to issue them with the same effect as if signed by all the Trustees in person. Checks may also be issued and signed by the Secretary in the names and behalf of all the Trustees. The Trustees shall keep a record of all trust certificates issued by them, of the names of all trust certificate holders, of all transfers, and of all their receipts and disbursements.
    8. In the event the New Bank, Lafayette-South Side Bank of St. Louis, is not formed, and the agreement between the two Banks is not carried out, then the shares of the Lafayette Bank contributed by the subscribers shall be returned by the Trustees to the then lawful holders of the outstanding trust certificates upon the surrender of such trust certificates.
    9. The pro rata assets of the Lafayette Bank which may be due to non-assenting stockholders, shall be held by the corporation for them, and all damages or other sums which the corporation may be required to pay to non-assenting stockholders, including costs and expenses of litigation, shall be paid by the corporation out of undistributed assets, and all damages or other sums which the said Trustees may be required to pay to non-assenting stockholders, including costs and expenses of litigation, shall be paid by the Trustees out of undistributed assets coming into their hands as such Trustees.
    10. There are five counterparts of this agreement and the signatures to all of them shall be counted the same as if all were signed to one copy. This instrument shall be void unless subscribed by at least two-thirds of all the stockholders of the Lafayette Bank, and unless the shares so subscribed are accordingly transferred and surrendered to the Trustees on or before March 1, 1916; but the Trustees are authorized and directed to continue to take subscriptions thereafter, and all stockholders thereafter subscribing and contributing their stock shall be regarded the same as stockholders who subscribe before March 1, 1910. If the necessary two-thirds of the stock has not been subscribed and transferred to the Trustees on or before March 1, 1910, as in this agreement provided, or if, on or before said date, the necessary two-thirds of the stock of the South Side Bank of St. Louis has not been transferred to Trustees under a certain trust agreement, providing for the ratification by the stockholders of said Bank of the agreement between the two Banks for their amalgamation or if the said agreement for the amalgamation of the two Banks be rescinded by either of the parties as in said agreement provided, then the shares transferred to the Trustees under this agreement shall be returned forthwith to the trust certificate-holders or their assigns, upon surrender of the outstanding trust certificates.
    On the same date, January 14, 1915, the stockholders of the South Side Bank, parties of the first part, August A. Busch, A. C. F. Meyer and Henry Menzenwertli, trustees, parties of the second part, and the South Side Bank, party of the third part, entered into a trust agreement similar to the foregoing trust agreement entered into by the Lafayette Bank and its stockholders and the trustees.
    The terms of the three agreements hereinbefore referred to were carried out. The stockholders of the two old banks transferred their stock in the respective old banks to the trustees named in the respective agreements in exchange for negotiable trust certificates issued, and authorized the said trustees to vote said stock so transferred in any way necessary to ratify and carry out the aforesaid agreement relating to the formation of the New Bank known as the Lafayette-South Side Bank.
    The petitioner, the Lafayette-South Side Bank, was formed in 1916 in accordance with the agreement hereinbefore referred to. At the date of incorporation, the petitioner issued 8,000 shares of capital stock, par value $100, for certain of the assets of the Lafayette Bank and the South Side Bank, 3,000 shares being issued for assets of the Lafayette Bank and 5,000 for assets of the South Side Bank. The tangible assets conveyed by the Lafayette Bank had a value of $468,000 and those of the South Side Bank a value of $780,000, or a total value of tangible assets of $1,248,000.
    Thereafter the Lafayette Bank and the South Side Bank continued in existence for the purpose of liquidating their assets and for such other purposes as might be necessary to a furtherance of the consolidation agreement between the two banks, but did not engage in the banking business.
    The earnings of the Lafayette Bank from 1911 to 1915, inclusive, were as follows:
    1911-$54, 038.12
    1912- 29,671.80
    1913-^_ 60, 571.10
    1914- 88,393. 04
    1915- 80, 428.63
    Net tangibles of the Lafayette Bank for the same period were:
    1911-$1,085, 691.89
    1912- 1,106, 651.20
    1913- 1,104,600.06
    1914- 1,128, 674.24
    1915- 1,137, 067.28
    The earnings of the South Side Bank from 1911 to 1914, inclusive, were:
    1911-$52,405. 90
    1912- 60, 868.86
    1913- 67, 802. 68
    1914- 93, 064.60

      Net tangibles oí the South Side Bank during the same period were:
    1911_$473, 616.92
    1912_ 502, 335.79
    1913_ 635, 389. 89
    1914_ 787, 735.73
    The bid price of the stock of the Lafayette Bank immediately prior to the formation of the petitioner in 1916 was $650 per share and that of the South Side Bank $240 per share. Few, if any, sales were made at the bid prices or any other price. The bid price of the Lafayette-South Side Bank stock was $260 shortly after this bank was formed and increased during 1916 to $288.
    The South Side Bank was known as a Busch bank from the fact that it was sponsored by the Anheuser-Busch Brewing Co., which had a large plant in the vicinity of the bank. August A. Busch was its president. The Lafayette Bank was known as a conservative German bank.
    During 1919 and 1920 the members of the two groups of aforementioned trustees together owned less than 50 per cent of the stock of the petitioner. Only one stockholder, Joseph Goettler, owned stock in the three corporations during 1919 and 1920, his holdings being: Lafayette Bank, 126 shares; South Side Bank, 2 shares; and Lafayette-South Side Bank, 125 shares.
   OPINION.

Littleton :

Three issues are raised in these proceedings as follows:

1. Were tlie Lafayette Bank and the South Side Bank affiliated with the petitioner for 1919 and 1920?
2. Did the petitioner acquire intangible assets by the issuance of capital stock therefor at date of organization, and if so, what was its value at the date of such acquisition?
3. In the event the Board should hold that the petitioner did not acquire intangible assets by the issuance of capital stock therefor, is the petitioner entitled to a paid-in surplus on account of intangibles paid in as a result of its formation?

