*2542 1. Value of property paid in for stock determined.
2. Amount of amortization of war facilities determined.
3. A petitioner, having made claim for a reasonable deduction for amortization at the time of filing its tax return for 1918, may amend its claim at the time of filing a petition with the Board and may include items not listed in the original claim.
*671 In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the years 1918 and 1919, for which the Commissioner has determined deficiencies of $4,874.21 and $23,055.92, respectively. The petitioner alleges error on the part of the Commissioner:
(1) In computing the invested capital of the petitioner involving (a) valuation of ganister rock property, (b) valuation of a contract negotiated by R. P. M. Davis with the Rock Hill Iron & Coal Co., (c) valuation of a contract negotiated by R. P. M. Davis with the East Broadtop Railroad Co., all of which properties were turned in to the corporation for stock.
(2) In*2543 the selection of comparatives for the computation of excessprofits tax under sections 327 and 328 of the Revenue Act of 1918.
(3) In determining inadequate amounts of depreciation deductions.
(4) In determining an inadequate amount of deductions for depletion of natural resources.
(5) In refusing to allow a deduction on account of the exhaustion of a coal contract with the Rock Hill Iron & Coal Co.
*672 (6) In refusing to allow a deduction on account of the exhaustion of a freight contract with the East Broadtop Railroad Co.
(7) In refusing to allow a deduction for the year 1918 due to the cancellation of the contract with the East Broadtop Railroad Co.
(8) In refusing to allow deductions on account of the amortization of war facilities.
No evidence was presented as to issue number two. The petitioner and the respondent have agreed by stipulation to the settlement of issue number three, by the allowance of additional depreciation, for the year 1918 of $23,318.30, and for the year 1919 of $12,304.16.
FINDINGS OF FACT.
Petitioner is a corporation organized September 12, 1911, under the laws of the Commonwealth of Pennsylvania, with an authorized capital*2544 stock of 3,000 shares of the par value of $300,000. Its principal office is at Mt. Union, Pa.
The petitioner was organized and incorporated under the name of Mt. Union Refractories Co., and in the year 1920 the name was duly changed to the United States Refractories Corporation.
The Kistler Land & Improvement Co. is an affiliated corporation of the United States Refractories Corporation, organized by the petitioner September 27, 1915, with principal office at Mt. Union, Pa., for the purpose of providing, and holding title to, housing facilities for employees of the petitioner.
R. P. M. Davis, for many years prior to 1911, was associated with the Harbison-Walker Refractories Co., a pioneer in the silica brick manufacturing industry, and while so employed determined to organize a company of his own to engage in the silica brick manufacturing business. His plans were to construct a plant, in units, with an ultimate capacity of 160,000 brick per day, which capacity was first reached in the latter part of 1916. Sometime in 1910 he employed Charles F. Eberly to act as his agent in securing options on ganister rock properties from the individual owners of land on Jack's Mountain, *2545 Huntingdon County, Pennsylvania. These options were acquired by Eberly upon separate small parcels, contiguous to each other, for considerations varying from $5 to $50, and according to their terms the land owners gave Eberly and his assigns the exclusive right to purchase the rock or the fee at certain stipulated prices at any time during the period of six months after the date of the option agreement. The options were all assigned to Davis. Five of the options were exercised by Davis in his own name and the remaining options or renewals thereof were exercised by the petitioner, with the exception of three which were allowed to lapse. After securing the options and before exercising them at the purchase chase *673 price stipulated, Davis had the titles examined and consulted two experts in the industry, one, Charles B. Hackman, then operating manager of the Mount Union plant of Harbison-Walker, and one, Jacob Schneider, superintendent of quarries of ganister rock for Harbison-Walker.
On July 26, 1911, R. P. M. Davis entered into a contract with the Rock Hill Iron & Coal Co. to supply coal to a corporation to be organized by Davis for a period of 25 years at graduated*2546 prices varying with the pick-mining rate paid by the coal company. It was recited that Davis proposed to organize a corporation for the manufacture of silica brick, and provided that the corporation, when organized, should be substituted as a party to the contract in the place and stead of Davis. The contract further provided that he coal company would supply the coal requirements of the proposed corporation not in excess of 1,500 tons per month, beginning April 1, 1912, except upon 90 days' notice from the corporation of additional requirements, not to exceed in any event 55,000 tons a year, and that the corporation should purchase all of its coal from the coal company, and would not resell any part thereof. No bonus was paid by Davis or the petitioner for this contract and the sale price of coal set forth therein was equivalent in amount to similar contracts between the Rock Hill Iron & Coal Co. and the Harbison-Walker Refractories Co., and also the Mount Union Silica Brick Co., companies which were engaged in a line of business similar to and competitive with that of the contemplated corporation. The coal contract had no actual cash value at date paid in for stock or on March 1, 1913.
*2547 On July 26, 1911, R. P. M. Davis entered into a contract with the East Broadtop Railroad & Coal Co. for the transportation of ganister rock for a period of 25 years, at a rate of 30 cents per net ton. It was recited that Davis proposed to organize a corporation for the manufacture of silica brick and provided that the corporation, when organized, should be substituted as a party to the contract in the place and stead of Davis. No bonus was paid for the contract. During the year 1911, the East Broadtop Railroad & Coal Co. did not ship ganister rock for other parties over its lines and had no specific open tariff rate. However, on May 30, 1914, there was published an open schedule of tariff rates on specific hauls of ganister rock from a point 19 miles from Mount Union to Mount Union, Pa., by the East Broadtop Railroad & Coal Co., at 30 cents per ton. In 1915 the same rate was extended. The Rock Hill Iron & Coal Co. and the East Broadtop Railroad & Coal Co. were affiliated companies, and the business of the two companies was under the same management and control. The freight contract had no actual cash value at the time paid in or on March 1, 1913.
