Court Opinion

ID: 4608133
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:07.834691+00
Date Added: 2024-06-11T07:53:39.470147
License: Public Domain

W. M. RITTER LUMBER COMPANY, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  W. M. Ritter Lumber Co. v. CommissionerDocket Nos. 42833-42836, 43604-43606, 48749, 57319-57322.United States Board of Tax Appeals30 B.T.A. 231; 1934 BTA LEXIS 1354; March 31, 1934, Promulgated *1354  1.  DEPLETION AND GAIN OR LOSS - BASIS. - March 1, 1913, value of five blocks of timber determined for depletion (Issue 1); as basis for gain or loss on sales (Issue 3); also March 1, 1913, value of lands determined as basis for gain or loss on sales (Issues 4 and 5).  2.  DEPLETION AND INVESTED CAPITAL. - (Issue 2) Certain agreement held to be a lease and not a sale.  Adjustment of remaining unrecovered capital cost of certain timber on January 1, 1920, as determined by respondent, denied.  3.  AFFILIATION. - (Issue 8) Where, on May 15, 1923, Ritter Co. purchased 83.8 percent of common stock, 98.8 percent of voting preferred of Consolidated Co., and also the voting rights of 15.1 percent of common stock then issued in the names of two of Consolidated Co.'s employees, pursuant to certain agreements, held, the legal right to vote the 15.1 percent common constituted "control" thereof, and ownership and control of 98.8 percent of voting stock constituted "substantially all" within sec. 240(c), Act of 1921.  Held, further, these companies were affiliated from May 15 to December 31, 1923.  4.  Id. - Held, 94.2 percent ownership and control of the voting stock of Jr. Co. *1355  acquired in the same manner constitutes "substantially all" and affiliation allowed from May 15 to December 31, 1923.  5.  Id. - At close of year 1923, the agreements with the two employees were abrogated by mutual consent and Ritter Co. became owner of the 15.1 percent common stock of Consolidated Co. and the 12.6 percent stock of Jr. Co.  Held, on January 1, 1924, Ritter Co. owned in excess of 95 percent of voting stock of Consolidated Co. and was affiliated within sec. 240(c), Act of 1924.  Held, further, from January 1 to July 31, 1924, Ritter Co. owned 94.2 percent stock of Jr. Co. and was not affiliated within sec. 240(c), Act of 1924.  Held, further, upon purchase by Ritter Co. of additional 2.5 percent of stock of Jr. Co. on August 1, 1924, they became affiliated.  6.  NET LOSS. - (Issues 9 and 10) Held, where two corporations were affiliated with each other (as determined by respondent) prior to affiliation with the Ritter group on May 15, 1923, their consolidated losses prior to affiliation with the Ritter group may not be applied against their consolidated income as one unit after such affiliation, but must be treated separately.  7.  Id. - *1356  Prior decisions followed in laying down a rule for application of net losses, if any, of Consolidated Co. and Jr. Co. to be computed under Rule 50.  8.  CREDIT - FOREIGN TAX. - (Issue 11) Held, sec. 240(c) of the 1918 Act; sec. 238(e) of the 1921, 1924, and 1926 Acts; and sec. 131(f) of the 1928 Act, specifically limit the amount of credit for foreign taxes deemed to have been paid.  9.  DEDUCTION - FOREIGN TAX PAID IN EXCESS OF CREDIT ALLOWED. - (Issue 12) Held, that foreign taxes deemed to have been paid, only for the purposes of sec. 240(c) of the 1918 Act, and sec. 238(e) of the 1921 Act, and corresponding sections of the 1924, 1926, and 1928 Acts, in excess of the amount thereof allowed as a credit, may not be deducted from gross income under sec. 234(a)(3) as "taxes paid or accrued" by the domestic corporation.  10.  DEDUCTION - BUSINESS EXPENSE - CONTRIBUTIONS. - (Issue 13) Contributions for welfare work among taxpayers' own employees, resulting in direct benefit to business, held deductible business expense.  11.  Id. - Contributions to various charitable, religious, and educational organizations and relief funds, from which taxpayers derived no direct*1357  benefit reflected in earnings or otherwise, held not to be ordinary and necessary business expenses.  12.  DEDUCTION - BUSINESS EXPENSE. - (Issues 14 and 46) Cost of rails, mining machinery, pumps, etc., for the purpose of maintaining the normal output of mines, held deductible as ordinary and necessary business expense.  13.  Id. - Cost of improvements to tipples which, although not increasing normal output, served to improve quality of output and maintain its market, and also the cost of dredging a creek and resurfacing a private road, held to be capital expenditures and not deductible as business expenses.  14.  STATUTE OF LIMITATIONS. - (Issue 21) For the year 1920, as to the Ritter Co., the statutory period expired on March 15, 1926.  Upon authority of Helvering v. Newport Co.,291 U.S. 485">291 U.S. 485, the waiver dated October 27, 1926, revived the liability.  That waiver, together with the waiver dated October 5, 1927, extended the period for assessment until December 21, 1928.  Held, assessment of additional tax against the Ritter Co. for 1920 not barred.  Held, further, that duly executed and timely filed waivers extended the period of*1358  limitations beyond the date of deficiency notices and assessment not barred as to Ritter Co. for 1922 and 1923; Raleigh Co. for 1920 to 1923, inclusive; and Big Sandy Co. and Knox Creek Co. for 1923.  15.  DEDUCTION - COMPENSATION - STOCK BONUS. - (Issue 22) Where, pursuant to an executed plan whereby the difference between the sale price of closely held stock to selected employees and the market value thereof was predetermined as additional compensation measured by the number of shares allotted to each employee based on salary, length of service, and efficiency, for services actually rendered, held to constitute additional reasonable compensation and deductible as a business expense.  16.  Id. - DIVIDEND CREDITS. - (Issue 23) Dividends on such stock, credited to the purchase price, held to be dividends and not additional compensation.  17.  INVESTED CAPITAL. - (Issue 24) Held, where employees paid $110 per share for stock having a market value of $271.72, only $110 per share may be included in invested capital.  Held, further, the difference was not paid in by services rendered, but was paid out by the corporation as compensation and a deductible business*1359  expense.  18.  INVESTED CAPITAL - INVENTORIES. - (Issue 30) Where depletion is based on March 1, 1913, value, for determining net income, the differential between that value over cost is the "realized appreciation" up to March 1, 1913, which is recoverable tax-free although actually income.  Held, that rough lumber inventories, for invested capital purposes, may not be increased from cost to March 1, 1913, value for the purpose of reflecting in earned surplus the excess of March 1, 1913, value over cost, where petitioners have failed to establish that respondent has not restored to earned surplus for invested capital purposes, that portion of prior depletion deductions applicable to the excess of March 1, 1913, value over actual cost.  19.  INVENTORIES - DEPLETION. - (Issue 33) In determining cost of lumber manufactured in 1920, in arriving at the closing inventory for that year, respondent should use the amount of depletion allowable as a deduction based on March 1, 1913, value, as determined in Issue 1.  20.  JURISDICTION. - (Issue 34) The Board has no jurisdiction over years for which no deficiencies have been determined, but may consider such facts relative to such years, *1360  in this instance net losses, as may be necessary to determine correctly the amount of deficiencies in controversy.  21.  GAIN OR LOSS - BASIS. - (Issue 35) The March 1, 1913, value of certain railroad company stock, also the cost of stock and property sold, determined.  22.  Id. - (Issue 39) The March 1, 1913, value of certain coal company stock determined.  23.  APPORTIONMENT OF TAX - AFFILIATION. - (Issue 41) Held, respondent was sufficiently advised that no part of consolidated tax was to be allocated to Consolidated Co. and Jr. Co. for the years 1925 and 1926, where all subsidiaries filed Form 1122, so stating, the Ritter Co. was assessed and paid the original tax shown on the consolidated return, and respondent has so treated the matter except as to those two corporations.  24.  DEDUCTION - LOSS ON LIQUIDATION OF SUBSIDIARY. - (Issues 43, 44, 45) Held, loss, including investment in stock and advances, sustained upon liquidation and dissolution of a subsidiary, is deductible by the parent corporation, but that the total loss must be adjusted or reduced by the total losses, sustained by such subsidiary in prior years during affiliation, which have been deducted*1361  in consolidated income tax returns for those years.  J. S. Seidman, Esq., and Frank E. Seidman, C.P.A., for the petitioners.  Philip M. Clarke, Esq., and Stanley E. Pearson, Esq., for the respondent.  LEECH*234  Respondent has determined deficiencies in income and excess profits taxes for the year 1920 and income taxes for the years 1922 to 1928, inclusive, as follows: Petitioners19201 1922 19231924W. M. Ritter Lumber Co$142,886.65$4,616.48$51,682.19$12,092.98Raleigh Lumber Co52,233.9013,319.438,952.205,019.91Big Sandy & Cumberland Railroad Co2,557.68Knox Creek Railway Co92.59Red Jacket Consolidated Coal & Coke Co., Inc5,722.88Total195,120.5517,935.9163,284.6622,835.77Petitioners1925192619271928W. M. Ritter Lumber Co$6,548.31$9,211.56$43,272.84$5,064.97Raleigh Lumber Co5,713.037,110.252,356.98Red Jacket Jr. Coal Co784.27W. M. Ritter Flooring Corporation1,630.5376.79Total12,261.349,211.5652,797.897,498.74*235  These proceedings have*1362  been consolidated.  The petition in Docket No. 43604 is dismissed as to the Red Jacket Jr. Coal Co. for the years 1924 and 1925, and the Red Jacket Consolidated Coal & Coke Co. for the year 1925.  The petition in Docket No. 43605 is dismissed as to the W. M. Ritter Flooring Corporation, Winding Gulf Railroad Co., and Smoky Mountain Railway Co. for the years 1924 and 1925.  The petition in Docket No. 42833 is dismissed as to the W. M. Ritter Flooring Corporation, Winding Gulf Railroad Co., and Smoky Mountain Railway Co. for the years 1920, 1922, and 1923.  In each instance the dismissal is ordered on motion of counsel for petitioners and for the reason that no deficiency has been determined against these companies for the years stated.  The Board is without jurisdiction as to these dismissed proceedings.  Cornelius Cotton Mills,4 B.T.A. 255">4 B.T.A. 255. Certain adjustments to income, invested capital, and/or tax have been stipulated as to Issues 6, 15, 16, 17, 18, 20, 25, 26, 27, 28, 29, 32, 36, 37, 38, 40, and 48.  Effect to these stipulations, incorporated herein by reference, will be given in the recomputation under Rule 50.  Petitioners have abandoned Issues 7, 19, 42, and*1363  47.  The trial of Issue 31 has been deferred pursuant to Rule 62(a).Petitioners' allegations of error remaining in issue are as follows: (1) Understatement of the timber depletion deduction for the years 1920 to 1928 by reason of assigning to the timber blocks of the Ritter and Raleigh Companies a March 1, 1913, value, less than the actual fair market value of the blocks on that date.  (2) Understatement of the timber depletion deduction to which the Ritter Company is entitled for the years 1920 to 1928, and the understatement of invested capital for the year 1920, with respect to the Western Pocahontas tract, even on respondent's basis, because of the understatement of the cost on January 1, 1920, of the Western Pocahontas tract owned by the Ritter Company.  (3) Overstatement of profit and/or understatement of loss for the years 1920 to 1928, on sales of timber made by the Ritter and Raleigh Companies, by reason of assigning to said timber a March 1, 1913, value less than its actual fair market value on that date.  (4) Overstatement of profit and/or understatement of loss for the years 1920, 1921, 1922 and 1924, on land sales made by the Ritter Company, by reason of*1364  assigning to said lands a March 1, 1913, value less than their actual fair market value on that date.  (5) Understatement of loss sustained by the Ritter Company in the year 1927 on the sale of its Hazel Creek block, by reason of assigning to the land and timber so sold a March 1, 1913, value less than their actual fair market value on that date.  (8) Failure to consolidate the income of the Consolidated and Jr. Companies with that of the remaining petitioners from May 15, 1923, to November 18, 1926, or for any part of said period.  (9) Disallowance of the statutory net loss of the Consolidated and Jr. Companies from January 1, 1921 to November 18, 1926, or any part of said period, as a deduction in computing the income of the consolidated group comprising *236  all petitioners from and after the time of commencement of affiliation between the said companies and the remaining petitioners.  (10) In the alternative for Issues (8) and (9), the omission to allow the deduction provided by the applicable statutes, of the statutory net losses of the Consolidated and Jr. Companies from January 1, 1920 to November 18, 1926, or any part of said period, in computing their own consolidated*1365  income.  (11) Omission to allow as a credit against petitioners' tax liability for the years 1920 to 1926 the amount to which the Ritter Company was entitled by reason of foreign taxes deemed to have been paid by it, and the failure to allow sufficient credit against petitioners' tax liability for the years 1927 and 1928.  (12) Failure to allow as a deduction to the Ritter Company for the years 1920 to 1928 the excess of the foreign taxes deemed to have been paid by it over the amount of such taxes applied as a credit against petitioners' tax liability for those years, pursuant to Issue (11).  (13) Disallowance for the years 1920 to 1928 of donations as ordinary and necessary business expenses.  (14) Disallowance and/or omission to allow the deduction of ordinary and necessary expenses of the Consolidated and Jr. Companies for the years 1921 to 1928 of amounts paid for machinery and equipment to maintain the normal output of the mines of those companies.  (21) Assessment and/or collection of the proposed deficiencies for the years 1920 to 1923 and for the year 1926 are outlawed.  (22) Omission to allow the Ritter Company as a deduction compensation to employees for the*1366  years 1920 to 1922, measured by the difference between the fair market value at the time of sale of the Ritter Company's stock to said employees, and the indicated sales price.  (23) In the alternative for issue (22), omission to allow the Ritter Company as a deduction for the years 1920 to 1928, the compensation paid by it to its employees in each of those years, measured by (1) the difference between the fair market value of the Ritter Company's stock at the time of the subscriptions to said stock by said employees, and the indicated subscription price; and (2) by the amounts in the form of and equivalent to dividends which were applied against subscription price.  (24) Omission to include in invested capital for the year 1920 the full amounts paid in for the Ritter Company's stock, sold by the Ritter Company to certain employees in that year, and measured by the difference between the fair market value of said stock at the time of the sale, and the indicated sales price.  (30) Understatement of invested capital for the year 1920 by unwarranted reduction in the Ritter and Raleigh Companies' rough lumber inventories at January 1, 1920.  (33) Overstatement of income for the*1367  year 1920, which resulted from overstatement of the Raleigh Company's closing inventory for that year, which in turn was brought about by Respondent's considering as part of the cost of manufacturing for the year 1920 an amount for depletion greater than he allowed as a deduction for that year.  (34) Failure to deduct from the net income of petitioners for the year 1922 and/or 1923 their statutory net loss sustained in the year 1921.  (35) Overstatement of income of the Ritter Company for the year 1923 in connection with the sale of the Big Sandy and Cumberland Railroad and stock in the Big Sandy Company.  *237  (39) Conversion of the loss sustained in the year 1924 by the Consolidated Company on the sale of its holdings of Norfolk and Chesapeake Coal Company stock, into a taxable profit.  (41) Unwarranted, and in the alternative, excessive allocation to the Consolidated and Jr. Companies of part of the tax paid by the Ritter Company for the years 1925 and 1926.  (43) Elimination of the loss sustained in the year 1926 by the Ritter Company on the dissolution of the Winding Gulf Company, by applying against the loss prior years' operating losses of the Winding Gulf Company*1368  used in those prior years as a deduction in computing consolidated income, and in any event the application of an excessive amount of such prior years' losses.  (44) Elimination of the losses sustained in the year 1927 by the Ritter Company on the dissolution of the Smoky Mountain Company, because the Smoky Mountain Company was a subsidiary of the Ritter Company, and by applying against the losses prior years' operating losses of the Smoky Mountain Company used in those prior years as a deduction in computing consolidated income, and in any event the application of an excessive amount of such prior years' losses.  (45) Elimination of the loss sustained in the year 1927 by the Consolidated Company on the dissolution of the Hull Coal and Coke Company because the Hull Coal and Coke Company was a subsidiary of the Consolidated Company.  (46) Disallowance of ordinary and necessary expenses of the Consolidated Company for road repairs in the years 1927 and 1928.  (49) In the alternative for Issue (14) the omission to allow depreciation for the years 1922 to 1928 on expenditures made in 1922 by the Consolidated and Jr. Companies, and held by respondent to be capital expenditures. *1369  Respondent avers that petitioners by valid consents in writing have waived the statute of limitations against assessment and collection of income and profits taxes for 1920 and income taxes for the years 1922 and 1923.  FINDINGS OF FACT.  The W. M. Ritter Lumber Co. (hereinafter referred to as the Ritter Co.) was incorporated under the laws of the State of West Virginia on March 21, 1901.  Since then it has been engaged in the manufacture of lumber.  The Raleigh Lumber Co. (hereinafter referred to as the Raleigh Co.) was incorporated under the laws of the State of West Virginia on November 15, 1899.  Since then it has been engaged in the manufacture of lumber.  The W. M. Ritter Flooring Corporation (hereinafter referred to as the Flooring Co.) was incorporated under the laws of the State of West Virginia on January 10, 1917.  Since then it has been engaged in the sale of lumber products.  