Court Opinion

ID: 4608269
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:23.624869+00
Date Added: 2024-06-11T07:53:40.951463
License: Public Domain

SAND SPRINGS RAILWAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT, AND CONSOLIDATED CASES.Sand Springs Ry. v. CommissionerDocket Nos. 32438, 32439, 35103, 35104, 35105, 35106, 39959.United States Board of Tax Appeals21 B.T.A. 1291; 1931 BTA LEXIS 2217; January 21, 1931, Promulgated *2217  1.  A franchise granted by a city to the petitioner permitted it to extend its railway within the city limits and required it to furnish electricity at prescribed rates.  The profits from the operation of the railway belonged to petitioner, the profits from the sale of electricity were required to be paid to a charitable institution.  Upon failure to make such payment the entire franchise might be terminated.  Held, that the payment to the charitable institution was one required to be made as a condition to the continued use of the franchise and deductible under section 234(a)(1) of the Revenue Acts of 1918 and 1921 in computing taxable income.  2.  Contracts which provide for unusual payments may be scrutinized to determine whether such payments are what they purported to be or whether a form is adopted as a subterfuge.  When such contracts are with a city, weight must be given to the public nature of the transaction.  3.  The official acts of a governing body of a city should be accepted as bona fide until the contrary clearly appears.  4.  Amounts paid as interest upon bonds issued by a corporation without consideration, such bonds not being held by a purchaser in good*2218  faith and for a valuable consideration, are not deductible, there being no enforcible indebtedness.  5.  A corporation engaged in the operation of a business is not exempt because its entire capital stock is owned by an exempt corporation nor can exemption be obtained upon the ground that a consolidated return is required of the income of the business corporation and the exempt corporation, or upon the ground that corporate entities should be disregarded.  J.S.Y. Ivins, Esq., for the petitioner.  John D. Foley, Esq., for the respondent.  PHILLIPS *1291  The Commissioner has determined deficiencies in income and profits taxes against the petitioner, Sand Springs Power, Light & Water Co., of $10,710.40 for the fiscal year ended June 30, 1918, of $904.58 for the fiscal period July 1 to December 31, 1919, of $866.70 for 1920 and $4,150.63 for 1921.  Against the Sand Springs Railway Co. he determined deficiencies of $28,166, $24,400.85, $34,879.98, $12,961.68, $23,157.16, and $19,020.86 for the fiscal years ended *1292  June 30, 1918, 1919, 1920, 1921, 1922, and 1923, respectively, and, by notice mailed after a proceeding had been instituted*2219  before the Board with respect to those years, purported to determine a deficiency of $19,873.60 against that company for the calendar year 1923.  Against the Sand Springs Gas Co. he determined deficiencies of $13,351.56 for the fiscal year ended June 30, 1918, and of $3,475.97, $990.15, $1,410.98, and $801.08 for the calendar years 1921, 1923, 1925, and 1926, respectively.  Against the Sand Springs Water Co. he determined deficiencies of $1,096.36 and $76.85 for the fiscal years ended June 30, 1929 and 1921, respectively, and, after proceedings instituted before the Board with respect to those years, purported to determine a deficiency of $505.77 for the calendar year 1920.  He determined a deficiency of $624.67 against the Sand Springs Park for the fiscal year ended June 30, 1917, and deficiencies of $1,090.16 and $516.29 against the Mary Oil & Gas Co. for the fiscal years ended June 30, 1918 and 1920, respectively.  The errors assigned and now urged are (1) that in computing the taxable income of Sand Springs Railway Co. for each year the Commissioner erroneously included the net receipts from operation under a franchise to supply electricity to the city of Tulsa or, in the alternative, *2220  failed to allow a deduction of such amount; (2) that in computing the taxable income of Sand Springs Railway Co. for each of the years involved the Commissioner disallowed a deduction of $18,000 paid as interest on bonds; (3) that invested capital has been improperly adjusted for taxes of prior years (involving no more than a recomputation for the respective years to reflect any adjustments in taxes for prior years occasioned by the decision in these proceedings); and (4) that the Commissioner erroneously held that the income of the Sand Springs Gas Co. and the Sand Springs Power, Light & Water Co. was not exempt from tax after December 31, 1919.  The proceedings bearing Docket Nos. 35103 to 35106, inclusive, involve other questions, but by agreement of counsel and with the consent of the Board the hearing in those cases was limited to the issues involved in the other proceedings.  Some of the petitioners are involved only because, being affiliated with Sand Springs Railway Co. and having filed consolidated returns, their tax liability will be affected by any change affecting the Railway Co.  FINDINGS OF FACT.  The Sand Springs Power, Light & Water Co., Sand Springs Railway Co.*2221  , Sand Springs Gas Co., Sand Springs Water Co., Sand Springs Park, Mary Oil & Gas Co., Sand Springs Oil Co., and Margaret Oil Co. are Oklahoma corporations.  *1293  The Sand Springs Home (hereinafter referred to as the Home) is a corporation organized under the laws of the State of Oklahoma.  In the year 1908 one Charles Page began, at his own expense, to take care of certain aged persons and orphans.  He devoted to that purpose a tract of land which he owned at Sand Springs, Okla., and erected buildings thereon.  He subsequently increased the number of buildings on the tract of land and the number of persons to whom he was extending aid, until in January, 1912, he was supporting about sixty persons.  On August 9, 1912, Page, in order to continue and perpetuate his charitable enterprises, caused the Home to be incorporated, and immediately transferred to it the property that he was at that time using for the benefit of the persons depending on his charity.  The articles of incorporation were executed by Charles Page, Edwin A.  Page, Claude F. Tingley, B. F. Breeding and C. E. Buchner.  They are set forth in full in the findings of fact in the proceeding before this Board*2222  known as Sand Springs Home v. Commissioner of Internal Revenue, Docket No. 4871, reported at 6 B.T.A. 198">6 B.T.A. 198, and are incorporated herein by reference with the same force and effect as if set out herein in full.  On August 3, 1918, amended articles of incorporation for the Home were executed by Charles Page, Edwin A. Page, C. F. Tingley, and B. F. Breeding, and were filed in the office of the Secretary of State of Oklahoma.  They are set forth in the proceeding mentioned above and are incorporated herein by reference with the same force and effect as if set out herein in full.  The Home has no stockholders.  During the years 1917 to 1926, inclusive, it was managed by five trustees, who received no salaries, except one who was paid $150 per month for acting as superintendent of the Home, to which work he devoted his entire time.  When the Home was first incorporated it had no assets that produced income.  Charles Page from time to time transferred to it land and other assets.  In the year 1914 or 1915 he transferred to it an oil and gas lease known as the "Atkins Lease," which has up to the present time produced a substantial income.  The income not necessary*2223  for carrying out the Home's charitable activities has been reinvested in various enterprises which produce income, the excess income being invested for the purpose of accumulating an endowment fund.  In the years 1917 to 1926, inclusive, the charitable activities of the Home consisted in maintaining a large dormitory for orphan children, who were given food, clothing, shelter, medical and dental treatment, and primary education at the expense of the Home, They were later sent by the Home to public schools and some of them were subsequently educated in universities.  A widows' colony *1294  was maintained where widows, especially those with children, who were unable to support themselves were furnished with cottages, light, water, gas, milk and ice, and in some cases with food and clothing.  The Home also maintained a day nursery for the children of widows who had employment; an oral school where deaf children were taught, and a nonsectarian church.  The Home also contributed money to the Salvation Army and other similar organizations; on occasions it opened an amusement park owned by it to charitable, benevolent and religious organizations for picnics, etc.; it furnished to*2224  the Light House Rescue Mission the use of the buildings occupied by it and it furnished camps to the Boy Scouts and the colored girls' Y.W.C.A.  It distributed food and clothing to persons in need and at Christmas time made a canvass of the whole vicinity for the purpose of furnishing boxes to all needy persons.  Persons out of employment were given money at times to assist them until they could secure work, and needy persons were treated at the expense of the Home in the Sand Springs Home hospital.  Bottled water was furnished free to numerous religious and charitable institutions, medical and dental attention was also furnished without cost to needy persons by the Home, and it sent tubercular patients to Colorado for treatment.  