Federal Dev. Co. v. Commissioner

FEDERAL DEVELOPMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Federal Dev. Co. v. Commissioner Docket No. 14283. United States Board of Tax Appeals 18 B.T.A. 971; 1930 BTA LEXIS 2554; January 31, 1930, Promulgated *2554 1. GAIN - YEAR RECEIVED. - Petitioner in 1919 sold at a profit certain real estate occupied under lease by a tenant, agreeing to secure the surrender of the premises by the tenant to the purchaser on a certain date in the following year. Fifty thousand dollars of the purchase price was held by the purchaser as a guarantee of the performance of this agreement, the purchaser paying petitioner interest on this sum, the principal being paid over to it in the following year less a small portion representing damage to the purchaser by reason of the tenant holding over for a period after the date agreed upon. Held, the profit represented by the entire consideration was received by petitioner in the year of sale. 2. EXPENSE - ADDITIONAL COMPENSATION. - The sum of $20,000 authorized by vote of petitioner's directors in 1920 and paid in that year to two of its officers as additional compensation for services rendered in 1919 is, on the facts, held not to be an expense deductible for 1919. 3. INCOME - RATE OF TAX. - Respondent held not to have erred in computing under section 301(c) of the Revenue Act of 1918 the tax on 1919 consolidated income represented by amounts received*2555 for work done under war contracts. 4. DEDUCTIONS - AMORTIZATION OF WAR FACILITIES. - The basis determined, upon the facts proven, for the computation of allowable amortization of facilities acquired by petitioner's affiliated corporation for production of articles contributing to the prosecution of the war, and held that the amount of such amortization represents a deduction from consolidated income whether applied in the first instance against income of the affiliated corporation or against the income of the consolidation. 5. Id. - The cost of certain contracts determined from the evidence, the sum thereof held to represent proper deductions, and the amount applicable to each of the taxable years in question determined. 6. INVESTED CAPITAL - CORPORATE EXEMPTION. - Petitioner became affiliated with its subsidiary corporation on October 18, 1918, both corporations being organized in that month and beginning business on that date. Held, respondent was not in error in computing consolidated income on the basis of a period from October 18 to December 31, 1918, and in prorating on such basis, in computing the profits tax, the average invested capital of the*2556 consolidated corporations and the corporate exemption allowable. Robert C. Shelley, Esq., and O. Walker Taylor, Esq., for the petitioner. Philip M. Clark, Esq., for the respondent. TRUSSELL *972 This proceeding results from the determination of deficiencies in income and profits tax of petitioner and the Kelley-Spear Co., affiliated corporations, as follows: [1918] $6,217.11 [1919] 102,035.01 [1921] 5,734.42 Total 113,986.54 Errors are assigned by petitioner as follows: (1) The inclusion in income for the year 1919 of the sum of $50,000 as gain accrued in that year on the sale of certain real estate. (2) The disallowance of $20,000 as expense for the year 1919, being $10,000 each additional compensation to two officers of petitioner for extra services rendered by them in that year. (3) The application by respondent under section 301(c) of the Revenue Act of 1918 of the 1918 tax rates to $111,150.19, not determined or received until 1919 in settlement for the cancellation of war contracts. (4) The refusal of respondent to allow the taxpayer adequate amortization on facilities acquired and used for the production*2557 of articles contributing to the prosecution of the war. (5) The refusal of the respondent to deduct the amortization allowance from the income of the consolidation instead of from the income of Kelley-Spear Co. alone. (6) The failure to allow as a deduction from income in 1919, the sum of $100,000, as reimbursement for the actual cost of Government contracts purchased in 1918 and canceled by the Government in 1919. (7) The reduction of the invested capital and exemption for the year 1918 on the theory that the return is made for only part of the year instead of for the full calendar year. (8) The refusal of the respondent to allow in the year 1921, the sum of $10,581.24 as a deduction for actual ordinary and necessary expenses incurred in that year. FINDINGS OF FACT. Petitioner is a Delaware corporation with an authorized capital stock of 2,500 shares of preferred stock of a par value of $250,000 *973 and 4,000 shares of common stock of no par value. On October 18, 1918, there were issued and outstanding 2,430 shares of preferred stock and all of the common stock. The Kelley-Spear Co. is a Maine corporation with an authorized capital stock of $500,000 common*2558 and $250,000 preferred stock, of which all of the common and $75,000 of the preferred was issued and outstanding on October 18, 1918. These corporations were both organized in October, 1918, and began business on October 18, 1918. They both filed on March 15, 1919, separate tentative returns for 1918, asking an extension of time to file final returns and alleging that they were affiliated and reserving the right to file a consolidated final return. On June 15, 1919, these corporations filed a consolidated return stated to be for the "period begun October 18, 1918 and ended December 31, 1918." Prior to September 25, 1918, a Maine corporation known as the Kelley-Spear Co., hereinafter referred to as the old company, was the owner