Standard Oil Co. v. Commissioner

STANDARD OIL COMPANY (AND AFFILIATED SUBSIDIARIES), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Standard Oil Co. v. Commissioner Docket No. 86516. United States Board of Tax Appeals 43 B.T.A. 973; 1941 BTA LEXIS 1422; March 18, 1941, Promulgated *1422 1. (a) In determining the expiration date of a United States patent, held, the first day of the 17-year period begins to run on the day after the patent is granted, so in the case of a patent granted January 7, 1913, the expiration date is January 7, 1930. (b) On March 1, 1913, petitioner owned a United States patent which had been granted on January 7, 1913. The fair market value of the patent as of March 1, 1913, was $70,000,000. In determining the reasonable allowance for exhaustion of the patent deductible in the calendar year 1930, held, petitioner is only entitled to deduct 7/365 of 1/16 313/365 of $70,000,000 notwithstanding the fact that in years prior to 1930 petitioner had deducted annually only one-seventeenth of the said fair market value, and the Commissioner had acquiesced in such deduction. 2. (a) Where respondent disallowed a claimed deduction and in his deficiency notice gave what turns out to be an erroneous reason for the disallowance, held, it was not necessary for the respondent to specially plead a different reason for the disallowance in order to sustain his disallowance of the deduction. (b) Where the judgment of a prior suit between*1423 the same parties is relied upon, not as a bar to the present action, but as a judicial determination of given facts, issues, or controversies, held, it is not necessary to plead it specially, and when given in evidence it is conclusive as to such facts, issues, or controversies. (c) Where a corporation in bad faith participated in an illegal scheme to defraud the United States of certain oil reserves, and as a result thereof was compelled to pay a large sum of money to the United States, held, it is against public policy to permit the corporation to deduct from its gross income any part of such amount paid, either as expense, loss, bad debt, or interest. Lee I. Park, Esq., and A. L. Green, Esq., for the petitioner. D. A. Taylor, Esq., for the respondent. BLACK *974 This proceeding involves the determination by respondent of a deficiency in income tax against petitioner and twenty affiliated subsidiary corporations for the calendar year 1930 in the amount of $711,913.83. Petitioner in numerous assignments of error contests the entire deficiency and prays for a refund, a claim for which was filed with the collector in the amount*1424 of $1,038,158.48. The respondent in his "Answer to Amended Petition" affirmatively alleges that petitioner failed to report as income for 1930 certain royalties in the amount of $74,916.88, and as a result thereof, the respondent makes a claim for an increased deficiency. Most of the issues, including the affirmative issue raised by respondent, have been settled by a written stipulation, and effect thereto will be given under Rule 50. Another issue, involving the deductibility by four of petitioner's subsidiaries of intangible drilling and development costs in computing net income for the purpose of applying the 50 percent limitation provision contained in section 114(b) of the Revenue Act of 1928, was submitted without briefing, to await the outcome of the Supreme Court's decision, subsequently made in Helvering v. Wilshire Oil Co., Inc.,308 U.S. 90; and upon the authority of that decision we sustain the respondent's determinations as to this issue. *975 The remaining issues are as follows: (1) Did respondent err in disallowing as "Excess depreciation on Burton patents" $618,587.18 of the $686,274.51 claimed by petitioner on its consolidated*1425 income tax return for the calendar year 1930? (2) Did respondent err in disallowing a deduction from gross income of $2,901,865.46 claimed by the Stanolind Crude Oil Purchasing Co. on its return for the period January 1 to September 21, 1930, as representing payment made to the United States on June 2, 1930, on account of a judgment for $2,906,484.32, less a recoupment of $4,618.86, which the United States obtained against Stanolind on May 28, 1930. (3) Did respondent err in including in the gross income of the Stanolind Crude Oil Purchasing Co. for the period January 1 to September 21, 1930, the amount of $256,374.18 which the United States allowed Stanolind as a credit for certain tanks in arriving at the amount of the judgment mentioned under issue (2)? (4) If issue (2) be decided in petitioner's favor, should the amount of $2,901,865.46 nevertheless be excluded from Stanolind's net loss for the period January 1 to September 21, 1930, under section 117(a)(1) of the Revenue Act of 1928? In his brief respondent concedes that issue (3) should be decided in favor of petitioner, and effect thereto will be given under Rule 50. FINDINGS OF FACT. 1. Petitioner was organized*1426 as a corporation under the laws of the State of Indiana on June 18, 1889. Since that time it has been engaged in the business of producing, marketing, and manufacturing petroleum products. Its principal office is in Chicago, Illinois. 2. During the calendar year 1930 petitioner was the "common parent corporation" of an "affiliated group" within the meaning of article 2 of Regulations 75, promulgated pursuant to the provisions of the Revenue Act of 1928. There were twenty affiliated corporations, some of which were affiliated during the entire year 1930, and others for only a part of the year. The Stanolind Crude Oil Purchasing Co. (sometimes referred to herein as Stanolind) was one of the twenty affiliated corporations. It was incorporated in the State of Delaware on February 5, 1921, and was affiliated with petitioner during the period from September 22 to December 31, 1930. Prior to September 22, 1930, it was known as the Sinclair Crude Oil Purchasing Co.The Stanolind Pipe Line Co. was one of the twenty affiliated corporations. It was incorporated in the State of Maine, and was affiliated with petitioner during the period from September 22 to December 31, 1930. Prior*1427 to September 22, 1930, it was known as the Sinclair Pipe Line Co. The Midwest Refining Co. (sometimes referred to herein as Midwest) was one of the twenty affiliated corporations. It was incorporated *976 in the State of Maine and was affiliated with petitioner during the entire calendar year 1930. 3. On June 15, 1931, petitioner, on behalf of the entire affiliated group, filed a final consolidated corporation income tax return for the calendar year 1930, showing a total tax liability of $4,152,633.94. This amount was paid to the collector at Chicago as follows: Mar. 16, 1931 $1,038,158.49 June 15, 1931 1,038,158.48 Sept. 15, 1931 1,038,158.49 Dec. 15, 1931 1,038,158.48 4. On December 12, 1933, petitioner filed with the collector at Chicago, a claim for refund for the calendar year 1930 in the amount of $1,038,158.48. Depreciation on Burton Process Patents. 