The Home also maintained a business college where pupils able to pay were required to pay, but those unable to pay were taught free.  It furnished school books and clothing to poor children who were not inmates of the institution and it maintained a cemetery and furnished burial lots to the poor without cost, and in some cases furnished caskets and burial clothing.  Orphan children were received at the home at all ages from birth up to twelve years.  Those*2225  received before the age of twelve were maintained by the Home until they became self-supporting.  For the purpose of supplying provisions for its charitable activities, the Home maintained upon its own land farms, gardens, a dairy, a cereal mill, a cannery, and a cold storage plant, and produced its own wheat, flour, vegetables, and fruits of all kinds, and milk, poultry, beef and pork.  All provisions used by the Home during the years 1917 to 1926, with the exception of salt, sugar, tea, coffee and spices, were produced by it on its own land.  The Home produced on its land a surplus of provisions, and this surplus, amounting to about 10 per cent of the total produced, was sold to the general public at regular market prices.  In order to produce income with which to carry on its charitable activities and to accumulate a permanent endowment, the Home operated oil and gas leases, and sold oil to refineries and gas to distributing companies.  It generated and sold electricity for light and power, and maintained a reservoir from which water was sold *1295  to the general public at commercial rates.  It operated a greenhouse where flowers and shrubs were raised and sold to the*2226  general public at commercial prices; and the greater portion of the spring water from springs on its premises was bottled and sold to the public at 10 cents a bottle, which was the usual price in the vicinity.  The Home also owned and operated a cotton gin in which it ginned not only its own cotton, but that of the general public, and charged the rates fixed by the Corporation Commission of Oklahoma.  The Home also owned an amusement park, known as Sand Springs Park, which was leased to a corporation which operated it for profit, but the children and other persons supported by the Home were allowed free access to the park and to all the amusements therein.  In its business activities, the Home traded with the general public and competed with other corporations and individuals engaged in similar business.  The entire net income of the Home was spent in carrying on its charitable activities and in accumulating an endowment fund.  The record does not show, however, what part of the Home's net income was expended for charitable purposes and what part was retained by it.  No part of the Home's net earnings inured to the benefit of any individual, except the amounts paid to employees for*2227  services rendered, and the amounts distributed by way of charity to destitute or needy persons.  During all the years in issue, Charles Page owned all the capital stock except directors' qualifying shares of the Sand Springs Railway Co., Sand Springs Water Co., Sand Springs Park, Mary Oil & Gas Co., Margaret Oil Co., and Sand Springs Oil Co.  During the years in issue until December 31, 1919, Charles Page was the owner of 996 of the total of 1,000 shares of the Sand Springs Power, Light & Water Co., and 1,996 of the total of 2,000 shares of Sand Springs Gas Co., the other four shares in each instance being directors' qualifying shares.  On December 31, 1919, Charles Page transferred to the Home 995 shares of the stock of the Sand Springs Power, Light & Water Co. and 1,995 shares of the stock of the Sand Springs Gas Co., the shares not transferred remaining as directors' qualifying shares.  The stock so transferred remained in the ownership of the Home during the balance of the years here involved.  On April 11, 1911, the city of Tulsa, Okla., granted to the Sand Springs Interurban Railway Co., the name of which was later changed to Sand Springs Railway Co., "the privilege, *2228  right and franchise, to construct, maintain and operate a street railway for the conveyance of passengers, parcels, freight, expressage and mail for a period of twenty-five (25) years, across, over and upon the *1296  land of the city of Tulsa without its corporate limits and hereinafter particularly described, and upon" certain streets in the city of Tulsa as specifically described.  This franchise was granted under Ordinance No. 881.  In 1912 Charles Page was the owner of all the stock of the Sand Springs Railway Co. except directors' qualifying shares.  On October 24, 1912, the city of Tulsa passed Ordinance No. 1059, which in addition to granting permission to the Railway Co. to extend its line eastward through the city from the Third Street Viaduct, also granted to the Railway Co. a franchise for the furnishing of electricity for lighting purposes to the city of Tulsa, and its residents.  This ordinance reads as follows: ORDINANCE No. 1059.  An Ordinance modifying and extending Ordinance No. 881, of the City of Tulsa, granting to the Sand Springs Railway Company, a corporation organized under the laws of Oklahoma, the right to use the streets, alleys, lanes, squares, *2229  public places and public grounds of the City of Tulsa, Oklahoma, for the purpose of supplying said City of Tulsa and the inhabitants thereof with electric current for light, heat and power, and the right to construct, maintain and operate an interurban railway on certain streets in said City.  WHEREAS, The said Sand Springs Railway Company was heretofore granted a franchise to construct, maintain and operate an interurban railway for the conveyance of passengers, parcels, freight, expressage and mail over and upon certain streets and alleys of the City of Tulsa, the terms thereof being particularly set forth in Ordinance No. 881, of the City of Tulsa; and WHEREAS, It is the desire of the said Sand Springs Railway Company that its said franchise, to-wit: Ordinance No. 881, be extended so as to grant said Company the right to construct its interurban railway along the following locations upon the following streets of the City of Tulsa, to-wit: * * * WHEREAS, it is the further desire of the said Sand Springs Railway Company that it be empowered by Ordinance and Franchise to exercise the general powers given it by the general laws of the State and its Charter, to-wit: to make contracts*2230  with the City of Tulsa and the inhabitants thereof for the furnishing to said City and all persons and corporations within the same, electricity for light, heat and power, and for the purpose of fulfilling such contracts as it may make to use the streets and public grounds thereof for the erection and maintenance of poles, wires, appliances, conduits, pipes and other devices and inventions for the transmission and sale of electric current over, across and beneath any and all of the streets, alleys, lanes, squares, public places and public grounds of said City, necessary or proper for carrying out said contracts and the powers, privileges and obligations imposed hereunder.  And, WHEREAS, on the Ninth day of August, 1912, the Home established by Chas.  Page in Tulsa County, Oklahoma, was incorporated by the State of Oklahoma under the name of Sand Springs Home; and WHEREAS, it is the desire of Chas. Page, President of the Sand Springs Home, that the same be placed upon a self supporting basis so that it may perpetually serve the intended purposes; and *1297  WHEREAS, Chas. Page is President of the Sand Springs Railway Company, and the following resolution relative to the*2231  profits obtained by said Railway Company from the sale of electricity within the City of Tulsa, pursuant to this Franchise, has been adopted, to-wit: "WHEREAS, The Company contemplates the making of contracts for the sale of electricity for light, heat and power within the City of Tulsa; and, "WHEREAS, it is the desire of the Company that the profits of such contracts shall be applied forever to the support and maintenance of the Sand Springs Home, and for no other purpose.  "Now THEREFORE, Be It Resolved, that from the date the first contract is made and entered into by the authority of the City of Tulsa, the net profits thereafter arising so long as the Sand Springs Railway Company shall sell electricity for light, heat and power within the limits of the City of Tulsa, as the same now are or may hereafter be, shall, on the 15th day of each and every month, be paid to the Treasurer of the Sand Springs Home, to be used by him as the Directors of the Sand Springs Home may direct, for the support and maintenance thereof." * * * AND, WHEREAS, the Sand Springs Railway Company has filed its written application, praying for the granting of this franchise; NOW, THEREFORE, BE IT*2232  ORDAINED BY THE BOARD OF COMMISSIONERS OF THE CITY OF TULSA, OKLAHOMA: SECTION 1.  That the Franchise heretofore granted to the Sand Springs Railway Company by Ordinance No. 881, of the City of Tulsa, be and the same is hereby modified and extended as hereinafter set forth in this Ordinance.  