Affiliation is claimed under the provisions of section 240 (b), Kevenue Act of 1918, which reads as follows:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

There is no contention advanced in these proceedings that there was a common ownership by the same stockholders in the three corporations sufficient to justify affiliation under the foregoing provisions ; in fact, the evidence presented shows only one stockholder common to the three corporations and his holdings were negligible as compared with the total stock outstanding. Likewise, it is not contended or shown that any one of the corporations owned stock in either of the other corporations. In effect, the claim advanced is that substantially all of the capital stock of the Lafayette Bank and the South Side Bank was controlled by the Lafayette-South Side Bank and that the parties owned its stock in such a manner as to satisfy the control contemplated by section 240 (b). This control, the petitioner says, was brought about through the amalgamation agreement of the two old banks and the trust agreements executed in connection therewith.

When the foregoing agreements were executed and carried into effect, the stockholders of the Lafayette Bank had a right to receive 371/2 per cent of the stock of the petitioner and the stockholders of the South Side Bank 6214 per cent.

Prior to the formation of the petitioner' bank, the stockholders of the Lafayette Bank assigned and delivered their stock to a group of trustees who caused the same to be canceled and new stock issued in the name of the trustees. The trustees then issued trust certificates to the old stockholders in lieu of the stock formerly held by them. Upon the formation of the petitioner bank, its stock, which would otherwise have been issued to the old stockholders of the Lafayette Bank, was issued to the aforementioned trustees, who in turn caused stock certificates to be issued to the appropriate old stockholders.

A similar method was pursued in the case of the South Side Bank, trustees being selected who functioned in a like manner to those selected in the case of the Lafayette Bank. In each case authority was given each group of trustees, under the trust agreements, to vote the stock of the old banks “ in favor of any resolution necessary to ratify said agreement or to carry it out.” Trustees testified at the hearing that they could vote this stock only in accordance with the authority outlined in the trust agreements.

The question is whether through the medium of the two groups of trustees, acting in conformity with their respective trust agreements and through the amalgamation agreement control existed necessary to bring about affiliation of the three companies.

In the Appeal of Isse Koch & Co., 1 B. T. A. 624, the Board defined “control ” as follows:

There is no authority in the section of law referred to or in its context so far as we can see, for assuming that Congress intended to use the word “ control ” in other than its ordinary and accepted sense. On the other hand, we believe that a proper construction of the statute, if it is to serve the purpose for which it was intended, requires us to hold that the “ control ” mentioned therein means actual control, regardless of whether or not it is based upon legally enforceable means. The control, however, must be shown to be a genuine and real control actually exercised, and it can n<jt be established by mere assertions or agreements between majority and minority stockholders unsupported by facts. Potential control of stock is not sufficient in itself to justify consolidation.

Further, the Board said in Appeal of Canyon Lumber Co., 1 B. T. A. 473, that:

The control, however, referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.

We must, therefore, determine whether there was real control, actually exercised, of substantially all the voting rights of the stock of the Lafayette and South Side Banks by the Lafayette-South Side Bank. First, we find that in the trust agreement under which new stock was to be issued to the trustees, authority was given to the trustees to vote the stock for certain purposes, namely, in favor of any 'resolution necessary to ratify said agreement or to carry it out, and there is no evidence of unlimited authority vested in the trustees to vote the stock for any and all purposes. The old banks were to continue in existence for a certain period during which various acts must necessarily be performed incident to liquidation and disposal of their assets. The interest of the petitioner in the acts effecting the liquidation was that the terms of the so-called amalgamation or merger agreement be carried out — particularly, that nothing be done in liquidation that would be to the detriment of the new bank, and that the “ going-concern ” value of the old banks be effectually transferred to the petitioner in so far as it was desired by the petitioner. To this extent, the trust agreements provide a means by which control is maintained by the trustees over the voting rights of the stock, but this is very far from saying that there was a genuine control for all purposes. Conceivably, many acts might have been necessary in connection with the liquidation of the old companies which did not affect the agreement which gave rise to the new bank, and, as to these, we have no evidence that the trustees had any right to vote the stock as trustees, and hence no control to this extent.

Secondly, the express words and tenor of the agreement are to the effect that the petitioner desired only certain assets of the old banks and great care was exercised in seeing to it that only approved assets came to the petitioner. Special guarantee funds were provided to protect the petitioner against certain contingent losses and also that losses occurring during the first three years on account of certain assets should be borne by the old banks. In other words, there is abundant evidence that the petitioner was to acquire certain assets and that that part of the business which it did not desire was to remain separate and distinct from the petitioner. What the petitioner did not take over remained as the property of the old banks to be disposed of by them. Losses suffered would be chargeable to the old. banks and any gains realized would accrue to them, not to the petitioner.

Thirdly, the trustees did not in their individual capacities together own a controlling interest of petitioner’s stock. The amalgamation agreement provided who should be officers and directors of the petitioner and the two groups of trustees were selected from the directors so named. The trustees under the trust agreement with the stockholders of the Lafayette Bank were old stockholders of the Lafayette Bank and similarly the other group of trustees were old stockholders of the South Side Bank. But from these facts we can not say that the acts of the trustees would be acts of the petitioner and that the control given to the trustees would be control by the petitioner of the two old banks.

The trust certificates, which were issued by the trustees to the stockholders of the old banks in lieu of the stock of the old banks' formerly held by them, were not introduced in evidence and no information was submitted to show the provisions contained therein other than that which may be gathered from the trust agreements themselves. Whether there were any rights reserved therein under which the holders thereof could function with respect to the remaining assets of the old banks, we are not informed. The trust agreements show limited authority vested in the trustees to vote the stock of the old banks issued to them. Apparently the remaining authority rested during the period of liquidation, in the stockholders of the old banks. Since the stockholders, prior to the execution of the trust agreement, had authority to vote their stock as owners of the same and if only a part of such right of control was granted to the trustees, it would seem reasonable to assume that at least a partial control yet remained in the old stockholders.

