*816 1. The petitioner reported its income from long term contracts on the completed contract basis. During 1931 through 1934, in addition to being engaged upon the completion of a long term contract begun in 1929, the petitioner was engaged in other business activities. Held that the New York State business corporation franchise tax and Federal capital stock tax for those years may not be allocated in full to the long term contract, which was completed and accepted in 1935 and deducted in that year, but are to be apportioned between the contract and petitioner's other business activities on the basis of the net income from each and the portion allocable to the long term contract deducted in 1935.
2. Under its method of reporting income from long term contracts the petitioner, in 1935, reported the entire amount of income derived from the long term contract completed in that year. Held that petitioner's excess profits tax exemption is to be computed on the basis of the adjusted declared value of its capital stock as of the close of the preceding income tax taxable year as provided in section 702 of the Revenue Act of 1934 and not upon the pyramided value of the petitioner's*817 capital for the seven-year period during which it was engaged in completing the contract; held, further, that section 702 of the Revenue Act of 1934 is not shown to be unconstitutional.
*706 This proceeding involves deficiencies in income and excess profits taxes of $25,598.26 and $9,308.45, respectively, for 1935. The matters in controversy are the respondent's action (1) in disallowing as deductions, in computing taxable net income on the completed contract basis of reporting income from a long term contract, the amount of $167,923.18 representing New York State franchise tax for the years commencing November 1, 1931, through November 1, 1934, and $17,606 representing Federal capital stock tax for the years commencing July 1, 1932, through July 1, 1934, and (2) in determining that the excess profits tax exemption to which petitioner was entitled was $200,802.68 instead of $6,188,000.
FINDINGS OF FACT.
The petitioner is a New York corporation, organized*818 about August 1, 1921, and has its principal office in New York City. On March 10, 1936, it filed its tentative income and excess profits tax return with *707 the collector of internal revenue for the third collection district of New York and on July 12, 1936, it filed its completed income and excess profits tax return for 1935 with that collector. The income and excess profits taxes of $775,923.16 and $275,776.27, respectively, shown on the completed return were paid during 1936 as follows: March 16, $278,739.97; June 10, $247,109.76; September 15, $262,924.85; and December 11, $262,924.85.
The petitioner was engaged in the construction and contracting business. In 1921 it adopted the completed contract method of reporting for Federal income tax purposes its income from long term contracts and thereafter continued to follow that method down through 1935.
Early in 1927 the petitioner began work under a contract for the completed during 1930. The petitioner reported the gross receipts from this contract in its Federal income tax return for the calendar from this contract in its Federal income tax return for the calendar year 1930. In the early part of 1929 the petitioner*819 began work on the construction of a water tunnel (known as "City Tunnel No. 2") under contract with the city of New York, which contract was finally completed and the work thereunder accepted in 1935. The gross receipts therefrom, amounting to $46,055,309.43, were reported by petitioner in its Federal income and excess profits tax return for the calendar year 1935.
During the years 1931 through 1935 the petitioner entered into no new contracts but continued the work under the water tunnel contract. At the time of the completion of the subway in 1930 there was petitioner which arose in connection with the construction of the subway, and by December 31 of that year petitioner had set up subway, and by December 31 of that year petitioner had set up these claims on its books as liabilities in the amount of $216,715.78. While possibly some of the claims are still pending, most of them have been disposed of. The claims were turned over to petitioner's counsel for settlement, adjustment, or defense. A great many of them were involved in suits. The disposition of the claims required a great deal of time, effort, and expense on the part of the petitioner in subsequent years. In its*820 Federal income tax returns the petitioner took deductions as follows as additional costs on contracts completed in prior years:
| 1931 | $6,056.22 |
| 1932 | 6,595.05 |
| 1933 | 44,691.40 |
| 1934 | 9,923.39 |
| 1935 | 31,721.62 |
In its income tax returns for the years 1931 through 1934 the petitioner reported the following amounts of gross income (exclusive of *708 income received from Federal, state, and municipal obligations and from corporate stocks) and net income or loss:
| Gross income | Net income or loss | |
| 1931 | $27,765.48 | $21,709.26 |
| 1932 | 14,741.01 | -6,224.26 |
| 1933 | -26,574.58 | -72,053.42 |
| 1934 | 137,320.18 | 124,658.25 |
Dividends and distributions made by the petitioner for the period 1930 through 1934 as shown by its Federal income tax returns were as follows: December 20, 1930, cash dividend, $464,000; December 21, 1932, cash dividend, $464,000, and a distribution in reorganization of $5,610,674.66 on some undisclosed date in 1932; and January 10, 1934, cash dividend, $265,490.06.