In addition to the rights, privileges, and franchises granted by said Ordinance No. 881, the Sand Springs Railway Company is hereby granted the right, privilege, easement and franchise to construct, maintain and operate an interurban railway for the conveyance of passengers, parcels, freight, expressage and mail for the unexpired portion of the term set forth in said original franchise, along the following location, across and upon the following streets and alleys in the City of Tulsa, to-wit: * * * SECTION 2.  In addition to the rights and privileges granted under said Ordinance No. 881, and under Section One of this Ordinance, the said Sand Springs Railway Company is hereby given and granted the right to supply the City of Tulsa and the inhabitants thereof with electricity, and is given and granted the right to accept lighting contracts with the City of Tulsa and within said City, and*2233  to supply the inhabitants thereof under such contracts as it may accept with light or electric current for power or heat, and subject to the conditions and obligations herein and by law imposed, the said Company is hereby granted the privilege, right, easement and franchise in, to, over and across and beneath all of the streets, alleys, lanes, squares, public places and public grounds in the City of Tulsa for the purpose of fulfilling such contracts as it may make, or be required to make as herein or by law provided, with said City and the inhabitants thereof for the supplying of light, heat and power, or either of them, for a period of twenty-five (25) years from the date of the approval of this Ordinance as required by law, and with the specific right in the City of Tulsa, in the manner provided by Ordinance No. 881, at any time it shall purchase the plant and properties of The Tulsa Corporation, *1298  operated under the provisions of Ordinance No. 90, and with the right on January 1st, 1920, and every five (5) years period thereafter, without said limitation, to purchase the properties installed within the City of Tulsa for the purpose of selling electricity under the provisions*2234  of this Ordinance and the purchase of said properties shall terminate this Franchise as to the business of selling electricity within the City of Tulsa.  SECTION 3.  For the purpose of carrying out the purposes of this Franchise, as provided in Section Two of this Ordinance, the said Company may erect and maintain poles, wires, and appliances for the transmission and sale of electric current for light, heat and power over, across and beneath any and all of the streets, alleys, lanes, squares, public places and public grounds of said City, as may be necessary or proper to carry on its business hereunder, except only when necessary and on order of the Board of Commissioners previously obtained, shall poles for the conveyance of electricity be placed in the streets, provided this provision shall not be applicable to that portion of Archer Street now occupied by the Company, and to make such excavations as may be necessary for its power purposes, and to extend, repair, maintain and operate conduits, pipes, wires, and all other devices and inventions below the surface of the ground for the transmission, conveyance and distribution of electricity of said purpose.  PROVIDED, That the*2235  City of Tulsa, through its Board of Commissioners, shall have the right to regulate and determine the location and character of all erections above the surface of the ground, and all conduits, pipes and apparatus placed beneath the surface of the ground, including the right to require such alterations, repairs, changes and relocations of the same as may be necessary for the best interests of the City of Tulsa.  The Board of Commissioners may require the Company to file with the City Auditor, plans of all proposed extensions, alterations, or re-locations of the Company's lines, either above or below the surface, and such plans shall stand approved unless dis-approved by the Board of Commissioners within fifteen (15) days after submission thereof.  All cuts or excavations made for installations of any kind on, across or beneath any of the streets, alleys and public grounds shall be repaired and the street improvements and all property damaged, restored by such method as the Board of Commissioners shall prescribe, and the street improvements maintained at the expense of said Company.  The Company shall have no right to enter any public park for any purpose without the written consent*2236  of the Park Board.  The Board of Commissioners may after three (3) years from the date hereof, by general ordinance, applicable to all companies engaged in selling electricity for light, heat and power, and upon reasonable notice, require the removal of over-head wires in any district and the substitution therefor of underground service.  SECTION 4.  That in the making of contracts with the City of Tulsa or the inhabitants thereof, the said Company shall be limited to the following maximum prices: * * * The Board of Commissioners of the City of Tulsa may by general ordinance, require the filing in the City Auditor's office, of a public schedule or tariff of rates, the prices stated in said schedule so filed to be verified by the oath of the Chief Officer of the Company and to be binding on said Company filing same.  The City of Tulsa, in the exercise of its rights to regulate the rates charged by the Company under this Franchise, in determining what shall be a fair return to the Company upon its investment, shall consider only the fair value of the physical properties of the Company used in operating its business of *1299  selling electricity under this Franchise, and*2237  the good will of the business and the value of said Franchise shall not be considered as an element of value in such regulation.  SECTION 5.  The said Company shall within six (6) months from the date of the ratification of this Ordinance as required by law, commence the construction of the proper modes of transmission of electricity for light, heat and power or either of them, on the streets and alleys of the City of Tulsa, to comply with such contracts as it shall have made within said time, and said Company shall render service to all persons applying therefor along its service lines installed as aforesaid.  PROVIDED, That the Board of Commissioners, by ordinance, may require the Company to extend its service line or lines to supply an applicant or applicants for contracts for service from the Company, except that the Company shall not be required to extend its service line or lines a greater distance than five thousand (5000) feet in any one calendar year, except that upon petition of responsible applicants for contracts of service from the Company sufficient to pay the operating expenses of said extension for a period of one year and six per cent interest for said period on*2238  the money expended in making said extension, the Board of Commissioners, may, by ordinance, require the Company to extend its service line or lines to supply such applicants and those along its service line or lines so installed.  SECTION 6.  The Company shall permit the City of Tulsa to use its poles and under-ground pipes or conduits when installed, for the installation and maintenance of the City's fire alarm and police patrol system, and any other electric wires except for the supplying of electric current to the inhabitants of the City of Tulsa, for light, heat or power which the City may desire to use, free of cost, and appropriate, accessible space upon such poles and in such pipes and conduits shall be provided and reserved by the Company for such purposes.  SECTION 7.  The Company shall at all times use and exert every reasonable effort to maintain its plant at the highest practical efficiency, and shall adopt and use as soon as it may be practicable, all available improvements arising in the course of the development of the business of generating and furnishing electrical energy, and shall continuously furnish a uniform, regular and ample supply of electrical energy to*2239  all of its customers, and all applicants for same along its entire system.  * * * SECTION 8.  The Company shall pay to the City of Tulsa, as compensation for this Franchise granting it the right to use the streets, alleys, lanes, squares, public places and public grounds of the City to fulfill contracts for supplying the City of Tulsa and the inhabitants thereof with electric current for light, heat and power, an amount equal to four per cent (4%) of the gross receipts accruing to it by the sale of electricity within the City of Tulsa, provided, that said bonus shall not be payable for the first three (3) years of the life of this Franchise.  SECTION 9.  The Company shall keep in good repair, all pavement required by the Company to be laid under this Franchise or under said original Franchise granted by Ordinance No. 881.  No street, alley or portion thereof, shall be construed to be occupied for interurban railway purposes under the terms of this Ordinance or by said original Franchise of said Company, unless permanent tracks have been laid on such street or alley and cars are operated thereon in regular, daily schedule.  Failure to operate cars on regular daily *1300 *2240  schedule for a period of thirty (30) days, except by order of court, shall render this Franchise void.  SECTION 10.  All tracks and equipment of any character, erected, constructed or used by said Company under either this Franchise or the original Franchise of said Company contained in said Ordinance No. 881, shall be constructed and maintained so as to prevent damage to public or private property by electrolysis.  