From a consideration of the entire evidence, we fail to find that control existed in the petitioner or its stockholders over the voting rights of the stock of the old banks which we consider necessary for affiliation. Undoubtedly, there was a certain degree of control exercised by the petitioner over the old banks during their period of liquidation and that, through the amalgamation agreement, restrictions were placed on the exercise of certain functions by the old banks. This however, is far from saying that control existed which would result in affiliation as contemplated by the statute. Even though corporation A, through an agreement which it has with the stockholders of corporation B, may be able to dictate certain policies-of corporation B, control could not be said to exist to any greater extent than that evidenced by the agreement itself. In order to bring about an affiliation, control must exist for all practical purposes — not merely for certain limited purposes.

The next question is whether intangible assets were acquired by the petitioner through the issuance of capital stock therefor at the date of incorporation. At the outset, it should be noted that the question is not whether the petitioner acquired good will heretofore possessed by the two old banks, but rather, whether stock was specifically issued for the good will. The evidence is clear that the petitioner was to receive and did receive certain good will of the old banks. This is admitted by the Commissioner in the brief which he filed. The point contended for by the petitioner is that stock was issued both for tangible and intangible assets, and that in the determination of its invested capital, its capital stock as issued at organization should be apportioned between the tangible and intangible assets upon the basis of their valuation at that time.

When it was proposed to form the petitioner, an agreement was entered into between the two old banks as to the assets which were to be transferred, the method of determining the value of the assets and other features incidental to the acquisition of the assets of the old banks by the petitioner, and the formation of the petitioner. All of this was set out in detail and with great particularity.

Among the provisions of the aforementioned agreement we find the following:

First party, for and m payment of the three thousand shares of the New, Banlc to be subscribed for by its nominees, shall pay to the said Lafayette-South Side Bank of St. Louis, at the time of its corporation, either in cash or other net assets of the character and value hereinafter defined, the sum of $468,000.00 over and above liabilities; and second party, for and m payment of the five thousand shares of the New Banlc to be subscribed for by its nominees, shall pay to the said Lafayette-South Side Bank of St. Louis, at the time of its incorporation, either in cash or other net assets [italics ours] of the character and value hereinafter defined, the sum of $780,000.00, over and above liabilities; making, for the said Lafayette-South Side Bank of St. Louis, net assets of $1,248,000.00 and corresponding credits as follows:
Capital Stock_$800, 000.00
Surplus Fund_ 400,000.00
Undivided Profits_ 48,000.00

Then follows this description of the “ other net assets ” which would be acceptable in lieu of cash in payment for the stock:

In lieu of all cash, or together with cash, in an amount sufficient to make up and pay for said subscriptions, either party may turn over such of its bank credits, bonds, stocks, real estate located in the City of St. Louis (but not elsewhere), real estate loans, mortgages, notes, bills of exchange, drafts or other securities, negotiable, or non-negotiable, lawfully held and owned by it, in its own right absolutely, at the date of such incorporation of the New Bank, including interest items accrued to that date, all of an actual and guaranteed value at date of incorporation of the New Bank, equal to the amount of cash in lieu of which such other assets are to be substituted. And the cash and other assets so to be turned over by the Lafayette Bank, the first party, must be $468,000.00 in excess of all its liabilities which the New Bank may agree to assume, and the amount of cash and other assets so to be turned over by the South Side Bank of St. Louis, the second party, must be $780,000.00 in excess of all its liabilities which the New Bank may agree to assume.

It will be noted that no reference is made in either of the foregoing provisions for the payment in of good will as consideration for the issuance of the stock.

Next we find that the parties provided committees to value the tangible assets to be transferred and for an arbitrator to act in case of dispute between the committees as to the valuation of the tangible assets to be received. Apparently, the thought uppermost in their minds was that only assets of a “gilt edged” and thoroughly acceptable character should be paid in for the stock. Special provisions were made to protect the petitioner against any loss which might occur in the acquisition of such assets.

Further, it was provided that:

If, at the date of the valuation of the assets of the respective Banks, preliminary to the incorporation of the New Bank, it appears that either Bank will not be able to turn over to the New Bank, in cash or other acceptable assets, the amount hereinbefore agreed to be put by it (the Lafayette Bank $468,000.00 and $100,000.00 Special Reserve Fund, and the South Side Bank of St. Louis $780,000.00 and $100,000.00 Special Reserve Fund), then the other Bank may correspondingly reduce the payment to he made by it for account of capital stock, surplus and undivided profits; that is to say, on the basis herein-before provided, each party was to pay in, for capital stock, surplus and undivided profits, the sum of $166.00 per share for the shares subscribed for it, and therefore if the amount in cash and other assets which can only be so contributed by either party be less than $156.00 per share, the amount to be paid in per share by the other party shall be similarly reduced. [Italics ours.]

Provision is then made in this language for the acquisition of such of the good will of the old banks as the petitioner desired:

From the date of the incorporation of the New Bank, and when it has been authorized by the Bank Commissioner to engage in business, the' parties hereto agree to turn over to the New Bank the good-will of their banking businesses and the customers thereof, so far as the New Bank may desire them; and to enable the New Bank to become fully possessed of such good-will and forever afterwards to enjoy the same, the parties hereto agree that they will-not, at any time thereafter, engage in any branch of the banking or safe-deposit business, except to liquidate their remaining assets and distribute them to their stockholders, and they agree to wind up their affairs and to procure a dissolution of their charters whenever their affairs have been wound up, and not later than five years from the incorporation of the New Bank.

In the next section of the agreement, we find these words:

Nor is any valuation to be placed on “ good-will,” “ business ” or “ going value” of either Bank, nor on its books of account, card system, or stationery.

The Board has heretofore had occasion to consider whether a bank which was prohibited by banking laws from carrying good will on its books as an asset would thereby be deprived of good will for invested capital purposes under the Revenue Acts, and we held that good will properly acquired, should be included in invested capital, regardless of the inhibition in the banking laws for its appearance on the books of the bank as an asset. Merchants National Bank v. Commissioner, 6 B. T. A. 1167. There was, however, in that proceeding no question' of the manner of acquisition of the good will which is the issue in these proceedings.