On its Federal income tax returns for the years 1929 through 1935 the petitioner showed among its assets at the close of the respective taxable years the following obligations*821 of states and municipalities and of the United States and stocks in domestic corporations and nontaxable interest and dividends received during the respective years from such sources:
| Assets | |||
| Year | State and municipal obligations | Federal obligations | Corporate stocks |
| 1929 | $5,349,078.63 | $2,095,562.50 | $156,455 |
| 1930 | 6,062,153.67 | 2,095,562.50 | 156,455 |
| 1931 | 6,108,025.09 | 7,027,984.38 | 172,630 |
| 1932 | 3,071,632.34 | 4,638,453.13 | 163,130 |
| 1933 | 2,385,785.89 | 5,698,482.98 | 163,130 |
| 1934 | 2,017,109.49 | 2,313,426.41 | 135,095 |
| 1935 | 1,404,159.88 | 2,264,244.77 | 83,295 |
| Interest | ||||
| Year | State and municipal obligations | Federal obligations | Dividends | Total interest and dividends |
| 1929 | $265,139.37 | $85,892.50 | $6,400.00 | $357,431.87 |
| 1930 | 243,991.52 | 85,595.00 | 8,500.00 | 338,086.52 |
| 1931 | 245,226.05 | 121,784.30 | 8,600.00 | 375,610.35 |
| 1932 | 183,561.06 | 232,233.72 | 4,900.00 | 420,694.78 |
| 1933 | 117,486.25 | 218,302.23 | 1,755.00 | 337,543.48 |
| 1934 | 91,138.75 | 150,827.36 | 1,287.17 | 243,253.28 |
| 1935 | 81,670.00 | 74,117.46 | 1,070.00 | 156,857.46 |
In its Federal income tax returns for the years 1931 through 1935 the petitioner showed the disposition*822 of Federal, state, and municipal *709 obligations and corporate stocks in the following amounts, with costs and at the losses indicated:
| Year | Amount received | Cost | Loss |
| 1931 | $761,000.00 | $761,165.00 | $165.00 |
| 1932 | 3,401,250.00 | 3,408,730.25 | 7,480.25 |
| 1933 | 2,749,900.47 | 2,781,971.45 | 32,070.98 |
| 1934 | 4,269,657.02 | 4,282,002.35 | 12,345.33 |
| 1935 | 2,269,259.84 | 2,343,466.17 | 74,206.33 |
The loss in 1931 resulted from a sale of New York City bonds.
Of the amount received as shown above for 1932, $1,350,000 represented the proceeds received upon the maturity in that year of obligations of the Federal Government and of New York City, and $2,051,250 represented the proceeds from the sale of Federal obligations. The amount received from the sale of Federal obligations was reinvested immediately in other Federal obligations. There were no sales of securities in 1933, the transactions in that year representing maturities of New York City and Federal obligations and the exchange of Federal obligations which had been called for redemption for other Federal obligations. Of the $4,269,657.02 received from security transactions in 1934, $3,399,238.25 represented*823 proceeds from the sale of Federal obligations, $5,184.39 represented proceeds from the sale of corporate stock, and $865,234.38 represented the proceeds received upon the maturity of obligations of New York City and Federal obligations received in exchange for other Federal obligations which had been called for redemption. Of the $2,269,259.84 reported as received from security transactions in 1935, $8,724.92 was received from the sale of corporate stock, $21,000 from the sale of Federal obligations, and $610,000 from obligations of New York City which matured in 1935, and $1,629,534.92 represented Federal obligations received in exchange for other Federal obligations which had been called for redemption.
The petitioner was a self-insurer with respect to the Workmen's Compensation Law of the State of New York and as such was required to make deposits with the insurance department of the state. The petitioner used for a portion or all of such deposits New York City and Federal bonds owned by it.
The contract for the construction of the water tunnel provided that for the purpose of assisting petitioner to prosecute the work advantageously the city's engineer should from time*824 to time as the work progressed, but not oftener than once a month, make in writing an estimate of the amount and value of the work and materials employed on the contract; that within 30 days from the date of the estimate the city should pay 90 percent of the amount thereof (failure of the city *710 to pay within that period made the city liable for the payment of interest at the rate of 4 1/2 percent per annum); that when the unpaid 10 percent of such estimates amounted to $2,000,000 the total amount of subsequent estimates should be paid in full; and that petitioner might receive payment in full of estimates by depositing acceptable securities (the petitioner to receive the interest thereon) of a market value equal to the portion of the unpaid 10 percent that it desired to withdraw. During the years 1931 to 1935 the petitioner deposited New York City and Federal bonds owned by it to obtain payment in full of monthly estimates.
