North American Coal Corp. v. Commissioner

THE NORTH AMERICAN COAL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

North American Coal Corp. v. Commissioner

Docket Nos. 28278, 38298.

United States Board of Tax Appeals

28 B.T.A. 807; 1933 BTA LEXIS 1068;

August 3, 1933, Promulgated

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1. Held, the deficiencies asserted for the years 1922 and 1923 are not barred by the statute of limitations.

2. The Board will not consider issues involving a question of fact which are raised for the first time in the brief.

3. The petitioner is liable as transferee of the assets of the A. J. Morgan Coal Co., under the provisions of section 280 of the Revenue Act of 1926, for a deficiency of that company for the year 1920.

4. Invested capital, and depletion deductions determined.

5. Loss on sale of Taplin properties by the Morgan Co. and depreciation of Johnson River tipple, determined.

6. Judgment was entered against petitioner in a trial court for a principal amount and interest in 1922. The judgment was appealed to the circuit court of appeals and, upon affirmance by that court, writ of certiorari was applied for to the United States Supreme preme Court, which was denied on June 5, 1924. Petitioner deposited Liberty bonds in the trial court as a supersedeas in an amount more than the amount of the judgment and interest. It claims such deposit was a payment of the judgment and seeks to deduct the interest therein in 1922. Held, such interest became a proper accrual in 1924, when certiorari was denied by the Supreme Court. Held, further, that interest on said judgment for 1922 and 1923 is not a proper deduction for any year prior to 1924, when petitioner's liability was finally determined.

7. Earnings of a syndicate in 1923 of which the petitioner was a member, which earnings were not distributed, do not constitute taxable income to the petitioner in that year.

C. F. Taplin, Esq., and Leo H. Hoffman, Esq., for the petitioner.

A. H. Pierce, Esq., and I. M. Tullar, Esq., for the respondent.

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MARQUETTE

The respondent gave notice to petitioner of its liability, under section 280 of the Revenue Act of 1926, for deficiencies in income and profits taxes as follows:

Company	Docket No.	Year	Deficiency
A. J. Morgan Coal. Co	28278	1920	$33,250.35
		1920	58,238.97
	28278	1921	33,441.86
		1922	14,452.13
Cleveland & Western Coal Co	38298	1923	5,899.78

The petitioner assails the determination as erroneous in numerous respect; while the respondent asks for increased deficiencies and liability, because of several errors in the determination which favor the petitioner. The issues are as follows:

(1) Whether assessment of the deficiencies in 1922 and 1923 taxes of the Cleveland & Western Coal Company is barred by the statute of limitations;

(2) Whether petitioner is liable, as transferee, under section 280 of the Revenue Act of 1926, for the deficiencies in taxes of the Cleveland & Western Coal Company; and if not, whether notice of such liability is a proper notice of deficiency in petitioner's own taxes, under section 274 of that act;

(3) Whether petitioner is liable, as transferee, under section 280 of the Revenue Act of 1926, for the deficiency in taxes of the A. J. Morgan Coal Company;

(4) Amounts to be included in 1920 invested capital of the A. J. Morgan Coal Company, in respect of the Taplin mine lease, Johnson mine lease, including 30-year extension, and 10-year purchase option on Berry coal; and proper adjustment of that invested capital for prior years' income taxes;

(5) Whether good will of $87,300 previously written off by the Cleveland & Western Coal Co. should be restored to earned surplus for 1920 and 1921 invested capital purposes; proper adjustment of 1920 and 1921 invested capital for inadmissible assets; amounts includable in 1920 and 1921 invested capital in respect of its own capital stock held by a trustee; amounts includable in 1921 invested capital, in respect of the Johnson mine lease including 30-year extension, and 10-year purchase option on Berry coal; and proper adjustment of 1920 and 1921 invested capital for prior years' income taxes;

(6) Reasonable allowances to the A. J. Morgan Coal Co. and/or the Cleveland & Western Coal Co., as their interests may appear, for 1920, 1921, 1922 and 1923, for depletion of the Taplin mine lease, Johnson mine lease including 30-year extension, and Berry fee coal;

(7) Reasonable allowances to the A. J. Morgan Coal Co. and/or the Cleveland & Western Coal Co., as their interests may appear, for 1920, 1921, 1922 and 1923, for depreciation of the machinery and equipment at the Johnson and Taplin mines;

(8) Whether the A. J. Morgan Coal Co. realized a gain or sustained a loss in 1920 upon the sale of its interest in the Taplin mine, and the amount of such gain or loss;

(9) Reasonable allowances to the Cleveland & Western Coal Co., for 1921, 1922 and 1923, for depreciation of the Johnson River tipple;

(10) Whether the Cleveland & Western Coal Co. deducted the sum of $253,405.57 from 1921 income, and whether it is entitled to deduct the sums of $66,601.38 and $24,256.75 from 1922 and 1923 income, respectively, in connection with certain litigation wtth the Main Island Coal Co.;

(11) Alternately to (10), elimination from reported 1920 income of the Cleveland & Western Coal Co., of $19,668 included therein in respect of coal shipments to the Panhandle Coal Co. for the account of the Main Island Creek Coal Co., which shipments were rejected by the latter; and whether the Cleveland & Western Coal Co. is entitled to deductions from 1920 and 1921 income, of $2,664.50 and $21,800.56, respectively, for accrued interest on an account payable to the Main Island Creek Coal Co.;

(12) Whether the Cleveland & Western Coal Co. was affiliated during the years under consideration with the Meadow Land Coal Co. and the Standard Island Creek Coal Co.;

(13) Inclusion in 1923 income of the Cleveland and Western Coal Co., of the sum of $3,675.25, representing its share of the profits earned in that year by a syndicate of which it was a member; [14) Whether the 1920 profits tax of the A. J. Morgan Coal Co. and the 1920 and 1921 profits taxes of the Cleveland and Western Coal Co. should be determined by special assessment.

The petitioner, at the hearing, abandoned so much of the fifth issue as relates to the question of restoring good will of $87,300 to earned surplus for 1920 and 1921 invested capital purposes. Upon motion of the parties, duly granted, the hearing was limited under Rule 62(a) to the issues other than special assessment. The proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

Petitioner, an Ohio corporation with its principal office at 1550 Union Trust Building, Cleveland, was organized in 1913, under the name of "The Cleveland & Western Coal Company." On January 1, 1926, without change in the corporate entity, its name was changed to "The North American Coal Corporation."

The A. J. Morgan Coal Co., hereinafter called the Morgan Co., was organized in 1916 under the laws of Ohio, with an authorized capital stock of $10,000 par value. A. J. Morgan and the petitioner each owned one half of the outstanding capital stock of the company. It was engaged in operating the leased properties, known as the Franklin mine.

I.

The petitioner's 1922 and 1923 income tax returns were filed on March 15, 1923, and March 14, 1924, respectively. On October 1, 1926, the petitioner executed and filed with the respondent a so-called waiver, in which it consented to an extension of the time within which the respondent might assess additional taxes for 1922 to December 31, 1927. On December 12, 1927, the petitioner filed with the respondent another waiver, in which it consented to a further extension of the time for assessment of additional taxes for 1922 to December 31, 1928. On March 7, 1928, the respondent mailed a notice to the petitioner, addressed to The North American Coal Corporation Union Trust Building, Cleveland, Ohio, the first paragraph of which reads as follows:

As provided in section 280 of the Revenue Act of 1926, there is proposed for assessment against you the amount of $20,351.91, constituting your liability as a transferee of the assets of Cleveland and Western Coal Company, Cleveland, Ohio, for income taxes in the amount of $20,351.91, due from Cleveland and Western Coal Company for the years 1922 and 1923, as shown in the attached statement and schedules.

The statement reads in part as follows:

Tax Liability
[Section 280, Revenue Act, 1926]
Transferee	Year	Tax to be
		assessed
The North American Coal Corporation	1922	$14,452.13
The North American Coal Corporation	1923	5,899.78

The records of this office indicate that the Cleveland and Western Coal Company was dissolved and its assets transferred to you on or about December 31, 1925; and that, under such transfer you received assets of value equal to, or in excess of, the amount of the total deficiency involved herein.

On May 7, 1928, the petitioner filed a petition with this Board for a redetermination of the deficiencies asserted in the above notice. The petition sets forth that the corporate name was changed on January 1, 1926, as heretofore stated in these findings; disregards the fact that the above notice was given under section 280, Revenue Act of 1926; and prays for a redetermination of the deficiencies, on the basis of two assignments of error relating to the computation of the tax. The respondent's answer did not raise any question about the form of the notice.

On March 4, 1931, the respondent filed an amended answer in which he affirmatively alleged that the petitioner was organized on or about January 1, 1926; that on the latter date, it received, by transfer, all of the assets of the Cleveland & Western Coal Co., without paying anything therefor; that the net value of these assets, as of the date of transfer, was in excess of the liability of the petitioner as transferee of the property of the Cleveland & Western Coal Co.; and that the petitioner was liable, under section 280, for the deficiencies in the income taxes of the Cleveland & Western Coal Co. In the same answer, the respondent alleged, alternatively, that the petitioner is liable, as the taxpayer, for the deficiencies determined for 1922 and 1923; that the notice of March 7, 1928, was sufficient under section 274, Revenue Act of 1926; and that the Board had jurisdiction to redetermine the deficiencies in question.

On April 20, 1931, the petitioner filed an amended petition, in which additional errors were assigned, including one raising the question of the propriety of the form of the notice of March 7, 1928. Therein, the petitioner alleged that "The Cleveland & Western Coal Company and The North American Coal Corporation are one and the same corporation, the name Cleveland & Western Coal Company having been changed to The North American Coal Corporation on January 1, 1926. No change in the corporate identity of said company was then or thereafter made." These allegations were admitted by the respondent in his answer to the amended petition.

On April 30, 1931, the petitioner moved for judgment of "no deficiencies due from the petitioner to the Commissioner of Internal Revenue in this proceeding as transferee of The Cleveland & Western Coal Company for the years 1922 and 1923," on the ground that it "is not the transferee of the assets of The Cleveland & Western Coal Company and is not liable as such transferee under section 280 for any income and profits tax due from The Cleveland & Western Coal Company for the years 1922 and 1923." After opportunity to be heard had been afforded the parties, an order was entered on August 1, 1931, denying the motion. In a memorandum accompanying that order, the Board held that while the petitioner is not liable as a transferee under section 280 for a deficiency in its own taxes, it was liable, as the taxpayer, for the deficiencies in question; and that the notice of such deficiencies given by the respondent met all of the requirements of section 274.

In an amended answer filed on February 27, 1932, the respondent alleged "that the deficiency notice mailed to the petitioner * * * fulfilled all of the requirements of section 274 of the Revenue Act of 1926, and that petitioner, by appearing before the Board of Tax Appeals in response to said notice, and by pleading to the merits of the deficiency asserted, waived any defect in said notice and waived its right to the issuance or receipt of another notice." These allegations were denied by the petitioner in its replication of April 11, 1932.

II.

On January 3, 1921, the petitioner became the sole owner of the outstanding capital stock of the Morgan Co. On the same day, the Morgan Co., with a view to liquidating and dissolving, transferred its entire assets to the petitioner, and the latter surrendered its stockholdings in, avd assumed all of the outstanding obligations of, that company. The Morgan Co. was dissolved on January 27, 1921.

The following is a statement of the assets and liabilities of the Morgan Co. as of the date of transfer, as reflected by its books of account:

Assets
Current:
Cash	$2,145.75
Notes and accounts receivable	358,688.54
Total current assets	360,834.29
Inventories: Mine and other supplies	55,319.88
Deferred: Prepaid insurance, royalty	115,452.83
and branch office advances
Fixed: Ohio coal lands, mine equipment,	545,100.49
office and engineers' equipment, less
depletion and depreciation reserves
Total	1,076,707.49
Liabilities
Current:
Accounts and notes payable	$138,713.98
Notes payable secured	61,428.83
Capital: Capital account	876,564.68
Total liabilities and capital	1,076,707.49

The foregoing assets and liabilities were entered upon the petitioner's books, as of the date of transfer, in the amounts stated, except that the notes and accounts receivable were entered in the sum of $106,969.13, the difference of $251,719.41 representing an intercompany note or account receivable due the Morgan Co. from the petitioner.

III.

The petitioner was affiliated with the Meadow Lands Coal Co. throughout the taxable years under consideration. It was also affiliated with the Standard Island Creek Coal Co. from and after October 31, 1920, and with the Wisconsin Coal & Dock Co. from January 1, 1920 to the date of merger in November 1920.

IV.