*674 On May 8, 1911, Davis*2548 with Wilson Kistler, Rembrandt Peale, and P. P. Griffin, entered into a written agreement to form a corporation (the petitioner herein) for the manufacture of silica brick and other purposes, and thereby agreed to subscribe for and purchase the capital stock thereof in the proportions set forth. It was agreed that 720 shares of the stock subscribed for by Davis should be paid for in property owned by or under option to him. The agreement further provided:
We agree to subscribe at par and pay for the number of shares and to the amounts set opposite our respective names below, and, in addition thereto we agree to procure the sale and payment therefor of other 600 shares of said capital stock at par prior to July 1, 1912, provided that this unertaking shall not bind any one of us to a greater amount than one-fourth of said 600 shares.
We agree that our respective subscriptions shall be payable as follows: $10,000 each upon the application for a charter and the balance on demand upon call of the directors.
It is understood and agreed that the minimum of ganister rock guaranteed by R. P. M. Davis under this agreement shall amount to one million five hundred thousand tons in place: *2549
| Number of shares | Amount | Name |
| 400 | $40,000 | Wilson Kistler. |
| 400 | 40,000 | Rembrandt Peale. |
| 400 | 40,000 | P. P. Griffin. |
| 820 | 82,000 | R. P. M. Davis. |
On September 12, 1911, the petitioner was organized and stock was subscribed for as follows:
| Wilson Kistler | 400 shares. |
| P. P. Griffin | 400 shares. |
| Rembrandt Peale | 400 shares. |
| R. P. M. Davis | 1,000 shares. |
| Clinton V. Hackman | 200 shares. |
| Francis D. Halstead | 200 shares. |
All these subscriptions were paid for in cash with the exception of that of R. P. M. Davis. Of the amount subscribed for by Davis, 720 shares were issued to him for ganister lands and ganister rights, and various contracts as set forth in the following minutes of the meeting of the directors of the company, dated Mount Union, Pa., November 10, 1911:
Meeting of Directors at the Office of the Company.
Mount Union, Pa., Nov. 10th, 1911.
Present: Messrs. Kistler, Davis, Griffin, Hackman and Halstead.
The minutes of the last meeting were read and approved.
The Contract between R. P. M. Davis and The Rockhill Iron & Coal Co. was read.
This contract is dated July 26, 1911, and provides that the Company then being*2550 organized by Mr. Davis shall, when incorporated, be recognized in his *675 stead as the other party to the contract. The contract further provides that The Rockhill Iron & Coal Co. shall furnish the proposed new Company (Mount Union Refractories Co.) coal under certain conditions, at certain stipulated prices during a period of Twenty Five (25) years from Jan. 1st, 1912.
On motion of Mr. Griffin, duly seconded, this contract was approved and the President was authorized to execute the contract for the company.
The Contract between R. P. M. Davis and The East Broadtop Railroad & Coal Co. was read. This contract is dated July 26th, 1911, and provides that the Company then being organized by Mr. Davis shall when incorporated, be recognized in his stead as the other party to the contract. The Contract is for a period of twenty (25) five years and further provides for the transportation of rock from the Brick Companies quarries to its plant, the building of sidings by the R.R. Co., rights of way, the shifting of cars, the option of the Brick Company to lease or purchase the site for its plant at Mount Union, and the grant of Ganister Rock owned by the Railroad Company on*2551 Black Log Mountain to the Brick Company.
On motion of Mr. Kistler, duly seconded, this Contract was approved, and the President authorized to execute it for the benefit of the Company.
The contract between R. P. M. Davis & G. V. Hackman was read. This contract is dated May 17th, 1911, and provides that the Company then being organized by Mr. Davis, shall when incorporated, be recognized in his stead as the other party to the contract. The contract is for a period of Five (5) Years and further provides as to salary, the purchase of the Companies Stock and etc.
On motion of Mr. Griffin, duly seconded, this contract was approved and the president authorized to execute it for the Company.
The Contract between R. P. M. Davis & F. D. Halstead was read. This contract is for a period of Five (5) years from the incorporation of the proposed Company, and provides that the Company then being organized by Mr. Davis shall assume all of the obligations now assumed by him. The contract further provides as to salary, the purchase of the Companies stock by F. D. Halstead, and etc.
On motion of Mr. Kistler, duly seconded, the contract was approved and accepted by the Company and the*2552 President authorized to execute the same for the Company.
R. P. M. Davis presented deeds in his name as follows: G. H. Heeter & Wife, Saltillo, Pa., 60 Acres in Fee.W. C. Hampson & Wife, Rock on 31 Acres 106.5 perches in Clay Township.
Sylvester Reed, Rock on 483 Acres in Cromwell Township.
Weaver & Heaton, Saltillo, Pa., Rock on 228 Acres in Cromwell Township.