SECTION 11.  The Company agrees to hold free and harmless, the City of Tulsa from damages for which the City might be liable by reason of the occupancy of the streets or alleys by the Company under the right herein granted.  SECTION 12.  In order that the net profits arising from the sale of electricity under this Franchise may go to the support of the Sand Springs Home, as provided by the resolution of the Sand Springs Railway Company, set forth in the preamble of this Franchise, it is stipulated and agreed that the City of Tulsa, by its properly designated officer, may inspect the books of the company so as to prevent evasion, in any way of this bequest, and should the Company rescind said resolution or fail to carry out the intent of said resolution, then this franchise*2241  shall terminate.  SECTION 13.  The Board of Commissioners of the City of Tulsa shall have power to make reasonable regulations relative to the occupancy of streets or alleys or other public places in the event of dispute between said Company and any other occupant thereof; provided that such regulations shall be reasonable, general and uniform, and with due regard to the rights of all parties, including the public welfare of the City of Tulsa and the inhabitants thereof; provided, further, that nothing in this section shall be construed to oust the jurisdiction of any court of law.  SECTION 14.  No condition herein imposed upon said Company or power herein reserved to the said Company shall be construed as a waiver of or limitation upon any power or right reserved in or granted to the City of Tulsa under its Charter or by the Constitution and Laws of the State of Oklahoma.  SECTION 15.  The Company agrees that at any time the Board of Commissioners shall receive from the present holders of street railway franchises in the City of Tulsa, pay for the cost of the paving now occupied by all of the tracks of such franchise holders in the streets of the City of Tulsa, the Company, *2242  upon notice of such payment by said franchise holders, will forthwith pay to the City of Tulsa, for distribution to the property owners affected, the proportionate cost of paving now installed and occupied or to be occupied by its tracks and one foot on each side of the rails thereof, under Ordinance No. 881.  It is understood that the initial payment to be made as aforesaid shall be in amount sufficient to reimburse the property owners for payments for paving theretofore made and thereafter payments shall be made as the installments of the cost of the paving shall become due.  SECTION 16.  And should the Company operating under this Ordinance, lay its tracks upon or across any street or alley, not included in Ordinance No. 881, which, prior to the laying of said tracks, has been paved and the costs thereof assessed to the owners of property abutting thereon, then said Company shall pay the proportionate cost of the paving of such street or alley so occupied; by its tracks and one foot on each side of the rails thereof: the initial payment to be made as aforesaid shall be in amount sufficient to reimburse the property owners for payments for paving theretofore made and thereafter*2243  payments shall be made as the installments of the cost of the paving shall become due.  *1301  SECTION 17.  This Franchise and the rights and privileges granted hereunder shall never be assigned, leased or transferred, or the control thereof in any way be acquired by any competing person or corporation without the consent of the City of Tulsa, nor shall the Company sell electricity to any competing company without the consent of the Board of Commissioners.  SECTION 18.  The Company shall, within ten (10) days after the passage and approval of this Ordinance and the ratification thereof by the electors of the City of Tulsa, deposit with the City Auditor of the City of Tulsa, a written acceptance of the terms and conditions thereof.  SECTION 19.  At the termination of this grant, except by purchase by the City as herein provided, the Company shall remove all poles and other installations above ground and shall place the streets and alleys in proper condition.  SECTION 20.  This Franchise shall be in full force and effect from and after its passage, approval, publication and ratification by the electors of the City of Tulsa, as provided by law, and acceptance by the Grantee. *2244  The franchise granted by said Ordinance 1059 was accepted by Sand Springs Railway Co. by action of its proper officers on January 24 and 25, 1913.  The construction of the lighting department authorized by the 1912 franchise was begun in or about December, 1913.  Record of this investment was carried on the books of the Railway Co. proper until June 30, 1916, at which time auxiliary books called "Lighting Department" were opened, and these books carried all records of that department from that date.  The books of the Sand Springs Railway Co. were kept on the accrual basis.  A separate set of books was kept by the Sand Springs Railway Co. showing the operation of the lighting department of that company.  The income from the lighting department for all years involved in these proceedings was credited on the books of the Railway Co. to profit and loss, and was also transferred out again.  The books of the Railway Co. do not include any other amount of earnings from the lighting department in "profit and loss." The 4 per cent of the gross income from the lighting department of the Sand Springs Railway Co. was accrued to the city of Tulsa on the books of the lighting department*2245  by debiting "franchise expense" and crediting the city of Tulsa.  The "franchise expense" account was closed to Sand Springs Home account each month instead of running it through the profit and loss account.  The profits from the lighting department were reinvested by the Sand Springs Railway Co. in the properties of the lighting department.  In auditing the returns of the petitioners, the revenue agent made separate computations of the income from the lighting department of the Sand Springs Railway Co. for each year, and in such computations allowed, as deductions from gross income 4 per cent thereof, *1302  accrued as payable to the city of Tulsa, under the terms of the franchise.  The respondent, without change in the amounts so determined by the revenue agent as the net income of the lighting department in each year, included such net income as part of the taxable income of the Sand Springs Railway Co. for each year.  On July 30, 1923, the Railway Co. assigned this franchise, and all appurtenant properties, to the Home, and on August 7, 1923, the Railway Co. made application to the Board of City Commissioners of the City of Tulsa for its approval and consent to the*2246  assignment.  The board formally approved the assignment on the same day.  On January 14, 1924, the Home assigned this franchise, and all appurtenant properties, to the Sand Springs Power, Light & Water Co., and on January 15, 1924, it applied to the Board of City Commissioners for the City of Tulsa for its approval and consent to the assignment.  The board approved the assignment on the same date.  The purpose of assigning the franchise and power properties to the Sand Springs Power, Light & Water Co. was to facilitate the floating of a bond issue.  The investment house in Kansas City which had negotiated for the loan required the bonds to be secured by property owned by an industrial rather than a charitable corporation.  The underwriters negotiating for the bonds demanded such an exorbitant discount on the issue that it was decided not to issue the bonds, but to sell the franchise and power properties instead.  With this purpose in view, the franchise and power properties were reassigned by the Sand Springs Power, Light & Water Co. to the Sand Springs Home, such reassignment being approved by the Board of City Commissioners of Tulsa, Okla., on August 8, 1924.  On August 8, 1924, a*2247  sale of this franchise, with all appurtenant properties, was made by the Home to Martin J. Insull, of Chicago, Ill., and this sale was approved by the Board of Commissioners of the City of Tulsa.  The resolution of said board provided in part as follows: 2.  That upon the completion of such sale by Sand Springs Home, there shall be terminated and completely extinguished, all and every trust, benefit, enjoyment, reversion, estate, equity, title or interest theretofore owned, held or enjoyed by or existing in favor of Sand Springs Home in or to the said franchise or the properties, business and good will or any portion thereof so sold, and the said Martin J. Insull and his heirs, successors, assigns and legal representatives shall be permanently relieved from any obligation to account to Sand Springs Home or to the City of Tulsa or any other person for net profits thereafter accruing, and they and the franchise, properties and business themselves in no event shall be held obligated or charged with any responsibility with reference to net profits derived therefrom by any previous holder or derived by Sand Springs Home or any other from such or any previous sale or transfer; all as provided*2248  by Section 12 of said Ordinance No. 1059 as amended.  *1303  This franchise, and the properties appurtenant, were never taken into the books of the Sand Springs Power, Light & Water Co., nor was the sale thereof recorded on its books.  In 1912 the Sand Springs Railway Co. issued first mortgage bonds in the sum of $300,000.  Charles Page turned these bonds over to the Sand Springs Home.  The bonds were secured by a mortgage, or trust deed, under date of July 1, 1912, between the Sand Springs Railway Co. and the Commerce Trust Co. of Kansas City, Mo., as trustee, to which the Railway Co. conveyed all its franchises and property.  The mortgage is recorded in Book 134, at pp. 175-189, of the books of the County Clerk of Tulsa County, Oklahoma.  The mortgage provided in part as follows: Whereas, The Company is a corporation organized and existing under the laws of the State of Oklahoma, with a capital stock of Three Hundred Thousand ($300,000) Dollars, and said Company is empowered and authorized by law, among other things, to borrow money on the credit of the corporation, not exceeding its authorized capital stock, and to execute bonds and other evidences of indebtedness*2249  therefor, and to mortgage and pledge the property and income of the corporation to secure the same; and Whereas, It is necessary to enable the Company to provide funds for the exercise of its corporate rights and privileges, and the transaction of its business that it shall borrow money to the amount of Three Hundred Thousand ($300,000) Dollars, by issuing bonds aggregating the par value of that amount; and Whereas, In the exercise of the powers in that behalf possessed by it, and in order to carry out the purposes and objects of the Company, and pursuant to the resolution adopted by its stockholders, and also by its Board of Directors at meetings regularly and duly called and held for the purpose, the Company has resolved and determined to borrow an amount of money not to exceed Three Hundred Thousand ($300,000) Dollars, to provide funds for the exercise of its corporate rights and privileges and the transaction of its business, and to that end to make, execute and dispose of an issue of bonds to the amount of Three Hundred Thousand ($300,000) Dollars, consisting of Three Hundred (300) bonds, numbered consecutively from One (1) to Three Hundred (300), inclusive, all of like tenor*2250  and date, and each for One Thousand Dollars ($1,000), of principal, and secured by this Indenture of Mortgage upon the property and rights of the company, as herein described, which bonds shall be dated the First day of July, 1912, and bear interest from the first day of July, 1912, at the rate of six (6%) per centum per annum, payable semiannually on the first days of January and July in each year, both principal and interest being payable in gold coin of the United States of America, of, or equal to, the present standard of weight and fineness; said bonds to become due and payable on the first day of July, 1937; and Whereas, This Company, pursuant to resolution duly adopted by its stockholders and by its board of directors, at meetings regularly held for the purpose, has authorized the making of said bonds, the coupons to be annexed thereto, and the Trustee's certificate and the registration certificate to be endorsed thereon, in the form or substantially the form following: *1304  No.  .  $1000.  UNITED STATES OF AMERICA, State of Oklahoma, Sand Springs Railway Company, Sand Springs.  FIRST MORTGAGE Six Per Cent.  Twenty five year Sinking Fund Gold Bond.  *2251  The Sand Springs Railway Company, a corporation duly organized under the laws of the State of Oklahoma, for value received, promise to pay to the bearer of this bond, or, if same be registered, to the registered holder thereof, One Thousand ($1000) Dollars in gold coin of the United States of America, of the present standard of weight and fineness at the office of Commerce Trust Company, in the City of Kansas City, in the State of Missouri, on the first day of July, A.D. 1937, with interest thereon at the rate of six (6) per centum per annum from the First day of July, 1912, payable semi-annually in like gold coin, at the office of Commerce Trust Company aforesaid, on the first days of January and July, in each year, upon presentation and surrender of the annexed coupons as they severally become due, until the principal and interest of this bond be fully paid according to the terms thereof.  * * * Upon default for sixty days in payment of any interest on any of the bonds secured by said mortgage, or upon any other default of the Company under the terms thereof, or upon the happening of other contingencies set forth in said mortgage the principal of this bond may become due in*2252  the manner, with the effect, and upon the conditions provided in said mortgage.  This bond shall pass by delivery, unless registered as to principal upon the books to be provided for that purpose by said Company, at the office of Commerce Trust Company, in the City of Kansas City, State of Missouri, such registration to be endorsed upon said bonds.  After such registration and endorsement this bond can be transferred only on said books, unless the last transfer be to bearer, when it shall again be transferable by delivery, subject to subsequent registration in like manner.  The registry of this bond shall not restrain the negotiability of the coupons by delivery merely.  This bond is subject to redemption on any First day of July, after the year 1915, until its maturity, at par, with a premium of five per cent, thereof and all interest thereon accrued, under the operation of a Sinking Fund.  * * * In Witness Whereof, the Sand Springs Railway Company has caused these presents to be signed on its behalf by its President, and its seal to be hereunto affixed and attested by its Secretary, and coupons for said interest authenticated by a fac-simile of the signature of its Treasurer, *2253  to be attached hereto, this First Day of July, 1912.  * * * Then follows the granting clause, the habendum, and other provisions of the usual trust deed.  These provisions are followed by detailed covenants with respect to the mode of issuing the bonds, the particular obligations regarding payment, redemption and discharge.  Article IV of the covenants relates to default, foreclosure, sale and the assumption of the trusts by the trustee.  *1305  The bond interest was set up on the books of the Sand Springs Railway Co. each year in the sum of $18,000, credited to bond interest accrued, and charged to profit and loss.  The actual cash payments of interest to the Home were credited to "Cash" on the books, and charged to the "Sand Springs Home Interest, Dividend and Rent Account." The Sand Springs Railway Co., in each of the years in litigation, took as a deduction from gross income in the computation of net income, $18,000, representing interest on these bonds.  The respondent disallowed this deduction on the ground that the payment was "in the nature of a gift" and increased net income accordingly in each year.  The Sand Springs Gas Co. paid no dividends after December 31, 1919. *2254  The Sand Springs Power, Light & Water Co. paid one dividend of $100,000 on or about January 1, 1920, when the stock was transferred to the Sand Springs Home.  In computing invested capital, the Commissioner made an adjustment therein for the income and profits taxes of prior years.  The statement forming part of the notice of deficiencies for the fiscal years 1920 to 1923, inclusive, mailed by the Commissioner to the Sand Springs Railway Co. on September 21, 1927, and incorporated by reference in the notices of the same date mailed to the Sand Springs Water Co. and Mary Oil & Gas Co., contains the following: The Sand Springs Home and its affiliated companies have been eliminated from this affiliation inasmuch as it has been ruled that they are exempt corporations.  OPINION.  PHILLIPS: The first question to be considered is that raised by the petitioner, Sand Springs Railway Co.  It contends that it is not taxable upon the income derived from its franchise to supply electric light and power to the city of Tulsa, its contention being based upon three separate grounds: (1) It held all such income, as soon as earned in trust for the Sand Springs Home; (2) such income should be*2255  excluded from gross income under section 213(b)(7) of the Revenue Acts of 1918 and 1921; and (3) if such income is taxable to it, the net receipts from the franchise are deductible from gross income under section 234(a)(1) of said revenue acts "as rentals or other payments required to be made as a condition to the continued use" of the franchise.  We have heretofore held that the Sand Springs Home was exempt from income tax for the year 1922 under the provisions of section 231(6) of the Revenue Act of 1921.  Sand Springs Home,6 B.T.A. 198">6 B.T.A. 198. Since the Home was operated in each of the taxable years before *1306  us in the same manner as during the year 1922 and since the provisions of the revenue acts which governed during each of such years were substantially similar to those of the Revenue Act of 1921, we conclude that the Home was exempt from taxation during each of the years before us and proceed to our further discussion upon that basis. The situation presented is unusual.  