By an agreement dated July 15, 1913, A. J. Morgan leased 366.237 acres of certain coal lands, known as the Taplin mine, located in the No. 8 Ohio field, for a term of 20 years, with an option to the lessee to continue for a further term of 20 years. The lessee agreed, among other things, to pay a royalty of seven cents for every ton (2,000 pounds) of coal mined from the premises; to pay $1,400 upon execution and delivery of the lease, to be applied on the first year's royalty; to have railroad sidings completed and to have the slope driven to the coal within nine months from the date of the lease agreement; to mine and ship at least 20,000 tons of coal the first year of the lease, at least 80,000 tons the second year, and at least 100,000 tons the third year and every year thereafter; and to pay all taxes and save the lessors harmless from all claims for damages that may arise from the operation of the lease, except damages to the surface. Other than the obligations thus assumed in the agreement, Morgan paid no consideration for the lease.

At the date of the aforementioned lease agreement, the Taplin mine contained 341.6 acres of recoverable coal. The average normal recovery of coal in the No. 8 Ohio field is approximately 5,000 tons per acre. Of the said 341.6 acres, 9 or 10 acres had bad roof conditions, which reduced the recoverable coal in the Taplin mine below the average normal recovery for the field. From December 1915, when the first coal was shipped from the mine, to April 1, 1917, a total of 9.6 acres were mined out, from which there were recovered 41,031 tons, an average of 4,274 tons per acre,

Morgan commenced to develop and operate the Taplin mine in the fall of 1913, and continued to do so until the close of 1916. During a portion or all of this period, he was also engaged, as lessee, in operating the Edge Hill mine. During 1914 and 1915 he brought machinery, equipment and supplies from the Edge Hill mine with which to carry on the work at the Taplin mine; but he made no appraisal, inventory, or record of such machinery, equipment, and supplies. A portion of the labor used in developing and equipping the Taplin mine was carried on the pay rolls of the Edge Hill mine and was paid from a common fund. Accurate records of the cost of developing and equipping the Taplin mine to the close of 1916, are not available.

In order to borrow funds with which to carry on operations, Morgan organized the Bannock Coal Co., an Ohio corporation, of which he was the sole stockholder, and on January 2, 1917, he assigned the Taplin mine lease, without any consideration therefor, to that company. Through inadvertence, the assignment was not acknowledged until May 17, 1917, and it was not recorded until May 20, 1917. A set of books was opened for the company and the properties taken over from Morgan were recorded thereon at values based upon an appraisal and inventory made by the company's auditor in conjunction with Morgan and the latter's assistant; but the appraisal and inventory values did not include the labor cost of installing materials and equipment. The books of the company show, as of March 31, 1917, among other assets, coal land, lease and buildings, $62,178.50; machinery and tools, $35,913; mules and harness, $825; houses, $500; and supplies, $1,334.95.

The actual cash value of the Taplin mine lease, as of the date of acquisition by the Bannock Coal Co., was $136,248.55.

V.

By an agreement dated June 5, 1901, the Johnson Brothers Coal Co., an Ohio corporation, leased certain coal lands, called in this record both the Pipe Creek mine and the Johnson mine, located in the No. 8 Ohio field, for a term of 15 years, with the privilege of renewal for an additional term of 15 years. The lessee agreed, among other things, to pay a royalty of six cents for every ton (2,240 pounds) of coal mined from the premises in the first three years; to pay a royalty of eitht cents for every ton mined after the first three years, with a rebate of one cent for each ton mined in excess of 100,000 tons but not in excess of 150,000 tons, and a rebate of two cents for each ton mined in excess of 150,000 tons; that the minimum quantity of coal mined in any year during the lease would not be less than 25,000 tons; and to pay all taxes levied against the property. The lease also provided that the lessee might remove any machinery and equipment it might have on the premises at the termination of the lease, if the parties fail to agree upon the purchase of the same by the lessor.

On February 6, 1903, the Johnson Brothers Coal Co. transferred and assigned the aforementioned lease to the Johnson Coal Co., a West Virginia corporation which had been organized on January 26, 1903.

In November 1916, the petitioner acquired all of the outstanding capital stock of the Johnson Coal Co. The minutes of the meeting of its borard of directors held on November 27, 1916, contain the following report of one of its officers concerning the acquisition of this stock:

There are 625 shares of Johnson mine stock outstanding. We agreed Offutt & Hamill for the 127 shares they control at $200 per share or $25,400, but this included not only their stock but a fifteen year extension of the lease on the same royalty with additional haulage rights from other properties. We agreed to purchase from the Johnson estate 248 shares at $133.33 per share, or $33,065.84. We also agreed to pay Offutt & Hamill for all remaining 250 shares, par. They have already secured 200 of the 250 shares.

Now, we have paid to date for this stock as follows:

$20,000 for 200 shares outside stock, part of certificates representing which stocks are now in our vault. We also paid Offutt & Hamill $6,350 in cash, same being one-fourth of purchase price of their stock and had Mr. Morgan give his three notes in the sum of $6,350 payable two, four, and six months from date, stock being placed in escrow at the First National Bank of Bellaire, Ohio. We also paid the Johnson estate $8,266.46 in cash, same being one-fourth of purchase price of their stock, and had Mr. Morgan give them three notes in the sum of $8,266.46 payable two, four and six months from date, this stock also being placed in escrow at the First National Bank of Bellaire, Ohio.

* * *

According to this agreement, we are paying a little over $83,000 for this company's properties, with statement of October 9, only showing net assets of approximately $31,000. It is believed, however, that considering indebtedness at the present time, we are practically paying $100,000 for this company as it now stands (there being nothing on the books for development) and it was on this basis that it seemed desirable to take over the property. It has also been agreed that Mr. Morgan is to take 150 shares of this stock at an average cost price, provided he can make some arrangement whereby we would not have to carry him for any of his account. The treasurer's action in this matter, upon motion, was duly ratified and approved.

The Johnson Coal Co. developed and operated the Johnson mine from 1903 to April 23, 1917. It did not keep a complete set of books prior to January 1, 1917, and such as it did keep were not accurate and did not reflect the actual cost of developing and equipping the mine to the close of 1916. In December 1916, the company's auditor and Morgan inspected the mine and inventoried all of the properties connected therewith, for the purpose of restating the accounts of the company. A new set of books was opened on January 1, 1917, and, by journal entry of that date, the following assets and liabilities were recorded thereon:

Assets
Land, buildings, and lease	$48,450.00
Machinery, fixtures, and equipment	44,239.00
Office equipment	125.00
Mules and harness	2,300.00
Store merchandise	2,000.00
Supplies	2,300.00
Cash in hands of trustee	692.00
Cash in bank	281.84
Accounts receivable	30,805.43
Total	131,193.27
Liabilities
Accounts payable	$19,373.25
Notes payable	7,200.00
Bonds payable	10,300.00
Pay roll accrued	3,396.38
Capital stock	62,500.00
Surplus	28,423.64
Total	131,193.27

The following is a statement of the assets and liabilities of the Johnson Coal Co., as of March 31, 1917, as reflected by its books of account:

Assets
Land, buildings and lease	$48,506.35
Machinery and equipment	48,055.79
Mules and harness	2,857.84
Office equipment	131.00
Cash in hands of trustee	692.00
Cash	4,573.10
Miscellaneous supplies	2,300.00
Notes receivable	2,000.00
Accounts receivable (C. & W. Coal Co.)	63,966.73
Accounts receiable (miscellaneous)	361.30
Deferred charges	2,021.11
Total	175,465.22
Liabilities
Bonds payable	$10,300.00
Notes payable	9,400.00
Accounts payable	5,637.77
Pay roll accrued	5,091.08
Capital stock	62,500.00
Surplus	82,536.37
Total	175,465.22

On April 23, 1917, the Johnson Coal Co., with a view to liquidating and dissolving, distributed its entire assets to the petitioner, and the latter surrendered its stockholdings in, and assumed all of the outstanding obligations of, that company. The transaction was effective as of April 1, 1917. At the direction of the petitioner, the Johnson Coal Co. assigned and transferred directly to the Morgan Co., as will hereinafter more fully appear, its land, buildings and lease, machinery and equipment, mules and harness, office equipment, and miscellaneous supplies. The Johnson Coal Co. was dissolved on or about June 11, 1917.

VI.

On December 12, 1916, the lessors of the Johnson mine, under the lease agreement of June 5, 1901, or their duly authorized representatives, and A. J. Morgan entered into an agreement, effective as of November 17, 1916, extending the lease for a term of 15 years, from June 5, 1931, to June 5, 1946, and granting to the lessee certain haulage rights over and through the leased premises. This agreement embraced, by reference thereto, all of the terms and conditions of the earlier agreement. In consideration for the extension and the haulage rights, Morgan agreed to exhaust all of the merchantable coal in the Johnson mine before hauling any coal over and through the leased premises from other lands; avd to pay to the lessors one cent per ton for all coal hauled over and through the leased premises from other lands, the minimum haulage to be paid for in any year to be on the basis of 50,000 tons. At April 23, 1917, this extension lease was owned jointly by Morgan and the petitioner.

VII.

Prior to April 23, 1917, A. J. Morgan obtained an oral option to purchase 335 acres of undeveloped coal, known as the Berry tract, adjoining the Johnson mine. At the date mentioned, this option was controlled jointly by Morgan and the petitioner.

VIII.

At April 1, 1917, the Morgan Co. had $1,000 par value of capital stock outstanding, one half of which was owned by A. J. Morgan avd the other one half by the petitioner. On or about that date, the authorized capital stock of the Morgan Co. was increased to $500,000 par value.

On April 23, 1917, the Bannock Coal Co. transferred and assigned, as of April 1, 1917, the Taplin mine lease and the properties connected therewith - machinery and equipment, mules and harness, and supplies - to the Morgan Co., and the latter issued in payment therefor, to A. J. Morgan, shares of its own capital stock of a total par value of $212,000. The properties so acquired by the Morgan Co. were entered on its books in the lump sum of $212,000, but in December 1917, a segregation of the properties was made on the books as follows: $136,248.55 to leasehold; $74,416.50 to machinery and equipment; and $1,334.95 to supplies.

The fair market value of the Taplin mine lease, as of the date of acquisition by the Morgan Co., was $136,248.55.

Also, on April 23, 1917, the Johnson Coal Co., at the petitioner's direction, transferred and assigned, as of April 1, 1917, the Johnson mine lease and the properties connected therewith to the Morgan Co., and the latter issued in payment therefor, to the petitioner, shares of its own capital stock of a toal par value of $212,000. The properties so acquired by the Morgan Co. were entered on its books in the lump sum of $212,000, but in December 1917, a segregation of the properties was made on the books as follows: $133,127.91 to leasehold; $74,419.98 to machinery and equipment; $2,300 to mine supplies; $131 to office fixtures; and $2,021.00 to deferred charges.

At the date of the assignment of the Johnson mine lease to the Morgan Co., the mine contained 267.2 acres of recoverable coal. The conditions existing in the Johnson mine, at the time, in relation to the average recovery per acre of coal, were the normal conditions prevailing in the No. 8 Ohio field.

On July 7, 1917, the representatives of the lessors under the lease agreement of June 5, 1901, advised the Morgan Co., in writing, that "It will be perfectly satisfactory to us to be paid for the same at the rate of $.0465 per ton of 2,000#, which is equivalent to $.08 per long ton of 2240# over 1 1/4 screen, which the original lease calls for."

The fair market value of the Johnson mine lease, as of the date of acquisition by the Morgan Co., was $133,127.91.

Also, on or about April 23, 1917, A. J. Morgan transferred and assigned the Johnson mine lease extension agreement of December 12, 1916, and the oral option to purchase the Berry tract to the Morgan Co., and the latter issued in payment therefor, on May 1, 1917, shares of its own capital stock, of a total par value of $75,000, of which shares a par value of $25,000 was in payment for the lease extension agreement, and shares of a par value of $50,000 were in payment for the purchase option on the Berry tract. Said stock was issued to Morgan and the petitioner, share and share alike. The extension lease and the purchase option were entered on the Morgan Co.'s books, in amounts equal to the par value of the shares issued therefor, respectively.

The books of the Morgan Co. show a total cost for the Berry tract of $113,996.80, made up as follows: $48,996.80 paid to Berry; $15,000 commission paid to Rice; and $50,000 of stock issued for the purchase option.

Each of the foregoing transfers and assignments to the Morgan Co. were a part of one plan of reorganization previously agreed upon by Morgan and the petitioner, to consolidate the ownership of the properties involved in the Morgan Co. It was a part of the plan that Morgan and the petitioner should own and control equal interests in the Morgan Co.; and upon the consummation of the transfers and assignments, each of those parties owned 50 percent of the outstanding capital stock of the Morgan Co.

In computing the 1920 invested capital of the Morgan Co., the respondent excluded therefrom $56,671.28 in respect of the Taplin leasehold, $21,633.52 in respect of the Johnson leasehold, $25,000 in respect of the Johnson mine extension lease, and $50,000 in respect of the purchase option on the Berry tract.