D. P. Whitsel & Rhoda, Rock on 393 Acres, 17 perches, Rock on 247 acres, 13 perches in Cromwell Township.
R. P. M. Davis proposed to deed this property to this Company also to apply $1200.00 which he had already paid to B. F. Whitsel on account of an agreement, which Whitsel is unable to carry out to the payment of the purchase price of a tract now in the process of purchase from Dr. A. R. McCarthy, unless a compromise agreement is reached with Whitsel and the $1200.00 paid to him.
R. P. M. Davis presented eight options which he had secured covering 4000 acres containing ganister rock adjoining above-named property on Jack's Mountain.
The five deeds above referred to, the McCarthy deed, and the options to buy were approved, and on motion of Mr. Kistler seconded by Mr. Griffin.
*676 Resolved*2553 that in consideration of the above named contracts viz:
The Rockhill Iron & Coal Company
The East Broad Top Railroad & Coal Company
C. V. Hackman and F. D. Halsteadand the above-named deeds viz: -
G. A. Heeter W. C. HampsonSylvester Reed
Weaver & Heaton
D. P. Whitseland the further consideration of $1200.00 to be paid by R. P. M. Davis on account of the purchase price of the Dr. A. R. McCarthy tract; and the options on the adjoining property presented by R, P. M. Davis: All of which contracts, deeds and options are hereby approved and accepted, that the President and Secretary be hereby authorized and instructed to execute on behalf of the Company each of these contracts and procure for the Company from R. P. M. Davis a deed or deeds for the property named in the deed referred to and under option by him, and further that upon the execution of these contracts and these deeds that the Secretary of this Company be and is hereby authorized to issue to R. P. M. Davis 720 shares of stock.
Motion of Mr. Griffin adjourned the meeting.
(Signed) F. D. Halstead, Secy.
Eighty shares were to be issued in the name of R. P. M. Davis and delivered to him at the rate*2554 of 10 shares at the end of each year during such time as and provided said Davis shall have complied with all the terms of the agreement between him and the petitioner until the total of 80 shares was issued. One hundred shares were to be issued to R. P. M. Davis and paid for at par by a promissory note of R. P. M. Davis payable eight years after its date, with interest. The balance of 100 shares is unaccounted for.
Additional shares were subsequently sold to selected individuals as follows:
| Year | Number of shares | Amount per share |
| 1913 | 15 | $100 |
| 1914 | 10 | 100 |
| 1915 | 45 | 100 |
| 1916 | 30 | 100 |
| 1916 | 100 | 125 |
The stock of petitioner has never been sold or offered for sale in the open market.
The ganister land acquired by the petitioner during the years 1911, 1912, and 1913, direct from Davis or through the exercise of options held by Davis or renewals thereof, was as follows:
*677 (1) Clay Park Tract. Title to all ganister rock in place on 500 acres acquired April 18, 1912, from Clay Park and wife, for a consideration of $1,150.
(2) E. A. Hudson Tract. Fee simple title acquired March 9, 1912, on 15 acres, from E. A. Hudson, et al., for*2555 $775.
(3) G. A. Heeter & wife Tract. (Warranted in R. W. Hudson) Fee title to 60 acres acquired from R. P. M. Davis on December 7, 1911, as part consideration for 720 shares of capital stock. The fee title on this tract was acquired by Davis from Halstead, his agent, on October 18, 1911. Halstead acquired the rock and fee title to this property from G, A. Heeter for $1,380 by contract dated August 3, 1911, and deed dated September 28, 1911.
(4) W, C. Hampson Tract. Title to all ganister rock in place on 31 acres 106 perch, acquired from R. P. M. Davis on December 7, 1911, as part consideration for 720 shares of capital stock. R. P. M. Davis acquired title to this property on September 16, 1911, from W. C. Hampson for a consideration of $1,600.
(5) Henry T. Weaver Tract. Title to all ganister rock on 228 acres was acquired from R. P. M. Davis on December 7, 1911, as part consideration for 720 shares of capital stock. R. P. M. Davis acquired title to the ganister rock on this tract on September 27, 1911, for a consideration of $5,000.
(6) B. Frank Whitsel Tract. Title to all the ganister rock on the following tracts: John Galbraith, 408 acres 77 perch; *2556 Joseph Galbraith, 400 acres 70 perch; Samuel Galbraith, 393 acres 41 perch; John Jordan Tract, 418 acres 120 perch. The title to these tracts was acquired January 29, 1913, for a consideration of $3,000.
(7) B. F. and Rhoda Whitsel. Title to all the ganister rock on the George Stevenson Tract, 393 acres 17 perch, and the John Smith Tract of 24 acres 13 perch, acquired from R. P. M. Davis on December 7, 1911, as part consideration for 720 shares of capital stock. Davis acquired title to this tract from B. F. Whitsel and Rhoda Whitsel on September 2, 1911, for a consideration of $400.
(8) R. W. Speer Tract. One-half undivided interest in all the ganister rock in the following tracts: Charles Boyle Tract, 389 acres 31 perch; Alex McKeehan Tract, 402 acres 53 perch; William Dickson Tract, 402 acres 26 perch; Sam Laird Tract, 401 acres 12 perch; George Kline Tract, 417 acres 129 perch; James Dickson Tract, 404 acres 150 perch. Title to this interest was acquired from R. W. Speer October 21, 1911, for a consideration of $500.
By contract dated June 10, 1912, and by deed dated July 18, 1912, the corporation cleared a cloud on the title to the Charles Boyle Tract by paying*2557 Mr. Beers $75.