5. As of March 1, 1913, the petitioner, Standard Oil Co. (Indiana), owned an invention known as the Burton Process for the cracking of gasoline. On January 7, 1913, the United States had issued a patent (No. 1,049,667) on this invention to "William M. Burton, of Chicago, Illinois, *1428 assignor to Standard Oil Company, of Whiting, Indiana, a corporation of Indiana." On November 19, 1912, Burton by a written assignment of that date had assigned, sold, and set over unto "Standard Oil Company, its successors, legal representatives and assigns, the entire right, title and interest in and to said invention and any and all improvements thereon I may hereafter invent, in and for the United States and all foreign countries and in and to any and all Letters Patent that may be issued thereon * * *." The fair market value as of March 1, 1913, of the said Burton Process patent was $70,000,000. On April 8, 1913, the Dominion of Canada issued to petitioner as assignee of Burton a patent (No. 147,094) on the same invention, which expired, pursuant to Canadian laws, on April 7, 1931. The application for the United States patent was filed on July 3, 1912, and the application for the Canadian patent was filed on December 20, 1912. 6. The laws of Canada in force from 1906 to 1932 provided as follows with respect to patents on inventions covered by patents in foreign countries: 8. Any inventor who elects to obtain a patent for his invention in a foreign country before obtaining*1429 a patent for the same invention in Canada, may obtain a patent in Canada, if the patent is applied for within one year from the date of the issue of the first foreign patent for such invention. 2. If within three months after the date of the issue of a foreign patent, the inventor gives notice to the Commissioner of his intention to apply for a patent in Canada for such invention, then no other person having commenced to manufacture the same device in Canada during such period of one year, shall be entitled to continue the manufacture of the same after the inventor has obtained a patent therefor in Canada, without the consent or allowance of the inventor. *977 7. Subsequent to March 1, 1913, the United States issued to certain individuals, as assignors of petitioner, 15 patents covering improvements on the Burton Process. Equivalent patents were also issued by the Canadian Government on five of these improvements. The numbers and dates of the United States patents on said improvements and the expiration dates of the aforesaid five Canadian equivalents, were as follows: United States patents on original and improvements Patent No. Date patented Expiration dates of Canadian equivalents Original Burton 1,049,667 Jan. 7, 1913 Apr. 7, 1931 (147,094). Improvements: Burton 1,055,707 Mar. 11, 1913 May 11, 1932 (155,567). Burton 1,105,961 Aug. 4, 1914 Burton 1,112,113 Sept. 29, 1914 Clark 1,119,496 Dec. 1, 1914 May 17, 1933 (162,584). Humphreys 1,119,700 Dec. 1, 1914 Nov. 15, 1938 (205,729). Humphreys 1,122,002 Dec. 22, 1914 Humphreys 1,122,003 Dec. 22, 1914 Sept. 20, 1933 (164,984). Rogers and Cooke 1,122,220 Dec. 22, 1914 Clark 1,129,034 Feb. 16, 1915 May 17, 1933 (162,585). Moore 1,130,318 Mar. 2, 1915 Clark 1,132,163 Mar. 16, 1915 Burton 1,160,680 Nov. 16, 1915 Burton 1,167,884 Jan. 11, 1916 Clark 1,388,514 Aug. 23, 1921 Lewis and Cooke 1,392,584 Oct. 4, 1921 *1430 8. The application for Patent No. 1,055,707 was filed September 23, 1912. All the remaining applications for improvements on the Burton Process were filed subsequent to March 1, 1913. 9. At all times subsequent to their respective dates of issue, and until their respective expiration dates, petitioner owned all of said patents. 10. The aforesaid value of $70,000,000 for the aforesaid Burton patent was agreed to by petitioner and the Commissioner of Internal Revenue in March 1928, and for each of the taxable years 1918 to 1929, both inclusive, the Commissioner allowed an annual deduction for exhaustion of said Burton patent of one-seventeenth of said value, or $4,117,647.06. No deduction for exhaustion of the patent was either claimed by petitioner or allowed by respondent for any year or period prior to the calendar year 1918. All of petitioner's taxable years prior to the taxable year 1930 are closed by the bar of the statute of limitations. 11. Petitioner received and reported as taxable income royalties during the years 1930 to 1933, on the aforesaid United States patents, for the use thereof prior to their respective expiration dates, as follows: [1930] $227,373.22 [1931] 5,751.96 [1932] 70,467.80 [1933] 50,000.00 Total 353,592.98 *1431 *978 12. Petitioner received and reported as taxable income royalties during the years 1930 to 1934, on the aforesaid Canadian patents, for the use thereof prior to their respective expiration dates, as follows: [1930] $237,799.54 [1931] 89,916.88 [1932] 56,319.25 [1933] 42,509.32 [1934] 39,854.37 Total 466,399.36 For the years 1914 to 1929, both inclusive, petitioner had received and reported as taxable income, royalties on said Canadian patents in the aggregate amount of $3,226,249.14. The aforesaid royalties on said Canadian patents were received pursuant to and in accordance with a contract dated January 30, 1914, between petitioner and the Imperial Oil Co. of Canada, Ltd., a Canadian corporation, wherein petitioner as licensor granted the Imperial Oil Co. as licensee, the right to manufacture in Canada gasoline and kerosene "in accordance with the invention of said Letters Patent No. 147094" and wherein petitioner agreed "that the license hereby granted shall, without additional payment, extend to and include any and all inventions, improvements, additions to or discovery useful to the manufacture of or under the subject matter of the Letters Patent*1432 or any Letters Patent for any new improvements on the invention of said Letters Patent which the Licensor may now own or hereafter acquire for the full term of any such further Letters Patent, including apparatus for the practice of said patented invention or improvements thereon * * *." 13. In its income tax return for the calendar year 1930, petitioner deducted, among other items under the heading of depreciation on patents, the amount of $686,274.51 covering the "Burton Pressure Still." The respondent disallowed $618,587.18 of the amount so deducted. In schedule 1-A, item (b), attached to the deficiency notice, the respondent explained this part of his determination as follows: (b) This adjustment is determined as follows: Depreciation on Burton patents claimed on return $686,274.51 Depreciation allowable 67,687.33 Excess disallowed $618,587.18 The Burton patents were issued and acquired January 7, 1913, and depreciation has been computed by you and allowed by the Bureau for each year on the basis of one-seventeenth of $70,000,000.00, the value allowed by the Bureau for such patents; accordingly, the seventeen-year life of the patent, which formed the*1433 basis of depreciation claimed and allowed for prior years, expired January 6, 1930. Therefore, the depreciation allowable, as above, is computed on the basis of $70,000,000.00 for the six days remaining of the seventeen-year life. *979 On pages 3 and 4 of the statement attached to the deficiency notice the respondent also explained his "Disallowance of depreciation on Burton Patents $618,587.18" as follows: The evidence indicates that these patents were acquired January 7, 1913, and that the seventeen-year life thereof, which formed the basis for the computation of depreciation thereon, expired January 6, 1930; therefore, in accordance with the provisions of section 43 of the Revenue Act of 1928 and article 342, Regulations 74, only that portion of the cost or value remaining and applicable to the six days falling within the taxable year 1930 is deductible. In the closing of your case for prior years, the Bureau held that one-seventeenth of the cost or value of these patents was an allowable deduction for each year of the life of such patents; therefore, it is held that, when it becomes necessary to adjust depreciation for years which have been closed, the amount allowed*1434 or allowable, whichever is greater, should be sued. On this basis, the Unit has adjusted the base by deducting the depreciation allowable as applicable to the exhausted life of such patents as at December 31, 1929. Your contention for any greater amount of depreciation on these patents, due to the fact that inadequate allowances have been made in prior years, must be denied. Stanolind's Claim for Deduction of $2,901,865.46. 