In 1912 the Railway Co. was the owner of a franchise permitting the operation of an interurban railway for the conveyance of passengers, parcels, freight, expressage and mail upon*2256  lands of the city of Tulsa located outside its corporate limits and upon certain streets within the city of Tulsa from the city limits to a point known as the Third Street viaduct.  In October, 1912, the city of Tulsa adopted Ordinance 1059 which granted a franchise to the Railway Co. to extend its lines farther into the city of Tulsa and to supply the city of Tulsa and its inhabitants with electricity.  The franchise recites a resolution adopted by the board of directors of the Railway Co. providing that the net profits arising from the sale of electricity within the limits of the city of Tulsa shall be paid to the treasurer of the Sand Springs Home on the fifteenth day of each month.  The franchise provides that the city may inspect the books of the company to prevent evasion of this resolution and further provides that should the Railway Co. rescind such resolution or fail to carry out its intent, the franchise shall terminate.  The Railway Co. accepted the franchise and thereby bound itself to furnish electricity as provided in section 5 and other sections of the ordinance.  The respondent takes the position that no trust was created; that there was a mere naked promise to give*2257  certain income to the Sand Springs Home and that the one penalty which it would have suffered had it refused to pay the profits over to the Home would have been the forfeiture of the franchise.  It is asserted that in accepting the franchise the corporation undertook to operate a business from which it could hope to derive no profit, that this was done because its sole stockholder was interested in the charitable work done by the Home and that the effect of the whole transaction was the same for tax purposes as if the corporation had earned profits which it had declared as dividends and paid to the Home upon the instruction of its stockholder.  We are of the opinion that this is based to some extent upon an incorrect construction of the franchise.  This franchise grants to the Railway Co. two privileges, one to extend its railway lines and the second to furnish electricity.  The first was to be exercised by the petitioner for its own profit; the second for the benefit of the Home.  The Railway Co. had no option to accept one and reject the other.  *1307  It could either accept or reject the franchise as a whole and its acceptance of the privilege to extend its railway lines*2258  necessarily involved the obligation to distribute and sell electricity and pay over the profits to the Home.  It is possible that the city of Tulsa would have granted a franchise to extend the railway lines.  It is possible that it would have granted a franchise to transmit and sell electricity for the benefit of the Railway Co.  It is possible that the franchise was drawn in the form in which accepted solely because of the interest of the stockholder of the Railway Co. in the Home and not because of any interest on the part of the city officials.  On the other hand, it is possible that the city officials were interested in seeing that the Home was supported and that the arrangement set out in the ordinance was a factor which weighed heavily in favor of granting the franchise sought by the petitioner.  The fact is that the Railway Co. accepted an ordinance giving it the right to extend its tracks within the city and permitting and requiring it to transmit and sell electricity, the entire franchise to terminate should it not pay over to the Home the profits from the sale of electricity.  We have here a conveyance to the petitioner of what appears to be a valuable property right upon*2259  the agreement of the petitioner to pay over to a third party the income from a certain part of the property so conveyed.  Upon the termination of the franchise the privileges conveyed revert to the city.  The Railway Co. had no equitable or beneficial interest in that part of the franchise which permitted the sale of electricity.  It may be that a trust could be spelled out, and would be if necessary to carry out the arrangement made by the parties, although the situation is complicated by the fact that the Railway Co. was undoubtedly required to invest a part of its own capital.  For this reason the income flowed not only from the franchise granted to the Railway Co. but in part from this investment of its capital.  We think it unnecessary, however, to determine whether or not the net income from the sale of electricity was received by the Railway Co. as a trustee and was therefore not a part of its income. Troost Avenue Cemetery Co. v. United States, 21 Fed.(2d) 194; American Cemetery Co. v. United States, 28 Fed.(2d) 918; *2260 Portland Cremation Association v. Commissioner, 31 Fed.(2d) 843; Los Angeles Cemetery Association,2 B.T.A. 495">2 B.T.A. 495. Assuming that the respondent is right in his contention that there is no trust, it nevertheless appears that in order to prevent termination of the franchise and consequently of the right to operate its street cars within that portion of the city of Tulsa specified in the ordinance, the Railway Co. was under the necessity of paying over the net profit from the *1308  sale of electricity to the Home.  This falls squarely within the provisions of sections 234(a)(1) of the Revenue Acts of 1918 and 1921, which provide for the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title or in which it has no equity." While it may not be the ordinary situation for a business corporation to pay a part of its entire profits or all of its profits from a certain part of its business to*2261  a charitable corporation as a condition to the use of city streets, a payment for that purpose is clearly an ordinary and necessary expense of the business. Huff, Andrews & Thomas,1 B.T.A. 542">1 B.T.A. 542; Louis C. Rollo et al.,20 B.T.A. 799">20 B.T.A. 799. See also United States v. Kellogg,274 Fed. 903; Alfred LeBlanc,7 B.T.A. 256">7 B.T.A. 256. We do not mean to hold that such contracts must not be scrutinized to determine whether such payments as those with which we are here concerned are in fact made for the use of property, or whether the form is adopted merely as a subterfuge.  The respondent takes the position that the surrounding circumstances show that the city had no interest in the profits of the lighting business beyond a payment to it of 4 per cent of the profits and points out that when the franchise to supply electricity was sold by the Home the clause regarding the profits to be paid to the Home was stricken out by the city.  We do not understand that the respondent contends that the removal of this clause from the franchise in a later year affected the legal obligations of the years before us, but rather that it is evidence that*2262  the clause was inserted at the request of the sole stockholder of the Railway Co. and might have been removed at any time at his request.  In other words, the contention is that the provision for the Home was a voluntary act on the part of the Railway Co. and its sole stockholder, was nothing in which the city was interested and was no part of the necessary expenses of the company.  The argument, so far as it is based on the subsequent modification of the franchise, loses its force when it is considered that the Home received the entire amount for which the franchise, as modified, was sold, presumably realizing in this way what all parties concerned considered an adequate recompense for the future profits.  In considering whether the payments provided for in the franchise were in fact made for the use of the property or whether the form was adopted merely to permit the profits to be paid over to the corporation in which the sole stockholder was the principal benefactor, weight must be given to the public nature of the transaction.  The official acts of the governing body of a city should be accepted as bona fide until the contrary clearly appears.  No sufficient reason *1309 *2263  appears for holding that the payment to the Home was other than what it purports to be, viz., a payment which the Railway Co. was required to make if it was to continue to enjoy the franchise.  City officials are naturally and properly interested in charitable corporations whose works relieve the city of a part or the whole of its duty to provide for those who are public charges.  There is no suggestion that the relationship between the company and the city was such that if it had failed to make the prescribed payments it would nevertheless have been permitted the continued enjoyment of the franchise.  It must be assumed that the city officials would have performed their duty and taken steps to enforce the termination of the franchise.  We are of the opinion that in computing the net income of the Railway Co. the Commissioner overstated such income for each of the years before us by the amount which accrued to the Home under the contract, viz., the net profits arising from the distribution and sale of electricity.  While the amount of such net income is not stated in the stipulation filed by the parties, it is stipulated that the revenue agent made a separate computation of this income*2264  which the respondent included in his computation without change.  It is this amount which is to be eliminated.  We come next to consider whether the petitioner, Sand Springs Railway Co. is entitled to deduct $18,000 in each of the years before us as interest paid upon indebtedness.  