of and operated a shipyard at Bath, Me., for the building of wooden vessels. This corporation on that date was occupied in building a vessel under contract for the United States Shipping Board Emergency Fleet Corporation, hereinafter referred to as the Shipping Board, which vessel was on that date approximately 95 per cent completed. This corporation on that date had a second contract which had been recently awarded it by the Shipping Board calling*2559 for the construction of six wooden barges for a price of $190,000 each. At the time of the awarding of this latter contract, certain individuals who were officers of petitioner, had in progress negotiations for the acquiring of the business of the old company and assisted that company in closing this contract with the Shipping Board. As a result of these negotiations and agreements for taking over this shipbuilding company, petitioner caused to be organized a Maine corporation under the name of Kelley-Spear Co., hereinafter referred to as the new company, which, in consideration of the agreement to pay $125,000, secured by mortgage, and of the issue of $75,000 par value of its stock, received the land and water rights, buildings, ways, docks, and other facilities of the old company. These assets of the old company were appraised by by the new company prior to their purchase at $200,000, the following values being assigned to each: Land and water rights $25,000 Buildings 65,000 Machinery 30,000 Equipment 25,000 Stable equipment 3,000 Docks and wharves 27,500 Ways 28,500 Total 200,000 *974 These values were the actual cash values of these various*2560 assets. The new company employed a public accountant to open up its books, who assigned to these assets book values as follows: Land and water rights $95,000.00 Buildings 25,175.00 Machinery 11,416.56 Equipment 18,243.67 Delivery equipment - Teams 1,397.25 Office furniture $767.52 Docks and wharves 25,000.00 Ways 23,000.00 Total 200,000.00 Upon acquisition of this property the new company expended the net amount of $59,358.39 for new buildings, machinery, and equipment. The original cost of these assets to the new company and the sum subsequently expended for additions represented expenditures for facilities for production of articles contributing to the prosecution of the war. The new company also paid to the old company $100,000 in cash and in return received an assignment of the two contracts mentioned above. Fifty thousand dollars of this amount represented payment for the contract to build one wooden vessel, which contract was approximately 95 per cent completed, and the new company completed the construction of this vessel and received the entire profit thereon in 1918 and included this in income in its return for that year. The balance*2561 of the payment of $100,000 cash was the consideration paid for the aforesaid contract to construct six wooden barges. On October 29, 1918, the Shipping Board conceled its contracts for four of the wooden barges and on March 21, 1919, made an award to the new company of $112,491.12 for construction on these four bulls. This award was paid the new company on April 29, 1919, and was included by it as income in its return for that year. In determining the deficiency here appealed from, respondent has determined $111,150.19 of this amount as subject to the 1918 tax rate under section 301(c) of the Revenue Act of 1918. The date of the termination of the new company's war work was September 16, 1919. Claim for amortization of war facilities was duly made in the filing of the consolidated return of petitioner for the new company for the years 1918 and 1919. For these years claims for amortization of $39,839.60 and $119,518.79, respectively, or a total of $159,358.39, were made and of this amount $114,895.24 was allowed by respondent. In determining the deficiency here appealed from, respondent has deducted the allowance for amortization from the income of the new company alone, *2562 and has computed under section 301 of the Revenue Act of 1918 the tax upon the sum received from the Shipping Board on April 29, 1919. *975 In determining the allowance of $114,895.24 for amortization, respondent has used as a cost of land and water rights the amount of $95,000 as set up on the books of the new company and has fixed thereon a salvage value as of September 16, 1919, of $61,000, allowing $34,000 as amortization on this item. In determining the allowable amortization respondent approved the report of the Government Appraisal Engineer and applied percentages of lost value to the various assets as recommended by such engineer. On September 16, 1919, the land and water rights in question had a residual value of $25,000. All of the common stock of the new company was during the years 1918 to 1921, inclusive, owned by petitioner, and the two corporations filed consolidated returns for said years. In the year 1919 the Boston Federal Reserve Bank was in the market for a building site and petitioner, being advised of this, acquired certain property suitable to that bank's needs and negotiated a contract with it for the sale at a cash price of $963,500, which*2563 was $143,967.25 in excess of cost of such property to petitioner plus expenses of sale. By this contract, dated August 7, 1919, petitioner agreed to convey title to the bank on or before August 29, 1919, ad to procure and deliver, at the time of passing title, signed agreements of several lessees, then using the premises, to vacate same by certain fixed dates. In the case of the Fairbanks Co., one of these lessees, petitioner agreed to obtain a contract to vacate by March 1, 1920. With respect to