14. Stanolind was incorporated primarily for the purpose of purchasing and selling crude oil, principally from the Mid Continent Field, and it regularly carried on that business from the time of its organization until after the close of the calendar year 1930. Its stockholders from February 5, 1921 (date of incorporation) to September 22, 1930, were the Sinclair Consolidated oil Co. and petitioner, each of which owned 50 percent of the stock and each of which, pursuant to an agreement between them, named one-half of the board of directors of Stanolind. This stock ownership continued until September 22, 1930, when petitioner purchased the one-half interest belonging to the Sinclair Consolidated Oil Co. and thereupon became be sole owner of the Stanolind*1435 stock. At all times during the period that Stanolind was a member of the affiliated group, its entire outstanding capital stock was owned by petitioner. The aggregate cost to petitioner of Stanolind's stock was over $30,000,000. 15. The Mammoth Oil Co. (sometimes referred to as Mammoth) was incorporated by Harry F. Sinclair on February 28, 1922. Its entire capital stock was issued to Sinclair for $1,000 and his services in procuring for Mammoth, on or about April 7, 1922, what purported to be an oil and gas lease from the united States on certain Government owned lands in the State of Wyoming, known as Naval Petroleum Reserve No. 3 and commonly called "Teapot Dome." Shortly thereafter the Sinclair Consolidated Oil Co. acquired the stock of Mammoth. 16. Shortly after April 7, 1922, Mammoth took possession of the lands covered by the purported lease and drilled oil and gas wells thereon. The Teapot Come lease, which was signed on behalf of the United States by Albert B. Fall, the then Secretary of the Interior, *980 and Edwin Denby, the then Secretary of the Navy, and on behalf 0f Mammoth by H. F. Sinclair, president, purported to grant to Mammoth the exclusive right*1436 to take and dispose of the oil and gas from the land covered thereby so long as produced in paying quantities. Stanolind was neither a party to the purported lease nor was it mentioned therein. The lease also purported to give to the lessee the right to construct tanks and other operating facilities on the leased lands. On February 9, 1923, Mammoth and the United States, by Fall and Denby, entered into what purported to be a supplemental agreement which concerned, among other things, certain storage facilities to be provided by the lessee, the operation of the purported lease, and the disposal of the Government's royalty oil. Stanolind was neither a party to the supplemental agreement nor was it mentioned therein. 17. On October 24, 1922, Mammoth, as party of the first part, Midwest, as party of the second part, and Stanolind (then known as the Sinclair Crude Oil Purchasing Co. and referred to in the agreement mentioned hereinafter as "Purchasing Company"), as party of the third part, entered into a contract the material part of which is as follows: THAT WHEREAS the parties hereto desire to cooperate in a program to extend the market for crude oil produced in the State of*1437 Wyoming and said party of the first part is the owner and operator of the lease on Naval Reserve No. 3, commonly called "Teapot Dome" and said party of the second part has contracts for the purchase of a large amount of crude oil that is being and will be produced in what is known as the "Salt Creek Field" in the State of Wyoming, and WHEREAS, said Purchasing Company desires to purchase and receive from said parties of the first and second part the Wyoming crude oil as herein provided NOW THEREFORE, for and in consideration of the mutual covenants and agreements to be kept and performed by each of the respective parties hereto, it is mutually understood and agreed by and between them and each of them as follows: I. That said Mammoth Company hereby sells and agrees to deliver to said Purchasing Company and said Purchasing Company hereby agrees to accept and pay for, all as herein provided, the first oil hereafter produced from said Teapot Dome or Naval Reserve No. 3 by said Mammoth Company to an amount not exceeding thirty million (30,000,000) barrels; RESERVING, HOWEVER, unto said Mammoth Company from said first production an amount equivalent to the Government royalty oil*1438 as long as and during the time Sinclair Refining Company, a corporation of Maine, with its principal office in the City of Chicago, Illinois, exercises its option or right to purchase and demand delivery of said royalty oil in accordance with the contract heretofore executed between the said Mammoth Company and Sinclair Refining Company, dated April 19, 1922. Any Government royalty oil so reserved shall not be included in said maximum of thirty million (30,000,000) barrels. II. That said Midwest Company hereby sells and agrees to deliver and said Purchasing Company hereby purchases and agrees to receive and pay for, all as herein provided, the same amount of crude oil not exceeding thirty million (30,000,000) *981 barrels as shall be sold and delivered by the Mammoth Company hereunder but deliveries shall not be required to be made by said Midwest Company in excess of thirty thousand (30,000) barrels per day. III. That the crude oil covered by this contract shall mean crude oil produced either from the Salt Creek Field or from the Teapot Dome Field and deliveries shall be made to said Purchasing Company in accordance with the general regulations it may prescribe*1439 at the storage tanks designated by the respective vendors. The Purchasing Company agrees to accept delivery of all oil from said Naval Reserve No. 3 as fast as the same is produced and delivered to it by the Mammoth Company. The Midwest Company shall deliver in each month the same amount of crude oil as is delivered to the Purchasing Company by the Mammoth Company, provided, that if the total deliveries by the Mammoth Company in any month are at a rate in excess of thirty thousand (30,000) barrels per day, the Midwest Company may, at its option, restrict its deliveries to thirty thousand (30,000) barrels per day. Such limitation by the Midwest Company shall not, however, reduce the total amount of crude oil to be sold and delivered by it hereunder, and it shall not reduce its deliveries below thirty thousand (30,000) barrels per day so long as it shall have delivered less oil to the Purchasing Company than the amount delivered by the Mammoth Company. IV. The price to be paid for said crude oil so delivered hereunder shall be the posted market field price, on the day of delivery, of said Purchasing Company for crude oil of the same quality in the Salt Creek Field or in the*1440 Teapot Field; PROVIDED, HOWEVER, that as to any Teapot crude oil representing the Government royalty interest which may be sold and delivered hereunder by the Mammoth Company it