The Big Sandy & Cumberland Railroad Co. (hereinafter referred to as the Big Sandy Co.) was incorporated by act of the General Assembly of the State of Virginia on January 25, 1900.  *238  The Knox Creek Railway Co. (hereinafter referred to as the Knox Creek Co.) was incorporated*1370  under the laws of the State of Kentucky on June 27, 1912.  The Winding Gulf Railroad Co. (hereinafter referred to as the Winding Gulf Co.) was incorporated under the laws of the State of West Virginia on July 3, 1906.  The Smoky Mountain Railway Co. (hereinafter referred to as the Smoky Mountain Co.) was incorporated under the laws of the State of North Carolina on August 1, 1905.  The Red Jacket Consolidated Coal & Coke Co., Inc. (hereinafter referred to as the Consolidated Co.) was incorporated on June 8, 1904, under the laws of the State of Virginia.  Since then it has been engaged in the business of mining coal.  The Red Jacket Jr. Coal Co. (hereinafter referred to as the Jr. Co.) was incorporated on February 24, 1909, under the laws of the State of West Virginia.  Since then it has been engaged in the business of mining coal.  The books of these companies have been kept on the accrual basis in the regular course of their businesses and were relied upon by them in the conduct of such businesses.  The income tax returns of these nine companies were filed on the accrual basis, with the approval of the respondent.  Respondent properly determined that the first seven named*1371  corporations were affiliated through the years 1920 to 1928, as defined by the respective revenue acts, and entitled to have their tax computed on a consolidated basis.  Their taxes have been so computed, with the Ritter Co. as the parent company, except that in the case of the Big Sandy Co. and the Knox Creek Co. the affiliation terminated on October 1, 1923, and in the case of the Winding Gulf Co. and the Smoky Mountain Co. affiliation terminated June 1, 1926, and June 2, 1927, respectively.  The Consolidated Co. and the Jr. Co. were included by petitioners as members of the affiliated group referred to in the next preceding paragraph, beginning on May 15, 1923.  Respondent determined that these two companies became members of the affiliated group on November 18, 1926.  Issue No. 1 - March 1, 1913, Value of Timber.On March 1, 1913, the Ritter Co. and the Raleigh Co. owned (in addition to other timber lands, the value of which at that date is not involved in these proceedings) five blocks of timber named and located as follows (A block of timber is an operating unit of not less than 100,000,000 board feet which would logically go to a single point *239  of manufacture*1372  or to one of the group of interchangeable points of manufacture.): Name of block and location: Maben, Wyoming and Raleigh Counties, West Virginia.  Raleigh, Raleigh and Wyoming Counties, West Virginia.  Knox Creek, Buchanan County, Virginia, Pike County, Kentucky.  Hazel Creek, Swain County, North Carolina.  Nantahala, Macon and Clay Counties, North Carolina.  The Raleigh Co. owned and operated the Raleigh block.  The others were owned and operated by the Ritter Co.  All of the blocks, except Vantahala, were completely blocked for band saw operation on a large scale and were being profitably operated on March 1, 1913.  The acreage, the number of board feet of merchantable timber and the fair market value per thousand feet of timber as to each of the respective blocks on March 1, 1913, were as follows: BlockAcreageFeetMarch 1, 1913, value per M feetMaben32,272297,257,160$8.68Raleigh45,368295,884,5538.22Knox Creek25,500128,058,2158.69Hazel Creek21,251140,348,0006.54Nantahala27,880108,176,7854.54The details with respect to the annual footage bought, sold, and/or cut with reference to each block from*1373  March 1, 1913, through the years in issue and all other data required for any recomputation of the timber depletion deduction for the years 1920 to 1928, inclusive, have been stipulated in petitioners' Exhibits 33 to 36, inclusive, incorporated herein by reference.  There is no issue as to the method of computing the depletion deduction, respondent's determination in that respect having been accepted by petitioner.  Issue No. 2 - Invested Capital - Basis for Depletion for Years 1920 to 1928, Western Pocahontas Tract.The parties have stipulated as follows: In computing invested capital of the Ritter Company for the year 1920, respondent used and allowed $293,139.98 as the cost of the 62,986,242 feet of timber), with respect to the Western Pocahontas tract of the Maben block as at January 1, 1920, shown in petitioners' Exhibit No. 35.  In December 1909 the Western Pocahontas Corporation, as lessor; the Raleigh Co., as lessee, and the Ritter Co., as guarantor, entered into a written agreement of lease as set forth in respondent's Exhibit F, incorporated herein by reference.  Under the terms of the lease *240  the Raleigh Co. was granted the right to cut, remove, and*1374  manufacture, within a period of 15 years, certain specified timber standing on approximately 27,500 acres of land known as the Western Pocahontas tract.  The lessee agreed to pay, as rents reserved, a royalty of $6 per thousand feet, log scale measure, as the timber was cut, but in minimum payments of $100,000 per annum for 10 years, the total payments not to exceed or be less than $1,000,000.  The tract contained 188,650,567 feet of timber, available under the lease, which by agreement was divided approximately equally between the Ritter Co. and the Raleigh Co. for the purpose of economical operation.  The unit cost of this timber was $5.30 per thousand feet.  Petitioners' Exhibits 33 and 35, included herein by reference, show the computative details as determined by respondent.  They disclose the treatment of the Western Pocahontas tract, separately from the rest of the Maben block for the years prior to 1920, as a leasehold having a cost of $6 per thousand feet of timber as cut and a March 1, 1913, value of $1.50 per thousand feet in excess of cost.  The exhibits disclose the computation of depletion, as to the timber alone, on the basis of $6 per thousand feet as cut, from*1375  March 1, 1913, to December 31, 1919, resulting in an unrecovered capital cost of $293,139.98 for the 62,986,242 feet standing and available to the Ritter Co. on January 1, 1920.  Such cost has been used by respondent in determining invested capital for 1920, and also as the basis for computing depletion on such tract of timber for the years 1920 to 1928.  Issue No. 3 - Gain or Loss from Timber Sales.In the years 1920 to 1928 petitioners sold timber acquired by them before and after March 1, 1913.  The amounts of timber sold from the several blocks, the year of sale and the sale prices are set forth in petitioners' Exhibit 37, incorporated herein by reference.  In arriving at the basis for gain or loss, respondent used as the starting point the respective March 1, 1913, values per thousand feet as determined by him.  The fair market values at March 1, 1913, of the timber acquired prior to that date, and thus the correct starting point for the recomputation of the gains or losses in question, are set forth in our findings of fact on the first issue.  There is no issue as to the cost of timber acquired after March 1, 1913.  The necessary details for a recomputation in this*1376  respect have been stipulated in petitioners' Exhibits 33 to 36, inclusive, incorporated by reference.  *241 Issues 4 and 5 - March 1, 1913, Value of Lands.During the years in issue the Ritter Co. made the following sales of land, acquired by it prior to March 1, 1913, in connection with its respective timber blocks: BlockYearAcreageSale PriceHazel Creek192721,079.00Wilson Creek19201,383.75$15,000.00Do1924946.003,500.00Nantahala192133,068.24158,502.87Do19224,019.4319,544.49The Hazel Creek sale embraced 21,079 acres of land, 26,329,813 feet of timber, the plant and other assets, for a total lump-sum consideration of $208,171.50.  The respondent determined the basis for computing gain or loss to be $60,525.74 for the plant and other assets; $96,517.14 for the timber and $63,237 for the land.  There is no issue as to the basis relative to the plant and other assets.  In arriving at the basis for the timber sold, respondent used as a starting point a March 1, 1913, value of $4 per thousand feet as determined by him.  The fair market value at March 1, 1913, of the timber of the Hazel Creek block was $6.54*1377  per thousand feet, as heretofore determined in the first issue.  The necessary details for recomputation of the basis for the timber have been stipulated in petitioners' Exhibits 33 to 36, inclusive, and 58-F, incorporated herein by reference.  The fair market value at March 1, 1913, of the Hazel Creek lands in issue was $6.75 per acre.  The Wilson Creek sale in 1920 embraced 1,383.75 acres of land, of which 836 acres were in the town of Mortimer, North Carolina.  The fair market value of this land at March 1, 1913, was $25 an acre for the 836 acres in Mortimer and $5.25 an acre for the remaining 547.75 acres sold in 1920.  The 946 acres of Wilson Creek land sold in 1924 had a March 1, 1913, fair market value of $5.25 an acre.  The fair market value of the Nantahala lands at March 1, 1913, was $4.75 an acre.  Issue No. 8 - Affiliation.Throughout the years 1923 to 1926, the Consolidated Co. had outstanding 23,860 shares of common stock of the par value of $100 each and 7,158 shares of preferred stock of the par value of $100.  The preferred stock had voting rights.  The Jr. Co. had outstanding 1,500 shares of common stock of a par value of $100 each.  W. N. Cummins*1378  entered the employ of the Consolidated Co. and the Jr. Co. in 1910 as general superintendent.  He was later made *242  general manager and occupied that position until 1927.  He was never an officer or director of either of the companies, but was employed on an annual salary basis.  In 1911 he bought for cash 241 shares of common stock and 72 shares of preferred stock of the Consolidated Co. and 50 shares of the common stock of the Jr. Co.  His ownership of these shares continued until 1927, when he severed connections with both companies.  H. T. Wilson was employed in 1922 as president of the Consolidated Co. and the Jr. Co.  At that time a new office of chairman of the board of directors was created, to which W. M. Ritter, one of the larger active stockholders of the companies, was elected.  Wilson continued in the employ of the Consolidated Co. and the Jr. Co. on an annual salary basis for about four years, during which time he was president and a director of both companies.  A qualifying share of stock was issued in Wilson's name, but this share was never owned by him.  In the fall of 1922 W. M. Ritter, on behalf of himself and four other large stockholders, offered Wilson*1379  and Cummins an opportunity to share in the profits of the Consolidated Co. and the Jr. Co. through the purchase of common stock in the companies under an oral arrangement by which they could pay for the stock wholly out of dividends thereon, but were not to acquire the voting rights of the stock until it was fully paid for.  Wilson and Cummins had no personal funds and no prospects of acquiring funds sufficient to pay for the stock.  Early in 1923 they agreed to the plan and the price of the stock was fixed at $225 a share for the Jr. Co. stock and $15 a share for the Consolidated Co. stock.  The number of shares involved in the transaction with Cummins was 900 shares of Consolidated Co. stock and 63 shares of Jr. Co. stock, at an aggregate price of $27,675.  In the transaction with Wilson the number of shares was 2,702 of the Consolidated Co. stock and 126 shares of the Jr. Co. stock at the aggregate price of $68,880.  Although the agreement between the parties was that the price was to be paid wholly out of dividends on the stock, as a matter of form, Cummins and Wilson each executed a series of five notes payable to each of the five vendors.  In each instance the price was to be*1380  paid in five equal annual installments, with interest at 6 percent per annum, the first payment of principal and interest falling due on January 1, 1924.  The notes contained a statement that the stock was pledged as collateral security and that default upon any of the notes matured all of the series of notes.  The stock certificates, issued in the names of Cummins and Wilson, respectively, were immediately endorsed in blank by them and delivered, together with the notes, to the vendors.  Wilson and Cummins never saw the stock certificates again, nor did they *243  know what was done with them.  They never voted the stock and gave proxies to the nominees of the holders of the notes.  On May 15, 1923, the Ritter Co. purchased 19,990 shares of common stock and 7,061 shares of preferred stock of the Consolidated Co. and 1,222 shares of common stock of the Jr. Co.  Four shares of common stock of each company were then issued in the names of four individuals as qualifying shares.  On the same date the Ritter Co. also acquired all of the above mentioned notes of Cummins and Wilson, together with possession of the stock pledged as collateral.  The notes were held by the Ritter Co. *1381  under the same terms as they were held by the previous holders, including the right to vote the collateral stock.  Except for the stock standing in the names of Cummins and Wilson, the remainder of the stock outstanding in the hands of individuals consisted of 27 shares of common and 25 shares of preferred stock of the Consolidated Co. and 37 shares of common stock of the Jr. Co.  On August 1, 1924, the Ritter Co. acquired the 37 shares of common stock of the Jr. Co.  On March 20, 1925, and November 14, 1926, the Ritter Co. acquired five shares and 20 shares, respectively, of the preferred stock of the Consolidated Co.  At no time between May 15, 1923, and November 18, 1926, did the Ritter Co. sell any of its stockholdings in the Consolidated Co. and the Jr. Co.  The operations of the Consolidated Co. and the Jr. Co. were not successful in 1923 and no dividends were paid in that year, nor during the next four years.  Toward the latter part of 1923 Wilson and Cummins, knowing that their notes maturing on January 1, 1924, would not be paid out of dividends in accordance with the agreement, discussed the matter with the officers of the Ritter Co.  In December 1923 the officers of the*1382  Ritter Co., acting in their official capacity, and Wilson and Cummins abrogated the above mentioned stock purchase agreement by mutual oral consent.  They further orally agreed that all the notes be then canceled, that the stock be reissued in the name of the Ritter Co., and that thereafter Wilson and Cummins would have an option to purchase the stock at the prices formerly agreed upon, so long as they paid annual amounts equivalent to the interest on the canceled notes.  The Ritter Co. made no demand for or attempt to collect interest or principal due on the notes.  Wilson and Cummins each made two payments to keep the option alive, one on January 1, 1924, and the other on January 1, 1925.  No payments were made thereafter and the payments made by Cummins were later returned to him.  Inadvertently, the notes were not marked canceled and the stock certificates stood in the names of Wilson and Cummins until November 1926, when the question of affiliation arose between petitioners *244  and the Government.  The Ritter Co. thereupon caused the stock certificates, issued in the names of Wilson and Cummins in 1923, to be issued in its name on November 9, 1926, in the case of the*1383  Jr. Co. stock and on November 18, 1926, in the case of the Consolidated Co. stock.  Beginning with May 15, 1923, the Consolidated Co. and the Jr. Co. occupied the same offices with the Ritter Co. in Columbus, Ohio, and the executive officers of the latter served in an executive capacity for the former.  The Ritter Co.'s legal department, engineering department, purchasing agent, advertising agent, and salesmen rendered considerable service to the Jr. Co. and the Consolidated Co. without charge.  Between 1923 and 1926 the Ritter Co. loaned the Consolidated Co. and the Jr. Co. a total of $600,000.  Beginning with May 15, 1923, the Ritter Co. determined who the directors and officers of the Consolidated Co. should be.  Petitioners and other companies affiliated with them filed consolidated returns for the years 1923 to 1928.  Respondent, however, determined that the Consolidated Co. and the Jr. Co., while as between themselves affiliated from May 15, 1923, to November 18, 1926, were not affiliated with the other petitioners for the years 1923 to 1925, inclusive, or for the period January 1 to November 18, 1926.  Issue Nos. 9 and 10 - Net Loss Application.The stipulation entered*1384  into between the parties sets forth the following: The taxable income or loss, as determined by Respondent, for the years 1921 to 1926, inclusive, was as follows: YearConsolidated CompanyJr. Company19211 $165,551.071 $52,459.9119221 102,950.631 7,167.7819231 11,334.291 11,972.12192476,094.941 30,311.93192545,775.036,887.78192685,939.3928,800.36(In determining the income of the Consolidated and Jr. Companies for the period November 18, to December 31, 1926, Respondent made an apportionment of the total income of said companies as computed by him for the year 1926 on a time basis, i.e., in the ratio of 1 13/30ths months to 12 months.  The allocated income for the period from November 18, 1926, to December 31, 1926, was accordingly determined by Respondent to be $10,264.97 in the case of the Consolidated Company, and $3,439.89 in the case of the Jr. Company.  The same method of apportionment would apply in determining the income of said companies for any period less than a full year.) *245  The amounts of taxable income or loss for the years 1921 to 1926, both inclusive, shown above, are after*1385  considering as deductions in the case of the Consolidated Company, from the taxable income or loss, deductions for the years 1921 to 1926, of dividends received on stock of domestic corporations as follows: YearDividends Received1921$58,385.00192238,367.50192364,130.001924$8,565.00192516,935.00192618,217.50There were no such dividends received by the Jr. Company in any of said years.  Neither company had any tax-free interest or any losses not sustained in their trade or business, and there were no deductions for discovery depletion.  Respondent did not allow any deductions from the consolidated income of the Consolidated and Jr. Companies for statutory net losses (as provided by section 204 of the Revenue Act of 1921 and section 206 of the Revenue Act of 1924 and 1926) if any, sustained from January 1, 1921 to November 18, 1926, or any part of said period.  Respondent did not allow any deduction from the consolidated income of Petitioners for statutory net losses, (as provided by section 204 of the Revenue Act of 1921 and section 206 of the Revenue Acts of 1924 and 1926) if any, of the Consolidated and Jr. Companies, sustained prior*1386  to November 18, 1926.  