other tenants, holding under leases providing for cancellation upon payment of a fixed sum, it was provided that at the election of petitioner the bank would accept title upon payment by petitioner of the sum necessary to secure the termination of such tenancies. With respect to certain tenants holding at will, it was provided that the bank would accept title subject to such tenancies. This contract of August 7, 1919, carried the following provisions: * * * The vendors further guarantee and agree that the entire premises will be vacated by said tenants as or before the dates above mentioned, and in the event of the said tenants failing to so vacate for any cause whatsoever, other than*2564 the consent of the vendee voluntarily given, the vendors agree to indemnify or hold harmless the vendee against any and all damage, direct or indirect, resulting therefrom. * * * (6) It is mutually agreed that if the vendors shall be unable to give title and to make conveyance free from encumbrances and restrictions as above stipulated, or if any party-wall agreements are found to exist and approved and accepted by the vendee, or if agreements providing for cancellation of leases and termination of occupancy thereunder in form satisfactory to the attorneys of the vendee are not delivered, as above set forth, then, in that event, the obligations of either party hereto shall cease, and this agreement shall be void without recourse to either party, but the acceptance of a deed and possession by the vendee shall be deemed to be a full performance and discharge hereof, *976 except in so far as the vendors have guaranteed the vacancy by all tenants and agreed to indemnify or hold harmless the vendee with respect thereto; which guarantee and agreement shall remain in full force and effect until said premises are finally vacated as above set forth. On August 29, 1918, petitioner*2565 was unable to deliver to the Reserve Bank an agreement by the Fairbanks Co. satisfactory to it, but title was passed and accepted by it, two contracts, both of that date, being executed embodying certain agreements with respect to the existing tenancies and providing security for the Reserve Bank in place of the guarantee of the original contract against damage to it by reason of the continuance of these tenancies. Both of these contracts evidence the fact that title had been passed and accepted that date. One of them evidenced the fact that sums required to be paid the tenants by petitioner under leases providing for cancellation on payment of fixed sums and totaling $27,000 had been deposited by petitioner with the Reserve Bank to be paid over by it when due, and by the other it was provided that the unlimited guarantee of the previous contract against damage to the Reserve Bank through failure to secure the vacating of the premises by the Fairbanks Co. by March 1, 1920, was modified to a limited guarantee of $50,000 and the damage liquidated as $500 per day for each day that company occupied the premises after that date. This contract evidenced the fact that petitioner had*2566 deposited with the Reserve Bank the sum of $50,000 as a guarantee to be returned to it upon the vacating of the premises by the Fairbanks Co., less any sums deducted under the liquidated damage agreement. By these contracts it was provided that the Reserve Bank would pay petitioner interest at 4 per cent upon the two deposits during the time held by them and should receive all rentals paid by the tenants for periods subsequent to September 1, 1919. In closing the transaction in the manner above described, the payment of the consideration for the property by the Reserve Bank and the making of the deposits by petitioner were effected by the former paying to petitioner the total consideration called for less the sums of the two deposits of $27,000 and $50,000. Thereafter, the Reserve Bank paid the sum of $27,000 to the lessees as provided and the deposit of $50,000 was held by it until the Fairbanks Co. vacated the premises, this being about March 3, 1920, and on March 12, 1920, payment was made to petitioner of the amount of the deposit plus interest and less the amounts provided to be deducted as liquidated damages, the net amount paid to petitioner being $49,081.44. Petitioner*2567 reported as taxable income for 1919 on account of this sale the sum of $97,017.25, this being the excess over the cost of the property of the net payment made *977 it by the Reserve Bank on August 29, 1919, and reported as income for 1920 the sum of $49,081.44, received on March 12, 1920. Respondent increased petitioner's net income for 1919 by $50,000, holding that the entire consideration for the sale was received in that year. The negotiations by petitioner with the Federal Reserve Bank in the year 1919 and the effecting of the agreements explained above were through the efforts of Draper and Hagar, president and vice president of petitioner, these services being of material value to petitioner. On May 11, 1920, petitioner's board of directors by proper resolution voted the payment of $10,000 each to Draper and Hagar, this resolution witnessing that it was compensation for their extra services during the year 1919. The amounts so voted to Draper and Hagar were shortly thereafter paid them by petitioner. These amounts were in addition to their regular salaries. For the calendar year 1921 the actual and necessary deductible expenses of petitioner amounted to $10,581.24. *2568 OPINION. TRUSSELL: The first assignment of error involves a question of law, the correctness of respondent's action in including in petitioner's income for 1919 the sum of $143,967.25, this