shall be paid therefor the smae price which it is required to pay the United States under its contract of April 7th, 1922, and the Midwest Company shall receive the same price for a like amount of Salt Creek crude of a similar quality sold and delivered by it hereunder, or if not of the same quality, with the same differential as is fixed by the posted field prices of the Purchasing Company, for the respective grades of crude oil. In addition to the price payable for said crude oil the Purchasing Company shall pay to the respective vendors a reasonable gathering charge for collecting the oil from the wells. * * * V. Payment for all oil delivered under this contract shall be made to the party making such delivery hereunder on or before the 25th day of each calendar month for the oil delivered during the first fifteen days of such month and on or before the 10th day of each calendar month for the oil delivered during the second half of each preceding month and the usual statements as to runs and deliveries*1441 shall accompany the checks covering said respective payments. VI. This agreement shall in any event terminate and be no longer binding upon either or any of the parties hereto on and after January 1, 1931; provided, that the Midwest Company, if it shall not have equalled the deliveries by the Mammoth Company, shall continue its deliveries at the rate of thirty thousand (30,000) barrels per day until the deficit is made up. *982 VII. Each of the vendors does warrant the title to all crude oil sold and delivered by it under this agreement, and agrees to hold the Purchasing Company harmless from all claims of any person or corporation to such crude oil. VIII. The Purchasing Company may, with the consent of the other parties, assign this contract to another oil purchasing company and if the contract is so assigned the posted field prices herein referred to shall be the posted field prices of the said assignee. The above contract was signed on behalf of Mammoth by H. F. Sinclair, as president; on behalf of Midwest by T. A. Davis, as president; and on behalf of the Sinclair Crude Oil Purchasing Co. by George H. Taber, Jr., as president. 18. Prior to March 12, 1924, Stanolind*1442 obtained from Mammoth, pursuant to the October 24, 1922, contract, 1,430,024.70 barrels of oil produced from lands covered by the Teapot Dome lease and paid Mammoth therefore the sum of $2,167,591.26. Stanolind disposed of all of this oil prior to 1928, and in its returns for the years prior to 1928 it duly reported all of the income realized by it from the sale of the crude oil thus acquired from Mammoth (as represented by excess receipts over cost, or the price paid to Mammoth), and no part of such income has ever been eliminated from taxable income for those years by the Commissioner. For the years 1923 to 1927, both inclusive, Stanolind reported net losses and paid no income tax for those years. For the year 1928, Stanolind reported a net income of $1,272,937.64 (after deducting a net loss for 1927 of $35,100.99), which was arrived at after deducting a net loss for 1926 of $115,688.88, and paid a tax for that year of $152,754.92, of which amount 25 percent was subsequently refunded. 19. Subsequent to March 12, 1924, and pursuant to the order of the United States District Court for the District of Wyoming, entered March 13, 1924, to which reference is hereinafter made, Stanolind*1443 made purchases under the October 24, 1922, contract from the receivers for Mammoth as follows: [1924] 735,331.49 barrels [1925] 632,701.66 barrels [1926] 422,378.69 barrels [1927] 276,520.03 barrels 20. During the years 1924 to 1927, inclusive, Stanolind made purchases from Midwest pursuant to the provisions of the October 24, 1922, contract as follows: [1924] 2,234,287.47 barrels [1925] 632,701.66 barrels [1926] 425,684.79 barrels [1927] 277,466.15 barrels *983 21. Stanolind's total purchases and sales of crude oil, per its books, for the years 1921 to 1928, both inclusive, including all the oil acquired pursuant to the October 24, 1922, contract as set forth above, were as follows: Year Barrels purchased Barrels sold [1921] 21,495,639.48 9,896,064.16 [1922] 27,903,530.54 10,964,542.74 [1923] 24,268,140.23 12,384,200.09 [1924] 26,931,492.93 24,776,154.12 [1925] 25,888,658.42 30,034,860.86 [1926] 28,399,986.07 31,875,609.41 [1927] 37,308,909.09 35,247,049.73 [1928] 42,138,503.45 39,981,744.16 Total 234,334,860.21 195,160,225.27 22. Respondent does not question in this proceeding the validity of Midwest's*1444 title to the oil which it sold to Stanolind under the October 24, 1922, contract, or contend that any part thereof was produced from the Teapot Dome lease. 23. At all times herein material, Midwest was a subsidiary of petitioner, and Mammoth was a subsidiary of the Sinclair Consolidated Oil Co. From 1921 to September 22, 1930, petitioner and the Sinclair Consolidated Oil Co. each owned 50 percent of the stock of the Sinclair Pipe Line Co., a party defendant in the Wyoming suit hereinafter mentioned. On September 22, 1930, petitioner also acquired the 50 percent interest owned by the Sinclair Consolidated Oil Co. in the Sinclair Pipe Line Co., and on or about the same date the name of Sinclair Pipe Line Co. was changed to "Stanolind Pipe Line Co." Neither petitioner nor any of its subsidiaries has ever at any time owned any stock of either Mammoth or the Sinclair Consolidated Oil Co., and neither of the last two named corporations has ever at any time owned any stock of petitioner. At all times herein material, Harry F. Sinclair was chairman of the board of directors of the Sinclair Consolidated Oil Co. and president of Mammoth, and R. W. Stewart was chairman of the board of*1445 directors of petitioner. Sinclair has never been an officer, director, or employee of petitioner, Stanolind, or any other subsidiary of petitioner, and has never owned any of Stanolind's stock. 24. On March 13, 1924, the United States instituted a civil suit in equity in the District Court of the United States for the District of Wyoming (sometimes referred to herein as the Wyoming suit) to secure the cancellation of the Teapot Dome lease purported to have been made by the United States to Mammoth on April 7, 1922, and to set aside the purported supplemental agreement made by the same parties on February 9, 1923. Stanolind and the Sinclair Pipe Line Co., which owned tanks and pipelines, respectively, located on the Teapot Dome lease, were also made parties defendant with Mammoth in this suit. The only allegations or references in the bill of complaint filed March 13, 1924, with respect to Stanolind, in addition to its inclusion in the *984 title of the case, were contained in paragraphs numbered 2 and 32, and prayers numbered (7) and (8) of the prayers for relief, all of which are as follows: 2. Defendant, Sinclair Crude Oil Purchasing Company, is, and at all times*1446 hereinafter mentioned was a corporation organized and existing under the laws of the state of Delaware, and is a citizen and resident of the said state, and has its principal office and place of business in Wilmington in said state, and is doing business within the state of Wyoming. * * * 32. Defendant Sinclair Crude Oil Purchasing Company, as plaintiff is informed, claims to have and to hold certain rights derived from defendant Mammoth Oil Company, and by its servants, agents, and employees has erected and maintained certain structures upon the lands described in paragraph 4 hereof. Plaintiff avers that said defendant Sinclair Crude Oil Purchasing Company, although alleging certain rithts to be upon said land, derived from said defendant Mammoth Oil Company, is nevertheless a trespasser upon said lands. * * * Plaintiff therefore prays: * * * (7) That your honorable Court command the defendant Sinclair Crude Oil Purchasing Company, and the defendant Sinclair Pipe Line Company, to make discovery in this action of their alleged rights to possession and occupancy of the said lands described in the bill of complaint, or any part thereof, adjudicate the rights of said defendants*1447 in the premises, and enter a decree against them in relief of the plaintiff's right of possession. (8) Such other and further relief as to your honorable Court shall seem meet in the premises. 