IX.

On January 1, 1920, the Meadow Lands Coal Co. was indebted to the petitioner on open account, in the sum of $18,174.90; and on December 31, 1920, the petitioner was indebted to the Meadow Lands Coal Co. in the sum of $594,034.22.

On October 1, 1920, and December 31, 1920, the petitioner was indebted to the Morgan Co. on open accounts in the sums of $237,614.04 and $251,825.63, respectively.

On October 30, 1920, and December 31, 1920, the Standard Island Creek Coal Co. was indebted to the petitioner on notes in the sums of $293,566.67 and $200,641.67, respectively; and on the same dates the petitioner was indebted to the Standard Island Creek Coal Co. on open account in the sums of $118,730 and $66,935.13, respectively.

On December 31, 1921, the Standard Island Creek Coal Co. was indebted to the petitioner on notes in the sum of $153,166.67, and on open account, in the sum of $16,881.70; and the petitioner was indebted to the Meadow Lands Coal Co. on open account in the sum of $293,886.05.

The foregoing constitute all of the intercompany accounts of the affiliated corporations on the dates mentioned.

In computing the deductions from 1920 and 1921 consolidated invested capital, for inadmissible assets, the respondent eliminated from the average admissible assets of those years the sums of $861,611.02 and $629,305.15, respectively, for intercompany accounts of affiliated corporations.

X.

Prior to December 4, 1916, the petitioner's code of regulations contained the following provision:

In case the holder of any of the stock of the company desires to dispose of any of the said stock to one not already a stockholder of the company, he shall first offer the same to the company at the same price as he holds a bona fide offer for same from such outside party. He shall not be entitled to sell the stock until the company has within thirty days refused or neglected to purchase it as aforesaid. The company shall not be obliged to transfer such stock if the above provision has been violated.

At a special stockholders' meeting held on the above mentioned date, the foregoing provision of the code was amended to read as follows:

In case the holder of any of the stock of this company desires to dispose of his said stock to one not already a stockholder of the company, he shall first offer same to the other stockholders of this company for purchase and the stockholders of this company are hereby given the option, for a period of thirty days, to purchase any stock of the company before it can be sold or in anywise disposed of to any outsider. The holder of any stock desiring to sell the same, before making such sale shall deposit with the Secretary, for a period of thirty days, his certificate or certificates of stock duly assigned to the President or Secretary of the company in trust to carry out the terms of this Regulation. The Secretary shall immediately notify all stockholders of such deposit.

E. W. Astell was one of the stockholders present at the meeting when the foregoing amendment to the code of regulations was adopted; and he, together with all of the other stockholders, consented and agreed, in writing, to the amendment. The code of regulations, as so amended, was in full force and effect during the taxable years under consideration.

In October 1919, Astell retired from the company and tendered the 500 shares of petitioner's capital stock owned by him and his wife for sale, in pursuance of the code of regulations then in force. This stock was purchased by C. F. Taplin, for himself, F. E. Taplin and A. C. King, all stockholders of the petitioner, for $90,000 cash, which the petitioner loaned to Taplin for that purpose. The petitioner charged the loan on its books to an account denominated "C. F. Taplin, Trustee." The loan was repaid in nine installments over the ensuing period to July 6, 1922.

In 1919 and 1920, Taplin, as trustee, received dividends on this stock from the petitioner, in the sums of $2,500 and $4,000, respectively. He reported these amounts as income in fiduciary returns which he filed for the trust for those years.

In 1921, the petitioner was recapitalized under the No-Par Stock Act of Ohio, and Taplin surrendered the 500 shares and new certificated were issued to him and his two associates, according to their respective interests in those shares of stock.

Respondent reduced petitioner's 1920 and 1921 invested capital, by the sums of $83,321.26 and $739.73, respectively, the differences between the unpaid balances of the loan to Taplin, as of the beginning of those years, and the payments, prorated from the dates thereof, made on the loan in the same years.

As heretofore stated in subdivision II of these findings, the petitioner acquired all of the Morgan Co.'s stock on January 3, 1921, and on the same day liquidated the Morgan Co. and took over all of its assets and assumed its liabilities. Among the assets so received from the Morgan Co. were the Johnson mine lease and properties connected therewith, the Johnson mine extension lease and the Berry tract, all of which were acquired by the Morgan Co. under the circumstances set forth in subdivision VIII of these findings. These properties were entered upon the petitioner's books at the same values at which they had been carried on the books of the Morgan Co.

In computing the petitioner's 1921 invested capital, the respondent excluded therefrom $21,633.52 in respect of the Johnson lease, $25,000 in respect to the Johnson mine extension lease, and $50,000 in respect of the Berry tract.

XII.

Respondent reduced 1920 consolidated invested capital by $76,651.52 for additional 1917 and 1918 income and profits taxes, by $4,641.52 for 1919 capital stock tax, and by $31,529.89 for 1919 income and profits taxes. He also reduced 1921 consolidated invested capital by $134,919.20 for additional 1917, 1918, and 1919 income and profits taxes, by $4,641.52 for 1919 capital stock tax, and by $370,253.36 for 1920 income and profits taxes.

XIII.

On January 2, 1917, the date the Bannock Coal Co. acquired the Taplin mine lease from A. J. Morgan, the Taplin mine contained 1,432,968 tons of recoverable coal. On April 1, 1917, the effective date of the transfer of the lease to the Morgan Co., the mine contained 1,418,968 tons of recoverable coal. The following statement shows the number of tons of coal mined from the Taplin mine during the period of the ownership of the lease by the Morgan Co.:

Year	Tons mined
4/1/17 to 12/31/17	55,686
1918	99,781
1919	93,636
1/1/20 to 9/30/20	62,085
Total	311,188

On April 1, 1917, the effective date of the transfer of the Johnson mine lease to the Morgan Co., the Johnson mine contained 1,336,000 tons of recoverable coal. The following statement shows the number of tons of coal mined from the Johnson mine during the period of the ownership of the lease by the Morgan Co.:

Year	Tons mined
4/1/17 to 12/31/17	100,266
1918	133,637
1919	123,175
1920	142,176
Total	499,254

The following statement shows the number of tons of coal mined from the Johnson mine during the period of the ownership of the lease by the petitioner:

Year	Tons mined
1921	313,667.35
1922	140,665.70
1923	116,483.10
1924	22,676.25
1925	13,141.60
1926	4,904.65
Total	611,538.65

Operation of the Johnson mine was discontinued in 1927, following a strike, and the mine was abandoned in 1929.

The following is a statement of the coal mined from the Berry tract by the petitioner, the coal being mined through the Johnson mine:

Year	Tons mined
1921	16,401.65
1922	50,301.65
1923	102,161.20
1924	103,098.50
1925	109,369.35
926	44,186.55
1927	37,875.80
Total	463,394.70

The following is a statement of the coal mined by the petitioner, on a royalty basis, from other tracts through the Johnson mine:

Year	Tons mined
1922	27,493.65
1923	75,846.40
1924	81,190.25
1925	208,333.55
1926	75,705.95
1927	40,880.20
Total	509,450.00

In computing the petitioner's net income for 1921 to 1923, inclusive, the respondent allowed deductions for depletion of the Johnson mine lease and Berry tract in the amounts of $32,024.25, $17,575.79, and $18,683.13, respectively, divided between the said lease and tract as follows:

	Depletion allowed on
Year	Johnson lease	Berry tract	Total depletion allowed
1921	$30,454.08	$1,570.17	$32,024.25
1922	14,054.72	3,521.07	17,575.79
1923	11,531.82	7,151.31	18,683.13

XIV.

On September 30, 1920, the Morgan Co. sold the Taplin mine lease and all of the properties connected therewith to A. J. Morgan, for stock. The books of that company show a loss in connection with the transaction of $45,530.07, made up as follows:

Lease	$136,248.55
Less reserve for depletion	29,664.21
		$106,584.34
Machinery and equipment	101,482.45
Buildings	46,172.59
Live stock	1,510.00
	149,165.04
Less reserve for depreciation	35,971.54
		113,193.50
Surface land		2,348.00
Mine supplies		18,404.23
Net book value		240,530.07
Selling price		195,000.00
Net loss		45,530.07

The respondent determined that the cost to the Morgan Co. of the properties which it sold to Morgan, less depletion and depreciation sustained to date of sale, was $196,010.65; that the selling price was $195,000; and that the Morgan Co. sustained a loss upon the transaction of $1,010.65.

XV.

On August 20, 1920, the Morgan Co. entered into a contract with the Beach Bottom Power Co., whereby the former agreed to supply the latter's Windsor power plant with 2,000 tons of coal per week to December 31, 1921. In order to take care of this contract, it was necessary to construct a tipple, harbor, and cribbing, which facilities are referred to as a unit known as the Johnson River tipple. It was agreed between the parties that the Beach Bottom Power Co. would furnish the money for the necessary construction work, and that the Morgan Co. would construct the tipple. Construction of the tipple was commenced by the Morgan Co. in September 1920, and was completed by the petitioner, following the liquidation and dissolution of the Morgan Co. in January or February 1921.

The Beach Bottom Power Co. was unable to furnish the necessary funds, as provided in the agreement, for the construction work. A contract was then entered into, which provided that the Morgan Co. should build the tipple and that the cost thereof was to be reimbursed to it by the Power Co. by adding one dollar to the price of the coal.

The cost to the Morgan Co. of such part of the tipple construction as it performed was $84,866.30. The cost to the petitioner of completing the work was $20,846.71. The total cost to the Morgan Co. and the petitioner, of constructing the tipple, was $105,713.01.

The petitioner delivered 22,154.10 tons of coal over the Johnson River tipple to the Power Co., under the original contract, to July 31, 1921. Another contract, dated September 1, 1921, called for coal deliveries by the petitioner to the Power Co. of approximately 3,000 tons per month during the period September to December 1921, both months inclusive, and approximately 2,000 tons per month during the period January to April 1922, both months inclusive. The total quantity of coal shipped over the tipple under that contract was 22,022.95 tons. Still another contract, dated August 26, 1922, called for the delivery by the petitioner to the Power Co. of 60,000 tons of coal, shipments to begin on August 28, 1922, and to be completed on August 28, 1923, but "the shipment of all coal in excess of the monthly total of 5,000 tons, which the seller shall have the right to make herein shall be fully completed on or before the 28th day of March, 1923." The total quantity of coal shipped by the petitioner under this last contract was 99,948.85 tons, but only a portion thereof was shipped over the tipple.

The first shipment of coal over the tipple was made on February 19, 1921; the last shipment was made in November 1925. The only shipments over the tipple in 1924 and 1925 were small quantities delivered to tow boats on the river for fuel. The following statement shows the total tonnage of coal shipped over the tipple, in each of the years during which the tipple was in use:

Year	Tons
1921	37,988.30
1922	41,774.15
1923	71,282.35
1924	71.30
1925	2,333.70
Total	153,449.80

The probable physical and useful life of the Johnson River tipple, as of the date of its completion, was five years.

XVI.

On or about September 10, 1920, a contract was entered into by and between the Main Island Creek Coal Co., hereinafter called the Main Island Co., and the petitioner, the substance of which is contained in the following communications passing between the parties:

WESTERN UNION TELEGRAM

Huntington, W. Va., 1920, Sept. 6, p.m. 12:57.

F. E. Taplin, Cleveland and Western Coal Co., Leader News Bldg., Cleveland, O.

Tidewater embargo raised on todays lading. Will you kindly wire me if you are in position to exchange shipments of mine run coal during time we are permitted to export. If you will arrange to do this we will ship you heavily to the lakes during time embargo is on to Tidewater. Please wire quick reply.

A. J. DALTON.

WESTERN UNION TELEGRAM

Huntington, W.Va., 9:26 a.m. Sept. 7, 1920.

F. E. Taplin, Cleveland, O.

Please answer my wire yesterday regarding exchange coal as previously stated. If you will give us your Logan County coal during times Tidewater is open we will replace same with shipments to the lakes when the embargo is on.

A. J. DALTON.

Cleveland, O., 1042A Sept. 7, 1920.

A. J. Dalton, Prest. Main Island Coal Ck. Co. Rp. Bldg., Huntington, W. Va.

Will be glad. Ship you coal while Tidewater not embargoed. Will six dollar exchange price given us by your Mr. Riggs be satisfactory. We do not care to invoice our coal any higher.

CLEVELAND AND WESTERN COAL CO.

LETTER

Main Island Creek Coal Co.

Main Island

Sales Department.

HUNTINGTON, WEST VIRGINIA, September 7, 1920.

Mr. F. E. TAPLIN,

Cleveland & Western Coal Co., 540 Leader-News Building,

Cleveland, Ohio.