Securities deposited by petitioner with New York City in connection with contracts and with the State of New York as security for self-insurance under the Workmen's Compensation Law of that state were as follows at the end of the indicated years: *825
| 1931 | 1932 | 1933 | 1934 | 1935 | |
| City of New York: | |||||
| Water Tunnel | $1,983,000 | $1,983,000 | $1,500,000 | $1,050,000 | $815,300 |
| 53rd St. Subway | 36,000 | 36,000 | 50 | 50 | 50 |
| Total | 2,019,000 | 2,019,000 | 1,500,050 | 1,050,050 | 815,350 |
| State of New York: | |||||
| Water Tunnel | 670,000 | 775,000 | 495,000 | 495,000 | 495,000 |
| 14th St. Subway | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 |
| Total | 710,000 | 815,000 | 535,000 | 535,000 | 535,000 |
| Total deposits | 2,729,000 | 2,834,000 | 2,035,050 | 1,585,050 | 1,350,350 |
Total cost of securities owned by petitioner at the close of the following years, respectively, was:
| 1931 | $13,308,639.47 |
| 1932 | 7,873,215.47 |
| 1933 | 8,247,398.87 |
| 1934 | 4,465,630.90 |
| 1935 | 3,751,699.65 |
About 1932 the city was having difficulty in selling its bonds. Monthly estimates of approximately two and a half million dollars were not paid currently and a part of that amount remained unpaid for more than two years, during which time it was necessary for petitioner to carry on the work through the use of other of its funds.
The construction of the water tunnel, which was about 21 miles in length, was hazardous. At some points it was about 800 feet underground*826 and passed under the East and Bronx Rivers. Conditions encountered in the sections under the rivers were such that at various points collapses were serious possibilities. If these had occurred several miles of tunnel would have been so damaged that petitioner hardly would have been able financially to repair them. In view of *711 the foregoing the petitioner considered it essential that it maintain substantial financial resources. In 1932 the petitioner completed the excavation of the tunnel which was the most hazardous part of the job and thereafter the petitioner did not consider it necessary to retain such substantial resources as formerly.
At the time of his death in February 1933, Patrick McGovern was the president and principal stockholder of petitioner. He owned 40,776 of the outstanding 46,400 shares and practically all of the remainder of the stock was owned by members of his family and by employees of the petitioner. In his will McGovern expressed the desire that all contracts entered into by petitioner prior to his death be performed, but that no new ones be entered into by petitioner after his death except such as might be necessary to complete those entered*827 into prior to his death. He also expressed the desire that petitioner be liquidated as soon after his death as might be practicable.
At a meeting of the stockholders of petitioner held on January 26, 1934, a resolution was adopted providing that the liquidation of the petitioner be commenced immediately. Pursuant to that resolution, liquidating dividends of $6,496,000 were paid during the remainder of 1934 and $928,000 during 1935. On April 30, 1936, the petitioner filed its certificate of dissolution as a corporation with the Secretary of State of the State of New York. Since that date the petitioner has been engaged in adjusting and winding up its business affairs.
All of the costs and expenses of the petitioner in completing the water tunnel contract, together with the New York State business corporation franchise tax and Federal capital stock tax of petitioner during 1931 through 1935, were deducted from the gross income from the completion of the contract and reported by petitioner in its Federal income and excess profits tax return for 1935. The petitioner did not deduct in any of its Federal income and excess profits tax returns for the years 1931 through 1934 any*828 amounts for New York State corporation franchise tax or Federal capital stock tax paid or incurred in those years, but it deferred such taxes and entered them upon its books as an expense of the water tunnel contract upon which it was then engaged.
New York State business corporation franchise tax was paid by petitioner for the following franchise years commencing November 1:
| 1931 | $119,445.57 |
| 1932 | 17,879.36 |
| 1933 | 18,651.20 |
| 1934 | 11,947.05 |
| Total | 167,923.18 |
*712 The New York State business corporation franchise tax was levied upon petitioner for the privilege of exercising its franchise in the State of New York in its corporate capacity. The amounts of the tax for the respective years indicated above were computed on the basis of the petitioner's entire net income as reported to the Federal Government for the respective preceding taxable years, plus other income received as dividends on stocks, and nontaxable interest on bonds. The franchise tax was computed on the basis of income received entirely from sources other than the water tunnel contract.