25. On the same day that the bill of complaint was filed the District Court issued an order appointing receivers of the property covered by the Teapot Dome lease, but excluding from such receivership the seventeen steel oil storage tanks owned by Stanolind. The court's order also provided that the receivers should continue the operation of the wells only to such extent as they should deem necessary to prevent loss or damage, and "until the further order of this Court to sell such oil and gas so produced from said wells at the market price for the same, and, in accordance with the terms and provisions of the contract heretofore executed between said defendant, Mammoth Oil Company, and said defendant, Sinclair Crude Oil Purchasing Company, under which contract said oil has been heretofore sold * * *." 26. Stanolind, in its answer filed April 10, 1924, admitted the allegations of paragraph 2 of the bill of complaint, and answered paragraph 32 thereof as follows: This defendant for its*1448 answer to the allegations contained in the thirty-second paragraph of said bill admits that it holds certain rights and interests in the land described in said bill, which were partly derived from said defendant, Mammoth Oil Company, and admits that this defendant has erected and now maintains certain structures, which are more specifically hereinafter described herein, upon a portion of the land described in paragraph fourth of said bill; but this defendant denies that it is a trespasser upon said land for the reasons hereinafter set forth herein. *985 In paragraph 34 of its answer, Stanolind "for separate and further defense" alleged such facts as it thought necessary to establish its ownership in and right to remove the seventeen tanks located on the Teapot Dome lease. 27. On June 19, 1925, the District Court handed down its decision in the Wyoming suit (5 Fed.(2d) 330). It held that the April 7, 1922, lease and the February 9, 1923, agreement were authorized by Congress in the Act of June 4, 1920. It found that there was no fraud involved and dismissed the case. The District Court's decision was reversed and remanded by the *1449 Eighth Circuit on September 28, 1926 (14 Fed.(2d) 705). The Circuit Court sustained the construction of the Act of June 4, 1920, but upon examination of the evidence it found that "each of the appellees is a mala fide trespasser" and held that the lease and agreement were obtained by fraud and corruption and directed the District Court "to enter a decree (a) canceling said lease and contract as fraudulent; (b) enjoining appellees from further trespassing upon the lands of appellant described in said lease; and (c) providing for an acounting on the part of appellee Mammoth Oil Company, for the value of all oil and other petroleum products taken under said lease and contract." The Circuit Court was affirmed by the Supreme Court on October 10, 1927 (275 U.S. 13, 35), and the Supreme Court not only held that the execution of the lease and agreement was fraudulent, but that there was no authority in law for their execution. In adjudicating the rights of Stanolind in the premises, the Supreme Court said: The lease gave the Mammoth Company the right to construct tanks and other operating facilities on the reserve. In January, 1923, the petitioner, Sinclair Crude*1450 Oil Purchasing Company [Stanolind], bought from that company the tanks already constructed and others being built thereon. It used them to store Salt Creek royalty oil that it bought from the Government. It claims that it relied on the validity of the lease and became the owner of the tanks as licensee and grantee of the lessee and entitled to maintain them in all respects as the lessee was entitled to do under the lease. It contends that the Circuit Court of Appeals erred in directing it to be restrained from further trespassing upon the reserve, and that in any event it should be given opportunity to remove its property. But the Purchasing Company is presumed to have known that no law authorized the making of any such lease. The existence of that arrangement for the exhaustion of the reserve was calculated to excite the apprehensions of one considering such a purchase and put him on his guard rather than to give assurance of safety. The use of such tanks to taki oil from the reserve was a part of the illegal scheme. Moreover, the Purchasing Company was owned half and half by the Sinclair Consolidated Oil Corporation and the Standard Oil Company of Indiana. Sinclair was*1451 chairman of the board of the former, and Stewart held like position in the latter. Shortly before the Purchasing Company bought the tanks, these chairmen acted for and controlled it in respect of most important transactions. That and other disclosed circumstances are sufficient to impute to it Sinclair's knowledge of the conspiracy to defraud by which the lease was obtained. It is clear that, *986 in respect of the use and removal of these tanks, the Purchasing Company is in no better position than the Mammoth Company would have occupied, if it owned them. * * * The tanks, pipe line and other improvements put upon the reserve for the purpose of taking away its products were not authorized by Congress. The lease and supplemental agreement were fraudulently made to circumvent the law and to defeat public policy. No equity arises in favor of the lessee or the other petitioners to prevent or condition the granting of the relief directed by the Circuit Court of Appeals. Petitioners are bound to restore title and possession of the reserve to the United States, and must abide the judgment of Congress as to the use or removal of the improvements or other relief claimed by*1452 them. Pan American case, supra, p. 510. Pursuant to the mandate from the Supreme Court, the District Court entered a decree on December 29, 1927, in which the only references to Stanolind were as follows: That the defendants Mammoth Oil Company, Sinclair Crude Oil Purchasing Company and Sinclair Pipe Line Company, are, and each of them is hereby, perpetually enjoined from further trespassing upon the lands of the United States of America, Plaintiff, being the lands described in paragraph 4 of the bill filed herein and in Article 1 of said lease, Exhibit B of said bill, and from claiming any right, title, or interest in said premises or any improvements, fixtures or structures situate thereon, and said defendants and each of them are and is enjoined from removing from the said lands any improvements, fixtures, or structures tures placed thereon by any of said defendants. 