Issue Nos. 11 and 12 - Foreign Tax Credit.The stipulation entered into between the parties sets forth the following: Petitioner, Ritter Company, owned during the years 1920 to 1928, inclusive, a majority of the voting stock of The Ritter Lumber Company, Ltd., of London, England, a corporation organized under the laws of the United Kingdom of Great Britain, on November 18, 1904.  Dividends were received by the Ritter Company from said foreign corporation during the years herein involved, stated in dollars (the rate of exchange used being at the date of the receipt thereof), as follows: 1920$32,983.36192114,157.36192212,742.8819249,574.661925$16,063.5419269,557.7719279,564.53192814,350.49The said dividends received by the Ritter Company were not deductible and were not treated as deductions by Respondent in computing Ritter Company's taxable income for the respective years.  The proportionate amount of British income, war profits tax and excess profits taxes (in dollars) paid by the Ritter Lumber Company, Ltd., upon or with respect to the taxable income of such foreign corporation on which such taxes*1387  were paid in connection with the 1920 dividend, and upon or with respect to the accumulated profits of said foreign corporation from which such dividends were paid with respect to the dividends of 1921 to 1928, both inclusive, and deemed to have been paid by the Ritter Company, is as follows: 1920$11,944.2819216,349.4519225,715.3019241,812.081925$3,087.2719262,487.0919272,494.1319283,584.13*246  Respondent did not allow Petitioners any credit against their taxes for the years 1920 to 1926, inclusive, and allowed a credit of $1,832.92 for the year 1927, and $1,722.24 for the year 1928, by reason of the foreign taxes deemed to have been paid by Ritter Company.  Respondent did not allow any deduction for the excess of the foreign taxes deemed to have been paid by Ritter Company over the amount to which Petitioner, Ritter Company, is entitled as a credit against its tax liability.  Issue No. 13 - Deductibility of Certain Expenditures.In the years 1920 to 1927 the Ritter Co. and the Raleigh Co. made the following expenditures, representing their respective contributions to a fund for walfare and betterment work among their*1388  employees living at the dozen or more company mill and camp sites: YearRitter Co.Raleigh Co.1920$922.481921981.95$191.501922902.57374.451923830.00235.001924$1,023.00$288.001925765.00185.001926855.00250.001927920.00182.50Prior to 1915 the Ritter Co. and Raleigh Co. employees, at the respective mills, formed committees for the purpose of collecting and distributing money for the benefit of needy employees and their families.  These collections and distributions were made annually, generally about Christmas time.  The committees solicited payments from the Ritter Co. and the Raleigh Co., which soon found that the welfare work was a direct benefit to their businesses by increasing the morale of the employees.  During the years in question the contributions were made without solicitation and as an established business policy of the companies.  The amounts paid by the Ritter Co. and the Raleigh Co. at the various mills were determined by the number of employees and the size of the operations.  The entire community at the various mills consisted solely of company employees and their families.  Only employees and their*1389  families were distributees of the moneys.  The exact method of distribution was left to the employees' committees.  The companies never experienced a strike, and have always had a very los labor turnover.  These payments were not made to any extent from philanthropic motives, but purely for business purposes.  In the years 1923 to 1928 the Ritter Co. made the following expenditures to the Columbus Community Fund: 1923 $60019242,40019253,0001926$3,60019273,00019283,000*247 The Columbus Community Fund, a corporation, was organized in 1923 for the purpose of supplying relief to unfortunate families and individuals in the City of Columbus and in Franklin County, Ohio.  It had the support and guidance of leading business, political, and other interests of the community and once a year it carried on an intensive campaign for contributions.  The funds collected were administered by it through about 40 agencies such as hospitals and charities.  None of petitioners' employees received any benefits from the Community Fund.  The Ritter Co.'s executive offices have been located in Columbus, Ohio, since 1900.  It has employed in its offices*1390  an annual average of approximately 50 to 100 persons, all of whom were residents of Columbus.  The Ritter Co. is the largest hardwood lumber manufacturing enterprise having its offices in the State of Ohio.  It has at all times done a substantial business in Ohio and from 1923 to 1928 the average annual sales amounted to a half million dollars, a substantial portion of which was in the city of Columbus.  In the solicitations by the Columbus Community Fund, great pressure was brought to bear upon business concerns, and the failure to contribute resulted in bad repute.  On the other hand, concerns which did contribute were given favorable publicity through the announcements of the subscriptions in newspapers, business luncheon meetings, and the like, especially where the contributions were substantial in amount.  The Ritter Co.'s officers determined, as a matter of business policy, that it should make contributions to the Community Fund in order to maintain a favorable business standing.  The amount of the subscription was determined annually upon the basis of what the Ritter Co. thought it could or ought to pay into the Community Fund commensurate with the benefits that it would receive. *1391  In making these payments, the Ritter Co. was motivated by business rather than philanthropic purposes.  In the years 1920 to 1928 the Flooring Co. made expenditures to forty or more charitable, religious and educational organizations in various amounts as set forth in petitioners' Exhibit 91, incorporated herein by reference.  All of these payments were made at the solicitation of customers of the Flooring Co., which had its offices in New York City and transacted substantially all of its highly competitive hardwood flooring business in that city and the adjoining regions.  The officers of the Flooring Co. determined, as a matter of business policy, that it had no alternative other than to make such payments in order to maintain the good will and business of its customers, especially in view of the fact that other flooring concerns in New York followed the practice of making such subscriptions at the solicitation of *248  customers.  The Flooring Co. was in no way interested in the contributees and its employees received no benefit therefrom.  The payments were not motivated by philanthropic considerations, but solely by business considerations.  In 1922 the Ritter Co. *1392  made payments as follows: Innes Crichton$3,500A. R. Pryor3,500J. P. Withers400W. R. Williams400These men were employees of the Ritter Lumber Co., Ltd., of England, which was engaged in the business of selling abroad the products of the Ritter Co.  They had been in charge of sales for the English company from ten to fifteen years and were very successful.  The sales they made in 1922 were profitable to the Ritter Co., which made such payments to reward them for their excellent work and to stimulate them to greater efforts.  The payments formed no part of the compensation the men received from the English Co. and they were not employees of the Ritter Co.  None of the payments in issue were considered at directors' or stockholders' meetings, but were made by the officers, who considered them as within the usual and regular routing of trade promotion.  With the exception of $922.48 claimed by the Ritter Co. for the year 1920 with respect to the contributions made for welfare work at its mills and camps, none of the payments were claimed by petitioners as deductions on their returns for the respective years, because of the disallowance of such items in*1393  prior years.  Respondent disallowed as a deduction the $922.48 for the year 1920, and did not allow any of the other payments as a deduction for the respective years.  Issue Nos. 14 and 46 - Deductibility of Expenditures for Mine Equipment and for Dredging and Road ResurfacingOn January 1, 1923, the Consolidated Co. was operating three mines known as Mitchell Branch, No. 8, and No. 32, and the Jr. Co. was operating the Jr. Mine.  Mine No. 5 and Mine No. 6 were placed in operation by the Consolidated Co. in 1923 and 1924, respectively.  All of these mines were drift mines, that is, a horizontal underground passage was excavated along the course of the coal vein or stratum on an up grade from the watershed level.  All the mines in operation on January 1, 1923, had passed the development stage and No. 5 and No. 6 Mines passed their development period in 1925 and 1926, respectively.  A mine passes the development period when production reaches the predetermined tonnage for which the mine was designed.  The tipple capacity *249  controls the production capacity of the mine, and no change took place in the tipple capacity of the respective mines between 1923 and 1928.  *1394  The mining operations were conducted by what is known as the room and pillar method, by which the mine area is divided into panels separated by barrier pillars, so that the coal included in these panels, or working areas, can be totally extracted without interfering with adjacent areas.  In this method of mining there is a constant advance of the working faces.  In petitioners' mines the advance was accelerated by the fact that the coal seams were thin.  The effect of these advances is to increase the number of units of mining equipment required to maintain the same production, on account of the longer hauls, the wider distribution of the work, and the reduced efficiency of shifting equipment from one face to another.  During the years 1923 to 1928 there was no material increase in production as compared with some of the years preceding 1923.  The amount of production of a developed mine will vary from year to year, depending upon the market, shipping and labor conditions.  The newly developed Mines Nos. 5 and 6 showed slight increases in production from year to year.  During the years 1923 to 1928, inclusive, the Consolidated Co. and the Jr. Co. made certain expenditures, as set*1395  forth in petitioners' Exhibits 103 and 104, incorporated herein by reference, for steel rails, copper wire, mine cars, locomotives, mining machinery, fans, pumps and motors.  Although each item of such equipment had a useful life in excess of one year, it was purchased and used in the respective years because of the advance in working faces in the several mines and for the purpose of maintaining their normal production.  None of the equipment was purchased for the purpose of increasing the normal output of the several mines, nor for decreasing the cost of operations or increasing the value of the mines or their output; nor did the installation of such equipment have that effect.  The Consolidated Co. and the Jr. Co. made the following expenditures for tipple alterations: YearConsolidated Co.Jr. Co.1923$17,300.73192415,068.14$16,415.07192531,933.48589.581926710.00Mine No. 32, operated by the Consolidated Co., had two seams of coal, the quality of which differed materially, and the tipple was designed to handle the coal from these seams without separation.  The customers complained about the quality of the coal and it was found *250 *1396  that, in order to keep the market and the price for the coal from Mine No. 32, there would have to be a separation of coal mined from the two seams.  The expenditures relating to the alterations of the tipple at Mine No. 32 represent the cost of separate conveyors to handle the coal from the two seams.  The alternations did not increase crease the capacity of the tipple and increased rather than decreased the cost of operating the tipple.  The alterations did increase the value of the output so far as coal from the best seam was concerned and preserved the market and the sale price for coal from that mine.  The Mitchell Branch Mine, operated by the Consolidated Co. and the Jr. Mine, operated by the Jr. Co., had tipples which were designed and operated without loading booms and picking tables.  It was found that their loadings contained slate, which resulted in complaints from customers.  Expenditures were made for loading booms and picking tables to eliminate the slate, which, although they did not increase the capacity of the tipples, resulted in maintaining the market and the sale price, due to the better quality of the output.  All of the items set forth in petitioners' Exhibits*1397  103 and 104, including the expenditures for tipple alterations, were capitalized on petitioners' books, were not claimed as deductions on the tax returns for those years, and were not allowed as deductions by the respondent.  During 1927 and 1928 the Consolidated Co. expended $11,699.47 and $18,273.61, respectively, in connection with the dredging of Mitchell Branch Creek, the disposal of materials dredged, and the resurfacing of Mitchell Branch road.  For many years prior to 1927 the Consolidated Co. had followed the practice of dumpting into Mitchell Branch Creek the refuse from picking and cleaning coal from its mines located on the creek.  By 1927 the accumulation of refuse had caused the creek to get out of bounds and to interfere with the operation of the mines.  The dredging work was completed in 1927 at a cost of approximately $7,000, although it was impossible to segregate accurately the cost of such work from the cost of the road work carried on at the same time during that year.  Gravel dredged from the creek was used on the road.  The remainder of the expenditures represents the cost of the road work.  The road, a private one about two miles long, parallels Mitchell*1398  Branch Creek from a public highway to the mines, and was used by employees and for hauling light materials.  The new road surface had a useful life of more than one year.  The dredging and road work did not increase the normal output of the mines, but it was an improvement to the mine property.  The expenditures were charged to expense.  The respondent refused to allow such expenditures as business expense deductions for the years 1927 and 1928, respectively.  *251 Issue No. 21 - Statute of Limitations.At the trial of the cases petitioners abandoned that part of this issue relating to the year 1926, and the parties agreed that petitioners' returns for the years 1920, 1922, and 1923 were filed on March 15, 1921, March 15, 1923, and March 15, 1924, respectively, except that the Ritter Co.'s return for 1922 was filed on March 14, 1923.  The Raleigh Co. filed a separate return for each of those years.  The Ritter Co. in its returns for the years 1920 and 1922 included, besides its own net income, the net income of the Flooring Co., Big Sandy Co., Smoky Mountain Co., Knox Creek Co., and Winding Gulf Co.  The Ritter Co. in its return for the year 1923 included, besides*1399  its own net income, the net income of the Flooring Co., Smoky Mountain Co., Winding Gulf Co., Consolidated Co., and Jr. Co.  On or about the following dates the petitioners and the respondent entered into the following waivers to extend the respective periods of limitation for making any assessment for the years in question, as follows: Waiver dated - Taxable yearPeriod of assessment extended to - Ritter CoOct. 27, 19261920, 1922Dec. 31, 1927.Ritter CoOct. 2, 19261922, 1923Dec. 31, 1927.Ritter CoOct. 5, 19271920 to 1923, inclDec. 31, 1928.Knox Creek CoOct. 2, 19261922, 1923Dec. 31, 1927.Knox Creek CoOct. 5, 19271920 to 1923, inclDec. 31, 1928.Big Sandy CoOct. 2, 19261922, 1923Dec. 31, 1927.Big Sandy CoOct. 5, 19271920 to 1923, inclDec. 31, 1928.Raleigh CoNov. 23, 19251920Dec. 31, 1926.Releigh CoOct. 27, 19261920, 1922Dec. 31, 1927.Raleigh CoOct. 5, 19271920 to 1923, inclDec. 31, 1928.The respondent's notices of deficiencies for the years 1920, 1922 and 1923 were mailed to the several petitioners on December 27, 1928.  No deficiencies were determined against the Big*1400  Sandy Co. and the Know Creek Co. for the years 1920 and 1922.  Issue No. 22 - Employees' Stock Bonus.  Issue No. 23 - Dividend credits on stock not paid for, as compensation.  Issue No. 24 - Invested capital as related to Issue 22.In 1919 the Ritter Co. had a very profitable year, its mills were running at top speed and lumber prices were advancing, but the advances in costs were not keeping pace with lumber prices.  However, there was considerable unrest among labor and the Ritter Co. lost several of its employees, holding key positions, to competitors.  *252  The aspects of the situation appearing to be serious, the Ritter Co. determined to give practically all of its employees a bonus as compensation for faithful services rendered in the past and particularly during 1919.  The plan was to sell Ritter Co. common stock to the key men at a price below its market value, the difference to constitute a bonus, and to pay the other employees a cash bonus based on length of service, salary and efficiency.  The purpose of the stock bonus was to bind the key men closer to the organization by their having an interest in the corporation's earnings.  W. M. Ritter*1401  selected twenty-five employees on the basis of their position, length of service, salary and efficiency to participate in the stock bonus.  He also fixed the price at which the stock would be sold to those employees and the number of shares each could buy, so that the difference between the purchase price and market value would be approximately equivalent to 50 percent of their respective 1919 salaries.  The selected employees were called to Columbus and the plan, its purpose and the terms of the contract submitted to them were fully explained.  At that time none of those employees owned any Ritter Co. stock because it was closely held.  On December 1, 1919, the Ritter Co. entered into written contracts with each of the twenty-five key men employees.  