Dear Mr. TAPLIN: Referring to our telegrams of September 6th and 7th with reference to exchange of your Logan County Coal.

This does not in any way have any bearing on the approximate tonnage of 60,000 net tons which has already been shipped to the Lakes for your account. All tonnage that has been shipped for your account, was simply an accomodation to you. My proposition is this: - That you ship to pools five or seven, Newport News Coal Exchange, account Dalton-Kelly Coal Corporation, Newport News, Va. all possible Logan County coal during the time that Tidewater is open and this coal will be replaced to you ton for ton while Tidewater is embargoed and during the present season of Lake Navigation. It is to be understood that any coal that is shipped on the exchange basis will not have any bearing on any tonnage that you have purchased or may hereafter purchase, from the Main Island Creek Coal Company.

I understand our Mr. Riggs explained this matter to you fully on the telephone today, and I trust you will co-operate with us in this matter as I feel that we have accmodated you on various occasions and I believe that you can do likewise for us and I assure you that I am indeed glad to be able to co-operate with you in any way with reference to shipments.

Trusting this matter is entirely clear, and with kind personal regards, I am

Yours very truly,

A. J. DALTON, President.

LETTER

The Cleveland and Western Coal Co.

Leader Building,

Cleveland.

SEPTEMBER 10TH, 1920.

Mr. A. J. DALTON,

President, Main Island Creek Coal Co.,

Huntington, W. Va.

DEAR MR. DALTON: I desire to acknowledge your letter of September 7th, confirming our arrangement to exchange coal.

I am very glad indeed to be able to return the coal to, which it is understood is outside of any direct purchases made from, The Main Island Creek Coal Company.

Trusting that this exchange may work out to our mutual advantage, and with kindest regards, I am,

Yours very truly,

F. E. TAPLIN.

During the remaining 1920 navigation season on the Great Lakes, September 10 to November 16, the Main Island Co. shipped, in pursuance of the agreement, 69,101.90 tons of coal to lake ports for the account of the petitioner, and billed the petitioner therefor on the basis of $6 per ton, the total billing price on the shipments amounting to $414,611.40. The shipments were accepted by the petitioner. The petitioner credited an account payable in favor of the Main Island Co. on its books with the amounts of the invoices rendered by that company, and deducted the total thereof, the said amount of $414,611.40, from gross income, as cost of sales, in its 1920 return. The 67,101.90 tons of coal were sold by the petitioner, and the total selling price thereof was included in the gross income reported in its 1920 return.

Prior to the close of the 1920 lake season, the petitioner caused the Standard Island Creek Coal Co. hereinafter called the Standard Island Co., to ship in pursuance of the agreement 8,684.75 tons of coal to Tidewater for the account of the Main Island Co., and bille d the Main Island Co. therefor on the basis of $6 per ton, the total billing price on the shipments amounting to $52,108.50. The shipments were accepted by the Main Island Co. Later in 1920 an additional 3,278 tons were shipped to Tidewater, for the account of the Main Island Co., and the petitioner billed the company therefor on the basis of $6 per ton, the total billing price on the shipments amounting to $19,668. These shipments are referred to in the record as "the Panhandle shipments." The shipments were rejected by the Main Island Co. under the claim that they were made after the close of the lake season. The petitioner charged the account payable with the Main Island Co. on its books with the amounts of $52,108.50 and $19,668. The petitioner included in the gross income reported in its 1920 return the commissions to which it, as exclusive sales agent for the Standard Island Co., was entitled. The amounts of $52,108.50 and $19,668, less the commissions allowable to the petitioner, were included by the Standard Island Co. in the gross income reported in its 1920 return.

The petitioner's and the Standard Island Co.'s books of account were kept on an accrual basis.

In settling with the Main Island Co. for shipments made prior to the agreement of September 10, 1920, the petitioner had made an erroneous deduction of $839.70 from the total of the former's invoices, which amount was thereafter, in 1920, credited by the petitioner to the account payable with the Main Island Co. There was then a credit balance in that account of $343,674.60.

At the time of the Main Island Co.'s rejection of the Panhandle shipments, as related in the third preceding paragraph, that company advised the petitioner that it would not accept any further shipments which the petitioner might make to Tidewater for its (the Main Island Co.'s) account, and that it would not be liable for any difference in tonnage shipments of the two companies under the exchange agreement. The petitioner was advised by counsel to, and did, notify the Main Island Co. that it would sell a quantity of coal equal to the difference between the tonnage the Main Island Co. had shipped to lake ports for petitioner's account and the tonnage the petitioner had shipped to Tidewater for the Main Island Co.'s account, and that it would charge the Main Island Co. with the difference between $6 per ton and the proceeds realized from the sales of the coal. During the period December 1920 to April 1921, both months inclusive, the petitioner sold 57,152.20 tons of coal - the difference of 57,139.15 tons in the shipments of the two companies under the exchange agreement, plus a part car of 13.05 tons - and realized from the sale thereof $119,211.56. That amount was included in 1921 gross income by petitioner.

On December 31, 1920, the petitioner opened a new account on its books, denominated "Main Island Creek Coal Company Adjustment Account for Standard Island Creek Coal Company", with a credit entry of $3,249.45, representing the difference between what the petitioner received from the sale of 1,512.45 tons of coal to the West Virginia Coal Co. and what it would have received at $6 per ton had the Main Island Co. permitted it to ship that coal to Tidewater for its account. The corresponding charge was made to the account payable with the Main Island Co.

On February 28, 1921, another new account was opened on the petitioner's books, denominated "Main Island Creek Coal Company Adjustment Account." The purpose of this account was to serve as a suspense account for so much of the liability in the account payable with the Main Island Co. as was necessary to cover the petitioner's claim against that company, payment of which liability the petitioner intended to withhold until the litigation, which petitioner knew was to be instituted by the Main Island Co., decided the respective claims of the parties. On the above mentioned date the petitioner charged the account payable and credited the adjustment account with the sum of $29,703.93, representing an amount claimed by the petitioner to be due it from the Main Island Co. for handling the latter's coal shipments in 1919. On May 31, 1921, the petitioner charged the account payable and credited the adjustment account with the sum of $342,913.20, representing the amount which the petitioner would have received at $6 per ton for the 57,152.20 tons of coal, necessary to balance the tonnage shipments of the two companies under the exchange agreement, had the Main Island Co. permitted the petitioner to ship that coal to Tidewater for its account. Also, on May 31, 1921, the petitioner credited the account payable and charged the adjustment account with the sum of $119,211.56, representing the proceeds realized by the petitioner from the sale of the 57,152.20 tons of coal. Further, on May 31, 1921, the petitioner credited the account payable and charged the adjustment account with the sum of $3,249.45, the entry being intended to reverse the one of December 31, 1920, in which the account payable and the "Main Island Adjustment Account for Standard Creek Coal Company" were charged and credited, respectively, with a similar amount. This reversing entry was in error in that the charge should have been made against the last mentioned account instead of the "Main Island Creek Coal Company Adjustment Account." After the foregoing entries had been made, and allowing for the error in the reversing entry, the account payable showed a balance due from the petitioner to the Main Island Co. of $90,269.03, and there was a credit balance in the adjustment account, reflecting the petitioner's claim against the Main Island Co., of $253,405.57.

On June 13, 1921, the petitioner mailed to the Main Island Co. its check, payable to the order of the latter, for the sum of $90,269.03, with an accompanying letter of explanation which reads in part as follows:

You will see by going over the accompanying statement that when you refused to furnish shipping orders to this company your company had shipped 57,139.03 tons more than had been returned to you under the exchange arrangement. There was nothing for us to do but sell this coal for your account, which we have done. In doing so, the tonnage over-ran the amount stipulated, by part of a car, to wit, 13.01 tons. According to agreement, we have therefore billed this part car over-shipment to you at $6.00.

The tonnages are now balanced on our books under the exchange arrangement and there stands to your credit the sum of $119,211.56 representing the sales price of the exchange tonnage which you refused to receive. Against this credit we have charged the 13.01 tons to $6.00, to wit, $78.30, and have credited you with $839.70 representing an invoice for exchange tonnage shipped you in September, which, through error, in the Accounting Department, was deducted in our settlement of December 11th for coal purchased from you prior to the exchange arrangement. On the exchange arrangement, therefore, the balance in your favor is $119,972.96.

In remitting to you the sum of $90,269.03, as per enclosed check, we have deducted the old charge of $29,703.93, being the cost of handling tonnage shipped by you under contract in the year 1919. The enclosed check therefore, is tendered and to be accepted in full settlement of accounts arising out of the exchange transaction and in full settlement of all claims arising out of our 1919 contract, it being understood, of course, that our payment and your acceptance of such a check would not preclude either side from making small adjustments arising out of errors in weight.

This check was returned to the petitioner by the Main Island Co. on June 18, 1921, with the comment that "This payment is not in accordance with the contract."

On September 1, 1921, the Main Island Co. brought suit against the petitioner in the United States District Court for the Northern District of Ohio, Eastern Division, for the sum of $363,342.60, with interest thereon from the 17th day of November 1920, until paid. The plaintiff's cause of action, as set forth in its petition, so far as material here, reads as follows:

That, on or about the 10th day of September, 1920, the Main Island Creek Coal Company entered into an agreement with the Cleveland and Western Coal Company for the exchange of coal. And by the terms of said agreement, The Cleveland and Western Coal Company was to ship to the Main Island Creek Coal Company, to pools five or seven, Newport News Coal Exchange, Newport News, State of Virginia, during the Lake Season of the year 1920, while Tidewater shipments were open and free from embargo, all the run of mine coal possible that was controlled by The Cleveland and Western Coal Company at said Logan County mines; in consideration of which shipments, the Main Island Creek Coal Company was to ship to the Cleveland and Western Coal Company, during the Lake Season of said year, an equal tonnage of run of mine coal from its Logan County mines; and it was further agreed and understood by and between the parties to said agreement that said coal was to be exchanged upon the basis of $6.00 per net ton, that is to say, that, if at the end of the exchange, either party had shipped to the other, pursuant to said agreement, a greater tonnage than it had received, the other party was to settle for the excess tonnage at the rate of $6.00 per net ton.

Defendant's answer, so far as material here, reads as follows:

Further answering, defendant admits that on or about the 10th day of September, 1920, an agreement was entered into between the plaintiff and the defendant for the exchange of coal, and that, under said agreement, the plaintiff shipped a certain tonnage of coal to or for the account of the defendant at the Great Lakes, and the defendant shipped a certain tonnage of coal to or for the account of the plaintiff at Newport News, Virginia, but the defendant specifically denies that said contract for the exchange of coal was upon the terms and conditions set forth in the petition herein, and especially does the defendant deny that said agreement provided that any excess of shipments made by one party over those made by the other party to said agreement should be paid for upon the basis of Six Dollars ($6.00) per net ton, or any other sum, but says that all settlements were to be upon the basis of exchange, ton for ton.

Further answering, and by way of defense, defendant says that said agreement entered into by the plaintiff and the defendant on or about the 10th day of September, 1920, provided that, up to the close of lake navigation in the year 1920, and when Tidewater shipments were embargoed, the plaintiff would ship mine run coal to or for the account of the defendant at the Great Lakes, and that, during the time that the plaintiff was permitted to export coal, the defendant would ship all possible mine run coal from its Logan County operations to Pools 5 or 7 at Newport News, Virginia, for the account of the plaintiff, said tonnages so shipped by each party to eventually balance, but, for bookkeeping purposes only, to be billed on the basis of Six Dollars ($6.00) per net ton, f.o.b. mines.

In further defense of said action, and by way of set-off, the defendant claimed that plaintiff was indebted to it for services in handling its lake shipments, under a 1919 contract, in the sum of $29,703.93, referred to as "Lake handling charges for 1919 coal." Defendant tendered payment of the sum of $90,269.03 in full settlement of all obligations arising under the exchange contract. In reply to the defendant's answer, plaintiff stated, in part, as follows:

On the contrary, the plaintiff says that the deliveries of coal by the plaintiff to the defendant, and by the defendant to the plaintiff, were confined to, and limited by, the season of lake navigation on the Great Lakes in the year 1920, and that, under said contract, the plaintiff was not authorized to deliver any coal to, or for the account of the defendant at the Great Lakes after the close of the season of lake navigation for the said year, and the defendant was not authorized to ship coal to, or for the account of the plaintiff, at either pools five or seven at Newport News, Virginia, or elsewhere, after the close of said season; and the plaintiff further denies that the price of $6.00 per ton, as alleged in said answer, was named in the contract between the plaintiff and the defendant as a mere bookkeeping price, and asserts that said price was to be, according to the terms of said contract, the price per ton at which the balance, at the close of the lake season, whether the same was in favor of the plaintiff, or in favor of the defendant, was to be settled for, and the difference paid.