28. On August 17, 1928, the District Court entered its final decree in placed thereon by any of said defendants. United States the sum of $2,294,597.74 as the value of the oil and other petroleum products taken by Mammoth, together with interest thereon at 7 percent per annum from the various dates*1453 on which the products were taken. Under date of March 13, 1939, the clerk of the District Court executed a certificate with respect to the status of the above mentioned judgment and decree in which he stated that on December 27, 1928, there was paid on said judgment the sum of $3,509.19 and that the records at his office disclose no further payment on said judgment and that except for the one payment of $3,509.19 "said judgment remains unpaid and unsatisfied on the records of my office." 29. In December 1928 the United States brought an action of trespass on the case in trover against Stanolind in the United States District Court for the District of Delaware for the conversion of the 1,430,024.70 barrels of crude oil which Stanolind had obtained from Mammoth under the above mentioned contract of October 24, 1922. The declaration filed in this suit (sometimes referred to herein as the Delaware suit) contained three counts. The pertinent provisions of the first count were as follows: (1) FOR THAT WHEREAS the said plaintiff heretofore, to-wit, on the First day of October, 1922, at and within the County of Natrona, State of Wyoming, to-wit, at the District of Delaware aforesaid, *1454 was lawfully possessed as of its own property *987 of upwards of 1,430,024.70 barrels of crude oil, said crude oil being contained within and beneath the surface of certain lands, situate in the said County of Natrona, owned in fee simple by and in the possession of the plaintiff as a part of the said plaintiff's public domain, and described as follows, - * * * and said crude oil being of great value, to wit, of the value of Two Million One Hundred and Sixty-eight Thousand Two Hundred and Fifty-two Dollars and Fifty-seven Cents ($2,168,252.57), lawful money of the United States of America; and being so possessed the said plaintiff, afterward, to wit, on the day and year first above mentioned, or sometime between that date and the 31st day of March, 1924, in the said County of Natrona, to wit, at the District of Delaware aforesaid, casually lost the said crude oil out of its possession; and the same afterward, to wit, on the day and year first aforesaid, or sometime between that date and the 31st day of March, 1924, in the said County of Natrona, to wit, at the District of Delaware aforesaid, came into the possession of the said defendant by finding; yet the said defendant, *1455 well knowing the said crude oil to be the property of the said plaintiff and of right to belong and appertain to it but contriving and fraudulently intending craftily and subtly to deceive and defraud the said plaintiff in this behalf hath not as yet delivered the said crude oil or any part thereof, to the said plaintiff although often requested so to do and hath hitherto wholly refused so to do; and afterward, to wit, on the day and year last aforesaid, in the said County of Natrona, to wit, at the District of Delaware aforesaid, converted and disposed of the said crude oil to its own use. WHEREFORE the said plaintiff says that it is injured and has sustained damage, including interest which is hereby claimed at the rate of seven per centum per annum which is and during all the times herein mentioned has been the legal rate of interest in the said County of Natrona, in the sum of Three Million Dollars ($3,000,000), and therefore it, the said plaintiff, brings its suit. 30. The second count of the declaration in the Delaware suit, in so far as material here, alleged, in substance, that the United States was the owner of the land covered by the lease of April 7, 1922, and was*1456 at that time "possessed as of its own property of all the crude oil and other petroleum products contained within and beneath the surface of said lands including the 1,430,024.70 barrels of crude oil" for the conversion of which the Delaware suit was instituted against Stanolind; that such oil was the absolute property of the United States and a portion of its public domain; that while it was so owned and possessed of the crude oil, Mammoth "wrongfully, wilfully and unlawfully trespassed upon and seized possession of said lands under the color and pretense of a fraudulent and illegal lease" purporting to be from the United States, as lessor; that Mammoth "wrongfully, wilfully, unlawfully and fraudulently drilled for, extracted and removed" from these lands crude oil and other petroleum products of the then value of $2,294,597.74; that Mammoth "wrongfully, wilfully, unlawfully and fraudulently sold and delivered, and caused to be sold and delivered, to the defendant 1,430,024.70 barrels of the said crude oil * * * of the then value of $2,168,252.57"; that Stanolind "then and there well knowing the wrongful, wilful, unlawful and fraudulent character" of the acts of Mammoth, and well*1457 knowing the fraudulent character of the pretended lease, and well knowing that *988 the crude oil at the time of its delivery to Stanolind was the absolute and unconditional property of the United States; and that Stanolind "with all the knowledge aforesaid, but covinously contriving and fraudulently intending to deceive and defraud the plaintiff in this behalf * * * wrongfully, wilfully, unlawfully and fraudulently converted and manufactured the said crude oil into fuel oil and other refined petroleum products and thereby increased the value thereof by the sum of" $1,000,000. On this count damages in the sum of $4,000,000 were sought. 31. The allegations of the third count of the declaration in the Delaware suit were substantially the same as the second count, except it also alleged that a decree had been entered against Mammoth in the Wyoming suit, that execution had issued thereon, "but no return thereof has thus far been made and no payment has been made to the said plaintiff" by Mammoth. 32. On September 11, 1929, Stanolind filed its plea in the Delaware suit, in which it alleged as to all of the counts that the United States was not the owner of and was not entitled*1458 to the immediate possession of the crude oil mentioned in the counts at the time of the alleged conversion; that Stanolind did not convert and dispose of the crude oil and other refined petroleum products mentioned in the counts to its own use; and that the United States was barred by the proceedings and judgment in the Wyoming suit. 33. On September 12, 1929, the United States filed its demurrer and replication, respectively, in the Delaware suit. Its demurrer was both general and special. The ground of the general demurrer was that the pleas and matters contained in the plea were not sufficient in law to bar or preclude the plaintiff. The special demurrer was limited to Stanolind's allegations with respect to the Wyoming suit, which were said to be insufficient in that they were conclusions of law, that they were argumentative, ambiguous and inconsistent, and that "the cause of action in the said Wyoming suit is separate and distinct from the cause of action in the above entitled case * * *." 