*678 (9) Sylvester Reed Tract. Title to the ganister rock on 483 acres, acquired from R. P. M, Davis December 7, 1911, as part consideration for 720 shares of stock. Davis acquired title to the ganister rock on this tract October 4, 1911, from Sylvester Reed for a consideration of $500.
(10) A. R. McCarthy Tract. Title to the ganister rock on 490 acres, 16 perch, acquired December 12, 1911, for a consideration of $980.
All the foregoing property was acquired by the petitioner through the exercise (by the petitioner, or Davis or his agents) of options upon the several parcels making up the whole, or renewals thereof, previously obtained and owned by Davis, and was acquired as separate small parcels or tracts in individual transactions. The purchase price for each and every parcel or tract was paid by Davis, the total of which, including the cost of the options theretofore taken, did not exceed $30,000. These several parcels or tracts formed one continuous property of approximately 11 miles in length and contained 8,000,000 tons of loose measure ganister rock of very high quality. One of the principal uses for ganister rock, from which silica*2558 brick is made, is for the lining of furnaces in the steel industry. In 1911 the open-hearth method of making steel, introduced about 1903, was extensively used and was rapidly supplanting the old Bessemer method, and at that time a new feature in the industry, the by-product coke ovens, was developed.
At a meeting of the directors on July 22, 1912, the contracts with the Rock Hill Iron & Coal Co. and the East Broadtop Railroad & Coal Co. were approved and the convenants thereof on the part of R. P. M. Davis to be performed and his rights thereunder assumed. In this meeting the following resolution was passed:
On motion of Mr. Kistler, Resolved, that the policy of this company with respect to operating its plant be based on a daily production of 30,000 brick, and that this production shall be maintained until the stock of brick on hand shall aggregate between three and four million brick.
At a meeting of the directors on June 16, 1913, appears the following:
The method of increasing the capacity of the plant was discussed in detail. * * * Second, the question as to building an additional drier, and possibly a couple of kilns, which would enable us to make about 60,000 brick*2559 per day and would mean a cost of possibly $30,000 was discussed. It was thought best to defer this actual work for a few weeks until business conditions could better be gauged; meanwhile the management of the company was instructed:
On motion of Mr. Griffin; to obtain plans and specifications and so far as possible bids on material for making a new drier, etc., when these bids are *679 all in the intention being to have another meeting and decide whether we shall go ahead with the work or not.
The petitioner's records of operations subsequent to the organization of the company are shown in the following table:
| Year | Net income | Depletion | Tons of ganister | Tons of Coal consumed |
| 1912 (3 months) | $11,152.71 | $671.40 | 13,428 | 6,707 |
| 1913 | 45,052.34 | 1,801.75 | 36,035 | 16,373 |
| 1914 | 51,463.77 | 1,801.10 | 36,022 | 17,325 |
| 1915 | 60,968.70 | 2,041,70 | 41,239 | 18,563 |
| 1916 | 257,655.15 | 3,674.85 | 72,271 | 23,833 |
| 1917 | 104,984 | 51,182 | ||
| 1918 | 120,192 | 45,785 | ||
| 1919 | 77,779 | 55,795 | ||
| 1920 | 74,832 | 47,364 | ||
| 1921 | 22,000 | |||
| 1922 | 50.254 | |||
| 1923 | 64,890 |
During the year 1918 the East Broadtop Railroad & Coal Co, refused to abide by the terms*2560 of its contract with the Mount Union Refractories Co. and notified the company of an increase in the freight rate on ganister rock from 30 cents as provided by the contract, to 70 cents. The breach of the contract occurred during the period of time that the East Broadtop Railroad & Coal Co. was under the jurisdiction of the United States Railroad Administration. The petitioner, believing that it had a valid and enforceable contract, sought to enforce the terms of this contract, but was advised by its attorneys that the contract could not be enforced since the enactment of the public service corporation law by the legislature of the State of Pennsylvania.
For the year 1918 the petitioner and its subsidiary, the Kistler Land & Improvement Co., filed with the Bureau of Internal Reevenue a consolidated return of income for taxation, and the Commissioner has treated the two companies as affiliated. The petitioner filed, as a part of its 1918 income-tax return, a claim for deduction on account of amortization of war facilities as follows:
| April 6, 1917, to December 31, 1918 | |||
| Apr. 6 to Dec. 31, 1917 | 1918 | Total | |
| Main buildings | $716.40 | $4,217.03 | $4,933.43 |
| Storage sheds | 12,062.94 | 12,062.94 | |
| Office buildings | 22.60 | 22.60 | |
| Kilns | 1,255.78 | 12.00 | 1,267.78 |
| Stone conveyor | 220.32 | 220.32 | |
| Dryers and flues | 6,934.54 | 6,934.54 | |
| Bins | 236,60 | 236,60 | |
| Power plant | 3,709.12 | 3,709.12 | |
| Machine shop and equipment | $1,526.09 | $12,986.29 | $14,512.38 |
| Tracks | 162.27 | 162.27 | |
| Grading and paving | 795,02 | 680.00 | 1,475.02 |
| Dust mill | 15,547.24 | 15,547.24 | |
| Mold house | 537.30 | 537.30 | |
| Electric outfit for crusher and elevator | 28,477.38 | 28,477.38 | |
| Coal pocket | 157.70 | 157.70 | |
| Coal handling outfit | 7,897.01 | 7,897.01 | |
| Reservoir | 411.63 | 422.63 | |
| Machine shop elevator | 2,709.57 | 2,709.57 | |
| Fan equipment | 4,211.41 | 4,211.41 | |
| Laboratory equipment | 191.76 | 191.76 | |
| Crusher | 7,633.91 | 7,633.91 | |
| 11,927.20 | 101,384.71 | 113,311.91 |
*2561 *680 The Company claims a deduction of the extra cost and estimates it to be at least 25 per cent of the total cost, namely: $28,327.98
Thereafter, and during negotiations between the petitioner and the Bureau of Internal Revenue for the adjustment of 1918 income taxes, the petitioner on February 28, 1921, wrote to the Commissioner as follows:
Commissioner of Internal Revenue,
Washington, D.C.