The petitioner paid Federal capital stock tax for the years ending on June 30, as follows:
| 1933 | $8,000 |
| 1934 | 8,000 |
| 1935 | 1,606 |
| Total | 17,606 |
*829 The above amounts of $167,923.18 and $17,606 representing New York State business corporation franchise tax and the Federal capital stock tax for the years indicated were deducted by petitioner from the gross income received from the water tunnel contract and reported in the Federal income and excess profits tax return of petitioner for 1935. In determining the deficiency in controversy the respondent disallowed said amounts as deductions.
The annual gross income derived by petitioner from the water tunnel contract, as shown by the monthly estimates rendered by the city of New York as construction progressed, was as follows:
| Years | Gross income | Percentages of total income |
| 1929 | $5,291,845.82 | 11.49 |
| 1930 | 12,919,837.85 | 28.05 |
| 1931 | 19,256,756.80 | 41.81 |
| 1932 | 5,781,409.22 | 12.55 |
| 1933 | 1,663,983.28 | 3.61 |
| 1934 | 398,008.55 | .87 |
| 1935 | 743,467.91 | 1.62 |
| Total | 46,055,309.43 | 100.00 |
The petitioner reported in its Federal income and excess pfofits tax return for 1935 a net incoem of $5,716,327.99, which included the reported net profit of $5,655,635.92 resulting from the completion of the water tunnel contract.
The value of its capital stock as declared*830 by petitioner in its capital stock tax return for the year ended June 30, 1933, was $8,000,000. In its capital stock tax return for the year ended June 30, 1934, which was the last such return filed prior to the completion of the water tunnel contract, the petitioner, on the basis of its opinion as to value of its capital stock on January 1, 1934, declared the value *713 of its capital stock at $8,000,000. In the return for the year ended June 30, 1935, the value was declared at $1,606,421.47, showing a reduction from the value declared for the preceding year, due principally to the distribution in liquidation in the amount of $6,496,000 made to petitioner's stockholders in 1934.
In determining the deficiency in excess profits tax the respondent allowed an excess profits tax exemption of $200,802.68, or 12 1/2 percent of the amount of $1,606,421.47, the value declared by petitioner in its return for the year ended June 30, 1935.
OPINION.
HILL: The petitioner contends that the New York State franchise tax and the Federal capital stock tax incurred by it during the years 1931 through 1934 are of such a character as to be properly allocable to the water tunnel contract*831 and that under the completed contract basis of reporting income are allowable deductions in determining the net income from the contract when completed in 1935. The respondent takes the position that said taxes are not properly allocable to any one or more particular activities of the petitioner, but, having been incurred and accrued in the years 1931 through 1934, respectively, they constituted proper deductions for the respective years in which incurred and therefore are not allowable deductions in determining the net income from the contract on the completed contract basis. There is no controversy between the parties as to the right of the petitioner to report the income from the water tunnel contract on the completed contract basis in 1935. Nor is there any controversy as to the New York State franchise tax and Federal capital stock tax constituting deductible items by petitioner. The controversy is as to the year or years in which such items were deductible.
The completed contract method of reporting income is a modification of the strict accrual method and differs from it in that items of income and expense, though recorded in primary accounts when accrued or incurred, *832 are not carried into profit and loss as earnings of the business until the contract to which they relate is completed. A separate account is kept for each contract. Any debit balance in the account represents the investment in the contract and any credit balance represents unearned income until the contract's completion. A characteristic of the method is that income earned in one accounting period may not be accounted for until a later period. Fort Pitt Bridge Works,24 B.T.A. 626">24 B.T.A. 626; affirmed on this point, 92 Fed.(2d) 825; certiorari denied, 303 U.S. 659">303 U.S. 659.