34. In the latter part of 1929 Stanolind offered to terminate the Delaware suit by paying to the United States the sum of $2,167,591.26, the value of the oil as represented by the*1459 prices which Stanolind had paid Mammoth, less the sum of $170,000, the estimated value of the seventeen oil tanks on the Teapot Dome lease belonging to Stanolind, plus interest at the rate of 7 percent per annum on the sum thus arrived at. 35. On April 2, 1930, counsel for Stanolind and the United States delivered a letter to the Chase National Bank of New York, stating that they were counsel in the Delaware suit; that they had agreed upon a settlement of that litigation, but believed that a joint resolution of Congress approving such settlement was required; and that pending *989 the passage of such a joint resolution it was requested that the bank act as escrow agent of the parties to the suit. 36. On April 2, 1930, counsel for both parties in the Delaware suit entered into the following stipulation: IT IS HEREBY STIPULATED AND AGREED by and between the attorneys for the parties hereto, subject to approval by the Court, and the passing of a Joint Resolution by the Congress, that the fair amount due the plaintiff in the above entitled action is the sum of $2,906,484.32 and that the Court may enter its judgment against the defendant for said sum and the accrued costs*1460 of this suit. The above amount of $2,906,484.32 was arrived at as follows: Value of the oil as represented by the prices which Stanolind had previously paid to Mammoth under its contract of October 24, 1922 $2,167,591.26 Plus interest at 7 percent on monthly balances 995,267.24 Total 3,162,858.50 Deduct: Value at 17 oil tanks $170,000.00 Interest thereon at 7 percent 86,374.18 256,374.18 Amount due United States as stipulated 2,906,484.32 37. On April 3, 1930, counsel for the United States wrote a letter to the United States Senate recommending that the offer of settlement in the Delaware suit be accepted. This letter is as follows: HON. THOMAS J. WALSH, United States Senate, Washington, D.C. DEAR SENATOR: In the case of the United States v. The Mammoth Oil Co., in the United States District Court for the District of Wyoming, the final account was approved on August 17, 1928. At or about the date of the filing of this account we learned that the Mammoth Oil Co. was insolvent, having assets of the appraised value of $68,598.31 and liabilities amounting to $1,874,217.88. After we learned of the insolvency of the Mammoth*1461 Oil Co. we brought suit against the Sinclair Crude Oil Purchasing Co., which company had bought most of the oil produced on the lease by the Mammoth Oil Co. This suit was for the conversion of the oil by the Sinclair Crude Oil Purchasing Co. based upon the theory that as the Mammoth Oil Co. had never acquired a valid title to the leasehold it could not give good title to the oil taken therefrom. The Sinclair Crude Oil Purchasing Co. filed certain pleas to our declaration which was filed in the District Court of Delaware. Shortly thereafter we were advised that the Sinclair Crude Oil Purchasing Co. might pay the value of the oil received by it, together with interest, rather than stand trial. This matter was brought to a head about six months ago by an offer of the defendant to pay the value of the oil received by it plus interest at the rate of 7 per cent per annum on monthly balances - that is, interest calculated on the oil taken by it in each month based on the total amount of that oil from the last day of the month in which delivery was made. We then took this matter up with yourself and Senator Nye, and perhaps other members of the Public Lands Committee of the Senate, *1462 and obtained your views. As the proposition was substantially for the full amount which the Government could recover, it was thought wise to accept it and close the *990 litigation. We then advised counsel for the Sinclair Crude Oil Purchasing Co. of our disposition in the matter, but the actual consummation of the settlement has been delayed due in part to a difference of opinion among those interested in the defendant company and in part to the fact that the Department of Justice had a pending suit against the same defendant arising out of the Salt Creek royalty contract, and we thought it would be of assistance to the Department of Justice if we were to insist that both cases be settled at the same time. The Department of Justice has now ascertained the correct amount which should be paid the Government in the Salt Creek royalty suit and are about to close it. There is therefore no reason why the settlement of our suit should be longer delayed. You will also remember that the Sinclair Crude Oil Purchasing Co. erected some 17 storage tanks of the capacity of 55,000 barrels per tank on the reserve for the storage of oil. These have now only a second-hand or scrap*1463 value, and this value is estimated at about $10,000 per tank, or $170,000 in all. The Navy has leased some of these tanks for storage of oil and it is thought that they may be of use in the future. The suggestion is that the Government give credit to the defendant for the present value of these tanks, namely, $170,000, with interest on said amount, thereby counterbalancing to that extent the interest that the Government is collecting on the principal sum due it. The Sinclair Crude Oil Purchasing Co. we think properly takes the position that we as special counsel have no authority to settle this case or to satisfy any judgment which may be taken by agreement in the case without a resolution of Congress authorizing us so to do. We have hesitated to ask Congress to adopt any resolution declaring its policy with respect to the settlement until we were absolutely certain that it would be carried out. In order to make this certain we have made an arrangement with the Sinclair Crude Oil Purchasing Co. under which it is to deposit with the Chase National Bank in New York in escrow the entire amount, principal and accruing interest to the date of such deposit. Under the agreement made*1464 this deposit is to be paid to the Treasury of the United States immediately upon the passage and approval of the joint resolution authorizing the settlement. If such resolution is not passed and approved within 60 days, the money is to be returned to the Sinclair Crude Oil Purchasing Co. A judgment for the amount of the settlement as agreed upon will be then entered and satisfaction of the judgment signed by counsel for the United States, thus closing the record in the suit. As we have heretofore advised, we consider this a very advantageous settlement to the Government. The legal rate of interest in Wyoming is 7 per cent. Under the terms of the settlement the defendant pays this rate of interest. While we believe that we could recover interest at the rate of 7 per cent were we to try the case, still there is a question whether the Delaware court would award interest at that rate since the legal rate in Delaware is 6 per cent. Under the proposed arrangement the Government is, we think, getting as favorable a result as it could get by pursuing the litigation to judgment and execution. We should add that the defendant under the terms of the settlement must pay the costs*1465 of the litigation. We enclose herewith a form of resolution which is approved by the attorneys representing the defendant as well as by ourselves, and if adopted will enable the escrow bank at once to forward the funds to the treasury of the United *991 States and authorize us to enter judgment for the amount of the settlement and the satisfaction thereof on the record. If the resolution meets your approval, will you kindly introduce it and explain to the Committee on Public Lands and Surveys, to which the resolution will no doubt be referred, the matters herein set forth with respect to the proposed settlement. Inasmuch as the fund deposited will bear no interest after the date of the deposit it will be of advantage to the Government if the resolution can be promptly adopted and the money paid into the Treasury at once. Should you or the committee desire any further information we shall be glad to give it. Very sincerely, [Signed] OWEN J. ROBERTS, ATLEE POMERENE, Special Counsel. 