My dear Sir:
We, hereby, withdraw our claim for Amortization of War Facilities, as reflected in our return for the taxable year ending December 31st, 1918, to the end that consideration of the revision of the income tax may be had under Section 327 and 328, otherwise to be reinstated.
Very truly yours.
United States Refractories Corporation,
Formerly Mount Union Refractories Company.
by R. P. M. Davis, Pres. (Signed)
On June 9, 1921, the Deputy Commissioner of Internal Revenue advised the petitioner "that after careful consideration and review your application under the provisions of section 327 for assessment of the war and excess profits tax, as prescribed by section 328 of the Revenue Act of 1918, has been allowed," and that a calculation of its tax liability*2562 for the year 1918 indicated an overassessment of $73,682.69. Thereafter, on September 30, 1922, the Commissioner advised the petitioner that a recomputation of its tax liability for 1918 disclosed an additional tax due of $4,874.21, and that the "amount deducted as amortization on the return is restored to income, as it is held that section 214 of the Revenue Act of 1918 does not apply." Again, on December 17, 1924, the Commissioner advised the petitioner that an examination of its income-tax return for the year 1919 disclosed an additional tax liability of $27,767 and that the "amount deducted as amortization on the return is restored to income, *681 as it is held that section 214 of the Revenue Act of 1918 does not apply. This question was submitted to the Engineering Division, which, after careful consideration of all the available data, returned the recommendation that 'any amortization claimed on the 1919 return should be disallowed in full.'" Thereafter, the Commissioner mailed to the petitioner the deficiency letters dated May 22, 1925, and December 12, 1925, advising it of the proposed assessments of additional taxes for the year 1918 and 1919 in the respective amounts*2563 of $4,874.21 and $23,055.92.
During the years 1917 and 1918, the petitioner was engaged in the manufacture of silica brick, which was utilized by the manufacturers of steel, copper and glass and in by-product coke ovens. In the early part of 1917 it became apparent that the petitioner had inadequate housing facilities for its employees. On July 13, 1917, it entered into an agreement with the Kistler Land & Improvement Co,, a subsidiary, whereby the latter agreed to rent to the former -
All the dwelling houses built, in process of building, or to be built during the term of the lease, or of any renewal or renewals thereof, and appurtenant lots in all that certain parcel and tract of land situated in Mifflin County, Pennsylvania, laid out and improved by the Kistler Land & Improvement Company, and known as Kistler Industrial Village -
the rental being $25 per month for each single house and $20 per month for each unit of a double house. On July 9, 1917, the Kistler Land & Improvement Co, entered into an agreement with the Mount Union Planing Mill Co., which provided as follows:
Art. 1. The contractor shall and will provide all the materials and perform all the work for the*2564 erection and completion of four double Capri Villas, at $2,878,50 each; eight Long Island cottages at $1,600 each; and seven Norman cottages at $1,675 each, making a total of 26 single and 4 double houses, and at a total price of $53,639.
On July 9, 1917, the Kistler Land & Improvement Co. entered into an agreement with the Baldwin Brothers Lumber Co., which provided:
Art. 1. The contractor shall and will provide all the materials and perform all the work for the erection and completion of twelve quadruple houses, according to the plans and specifications of J. Herbert Hull, the architect, it being understood that these houses are to be roofed with Cortwright Metal Shingles and that the cellars are to be excavated and concreted as per said plans and specifications at the price of $3,250 each, totalling $39,000.00.
These houses were completely constructed during 1917 and 1918 at a cost of $95,104.23, of which amount $55,553.25 was shown in the books from November 1, 1918, to the close of the year 1919. Of the total payment of $95,104.23, the sum of $2,894.23 was for unexplained extras not covered by the contracts. The Kistler Land & Improvement *682 Co. owned 175 houses*2565 or renting units, inclusive of the 82 houses constructed under the above-mentioned contracts, and all were occupied during the year 1918. The average number of houses occupied during the post-war period was 75 in 1921, 90 in 1922, and 85 in 1923.
Subsequent to April 6, 1917, the petitioner constructed, erected, and installed or acquired the following buildings, machinery, equipment and other facilities, which, with the exception of the "Dust mills" and "Dust mill & addition" were for the production of articles contributing to the prosecution of the War:
| Description of item | 1917 costs | 1918 costs | 1919 costs |
| Crusher | $7,633.91 | ||
| Dust mill | 5,961.64 | ||
| Main buildings | $4,217.03 | $6,080.35 | |
| Storage sheds | 12,062.94 | ||
| Driers and flues | 6,934.54 | ||
| Boilers, engines and shafting | 3,709.12 | 5,771.59 | |
| Dust mill and addition | 15,547.24 | 16,987.07 | |
| Electrical outfit | 28,477.38 | ||
| Coal-handling outfit | 7,897.01 | ||
| Fan equipment | 4,211.41 |
These facilities were not essential for peace-time production, and the prewar plant and equipment was entirely adequate for postwar requirements. With the exception of the storage sheds none of the additional facilities have*2566 been used to capacity in any of the postwar years. All the foregoing expenditures were made in pursuance of a program formed and in fulfillment of commitments made in 1917 and 1918 prior to the Armistice. The expenditures subsequent to November 11, 1918, were necessary to the completion of construction begun prior thereto, and the completion of such construction was necessary to avoid a total loss on the items affected.