The New York State franchise tax was for the respective fiscal years begun on November 1, 1931, 1932, 1933, and 1934, and was *714 accruable by petitioner in its calendar years during which said fiscal years began, even though the tax was not required to be paid until as late as January 1 following the close of the calendar years. Par. 209 of the Tax Law of the State of New York; Jamestown Worsted Mills,1 B.T.A. 659">1 B.T.A. 659; *833 Kossar & Co.,16 B.T.A. 952">16 B.T.A. 952; petition for review dismissed by the Circuit Court of Appeals for the Second Circuit, April 2, 1932. The capital stock tax for the year ended June 30, 1933, was accruable by petitioner on June 16, 1933, the date of the enactment of the National Industrial Recovery Act, which by section 215 imposed the tax. The capital stock tax imposed by the National Industrial Recovery Act for the year ended June 30, 1934, was accruable by petitioner on July 1, 1933. Cf. I.T. 2726, C.B. XII-2, p. 42. On May 10, 1934, the Revenue Act of 1934 was enacted. Section 703(d) of that act amended the National Industrial Recovery Act so as to provide that the capital stock tax imposed by section 215 thereof should not apply to any taxpayer in respect of any year except the year ended June 30, 1933, thereby extinguishing all liability of petitioner for capital stock tax for the year ended June 30, 1934, under the National Industrial Recovery Act. Cf. I.T. 2827, C.B. XIII-2, p. 130. The provisions of section 701 of the Revenue Act of 1934 imposed a capital stock tax for the year ended June 30, 1934, and for subsequent years. Under those provisions the capital*834 stock tax for the year ended June 30, 1934, was accruable by petitioner on May 10, 1934, and the capital stock tax for the year ended June 30, 1935, was accruable on July 1, 1934. Cf. G.C.M. 13681, C.B. XIV-1, p. 58; G.C.M. 17340, C.B. XV-2, p. 81.
Article 42-4 of Regulations 86, pertaining to the Revenue Act of 1934, provides as follows:
Long-Term Contracts. - Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term "long-term contracts" means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon either of the following bases:
(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificates of architects or engineers showing the percentage of completion during the taxable year of the entire work to be performed under the contract. There should be deducted from*835 such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If, upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.
*715 (b) Gross income may be reported for the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion.
* * *
Were the New York State franchise tax and the Federal capital stock tax in controversy properly allocable to the water tunnel contract? The respondent has determined*836 that they were not and the burden is upon the petitioner to show that such determination is erroneous. The New York State franchise tax was imposed on petitioer for the privilege of exercising its franchise in that state in a corporate or organized capacity and the Federal capital stock tax was imposed with respect to carrying on or doing business. The petitioner takes the position that the only business it was carrying on from 1931 through 1935 was the completion of the water tunnel contract and that therefore the taxes were allocable in their entirety to that contract under the foregoing regulations. The respondent contends that, since the New York State franchise tax was computed upon the basis of petitioner's entire net income as reported in its Federal income tax returns for the respective preceding years plus certain other income from its large holdings of securities which was nontaxable income in petitioner's Federal income tax returns, and since the petitioner had dealings in substantial volume in securities the ownership of which was not essential to the completion of the water tunnel contract, no portion of either the New York State franchise tax or the Federal capital*837 stock tax is properly allocable to the water tunnel contract. Since the New York State franchise tax was imposed for the privilege of petitioner's exercising its franchise in that state, we think it is immaterial that the amount of that tax should be computed on or measured by income, either taxable or nontaxable, in petitioner's Federal income tax returns that did not relate to the water tunnel contract. Respondent does not contend that such tax was an income tax.
The evidence shows that if petitioner had not entered into the water tunnel contract and had had no other business, but had continued to exist and exercise its franchise in the handling of its securities and the collection of the income therefrom during the years 1931 through 1935, it would have paid the same franchise tax that it did pay. The petitioner's practice in deducting New York State franchise tax in its Federal income tax returns has not been consistent. In its returns for 1928 and 1929, when it was reporting income on the completed contract basis, as in later years it took deductions for *716 the franchise tax but reported no income from completed contracts. The evidence further shows that at the*838 end of 1930 there was outstanding against the petitioner a large number of property damage claims which had arisen from the construction of the subway, which was completed in that year, and that the disposition of those claims required a great deal of time, effort, and expense in later years. The evidence further indicates that possibly some of the claims are still pending. In addition, the petitioner's Federal income tax returns for the years 1931 through 1935 show that it took deductions during that period totaling approximately $100,000 as costs of contracts completed in prior years. What portion, if any, of such amount represented payments in settlement of subway damage claims we do not know. It may well be that such expenditures were made for repairs to and the servicing of construction jobs which it had done in years prior to 1931 and for which it was liable under the contracts for those jobs.