Briefly, the contract provides that the fact that the purchaser is an employee is, to a great extent, the consideration that moves the company to enter into this agreement; that the price is $100 per share; that the purchaser is to contemporaneously execute his nonnegotiable note payable to the company on or before December 1, 1929; that no interest is to be charged except at the rate of 5 percent on any balance due after the first*1402  five years; that the purchaser may pay for the stock in whole or in part at any time he so desires within ten years; that the total number of shares is to be issued and delivered to the purchaser and immediately endorsed by him and redelivered to the company as collateral security; that cash dividends shall, as to stock held as security, be applied to the purchase price; that from time to time, when as many as five shares have been paid for by cash and/or dividend credits, such shares shall be delivered to the purchaser; that in the event of death of the purchaser his personal representative may, within twelve months, pay the balance due and receive all or any part of the stock held by the company as collateral; that in the event the purchaser's employment by the company ceases, except by death, the agreement shall terminate and the company shall issue to him stock to the amount of any accumulated credits by cash and/or dividends and deliver to him his note; and that the contract is not negotiable or assignable.  Upon the execution of the agreements and the notes on December 1, 1919, the Ritter Co. issued a total of 745 shares of its common *253  stock in the names of the twenty-five*1403  employees participating in the stock bonus plan.  At the same time cash bonuses were paid to other employees.  The bonus arrangement stimulated the efforts of employees and the year 1920 was even more profitable than 1919.  The Ritter Co. decided to continue the bonus plan and on December 1, 1920, executed agreements with thirty-six of its key men employees, substantially the same in substance and form as for 1919, except that the price was $110 per share with interest at 5 percent per annum.  Upon the execution of the agreements and notes on December 1, 1920, the Ritter Co. issued 980 shares in the names of such employees.  The fair market value of the Ritter Co. common stock was $271.72 per share on December 1, 1920.  Cash bonuses were paid to the other employees.  On December 1, 1921, the Ritter Co. executed substantially the same agreements with forty-three of its key men employees, except that the price was $100 per share, with no interest for the first year and 5 percent thereafter.  On December 1, 1921, the Ritter Co. issued 1,073 shares of its stock in the names of such employees and on that date the fair market value thereof was $247.50 per share.  Cash bonuses were paid*1404  to the other employees.  On December 1, 1922, the Ritter Co., in continuing its 1919 bonus plan, again executed substantially the same agreements with forty-three of its key men employees, except that the price was $110 per share, with interest at 5 percent per annum.  On December 1, 1922, the Ritter Co. issued 1,113 shares of its stock in the names of such employees and on that date the fair market value thereof was $248.83 per share.  Cash bonuses were paid to the other employees.  The stock bonus plan was approved by the Ritter Co.'s board of directors.  After 1922 the plan was discontinued because the company's officers felt that the employees had acquired a sufficient number of shares to insure their receipt of considerable amounts in dividends.  The various contracts were carried out and every employee made some payments, totaling approximately $170,000 in 1932, for the stock in addition to the dividend credits.  In each of those years the cash salary paid each employee, plus the value of his stock bonus, constituted reasonable compensation for services actually rendered.  The cash bonuses paid to other employees ranged from 20 to 50 percent of their salaries and the total*1405  amount paid to each employee constituted reasonable compensation for services rendered.  The compensation paid in cash to certain employees of the Ritter Co. for the years 1920 and 1928, inclusive, was as set forth in petitioners' Exhibit 94, incorporated herein by reference.  Cash dividends on *254  employees' stock for the years 1920 to 1928, credited on shares not then fully paid for, were as set forth in petitioners' Exhibit 95, incorporated herein by reference.  During those years, dividends on shares fully paid for and delivered to the employees were paid to the employees.  The respondent allowed no deduction for those years, as compensation to employees or otherwise, of the amounts represented by the difference between the agreed purchase price and the fair market value of the stock at the date of the execution of the several agreements.  The respondent made no allowance or deduction, as additional compensation to employees, of amounts set out in petitioners' Exhibit 95 representing dividends credited to employees' accounts as payments on stock then held by the company as collateral.  The respondent, in computing the Ritter Co.'s invested capital for 1920, took*1406  the price per share expressed in the 1920 contract, that is, $110 per share, as the actual cash value bona fide paid in per share for such stock.  Issue No. 30 - Invested Capital for Rough Lumber Inventories.The rough lumber inventories of the Ritter Co. and the Raleigh Co., as at January 1, 1920, which were used by respondent in computing taxable income for the year 1920 were as follows: Ritter Co.Thousand feetCorrected cost, including Mar. 1, 1913, depletion valueAmount40,0651 $34.62 per M $1,387,181.68Raleigh Co.9,4091$42.84 per M $403,081.56The rough lumber inventories of the Ritter Co. and the Raleigh Co. as at January 1, 1920, which were used by respondent in computing invested capital for the year 1920 were as follows: Ritter Co.Thousand feetActual costAmount40,0651$33.657 per M $1,348,599.08Raleigh Co.9,4091$42.388 per M $398,828.69*255  In computing the consolidated invested capital of petitioners for the year 1920 respondent used the actual cost of rough lumber inventories on January 1, 1920, as set forth above. *1407 Issue No. 33 - Depletion Calculation for Inventories.The stipulation entered into between the parties sets forth the following: (a) The depletion deducted by the Raleigh Company for the year 1920 was $159,279.99.  Of that amount Respondent allowed $117,258.24.  (b) In computing cost of manufacturing for the year 1920 in order to determine the Raleigh Company's inventory at December 31, 1920, Respondent used as the amount for depletion $159,279.99, instead of $117,258.24, the amount allowed by him.  (c) In determining income of the Raleigh Company for the year 1920, Respondent used the cost inventory figures so resulting.  Issue No. 34 - Application of Any 1921 Net Loss.The stipulation entered into between the parties sets forth the following: (a) Respondent determined that Petitioners (other than the Consolidated and Jr. Companies) had a net taxable income in the year 1921 of $11,372.67.  This amount it after considering as a deduction $75,000.00 of dividends on stock of domestic corporations.  There were no losses not sustained in the trade or business of said petitioners, no deductions for discovery depletion, and no tax-free interest, except for $59,384.00*1408  of interest in United States obligations, which was subject to excess profits tax, and was so taxed.  (b) Respondent made no deduction from the net income of Petitioners for the year 1922 and/or 1923 for statutory net loss or losses, if any (as provided by section 204 of the Revenue Act of 1921).  Issue No. 35 - Gain or Loss on Sale of Big Sandy Stock - March 1, 1913, Value of Big Sandy Stock.Under date of October 12, 1923, the Ritter Co., the Big Sandy Co., and the Norfolk & Western Railway Co. entered into an agreement of sale as set forth in petitioners' Exhibit 74, included herein by reference.  Pursuant thereto the Ritter Co. received from the Norfolk & Western Railway Co. a consideration of $600,000 for (1) all the stock (1,000 shares) of the Big Sandy Co. transferred to the Norfolk & Western Railway Co.; (2) the conveyance by the Ritter Co. to the Big Sandy Co. of title to the main line right of way, roadbed, and steel rail over which it then operated under a lease, and, further, (3) the assumption by the Ritter Co. of the liabilities of the Big Sandy Co., amounting to $99,290.14, the Ritter Co. receiving the nonrailway assets, amounting to $8,483.16, of the Big Sandy*1409 *256  Co. and also of the Knox Creek Railroad Co., all of the stock of which was owned by the Big Sandy Co.  Of the 1,000 shares so transferred, the Ritter Co. acquired 500 shares in 1901 at a cost of $50,000, and the March 1, 1913, fair market value of such stock was not in excess of cost.  The other 500 shares were acquired by Ritter Co. in 1919 at a cost of $50,000 by giving the Big Sandy Co. a credit in that amount against advances theretofore made by the Ritter Co. to the Big Sandy Co.  Between 1901 and June 30, 1909, the Big Sandy roadbed construction account amounted to $60,993.12, representing actual cost.  Due to the fact that Ritter Co. owned the rights of way, it took over the roadbed at the cost thereof to the Big Sandy Co. on June 30, 1909.  Between that date and March 1, 1913, the Ritter Co. expended $49,753.43 for roadbed construction of the Slate Creek extension.  The March 1, 1913, fair market value of such roadbed construction, consisting primarily of grading and ballast, was at least equal to cost.  Between March 1, 1913, and October 1923, the Ritter Co. expended $18,774.10 for roadbed construction, principally for the extension down Slate Creek to Grundy, *1410  located on the Levisa River.  Throughout those years, the replacements and repairs made by the Ritter Co., the cost of which was charged off as an expense, more than offset any depreciation which might have otherwise been sustained up to October 1923, when the roadbed was conveyed to the Big Sandy Co. pursuant to the agreement of sale.  Respondent has allowed no deductions for depreciation on such roadbed construction.  Certain of way transferred to the Big Sandy Co. under the agreement of sale cost the Ritter Co. $7,573.56.  The steel rail used on the Big Sandy road was leased by the Ritter Co. and under the agreement of sale the latter purchased the rails in October 1923 at a cost of $78,873.92 and transferred them to the Big Sandy Co.  The sale of the Big Sandy stock and other properties constituted one transaction and the cost, the consideration received, and the gain derived were as follows: Gross sale price$600,000.00Cost of Big Sandy stock (1,000 shares)$100,000.00Cost of roadbed construction (depreciation offset by replacements and repairs)129,520.65Cost of rights of way7,573.56Cost of steel rail78,873.92Liabilities assumed99,290.14415,258.27Less: Nonrailway assets acquired8,483.16Basis406,775.11Taxable gain193,224.89*1411 *257 Issue No. 39 - March 1, 1913, Value of Norfolk & Chesapeake Coal Co. Stock, and Gain or Loss on Sale.In 1924 the Consolidated Co. sold 1,020 shares of Norfolk & Chesapeake Coal Co. stock for $140,000.  Of the 1,020 shares the Consolidated Co. acquired 510 shares in 1908, for cash and certain sale contracts, at the organization of the Norfolk & Chesapeake Coal Co. and 510 shares as a stock dividend in 1922.  The fair market value at March 1, 1913, of the 510 shares of stock of the Norfolk & Chesapeake Coal Co. then owned by the Consolidated Co., was $130,000.  The taxable profit realized by the Consolidated Co. by the sale in 1924 was in the amount of $10,000.  Issue No. 41 - Apportionment of Tax.For the years 1925 and 1926 the consolidated return filed by the Ritter Co. included the net income of the Consolidated Co. and the Jr. Co.  The two latter companies filed information returns on Form 1122 for each of those years, setting forth that no part of the consolidated tax was to be allocated to them.  For the taxable year 1925 the Ritter Co. was originally assessed and it paid in 1926 a tax of $119,866.69.  In determining the deficiency against the*1412  Ritter Co. for 1925 the respondent allocated to and treated as having been assessed against and paid by the Consolidated Co. and the Jr. Co. the amount of $6,846.17 out of the $119,866.69 previously paid by the Ritter Co.  For the taxable year 1926 the Ritter Co. was originally assessed and it paid in 1927 a tax of $153,440.88.  In determining the deficiency against the Ritter Co. for 1926, the respondent allocated to and treated as having been assessed against and paid by the Consolidated Co. and the Jr. Co., the amount of $14,931.33 out of the $153,440.88 previously paid by the Ritter Co.  Respondent determined that the Consolidated Co. and the Jr. Co. were not affiliated with the Ritter Co. for the year 1925 and the period January 1 to November 17, 1926.  However, he allowed affiliation as to the other subsidiaries, included in the original consolidated return filed by the parent (Ritter) company, and, inasmuch as the subsidiaries filed Form 1122, he allocated no additional tax to those subsidiaries for the years 1925 and 1926.  Issue No. 43 - Loss on Liquidation of Subsidiary.The parties have stipulated as follows: Prior to March 1, 1913, the Ritter Company acquired*1413  25 shares, representing all of the capital stock of the Winding Gulf Company, at a cost of $2,500.  On July 6, 1925, the Winding Gulf Company filed a certificate of dissolution with the State authorities, and in 1926 the company was liquidated, as a result of *258  which the Ritter Company received in said year of 1926, $912.22 in exchange for said 25 shares of stock.  For the years 1917 to 1925, inclusive, and for 1926 up to the date of final liquidation, the Winding Gulf Company was included in the consolidated returns with the Ritter Company, and Respondent made no change in that respect.  Petitioners deducted a loss of $1,587.78 in their 1926 return, in connection with the said disposition of the Winding Gulf Company stock.  Prior years' losses of the Winding Gulf Company, as determined by Respondent, used as a deduction in consolidated income for such prior years, was $411.54, of which $33.49 was for the year 1917, and was deducted in that year only for excess profits tax purposes.  On the date of final liquidation in 1926 the Winding Gulf Company's deficit, as shown by its books, was $1,587.78.  Respondent allowed Petitioners no deduction with respect to said disposition*1414  of the stock of the Winding Gulf Company.  Issue No. 44 - Loss on Liquidation of Subsidiary.The parties have stipulated as follows: Prior to March 1, 1913, the Ritter Company acquired all of the capital stock of the Smoky Mountain Company at a cost of $50,000.00.  In the year 1927 the Smoky Mountain Company was liquidated and dissolved.  At the time of the dissolution the Smoky Mountain Company was indebted to the Ritter Company for cash advances in the amount of $28,920.88.  In the liquidation and dissolution the Ritter Company realized noting from said indebtedness or from its stock.  Ritter Company ascertained the indebtedness of $28,920.88 to be worthless in the year 1927, and charged it off in that year, - it also sustained in that year the loss in its investment of $50,000.00 in the stock of the Smoky Mountain Company, provided that, as a matter of law, a loss or a bad debt can be recognized as deductible in such transaction.  For the years 1917 to 1926, inclusive, and for 1927 up to the date of final liquidation and dissolution, the Smoky Mountain Company was included in the consolidated returns with the Ritter Company and Respondent made no change in this respect. *1415  In Petitioners' returns for the years 1917 to 1927, losses of the Smoky Mountain Company, aggregating $49,403.69 were offset against income of other Petitioners, of which $5,291.88 is applicable to the year 1917, and was offset against income of other Petitioners for excess profits tax purposes only.  Respondent determined the loss of the Smoky Mountain Company for 1917 to be $2,793.88.  In the 1927 return Petitioners deducted as a loss on the dissolution of the Smoky Mountain Company, $29,517.19, arrived at by deducting said amount of $49,403.69 from $78,920.88 (the total of said stock cost, of $50,000.00, and said indebtedness of $28,920.88).  Respondent disallowed said deduction of $29,517.19.  Issue No. 45 - Loss on Liquidation of Subsidiary.The parties have stipulated as follows: In 1904 the Consolidated Company acquired all the capital stock of the Hull Coal and Coke Company at a cost of $105,000.00.  In the year 1927 the Hull Coal and Coke Company was liquidated and dissolved, and the Consolidated *259  Company realized nothing on its investment of $105,000.00.  Petitioners sustained a loss in said amount in said year, provided that, as a matter of law, *1416  a loss can be recognized as deductible in such a transaction.  Petitioners deducted $105,000.00 in their return for the year 1927, as a loss on said stock.  Respondent disallowed the said deduction of $105,000.00.  As the date of final dissolution and liquidation in 1927, and since January 1, 1923, the Hull Coal and Coke Company was included in the consolidated returns filed by the Ritter Company and its claimed affiliates.  Respondent made no change in this respect, except to hold that Consolidated Company, Jr. Company and Hull Coal and Coke Company were not affiliated with Ritter Company and its claimed affiliates prior to November 18, 1926.  OPINION.  LEECH: In presenting the evidence upon which the first issue must be decided the parties have submitted for our consideration a most voluminous record, consisting of the testimony of numerous expert witnesses, maps, publications, schedules, computations, and timber questionnaires.  This opinion would be interminable if we endeavored to include in our findings of fact all of the data considered in arriving at the March 1, 1913, values as found for the five blocks of timber, respectively.  A careful study has been made of the*1417  maps, data, and testimony showing the relative location and topography of the timber tracts and of the effect of consolidation of numerous tracts into compact boundaries for block operations.  Also, the thickness of the stand of timber per acre, the species distribution, the size and quality, the availability of the timber to the mills and of the mills to the consuming markets, the mill run value and cost of production of lumber produced from the blocks, and other factors upon which the expert witnesses founded their opinions, including the fact that all of the blocks, except one (Nantahala), were being profitably logged at the basic date.  We are confronted with the problem of determining the March 1, 1913, value of timber, largely upon opinion testimony, for, while we have before us a great mass of factual evidence as to the nature of the properties on the basic date, we are not timber experts.  However, having before us those basic facts upon which the expert witnesses founded their conclusions as to values, we are able to determine the weight to be given to the testimony of some thirteen experts whose opinions do, and probably should, differ.  The witnesses' education, training, *1418  experience, and peculiar knowledge of the facts are essential requirements.  We need not review the qualifications of each of the numerous witnesses.  