The crusher was practically never used after its purchase, and eventually was taken out, scrapped, and placed on a siding. The dust mill was built for the purpose of manufacturing cement and was not shown to be essential to the production of petitioner's principal product or for the production of war materials. The expenditures on the main building were for the purpose of providing space for a moulding room, which is still in use, but the space formerly available was adequate for postwar uses. The storage sheds are still being used to capacity. The driers and flues were built to provide additional capacity, but the driers and flues available prior to April 6, 1917, were adequate to take care of the postwar business. The item of boilers, engines and shafting*2567 covered the installation of a No. 3 boiler and a new separate engine and shafting, and pipe required *683 to install it. The boiler capacity of the petitioner prior to April 6, 1917, was adequate to take care of the postwar requirements. The item of electrical outfit covered the expenditure for purchasing and installing one large motor and electrical appurtenances, which were purchased as a safeguard for operations in the event of a breakdown of their regular machinery. This motor was never used and was subsequently dismantled and sold about the year 1925 for $2,500. The coal-handling outfit consisted of a derrick and engine installed for the purpose of storing coal. This equipment is still in use, but the quantity of coal stored by it is much less than during the war period. The fan equipment consisted of a large number of special fans which were put in the kilns so that men could work in them much sooner than was possible without them, thereby increasing the capacity of the plant. These fans are not now used and they are unnecessary with the present production.
The production of brick and the rock mined by the petitioner during the years 1916, 1917, and 1918, and*2568 the postwar years are shown as follows:
| Year | 9-inch equivalent brick produced | Net tons rock mined and used | Employees |
| 1916 | 19,464,622 | 72,271 | |
| 1917 | 40,590,475 | 104,984 | |
| 1918 | 39,633.870 | 120,192 | 940 |
| 1919 | 28,778,458 | 77,779 | 700 |
| 1920 | 27,930,834 | 74,832 | 650 |
| 1921 | 10,530,133 | 22,000 | 325 |
| 1922 | 18,482,734 | 50,254 | 350 |
| 1923 | 25,754,258 | 413 |
The actual cash value of the ganister property at the time paid in for stock was $300,000, Its value on March 1, 1913, was the same ($300,000).
Additional deductions for depreciation for the year 1918 in the sum of $23,318.30 and for the year 1919, $12,304.16, are stipulated and allowable.
OPINION.
VAN FOSSAN: We have to consider two fundamental questions, (1) the value of ganister rock property and certain contracts at the date of acquisition in 1911, and on March 1, 1913, and (2) the deductibility and amount of amortization of war facilities. The decision on these issues, coupled with the stipulation of the parties, disposes of all the issues that were presented.
For some years prior to 1911 Davis had been employed by Harbison-Walker Corporation, a pioneer concern in the ganister rock *684 *2569 and silica brick manufacturing industry, and had devoted years to the study of that industry. He represented his company in various capacities and served in important positions. His familiarity with and knowledge of the industry, in all its phases, were recognized by the company and his opinion and advice were relied upon. For reasons not material here, Davis determined to sever his connection with Harbison-Walker and to organize a corporation to engage in the same industry. In furtherance of this plan in 1910 and 1911 he proceeded secretly to acquire options upon numerous small tracts of ganister rock, to negotiate contracts to insure a plant site, transportation facilities for raw materials and fuel requirements, and to obtain the necessary financial backing for his project. On September 12, 1911, all his preliminary plans having been perfected, Davis incorporated the petitioner and transferred to it the ganister lands and the agreements for contracts covering transportation and fuel, for which he received 720 shares of the capital stock.
Although it appears that the legal title to some of these lands was acquired in the name of the petitioner, after incorporation, direct*2570 from the original owners, without the intervention of Davis in the chain of title, the evidence is clear that the title to all the lands was acquired through the exercise of options owned by Davis and with funds supplied by Davis personally. Under such circumstances we think it clear that Davis transferred the beneficial ownership of all the property to petitioner and that the petitioner in effect received title to all the property from Davis in exchange for stock. (See .)
Davis' plans contemplated a plant with an ultimate capacity of 160,000 brick per day, but in 1912 the policy of the company was based on a plant of 30,000 brick per day, and it was not until the latter part of 1916 that petitioner reached a production of 160,000 bricks.