At the end of the indicated years the petitioner owned Federal, state, municipal, and corporate securities as follows, of which the indicated amounts were on deposit with the New York City and/or with the State of New York in connection with the percentages retainable by the city*839 under contracts and/or in connection with the petitioner's self-insurance under the Workmen's Compensation Law of New York State, and from which petitioner received income as indicated:
| Security holdings | Amount of securities on deposit | Income received from securities | |
| 1929 | $7,601,096.13 | Not shown | $357,431.87 |
| 1930 | 8,314,171.17 | $2,392,000.00 | 338,086.52 |
| 1931 | 13,308,639.47 | 2,729,000.00 | 375,610.35 |
| 1932 | 7,873,215.47 | 2,834,000.00 | 420,694.78 |
| 1933 | 8,247,398.87 | 2,035,050.00 | 337,543.48 |
| 1934 | 4,465,630.90 | 1,585,050.00 | 243,253.28 |
| 1935 | 3,751,699.65 | 1,350,350.00 | 156,857.46 |
The petitioner points to the fact that the completion of the tunnel was a large, hazardous undertaking and contends that this made it necessary that it have substantial financial reserves and further that the requirements respecting its self-insurance and obtaining payment of the retainable percentage of current monthly estimates made necessary the deposit of substantial amounts of securities. It urges that its securities were only working capital used in the performance of the water tunnel contract and that their handling and management did not constitute a business activity*840 separate and apart from the performance of the water tunnel contract. The amount of the securities on deposit with the city and with the State of New York was only a fractional part, ranging from approximately one-fifth to one-third, *717 of those owned by petitioner at the end of the respective years 1930 through 1935. So far as the record shows, the deposit of securities was not necessary to the performance of the water tunnel contract, but, by making deposit of them as it did, petitioner was enabled to receive the interest on substantial sums of money which otherwise would have been tied up on the contract, with no interest receivable therefrom. While the evidence shows that in 1932 the city was having difficulty in selling its bonds and was not able currently to make payment of the monthly estimates, thus making it necessary that the petitioner use other of its funds in the carrying out of the contract, that fact does not appear to have affected the amount of petitioner's security holdings. Between the end of 1931 and 1932 those holdings decreased by $5,435,424, which was approximately $640,000 less than the amount distributed by petitioner to its stockholders during*841 that time. Furthermore, between the end of 1932 and the end of 1933 the petitioner's holdings of securities increased approximately $375,000. The balance sheets accompanying petitioner's Federal income tax returns for the years 1930 through 1934 show that at the end of all years during that period petitioner's holdings of Federal, state, municipal and corporate securities were well in excess of one-half of its total assets and at the end of 1931 such holdings were in excess of two-thirds of its total assets. While we are not informed as to the various activities that petitioner's charter authorized it to engage in, the evidence would indicate that the purchase, sale, and holding of securities and the receiving of the income therefrom must have been one. In view of this and of the petitioner's activities with respect to other prior contracts, we do not think that the petitioner has established that the only business it was engaged in from 1931 through 1934 was the performance of the water tunnel contract. Pertinent to the situation here is the following statement from *842 Argonaut Consolidated Mining Co. v. Anderson, 52 Fed.(2d) 55:
Just what activities bring a corporation within the statutory definition the decisions, as is almost inevitable, do not certainly declare. That there is a degree of quietude which will exempt it, is indeed well settled (Zonna v. Minneapolis Syndicate,220 U.S. 187">220 U.S. 187, 31 S. Ct. 361">31 S.Ct. 361, 55 L. Ed. 428">55 L.Ed. 428; McCoach v. Minehill, etc. Co.228 U.S. 295">228 U.S. 295, 33 S. Ct. 419">33 S.Ct. 419, 57 L. Ed. 842">57 L.Ed. 842; U.S. v. Emery, etc. Co.,237 U.S. 28">237 U.S. 28, 35 S. Ct. 499">35 S.Ct. 499, 59 L. Ed. 825">59 L.Ed. 825; Eaton v. Phoenix Securities Co.,22 F.(2d) 497, (CCA 2); Rose v. Nunnally Co.,22 F.(2d) 102 (CCA 3)); but how far it may be active and still maintain its exemption, is in the nature of things impossible of statement in general terms. In most of those cases in which the corporation has succeeded its activities have been confined to holding the title of property, whose usufruct it receives and distributes in dividends. When this is the whole scope of its dealings, it does no business within the meaning of the statute.