Suffice it to say that more weight has been given to the opinions of petitioners' witnesses than those of the respondent for *260  the reason that, collectively, they were more thoroughly acquainted with the basic facts as they existed prior to and at March 1, 1913, and, through their experience with purchases and sales and the actual operation of timber properties, possess higher qualifications in reference to the properties in controversy.  Some of respondent's witnesses, although timber men, had never inspected the properties in question, except briefly a few weeks preceding the trial and after millions of feet of timber had been cut off during the intervening years.  Most of the sales to which respondent's witnesses testified have been disregarded entirely because of the lack of details necessary to determine the comparability, if any, to the properties in question.  Testimony as to other sales is entitled to little weight, due to the location of the properties and slight comparability as to the species of the trees, the*1419  areas, and logging conditions.  While we are of the opinion that the whole range of values to which respondent's witnesses testified is too low, in our judgment the values now sought by petitioners, which are in excess of those we have found, are not sustained by the record.  The values we have found are the same as those set out by petitioners in the several timber questionnaires prepared and filed during 1919 and 1920.  Petitioners are not bound by those valuations in the sense that they may not now prove different values.  Cf. Spreckels v. Brown,212 U.S. 208">212 U.S. 208, 210. However, petitioners' principal witnesses in this proceeding fixed those values 13 or 14 years nearer the basic date while acting upon the facts and circumstances known by them to exist or reasonably to be anticipated at March 1, 1913.  Valuations are at best a matter of opinion and, after study of the basic facts as to the property itself, the opinions of the experts and weight to be given each, the conflicting mathematical computations of estimated future realization per thousand feet, and other data, it is our judgment that the record substantiates the values we have found.  The recomputation*1420  of the depletion deduction for each of the years in question will be made under Rule 50 upon the basis of such values and the data as stipulated in petitioners' Exhibits 33 to 36, inclusive, incorporated in the findings by reference.  Issue No. 2 - Invested Capital and Basis for Depletion for Years 1920 to 1928 Western Pocahontas Tract.This issue involves the question of whether the timber on the Western Pocahontas tract was purchased or leased in 1909, and the cost basis of such timber which had not been cut on January 1, 1920, for the purpose of computing invested capital for 1920 and depletion for the years 1920 to 1928, as to the Ritter Co.  *261  The question of whether the instrument of December 1909 conveyed title to the timber or a leasehold interest therein involves property rights of the parties thereto in West Virginia and must be determined pursuant to the laws of that state.  Cf. Crooks v. Harrelson,282 U.S. 55">282 U.S. 55; Uterhart v. United States,240 U.S. 598">240 U.S. 598; Balkan v. Woodstock Iron Co.,154 U.S. 177">154 U.S. 177; *1421 E. K. Wood Lumber Co.,25 B.T.A. 1013">25 B.T.A. 1013, 1023. This question is not affected by the decisions in Burk-Waggoner Oil Assn. v. Hopkins,267 U.S. 110">267 U.S. 110, and Burnet v. Harmel,287 U.S. 103">287 U.S. 103, holding that state law can not control the interpretation of the Federal revenue acts, because the present issue does not involve the character or taxability of income. Neither respondent nor petitioners have cited any authorities on this question of law.  On brief petitioners' chief contention is that even on the absis of the respondent's determination that the instrument was a lease, the unit cost per thousand feet of timber on the Western Pocahontas tract was $5.30 instead of $6, as used by respondent in determining the cost basis of the 62,986,242 feet standing and available to the Ritter Co. on January 1, 1920.  The instrument designates itself as a lease and the parties thereto as lessor and lessee.  The lessor "grants" to the lessee the right to cut, convert into personal property, remove and sell all timber 13 inches and up in diameter and the use of the land for such purpose during a period of 15 years, for a specified rental.  The instrument*1422  provides for forfeiture by the lessee and a reversion to the lessor.  All the essentials of a valid lease are present.  The instrument contains no words of sale or conveyance, ordinarily used in a deed to pass fee simple title or a lessor freehold estate in the standing timber.  We conclude that the transaction in 1909 was a lease and not a sale.  Cf. Harvey Coal & Coke Co. v. Dillon,59 W. Va. 605">59 W.Va. 605; 53 S.E. 928">53 S.E. 928; Tootham v. Courtney,62 W. Va. 167">62 W.Va. 167; 58 S.E. 915">58 S.E. 915; Brown v. Gray,68 W. Va. 555">68 W.Va. 555; 70 S.E. 276">70 S.E. 276; Wilson v. Buffalo Collieries Co.,79 W. Va. 279">79 W.Va. 279; 91 S.E. 449">91 S.E. 449; Furrow v. Blair,84 W. Va. 654">84 W.Va. 654; 100 S.E. 506">100 S.E. 506; Cunningham v. Heltzel (W.Va.), 105 S.E. 155">105 S.E. 155; Adkins v. Huff,58 W. Va. 645">58 W.Va. 645; 52 S.E. 773">52 S.E. 773. The lease provided for payments of $6 per thousand feet of timber as cut, but minimum payments of $100,000 per annum for 10 years and not more than a total of $1,000,000 for all of the timber available under the lease.  Such timber amounted to 188,650,567 feet and the unit*1423  cost thereof was $5.30 per thousand feet.  In 1909 the total available timber was divided approximately half and half by agreement between the Ritter Co. and the Raleigh Co.  Petitioner (Ritter Co.) does not contend that the respondent has understated the total cost of all the timber available to it on the Western Pocahontas tract and the record does not disclose any understatement. *262  Its contention is that the 62,986,242 feet standing on January 1, 1920, at a unit cost of $5.30 per thousand feet equals a cost of $333,827.08 on that date, which should be included in invested capital for 1920 and also used as the basis for computing depletion on timber cut from that tract during the years 1920 to 1928.  The determination of this issue may not be made upon that factor alone and without consideration of the depletion deductions allowed in prior years.  Cf. C. B. Shaffer,29 B.T.A. 1315">29 B.T.A. 1315. Respondent has computed depletion, on the timber alone, at the rate of $6 per thousand feet as cut from March 1, 1913, to December 31, 1919, resulting in an unrecovered capital cost of $293,139.98 for the 62,986,242 feet standing and available to the Ritter Company on January 1, 1920. *1424  In establishing the unit cost to be $5.30 instead of $6 per thousand feet for all the timber available under the lease, petitioner has shown merely that respondent has computed and, so far as the record discloses, allowed deductions from gross income for depletion in years prior to 1920, in amounts in excess of actual unit cost of the timber cut.  In our judgment such allowances were reasonable and petitioner has had the benefit of the deductions, resulting in a recovery of capital cost except for the remaining $293,139.98, as determined by respondent.  If the remaining unrecovered capital cost on January 1, 1920, should now be increased to $333,827.08, the petitioner would secure a double deduction on the same asset to the extent of the increase, to which it is not entitled. Alpin W. Cameron,20 B.T.A. 305">20 B.T.A. 305, affd., 56 Fed.(2d) 1021. The theory underlying the allowance of depletion and/or depreciation is that a gradual sale is being made by use of the asset over a period of time and that at the end of its useful life the aggregate of the sums set aside in the several years should equal the original cost basis. *1425 United States v. Ludey,274 U.S. 295">274 U.S. 295. In numerous cases we have adjusted the rate applicable to the remaining unrecovered capital cost, cf. James R. McCahill,29 B.T.A. 1080">29 B.T.A. 1080, but we have denied any increase in the remaining capital cost to be recovered where there was no understatement of the basic capital cost or value.  Cf. J. J. White Lumber Co.,24 B.T.A. 274">24 B.T.A. 274. On this issue respondent's determination is sustained.  Issue No. 3 - Gain or Loss on Sale of Timber.This issue involves merely a recomputation of gain or loss on the sale of timber in certain years on the bases of a stipulation incorporated in the findings by reference and the March 1, 1913, value of the timber as heretofore determined by us.  The proper adjustment will be made under Rule 50.  *263 Issue Nos. 4 and 5 - March 1, 1913, Value of Lands.These issues involve the determination of the March 1, 1913, fair market value of certain lands as distinguished or separated from the value of merchantable timber standing thereon.  The record contains the opinion testimony of the witnesses who testified with respect to the timber values in issue. *1426  The values set out in the findings have been determined after consideration of all the evidence, including that referring to location, accessibility, utility, and the expert testimony pertaining thereto.  The values so found will be used as the basis in recomputing under Rule 50 the gain or loss upon the sales in issue.  Issue No. 8 - Affiliation.This issue involves the question of whether the Consolidated Co. and the Jr. Co. were affiliated with the petitioners from May 15, 1923, to November 18, 1926, or during any part of that period.  As to the Consolidated Co., there was issued in the names of Wilson and Cummins on January 1, 1923, 15.1 percent of the outstanding common stock pursuant to an agreement whereby the transferors retained the voting rights of such stock until it should be paid for solely out of the dividends accruing thereon.  At that time Wilson and Cummins had no funds and no prospects of acquiring funds sufficient to pay for the stock.  On May 15, 1923, the Ritter Co. purchased 83.8 percent of the outstanding common stock and 98.6 percent of the outstanding preferred (voting) stock of the Consolidated Co. from W. M. Ritter and four other large stockholders. *1427  Also, on the same date and from the same persons, the Ritter Co. acquired the voting rights of the 15.1 percent common stock issued in the names of Wilson and Cummins, through the assignment to it of the agreement under which such stock was issued to them on January 1, 1923.  At the same time the notes of Wilson and Cummins and the stock certificates, endorsed in blank as collateral to the notes, were delivered to the Ritter Co.  Having the legal right to vote such 15.1 percent of the stock, the Ritter Co. had "control" thereof within the meaning of section 240(c) of the Revenue Act of 1921. 2Gulf Coast Irrigation Co.,24 B.T.A. 958">24 B.T.A. 958; J. A. Folger & Co.,23 B.T.A. 210">23 B.T.A. 210. Accordingly, the Ritter Co. owned directly or controlled 98.9 percent of the common stock and 98.6 percent of the voting preferred *264  stock of the Consolidated Co. during the period May 15 to December 31, 1923, inclusive.  We are of the opinion that the Ritter Co. owned or controlled "substantially all" of the stock of the Consolidated Co. within the meaning of section 240(c) of the Revenue Act of 1921 and that those companies were affiliated during the said period from May*1428  15 to December 31, 1923.  Cf. Brownsville Ice & Storage Co.,18 B.T.A. 439">18 B.T.A. 439. As to the balance of the period in controversy, January 1, 1924, to November 18, 1926, the Ritter Co. must have owned at least 95 percent of the voting stock of the Consolidated Co. to have been affiliated therewith pursuant to section 240(c) of the Revenue Acts of 1924 and 1926. 3Under the terms of the agreement pursuant to which the 15.1 percent common stock of the Consolidated Co. was*1429  issued in the names of Wilson and Cummins and immediately endorsed in blank and redelivered to the transferors, the former were not obligated to pay for the stock other than by a credit of any accruing dividends thereon.  It may be seriously doubted if there was an actual sale or transfer of title to the stock to Wilson and Cummins.  Cf. Moore v. McGrawl, 63 Fed.(2d) 593. However, we need not so hold, specifically, in view of the facts existing at the close of the year 1923.  At that time it was known that no dividends would be declared and that all the notes would be in default on January 1, 1924.  Thereupon, in December 1923 the Ritter Co. and Wilson and Cummins abrogated the stock purchase agreements by mutual oral consent.  As between those parties that contract of December 1923 was then completely executed.  The Ritter Co. then had and retained possession of the outstanding certificates endorsed in blank by Wilson and Cummins.  The fact that through inadvertence such stock was not transferred on the books of the corporation is immaterial.  As between the parties, the beneficial interest in the stock was assignable by parol. *1430  The ownership passed immediately by force of the agreement evidencing the intent to pass immediate title, which effected delivery of the stock already held by the Ritter Co. and endorsed in blank by Wilson and Cummins.  Registration on the books of the corporation is merely for the convenience of the corporation and its stockholders.  Lipscomb v. Condon,56 W. Va. 416">56 W.Va. 416; 49 S.E. 392">49 S.E. 392; West v. Empire Life Ins. Co.,242 Fed. 605. Cf. C. J. Swift Co.,12 B.T.A. 974">12 B.T.A. 974; Federal Advertising Agency, Inc.,19 B.T.A. 1126">19 B.T.A. 1126, 1135; Gorton Roth,26 B.T.A. 631">26 B.T.A. 631. *265  On January 1, 1924, the Ritter Co. owned the 15.1 percent common stock of the Consolidated Co., althouth through inadvertence it remained standing in the names of Wilson and Cummins until November 18, 1926, on which date the Ritter Co. had the stock issued in its name.  Accordingly, from January 1, 1924, to November 18, 1926, inclusive, the Ritter Co. owned 98.9 percent of the common stock and 98.6 percent of the voting preferred stock of the Consolidated Co. and was affiliated therewith pursuant to section 240(c) of the Revenue*1431  Acts of 1924 and 1926.  As to the Jr. Co., 12.6 percent of the common stock stood in the names of Wilson and Cummins under the same circumstances as heretofore stated with respect to the Consolidated Co., and the Ritter Co. owned 81.6 percent from May 15 to December 31, 1923.  Thus, the Ritter Co. owned or controlled 94.2 percent of all the outstanding stock of the Jr. Co. during that period.  Section 240(c) of the 1921 Act does not specify a definite minimum percentage, but instead, "substantially all" of the stock, to bring about affiliation.  The term is an elastic one and prior to the decision in Handy & Harmon v. Burnet,284 U.S. 136">284 U.S. 136, this Board and the courts granted affiliation in many cases involving varying percentages of ownership or control of stock ranging from as low as 69 percent and 72 percent involved in Ajax Enameling & Foundry Co.,7 B.T.A. 1230">7 B.T.A. 1230. Since that case, the construction placed on the term "substantially all" has been much stricter in cases too numerous to need citation.  Each case has been decided upon its onw facts and no general rule has been established as to what percentage constitutes "substantially all." None*1432  of the cases decided subsequent to Handy & Harmon v. Burnet, supra, which we have examined involved an ownership in excess of 85 percent which was held to be insufficient.  In Burnet v. Bank of Italy, 46 Fed.(2d) 629; certiorari denied, 283 U.S. 846">283 U.S. 846, the court held that "substantially all" is an elastic term which does not mean a fixed percentage, but does mean all except a negligible minority and, further, that 15 percent is not a negligible minority.  In Handy & Harmon v. Burnet, supra, six men owned 93.71 percent and 75 percent, respectively, of the voting stock of two corporations.  In its opinion the Supreme Court apparently accepted 93.71 percent as "substantially all" the stock of one corporation and (inter alia) discussed only the question of the ownership of 75 percent of the stock of the other, which it held not be "substantially all." The Court did not decide nor intimate what minimum percentage may be considered "substantially all." After consideration of those decisions, we are of the opinion that 5.8 percent is a negligible minority and that the Ritter Co. owned or controlled substantially all*1433  of the Jr. Co. stock within the meaning of section 240(c) of the 1921 Act *266  and was affiliated therewith from May 15 to December 31, 1923, inclusive.  Under the circumstances heretofore stated with reference to the Consolidated Co., the Ritter Co. also became the owner on January 1, 1924, of the 12.6 percent stock of the Jr. Co. standing in the names of Wilson and Cummins, making a total of 94.2 percent owned on that date.  Of the balance of the stock outstanding from January 1, 1924, inclusive, 2.5 percent was owned by persons described by the record as "others" and 3.3 percent was owned by Cummins, he having bought the stock and paid cash therefor in 1911.  Although Cummins was employed from year to year and the Ritter Co. had control of his stock by acquiescence and the exigencies of business, that is not sufficient to constitute the stock ownership by the Ritter Co. and Cummins "of the same interest," for Cummins was not a stockholder of the Ritter Co.  Handy & Harmon v. Burnet, supra. Section 240(c) of the Revenue Acts of 1924 and 1926 requires, for the purpose of affiliation, the ownership of at least 95 percent of the voting stock. *1434  This is a specific statutory requirement which may not be varied, even though the Ritter Co.'s stock ownership falls short by only .8 of 1 percent.  Accordingly, the Ritter Co. and the Jr. Co. were not affiliated during the period January 1, 1924, to July 31, 1924, inclusive.  On August 1, 1924, the Ritter Co. acquired the 2.5 percent of the Jr. Co. stock in the hands of "others", thus making its total ownership amount to 96.7 percent of all the voting stock of the Jr. Co.  Thus, the Ritter Co. and the Jr. Co. were affiliated during the period from August 1, 1924, to November 18, 1926, inclusive.  Issue Nos. 9 and 10 - Net Loss Application.These issues involve the application of net losses of the Consolidated Co. and the Jr. Co. in years prior to affiliation with the Ritter Co. and the other petitioners.  The respondent determined that they became affiliated with the Ritter Co. on November 18, 1926, and, further, that they were not affiliated with the Ritter Co. during the period May 15, 1923, to November 18, 1926, but that during that same period they were affiliated with each other.  In Issue No. 8 we determined that the Consolidated Co. was affiliated with the Ritter*1435  Co. during the period May 15, 1923, to November 18, 1926, and that the Jr. Co. was affiliated with the Ritter Co. from May 15 to December 31, 1923, and from August 1, 1924, to November 18, 1926.  