*510OPINION.
GREen:When the Gould Coupler Co. of West Virginia was organized in 1889, certain patents were transferred to it in exchange for $4,999,500 par value of its stock. The Gould Storage Battery Co. of West Virginia, incorporated in 1899, likewise acquired patents for $4,999,500 of its stock. In 1903 two corporations were formed in New York State, bearing the same names and having the same amounts of authorized capital stock as these West Virginia companies, and they took over the business and assets of the latter, respectively, in exchange for substantially all of the capital stock of the new corporations. At the time of the transfer in 1903, each of the West Virginia corporations, it appears, owned many more patents than they acquired originally (although the first patents acquired by the Gould Coupler Co. had expired prior to 1903). The Commissioner took the position that, in determining invested capital, the New York corporations would be entitled to have included only the value, if any, of intangibles paid in for stock of their predecessors— the West Virginia corporations — in 1889 and 1899, respectively. We held in Appeal of Regal Shoe Co., 1 B. T. A. 896, and Appeal of National Bakers' Egg Co., 3 B. T. A. 1205, that invested capital is to be measured by the value of property paid in for stock of the taxpayer, and not by property paid in to a predecessor corporation (except, of course, in cases which come within section 331, Revenue Act of 1918). Those decisions are applicable to the facts in this case.
This being so, we must determine the value of the intangible property paid in to each of the New York corporations in 1903. The value of the tangible property paid in is not in dispute.
*511We will first consider the Gould Coupler Co. By June, 1903, all of the ten patents transferred by Gould to the West Virginia corporation had expired, so we can give no weight to the petitioner’s argument that the Browning and Barnes patents were peculiarly valuable as basic patents. The Gould Coupler Co¡ of West Virginia had, however, practically from the time of its organization down to June, 1903, engaged continuously in developing and improving the first automatic couplers, and patents were obtained covering these improvements and developments. It also acquired patents covering a number of other railroad appliances, and its engineers from time to time devised improvements in those appliances to meet the demands of railroad service. The improvements also were covered by patents. At the date of the transfer to the New York corporation, it owned 109 patents classified as follows:
Car couplings- 26
Passenger platform buffers- 17
Locomotive buffers- 2
Car trucks_ 13
Passenger car vestibules_ 9
Freight car buffers_ 5
Passenger car couplers_ 5
Passengers car buffers without platforms_ 3
Passenger car draft gear_ 1
Locomotive vestibule and buffer_ 1
Coupler unlocking device_ 1
Steel platform frames_ 2
Journal boxes_ 7
Draft gear_ 7
Electric car lighting equipment_ 10
There is no doubt in our minds that these patents were valuable in the enterprise as income-producing factors. It is also apparent that there was in the business a considerable good will value which contributed materially to its success. The products of the company were being used on some of the principal railroads, such as the New York Central, the Erie, the Michigan Central, and the Lacka-wanna. As Gould testified, the management of the Lackawanna Bailroad had directed that all axles for that railroad be bought from him. By 1903 the business was well enough established so that it was not affected by the expiration of the ten original patents. These had expired on various dates between February 28, 1899, and March 9, 1903. By that time the West Virginia corporation had developed or acquired the series of patents mentioned above, and it was so organized in personnel as to enable it to continue experimentation and the further development and acquisition of patents. *512The 109 patents then owned had different periods of unexpired life, as follows:
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From the date of its organization down to 1903 the company continuously showed large net earnings. During the flye years preceding June 30, 1903, with an average tangible capital of $1,426,-782.49, it showed average net profits of $338,474.57. The only paid-in tangible property was $500 in cash. Upon this showing we are satisfied that there was paid in to the Gould Coupler Co. of New York intangible property of considerable value. We believe it proper, upon the evidence, to determine its value by the formula method. The petitioner contends for a valuation, by this method, arrived at by allowing a return of 8 per cent on the average tangible assets, and capitalizing the balance of the average net profits at 10 per cent, which gives a value for intangibles of $2,243,359.70. This attributes about two-thirds of the net earnings to intangibles. We believe, however, after careful consideration of all of the evidence, a fairer basis would be to allow 9 per cent return on the tangible property and to capitalize the remaining average net earnings on the basis of six years’ purchase, or 16% per cent, which results in a valuation of $1,260,411.90.