The plaintiff further denied any liability to the defendant for the sum of $29,703.93, or any other sum, for charges for handling shipments made under the 1919 contract; and asserted that it had fully met and liquidated all of its obligations to the defendant under the contract.

The parties were in agreement as to the tonnage which each had shipped for the account of the other during the lake season, and stipulated the said tonnages to the court.

The case came on for trial before a jury and on October 16, 1922, a verdict was returned for the plaintiff in the sum of $404,279.18, being the amount of the plaintiff's claim, $363,342.60, and interest in the sum of $40,936.58, and judgment was entered accordingly. In answer to one of the two questions which the court had propounded to it, the jury stated that nothing had been allowed to the defendant "on account of its set-off set up in the answer and crosspetitioner for lake handling charges of 1919 coal." On January 22, 1923, the defendant duly filed its petition for appeal to the United States Circuit Court of Appeals for the Sixth Circuit; and on the same day, the district court entered an order allowing the appeal and ordering a stay of execution, conditioned upon the furnishing of a supersedeas bond in the sum of $500,000. The defendant filed its supersedeas bond on January 25, 1923, secured in lieu of sureties by $500,000 par value of United States Liberty bonds deposited with the court. The order of the court approving the supersedeas bond, entered January 25, 1923, provided that:

It is further ordered that the said defendant may at any time substitute for said bond, and the securities deposited as aforesaid, a good and sufficient bond with individual or corporate sureties to be approved by this Court; and further, the principal amount of said bond being deemed by this Court ample security for the performance of the conditions therein named, it is ordered that the interest due or to become due on the principal of said Liberty Bonds during the time that the same shall remain on deposit with this Court shall be payable to the defendant.

Thereafter, by proceedings duly had, said appeal was perfected and the cause heard, and the judgment of the district court was affirmed by the circuit court of appeals. Writ of certiorari was denied by the United States Supreme Court on June 5, 1924. The Liberty bonds were sold and, on or about June 5, 1924, the petitioner paid to the Main Island Co. the amount of the judgment with interest thereon, a total of $444,687.10.

When the Main Island Co. rejected the Panhandle shipments in 1920, the petitioner, not being a party to the Tidewater Coal Exchange, refused to have anything to do with those shipments of coal, and they were sold for charges. Nothing was ever received by the petitioner or the Standard Island Co., which had made the shipments at petitioner's directions, in payment for the Panhandle shipments.

In computing net income for 1922 the petitioner deducted $66,601.38, of which $60,604.58 represented the amount by which the judgment ($404,279.18) exceeded the liability ($343,674.60 - $90,269.03 in the account payable and $253,405.57 in the adjustment account) to the Main Island Co. shown on its books, and $5,996.80 represented interest on the judgment from date of rendition to the close of the taxable year. Respondent disallowed the deduction.

In computing net income for 1923 the petitioner deducted $24,256.75, representing interest on the judgment from January 1 to December 31, 1923. The respondent disallowed the deduction.

XVII.

During 1923, petitioner was a member of a syndicate which was engaged in buying and selling shares of corporate stocks. The operations of the syndicate for that year resulted in a profit, and the petitioner's distributive share thereof was $3,675.25. The syndicate was closed in 1929. The petitioner did not include this distributive share in its return for 1923, and it has not been so included by the respondent in his deficiency determination for that year.

OPINION.

MARQUETTE: Issue (1). - On the brief, the petitioner concedes that the deficiencies in 1922 and 1923 taxes are not barred by the statute of limitations, if the respondent's notice of March 7, 1928, fulfills all of the requirements of section 274, Revenue Act of 1926. The question of the sufficiency of that notice was decided by the Board in the order entered August 1, 1931; and the conclusions reached in the accompanying memorandum are supported by the circuit court's decision in . Under the waivers or consent agreements the time for assessment of any additional taxes found due for 1922 was extended to December 31, 1928. The period of limitation for assessment of any additional taxes found due for 1923 did not expire until March 14, 1928, four years from the date the return was filed. Sec. 250(d), Revenue Act 1921; sec. 277(a)(1), Revenue Act 1924; sec. 277(a)(2), Revenue Act 1926. And as the respondent's notice was mailed within the applicable periods of limitation, assessment of the 1922 and 1923 deficiencies is not barred.

Also, on the brief, the petitioner raises the question of the statute of limitations in respect of the liability asserted against it under section 280 as transferee of the A. J. Morgan Coal Co., for the deficiency in the 1920 taxes of that company. This is a new question raised for the first time on the brief, and, therefore, is not properly before the Board. This Board will not consider issues of fact not pleaded in the original petition or raised by proper amendment thereto. ; ; ; ; ; ; and . Cf. .

Issue (2). - The question raised by this issue is substantially the same as that disposed of by the order entered August 1, 1931. In the memorandum accompanying the order we held that while the petitioner is not liable as a transferee under section 280, Revenue Act 1926, for the deficiencies in 1922 and 1923 taxes, since it and the Cleveland & Western Coal Co. are the same corporation, it is liable as the taxpayer for the deficiencies in question; and that the notice of such deficiencies, given by the respondent, met all of the requirements of section 274. For the reasons set forth in that memorandum we adhere to our order of August 1, 1931, denying the petitioner's motion for judgment of no liability for the deficiencies in 1922 and 1923 taxes.

Issue (3). - In this issue, the petitioner denies liability at law or in equity for the deficiency in the 1920 taxes of the Morgan Co. The latter, in the process of dissolution, distributed its entire assets to the petitioner, its sole stockholder, the petitioner assuming all of the outstanding obligations. Twenty-four days later the Morgan Co. dissolved. As the result of this distribution the Morgan Co. was entirely divested of means wherewith to meet its liability for the deficiency now asserted by the respondent. It is well settled that any distribution to stockholders of the assets of a corporation which renders the corporation insolvent gives rise to a liability to creditors on the part of the stockholders receiving such distribution to the extent of the value of the assets received. ; ; and .

Assuming the burden imposed upon him by section 602, Revenue Act 1928, of showing that the petitioner is liable as a transferee of the assets of the Morgan Co., respondent placed in evidence a statement, furnished by petitioner's counsel at the hearing, of the assets and liabilities of the Morgan Co. as of the date of the distribution, as reflected by that company's books of account. This statement shows an excess of assets over liabilities of $876,564.68. The assets and liabilities shown on this statement were entered upon the petitioner's books as of the date received, except that the notes and accounts receivable were entered in the sum of $106,969.13, the difference of $251,719.41 representing an intercompany note or account receivable due the Morgan Co. from the petitioner. Thus the net assets received from the Morgan Co. were recorded on the petitioner's books at a value of $624,845.47. The petitioner produced no countervailing evidence of value. Furthermore, the Morgan Co.'s chose in action against the petitioner in the sum of $251,719.41, relief from which was gained by the petitioner by the liquidation and dissolution of the Morgan Co. alone was more than the outstanding obligations, including the deficiency in question of the Morgan Co. We think this evidence is sufficient to establish a prima facie case for the respondent; and without countervailing evidence from the petitioner we conclude that the net value of the assets which it received in liquidation of the Morgan Co. was equal to the liability here asserted by the respondent. The respondent is entitled to judgment on this issue.

Issue (4). - In the petition, as amended, the petitioner charges that respondent has understated the 1920 invested capital of the Morgan Co., due (1) to excluding or failing to include costs of $657,808 in respect of the properties acquired by that company on April 23, 1917, from the Bannock Coal Co., A. J. Morgan and the petitioner; and (2) to improper and excessive adjustments for 1917, 1918, and 1919 income and profits taxes. The respondent countered in his answer by invoking the provisions of section 301, Revenue Act 1918, alleging that in view of those limiting provisions he erred in including any amount whatever in invested capital, in respect of the aforementioned properties, and asks for an increased deficiency for the year concerned. On the brief the petitioner concedes that the limitations of section 331 are applicable to these properties; that in view of the said limitations the respondent has correctly excluded the costs of the Johnson mine extension lease and the purchase option on the Berry tract, has incorrectly included $34,989.42 in respect of the Johnson mine lease and the properties connected therewith, and has incorrectly excluded $156,731.73 in respect of the Taplin mine lease and the properties connected therewith; and the additional invested capital claimed therein is $121,742.31.

Section 331 provides that "In the case of * * * change of ownership of property, after March 3, 1917, if an interest or control in such * * * property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: * * *." The Morgan Co. acquired the Taplin mine lease and the properties connected therewith from the Bannock Coal Co., of which A. J. Morgan was the sole stockholder. It acquired the Johnson mine lease and the properties connected therewith from the petitioner. Both acquisitions were parts of the same plan of reorganization and were consummated after March 3, 1917. Immediately after the Morgan Co. acquired these properties, Morgan and the petitioner each owned 50 per centum of the capital stock of that company. Under these circumstances the amounts to be included in the 1920 invested capital of the Morgan Co. in respect of the aforementioned properties are limited by the foregoing provisions of section 331 to the values which would have been allowed in computing the invested capital of each of the predecessor owners had not the properties been transferred to the Morgan Co.

By section 326(a), Revenue Act 1918, invested capital is defined as "(1) Actual cash bona fide paid in for stock or shares; (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus * * *; (3) Paid-in or earned surplus and undivided profits; * * *"

The Taplin mine lease and the properties connected therewith were acquired by the Bannock Coal Co., the predecessor owner, on January 2, 1917, from A. J. Morgan, without any consideration therefor. The amount which would have been included in that company's 1920 invested capital in respect of the lease and properties had they not been transferred to the Morgan Co. is the actual cash value thereof, as of January 2, 1917, plus the cost of any capital additions made during the ensuing period to December 31, 1919, the total being subject to proper adjustment for depletion and depreciation sustained during that period. The petitioner contends that such actual cash value is $350,000, as compared with $155,328.72 included in invested capital by respondent; but it concedes if $350,000 be accepted as the correct value that invested capital should be reduced by $52,094.91 for depletion sustained from April 1, 1917, to December 31, 1919, as compared with the respondent's depletion adjustment of $14,155.36. It makes no claim in respect of any capital additions made in the period January 2, 1917, to December 31, 1919. The respondent says the properties cost the Bannock Coal Co. nothing; hence, nothing could be included in respect thereof in that company's 1920 invested capital, and, by section 331, nothing should have been included in respect of those properties in the Morgan Co.'s 1920 invested capital. But the respondent's position is clearly wrong, since the properties, had they not been transferred to the Morgan Co., would have been included in the Bannock Coal Co.'s 1920 invested capital under section 326(a)(3) as paid-in surplus, at their actual cash value as of January 2, 1917, with adjustment for subsequent depletion and depreciation.

The Johnson mine lease and the properties connected therewith were acquired by the petitioner, the predecessor owner, on April 23, 1917, in the liquidation of the Johnson Coal Co., of which the petitioner was the sole stockholder. The Johnson Coal Co. acquired the lease and some properties connected therewith on February 3, 1903, from the Johnson Brothers Coal Co., and issued its own stock in payment for the same. The amount which would have been included in the petitioner's 1920 invested capital in respect of the lease and properties is also limited by section 331 to the amount which would have been included in the Johnson Coal Co.'s 1920 invested capital, had not the latter transferred the properties to the petitioner. This latter amount is, under section 326(a)(2), the actual cash value of the lease and properties as of February 3, 1903, plus the cost of any capital additions made in the ensuing period to December 31, 1919, the total being subject to proper adjustment for depletion and depreciation sustained during that period. On the brief the petitioner contends that the amount so includable in invested capital is $135,000, as compared with $190,366.48 included by respondent; and that if $135,000 be accepted as the correct amount, invested capital should be reduced by $14,946.33 for depletion sustained from April 1, 1917, to December 31, 1919, as compared with the respondent's depletion adjustment of $35,323.39. The respondent says that there are no recognizable costs to the Johnson Coal Co. in respect of the aforementioned properties which would have been included in that company's 1920 invested capital; hence, by section 331 nothing could have been included in respect thereof in the petitioner's 1920 invested capital, and, consequently, by the same section nothing should have been included in the Morgan Co.'s 1920 invested capital in respect of these properties.

The petitioner called two witnesses to give expert opinion evidence as to the value of the Taplin and Johnson properties as of the dates of acquisition by the Bannock Coal Co. and the Johnson Coal Co., respectively, and as of April 1, 1917, the effective date of the transfers of those properties to the Morgan Co. One of them, Morgan, was formerly vice president and general manager of the Morgan Co., and has been interested in the purchase and sale and the development and operation of coal mines in the No. 8 Ohio field for about thirty years. The other, Elkins, is a geologist and mining engineer of thirty years' experience, twenty-three of which have been spent in the No. 8 Ohio field, where he has kept up the projection and planning of mines and the surveys of mined out coal and development of new properties and equipment for a large number of representative companies, and where he has also engaged in buying and selling coal properties and was consulted by different companies that were purchasing and by banks. The respondent called one expert witness who expressed no opinion as to values, but gave only his opinion as to the proper method of valuing leasehold interests generally. In addition to the expert testimony there is considerable documentary evidence bearing upon the question of values.