being the difference between the cost and the sale price less expenses of sale, of certain real estate sold by petitioner in that year to the Boston Federal Reserve Bank. Petitioner contends that $50,000 of this amount does not represent income for 1919 as it was retained by the purchaser as a guarantee of the seller's obligation to secure the surrender on a certain date of a portion of the premises by a tenant. The facts are not in dispute. The sale was effected in 1919 as a result of a contract by the terms of which petitioner bound itself to deliver title and to secure the vacating of the premises by a certain tenant or to secure harmless the purchaser in case the premises were not vacated as provided. Upon closing the transaction on August 29, 1919, an agreement by the tenant to vacate had not been secured by petitioner but title was accepted by the purchaser and another contract executed which provided, in so far as pertinent to the question at issue, that in place of the unlimited*2569 guarantee of the former contract petitioner had deposited with the purchaser $50,000 as a guarantee that the tenant would vacated the premises by March 1 of the following year, petitioner's liability being limited to this amount, and the damage in case the tenant failed to vacate the premises was liquidated by the agreement at $500 per day. By this agreement the purchaser agreed to pay petitioner interest on the deposit and the fact was *978 witnessed that title had passed and the full amount of the consideration paid the petitioner. The closing of the transaction and making of the payment by the purchaser and the guarantee deposit by petitioner was effected by the purchaser making payment of the purchase price less the amount of the deposit. From that time forward title to the property was in the purchaser and it received the rentals paid by tenants. The premises were vacated by the tenant in question shortly after March 1, 1920, and the purchaser thereupon returned the deposit less the per diem damage agreed upon and plus interest, the net amount paid over being $49,081.44. Petitioner included in income for 1919 on account of this transaction $93,967.25 for 1919, and*2570 $49,081.44 for 1920. Petitioner contends that the $50,000 representing the deposit was not received by it in 1919, and the fact that it would receive any portion of it was not possible to determine in that year; that there was no basis then for its accrual, and consequently it represented income for 1920 when received and then only in the net amount actually paid over. The fact that in concluding the transaction the Federal Reserve Bank, instead of paying over the entire amount of the purchase price and then receiving back a deposit of $50,000 from petitioner, retained that sum from the total makes no difference. The result is the same in any event. The retaining of this amount was a use of it as funds of the petitioner in carrying out the latter's obligation to make a deposit. The sum was held from that time forward as money belonging to petitioner, interest being paid the latter for the time it was held. The fact that one who sells property guarantees the purchaser against some contingency arising in a future year and makes a deposit as security for the guarantee does not lessen by the amount of the guarantee or the amount of the deposit the profit which he had made on the*2571 sale. If in such case the happening guaranted against takes place in the following year and a portion of the deposit is in consequence lost, the result is one affecting income for that year to the extent of the loss. The action of respondent is approved. The second assignment of error is upon respondent's disallowance as an expense of 1919 of the sum of $20,000 representing payments of $10,000 each made by petitioner on May 11, 1920, to its president and vice president as extra compensation for services rendered in 1919. The record shows that these two officers of petitioner represented it in 1919 in negotiating and concluding certain transactions which resulted profitably to petitioner. Both individuals were on fixed salaries and petitioner was entitled to their services. There is nothing shown which indicates that any legal obligation arose in *979 1919 on the part of petitioner to make payment of additional compensation to them over and above the salaries voted. Neither the minutes nor the books of account of petitioner for 1919 record anything which suggests an understanding that additional compensation was legally due or liability therefor admitted in that year. *2572 The only minute entry in 1919 in respect to the transaction is a resolution approving action taken for petitioner and authorizing further action for it. No item representing added compensation was accrued on the books prior to the actual voting of such compensation on May 11, 1920. Under the recordAs submitted, we can not see that a basis existed for accrual in 1919, of any additional amount on account of these services and no such accrual was made. ; ; affd., . Petitioner's counsel insists in his reply brief that the service rendered was over and beyond those called for from these officers and represented by the regular salaries paid them, and that he can show that fact if permitted to introduce further proof, but even if such condition, if proven, would alter the conclusion reached, we must decide the question on the record as made up on the regular hearing. Counsel can not be permitted to prove his case in piecemeal and supply deficiencies in proof after final submission. The action of respondent is approved. The third assignment*2573 of error is upon the action of