The Gould Storage Battery Co. of New York acquired all of the assets of the Gould Storage Battery Co. of West Virginia. Among them were 32 patents relating to batteries, plates, processes, and train lighting equipment. Two of these had been acquired by the West Virginia corporation from Gould upon its formation; the remainder were acquired or developed subsequently. The evidence does not disclose the amount paid by Gould for the two original patents, or the cost to the company of the patents obtained later. The company had no net earnings. There is nothing in evidence from which we can determine that the intangibles transferred to the Gould Storage Battery Co. of New York had value at June, 1903.
The total outstanding stock of the Gould Coupler Co. of New York was $5,000,000. Therefore, the value of the intangibles paid in to this company for stock exceeds 25 per cent of the par value of *513its total stock outstanding on March 3, 1917- — 25 per cent being the limitation placed by section 326 (a) (4), Revenue Act of 1918, upon the amount of intangibles that may be included in invested capital. The petitioner claims this limitation should, in affiliations, be applied to the total outstanding stock of the affiliated group and not to each member of the group separately. Section 240(b) defines two classes of affiliations:
(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.
Regulations 45, article 865, provides that, in the case of the former class of affiliations, the limitation on the amount of intangibles shall be in the aggregate 25 per cent of the total outstanding stock, but as to the latter class, it provides that the limitation shall be applied to each corporation separately. In the present case we have a combination of the two classes. Gould owned substantially all the stock of the Gould Coupler Co. and of the Gould Storage Battery Co. of New York, but the stock of the other four battery companies was all owned by the Gould Storage Battery Co. of New York. The question thus indicated is, What is the correct method for either or both of the two classes of affiliation or for an affiliation which is a combination of the two?
This leads to a consideration of what Congress intended when it said in section 240(a) “corporations which are affiliated * * * shall * * * make a consolidated return of net income and invested capital for the purposes of this title [income tax] and Title III [profits taxes], and the taxes thereunder shall be computed and determined on the basis of such return ”, and, later, “ the total tax shall be computed in the first instance as a unit.” There are two other questions in this case, to be referred to presently, the answers to which also depend upon the construction of this language. Much controversy has arisen over what was meant by the term “ consolidated return,” and there are current two conflicting points of view. One, commonly referred to as the “legal theory,” maintains that “ consolidation ” is a matter of procedure, and the consolidated invested capital and net income should be the sum of the amounts of invested capital and net income, separately computed for each of the several affiliated corporations. Under the other, known as the “ accountant’s ” or “ economic unit ” theory, all intercompany transactions and relationships are eliminated, and a resulting balance sheet and profit and loss statement is obtained which shows the situation as though it were a single business. The advocate of either theory generally insists that his theory should be adhered to consistently in applying section 240.
*514In the Revenue Act of 1917 there was no express provision for affiliation. However, the Commissioner, with the approval of the Secretary of the Treasury, promulgated Regulations 41, relating to the profits tax, which provided (articles 77 and 78) that certain corporations should be deemed affiliated and that the Commissioner might require consolidated returns from such corporations whenever necessary more equitably to determine the invested capital and net income. These articles are quoted in full below:
Art. 77. When affiliated corporations must furnish information as to inter-corporate relations. — For the purpose of the excess profits tax every corporation will describe in its return all its intercorporate relationships with other corporations with which it is affiliated, and will furnish such information in relation thereto as will enable the Commissioner of Internal Revenue to compute the amount of the tax properly due from each corporation on the basis of an equitable and lawful accounting.
For the purpose of this regulation two or more corporations will be deemed to be affiliated (1) when one such corporation owns directly or controls through closely affiliated interests or by a nominee or nominees, all or substantially all of the stock of the other or others, or when substantially all of the stock of two or more corporations is owned by the same individual or partnership, and both or all of such corporations are engaged in the same or a closely related business; or (2) when one such corporation (a) buys from or sells to another products or services at prices above or below the current market, thus effecting- an artificial distribution of profits, or (b) in any way so arranges its financial relationships with another corporation as to assign to it a disproportionate share of net income or invested capital.