The Jr. Co. was not affiliated with either the Ritter Co. or the Consolidated Co. during the period January 1, 1924, to July 31, 1924, inclusive.  *267  The parties have stipulated certain figures and facts as to the years 1921 to 1928 as set out in the findings with reference to these issues, and also, they have included in stipulations (applicable to Issues 15 to 18, and 40, and included in the findings by reference) certain adjustments to income and deductions of the Consolidated Co. and Jr. Co. for the years 1923 to 1928.  They have further stipulated additional depletion deductions for both companies for the years 1923 to 1928, based upon the Board's determination of Issue No. 14.  Thus the parties, by agreement, have placed themselves in a position to recompute the income or net losses of these two companies under Rule 50.  We are asked to determine merely the application of any net losses of the Consolidated Co. and the Jr. Co. prior to affiliation with the Ritter Co. and its*1436  other affiliates.  The record does not disclose the exact stock ownership as to the Consolidated Co. and the Jr. Co. prior to May 15, 1923, except that with reference to Issue No. 8, the testimony was that W. M. Ritter and four other individuals were the largest stockholders.  No issue has been specifically raised as to the affiliation of those two companies prior to May 15, 1923, and the only reference thereto in the record is the stipulation that, "Respondent did not allow any deductions from the consolidated income of the Consolidated and Jr. Companies for statutory net losses (as provided by section 204 of the Revenue Act of 1921 and section 206 of the Revenue Acts of 1924 and 1926) if any, sustained from January 1, 1921, to November 18, 1926, or any part of said period." Petitioners contend that the Consolidated Co. and the Jr. Co. were affiliated with each other prior to affiliation with the Ritter Co. and other petitioners, and that their consolidated losses prior to affiliation with the group should be applied against their consolidated income as one unit after affiliation with the group, instead of being treated separately.  In the case of the *1437 Delaware & Hudson Co.,26 B.T.A. 520">26 B.T.A. 520; affd., 65 Fed.(2d) 292, the Board said, "The Woolford and Planters decisions have now settled that the affiliated group is not a taxpayer, but is only the machinery for determining the factors upon which the tax liability of each separate corporation is computed.  Each corporation is a taxpayer in its own behalf.  * * * There is no support for the use of a statutory net loss of one corporation except to apply it to that corporation alone, and this is as true in respect of affiliated corporations as of independent corporations." In applying their respective net losses, the Consolidated Co. and the Jr. Co. must be considered separately and independently.  Woolford Realty Co. v. Rose,286 U.S. 319">286 U.S. 319, lays down the rule that a net loss sustained by a corporation prior to affiliation may be applied, not to the net income of the group for which a consolidated *268  return is filed, but only to the same corporation's net income for the succeeding (second) taxable year and the excess to be carried over to the next succeeding (third) taxable year, at which time the process of carrying over is to*1438  end, and that a net loss carried forward may be deducted only from net income for the current year, computed without the deduction of such prior year's net loss, that is, a net loss may not be used in computing a net loss.  Under the decision in Swift & Co. v. United States, 38 Fed.(2d) 365, cited with approval in the Woolford case, the application of the net loss to the corporation's net income for the succeeding taxable year after affiliation must be limited to the amount not absorbed, as a current loss, by the income of the consolidated group.  See Washburn Wire Co.,26 B.T.A. 464">26 B.T.A. 464; Delaware & Hudson Co., supra.We have held that in applying a statutory net loss under the Revenue Act of 1921 the term "taxable year" as used in section 204(b) 4 means a taxable period of twelve months and is not changed by affiliation occuring therein.  The calendar year 1923 of the Consolidated Co. and the Jr. Co. is divided into two parts, January 1 to May 14, prior to affiliation, and May 15 to December 31, after affiliation, which are not to be taken as separate taxable years, but are to be considered as together constituting one taxable*1439  year in computing the separate net income or net loss of each taxpayer.  Consequently, in relation to the calendar year 1921, the calendar years 1922 and 1923 are the "succeeding taxable (second) year" and the "next succeeding taxable (third) year," respectively.  In respect to the calendar year 1922, the calendar year 1923 is the "succeeding taxable (second) year." The net loss for 1923 must be apportioned between the periods January 1 to May 14, prior to affiliation, and May 15 to December 31, during affiliation.  The net loss sustained prior to affiliation may be carried forward to the next two succeeding taxable years and applied solely against the income of the corporation sustaining the net loss.  The net loss sustained after affiliation should be either absorbed by the income of the consolidated group for 1923 or carried forward and applied solely against the income of the corporation sustaining the loss, but must not be applied twice.  Cf. General Box Corp.,22 B.T.A. 725">22 B.T.A. 725; Riley Stoker Corp.,26 B.T.A. 749">26 B.T.A. 749; affd., *1440 67 Fed.(2d) 688; Delaware & Hudson Co., supra.*269  For the period January 1 to July 31, 1924, the Jr. Co. was not affiliated with the group, but was affiliated therewith from August 1 to December 31, 1924, and the succeeding years in controversy.  Thus, as to the Jr. Co., the calendar year 1924 was divided into two periods, one before and one after affiliation, each of which constituted a "taxable year" as that term is used in section 206(b) of the Revenue Acts of 1924 and 1926. 5 Cf. *1441 Summerfield Co.,24 B.T.A. 829">24 B.T.A. 829; 26 B.T.A. 440">26 B.T.A. 440. Consequently, the period from January 1 to July 31, 1924, constitutes a "taxable year" prior to affiliation in 1924, and the period from August 1 to December 31, 1924, constitutes a "taxable year" after affiliation, in applying any of the Jr. Co.'s net losses to its own net income in the manner above stated.  The computation of the net losses sustained by the Consolidated Co. and the Jr. Co. will be*1442  made pursuant to the stipulations and the application thereof will be made in accordance with this decision, under Rule 50.  Issue No. 10 is in the alternative for Issue No. 9 in the event the Board had sustained the respondent's determination that the Consolidated Co. and the Jr. Co. were not affiliated with the Ritter Co. from May 15, 1923, to November 18, 1926, but were affiliated with each other during that period.  Issue Nos. 11 and 12 - Foreign Tax Credit.As to Issue No. 11, the parties have stipulated all the facts necessary to a recomputation of the amount of the credit for foreign taxes to which the Ritter Co. is entitled in each of the years 1920 to 1928, inclusive, pursuant to the applicable revenue acts.  Since the Ritter Co. owned a majority of the voting stock of the British corporation, the amount of the credit for the years 1920 to 1928, inclusive, must be computed pursuant to section 240(c) of the Revenue Act of 1918 and section 238(e) of the Revenue Acts of 1921, 1924, 1926, and section 131(f) of the 1928 Act, which specifically limit the amount of the credit for foreign taxes which by those sections are deemed to have been paid by the Ritter Co. upon the*1443  dividends received by it in each of those years from the British corporation.  The recomputation will be made under Rule 50, pursuant *270  to the stipulation and the specific provisions of those sections, after effect has been given to the decision on other issues affecting the amount of the Federal taxes and a fortiori the limitation as to the amount of the credits.  Issue No. 12 raises the following question: If the amount of the credit allowed, under Issue No. 11, for each of the years 1920 to 1928 is less than the amount of foreign taxes deemed to have been paid pursuant to the above mentioned sections of the various revenue acts, may the excess be allowed as a deduction from gross income as "Taxes paid or accrued within the taxable year" pursuant to section 234(a)(3) of the Revenue Acts of 1918, 1921, 1924, 1926, and section 23(c) of the 1928 Act? The applicable provisions of the 1918, 1921, 1924, 1926, and 1928 Revenue Acts, although dissimilar in some respects, are substantially the same in so far as they affect this issue, and for convenience the designated sections of the 1921 Act will be used in our discussion of the question involved.  While section 234(a)(3) *1444  provides for a deduction from gross income of taxes "paid or accrued" within the taxable year except so much of foreign income, war and profits taxes "as is allowed as a credit under section 238," that section encompasses only taxes actually paid by or accrued against the taxpayer claiming the deduction.  Subdivision (a) of section 238 provides for a credit for foreign taxes actually paid by the domestic corporation and (without deciding, for the issue is not before us) the unambiguous wording of section 234(a)(3) would seem to permit a deduction of the excess of foreign taxes actually paid over the amount of such taxes allowed as a credit.  However, subdivision (e) of section 238 is a special provision applicable where, as in this proceeding, the domestic corporation owns a majority of the voting stock of a foreign corporation from which it receives dividends not deductible from gross income under section 234(a)(6).  The amount of foreign tax thereby deemed to have been paid by the domestic stockholder corporation is, by the terms of the subdivision, a certain proportion of the income, war and excess profits taxes paid by the foreign corporation to a foreign country.  The*1445  provisions of the subdivision are, by its own terms, only for the purposes of section 238, that is, the allowance of a credit under such circumstances, although the foreign tax was actually paid by the foreign corporation and not by the domestic corporation allowed a credit for a portion thereof.  We conclude that foreign taxes deemed to have been paid only for the purposes of section 238, in excess of the amount thereof allowed as a credit, may not be deducted from gross income under *271  section 234(a)(3) as "taxes paid or accrued" by the domestic corporation.  Issue No. 13 - Deductibility of Certain Expenditures.With reference to the first group of expenditures made by the Ritter Co. and the Raleigh Co. during the years 1920 to 1927, inclusive, for the purpose of welfare work among their own employees at the mill and camp sites, which resulted in a direct benefit to their business by improving the morale and well-being of their employees, we are of the opinion that such expenditures constituted ordinary and necessary business expenses and should be allowed as deductions in the respective years.  Cf. *1446 Corning Glass Works v. Commissioner, 37 Fed.(2d) 798; certiorari denied, 281 U.S. 742">281 U.S. 742; Missouri Pacific R. R. Co.,22 B.T.A. 267">22 B.T.A. 267. In connection with the second group of expenditures made by the Ritter Co. to the Columbus Community Fund during the years 1923 to 1928, inclusive, and those made by the Flooring Co. to a large number of charitable, religious and educational organizations, relief funds, and the like, during the years 1920 to 1928, inclusive, we are of the opinion that they are not deductible as ordinary and necessary business expenses under the various revenue acts applicable to those years.  In the case of Eitingon-Schild Co.,21 B.T.A. 1163">21 B.T.A. 1163, we reviewed numerous cases establishing and applying the rule that donations or contributions made by a corporation to charitable organizations are deductible only as ordinary and necessary business expenses, which conclusively implies that they bear a reasonable relation to the conduct of the corporation's business.  The fact that some pressure is brought to bear upon the corporation either by a community chest organization or some of the corporation's customers*1447  interested in a particular charity, and the corporation makes the contributions to avoid criticism or possible ill will and to secure favorable publicity rather than through philanthropic considerations, is not sufficient to change the character of such contributions to a business expense.  The relation of such donations to the proper conduct of the corporation's current business is too remote and incidental to result in any direct benefit reflected in increased earnings or otherwise.  Cf. Capital Traction Co.,27 B.T.A. 926">27 B.T.A. 926; Adam, Meldrum & Anderson Co.,29 B.T.A. 419">29 B.T.A. 419; Harry A. Koch Co.,23 B.T.A. 161">23 B.T.A. 161; Kansas City Southern Ry. Co.,22 B.T.A. 949">22 B.T.A. 949; Killian Co.,20 B.T.A. 80">20 B.T.A. 80; Stephens Fuel Co.,13 B.T.A. 666">13 B.T.A. 666. The case of Evening Star Newspaper,28 B.T.A. 762">28 B.T.A. 762, is distinguished on its facts, for there the very existence of the taxpayer depended upon the general opinion and esteem of the public within its circulation radius.  The taxpayer *272  itself took a lead in the campaign for funds from that same public, while, in the instant case, petitioners were merely solicited*1448  contributors.  The case of S. C. Toof & Co.,21 B.T.A. 916">21 B.T.A. 916, is distinguished on its facts.  There, in each instance where the amount of the contribution was allowed as a business expense deduction, the taxpayer had direct business relations with the contributee as a customer and the contribution resulted in a direct benefit reflected in increased profits to the taxpayer for the current year.  The fourth group of payments by the Ritter Co. in 1922 to four employees of an English corporation were made as rewards for meritorious services rendered to that foreign corporation which resulted in profits to the Ritter Co. because such foreign corporation was engaged in selling the Ritter Co.'s products.  The four men were not employees of the Ritter Co. and it was under no legal obligation to make the payments.  Clearly such expenditures were purely gratuities and did not constitute deductible ordinary and necessary business expenses of the Ritter Co.  Cf. Walter E. Kramer, Executor,27 B.T.A. 1043">27 B.T.A. 1043, 1050. Issue Nos. 14 and 46 - Deductibility of Expenditures for Mine Equipment and for Credging and Road Resurfacing.*1449  The facts show that during the years 1923 to 1928, inclusive, the Consolidated Co. and the Jr. Co. expended certain amounts as set out in petitioners' Exhibits 103 and 104, incorporated herein by reference, for steel rails, copper wire, mine cars and locomotives, mining machinery, fans, pumps, and motors, for the purpose of maintaining the normal output of their mines.  Those items must be allowed as ordinary and necessary business expense deductions under authority of West Virginia-Pittsburgh Coal Co.,24 B.T.A. 234">24 B.T.A. 234, and Hutchinson Coal Co.,24 B.T.A. 973">24 B.T.A. 973; affd., 64 Fed.(2d) 275; certiorari denied, 290 U.S. 652">290 U.S. 652. We are of the opinion that petitioners have failed to establish that the tipple alterations made during 1923 to 1926, inclusive, fall in the class of those items above mentioned.  While the alterations did not increase the normal output of the mines served by those tipples, the quality of the output was improved.  In fact it appears that the market for the coal from those mines would have been lost but for those permanent improvements to the tipples which eliminated the slate from coal produced from two of the mines*1450  and separated the inferior coal from that of good quality produced from one of the mines.  The tipple alterations constituted capital improvements and the respondent is sustained in disallowing deductions *273  therefor as business expenses.  Cf. Harriet B. Borland,27 B.T.A. 538">27 B.T.A. 538; Parkersburg Iron & Steel Co.,17 B.T.A. 74">17 B.T.A. 74; affd., 48 Fed.(2d) 163. The expenditures made during 1927 and 1928 by the Consolidated Co. for dredging Mitchell Branch Creek and resurfacing its private road, involved in Issue No. 46, were clearly capital expenditures, being permanent improvements which enhanced the coal properties and not in the nature of equipment used solely for the purpose of maintaining normal production of the mines in those years.  The respondent is sustained in disallowing the items as deductions for business expenses.  Cf. Colony Coal & Coke Corp.,20 B.T.A. 326">20 B.T.A. 326; affd., 52 Fed.(2d) 923; Manistique Lumber & Supply Co.,29 B.T.A. 26">29 B.T.A. 26. Issue No. 21 - Statute of Limitations.On March 15, 1921, the Ritter Co. filed its return for the year 1920. *1451  Section 250(d) of the Revenue Act of 1918 provided for a five-year period of limitation for assessment, that is, until March 15, 1926.  The first waiver with respect to the year 1920 was not executed until October 27, 1926, more than seven months after the expiration of the statutory period and the second waiver was executed on October 5, 1927.  Upon authority of Helvering v. Newport Co.,291 U.S. 485">291 U.S. 485, the waiver of October 27, 1926, revived the Ritter Co.'s tax liability for 1920, and, pursuant to section 278(c) of the 1926 Act and the terms of that waiver, the assessment could be made at any time up to December 31, 1927.  The timely waiver dated October 5, 1927, extended the period for assessment until December 31, 1928.  The deficiency notice was mailed on December 27, 1928.  Accordingly the assessment of any additional taxes against the Ritter Co. for 1920 was not barred at the date of the mailing of the deficiency notice.  As to the Ritter Co. for the years 1922 and 1923, the Raleigh Co. for the years 1920 to 1923, inclusive, and the Big Sandy Co. and the Knox Creek Co. for the year 1923, the facts show that waivers were duly executed by the parties prior*1452  to the expiration of the statutory periods as provided by section 250(d) of the Revenue Acts of 1918 and 1921, and that the periods of limitation were subsequently extended by timely valid waivers executed pursuant to section 278(c) of the Revenue Acts of 1924 and 1926, so that assessment could have been made at any time up to December 31, 1928.  The respondent's notices of deficiencies were mailed to these petitioners on December 27, 1928.  Assessment of any additional taxes against them for the years considered in this paragraph was not barred at the date of the mailing of the deficiency notices.  