It appears that in 1912 the Sand Springs Railway Co. issued first mortgage bonds in the sum of $300,000.  Its president, Charles Page, turned these bonds over to the Sand Springs Home.  During each of the years involved the Railway Co. paid $18,000 to the Home as interest upon these bonds and claims this amount as a deduction in computing its income.  The respondent disallowed this deduction on the ground that the payment was "in the nature of a gift." At the hearing counsel for the petitioner made the following statement with respect to this issue: The third issue which carries through all these years is that of the interest on bonds of the Sand Springs Railway.  As I have said, Mr. Page was a benefactor of the Sand Springs Home and was a stockholder of the Sand Springs Railway.  The Sand Springs Home needed some running income and Mr. Page caused the Railway Company to issue to him $300,000 face value*2265  of mortgage bonds, regular ordinary bearer bonds.  There is a sample bond which will be in evidence with the stipulation similar to one of the others.  Whether or not any consideration ran from Mr. Page to the Railway Company for the issuance of those bonds has been a matter that has been controverted between the taxpayers and the Bureau, but we offer no evidence to show that Mr. Page worked for the Railway Company without salary or that the Railroad Company owed him money on account of having assigned to it rights of way he acquired in his own name and things like that.  For a time there was an effort on the part of the representatives of the taxpayers to show that an equivalent quid pro quo went from Mr. Page to the Railway Company for the *1310  issuance of those bonds, but we are satisfied to stand on the proposition that the bonds, whether they were a gift from the Railroad Company to Mr. Page or whether they were received for a valid consideration, in the hands of the Home constituted a valid obligation * * * our position is that the statute provides for the deduction of interest paid and this was interest paid.  Later in the hearing while the parties were offering*2266  their evidence counsel called attention to a stipulation of the parties made during the course of the taking of a deposition to the effect that if a certain witness were called he would testify, subject to objection, that certain statements were made to him by Page with respect to the circumstances under which the bonds were issued.  Counsel for the petitioner then made the following statement: As to whether it is admissible as an admission against interest or whether it constitutes hearsay is something I do not think the Board will really have to rule on, because we have not offered any evidence to show that the Sand Springs Railway Company got from Mr. Page any equivalent consideration when it issued the $300,000 of bonds to him, and it makes little difference whether he said or did not say what Proctor alleges, the question being reduced to one of law, assuming that the bonds were a gift, is the income on them deductible.  In view of the determination of the Commissioner that the so-called interest was in the nature of a gift and the statements made by counsel for petitioner at the hearing, it would appear that there now remains no room for any argument as to whether or not*2267  the bonds, under seal, purport consideration or whether the durden is on petitioner or respondent to prove consideration or its lack, or that the bonds were issued as a dividend.  Upon the record before us we must assume that the bonds were issued by the Railway Co. to Page as a gift.  It is generally recognized that the issuance, without consideration, of a promissory note is nothing more than a promise to make a gift and therefore unenforcible in the hands of the payee.  Simon Benson,9 B.T.A. 279">9 B.T.A. 279. The Home, having acquired the notes from Page by gift, does not have the rights which, under the law of negotiable instruments, would accrue to one who had purchased in due course for a consideration and without notice.  It took the notes subject to any defense which could have been urged against them while in the hands of Page.  The petitioner further urges that contracts are enforced in favor of charitable corporations regardless of consideration.  We know of no decision which goes so far, nor does counsel cite any.  There are decisions which hold that subscriptions to charitable corporations may be enforced regardless of consideration, but the more generally accepted*2268  bases for enforcing such subscriptions are that a consideration results from the subscriptions of others or that grounds exist which estop the subscriber from relying upon a want of consideration.  *1311  The bonds having been issued to Page, the case before us does not fall within the principles which control subscriptions to charities.  The later gift to a charitable corporations does not cure the infirmity which existed at the time of issuance.  We are of the opinion that the record establishes no enforcible indebtedness upon these bonds upon which the Railway Co. was required to pay interest.  The action of the Commissioner is affirmed.  The next question for consideration is whether the Sand Springs Power, Light & Water Co. and the Sand Springs Gas Co., after the transfer of all their stock to the Sand Springs Home on December 31, 1919, are exempt from taxation.  Several grounds for exemption are urged.  It seems clear to us that these companies were not "organized and operated exclusively" for the purposes mentioned in section 231, subdivision (6) of the Revenue Acts of 1918, 1921, 1924, and 1926.  Nor are these corporations mere holding companies, such as are described*2269  in subdivision (12) of the 1918, 1921, and 1924 Acts and subdivision (13) of the 1926 Act.  That there is in these acts a provision by which exemption is granted to holding companies whose entire profits are turned over to exempt corporations would indicate an intent on the part of Congress not to grant exemption to other corporations whose profits might be similarly used.  It is further contended that, since the Home owned all the stock of the Water Co. and of the Gas Co., the Home and these corporations were affiliated within the meaning of section 240(b) of the Revenue Act of 1918 and section 240(c) of the Revenue Act of 1921, with the result that the identity of these two public service corporations was merged in that of the Home and their income became exempt from income and profits tax.  These sections provide: 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. *2270  Petitioner plant themselves on the literal provision of the above subdivision and assert that the Home, the Water Co., and the Gas Co. are domestic corporations and that since the Home owned all the stock of the other two, except the qualifying shares, they should be deemed to be affiliated.  If we apply an equally literal construction to section 230 of the same revenue acts we would be compelled to hold that the income of the Home is taxable, since that section provides "there shall be levied, collected and paid * * * upon the net income of every corporation" a certain rate of tax.  That "every corporation" is not to be taxed is evident from the provisions of section 231 of the Revenue Acts of 1918 and 1921.  All *1312  relevant sections of each act must be construed together so that they may harmonize and at the same time avoid if possible any absurd result.  Section 240(a) of the Revenue Act of 1918 provides: That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title*2271  and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return.  Section 240(a) of the Revenue Act of 1921 differs from the above provision in that no reference is made in the latter to invested capital.  The Home was not subject to income and profits tax and under section 239 of both revenue acts was not required to make a return.  It could not have been the intent of Congress to require it to make a return simply because it owned all the stock, except the qualifying shares, of the Water Co. or of the Gas Co.  The provision for consolidated returns does not purport to do more than prescribe a method for returning income and computing the amount of the tax.  It imposes no tax and grants no exemption.  It is administrative in character and does not alter the substantive provisions of the law.  Furthermore, it would appear that the contention made by the petitioner would have to be denied under the express terms of section 240, which provides for a consolidated return of "net income." In defining the words "net income" as applied to a corporation, the revenue acts limit the term to "the case of a corporation subject to tax." Section 232, *2272  Revenue Acts of 1918 and 1921.  The Home could have no net income within the statutory definition.  It would seem clear that the provision for a consolidated return of net income can have no application to a corporation which can not possibly have net income.  We conclude that the provisions for a consolidated return do not serve to exempt from tax the income of the Water Co. and the Gas Co.  Next it is urged that we should construe all the provisions of section 231 liberally and hold that the income of the Water Co. and of the Gas Co. is exempt under their cumulative effect, citing Y.M.C.A. Retirement Fund, Inc.,18 B.T.A. 139">18 B.T.A. 139. If we may assume, contrary to the general rule that exemptions are to be strictly construed, that the provisions exempting charities should be given a liberal construction, it would still appear that the most liberal construction is insufficient to cover the exemption sought.  