However, it takes little to bring it from behind this*843 shield. * * *
In *718 Harmar Coal Co. v. Heiner, 34 Fed.(2d) 725, the test was stated as follows:
* * * when a corporation is organized for one definite purpose, the ultimate object of which is profits, and it engages in the business of effectuating that purpose and then stops the business by reason of sale, lease, or other action, and thereafter simply hangs on, in a corporate sense, receiving and distributing the avails of its re-organized affairs, it is not doing business. On the other hand a corporation, organized for a definite though limited business purpose involving profits, that pursues activities to carry out that purpose, no matter how few or small they may be, is carrying on or doing business within the meaning of the statute. * * *
Since the petitioner has not shown that its only business during the years 1931 through 1934 was the performance of the water tunnel contract and since the New York State franchise tax and Federal capital stock tax in controversy related to all of petitioner's activities and not solely to its work on the water tunnel, the entire amount of such taxes is not properly allocable to the water tunnel contract. *844 These taxes having accrued in years prior to 1935, only such portion of them as is allocable to the water tunnel contract may be brought forward and deducted in 1935. The portion allocable to petitioner's remaining activities, however, may not be so brought forward. Cf. Norton Construction Co.,21 B.T.A. 443">21 B.T.A. 443.
Apparently for the purpose of showing how, in accordance with good accounting practice, the franchise and the capital stock taxes in controversy should be allocated, if it should be determined that petitioner's work on the water tunnel during 1931 through 1934 did not constitute its sole business activity, the petitioner submitted the opinion testimony of two reputable certified public accountants. In substance their testimony is that where a corporation is engaged in two types of buiness activity, the franchise and the capital stock taxes paid by it should be apportioned between the kinds of business activity on the basis of the proportion that the net income resulting from each activity bears to the total net income from both activities. On the record before us we think such a method of apportioning the franchise and the capital stock taxes in controversy*845 between the water tunnel contract, on the one hand, and the petitioner's other activities on the other, is fair and reasonable and properly applicable here. We hold, therefore, that there should be such apportionment.
The remaining issue is as to the correctness of the respondent's action in determining the excess profits tax exemption to which petitioner was entitled at $200,802.68, or 12 1/2 percent of $1,606,421.47, the value declared by petitioner for its capital stock in its capital stock tax return for the year ended June 30, 1935. The petitioner's position is that, since in its 1935 Federal income tax return it reported the entire income from the water tunnel contract earned over *719 the seven-year period from 1929 to 1935, its excess profits tax exemption for 1935 likewise should be determined on the value of its capital stock for the seven-year period. By multiplying $8,000,000, the value declared for its capital stock in its capital stock tax returns for the years ended June 30, 1933 and 1934, by seven, representing the number of years involved in completing the contract, from that product subtracting $6,496,000, representing the distributions in liquidation*846 made in 1934, and taking 12 1/2 percent of the remainder, the petitioner computes the excess profits tax exemption at the amount of $6,188,000, which it contends is the proper amount.
Respecting capital stock and excess profits taxes, the Revenue Act of 1934 provides as follows:
SEC. 701. CAPITAL STOCK TAX.
(a) For each year ending June 30, beginning with the year ending June 30, 1934, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.
* * *
(f) For the first year ending June 30 in respect of which a tax is imposed by this section upon any corporation, the adjusted declared value shall be the value, as declared by the corporation in its first return under this section (which declaration of value cannot be amended), as of the close of its last income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section (or as of the date of organization in the case of a corporation having no income-tax taxable year ending at or prior to the close of the year for which the*847 tax is imposed by this section). For any subsequent year ending June 30, the adjusted declared value in the case of a domestic corporation shall be the original declared value plus (1) the cash and fair market value of property paid in for stock or shares, (2) paid in surplus and contributions to capital, (3) its net income, (4) the excess of its income wholly exempt from the taxes imposed by Title I over the amount disallowed as a deduction by section 24(a)(5) of such title, and (5) the amount of the dividend deduction allowable for income tax purposes, and minus (A) the value of property distributed in liquidation to shareholders, (B) distributions of earnings or profits, and (C) the excess of the deductions allowable for income tax purposes over its gross income, adjustment being made for each income-tax taxable year included in the period from the date as of which the original declared value was declared to the close of its last income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section. The amount of such adjustment for each such year shall be computed (on the basis of a separate return) according to the income tax law applicable*848 to such year. * * *
SEC. 702. EXCESS-PROFITS TAX.
(a) There is hereby imposed upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 701, an excess-profits tax equivalent to 5 per centum of such portion of its net income for such income-tax taxable year as is in excess of 12 1/2 per centum of the adjusted declared value of its capital stock * * * as of the close of the preceding income-tax taxable year (or as of the date of organization if it had no preceding income-tax taxable year) determined *720 as provided in section 701. If the income-tax taxable year in respect of which the tax under this section is imposed is a period of less than 12 months, such adjusted declared value shall be reduced to an amount which bears the same ratio thereto as the number of months in the priod bears to 12 months. For the purposes of this section the net income shall be the same as the net income for income tax purposes for the year in respect of which the tax under this section is imposed.