The ganister lands were acquired by Davis through an agent in small parcels from individual and independent owners, at a total cost not exceeding $30,000, The separate parcels, taken individually, were of comparatively little value, because of the limited quantity of rock recoverable from any one tract. All the parcels, however, being contiguous, when consolidated formed*2571 a property 11 miles in length, containing 8,000,000 tons of loose measure rock, recoverable without the necessity of drilling. As one property, these parcels were of much greater value than the sum of the values of the parcels as separate properties. . (Cf. .) The rock on this property was of excellent quality, from which the best grade silica brick and by-products could be manufactued, and was readily accessible to petitioner's proposed *685 plant. The manufacture of steel by the open-hearth method was, in 1911, well advanced and was rapidly expanding, and the demand for brick made from ganister rock was increasing in proportion. The heat-resisting qualities of such brick made it highly desirable for use in steel furnaces, both of the old Bessemer type and the new open-hearth type. The development in 1911 of the by-product coke oven process created a further demand for ganister brick. It seems clear from the evidence before us that there was an adequate market available for petitioner's product,
Davis placed a value of 10 cents per*2572 ton, or $800,000, upon the rock in place at the date of petitioner's incorporation, basing his value largely on the estimated profits to be made in converting the rock into brick. The Commissioner's value was $80,000. In the opinion of another witness, Mr. Hartman, this rock was worth from $500,000 to $600,000. This figure was predicated on the assumption of a plant of large capacity. Mr. Hartman testified to three sales of ganister rock properties, in tracts much smaller than that acquired by the petitioner, made in Pennsylvania at or about 1911, where, in one instance, a tract containing approximately $150,000 tons of rock sold for $14,000, and in the others, two tracts containing approximately 400,000 tons each sold for $60,000 and $40,000, respectively. These sales were not shown to be sufficiently representative to establish a conclusive measure of value.
Upon consideration of the entire record and giving due weight to all the evidence relative to the quality and quantity of the rock, the size of the property, the facility of recovery, the uses and demand for the product, the accessibility of the property, the existence of an available market, the assurance of a plant*2573 of $30,000 brick capacity, with a reasonable expectation of expansion, as well as the evidence of three sales of somewhat similar property, we find that the actual cash value of the ganister rock property and ganister rights paid in to the petitioner by Davis for stock was $300,000 at the time so paid in, 1911. Both petitioner and respondent agree that the value on March 1, 1913, was the same as at the date of acquisition. Accordingly, we find that the March 1, 1913, value of this property was $300,000. This amount should be used in the computation of petitioner's invested capital and also in computing depletion allowances for the taxable years.
The evidence relative to the freight and coal contracts alleged to have been paid in by Davis at the date of incorporation, fails to establish any value therefor. There is some question whether Davis owned any such contracts, for it appears that all he had was the agreement of the railroad and coal companies to enter into such contracts with the petitioner, if and when incorporated, But even if it be conceded that Davis did own such contracts there is no basis in *686 this record upon which to find any value therefor. It appears*2574 that simialr contracts upon like terms were made by the coal company with other corporations, competitors of the petitioner, and so far as the record discloses any one desiring such a contract might obtain it upon application to the coal company. The same observation applies to the railroad contract. Nothing was paid for it and it was not shown to be exclusive. Although such contracts may have afforded some security to the petitioner in solving its transportation and fuel problems, and contributed to the successful organization of the company, there is nothing in the record to indicate that they had an independent value, Neither Davis nor the petitioner paid a bonus for these contracts and it nowhere appears that they could be sold for any amount. We hold, therefore, that the freight and coal contracts had no cash value either at the date of acquisition or on March 1, 1913, and they were properly excluded from invested capital. It follows that no deduction is allowable in the taxable years for the exhaustion of such contracts and that no deduction can be allowed in the year 1918 for the alleged loss of the freight contract.
We come now to the last issue - amortization of war*2575 facilities. The petitioner claims a deduction from gross income for the amortization "of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war," under the provisions of section 234(a)(8), Revenue Act of 1918. The claim comprises certain dwelling houses constructed by the subsidiary corporation, as well as certain items of plant equipment, as set forth in the findings of fact. The respondent refused to allow a deduction for amortization and contends that the petitioner is not entitled to such an allowance, for the reason that no "claim therefor was made at the time of filing return for the taxable years 1918, 1919, 1920, or 1921" as provided by section 234(a)(8), Revenue Act of 1921, and no claim therefor was made before June 15, 1924, as provided by section 1209, Revenue Act of 1926.
It is not disputed that petitioner filed with its 1918 and 1919 returns claims for amortization of war facilities, but it appears that the claims so filed do not agree in amount and in certain items with the claim made in this proceeding. It further*2576 appears that petitioner by letter of February 28, 1921, tentatively withdrew its claim for amortization of war facilities filed with the 1918 return, "to the end that consideration of the revision of the income tax may be had under sections 327 and 328, otherwise to be reinstated," It does not appear that the claim filed with the 1919 return was ever withdrawn for any purpose, but neither of the original claims embraced the houses constructed by the subsidiary corporation. Upon these facts *687 the respondent contends that no claim for amortization was made within the time prescribed by the revenue laws.
The Revenue Act of 1918, section 234(a)(8), provided that in the case of facilities -
constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles 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 * * * as has been borne by the taxpayer.
No special method or limitation is prescribed by the 1918 Act for the making or allowance of a claim for such deduction. In section 234(a)(8) of the 1921 Act, however, Congress*2577 did incorporate a specific limitation upon amortization claims by providing that the deduction -
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).
Since it is conceded petitioner made a claim for amortization with its 1918 and 1919 returns, the decision on this point turns on the effect of petitioner's letter of February 28, 1921.
The letter in question is couched in conditional or contingent terms. It was at most a tentative withdrawal. The fact that the claim was subsequently insisted upon and considered by the Bureau indicates that it was so understood by both parties. It was subsequently referred to in various communications and the deficiency letters on which the proceeding is based ruled adversely on its merits.