respondent in taxing at the 1918 rate under section 301(c) of the Revenue Act of 1918, $111,150.19 of the income of the affiliated corporations for 1919 and representing payments made to the Kelley-Spear Co. in that year by the United States for work done under its war contracts. The record shows that the income in question was from work done under contracts with the United States executed between April 6, 1917, and November 11, 1918. We see no difference in the fact that the contracts were executed by a predecessor corporation. They were assigned to and responsibility thereunder accepted by this taxpayer. The work under them was done for the United States which made therefor the payments to this taxpayer which represent the income in question. It is not claimed, and the evidence does not indicate, that respondent in determining the net amount subject to tax at 1918 rates, has failed to reduce the gross income of this character by the expense incident to its production, other than in his refusal to allow any amount as a deduction representing the cost of the contracts of construction. The amount of this income should be reduced by the sum of $33,333.34, *2574 hereinafter found by us under the sixth assignment of error, as a cost applicable to the contracts, for performance of which the payment in question was made in 1919. . *980 Aside from this adjustment, we sustain the action of respondent in applying the 1918 tax rate to this item of income. ; . The fourth assignment of error is upon the amortization allowed for 1918 and 1919 in respect to the facilities of the Kelley-Spear Co. acquired or installed for war work, all of that company's assets having been acquired for that purpose. Respondent has allowed $114,895.24 prorated over the period of war production which it is agreed ended on September 16, 1919. Petitioner contends that the correct allowance is $205,147.60 and in support of its position attempts to prove as of September 16, 1919, for purposes of amortization, a salvage value of $31,300. This salvage value is attempted to be shown by a retrospective appraisal made on November 11, 1926, and by the testimony of one of the parties making*2575 this appraisal. Aside from the fact that the appraisal is a retrospective one made after the lapse of seven years and accordingly does not carry the weight of an appraisal of value made upon inspection and consideration at the particular time at which the value is sought to be fixed, we do not think that it, or the testimony given supporting it, establishes the basis for amortization asked by this petitioner. It appears to have been assumed that the basis for amortization is determined by the salvage value, at completion of the Government work, of the various assets constituting the plant, and both the appraisal and the testimony introduced are upon this basis. In this case there was neither abandonment nor salvage of the plant at the close of the Government work. In fact, the record shows the plant in operation as a going concern in private work up until late in 1921. The basis for amortization was the residual values of the land, buildings, and facilities on September 16, 1919, as parts of a shipbuilding plant, not what they were worth as salvage. These assets can not, we think, be considered as having only a salvage value on that date when in use following that time and*2576 their residual value is not shown by estimate of their salvage value made by comparison with some other plant which was actually stripped and salvaged. It is shown, however, that in computing the amortization allowance of $114,895.24 respondent used as the cost of the land and water rights the amount shown on the books of $95,000. It is shown to our satisfaction that this entry was in error. It is apparent that no such amount was considered for payment for this asset by the company in acquisition of the property and the asset has never had a value anywhere near that figure. It is testified that the public accountant, *981 in opening the books, in error, assigned this amount of the total consideration to the land and water rights and the facts proven indicate that such was the case. We have found that the cost of the land and water rights to this taxpayer was $25,000 and that this asset had not lessened in value on Septmeber 16, 1919. It was assessed separately for taxation at $30,000 in 1919, and not until 1924 was that valuation reduced to $18,000. Petitioner's main witness on real estate values testifies that the value in 1919 was higher than at any other time. *2577 The opening asset account of this taxpayer should be adjusted in accordance with our finding as to original costs of the various assets, these items should be increased by the cost of additions made, and amortization, with proper adjustment for depreciation sustained, should be recomputed on the various classes of assets other than land and water rights by applying the percentages of lost value as ascertained and used by the respondent. Under the fifth assignment of error it is contended that the amortization deduction should be charged against the consolidated income of the two affiliated companies and not deducted in the first instance from the income of the Kelley-Spear Co. The question is immaterial as the result in either case would be the same, the entire allowance being realized as a deduction to the extent of consolidated income of the two corporations. Petitioner takes the position that should the amortization allowance exceed the income of the Kelley-Spear Co., such excess, in case the deduction were allowed originally against income of that company, would not reduce the income