Cases have also been before the Board where a mixed aggregate of tangible and intangible assets were acquired for capital stock and the Commissioner had applied a sufficient amount of the stock to equal the value of the tangible assets before considering any stock as having been issued for intangible assets on the theory that there was a presumption that the stock was first issued for the tangibles and that only the excess of the par value was applicable to good will. We held against such a presumption and permitted an allocation of the stock between the two classes of assets. St. Louis Screw Co., 2 B. T. A. 649; Mandel Brothers, 4 B. T. A. 341. There was, however, a specific finding in each case that the stock ivas issued not only for tangibles, but also for intangibles.

A proceeding closely analogous to these proceedings was before the Board in Charles Rubens & Co., 6 B. T. A. 626, wherein an allocation was denied as not coming within the principle of St. Louis Screw Co., supra. There an individual owned a business whose assets consisted of tangibles and intangibles which were acquired by a new corporation which was formed. The agreement under which the assets were transferred provided that stock should be issued for the tangible assets and that the intangible assets should be conveyed for the nominal consideration of one dollar. Even the nominal consideration was not paid. There was evidence that there was good will possessed by the individual which he desired to transfer to the corporation and that the only consideration which flowed to the individual in the sale was the capital stock of the corporation. The Board was reminded there as here that contracts should be interpreted as a whole so as to give effect to each term. The Board, in denying petitioner’s claim, said:

We are impelled, however, by a fair reading of the written evidence of the transaction, to decide against the petitioner in this -respect. The express language of the offer, the resolution and the contract, as well as the certificate of subscription filed with the Secretary of State, are unequivocal and unambiguous and leave no room for construction. The parties themselves deliberately and with unmistakable clearness chose to have the tangible property alone paid in for capital stock and the intangible property separately treated. This was their manifest intention and it was legally fulfilled. The fact that a subsequent revenue law makes their choice less fortunate to them than it might otherwise have been and imposes upon the corporation a greater tax than if another course had been adopted, can not serve to justify an interpretation of the transaction, at variance with the clear language of the instruments by which it was performed. (The argument that contracts should be interpreted as a whole and so as to give effect to each term is beside the point, for it is by thus reading the documents that we are led to the conclusion reached.

Likewise, see Nature's Rival Co., 6 B. T. A. 294, wherein these statements appear:

Prom the evidence it is not possible to decide that the petitioner’s invested capital should include any amount for the alleged good will or other intangible property. The statutory invested capital includes intangible property only when “ paid in for stock or shares.” The evidence clearly shows that the only property paid in for stock or shares at the time of organization was $10,000 cash and merchandise which was paid in for $10,000 of stock. This has been allowed in invested capital by respondent. The evidence is also clear that the intangible property acquired from the Arizona Company and the Form Company was turned in to the petitioner at the same time. It was of such a nature that apart from the business it was of no value and hence it would be idle to argue that it was withheld by the individuals until 1913. And the witnesses testified that it was not withheld but was at once turned in to the new company. This being so, such value as it had could only be a paid-in surplus. If so, it was not within the statute.

The Board is of the opinion that the principle decided in the two preceding cases is conclusive of the question here involved. Section 326, Revenue Act of 1918, recognizes intangibles as invested capital only when paid in for stock or shares. An examination of the entire agreement under which the good will came to the petitioner shows not only that the consideration for the issuance of stock was not g-ood will, but also that every precaution was taken to keep it from being so considered. The parties provided with meticulous care exactly the character of assets which would be acceptable consideration for the stock of the petitioner, and good will was not among these assets. In a separate provision of the instrument, it is provided that, “ From the date of the incorporation of the New Bank and when it has been authorized by the Bank Commissioner to engage in business,”- then such good will of the old banks as the petitioner desired was to be turned over. We fail to see how the agreement can leave any doubt that the stock was to be issued for tangibles alone and that the intangibles were to come to the petitioner under the terms of the agreement, but without consideration. Any allocation of stock to intangibles must, therefore, be denied.

Since the value of the tangibles was in excess of the capital stock issued, the only manner in which the value of the intangibles could find their way into invested capital would be as a paid-in surplus. The Board, however, has already held that a paid-in surplus can not be allowed on intangibles. Herald-Despatch Co., 4 B. T. A. 1096.

Reviewed by the Board.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Morris:

license: Public Domain

text:
    Warren Reilly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5380.
    Promulgated September 7, 1927.
    Petitioner is entitled to return its income from installment sales by the use of the installment method as prescribed by subdivision (d) of section 212 of the Revenue Act of 1926.'

      P. G. Sheehy, Esq., and John H. Riordan, Esq., for tbe petitioner.

      Donald D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1919 in the amount of $668.97, and over-assessments for the years 1920 and 1921, in the amounts of $41.93 and $142.50, respectively. The issues are: (1) Whether the net income of the partnership of which the petitioner is a member should be computed on the installment basis; and (2) the right of husband and wife, domiciled in California, to file separate returns, each reporting one-half of the community income.
    FINDINGS OF FACT.
    Petitioner is a citizen of the United States and a resident of California. During the years 1919, 1920, and 1921, he was a married man; and the returns which he filed for those years were joint returns for himself and his wife.
    During the years involved in this appeal petitioner was a member of the copartnership of Robinson & Sons Co., in which he owned a one-half interest. The partnership was regularly engaged in selling furniture, and household furnishings, and equipment on the installment plan. Sales were also made for cash and on open account. From 40 to 50 per cent of the total sales made in each year were on the installment plan.
    In the case of sales on the installment plan, the purchasers executed a conditional sales contract which provided, among other things, that title to the property described therein remained in the vendor until full payment was made. The initial payments were usually from 20 to 25 per cent of the selling price of the goods; but some sales were made with a smaller initial payment, if the purchaser was known to be reliable and the monthly payments large. The deferred payments were often extended over periods of 18 months to 2 years.
    A cash discount of 10 per cent was allowed to purchasers who purchased for cash, and on open account if payment was made within the required time.