Cf. Chadbourne & Moore, Inc.,16 B.T.A. 1054">16 B.T.A. 1054. *274 Issue No. 22 - Employees' Stock Bonus.This issue involves the question of whether the issuance of common stock by the Ritter Co. during the years 1919 to 1922, inclusive, to certain selected employees, as detailed in our findings of fact, was pursuant to a sale of stock to the employees as determined by respondent, or was pursuant to an executed plan by which there was a sale of stock to the employees at a stated price and, also, the payment of additional compensation measured by the difference between the*1453  sale price and the fair market value per share on the date of issuance, as contended by petitioner, the Ritter Co.  The respondent calls our attention to the fact that the Board and the courts have held that no realized and therefore no taxable gain results from the bona fide purchase of stock or property at a price less than the fair market value thereof, Miles v. Safe Deposit & Trust Co.,259 U.S. 247">259 U.S. 247; Rose v. Trust Co. of Georgia, 28 Fed.(2d) 767; George W. Van Vorst, Executor,22 B.T.A. 632">22 B.T.A. 632; affd., 59 Fed.(2d) 677. He then cites Durkee v. Welch, 49 Fed.(2d) 339, as authority for his position here.  In that case the court found that the taxpayer purchased stock under an employee's stock purchase plan which did not involve any question of a bonus.  It differentiated, and refused to consider as material to the issue before it, three earlier disassociated stock purchase plans offered by the same company which did involve a bonus payment.  The court held there was merely an offer to the employees to buy stock at par on deferred payments and when the stock was fully paid and delivered in 1925*1454  the then value thereof in excess of cost was neither a gift nor a bonus, and was not realized gain to the employee.  Here the agreement between the Ritter Co. and each employee contained all elements of a binding contract for a sale and purchase of stock at a stated price to be paid within ten years by cash payments and/or the credit of dividends applicable to those shares held as collateral for the employee's note.  In this respect the case is similar to the facts in Gardner Governor Co.,27 B.T.A. 1171">27 B.T.A. 1171, in which the Board disallowed the claimed deduction upon a failure to establish that at the inception of the employees' stock purchase plan the parties considered as compensation the value of the stock in excess of the agreed purchase price.  However, in the present controversy the circumstances and conditions surrounding the execution of each contract disclose that the intention of the parties was not only a purchase and sale of stock, but in addition thereto and, primarily, the payment by the Ritter Co. of a stock bonus, as compensation for services actually rendered.  The amount of this bonus was predetermined to be the difference between the purchase price *1455 *275  and the market value of the number of shares allotted to each employee.  It was based on his salary, length of service, and efficiency.  These facts bring this case within the rule laid down in Haskell & Barker Car Co.,9 B.T.A. 1087">9 B.T.A. 1087, and Alger-Sullivan Lumber Co., 57 Fed.(2d) 3. Also, cf. Robinson v. Commissioner, 59 Fed.(2d) 1008. We hold that the difference between the purchase price and the fair market value on the date each of the series of contracts were entered into, that is, the date of acquisition of the stock by the employees, constituted reasonable additional compensation for services rendered and was a proper deduction in determining Ritter Co.'s taxable net income during the years in controversy.  Issue No. 23 - Dividend Credits on Stock Not Paid For as Compensation.Under Issue No. 22 we determined that the stock issued to employees under the stock purchase plan was sold to them on the date the respective agreements were executed.  Accordingly, the dividends, when declared, were paid to the employees as dividends, not as compensation, but were to be credited immediately on the purchase price under*1456  the terms of the agreement of the parties.  The respondent did not err in disallowing deductions for such dividends as compensation.  Issue No. 24 - Invested Capital as Related to Issue No. 22.As to the year 1920 the Ritter Co. contends that in effect it sold stock to its employees for its market value of $271.72 per share, of which $161.72 per share was paid in by services rendered (the bonus); and $110 represented accounts receivable from employees for stock.  The respondent, in computing invested capital for 1920, has taken $110, the price per share stated in the 1920 contract, as the actual cash bona fide paid in for such stock within the meaning of section 326(a) of the 1918 Act, although such amount was represented by accounts receivable.  That action was correct.  Haskell & Barker Car Co., supra.The excess value of the stock in the amount of $161.72 was paid out by the Ritter Co. as reasonable compensation for services rendered and has been allowed as a deductible expense.  It is inconsistent for petitioner to claim that the value of such services should be at the same time capitalized.  Upon the facts that the regular and ordinary services rendered*1457  were not worth more than the compensation paid by the issuance of stock and were not actual contributions to capital in exchange for stock, the amount of $161.72 per share was properly excluded from invested capital by respondent.  *276  Cf. Wells Brothers Co. of Illinois,16 B.T.A. 79">16 B.T.A. 79; Kent Paper Co.,13 B.T.A. 273">13 B.T.A. 273; Crown Potteries Co.,12 B.T.A. 1412">12 B.T.A. 1412; Klamer-Goebel Furniture Co.,11 B.T.A. 1322">11 B.T.A. 1322. Issue No. 30 - Invested Capital - Rough Lumber Inventories.This issue was raised upon petitioner's assignment of error stated as follows: "Understatement of invested capital for the year 1920 by unwarranted reduction in the Ritter and Raleigh Companies' rough lumber inventories at January 1, 1920." In determining the value of rough lumber inventories of the Ritter Co. and the Raleigh Co. as of January 1, 1920, for the purpose of computing income for 1920, the respondent has properly used the March 1, 1913, depletion value per thousand feet.  Petitioners agree that his computative method is correct.  The result thereof is that petitioners are permitted to recover, exempt from tax, the excess of the March 1, 1913, value*1458  over cost in addition to the actual cost.  That differential is termed "realized appreciation", meaning that the subject matter of depletion has been severed from the land, passed through the inventory, and sold, and the excess of March 1, 1913, value over cost has been realized by sale, which, although actually income, is tax free.  Cf. Clearfield Lumber Co.,3 B.T.A. 1282">3 B.T.A. 1282, 1288. In determining rough lumber inventories of the two companies as of January 1, 1920, for the purpose of computing invested capital for 1920, the respondent has used actual cost per thousand feet, which is less than the March 1, 1913, value.  Petitioners contend that this is error and that the inventory value used in computing invested capital should be increased to equal the inventory value used in computing income.  Petitioners' argument is that invested capital includes earned surplus and that the above mentioned differential of "realized appreciation" as of January 1, 1920, has augmented earned surplus and undivided profits and that, to properly reflect the amount of the latter, the March 1, 1913, inventory value must be used in computing invested capital, instead of the lesser figure, *1459  cost.  The Board and the courts have held that there may not be included in invested capital the appreciation in value of capital assets occurring subsequent to their acquisition.  H. T. Cushman Mfg. Co.,2 B.T.A. 39">2 B.T.A. 39; Jamison Coal & Coke Co.,24 B.T.A. 554">24 B.T.A. 554, 568; La Belle Iron Works v. United States,256 U.S. 377">256 U.S. 377. Petitioners agree with this well established principle as applied generally to capital assets such as those involved in those cases, but contend that the question here is not controlled by those decisions, since it involves the value of inventories, which automatically affect earned surplus and undivided profits. *277  The issue as framed does not state the real controversy, because the valuation of inventories at a figure other than cost affects only net income and not invested capital.  The latter is a statutory concept which includes earned surplus and undivided profits as one of its factors.  Sec. 326(a)(3), Revenue Act of 1918.  What the petitioners are seeking relief from, is not an understatement of inventories because based upon cost for invested capital purposes, but an alleged understatement of earned*1460  surplus to the extent that it does not include that portion of prior deductions for depletion applicable to the excess of March 1, 1913, value over actual cost, in respect of the timber used in the manufacture of the rough lumber in the inventory.  Petitioners have failed to establish that respondent has not restored to earned surplus deductions allowed for depletion applicable to such excess of March 1, 1913, value over cost.  Accordingly, upon such failure of proof of a material fact, we must deny petitioners the relief sought in this issue and sustain the respondent's determination.  Issue No. 33 - Depletion Calculation for Inventories.On brief, respondent agrees that in determining the cost of lumber manufactured in 1920 by the Raleigh Co. in arriving at the closing inventory at December 31, 1920, he will use the amount of depletion allowed the Raleigh Co. as a deduction for 1920, as contended for by petitioner, instead of the amount used by him in his computation of the pending deficiency.  However, the depletion deduction allowed by respondent was based upon the March 1, 1913, value of the Raleigh Co.'s timber as determined by him.  In Issue No. 1 we redetermined the*1461  correct March 1, 1913, value which should be used for computing the depletion deduction for 1920 and effect thereto will be given in the recomputation on this issue under Rule 50.  Issue No. 34 - Application of any 1921 Net Loss.No deficiencies have been determined against any of these petitioners for the year 1921.  However, pursuant to the provisions of section 272(g) of the Revenue Acts of 1928 and 1932, the Board, in redetermining a deficiency in respect of any taxable years in question, may consider such facts with relation to the year 1921 as may be necessary to determine correctly the amount of the deficiencies in controversy, although it has no jurisdiction to determine whether the taxes for 1921 have been overpaid or underpaid.  Greenleaf Textile Corp., B.T.A. 737; affd., 65 Fed.(2d) 1017. *278  The parties have stipulated certain facts and, as in other issues, the record contains the computative data for determining any net losses petitioners may have sustained, after giving effect to the Brard's decision on the other issues applicable to 1921 as well as the years in controversy.  The net losses, if any, should be computed pursuant to section*1462  204 of the Revenue Act of 1921 and applied in the succeeding taxable years 1922 and 1923 in the manner set out in our decision on Issues 9 and 10.  In addition to the question of net losses for 1921 our decision upon certain issues as to years in question are applicable to years for which no deficiencies have been determined against some of the petitioners and, pursuant to section 272(g), supra, in recomputing the petitioners' tax liability under Rule 50 for the years in controversy, effect will be given to the Board's decision as to those other years in so far as it may be necessary to determine correctly the deficiencies in controversy.  Issue No. 35 - Gain or Loss on Sale of Big Sandy Stock - March 1, 1913, Value of Big Sandy Stock.In 1923, pursuant to the agreement incorporated in our findings by reference, the Ritter Co. sold 1,000 shares of Big Sandy Co. stock to the Norfolk & Western Railway Co. and certain railroad property to the Big Sandy Co.  The Ritter Co. had acquired 500 shares prior to March 1, 1913, and 500 shares subsequent to that date.  While this issue involves the gain derived or loss sustained upon that transaction in 1923, the primary question*1463  is the March 1, 1913, value of the 500 shares of Big Sandy Co. stock acquired by the Ritter Co. prior to that date.  Apparently the Ritter Co. reported on its return a gain computed on the basis of cost.  The respondent increased the amount of gain, computing the same on the basis of cost as determined by him.  Petitioner now contends that 500 shares of the Big Sandy Co. stock had a fair market value of at least $1,000,000 on March 1, 1913, and that, the sale price being in excess of cost but less than the March 1, 1913, value, there was neither taxable gain derived nor a deductible loss sustained on the sale in 1923.  Petitioner further contends that the value of the stock on the basic date is not to be fixed by the value of the Big Sandy railroad as actually constructed at that time, that is, a small narrow gauge line designed and operated primarily in the interest of the Ritter Co.'s lumbering business, or, as petitioner's counsel states on brief, "It is immaterial that the Big Sandy Company may have (been) then set up even as a losing 'Toonerville Trolley' passing through raw and sparsely settled country.  For all we are concerned, there may have been no railroad actually in*1464 *279  existence at the time." Further, petitioner contends that the value of the stock is to be fixed by what earnings one could reasonably anticipate at March 1, 1913, because of the stock's inherent attributes, that is, that the Big Sandy Co. could have built under its charter a standard gauge railroad 58 miles long at an estimated cost of $5,644,826, at March 1, 1913, over the reconstructed route completed in 1929 by the Norfolk & Western Railway Co. at a cost of approximately $8,000,000.  That if such a railroad had been built at March 1, 1913, there could have been anticipated the development, within two or three years, of an estimated traffic per year amounting to 5,000,000 tons of coal, 200,000 tons of lumber, 100,000 tons of other freight such as machinery, supplies, animals, foodstuffs, store goods, etc., 400 round trip passengers each day, 1,500 pounds of mail each day and also some express traffic, and, further, certain estimated earnings on such traffic through the development of the theretofore dormant region which would almost automatically blossom into intensive mining and industrial activity because of the coming of such a railroad.  The greater portion of such*1465  estimated traffic was supposed to originate from the Levisa River watershed, since the larger part of the reconstructed road would have been along the Levisa River, then across the divide and down Knox Creek to Devon, using about 12 miles of the Big Sandy roadbed as it existed at March 1, 1913, along Knox Creek and Slate Creek.  Petitioner has placed in evidence the Big Sandy Co.'s charter and argues that under its provisions the Big Sandy Co. had the exclusive right to construct and operate a railroad in the Buchanan County territory and that therefore no other railroad could have built a feeder line to amass the anticipated traffic and earnings through development of the natural resources of that territory, without acquiring the Big Sandy Co.'s stock.  We doubt whether the existence of the Big Sandy Co.'s charter would have prohibited another company from securing a charter to build a railroad in the Buchanan territory (for instance along Levisa River) so long as it did not parallel the road which the Big Sandy had constructed and operated along Knox Creek and Slate Creek.  However, we deem it unnecessary to determine that question of law.  We have given careful consideration*1466  to the testimony of petitioner's witnesses and their qualifications, the maps and schedules placed in evidence, the facts relating to the construction and operation of the Big Sandy road, the nature of the territory, including the population and natural resources, and the possibility of other railroads building feeder lines into that territory.  Petitioner's expert witness on railroad valuation gave the factors which are customarily used in valuing railroads and, in the main, those factors *280  are based on facts known or more or less definitely ascertainable as of the date for which the valuation is being made.  That is as it should be.  But in giving his expert opinion that the 500 shares of Big Sandy Co. stock had a fair market value of $1,500,000 on March 1, 1913, the sole basis therefor was the preceding witnesses' testimony of estimates of anticipated traffic and earnings if the Big Sandy Railroad had been reconstructed as a standard gauge road and along an almost entirely different route.  But even more serious than that, the record shows no foundation in fact for the estimates of so large an amount of traffic which, in our opinion, are only conjecture.  The Board is*1467  not bound by opinion of experts.  Anchor Co. v. Commissioner, 42 Fed.(2d) 99; Bourne v. Commissioner, 62 Fed.(2d) 648. Sound judgment rejects a value of $1,000,000 for the 500 shares of Big Sandy Co. stock at March 1, 1913.  On the other hand, all of the testimony and evidence is directed to establish that value and, since that figure is rejected, we are unable to find any March 1, 1913, value in excess of cost.  The sale of the stock and other properties constituted one transaction on which the Ritter Co. realized in 1923 a taxable profit in the amount of $193,224.89, computed as set out in our findings of fact.  Issue No. 39 - March 1, 1913, Value of Norfolk & Chesapeake Coal Co. Stock and Gain or Loss on Sale.In 1924 the Consolidated Co. sold 1,020 shares or 51 percent of the outstanding stock of the Norfolk & Chesapeake Coal Co. for $140,000.  Of those shares, 510 were acquired in 1908 and 510 were acquired in 1922 by a stock dividend.  Respondent determined that the stock had a March 1, 1913, value of $118.79 per share of $60,582.90 for the 510 shares, based on the net worth of the tangible assets of the Norfolk & Chesapeake*1468  Coal Co.  Petitioners contend that the March 1, 1913, fair market value of the 510 shares was at least $150,000, based on the value of the tangible assets, plus the value of good will represented by the contracts for which stock was issued.  No question has been raised as to cost.  The uncontradicted testimony of petitioners' witness clearly proves that the stock had a value in excess of that determined by respondent.  Prior to 1908 the H. T. Wilson Coal Co. had established a market for the coal produced from its own mines, the Consolidated Co.'s mines and others.  The sales contracts for which Norfolk & Chesapeake Coal Co. issued 60 percent of its stock in 1908 carried with them the good will which had theretofore been established.  