(b) All provisions of law (including penalties) applicable in respect of the taxes*849 imposed by Title I of this Act, shall, insofar as not inconsistent with this section, be applicable in respect of the tax imposed by this section, except that the provisions of section 131 of that title shall not be applicable.
The petitioner argues that if the capital of a corporation reporting income for a period of less than 12 months is to be reduced to an amount which bears the same ratio thereto as the number of months in the period bears to 12 months, as provided in section 702(a), then the capital in the case of a corporation reporting income earned over a period greater than 12 months is to be increased in a corresponding ratio. Although the act contains no specific provision which upholds the petitioner's conclusion, it urges that such was the intention of Congress and points to certain statements contained in the report of the Committee on Finance of the Senate (Senate Report No. 558) in reporting the Revenue Act of 1934 to the Senate and in the Conference Report (No. 1385) to the House on the act, to the effect that the primary purpose of the excess profits tax was to induce corporations automatically to declare a fair value for their corporate stock for capital stock*850 tax purposes and the secondary purpose was to subject to a somewhat higher rate of tax abnormal profits which are out of proportion to the capital of the corporation. Conceding that such were the purposes of Congress in enacting the excess profits tax provisions of the act, we sre unable to find anything in such statements or in the act itself indicating that to effect those purposes it was the intention of Congress to go to such a length as the petitioner requests here and pyramid capital stock values for a period of seven years. While in section 702(a) Congress definitely has provided that, in cases where the income tax taxable year in respect of which the excess profits tax is imposed is a period of less than 12 months, the declared value of the capital stock shall be reduced to the proportion that the number of months in such taxable period bears to 12 months, it has failed to provide that the capital is to be increased in a corresponding ratio in cases where the income reported was earned over a period greater than 12 months. Congress having failed to make such provision in the act, we are without authority to supply the omission, graft on something that is not there, and allow*851 the petitioner's contention. Iselin v. United States,270 U.S. 245">270 U.S. 245; Smietanka v. First Trust & Savings Bank,257 U.S. 602">257 U.S. 602.
*721 The petitioner urges that, if we find that the act does not authorize the allowance of its contention, then we must find that the act is unconstitutional as being violative of the Fifth Amendment, because it imposes a tax that is arbitrary, unreasonable, and capricious. For reasons satisfactory to itself the petitioner at the beginning of its existence elected to report its income from long term contracts on the completed contract basis. Under that method no income received from such contracts was reported and taxed until the completion of the contracts even though, as in the case of the water tunnel contract, several years elapsed between receipt of a substantial portion of the income from the contract and the year in which such income was subjected to tax. Conceivably the receipt and use of such income for several years prior to its taxation might be an advantage enjoyed by petitioner over other taxpayers who were currently reporting income from long term contracts as accrued or received. It may well*852 be that it was for this reason that Congress failed to provide that the excess profits tax exemption in the case of corporations reporting income on the completed contract basis should be computed on the pyramided capital of such corporations during the period they were engaged on the long term contracts. The distributions in liquidation made by petitioner in 1934, the year prior to the completion of the contract and the reporting of the income therefrom, contributed very materially to the reduction of petitioner's capital, thereby reducing the excess profits tax exemption and consequently increasing the amount of its excess profits tax in 1935. Where a taxpayer voluntarily chooses his own course of action, he may not thereafter avoid its results. Cf. Pacific National Co. v. Welch,304 U.S. 191">304 U.S. 191; Chicago Telephone Supply Co. v. United States,23 Fed.Supp. 471; certiorari denied, 305 U.S. 628">305 U.S. 628.
We fail to see that the act, by providing that the amount of the petitioner's excess profits tax exemption be computed in the manner employed herein by the respondent, results in an arbitrary and capricious confiscation of the petitioner's*853 property or is otherwise in violation of the Fifth Amendment.
Finding no error in the respondent's determination of the amount of petitioner's excess profits tax exemption, his determination of such exemption is approved. However, our decision as to the deductibility of an allocable portion of the New York State franchise tax and the Federal capital stock tax will result in a reduction of the amounts of the deficiencies determined by respondent as to both the income tax and the excess profits tax.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN dissents.
*722 LEECH, dissenting on the first issue: It seems to me petitioner has established that the only business in which it was engaged from 1931 through 1934 was the performance of the water tunnel contract. Therefore, I think, the state franchise tax and Federal capital stock tax, for such years, are allocable, in their entirety, to 1935, the year in which the water tunnel long term contract was completed.