      The partnership maintained a ledger account with each purchaser of goods on the installment plan. Upon execution of a conditional sales contract, the purchaser’s account was charged with the full purchase price of the goods and credited with the initial payment. Thereafter, the account was credited with the deferred payments as and when made.
    The partnership’s books of account were maintained upon the accrual basis. Prior to 1919, all installment sales were treated as closed and completed transactions of the year in which 'made. At the close of the years 1919, 1920, and 1921, there were charged against profit and loss and credited to unpaid profit account, the amounts of $7,000, $6,300, and $3,100, respectively, representing certain percentages of the estimated deferred payments on installment sales remaining unpaid at the close of each year. The amounts charged against profit and loss and set aside to unpaid profits account for the years 1919 and 1920 were added to the income of the years 1920 and 1921, respectively.
    The gross sales, the cost of goods sold, the gross profit, and the percentage which the gross profit is of the gross sales, for the years 1918 to 1921, inclusive, as shown by the partnership’s books of account, are as follows:

    The deferred payments on installment sales unpaid at the close of the years 1919, 1920, and 1921, and the years in -which the sales, to which such deferred payments related, were made, are as follows:

   OPINION.

Morris:

The Commissioner has determined overassessments for the years 1920 and 1921; hence, we are without jurisdiction to determine the issues pertaining to those years. Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The question of the right of husband and wife, domiciled in the State of California, to file separate returns, each reporting one-half of the community income, has already been decided adversely to the petitioner and the determination of the Commissioner in that respect is therefore approved. Appeal of D. Cerruti, 4 B. T. A. 682.

The petitioner contends that as the partnership of Robinson & Sons Co. was, during the years involved in this appeal, regularly engaged in the sale of personal property on the installment plan, the income of the partnership from installment sales should be computed in accordance with the provisions of section 212 (d) of the Revenue Act of 1926. The Commissioner opposes this contention for reasons which are not clear in the record.

The right of a taxpayer, who regularly sells or otherwise disposes of personal property on the installment plan, to return its income from installment sales in accordance with the installment sales method, as laid down in the statute, is established by the provisions of section 212 (d) of the Revenue Act of 1926, which is to be applied retroactively under section 1208 of the same Act; and as the partnership of Robinson & Sons Co. did, during the years involved in this appeal, regularly sell personal property on the installment plan, it is entitled, if it so elects, to have its income from installment sales computed in accordance with the provisions of section 212 (d), for the purpose of determining the distributive shares of the partners, provided its books of account were kept in such a manner that adequate data are available therefrom upon which an accurate computation of income, upon the installment basis, may be predicated. L. S. Weeks Co. v. Commissioner, 6 B. T. A. 300.

Petitioner concedes that the income from installment sales is not correctly reflected on the partnership books, because of the method used in computing such income. It contends, however, that the income from installment sales, for 1919, can be correctly determined in accordance with the installment sales method -of computing income, and suggests the following as a proper determination:

Computation of gross profit for 1918
Gross sales (cash, open account, and Installment)-$118,334.13
Cost of all goods sold_ 74,644.95
Gross profit on all sales for 1918_ 43, 689.18
Percentage of gross profit (gross profit divided by sales)_ 36.9
Computation of gross income for 1919
Gross sales (cash, open account, and installment)_$214, 537. 47
Cost of all goods sold_ 124, 985. 94
Gross profit on all sales for 1919_ 89, 551. 53
Percentage of gross profit (gross profit divided by sales)- 41. 7
Installment accounts receivable at close of 1919:
On sales made in 1918_ 585.05
On sales made in 1919_ 9,976.55
Unrealized profits in installment accounts receivable at close of 1919:
On sales made in 1918 (36.9% of $585.05)_ 215. 88
On sales made in 1919 (41.7% of $9,976.55)_ 4,160.22
Total unrealized profits at close of 1919_ 4,376.10
Gross income for 1919 (gross profit less unrealized profits)— 85,175.43

The gross income of $85,175.43, as above computed, represents the gross profit on cash and open account sales made in 1919 plus that proportion of the installment payments actually received in the year, on installment sales made in 1919, which the total profit realized or to be realized, when payment is completed for all sales, cash and open account as well as installment, bears to the total sales price of all sales made during the year. The chief objection to the computation of income by the above method is that no accounting is made of the profits included in the installment collections of the year, on installment sales of prior years, although the unrealized profit, at the close of 1919, in the then unpaid installment contracts of prior years, is deducted from income of 1919 which includes only the income from sales made in that year. This leads us to believe, though not so shown in the record, that the petitioner, having made the change from the straight accrual basis to the installment sales method of returning income in 1919, is assuming that all installment sales, prior to 1919, having been treated as closed and completed transactions in the years in which made and the income therefrom having been returned for the purposes of the tax in those years, the income from such installment sales of prior years is not again to be returned and subjected to the tax in the years in which actually collected. If this be true, then by this method of computing income the same incongruous results are obtained which we so severely criticized in the Appeal of B. B. Todd, Inc., 1 B. T. A. 762.

It is a cardinal principle of the taxing statutes that the method of accounting employed shall clearly reflect the income; and a taxpayer may not compute its income partly on one basis and partly on another, as it is apparent is contemplated by the suggested method, for the very reason that income is not thereby clearly reflected. To treat the collections made during the year, on installment sales of prior years, as income for the years in which such sales were made, while at the same time returning as income for 1919 only the profits upon the sales made in that year which are actually reduced to possession, is, in effect, an accounting for the income on sales of prior years on the accrual basis, and for the income on sales made in 1919 on the installment sales basis. Both methods can not be used in computing the income of one year; one must give way to the other. Thus we said in the Todd appeal: “ To report, however, upon a basis which considers only the profit upon the business entered into during a year which is actually reduced to possession in cash, and to exclude all business of prior years reduced to possession in cash, at the same time deducting as expenses all accrued obligations, is to destroy all relationship between the true net income and the income reported for taxation.”