The $135,000 claimed by the petitioner as includable in the Morgan Co.'s 1920 invested capital, in respect of the Johnson properties, represents the opinions of its two expert witnesses as to what it cost to develop and equip the mine to the production stage which it had reached on April 1, 1917. There is no evidence of the cost of any capital additions made after that date; and the petitioner makes no claim in respect thereof. Morgan, asked to estimate the depreciated cost of the Johnson mine on April 1, 1917, made the categorical statement, without giving his reasons therefor, that "it would cost $125,000 to $150,000 to duplicate it." Elkins expressed the opinion that the cost of developing and equipping the mine, as it stood on April 1, 1917, was $135,000. His estimate was predicated upon "a rough and ready rule of calculating the cost of developing and equipping a mine in the No. 8 field that was generally used by people in the field at that time", of "one dollar a ton for production"; and, as he estimated the annual production of the mine to be 135,000 tons, he arrived at the estimated cost of $135,000. He also related the details of a transaction in which the Robey Coal Co. in April 1917, disposed of a developed and operating coal property of 5,000 acres, located in the No. 8 Ohio field and having an estimated production capacity of 500,000 tons per annum, to the Great Lakes Coal Co., the development and equipment being included in the consideration at a figure of $500,000.

Assuming merely for the sake of argument, for we consider the evidence is not sufficient to establish the fact, that the development and equipment in the Johnson mine, as it stood on April 1, 1917, cost $135,000, it is clear from the evidence that the whole amount would not have been included in the Johnson Coal Co.'s 1920 invested capital had it not transferred the Johnson properties. By its terms the lease agreement of June 5, 1901, under which the Johnson Coal Co. held and operated the Johnson properties, expired on June 5, 1916; and notwithstanding the renewal privilege, the cost of development and other permanent capital additions would be written off against earnings through provision for depletion and depreciation over the original term of the lease, ; reversing ; certiorari denied, , leaving nothing in invested capital after June 5, 1916, in respect of those properties, but the salvage value of the removable property. It should be stated in this connection that there is no evidence of an intent on the part of the Johnson Coal Co. prior to June 5, 1916, to exercise its renewal privilege. Since the estimated cost of $135,000 purports to represent the entire development and equipment costs, and as there is no evidence by which to effect a segregation as between cost of permanent improvements amortizable over the original term of the lease and cost of removable property, we are unable to say what portion of the $135,000, if that figure was accepted as correct, would be includible in the 1920 invested capital. So far as it relates to the Johnson properties, the issue must be decided adversely to the petitioner.

This brings us to the respondent's affirmative defense as it relates to the Johnson properties. As already stated, he included those properties in the Morgan Co.'s 1920 invested capital at a value of $190,366.48. Of that amount $111,494.39 was for the leasehold, $74,419.98 for machinery and equipment, $2,300 for mine supplies, $131 for office fixtures, and $2,021.11 for deferred charges. The respondent says now that it was error to have included any amount whatever in respect of those properties. For reasons already stated above we agree with that proposition so far as it relates to the $111,494.39 included for leasehold; but we disagree with it as it relates to the remaining items, because of the lack of proof that they would have been included in the Johnson Coal Co.'s 1920 invested capital, had they not been transferred, at any lower values than those which the respondent included in the Morgan Co.'s 1920 invested capital.

The $350,000 claimed by the petitioner as includable in the Morgan Co.'s 1920 invested capital in respect of the Taplin properties represents the opinions of its two expert witnesses as to the actual cash value of those properties as of January 2, 1917, the date they were paid in to the Bannock Coal Co. byMorgan. There is no evidence of the cost of any capital additions made after that date; and the petitioner makes no claim in respect thereof. The respondent included those properties in the Morgan Co.'s 1920 invested capital at a value of $155,328.72. Of that amount, $79,577.27 was for the leasehold, $74,416.50 for machinery and equipment, and $1,334.95 for mine supplies. We have found as a fact that the actual cash value of the leasehold as of the date of acquisition by the Bannock Coal Co. was $136,248.55; and the evidence is insufficient to establish that the actual cash values of the other properties were greater than those allowed by respondent in computing the Morgan Co.'s 1920 invested capital. In the part of this opinion dealing with the sixth issue, we shall discuss that finding and that insufficiency of evidence. Accordingly, the amount includable in the Morgan Co.'s 1920 invested capital in respect of the Taplin properties is $212,000, which amount is subject to adjustment for depletion sustained from January 1, 1917, to December 31, 1919, computed in accordance with the conclusions of this opinion in respect to the sixth issue.

As to the second part of this issue, the petitioner presented no proof by which we may determine the proper adjustments of 1920 consolidated invested capital for 1917, 1918, and 1919 taxes. Consequently, we may not disturb the respondent's adjustments for those taxes.

Issue (5). - The questions raised in this issue are (1) the correct amounts of intercompany accounts of affiliated corporations to be eliminated from the admissible assets for the purpose of computing the deductions from petitioner's 1920 and 1921 invested capital for inadmissible assets; (2) respondent's adjustments of the petitioner's 1920 and 1921 invested capital in respect to the Astell stock purchased by C. F. Taplin; (3) amounts includable in petitioner's 1921 invested capital in respect to the Johnson properties, the Johnson mine extension lease, and the Berry tract; and (4) proper adjustments of petitioner's 1921 invested capital for prior years' taxes.

In the findings of fact we have set forth the balances due on intercompany accounts of the affiliated corporations as of the beginning of 1920 and 1921, or as of the dates when affiliation took place, and as of the close of those two taxable years. These facts disclose that the total intercompany accounts due from affiliated corporations were $668,085.61 on January 1, 1920, or later in the same year when affiliation took place; $1,113,436.65 on December 31, 1920; $861,611.02 on January 1, 1921; and $463,934.42 on December 31, 1921. They also disclose that the net intercompany accounts - offsetting payables and receivables between the same companies - due from affiliated corporations were $430,625.61 on January 1, 1920, or later in the same year when affiliation took place; $979.566.39 on December 31, 1920; $727,740.76 on January 1, 1921; and $463,934.42 on December 31, 1921. On the basis of these figures the average total intercompany accounts are $890,761.13 for 1920, and $662,772.72 for 1921; and the average net intercompany accounts are $705,096 for 1920, and $595,837.59 for 1921. Since the evidence does not disclose whether the respondent included the total or the net intercompany accounts in the assets before eliminating the intercompany accounts, we cannot say which of the two sets of figures, average total or average net, are the proper amounts to be eliminated from the average admissible assets. Under the circumstances, the respondent's deductions from 1920 and 1921 invested capital on account of inadmissible assets must stand undisturbed so far as this particular item is concerned.

The unpaid balances on petitioner's loan to Taplin, by which the latter was enabled to purchase the Astell holdings of petitioner's stock, were $87,500 on January 1, 1920, and $2,000 on January 1, 1921. These amounts were excluded from petitioner's invested capital for 1921 and 1921 by the respondent. However, the respondent included in invested capital the sums of $4,178.74 and $1,260.27, respectively, such sums being pro rata proportions of the payments made on the loan at various times in the years concerned. In making these adjustments to petitioner's invested capital the respondent proceeded upon the theory that the petitioner rather than Taplin was the actual purchaser of the Astell stock; that Taplin's part in the transaction was merely that of trustee or agent for the petitioner; that beneficial ownership of the stock was vested in the petitioner; that the petitioner elected this method of acquiring the stock in order to circumvent the Ohio laws forbidding a corporation to purchase its own stock, except to prevent loss on a debt; and that the transaction constituted a retirement by the petitioner of its own stock and a return or repayment of a part of the petitioner's invested capital. It is not clear why he included the pro rata proportions of the payments made on the loan; presumably he treated them as payments received upon a resale of the stock. The evidence is clear and convincing, however, that Taplin was acting for himself and two of his fellow stockholders; that he purchased the stock for his own and their account, and was not acting for the petitioner in the transaction; that he borrowed the funds with which to make the purchase from the petitioner, and later repaid the whole amount thereof; that he, as trustee for himself and his two associates, received dividends on this stock from the petitioner, which he reported in income tax returns; and that upon the recapitalization of the petitioner in 1921 he surrendered the certificates of stock for new certificates which were issued to him and his associates, according to their respective interests in the shares of stock. These facts indicate quite clearly that respondent's adjustments of petitioner's 1920 and 1921 invested capital in respect to Taplin's purchase of the Astell stock are incorrect.

In the petition as amended petitioner charges the respondent erred in excluding from, or failing to include in, petitioner's 1921 invested capital, costs of $657,808 in respect of the Taplin mine lease and properties connected therewith, the Johnson mine lease and properties connected therewith, the Johnson mine extension lease and the Berry tract. The respondent counters, as he did in answer to issue (4), which involves substantially the same question, by invoking the provisions of section 331, Revenue Act 1921 (same as section 331, Revenue Act 1918), alleging that in view of those limiting provisions he erred in including any amount whatever in invested capital in respect of the aforementioned properties, and asks for an increased deficiency for the year concerned. As set forth in subdivisions II and XI of the findings, the petitioner acquired all of the capital stock of the Morgan Co. on January 3, 1921, and on the same day liquidated the Morgan Co. and took over all of its assets and assumed its liabilities. It is not clear why the assignment of error has beev made It is not clear why the assignment of error has been made since, as appears elsewhere in this report, the said lease and properties were sold by the Morgan Co. in 1920 to a third party and, consequently, were not among the assets which the petitioner received upon liquidation of that company in 1921. It does not appear anywhere in the record that the petitioner acquired the lease and properties in 1921 from the purchaser thereof. Accordingly, it appears that the petitioner is not entitled to include any amount in its 1921 invested capital in respect of the Taplin mine lease and properties connected therewith. As to the other properties in question, the amounts to be included in petitioner's 1921 invested capital are, under section 326(a) of the 1921 Act (same as section 326(a) of the 1918 Act), the actual cash or fair market value of the properties as of the date acquired by the petitioner, but by section 331 these amounts may not exceed the values which would have been included in the Morgan Co.'s 1921 invested capital had not those assets been transferred to the petitioner. The petitioner made no offer of proof of the value of the properties in question as of the date acquired by the petitioner, and accordingly, its contentions in respect of this part of the fifth issue must fail.

As to the respondent's affirmative defense, we hold, consistent with our decision on the fourth issue, that nothing is includable in invested capital in respect of the Johnson mine lease; but as to the properties connected with that lease the respondent produced no proof that the amount includable in invested capital is less than what he allowed.

The petitioner presented no proof by which we may determine the proper adjustments of 1921 consolidated invested capital for 1917, 1918, and 1919 taxes. The correct tax liability for 1920 is one of the matters before us in these proceedings, and the proper adjustment of 1921 consolidated invested capital on account of that liability will be determined under Rule 50.

Issue (6). - In this, the sixth issue, the petitioner complains of the inadequacy of the respondent's allowances, in computing the Morgan Co.'s 1920 net income and the petitioner's 1921, 1922, and 1923 net income, for depletion of the Taplin mine lease, the Johnson mine lease, and the Berry tract. The respondent counters in his answer with the allegation that the depletion deductions which he allowed are excessive; and he asks for increased deficiencies for the years concerned on that ground.

Section 214(a)(10) of the 1918 and 1921 Acts provides:

That in computing net income there shall be allowed as deductions:

* * *

(10) In the case of mines * * * a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted * * *. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.

The Morgan Co. was the owner of the Taplin mine lease until it sold the same to a third party on September 30, 1920. It owned the Johnson mine lease, including the extension, during all of 1920. There is no evidence as to when it acquired the Berry tract, the record showing only that it acquired the purchase option on that tract in 1917 and that no coal was mined therefrom during the period of its ownership by the Morgan Co. The depletion allowances for 1920, in respect of the Taplin mine lease and the Johnson mine lease, therefore, must be based upon the cost to the Morgan Co. of those properties. Since the petitioner owned the Johnson mine lease, including the lease extension and the Berry tract during all of 1921, 1922, and 1923, the depletion allowances for those years in respect of those properties must be based upon their cost to the petitioner.

The petitioner did not produce one iota of evidence of the cost to it of the Johnson mine lease, including the extension, and the Berry tract, which properties it acquired upon the liquidation of the Morgan Co., on January 3, 1921. Without evidence of such cost we are unable to determine what are reasonable allowances for depletion of these properties for 1921, 1922, and 1923, and, consequently, we must affirm the respondent's allowances to the petitioner for those years.

