*2650 CONSOLIDATED INVESTED CAPITAL. - No part of an existing surplus of one member of an affiliated group of corporations may be eliminated from the consolidated invested capital where such surplus or any part thereof is not shown to be duplicated in the accounts of one or more of the affiliated group.
*157 This peoceeding has been brought by the Middlesex Ice Co., on behalf of iteself and its affiliated companies, the Fresh Pond Ice Co., and the Cambridge Ice Co., from the Commissioner's determination of deficiencies in income and profits taxes as follows:
| Middlesex Ice Co., for fiscal period ending March 31, 1921 | $4,356.59 |
| Fresh Pond Ice Co., for fiscal period ending April 30, 1920 | 4,901.89 |
| Cambridge Ice Co., for fiscal period ending April 30, 1920 | 2,262.56 |
| Total | 11,521.04 |
The petition sets forth two allegations of error, as follows:
(1) That the Commissioner has excluded from invested capital an item of $22,716.90 which was the surplus of the Cambridge Ice Company at the date its shares were acquired by the Middlesex Ice*2651 Company and applicable to such shares; and
(2) That the Commissioner has applied theoretical rates of depreciation to buildings and property of the Fresh Pond Ice Company and has reduced the value of the said assets below their real value at the beginning of said periods, and has thereby reduced the invested capital of the said companies.
At the hearing of this proceeding the second allegation of error was withdrawn.
FINDINGS OF FACT.
For some year prior to the periods in question the Fresh Pond Ice Co. and the Cambridge Ice Co. were, and still are, operating ice companies. Their stock was owned by the same persons. Prior to 1917, these persons organized the Middlesex Ice Co. as a Massachusetts trust with transferable shares to be used as a holding company for the stock of the operating companies. The owners of the stock of the Cambridge Ice Co. turned over to the Middlesex Ice Co. 99 per cent of the Cambridge Ice Co.'s stock and received in exchange therefor an equal par value of the transferable shares of the Middlesex Ice. Co. This transaction took place prior to January 1, 1917, and at the date of the transaction the Cambridge Ice Co. had a paid-in or earned surplus*2652 of $22,946.36. For the taxable periods here under review the three companies above named, with another, made consolidated income and profits-tax returns with the approval of the Commissioner.
Making the adjustment of consolidated invested capital of the group the Commissioner eliminated from such consolidated capital the amount of $22,716.90, the same being 99 per cent of the surplus of the Cambridge Ice Co. at the date when its stock was acquired by the Middlesex Ice Co. On May 1, 1919, the starting point of the taxable periods here under review, the Cambridge Ice Co. had a capital stock issued and outstanding of $40,000 and a surplus of $32,678.95. No part of this surplus was reflected in the accounts from the Middlesex Ice Co. or any of the other affiliated companies.
*158 OPINION.
TRUSSELL: Under requirements made by the Treasury Department one of the early steps in ascertaining the consolidated invested capital of a group of affiliated companies is the preparation of a consolidated balance sheet. Each member of the affiliated group enters the consolidation with its invested capital as defined by section 326 of the Revenue Acts of 1918 and 1921. From this preliminary*2653 exhibit there is then eliminated such items or amounts as are shown to be duplications either of investment or of earned surplus and undivided profits. The law does not specifically provide for, and we are unable to find, that it in any sense contemplates any reduction or elimination of actual assets not appearing as duplications. In the instant case, it appears that on May 1, 1919, the Cambridge Ice Co.'s surplus was in excess of the amount existing at the date when the holding company acquired the Cambridge Ice Co.'s stock. That surplus, not having been distributed to the stockholders or dissipated in operations, may not be eliminated from the consolidated invested capital by reason of any exchange of stock shares among the owners thereof.
Reviewed by the Board.
The deficiencies may be recomputed in accordance with the foregoing opinion upon 15 days' notice, pursuant to Rule 50, and judgment will be entered accordingly.