It being admitted that profits from installment sales are taxable income within the meaning of the taxing statutes, we think that the method of accounting employed in computing the income, if such method is permitted by statute, is determinative of the question as to when the income from installment sales is to be accounted for. If a taxpayer changes from the straight accrual basis to the installment sales basis of returning income, all items of income must be treated consistently under the new basis adopted, and all profit reduced to possession in cash during'the year in which the change is made, notwithstanding that a portion thereof applies to sales of prior years and has been returned for taxation in those years, must be returned as income of the year in which reduced to possession.

Subject to modification as above indicated, we see no reason why the method suggested by the petitioner may not be adopted for the purpose of computing income for the year 1919. When modified as above indicated, the petitioner’s gross income will be an amount obtained by adding to the gross profit on the total cash, open account, and installment sales of the year, the unrealized profit in the unpaid installment contracts at the beginning of the year, and deducting the unrealized profit in the unpaid installment contracts at the close of the year. See Appeal of Blum's, Inc., 7 B. T. A. 737.

[Reviewed by the Board.

Judgment will be entered on 15 days' notice, in accordance with Rule 50.


author: SteRNHAgen:

text:
    John Polachek, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7678.
    Promulgated September 9, 1927.
    3.The amortization provision must be construed to preserve its national significance, whatever may be the result oí such construction locally for a single year upon a single taxpayer.
    2. The amortization provision is alleviativo and, so far as consistent with its broad purpose, it should be specifically applied liberally.
    3. The amortization deduction is an extraordinary one growing out of the war, and, unlike the deductions for exhaustion, obsolescence or loss, is unrelated to the normal determination of net income.

      4. The amortization deduction was provided, not as an essential factor in the determination of income, but as a method of reducing tax, and to relieve the taxpayer from an unbalanced wartime investment. It should reasonably be directed against the burdens of war taxation.
    5. The word “ reasonable ” in the amortization provision is elastic, but it implies a relation between the broad purpose of the Act and its specific application, and must be construed to promote the intendment of the provision.
    6. The word “ amortized,” although it may ordinarily connote a period of years, does not require that the deduction bo in any caso spread over more than one year if this is not in consonance with the statutory intendment.
    7. Where the petitioner erected a building during 1918 for war purposes, but the building was never used for the production of articles contributing to the prosecution of the war, all orders for such articles having been canceled immediately after the signing of the Armistice in Novembei’, 1918, held, the amortization deduction was properly confined to that year, although the amortizable cost was greater than the income against which it was airplied.

      Emanuel II. Reichart, Iisqn for the petitioner,

      John D. Foley, Esq., for the respondent.

      This proceeding is for the redetermination of deficiencies of $2,380.15 and $7,038.56, income taxes for 1920 and 1922, respectively, arising from the respondent’s disallowance of deductions for the amortization of the cost of wartime facilities. The parties stipulated that the facts are the same as those in the prior proceeding brought by this petitioner for 1919, John Polachek, 3 B. T. A. 1051.
    FINDINGS OF FACT.
    The petitioner is an individual residing at New York City, N. Y.
    The petitioner, in May, 1910, engaged in the business of designing, casting, and erecting ornamental bronze and iron work, under the name John Polachek Bronze & Iron Works, with a capital of $23,000, and maintained and operated a plant for such purposes at Long Island City, N. Y. About September, 1910, he lost about $16,000, due to the failure of two banks in which he had money on deposit, and was left with machinery, equipment, and materials that had cost him about $7,000, but without any money to meet his pay roll and other expenses. He then went to his brother, Charles N. Polasky, and requested a loan of sufficient money to enable him to continue his business. Polasky at first refused to lend the petitioner any money, but finally agreed to lend and did lend him $7,000, on the following conditions:
    That Polasky should receive one-half of the net profits of the business; that neither the petitioner nor Polasky should withdraw any profits from the business during the period of 10 years; that if the business did not produce any profits the taxpayer would, in any event, pay to Polasky the said sum of $7,000, with interest at the rate of 6 per cent; and that the business should be carried on under the sole direction of the petitioner.
    The business was conducted by the petitioner, under the agreement of 1910, until March 1, 1919. Shortly before that date Polasky became dissatisfied because he was not entitled to withdraw any money from the business and had not received any return on his loan, and he therefore proposed that the petitioner buy him out, and the petitioner did buy out his interest in the business for $50,000.
    During the year 1918 the John Polachek Bronze & Iron Works received orders for castings which were not of the kind ordinarily made in the business then carried on by it and which were to be used in the building of ships for the United States Shipping Board Emergency Fleet Corporation, and thereby to contribute to the prosecution of the World War. In order to provide for the production of these castings the John Polachek Bronze & Iron Works constructed, during the year 1918, an additional building to be used as an iron foundry. The building was begun in April, 1918, and was completed in December, 1918. The building was never actually used in the production of articles contributing to the prosecution of the World War, all orders on hand for the production of such articles having been canceled immediately after the signing of the Armistice in November, 1918. The building in question cost $50,755.23, and the land on which it was erected cost $3,400. Of the construction cost of the building, the amount of $16,186.14 was actually paid in the year 1918, and the balance, $34,569.09, was paid in the year 1919. The building was not in use from the time it was completed until about September 1,1921, at which time about 40 per cent of its capacity was put into use as an iron foundry.
    The John Polachek Bronze & Iron Works filed an income and profits-tax return for the year 1918 as a partnership. Its books of account were kept on the accrual basis.
    The petitioner, in computing his net income for the year 1919, deducted for the amortization of the building in question the amount of $12,688.80. The deduction was disallowed by the Commissioner, on the ground that the amortization period of the petitioner ended December 31, 1918, and that deduction for amortization should be allowed only for the year 1918.
   OPINION.