We should have to read into the law something which we do not find there.  Such is not construction, but legislation.  Further, we would repeat at this time that the provision exempting holding companies whose *1313  entire income is paid over to charities evidences*2273  an intent not to exempt operating companies.  Lastly, it is asserted that we should disregard the corporate entities of the Gas Co. and Water Co. and hold that their incomes were earned by the Home.  In this connection it is urged that since under its charter the Home had the authority to operate as a public utility company and could have performed the same functions as those performed by these two companies, and since it owned all their stock except the qualifying shares, we should hold that they were but arms of the charity.  We can not accept this view.  Congress has provided the extent of the exemption and neither of these companies falls within it.  It is evident that Congress had in mind that charities might use subsidiaries and provided for the exemption of such as were mere holding companies.  To permit other subsidiaries, which do not fall within any of the exemptions, to escape tax upon their income would be to disregard the statutory limitation on exemption.  See also Curran v. Arkansas,15 How. 304">15 How. 304, where the court said: That a State, by becoming interested with others in a banking corporation, or by owning all the capital stock, does not impart*2274  to that corporation any of its privileges or prerogatives, that it lays down its sovereignty, so far as respects the transactions of the corporation, and exercises no power or privilege in respect to those transactions not derived from the charter, has been repeatedly affirmed by this court, in Bank of United States v. The Planters Bank,9 Wheat. 904">9 Wheat. 904; Bank of Kentucky v. Wistar et al.,3 Pet. 431; Briscoe v. The Bank of Kentucky, 11 Id. 324; Darrington et al. v. The bank of Alabama,13 How. 12">13 How. 12. The action of the Commissioner in subjecting the income of the water Co. and the Gas Co. to tax is approved.  At the hearing counsel for the respondent was granted permission to amend his answer to allege that the Water Co. and the Gas Co. continued to be affiliated with the other petitioners after the stock of those two companies was transferred to the Home.  In his brief the respondent concedes, properly, that no such affiliation existed.  By agreement of counsel and consent of the Board only such issues were tried in the proceedings known as Docket Nos. 35103 to 35106, inclusive, as related to the*2275  questions of affiliation, discussed above.  Other questions exist in those proceedings, but these the parties believed might be disposed of by stipulation after the decision upon the affiliation issue.  These cases will be held under submission until a decision under Rule 50 is entered in Docket Nos. 32438, 32439, and 39959.  If not settled by stipulation by that time they will be restored to the calendar for further hearing.  Reviewed by the Board.  Decision will be entered under Rule 50 in Docket Nos. 32438, 32439, and 39959.ARUNDELL*1314 ARUNDELL, dissenting: I do not agree with the Board's decision on the first point holding that the earnings of the petitioner's light and power department are deductible as ordinary and necessary expenses.  The majority opinion is based primarily upon the words of the franchise giving the city of Tulsa the right of cancellation if the light and power earnings are not paid over to the Sand Springs Home, and does not give sufficient consideration to the surrounding facts and circumstances.  My view is that a deeper scrutiny is required to determine the substance of the entire matter.  It is inconceivable that in the*2276  ordinary course of business a corporation would be required to build a power plant, establish transmission lines and otherwise make the large outlay necessary to care for the light and power needs of a city without a cent of return on its investment.  Corporations operated for profit do not do business that way, nor are cities accustomed to exact such terms.  When we take into view the surrounding circumstances, all of which are established as facts and not merely by inference, we find the real purpose of this unusual transaction.  Charles Page was the owner of all the stock, except qualifying shares, of the Sand Springs Railway Co.  He was also the founder and one of the incorporators of the Sand Springs Home, which we held in 6 B.T.A. 198">6 B.T.A. 198, to be a charitable organization.  It was Page's intent and desire to endow the home with such funds as would enable it to continue in perpetuity.  As a step towards that end he conceived the idea that was embodied in the resolutions of the Railway Co. and finally into the franchise procured from the city of Tulsa.  The provisions allowing the Railway Co. to engage in the light and power business on condition of payment of earnings*2277  to the Home were not inserted at the instance of the city.  The franchise was not prepared upon the initiative of city officials and offered to the company on a "take it or leave it" basis.  On the contrary, it was drafted at the request of the Railway Co.  The preamble to the franchise shows beyond a doubt that this was the situation.  So viewed, any amount paid by the Railway Co. to the Home would be merely a part of Page's objective of endowing the latter and would be a charitable contribution which, under the taxing statute, is not an allowable deduction to a corporation.  While it is true the policy of the law is to favor charities, that favor has never been extended so far as is here claimed.  Even in the case of individuals, deductions for gifts to charitable and other tax-exempt organizations are limited to 15 per cent of the net income.  Deductions have been allowed to corporations in some cases for sums contributed to charity, not because of the charitable aspect of the contributions, but because their proximate connection with the business of the taxpayer was sufficient to stamp them with the character of ordinary and necessary business expenses.  And so, while not doubting*2278 *1315  that the endowment of the Home was a worthy enterprise, I feel that the well established construction of taxing statutes which limits deductions to those specifically enumerated, and the numerous decisions denying charitable deductions, as such, to corporations, forbids our allowance of the deductions claimed here.  The theory prompting the majority opinion, that the payment of the profits from the lighting department was necessary to the continued enjoyment of the franchise, is refuted by the fact that the profits were not paid over to the Home, but were reinvested in the properties of the lighting department.  While such reinvestment may have inured ultimately to the benefit of the Home, the fact is that in failing to pay over the profits the taxpayer did not comply with the literal terms of the franchise, which required that the profits be paid to the treasurer of the Home on the "15th day of each and every month." The majority opinion does not find it necessary to decide the alternative contention that if the entire net profits may not be deducted as an ordinary and necessary business expense, they should be treated as a trust fund for a charitable organization. *2279  It seems to me that there is no merit in this contention.  The money received by the Railway Co. was in payment for electricity purchased by consumers and was not paid in in trust, as were the perpetual care funds in Los Angeles Cemetery Association,2 B.T.A. 495">2 B.T.A. 495; Inglewood Park Cemetery Association,6 B.T.A. 386">6 B.T.A. 386; and Portland Cremation Association v. Commissioner, 31 Fed.(2d) 843, cited by petitioner.  This amount when received constituted gross income of the corporation.  From this amount was paid the expenses incident to the operation of the business.  The remainder, the gross income less the statutory deductions, is the net income that the revenue acts tax.  If there is any trust, it is only of the amount left after the payment of the taxes.  This case is not unlike that of Cleveland Railway Co.,10 B.T.A. 310">10 B.T.A. 310, where the taxpayer was required by municipal ordinance to place in a revolving fund its earnings in excess of a fixed amount and, when that fund reached a specified figure, car fares were to be automatically reduced.  The taxpayer contended that the excess earnings were either expenses or trust funds*2280  for the benefit of car riders.  These contentions were rejected both by the Board and the Circuit Court of Appeals.  See 36 Fed.(2d) 347. The reasoning of the Board and the court in that case is applicable here.  It is also worthy of note that when the sale to other interests was made the provision of the franchise here involved was rescinded.  This, together with the fact of nonpayment during the taxable years, demonstrates clearly that payment of the light and power earnings *1316  to the Home was not a necessary condition to the operation of the lighting and power department.  TRUSSELL agrees with this dissent.