Petitioners' witness valued the 510 shares at $150,000, based on earnings *281  which he followed from month to month from the date of organization of the Norfolk & Chesapeake Coal Co.  The stock was not listed on any exchange and no sales thereof were made at or near March 1, 1913.  In the absence of sales, the value of the stock must be determined by the value of the underlying assets, the financial condition and other factors affecting the*1469  business of the corporation.  Cf. Lillian G. McEwan,26 B.T.A. 726">26 B.T.A. 726; J. G. Robertson,28 B.T.A. 53">28 B.T.A. 53. As a check upon opinion valuations of intangible assets, the Board has approved the use of the formula set out in A.R.M. 34, C.B. 2, p. 31.  Cf. Alexander D. Falck,26 B.T.A. 1359">26 B.T.A. 1359, 1365. By reducing the average earnings for 6 fiscal years, March 31, 1911, to March 31, 1916, inclusive, by 10 percent of the average tangibles for that period and capitalizing the remaining earnings at 15 percent, we arrive at a value of intangibles which, together with the value of tangibles, results in a value of approximately $130,000 for the 510 shares.  We have carefully considered all the oral testimony and documentary evidence in reference to the organization and growth of the business of the Norfolk & Chesapeake Coal Co., its sales, profits, tangible assets, and good will, as well as the opinions on valuation.  We conclude, and have so found, that the March 1, 1913, fair market value of the 510 shares of Norfolk & Chesapeake Coal Co. stock owned by the Consolidated Co., on that date was $130,000, and that the taxable gain realized by the Consolidated*1470  Co. on the sale in 1924, was $10,000.  Proper adjustment will be made under Rule 50.  Issue No. 41 - Apportionment of Tax.Section 240(b) of the Revenue Acts of 1924 and 1926 provides: In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each.  There shall be allowed in computing the income tax only one specific credit computed as provided in subdivision (b) of section 236.  Respondent contends that the filing of Form 1122 for the years 1925 and 1926 by the Consolidated Co. and the Jr. Co., with the statement thereon that no tax was to be allocated to them, is not sufficient to show an agreement, within the meaning of the above quoted section, between the corporations included in the consolidated return filed by the parent (Ritter) company for those years.  It is not necessary that such agreement be in writing or in any particular form.  It is sufficient if*1471  the conduct of the parties and the record clearly and definitely advises the respondent how the consolidated *282  tax is to be allocated and assessed.  Cf. Himelhoch Bros. & Co.,26 B.T.A. 541">26 B.T.A. 541; Washburn Wire Co.,26 B.T.A. 464">26 B.T.A. 464 and 1146; affirmed on this issue, 67 Fed.(2d) 658. Here, the parent (Ritter) company filed consolidated returns, the subsidiaries filed information returns on Form 1122 stating that none of the tax was to be allocated to them, and the tax shown on the consolidated returns was assessed against and paid by the Ritter Co. in the amounts of $119,866.69 for 1925 and $153,440.88 for 1926.  Furthermore, the respondent has treated those returns as an agreement and has assessed against the Ritter Co. all of the additional tax for 1925 and 1926 with respect to all of the corporations included in the original consolidated returns except the Consolidated Co. and the Jr. Co.  The latter two corporations were ruled out of the affiliation by respondent for 1925 and for the period January 1 to November 17, 1926.  In determining the deficiencies against the Ritter Co. for 1925 and 1926, he reduced the amount of taxes previously*1472  paid by it, by amounts allocated to those two subsidiaries; that is, he credited the Consolidated Co. and the Jr. Co. with taxes previously paid by the Ritter Co.  However, in Issue No. 8 we held that the Consolidated Co. and the Jr. Co. were affiliated with the Ritter Co. during 1925 and the period January 1 to November 17, 1926.  Any additional tax due upon their incomes for such period will be allocated to the Ritter Co. just as the respondent has done with respect to the other corporations included in the consolidated returns for 1925 and 1926.  Issue Nos. 43, 44, 45 - Loss on Liquidation of Subsidiaries.All three of these issues involve two questions of law, namely: (1) Does taxable gain or deductible loss result to the parent corporation when its subsidiary corporation liquidates and dissolves?  (2) If such a loss is deductible, should it be adjusted or reduced by the total amount of operating losses sustained by the subsidiary in prior years in which such losses were offset against operating income of the parent corporation by deductions taken in consolidated tax returns filed for such prior years during which the corporations were affiliated?  *1473  The first question must be answered in the affirmative under authority of Remington Rand, Inc. v. Commissioner, 33 Fed.(2d) 77; certiorari denied, 280 U.S. 591">280 U.S. 591; Southwestern Ice & Cold Storage Co.,27 B.T.A. 190">27 B.T.A. 190; Canal-Commercial Nat. Bank,22 B.T.A. 541">22 B.T.A. 541; affd., 63 Fed.(2d) 621; certiorari denied, 290 U.S. 628">290 U.S. 628, with respect to gains on such a transaction; and Riggs Nat. Bank,17 B.T.A. 615">17 B.T.A. 615; affd., 57 Fed.(2d) 980; Carey Salt Co.,26 B.T.A. 675">26 B.T.A. 675; Houghton & Dutton*283 Co.,26 B.T.A. 1420">26 B.T.A. 1420; Vonnegut Hardware Co.,28 B.T.A. 784">28 B.T.A. 784, with respect to losses on such a transaction.  As to the second question the decisions of this Board and of the courts have not been uniform.  Following the decision in the Remington Rand case, supra, which reversed 11 B.T.A. 773">11 B.T.A. 773, and held that the liquidation and dissolution of a subsidiary is a transaction resulting in taxable gain or deductible loss, but that the gain should not be reduced by the prior earnings of the subsidiary, the Board decided the *1474 Riggs Nat. Bank case, supra, and followed the Remington Rand case as to such a transaction resulting in gain or loss, but held that the loss deductible for the period outside of affiliation must be reduced by the amount of the subsidiary's operating loss sustained during the period of affiliation and deducted on the consolidated return.  The purchase of the stock and liquidation of the subsidiary occurred within the calendar year 1922.  The Riggs Nat. Bank case, supra, has been cited and followed in subsequent Board cases too numerous to mention.  However, in the Carey Salt Co., supra, the Board allowed, as a deduction, a loss sustained upon liquidation of a subsidiary in the total amount of advances and loans by the parent to the subsidiary during the several years of affiliation, without any adjustment or reduction on account of the subsidiary's losses sustained in those prior years and deducted in consolidated returns, citing among other cases United Publishers' Corp. v. Anderson, 42 Fed.(2d) 781; *1475 Remington, Rand, Inc., supra;Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed.(2d) 568; Riggs Nat. Bank, supra. In the case of Houghton & Dutton Co., supra, the Board followed the Riggs Bank case in holding that the loss sustained on liquidation should be reduced by the subsidiary's operating loss sustained during the period of affiliation within the same year, which had been reflected in consolidated income for that period, but that no losses of the subsidiary in prior years should be carried forward to the current year to reduce the loss sustained on liquidation of the subsidiary (citing United Publishers' Corp. v. Anderson, supra ). In this latter case the court decided that the loss sustained on liquidation was deductible without consideration of deductions for losses of prior years on the consolidated returns, for the reason that the question was the converse of that of the amount of gain realized on such a transaction as was present in Remington Rand, Inc., supra.In *1476 Aluminum Goods Mfg. Co.,22 B.T.A. 1">22 B.T.A. 1, the Board disallowed a claimed deduction for a loss sustained on liquidation of a subsidiary on the ground that, since formal dissolution had not occurred, it was an intercompany transaction.  The decision was reversed, 56 Fed.(2d) 568, the court holding that the loss was not an intercompany transaction.  In that case the subsidiary was organized in *284  1914 and sustained net losses for 1914, 1915, 1916, and 1917.  The parent company (Aluminum Goods Mfg. Co. ) and the subsidiary company filed separate returns for normal tax for all of those years, but for 1917, filed consolidated returns for excess profits tax.  The subsidiary was completely liquidated by the end of 1917 and formally dissolved in February 1918.  The loss claimed by the parent company on the consolidated return was the amount of its investment in the stock of and advances to the subsidiary, less the subsidiary's operating loss for 1917 which was deducted on that current year's consolidated return.  Upon appeal of that case, in *1477 Burnet v. Aluminum Goods Mfg. Co.,287 U.S. 544">287 U.S. 544, the Supreme Court held that while affiliation was not ended by mere liquidation of the subsidiary, the method of accounting to be applied to consolidated returns must not withhold from a taxpayer all benefit of deduction for losses actually sustained and deductible under the sections governing the computation of taxable income, when at the same time such method of accounting would not further the very purpose for which consolidated returns are required, that is, primarily to preclude distortion of taxable income by intercompany transactions.  The Supreme Court pointed out that the subsidiary's losses for 1914, 1915, and 1916 could not be deducted from the profits of the parent company because no consolidated returns were filed for those years.  It was said, further, that so far as the loss from operation of the subsidiary in earlier years contributed to the parent company's capital loss in 1917, deduction of the latter in the consolidated return involved no double deduction of losses of the business of the two companies during affiliation, for the total loss in 1917 was reduced, before deduction in the consolidated*1478  return, by the amount of the subsidiary's operating loss for that year.  In allowing the claimed deduction the Court said: "While equitable principles of accounting applied to the calculation of the net income of the business unit do not permit deduction of the loss twice, they do require its deduction once." Following that decision of the Supreme Court, the Circuit Court of Appeals, Tenth Circuit, in a well considered opinion in the case of Hernandez v. Charles Ilfeld Co., 66 Fed.(2d) 236, decided that the loss sustained upon the complete liquidation of a subsidiary, and comprising the investment in its stock and advances, was a real loss suffered by the parent company as a separate corporate entity, but that such total loss must be reduced by the total deductions theretofore allowed in the consolidated return on account of the subsidiary's operating losses in prior years.  In that case the losses of prior years, so allowed as deductions, exceeded the total loss sustained by reason of the purchase, operation and liquidation and no deduction was allowed on account of the latter.  Following that decision the Circuit *285  Court of Appeals, Ninth Circuit, *1479  which had decided the Riggs Nat.  Bank case, supra, had before it for review this Board's decision in the Apartment Corp.,26 B.T.A. 849">26 B.T.A. 849, in which the Board allowed the loss sustained upon liquidation of a subsidiary without any reduction thereof for the subsidiary's losses deducted in consolidated returns for prior years.  The court's decision, reported at 67 Fed.(2d) 3, reversed the Board and held that the losses allowed in prior years in the consolidated returns exceeded the total loss on liquidation and that no additional deduction upon the liquidation could be properly allowed.  For reasons stated, the court disagreed with the conclusion reached in the case of McLaughlin v. Pacific Lumber Co., 66 Fed.(2d) 895. In Summerfield Co.,29 B.T.A. 77">29 B.T.A. 77, the petitioner therein sustained a loss of $135,000 invested in stock, and $156,693.03 on advancements, upon a liquidation of a subsidiary.  In prior years a total of $155,581.19 had been deducted in consolidated returns for losses of the subsidiary.  In allowing a deduction for loss on liquidation, the Board held that "the loss sustained upon the stock investment*1480  should be allowed in full." It then held that, "the loss on open account should be reduced by the amount of the Taylor Company's (subsidiary's) operating losses previously included in the consolidated returns during affiliation, leaving a balance of $1,111.84, which may now be deducted." Although the loss there sustained on advancements was in excess of the amounts deducted in consolidated returns for prior years for losses of the subsidiary, that decision might be construed as deciding that the loss on the investment in the stock upon liquidation may not be reduced in a like manner where there had been no advancements or where the deductions in prior years were in excess of the loss on advancements. Our conclusion is that the total loss sustained upon the complete liquidation of an affiliate, including the investment in its stock and advances made to it and properly deductible from income upon the termination of affiliation by dissolution, must be reduced by the total losses sustained by such affiliate in prior years for which consolidated returns were filed and on which such losses were taken as a deduction from consolidated income in those years.  As to Issue No. 43, the Ritter*1481  Co. owned all the stock of the Winding Gulf Co. acquired at a cost of $2,500.  Upon dissolution of the latter in 1926 the Ritter Co. received $912.22 in exchange for such shares.  In consolidated returns filed for prior years during which they were affiliated there was deducted a total of $411.54 for losses sustained by the Winding Gulf Co.  However, of that latter amount, $33.49 was deducted for the year 1917, for which a consolidated return was filed only for excess profits tax purposes.  We are here concerned with normal tax and, inasmuch as such amount *286  of $33.49 has not heretofore been deducted in a consolidated return for normal tax, the allowance in the year in question will not result in a double deduction from the Ritter Co.'s income subject to normal tax.  Accordingly, the Ritter Co. is entitled to a deduction in 1926 for the loss sustained upon the liquidation and dissolution of the Winding Gulf Co., but such loss, amounting to $1,587.78, must be reduced by $378.05, the amount of the latter's losses deducted in prior years in consolidated returns for normal tax.  As to Issue No. 44, the Ritter Co. owned all of the stock of the Smoky Mountain Co., acquired at*1482  a cost of $50,000.  Upon the liquidation and dissolution of the latter in 1927, the Ritter Co. realized nothing on such investment in the stock, nor on the amount of $28,920.88 cash advances theretofore made by it to the Smoky Mountain Co.  In 1927 the Ritter Co. charged off such amount of $28,920.88 as a worthless debt.  For the years 1917 to 1927 losses of the Smoky Mountain Co., aggregating $49,403.69, were deducted in consolidated returns for those years for which they were affiliated.  Of that latter amount, $5,291.88 was deducted in a consolidated return for 1917 only for excess profits tax purposes.  The total deductible loss in the amount of $78,920.88 sustained in 1927 on liquidation of the Smoky Mountain Co. must be reduced by $44,111.81, the amount of the latter's losses deducted in prior years in consolidated returns for mormal tax.  As to Issue No. 45, the Consolidated Co. owned all of the stock of the Hull Coal & Coke Co., acquired in 1904 at a cost of $105,000.  Upon liquidation and dissolution of the latter in 1927, the Consolidated Co. realized nothing upon such investment.  The amount of $105,000 was deducted as a loss in the consolidated return for 1927 and the*1483  respondent disallowed it.  From January 1, 1923, until date of dissolution, the Hull Coal & Coke Co. was included in the consolidated returns filed by the Ritter Co. and its claimed affiliates.  Respondent determined that the Consolidated Co., the Jr. Co., and the Hull Coal & Coke Co. were not affiliated with the Ritter Co. prior to November 18, 1926.  In Issue No. 8 it was shown that respondent determined that the Consolidated Co. and the Jr. Co. were affiliated as between themselves for several years prior to November 18, 1926, and, upon the fact that Consolidated Co. owned all stock of the Hull Coal & Coke Co. since 1904, it is presumed that the latter was included in the affiliation determined by respondent to exist between the Consolidated Co. and the Jr. Co.  The stipulated facts on this issue do not show that deductions, if any, were taken and allowed, in consolidated returns for years prior to 1927 in which the Consolidated Co. and the Hull Coal & Coke Co. were included as affiliated corporations, on account of any operating losses sustained *287  in those years by the Hull Coal & Coke Co.  If any such deductions have been allowed, they will be used to reduce the loss*1484  of $105,000 now claimed by the Consolidated Co., so as to eliminate any double deduction.  This is merely a mathematical computation which will be made by the parties under Rule 50.  Issue No. 49 - Depreciation.This issue is in the alternative for Issue No. 14 and alleges that respondent failed to allow depreciation for the years 1922 to 1928 on expenditures made by the Consolidated Co. and the Jr. Co. which were held by respondent to be capital expenditures.  Disposition of this issue is made in the stipulation as to Issues Nos. 15 to 18 incorporated hereinabove by reference, and effect thereto will be given in the recomputation under Rule 50.  Reviewed by the Board.  Judgment will be entered pursuant to Rule 50.Footnotes1. Proceedings of the following petitioners are consolidated herewith: Raleigh Lumber Company; W. M. Ritter Flooring Corporation; Big Sandy and Cumberland Railroad Company; Knox Creek Railway Company; Winding Gulf Railroad Company; Smoky Mountain Railway Company; Red Jacket Consolidated Coal and Coke Company, Inc.; and Red Jacket Jr. Coal Company. ↩1. No data for 1921. ↩1. Loss. ↩1. M = Thousand. ↩1. M = Thousand. ↩2. For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests. ↩3. For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests.  * * * ↩4. (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary. ↩5. If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called "second year"), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called "third year"); the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary. ↩