of petitioner. In this, petitioner is in error as the consolidation of income and deductions*2578 would give full effect to such excess in reducing thereby the consolidated income which includes the income of petitioner. In , we said: * * * It must follow that the amortization deduction is a deduction allowable to the affiliated group of corporations in a consolidated return. This means, under the circumstances of this case, that the amortization deduction with respect to the housing facilities erected, constructed or acquired by the Home Company should be allowed as a deduction in determining the net income to be included in the consolidated return, irrespective of whether in arriving at such consolidated net income the deduction is in the first instance applied to or by the Home Company. The sixth assignment of error raises the issue of the right of the Kelley-Spear Co. to deduct in 1918 and 1919 the cost of certain shipbuilding contracts alleged to have been acquired for $100,000, respondent contending that the payment of this sum was for the good will of the old company whose assets were acquired, and in support of this shows that on the books of the new company good will was *982 entered*2579 at $100,000, but in this connection it is also noted that "Option and Contracts" were entered at $400,000. It is not indicated that the good will of the old company had a value or represented a definite asset sought to be acquired by the new company and included at any figure as a part of the $100,000 cash paid by the new company. The contracts were two in number, one for the construction of a wooden vessel which was then 95 per cent complete and the additional cost and profit subject to accurate estimate. It is testified by this company's officers that the indicated profit, which the new company would and did receive in full, was estimated to be in the neighborhood of $100,000, and in making up the total offered and paid for the assets this contract was included at $50,000 and that the second contract, one for six wooden barges at $190,000 each, represented the consideration for the balance of the $100,000 cash payment. It is testified that the purchase was made upon recommendation of Fuller, the president of the new company and for many years an officer of the general contracting firm of George A. Fuller Co., who estimated the probable profit on the two contracts and recommended*2580 that they be included in the offer of purchase at $50,000 each. We think it has been sufficiently established that the $100,000 in question was paid for these two contracts and represents a proper deduction from the income received therefrom. The contract for construction of one wooden vessel appears to have been completed, and payment therefor to have been received and reported by this taxpayer in the consolidated return for 1918, and we hold that $50,000 of this cost represents a proper deduction for that period. The second contract was for six wooden barges at the same prior for each. The contract for four of these barges was canceled by the Government after some work had been done thereon and the taxpayer was paid $112,491.12 for this construction on April 29, 1919, and included this amount in the consolidated income for 1919, and we hold that a ratable portion or two-thirds of the $50,000 cost of this contract for six barges is applicable to these four whose construction was canceled, and accordingly $33,333.34 of this cost represents a proper deduction from this item of income for 1919. In respect to the remaining two barges, the contract was not canceled and we presume*2581 they were completed and paid for, but we are not advised as to when this occurred and consequently that portion of the cost of the contract applicable to them is not shown to be a deduction for any one of the taxable years before us. The seventh assignment of error is upon respondent's action in computing the excess and war-profits taxes of the affiliated companies for the period October 18 to December 31, 1918, instead of *983 on a full calendar year basis. It appears that affiliation of these corporations began on October 18, 1918, and that they were both organized in that month and began business on that date. Accordingly, it is only for the period from that date to the close of that year that a 1918 consolidated return could be filed as their accounting period was closed at the end of the calendar year. The pertinent portions of the Revenue Act of 1918 provide: SEC. 312. That the excess profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year. SEC. 305. That if a tax is computed under this title for a period of less than twelve months, the specific examption of $3,000, *2582 wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000, as the number of months in the period is of twelve months. SEC. 326. (d) The invested capital for any period shall be the average invested capital for such period, but in the case of a corporation making a return for a fractional part of a year, it shall (except for the purpose of paragraph (2) of subdivision (a) of section 311) be the same fractional part of such average invested capital. Respondent was not in error in computing consolidated net income on the basis of the period October 18 to December 31, 1918, for which the return in question was filed, and in prorating invested capital and corporate examption on such basis he complied with the specific provisions of the taxing act. The eighth assignment of error is disposed of by the stipulation filed that petitioner's deductible expenses for the year 1921 were in the sum of $10,581.24. Judgment will be entered pursuant to Rule 50.