Art. 78. When affiliated corporations may he required to malee consolidated return. — Whenever necessary to more equitably determine the invested capital or taxable income, the Commissioner of Internal Revenue may require corporations classed as affiliated under article 77 to furnish a consolidated return of net income and invested capital. Where such consolidated return is required it may be made by any one or more of such corporations or by all of them acting jointly; but if such affiliated corporations, when requested to file such consolidated return, neglect or refuse to do so, the Commissioner of Internal Revenue may cause an examination of the books of all such corporations to be made and a consolidated statement to be made from such examination. In cases where consolidated returns are accepted, the total tax will be computed in the first instance as a unit upon the basis of the consolidated return and will be assessed upon the respective affiliated corporations in such proportions as may be agreed among them. If no such agreement is made the tax will be assessed upon each such corporation in accordance with the net income and invested capital properly assignable to it.
The substance of these articles was later enacted into section 1331 of the Revenue Act of 1921. Provisions with respect to affiliations and consolidations were incorporated into the Revenue Act of 1918 in section 240 thereof. That section changed the definition of affiliation and made the filing of consolidated returns mandatory, but the underlying principle expressed in articles 77 and 78 was adopted. This is shown by the report of the Finance Committee on the Revenue *515Bill when it was before the Senate, which contains the following explanatory statement (Sen. Hep. ISTo. 617, 65th Cong., Bd sess., pp. 8, 9):
Provision has been made in section 240 for a consolidated return, in the case of affiliated corporations, for purposes both of income and profits taxes. A year’s trial of the consolidated return under the existing law demonstrated the advisability of conferring upon the commissioner explicit authority to require such returns.
So far as its immediate effect is concerned consolidation increases the tax in some cases and reduces it in other cases, but its general and permanent effect is to prevent evasion which can not be successfully blocked in any other way. Among affiliated corporations it frequently happens that the accepted intercompany accounting assigns too much income or invested capital to company A and not enough to company B. This may make the total tax for the corporation too much or too little. If the former, the company hastens to change its accounting method; if the latter, there is every inducement to retain the old accounting procedure, which benefits the affiliated interests, even though such procedure was not originally adopted f<y: the purpose of evading taxation. As a general rule, therefore, improper arrangements which increase the tax will be discontinued, while those which reduce the tax will be retained.
Moreover, a law which contains no requirement for consolidation puts an almost irresistible premium on a segregation or a separate incorporation of activities which would normally be carried as branches of one concern. Increasing evidence has come to light demonstrating that the possibilities of evading taxation in these and allied ways are becoming familiar to the taxpayers of the country. While the committee is convinced that the consolidated return tends to conserve, not to reduce, the revenue, the committee recommends its adoption not primarily because it operates to prevent evasion of taxes or because of its effect upon the revenue, but because the principle of taxing as a business unit what in reality is a business unit is sound and equitable and convenient both to the taxpayer and to the Government.
It will be observed that the Finance Committee recommended the adoption of section 240 because, as it states, the principle of taxing as a business unit what really is a business unit is sound and equitable and convenient. As pointed out above, one of the respects in which this section differs from articles 77 and 78 is that it prescribes as the basis of affiliation control of the stock, without regard to the kind of business the different corporations may be engaged in or what their other relations to each other may be. The test is unity of control of substantially all the stock, it being apparent that such control would enable the “ unit ” to make intercompany arrangements affecting the invested capital or net income of the separate members. It was recognized by Congress that the equitable and convenient way of dealing with such a situation was to treat a group of corporations thus controlled as a business unit, and hence it provided for a consolidated return. It is plain that the purpose was to circumvent intercompany dealing and accounting practices, of whatever origin or object, through which the invested capital or net income of a *516corporation in a group under common control might be artificially increased or diminished, with the attendant effect on the taxes upon such company if separately assessed. The so-called “ legal ” theory does not fulfill this purpose, nor does the language of the statute support this theory. Section 240 provides that the taxes shall be computed as a unit — not as an aggregate — and upon the basis of a consolidated return. The verb “ to consolidate ” means more than to add together; it means to weld into one things that previously were separate. It is derived from the Latin verb consolidare, “ to make firm or solid.” The following definitions are given in Murray’s New English Dictionary: “ To make solid, to form into a solid or compact mass; to solidify; to combine compactly into one mass, body or connected whole (territories, estates, companies, administrations, commercial concerns and the like).” The participial adjective “ consolidated ” is defined to mean “ made solid, firm or compact; solidified ; combined, unified.” The language of section 240 and its legislative background show that Congress used the word “ consolidated ” in the sense of “ unified ”; there is nothing to indicate they used it in the sense of “ summarized.” Further, it appears from the report of the Finance Committee that section 240 was recommended after a year’s trial of the consolidated return under the 1911 law. This is the time during which Regulations 41, articles 77 and 78, quoted above, were in force. These articles, it will be noted, provide that the Commissioner may cause an examination of the books of all of the affiliated corporations to be made and a “ consolidated statement ” to be made therefrom. The word “ consolidated ” had become current in accounting nomenclature to describe balance sheets, profit and loss statements, and income statements of a group of companies connected with each other by control of stockholdings. Such statements are used in business to show the financial condition or earning power of an undertaking thus constituted after eliminating all the relations of the constituent companies one to another. The consolidated balance sheet represents the ultimate financial position of the group to the outside world after the elimination of the intercompany relationships.