The tentative withdrawal was much in the nature of an offer in compromise and failing to accomplish the settlement of the tax controversy between the parties, it should not be held binding. We are of the opinion that petitioner's claim for amortization is properly before us for consideration.
Nor is it material that the items of*2578 the claim presented before us are not identical with the items contained in taxpayers' statement of claim attached to its returns. Respondent's contention would forbid any amendment of such a claim, either by striking out or adding to the items originally presented. In our opinion such a strict construction would be violative of the purposes of the law. The amortization provision is a relief measure, and should be liberally construed. A reading of the Act convinces us that the clause, "if a claim therefor was made" refers to and modifies the phrase, "reasonable deduction for amortization." The making of the claim at the time of filing the return puts the Government on notice of the existence of the claim. Its duty then is to determine what constitutes a reasonable deduction. It is conceivable that a claim for a reasonable deduction for the amortization of war facilities set up as a lump *688 sum with no itemization might be held to satisfy the provision that "a claim therefor be made." There is nothing in the Act specifically requiring itemization or forbidding amendment at any time before final settlement. We are satisfied that petitioner, having made claim for a reasonable*2579 deduction for amortization at the time of filing its return, may properly be allowed to amend its claim at the time of filing a petition with the Board, and may include items not listed in its original claim.
The petitioner filed a consolidated return for the taxable years, for itself and subsidiary, the Kistler Land & Improvement Co., and its tax liability has been determined upon the basis of consolidated net income. No question is raised as to the affiliation of the two corporations. It follows that for the purpose of the taxing statutes the two corporations are to be treated as one and their separate, independent corporate identities are merged into the new taxable entity thus created. . All matters affecting the tax liability of either or both members of the group are to be considered in determining the tax liability of the new taxable entity. The amortization deduction, as well as all other deductions to which either or both corporations are entitled, is allowable to the new entity. *2580 . It follows further that a claim for amortization filed by the new entity (or the parent corporation) in accord with the provisions of the Act is a sufficient compliance with the requirement that a claim be filed, to entitle the consolidated group to the amortization deduction allowable to both corporations. We proceed, therefore, to consider the amortization of the houses erected by the subsidiary company.
The houses constructed by the subsidiary corporation, with funds supplied by the petitioner, are facilities constructed or erected for the production of articles contributing to the prosecution of the war, within the meaning of section 234(a)(8) of the Revenue Acts of 1918 and 1921. The petitioner had to supply living quarters for its employees in order to obtain the labor necessary to operate its plant, and the subsidiary corporation was organized merely as a convenient method of providing the necessary housing facilities. See
The number of houses, and the cost thereof, constructed by the subsidiary company on or after*2581 April 6, 1917, are set forth in the findings of fact. A total of 175 housing units were available and occupied in the year 1918 and the greatest average number of units occupied at any time in the normal postwar years was 90. The value in use of such houses was, therefor, a fraction over 51 per cent and the decline in useful value was approximately 49 per cent, *689 which we find is a reasonable allowance for the amortization of the cost of the houses.
The expenditures under the contracts on account of these houses were $92,210 and the amortization deduction should be computed on this basis. The expenditures in excess of this figure were not explained and are excluded.
We have set forth in the findings of fact the facilities constructed, erected, installed, or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war, together with the cost thereof. It appears that certain expenditures on account of some of the facilities were made subsequent to November 11, 1918, and in the year 1919, but the evidence is clear that all the equipment was constructed pursuant to a plan of expansion determined upon in 1917 after April*2582 6, and that the expenditures made in 1919 were necessary to the completion of construction theretofore begun, which would have been totally lost unless completed. In this circumstance we believe the expenditures subsequent to December 31, 1918, should be included in the computation of amortization.
Considering the specific items, it appears that the crusher, erected in 1917 at a cost of $7,633.91, was used but little during the war period and at the close of the war was placed upon a siding and scrapped, and that the electric outfit, erected in 1918 at a cost of $28,477.38, was never used by the petitioner and was sold in 1925 for $2,500. Amortization on these two items should be allowed for the full amount of the cost after deducting depreciation incurred, and, in the case of the electric outfit, the salvage value realized upon the resale in 1925. It was not established that the product of the dust mill was an article contributing to the prosecution of the war and no amortization on account of its cost is allowed. The storage sheds have been used to capacity in the postwar years, as well as during the war period, and the petitioner abandoned its claim for amortization of their*2583 cost. The remaining facilities of plant equipment have been used to some extent during the postwar years, but the available production has not been sufficient to permit of their use to capacity, nor is it possible to determine the exact percentage of use of each item. As to these latter facilities, therefore, their value in use to the petitioner in the postwar years may properly be measured by comparing the maximum war-time production of the plant with the maximum production in any of the postwar years. The production of the plant in 1917 was 40,590,475 brick, while the maximum production reached in any of the normal postwar years (1923) was 25,754,258 brick. It thus appears that the facilities in question had *690 a useful value of 63.4 per cent during the postwar period and that the decline in useful value is 36.6 per cent, which we find is reasonable and should be allowed.
It did not appear in the record of the case that petitioner's war-time production continued beyond December 31, 1918, and that date is accordingly fixed as the termination of the amortization period. The deduction for amortization will be confined to the 1918 income. *2584 .
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by MARQUETTE and PHILLIPS.