SteRNHAgen:

The petitioner now presents for 1920 and 1922 precisely the same demand for an amortization deduction as the Board considered and decided in respect of the calendar year 1919, John Polachek, 3 B. T. A. 1051, and ardently insists that the former decision on that point was incorrect and should therefore be overruled. To this end, his argument goes not alone to the merits of his present claim under the statute, but also to demonstrate the alleged fallacy of reasoning in the opinions both in Walcott Lathe Co., 2 B. T. A. 1231, and his earlier case. The arguments have elicited further consideration.

The parties have agreed that the facts are in terms the same as those found by the Board in the earlier report. The building, completed in December, 1918, at a cost of $50,755.23, of which $16,186.14 was paid in 1918 and $34,369.09 was paid in 1919, although it was constructed for the production of articles contributing to the prosecution of the war, was never' so used and remained idle until about September 1, 1921, when about 40 per cent of its capacity was used as a foundry. Upon these facts the petitioner predicates his argument that in 1920 he was entitled, under section 214 (a) (9) of the Revenue Act of 1918, to an amortization deduction of $12,688.80, and that in 1922 he was entitled, under section 214 (a) (9) of the Revenue Act of 1921, to an amortization deduction of $10,270.04. These amounts he claimed on his return for the years in question, and the respondent’s disallowance of these deductions gave rise to the determination of the deficiencies in question, aggregating $9,418.71. The respondent, as in the earlier case, conceding that the facts are within the purview of the statutory provision for amortization, adopts the view that such amortization as the facts indicate is only deductible for the year 1918 and not for any later year. The petitioner contends that as a matter of law he is entitled to apportion the amortizable cost among the several years until September, 1921, when the facility became to some extent useful. To deprive him of this, he says, is to refuse the “ reasonable deduction ” granted by the statute, and he seeks to drive home this deprivation by referring to the alleged fact (not contained in the record) that the net income for 1918 is insufficient to absorb the amortizable cost.

The amortization deduction of the statute has from the time of its first enactment in the Revenue Act of 1918 been the subject of constant and widespread discussion. Its terms are so broad and general and its benefits so variously and widely sought, that its application has given rise to numerous delicate questions. The amounts involved have been relatively large and have thus provoked spirited differences. Some of these have already been brought before the Board and have been decided. Walcott Lathe Co., 2 B. T. A. 1231; John Polachek, 3 B. T. A. 1051; G. M. Standifer Construction Corporation, 4 B. T. A. 525; Manville Jenckes Co., 4 B. T. A. 765; Standard Refractories Co., 6 B. T. A. 24; American-Hawaiian Steamship Co., 7 B. T. A. 13. A statutory provision so general in its.scope and affecting many interests in varying degrees and different ways, must be construed in an endeavor to preserve its national significance, whatever may be the effect of such construction locally for a single year upon a single taxpayer.

There can be no question that the provision is alleviative, and that, so far as consistent with its broad purpose, it should be specifically applied liberally to promote the relief which it was designed to afford. Liberality in construction, however, may not transcend a consistent adherence to its primary purpose. It is unfortunately true of legislative draftsmanship that in seeking to provide for the many it may fail to reach a few. This is the history of litigation. Cf. La Belle Iron Works v. United States, 256 U. S. 377; 3 Am. Fed. Tax Rep. 3113. It is well recognized that courts are denied the power, in order to remedy an apparent hardship, to distort the statute beyond the scope of its terms.

It is necessary, therefore, to determine first the general purpose of the amortization provision, insofar as its lánguage permits such consideration, before it is possible to determine the rights of the particular taxpayer under it. The inversion of this by considering first the particular circumstances of the taxpayer, irrespective of the many taxpayers otherwise situated, would obviously be improper. The amortization deduction is an extraordinary one, born of the peculiar circumstances of the war and quite unrelated to the normal determination of net income. It is not one of the factors which year in and year out affect income. Were it not for the war, its high cost of materials and construction, its demands for articles unsuited to peace, its complete absorption of the industries of the nation for its sovereign purpose at whatever cost, and the inevitable post-war reaction, there would have been no occasion for this so-called deduction. In this, it is unlike the deduction for exhaustion, wear and tear and obsolescence provided by the immediately preceding subdivision of the same section of the Revenue Act of 1918, i. e., section 214 (a) (8) , and unlike the deduction for losses in subdivision (4). The amortization deduction, so far as can be ascertained from the meager legislative history open for our consideration, was enacted not because it was believed an essential factor in the determination of income, but rather because it was believed to be a fair, even though extraordinary, method of reducing tax. It is plain 'that income is not normally affected by an inflated capital cost, whether attributable to war or otherwise. Section 215 (b) expressly prohibits the deduction of such capital outlay. Normally such capital investment is kept unimpaired by taking from net income annually, through allowance for exhaustion, wear and tear and obsolescence, an amount sufficient to aggregate its cost at the end of its life. As to the war facilities, however, the taxpayer who had invested extensively was permitted something greater than this in an effort to relieve him from an unbalanced investment incurred during the war and beyond his peacetime needs. As said in Walcott Lathe Co., supra, this extraordinary deduction was actuated by a purpose to afford relief from the high taxes of the war period and was in its nature something different from the usual depreciation deduction.

In the depreciation deduction, taxpayers already had a method of reflecting in income the anticipated physical disappearance of their capital; and in obsolescence, the anticipated effect of economic conditions. In the loss provision, they had the reflection of a present disappearance as distinguished from one anticipated. It would be both irrational and untrue to assign to the amortization deduction the attributes already found in depreciation, obsolescence or loss. Clearly amortization must be something different from these, or it is nothing. This difference we find in the very genesis of the amortization provision. It arose out of the war exigencies as a relief from the drastic burdens which they imposed, and should be construed so as to provide for all taxpayers as a whole such relief in greatest measure.