The petitioner contends upon the basis of the testimony of its two expert witnesses that the cost to the Morgan Co. of the Taplin mine lease and properties connected therewith, the Johnson mine lease, including the extension, and the properties connected therewith, and the Berry tract were $375,000, $525,000, and $167,500, respectively. It allocates the alleged cost of the Taplin properties, $299,248.55, to the lease, $74,416.50 to machinery and equipment, and $1,334.95 to supplies; and the alleged cost of the Johnson properties, $446,127.91, to the lease, including the extension, $74,419.98 to machinery and equipment, $2,300 to mine supplies, $131 to office fixtures, and $2,021.11 to deferred charges. The respondent determined that the cost of the Taplin properties was $155,328.72, of which $79,577.27 was for the lease, $74,416.50 for machinery and equipment and $1,334.95 for supplies. He also determined that the cost of the Johnson properties was $190,366.48, of which $111,494.39 was for the lease, $74,419.98 for machinery and equipment, $2,300 for mine supplies, $131 for office fixtures, and $2,021.11 for deferred charges. He further determined that the cost of the Berry tract was $63,966.80. Since the Morgan Co. paid for the Taplin and Johnson properties with shares of its own stock, and lacking any direct evidence from the petitioner as to the value of such shares, we may inquire as to the fair market value of the properties as of the date of acquisition to determine their cost.

Morgan expressed the opinion that the values of the Taplin and Johnson properties as of the date of acquisition by theMorgan Co. were $325,000 and $500,000, respectively. He testified as to the conditions existing in the No. 8 Ohio field in 1917, stating that "labor was scarce, cars were scarce and prices were high, and the people as a rule had gone crazy on coal companies"; that "the war was on, and that was the starting of the high prices for coal"; that operating mines "were mostly sold on production * * * in other words, an acreage would not be worth much more than originally, but production would be worth, I would say $2 or $3 a ton"; that the annual production of a mine located on the Baltimore & Ohio Railroad and the Wheeling Railroad, such as the Taplin mine, was worth $2 a ton, but a mine located on the Pennsylvania Railroad and the New York Central Railroad was worth $3 a ton; that the Baltimore & Ohio "was giving less than 50 percent car supply", while "the Pennsylvania and the New York Central were giving about 85 percent, I would say", and "that is where the difference of $2 and $3 came in that the people would pay for properties"; that the Taplin mine "would have cars for 100,000 tons"; that coal prices began to go up about December 1916 or January 1917, so that the value of the mine was about the same in January 1917 as on April 1, 1917, in fact, all during 1917 until Government prices went into effect, then the bonus would be lost, but there would be some bonus even after Government prices were established; and that the value of the mine would be the bonus value of the annual production, plus its cost or its normal value of acreage, machinery, and equipment, and so forth. He further testified that in arriving at a value of $325,000 for the Taplin mine and whatever else went with it, "I figure the mine cost $125,000, and the bonus was worth $200,000 in 1917"; and that the Taplin mine could have been sold for $325,000 as of April 1, 1917. He also testified that he thinks the annual production of the Johnson mine in April 1917 was about 150,000 to 175,000 tons; that that production "would be worth $2.50 or $3.00 a ton bonus on the property"; and that, as to the value of the Johnson mine in April 1917 without the bonus value for annual production, "it would cost $125,000 to $150,000 to duplicate it. You would have to dig the slope and sink the shafts and they were already sunk and complete."

Elkins expressed the opinion that the value of the Taplin properties in January 1917, when acquired by the Bannock Coal Co., was $350,000; that the value of the Taplin properties in April 1917, when acquired by the Morgan Co., was $375,000; that the value of the Johnson mine as of the date of acquisition by the Morgan Co. was $525,000; and that the value of the Berry tract as of April 1917, when the Morgan Co. acquired from A. J. Morgan the purchase option on that tract, was $167,500. He also testified as to the conditions existing in the No. 8 Ohio field in 1917, stating that there was a rough and ready rule for calculating the cost of developing and equipping a mine in the No. 8 Ohio field that was generally used by people in the field at that time, "We figured one dollar a ton for annual production. That was a very safe method to use." He testified that prices for free coal rose from $1.05 a ton in April 1916 to $1.90 a ton in October 1916, and to $4 a ton in January 1917, and there was practically no change in the first three months of 1917; that "the operators tried not to let it get over $4 a ton. They thought that was high enough. There were odd cases where they let it run away and made all they could, but the larger percentage of good operators were trying to hold the basis about $4 a ton. Shortly after April 1, they went into what was known as the Lane-Peabody agreement"; and Government prices went into effect about August 21, 1917; that the prices of $1.90 a ton in October 1916 to $4 a ton in January 1917 were generally on small amounts of coal, because most mines had 60 to 80 percent of production tied up under contract; that he did not realize at the time that the high price of January 1917 "was going to last long, but it began to steady up after the United States entered the war and it looked like we would have it for some time. I did not realize right off what was taking place. I did not know at that time we were going to get in the war. We had just gone through with a campaign about having kept out of the war. * * * Along about the first of 1917 we all realized we were going to get into the war and would have prevailing conditions for some time"; that the coming of the new coal contract season, April 1, 1917, had a greater effect upon the value of the mines than the sales price on small amounts of coal; that mine values were higher at April 1, 1917, than in the first ten days of 1917, because April 1 is the beginning of the new contract year and prices were about four times as high on April 1, 1917, as on April 1, 1916; that the car supply in January 1917, following five or six weeks of zero weather which resulted in a bad breakdown of railroad equipment, was about 30 percent of normal, reaching about 90 percent about the middle of February and through March, and falling off far below expectations during the remainder of the year because of conditions which arose that could not be foreseen in the early part of the year; that the demand for cars was present all through 1917, and the production was restricted only because of the condition in the car supply; that buyers of coal mines in the No. 8 Ohio field "figure an allowance for the year's tonnage available, plus the equipment of the mine", the total being the value of the mine; that in April 1917 the Robey Coal Co. sold 5,000 acres of developed coal property, having an estimated annual production of 500,000 tons, to the Great Lakes Coal Co. for $2,500,000, the said coal property being located in the No. 8 Ohio field, on the Wheeling Railroad; that he participated in the negotiations leading up to that transaction, and that the selling price was arrived at as follows: "We figured a scale producing half a million tons a year, but we took into consideration the car supply would not let us have that. We brought it down to 30,000 tons a month, or 360,000 tons a year. From those figures, on a basis of $1,000,000 for this 360,000 tons of coal and the remaining acreage, we figured at $200 per acre, arriving at these figures"; that the $1,000,000 bonus on a basis of 360,000 tons annual capacity, figured in the selling price, was figured at $2.75 per ton of annual production; "the reason we arrived at that figure, the available figures for cost of coal along about that time $1.25 per ton and the sales price $4. The difference between the $1.25 and the $4 was the $2.75", which was a bonus for going mines with production presently available; that the equipment was included in the sale price at a figure of $500,000; and that there were other sales made on the same basis. He further testified that in arriving at a value of $525,000 for the Johnson mine, "I took 135,000 tons annual production at $2.75. * * * I added the development and equipment, $135,000. That gave $506,250; and the balance I put into the lease extension of this Johnson property"; and the figure of $525,000 represented the value of the Johnson mine based upon "what mines were selling for in the field." Explaining how he arrived at a value of $375,000 for the Taplin mine, he stated: "I figured 100,000 tons of annual capacity in that mine at $2.75 per ton, which would be $275,000, plus $100,000 for development and equipment; that would make $375,000." He further testified that he arrived at a value of $167,500 for the Berry tract on the basis of "the going price for coal lands adjoining developed mines at that date."

It appears from the record that both expert witnesses are, more or less, interested parties; but aside from that, there are other and more cogent reasons why their opinions of values of the Taplin and Johnson properties should not be accepted. The so-called "rough and ready rule" by which they purport to measure the cost of developing and equipping the Taplin and Johnson mines, is, as we understand it, a rule for measuring the probable cost of developing and equipping a mine to the point where it will maintain a certain production. Whether it contemplates the installation and use of new or secondhand machinery and equipment, or both, we do not know; and that seems to us to be an important factor, if we are to accept the rule for the purpose for which it was offered, because the record discloses that the machinery and equipment in both the Taplin and Johnson mines, at the dates acquired by the Bannock Coal Co. and the Morgan Co., were well advanced in the number of years of use. It merely begs the question to say that the rule was used in the Robey Coal Co. - Great Lakes Coal Co. transaction in 1917, in which a very large coal acreage was transferred, for we have no way of comparing the standard and condition of the development, machinery and equipment involved in that transaction with that of the Johnson and Taplin mines. Without the flexibility necessary to reflect the peculiar conditions of the properties to be valued, the rule is a poor substitute for proved facts which would enable us to reach an independent judgment as to the cost of those properties. Furthermore, it clearly appears from the record that the witnesses' opinions of values comprehend fee estates, rather than the lesser estates of leasehold interests, and it is the latter which we are called upon to value here. Valuations of the two estates require consideration of different factors; and it would be a mere coincidence if perchance the values of both were the same. There is also the Johnson mine extension lease running from 1931 to 1946, upon which the witness Elkins placed a value of $18,750. According to the witnesses' estimates, as of April 1, 1917, of the probable future production, the recoverable coal in the acreage covered by that lease would be exhausted before 1931. The evidence shows that all of the coal had been mined out and the mine abandoned by 1929. It is evident, therefore, that the chief value of that extension lease was in the haulage rights granted to the lessee, to haul over and through the leased premises coal mined from other lands. That value could not be determined by reference to sales of operating mines, as it appears Elkins has done. We were given no facts upon which we might predicate any conclusion as to the value of such haulage rights.

Coming to the other evidence bearing upon the question of values, which we shall not attempt to discuss at any great length, there is the purchase by the petitioner, in November 1916, of all of the capital stock of the Johnson Coal Co., the then owner of the Johnson properties, and of a fifteen-year extension - presumably, 1916 to 1931 - of the Johnson mine lease, for a total price of $83,465.82, which, considering the then indebtedness of the Johnson Coal Co., represented a value for that company's entire assets of approximately $100,000; and the minutes of the meeting of petitioner's directors containing a report on, and ratification of, that purchase set forth that "we are practically paying $100,000 for this company as it now stands (there being nothing on the books for development) and it was on this basis that it seemed desirable to take over the property." We do not have a balance sheet of the Johnson Coal Co. as of the date of petitioner's purchase of its stock. One, as of January 1, 1917, some forty-seven days after the purchase, shows cash and outstanding accounts receivable of that company in the amount of approximately $31,700. But, even if there were no cash or accounts receivable among the Johnson Coal Co.'s assets as of the date of petitioner's purchase of its stock, the price paid for the stock would indicate that the Johnson properties, later transferred to the Morgan Co., were not worth more than $100,000 in November 1916. Elkins' estimate of the value of the properties as of that time was $250,000.

While the Taplin mine, as of the date of acquisition of the leases by the Morgan Co., contained approximately 100,000 more tons of coal than the Johnson mine, that advantage of the Taplin mine was largely offset by the greater annual production capacity and newer equipment of the Johnson mine. That the two properties were regarded as of equal value is evident by the Morgan Co.'s issuance of an equal amount of stock, $212,000 par value, in payment for each of the properties. If the difference in value between the two properties as of the date paid in to the Morgan Co. was as great as is indicated by the opinion evidence of petitioner's expert witnesses, it is difficult to understand why they were transferred by different parties for equal interests, 50 percent each, in the Morgan Co. Certainly there is no explanation in the record for that seemingly improbable situation.

In the capital stock tax return which it filed for the fiscal year ended June 30, 1917, introduced in evidence by the respondent, the Morgan Co. reported the fair value of its 5,000 shares of outstanding capital stock to be $575,000, and an estimated fair value per share of $115, and the tax was computed and paid upon the basis of such estimated value. On the basis of this estimated fair value the value of the shares issued for each of the Taplin and Johnson properties was $243,800. Deducting from that figure, in each instance, the values of the properties other than the leases, upon which the parties appear to be in agreement, the share values allocable to the Taplin mine lease and the Johnson mine lease are $168,048.55 and $164,927.91, respectively. These leases were entered upon the Morgan Co.'s books in the amounts of $136,248.55 and $133,127.91, respectively.

Taking the record as a whole, we are of the opinion that the value of the Taplin mine lease as of January 2, 1917, the date acquired by the Bannock Coal Co., and as of April 1, 1917, the effective date of the transfer of the lease to the Morgan Co., was $136,248.55; and that the value of the Johnson mine lease as of April 1, 1917, the effective date of its acquisition by the Morgan Co., was $133,127.91. We have made findings to that effect.