In the light of the genesis of section 240, the object sought to be attained, and the sense in which the word “ consolidated ” is used in accounting practice, we are led to the conclusion that Congress intended to require consolidated returns of net income and invested capital arrived at by constructing a single composite invested capital for the group from which duplications and intercompany obligations would have been eliminated, and one statement of net income based on a profit and loss statement from which would have been eliminated all intercompany losses, profits, and other transactions *517affecting income. We are not to be understood as approving any particular accounting practice, but are pointing out the method to be followed in applying the provisions of the statute. If any inconsistency appears between the so-called “ accountant’s ” theory and any provision of the statute, the latter, of course, will control.
It follows from what we have said that, in applying the limitation on the amount of intangibles, the group shall be treated as a unit, i. e., the limitation shall be measured by the par value of the total outstanding stock of the group. This rule should be followed in both classes of affiliation, and hence in a combination of the two. There is no authority in the statute for treating the two classes differently.
We come now to the question, Should the earned surplus of the Gould Coupler Co. be reduced by the operating deficits of the other affiliated corporations in arriving at the consolidated invested capital ?
In considering this question, the place of invested capital in the scheme of the profits taxes should not be overlooked. These taxes are measured and graded, not by net income, but by the relation of net income to the invested capital which contributed to its production. They are imposed upon net income in excess of credits, and the credits are measured by the amount of the invested capital.
In defining “ invested capital ” Congress limited it to the “ actual cash value ” of property paid in (with certain limitations and qualifications not here material) and earned surplus. The measure is actual contributions made for stock or shares and actual accretions in the way of surplus. The purpose of Congress was to confine the capital, the income from which was to be in part exempted from these special taxes, to the risks accepted by the investors in embarking in the enterprise, including earned surplus or undivided profits left in the business. LaBelle Iron Works v. United States, 256 U. S. 377. The common sense motive was to have a check on inflation. In the case of an affiliation, treating the group as a unit — as we hold it should be treated — it is apparent that the amount at risk, in addition to the paid-in capital, is the net earned surplus.
There is a further consideration impelling us to answer this question in the affirmative. The paid-in invested capital of a corporation, as represented by its capital stock, remains fixed, that is to say, it is not reduced by an operating deficit. Appeal of Guarantee Construction Co., 2 B. T. A. 1145. Hence, in an affiliation, if the operating deficits were not offset against earned surplus, the consolidated invested capital could be inflated by building up an artificial earned surplus in one member at the expense of others whose invested capital would not be correspondingly reduced. It was just this kind of result which Congress intended to circumvent when it enacted section 240.
*518Further questions relating to the consolidated return arise out of the claim of the petitioner for deduction of alleged losses sustained by the Gould Storage Battery Co. of New York upon the cessation of business by the storage battery companies of Ohio and .Massachusetts. These companies discontinued business in 1918— the Ohio corporation on December 80, and the Massachusetts corporation on August 1.
The Ohio corporation was indebted to the Gould Storage Battery Co. of New York in the sum of $45,855.22 on January 1, 1918; on December 31, 1918, the indebtedness was $46,331.93. The latter owned all of its outstanding stock of $8,000 par value.