It is not improper to consider the possible situations reasonably within the scope of the application of the provision. Should those whose inflated investment was devoted entirely to war purposes at large profits and was useless immediately or shortly after the Armistice, so that they had no net income except that subject to high taxes during 1918, be called upon to spread the deduction over the subsequent barren years? Such a taxpayer with far greater reason than that of this petitioner could insist that the income derived during the war years and subject to the high war taxes was intended to be and fairly should be the medium for relief. Walcott Lathe Co., supra. This would likewise be true of the taxpayer whose investment in war facilities was used in war production, such as ships, for some time after the Armistice. Such a taxpayer would, for several years after the Armistice, derive income which was no less directly related to the war and attributable to war facilities. See Standifer Construction Corporation, supra, and Manville Jenckes Co., supra. These taxpayers may with equal force urge that the deduction would be unreasonable and therefore not within the statute if it were required to be spread over years having no relation to the highly taxed war income. It may fairly be said that an extraordinary war deduction should reasonably be directed against the extraordinary burdens of war taxation.

The word “ reasonable ” is, of course, elastic. It has its proper place in the Act, as is shown by the several cases already cited. But because the deduction must be reasonable is no warrant for permitting it to be irrational. It implies a relation between the broad purpose of the Act and its specific application. It precludes generosity no less than parsimony. It is only reasonable if it promotes the intendment of the statute, and only in the light of such intendment can the word be construed and applied. It would be quite the reverse of reasonable to permit the construction of the statute to depend upon the adventitious circumstance that the taxpayer had no income in the year when he might otherwise have a deduction. This may happen as to any of the statutory deductions. The statute was designed to give relief and not to confer bounty, and if a taxpayer is otherwise free from tax, whether because of lack of income or excess of deductions, he may not complain because he can not avail himself of the relief. We must assume that Congress intended to grant relief from tax and that if there be no tax there is no cause for relief; but it is not to be assumed that Congress intended to bestow tax exemption merely because the taxpayer was fortunate enough to need no relief. To confine the deductions to 1918 in the present case is to allow a reasonable deduction as provided by the statute.

This application of the statute is not in effect to penalize a taxpayer situated as this petitioner. Petitioner happens to be free from high tax because he has no high income; and it is not a penalty that in the ensuing years he is taxed equally with others upon his normal income. Nor does this, as he contends, impose an artificial limitation upon the statutory relief. Instead it is merely the restriction of the relief within the scope intended to be covered by the statute.

Some point is made that the word “ amortize ” itself connotes a period of years, which is inconsistent with the application of the deduction to a single year. The word is not so definitive, and, since the broad terms of the statute necessarily require interpretation, the word must be applied in consonance with the statutory intendment as we understand it. So long as there are cases where the period of war production, war income, or other war circumstances, extends beyond 1918 (cf. Standifer Construction Corporation, supra), so that the deduction may be spread, the word fits the purpose. The petitioner’s contention would require that in no case could the deduction be confined to a single year, a view which, as we have seen, would more often defeat the statutory deduction than afford the intended relief. The word is sufficiently adapted to the remedy provided so that it may apply, as the statute says, to “ the year or years affected.” A reasonable deduction may, under the circumstances of each case, be either spread over a period or confined to a single year. The facts here indicate no reason for a spread.

The petitioner argues his right to spread the cost over the years until the time in September, 1921, when he began to use his building to the extent of 40 per cent of its capacity. This seems to exclude an allowance for' 1922, although the 1922 deficiency is complained of in the petition. But September, 1921, has no real significance as a terminal date of the amortization period. Mark that it is the unused 60 per cent which petitioner treats as the measure of amortized cost. This, so far as the facts disclose, is still unused. Why then, if spread at all, should the spread be limited by the date when the remaining 40 per cent was used? If, as petitioner argues, the deduction for unused facilities may offset the income of ordinary years having no relation to war expenditure, war production, war income, or other war circumstances, there would be no reason to limit the years by the date when the nonamortizable part of the facilities was first used. In other words, if a reasonable deduction is not restricted by war circumstances, then there is no restriction whatever; and it is unbelievable that Congress intended to leave it to the desire of each taxpayer influenced by his particular tax liability. The only fact in respect of the cost of these facilities which, occurred after 1918 was the final payment which was made in 1919. But since his income was computed by accruals rather than payments, it must be assumed that this expenditure was reflected in 1918, the year of its commitment. Thus 1918 is the only year affected by the war or which contained any relation between petitioner’s income and his war outlay. In that year counsel says, in his brief (but outside the record), that petitioner’s income was $20,068.84, and therefore insufficient to absorb the entire amortizable cost. We must hold, however, that this fact may not serve to shift the deduction or any part thereof to the later years. The stipulated facts do not, in our judgment, establish a reasonable deduction for the years 1920 and 1922 now in question, and the respondent correctly disallowed the amortization claimed.

Judgment will be entered accordingly for the respondent.

Considered by Moükis and ÁRundell.

       Sec. 214. (a) That in computing net income there shall be allowed as deductions:
      * # * * * * *
      (0) In the ease of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 3017, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including- any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time within three years after the termination of the present war, the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined ; and the amount of tax due upon such redetennination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252.

         Sec. 214. (a) That in computing net income there shall be allowed as deductions:
      # * * * 1)< * *
      (9) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1017, for the production of articles contributing to the prosecution of the war against the German Government, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of such war, there shall be allowed, for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921) a reasonable deduction for the amortization of such part of the cost of such facilitie.s or vessels as 1ms been borne by the taxpayer, but not again including any amount otherwise allo-wed under this title or previous Act of Congress as a deduction in computing net income. At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the income, war-profits, and excess-profits taxes for the year or years affected shall be redetermined; and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252.

       Sec. 214. (a) That in computing not income there shall be allowed as deduction» :
      * # * Ifc * *
      (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

       (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.

       See. 215. That in computing net income no deduction shall in any case bo allowed in respect of—
      * * * * >- * *
      (b) Any amount paid out for new buildings or for permanent improvements or better-ments made to increase the value of any property or estate.