On the basis of the findings, the depletion rates for 1920 for coal mined from the Taplin and Johnson mines are 9.6 and 10 cents per ton, respectively. Therefore, the Morgan Co.'s depletion allowances for 1920 are $5,960.16 on the 62,085 tons mined from the Taplin mine, and $14,217.60 on the 142,176 tons mined from the Johnson mine.

Issue (7). - This issue arises out of respondent's affirmative defense that the deductions which he allowed for depreciation of machinery and equipment used in connection with the Taplin and Johnson mines are more than reasonable allowances for such depreciation. He failed to submit any proof of facts supporting the allegation; hence, the deductions which he has allowed must stand.

Issue (8). - The petitioner contends that the Morgan Co. sustained a loss of $172,567.84 in 1920 upon the sale of the Taplin properties to A. J. Morgan. The alleged loss is $67,037.77 greater than the loss shown by the Morgan Co.'s books of account. The petitioner computes the loss as follows:

Original cost of Taplin properties (based	$375,000.00
upon alleged fair value, as of date of
acquisition by Morgan Co. from Bannock Coal Co.)
Cost of net additions made by Morgan Co	94,165.82
Total cost of properties sold		$469,165.82
Less: Depletion sustained to date of sale	65,626.44
(computed on basis of an original cost of
$375,000 for the properties)
Depreciation sustained to date of sale	35,971.54
		101,597.98
Depleted and depreciated cost		$367,567.84
Selling price		195,000.00
Loss sustained on transaction		$172,567.84

We have already held, in deciding the fourth issue, that the original cost of the Taplin properties, based upon their fair market value as of the date of acquisition from the Bannock Coal Co., was $212,000, of which $136,248.55 is allocable as the cost of the lease. Since respondent's basis is predicated upon an original cost of only $79,577.27 for the lease, that basis is understated by the difference, $56,671.28, between the original cost determined by the respondent and the original cost we have found, $136,248.55, less the additional depletion of $12,291.93, computed at the rate of 3.95 cents per ton on 311,188 tons mined on said additional cost of $56,671.28 allowed in this opinion. The proof does not establish the necessity for any other adjustments in respondent's determination. We, therefore, find that the Morgan Co. sustained a loss of $45,390 upon the sale of the Taplin properties to A. J. Morgan in 1920.

Issue (9). - In this issue, the petitioner charges that the respondent has allowed inadequate deductions for 1921, 1922, and 1923 for depreciation of the Johnson River tipple. The parties have filed a written stipulation to the effect that "the Board may find the useful and depreciable life of the Johnson River tipple to be five years"; and that "The sole remaining issue, with respect to said Johnson River tipple, is what is the proper cost basis recoverable by depreciation." The petitioner contends that the recoverable cost is $105,713,01, the actual total cost, to the Morgan Co. and to itself, of constructing the tipple; while the respondent contends that the evidence fails to establish any greater cost than $21,246.71 [$20,846.71], the amount actually expended by the petitioner to complete the tipple following the acquisition by the petitioner, in the liquidation of the Morgan Co., of the uncompleted structure.

The contracts with the Power Co. are not in evidence. However, A. J. Morgan, who personally negotiated the original contract, testfied as to the terms relating to the construction of the tipple, as follows:

Q State whether or not the tipple was built in reliance upon the contract?

A Do you want the story?

Q I would like to have it while you are here. You probably know it better than any one else.

A The power company could not get coal. We agreed to build the tipple and they to furnish the money. They could not furnish the money, then they gave us an iron-clad contract to build a tipple and add one dollar on the price of the coal to pay for the tipple.

It is evident from this testimony that the entire cost of building the tipple was to be borne by the Power Co. There is no evidence that the contract was not carried out in this respect. The petitioner delivered a total of 144,125.90 tons of coal to the Power Co. under the three contracts; and if one dollar was added to the per ton price of the coal which the Power Co. was to pay, "to pay for the tipple", as Morgan states the contract provided, the petitioner has been entirely reimbursed for the $105,000 expended in constructing the tipple, and there is nothing to be recovered through annual deductions for depreciation. In this connection, it should be stated that there is no evidence that the one dollar added to the contract price for each ton of coal shipped as payment for the tipple has been included by the petitioner in gross income reported in its returns. Under the circumstances, we find that the petitioner is not entitled to any deductions for 1921, 1922, and 1923 for depreciation of the Johnson River tipple.

Issue (10) and the alternative issue (11). - The respondent affirmatively alleges that petitioner deducted from 1921 gross income the sum of $253,405.57, representing an amount set aside on its books as a reserve against an unadmitted claim of the Main Island Co. which was then in litigation, and that he erroneously allowed such deduction in his deficiency determination for 1921, and he asks for an increased deficiency for the year concerned on the basis of such alleged facts. The petitioner contends that respondent has erroneously disallowed the deduction of $66,601.38 from 1922 income, of which $60,604.58 represents the amount by which the judgment returned against it in 1922 in favor of the Main Island Co. exceeded the liability to the latter shown on petitioner's books, and $5,996.80 represents the interest on the judgment from date of rendition to the close of 1922. The petitioner further contends that the respondent has erroneously disallowed the deduction from 1923 income of $24,256.75, representing the interest on the judgment accruable in that year. In the alternative, the petitioner contends that the respondent erred in his deficiency determinations for 1920 and 1921, in failing to allow as deductions for those years the amounts of $2,664.50 and $21,800.56, respectively, for interest accrued on an account payable to the Main Island Co.

The so-called reserve to which the respondent refers is the credit balance of $253,405.57 in the "Main Island Creek Coal Company Adjustment Account", which was created by the entries of February 28 and May 31, 1921, as set forth in subdivision XVI of the findings of fact. It is clear from those findings that the credit balance was not created by any deduction from income, or the exclusion of an item properly includable in taxable income, but is attributable solely to book entries by which a portion of petitioner's liability in the account payable with the Main Island Co. was transferred to this adjustment account, to be held in suspense and not paid pending the outcome of the litigation instituted by the Main Island Co. to recover under the exchange contract of September 10, 1920. It is also clear that none of the items appearing in the account payable from which the transfers to the adjustment account were made were deducted by the petitioner in computing 1921 net income. Furthermore, there is no satisfactory proof that the amount in question was allowed as a deduction by the respondent in his deficiency determination for 1921. Under the circumstances we find that the respondent's affirmative defense is without merit and his prayer for an increased deficiency for 1921 as to this item is denied.

Of the amount of $60,604.58 which the petitioner contends should be deducted from 1922 income, $19,668 represents a portion of the Main Island Co.'s claim upon which the latter obtained judgment in 1922, and $40,936.58 the amount of interest included in that judgment. The petitioner's claim to the deduction of the amount of $60,604.58 is predicated upon the theory that the deposit of the Liberty bonds with the United States District Court as security for its supersedeas bond constituted a payment of the judgment returned against it in that court; and that such payment of the judgment in 1922 gave rise to a deduction for that year, notwithstanding that it appealed to the United States Circuit Court of Appeals as to so much of the judgment as exceeded the admitted liability to the Main Island Co. reflected by the petitioner's books of account.

On its books of account the petitioner showed a total liability to the Main Island Co. of $343,674.60. That amount was $19,668 less than the Main Island Co.'s claim of $363,342.60, for which amount judgment with interest of $40,936.58 was obtained by the latter in 1922. This difference of $19,668 is due to the petitioner's claim of partial payment of the Main Island Co.'s claim by the Panhandle shipments of 1920, which shipments were rejected by the Main Island Co. as made after the expiration of the contract. In computing net income in its 1920 return the petitioner deducted, as cost of sales, the aggregate amount of the Main Island Co.'s invoices covering the shipments made to lake ports for the petitioner's account; and the amount so deducted obviously included the whole amount of the Main Island Co.'s claim. In the present state of the record, we can not say that that deduction was wrong. Obviously, then, the petitioner is not entitled to deduct again any part of that claim in the year of payment. It is equally obvious, however, that the amount of the rejected Panhandle shipments was improperly included in the 1920 consolidated income. These shipments when made by the petitioner were immediately rejected by the Main Island Co. The coal was sold for charges, and neither the petitioner nor the Standard Island Co., which shipped the coal for the petitioner, ever received anything therefor. At the close of 1920 there merely existed a claim of right on the part of the petitioner to have these shipments offset or credited against its liability to the Main Island Co., a claim that was disputed by the latter and which was finally held, in the litigation of the Main Island Co.'s claim, to be without any foundation and was not allowed. Of the $60,604.58 deduction claimed by the petitioner, $19,668 is, under the circumstances above noted, clearly not allowable. On the other hand, the consolidated net income for 1920 should be reduced by the elimination of the Panhandle shipments amounting to $19,668.

As to the remaining sum of $40,936.58, being the amount of the interest included in the judgment rendered against the petitioner in 1922, this amount is not a proper deduction for 1922. There was no admission of liability for this amount on the part of the petitioner in 1922. The judgment was appealed by the petitioner to the United States Circuit Court of Appeals, and upon affirmance by that court, writ of certiorari was applied for to the United States Supreme Court and denied by the Court on June 5, 1924. The judgment entered in 1922 was not final so long as an appeal was pending before a higher tribunal. During the pendency of the appeal it was not known that there would be any liability to respondent for the amount claimed. It was clearly contingent and therefore was not properly accruable. Cf. ; ; ; ; .

The petitioner relies on , and , to support its right to a deduction in the year claimed. It was held in those cases that where cash or bonds are deposited in trust or in escrow as a supersedeas, such deposit is equivalent to payment of the judgment and will support a deduction from income to the extent of the deposit, notwithstanding the fact that an appeal is pending from the judgment. The facts clearly disprove the premise of petitioner's contention to the effect that the judgment was paid in 1922, as the Liberty bonds deposited with the court as security for the supersedeas bond were not so deposited until January 25, 1923. Under the circumstances the amount of $40,936.58 may not properly be deducted from 1922 income.

While the decisions last above cited would appear to warrant a deduction of the amount in 1923, we think the trend of decisions of the Supreme Court and other Federal courts, as well as of the Board, is contrary thereto. The prevailing rule appears to be that unless the circumstances are exceptional, the deduction may be taken only in the year in which the liability becomes fixed by a final judgment. We are unable to see how a deposit in escrow or in trust of moneys or securities as a supersedeas adds anything by which the liability becomes fixed and determined. Its only effect is to guarantee the payment of the judgment in the event of its affirmance.

We are of the opinion that the amount in question is not properly accruable as a deduction in the year 1923, but should be accrued when the petition for certiorari was denied by the Supreme Court in the year 1924.

As to the further sums of $5,996.80 and $24,256.75 which petitioner seeks to deduct from 1922 and 1923 income, respectively, as interest on the judgment accruable in those years, we hold that these are not proper deductions for any year prior to 1924, in which year litigation was finally completed and the petitioner's liability for payment of the interest was determined.

As to the petitioner's alternative contention of right to deduct from 1920 and 1921 income the sums of $2,664.50 and $21,800.56, respectively, as interest accrued in those years on its liability to the Main Island Co., the petitioner produced no proof which would establish its right to deduct these amounts.

Issue (12). - This issue has been settled by the stipulation of the parties as to the companies affiliated with the petitioner during the taxable years in question. The substance of that stipulation is set forth in subdivision III of the findings of fact, and effect will be given thereto in the recomputation under Rule 50.

Issue (13). - In this issue, the respondent affirmatively alleges that he erred in his deficiency determination for 1923, in failing to include in income the petitioner's distributive share, $3,675.25, of the profits earned in that year by the syndicate of which the petitioner was a member. At the hearing, counsel for the petitioner conceded that the petitioner's share of the syndicate profits for 1923 was $3,675.25, and that if the profits of a syndicate are taxable to the members for the year in which earned by the syndicate, the petitioner's 1923 net income, as determined by the respondent in the deficiency notice, should be increased by $3,675.25. On brief, the petitioner concedes that if the Board has correctly interpreted the law on the latter point in , and , then the respondent's affirmative allegation is correct. In the two cited cases, which are companion cases, a syndicate, which was not a taxable entity under the revenue acts, earned net income which was not distributed to the members during the years when earned. The time of making such distribution was, by agreement of the members, left to the discretion of one of their number, who was the syndicate manager. It was held by this Board that the distributive net earnings of the syndicate constituted taxable income to the members in proportion to their respective interests, for the year or years when earned. Our decisions in the two cases have since been reversed by the Circuit Court of Appeals for the Second Circuit, in , and ; and upon authority of the decisions of that court, we must hold adversely to the respondent on this issue.

The proceeding in Docket 28278 will be restored to the general calendar for assignment for hearing in due course on the special assessment issues, under Rule 62(b), unless the petitioner files a waiver of such issue within 30 days after the promulgation hereof, in which event, judgment will be entered under Rule 50. Judgment in Docket 38298 will be entered under Rule 50.