The Massachusetts corporation owed the New York corporation on January 1, 1918, $23,534.46; on August 1, 1918, $21,182.46. The latter owned all of the capital of the Massachusetts corporation, amounting to $2,600, par value.
The Commissioner disallowed the deduction of both the debts and the investment in stock on the ground that they were intercompany losses. The petitioner’s claim for their allowance is based on its argument that the invested capital and net income of an affiliation should be separately determined in the first instance and then added together to arrive at the consolidated invested capital and net income; that the deductions would be allowed to the New York corporation, under section 234(a)(4), if it had made a separate return. Neither party drew any distinction between the debts and the investment in stock, or between debts incurred while the companies were affiliated and those arising before affiliation.
Operating losses sustained by any member during the period of affiliation are deducted in arriving at the consolidated net income. It is, of course, immaterial in determining consolidated net income that such losses are met from advances made by one of the other members. That is an internal arrangement which does not afifect the group as a taxable entity. The loss of any member is a loss of the group, and the loss may not be deducted again in the form of an intercompany obligation which may have become worthless. Through the group having received the benefit of the deduction, each constituent corporation has benefited by virtue of its being a member of the group. This disposes of any question of the deductibility of indebtedness resulting from operating losses of the subsidiaries during the period of affiliation.
The petitioner asserts, in its brief, that the Ohio and Massachusetts corporations were dissolved. In a careful examination, we are unable to find that this is shown by the evidence, and we can not assume it to be a fact. A witness testified, with respect to the Massachusetts corporation, “ So far as I know the company went out of *519business at that time”; and as to the Ohio corporation, “ I understand that the company discontinued business in Ohio.” It is well settled that dissolution is not effected by a cessation of corporate business and acts; mere non-user does not dissolve a corporation. 3 Cook on Corporations, 8th ed., section 631, p. 2301, and cases cited. The record shows merely that the two subsidiaries discontinued business and that the parent company charged off their indebtedness to it and also its investment in their stock. There is no evidence of what assets the subsidiaries had, or that they did not have any, and there is nothing to show that their assets were liquidated. There is nothing showing that the parent corporation did not continue to control the stock. Hence the subsidiaries continued to be members of the affiliated group. During the continuance of this status intercompany obligations are disregarded for the purposes of the tax. We are not called upon, therefore, to decide questions which would arise if the affiliated group were broken up by the dissolution of some of the members.
The petitioner seeks to increase invested capital by adding to surplus expenditures of both the two West Virginia corporations and their Few York successors for patent development, applications for patents, and in litigation affecting patents, which had been charged to expense.
The expenditures of the West Virginia corporations were reflected in the value of the patents at the time they were transferred to the New York corporations. It is this value that the latter paid for, and there is no ground for adding thereto sums spent by the prior owner in bringing the patents to the state they were in when acquired by the New York corporations.
The testimony tends to show that the sums expended by the New York corporations were in their nature capital expenditures, but the evidence is insufficient to enable us to determine what part thereof, or that any of them, should be added to surplus in 1918 and 1919. The petitioner claims the full amount. The items making up the totals were identified in the corporations’ books, by accountants, as having been spent for the purposes stated. However, just what the corporations got for the money expended is not disclosed. They did acquire many patents after 1903, but these expenditures are not connected up with any of those patents. Further, it is obvious that any patents thus acquired were exhausting with the lapse of time, and it is only the proportion of the cost representing their unexpired life in 1918 and 1919 that might be added to surplus in those years. We have no evidence of what their unexpired lives were in those years. Also a large part of the money was spent in litigation over patents, and it does not appear with what results. If any of the patents were declared invalid, the expenses connected with the litigation may not be included in invested capital.
*520Certain items of depreciable assets were not included in the petitioner’s original returns and were also omitted by the Commissioner in recomputing depreciation. It is apparent to us that they were omitted in error, as the total cost of fixed assets shown in the balance sheet prepared by the revenue agent agrees with the amount now claimed by the petitioner. A list of'the property omitted is set forth in the findings. The petitioner is entitled to depreciation on this property at the rates respectively used by the Commissioner for the petitioner’s other property of the same kinds upon which depreciation has already been allowed.
Judgment will be entered on 15 days’ notice, under Rule 50.