38. On April 4, 1930, Stanolind deposited with the Chase National Bank of New York the amount of $2,906,484.32 to be held in escrow pending action by Congress. 39. *1466 On April 14, 1930, the Committee on Public Lands and Surveys of the United States Senate recommended the passage of a joint resolution authorizing the settlement of the Delaware suit on the basis recommended by counsel for the United States. In connection therewith the Committee rendered Senate Report No. 409, Seventy-first Congress, Second Session. This report accompanied Public Resolution No. 72, Seventy-first Congress (S. J. Res. 165) approved May 13, 1930, which reads as follows: Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Special Counsel Atlee Pomerene and Owen J. Roberts representing the United States be, and they are hereby authorized to settle the case of United States against Sinclair Crude Oil Purchasing Company (numbered 1431, civil), now pending in the District Court of the United States for the District of Delaware for the sum of $2,906,484.32, which sum is now deposited by the defendant in escrow pending approval of such settlement by the Congress. Resolved, That upon receipt of said sum by the Treasurer of the United States said special counsel be, and hereby are, authorized to satisfy*1467 any judgment which may be entered in said cause against the defendant pursuant to such settlement, upon payment by defendant of the record costs therein. Approved, May 13, 1930. 40. On May 28, 1930, counsel for the United States and Stanolind filed the following stipulation in the said cause in the District Court of the United States for the District of Delaware: It is Hereby Stipulated and Agreed by and between the attorneys for the parties hereto, subject to approval by the Court, and the passing of a Joint Resolution by the Congress, that the fair amount due the plaintiff in the above entitled action is the sum of $2,906,484.32 and that the Court may enter its judgment against the defendant for said sum and the accrued costs of this suit. [Signatures.] *992 On May 28, 1930, the following order was entered by said court: May 28, 1930. Defendant by Charles F. Curley, Esqr., its attorney, comes into court and by leave of court confesses judgment in favor of the plaintiff and against the defendant, in the sum of Two Million nine hundred six thousand four hundred eighty four dollars and thirty two cents ($2,906,484.32) and costs. Judgment. And now, to*1468 wit, this twenty-eighth day of May, A.D. 1930, it is considered and adjudged by the court now here that the said United States of America, plaintiff, do have and recover of and from the said Sinclair Crude Oil Purchasing Company, defendant, the sum of Two million nine hundred six thousand four hundred and eighty four dollars and thirty two cents ($2,906,484.32), and its costs in and about this suit expended. This judgment was paid in full by Stanolind on June 2, 1930, from the deposits which it had, on April 4, 1930, made with the Chase National Bank of New York. At the time of the judgment, Stanolind's books carried an account payable to Mammoth in the amount of $4,618.86. This amount was credited to surplus and the aforesaid amount of $2,906,484.32 was charged to surplus, the effect of which was a net charge to surplus of $2,901,865.46. 41. At the time of the aforesaid judgment against Stanolind and the payment thereof, and at all times thereafter, any claim for recoupment that Stanolind might have had against Mammoth was worthless and unrecoverable, except to the extent of Stanolind's liability to Mammoth in the amount of $4,618.86 as aforesaid, all of which was known to*1469 Stanolind at the time said payment was made and at the time said charge to surplus was made on its books. 42. Stanolind filed a separate return for the period January 1 to September 21, 1930, on which return it reported a net loss of $3,715,123.57 In arriving at this net loss it deducted $2,901,865.46 which was made up of the above-mentioned judgment of $2,906,484.32 less the account payable to Mammoth of $4,618.86. The respondent disallowed the deduction of $2,901,865.46 and also determined that Stanolind's income for that period should be increased by the allowance of $256,374.18 it was given for the seventeen tanks, thus making a net addition of $3,158,239.64 to the consolidated net income for the calendar year 1930, and in a statement attached to the deficiency notice the respondent explained his determination relative to these items as follows: III. Stanolind Crude Oil Purchasing Company. Disallowance of amount paid in settlement of the case of United States v. Sinclair Crude Oil Purchasing Company. Amount paid in settlement of case $2,162,972.40 Interest thereon $995,267.24 Evidence in the case indicates the above liability was that of the Mammoth*1470 Oil Company by virtue of a judgment secured by the government against that *993 company, and that collection was made from Stanolind Crude Oil Purchasing Company, formerly Sinclair Crude Oil Purchasing Company, by voluntary agreement to pay a specified amount of principal and interest in settlement of the claim. Payment was made as of April 4, 1930. It is clearly evident, therefore, that such payment was not an ordinary and necessary expense applicable to the period within which payment was made, viz., January 1 to September 21, 1930, and that the loss of that period may not be increased by such payment for the purpose of carrying forward an operating net loss under the provisions of section 117 of the Revenue Act of 1928, and/or article 41(c), Regulations 75. Relative to your contention in respect of the deductibility of the interest paid in this connection, after very careful consideration of the intent and purpose of the settlement of this case, as indicated in Senate Report #409, referred to in your protest, it is the opinion of this office that the interest involved was a part of the settlement base, and not interest paid or accrued within the taxable year on indebtedness*1471 as contemplated in section 23(b) of Revenue Act of 1928. Accordingly, your contentions with respect to the deductibility of the payment of this judgment, together with interest thereon, are denied. 43. Except as its statutory net losses may be carried forward, all of Stanolind's taxable years prior to 1930 are now closed by the statute of limitations. 44. The lease of April 7, 1922, and the supplemental agreement of February 9, 1923, were executed without warrant or authority of law and contrary to the policy of the United States to conserve its petroleum resources. The lease and agreement were fraudulent. Stanolind is charged with notice that those agreements were executed contrary to law, and with knowledge of the fraud perpetrated. Stanolind acted in bad faith and as a mala fide trespasser upon the Government-owned lands in acquiring the 1,430,024.70 barrels of oil in question. OPINION. BLACK: The first issue is whether the respondent erred in disallowing as a deduction from petitioner's gross income for the calendar year 1930 "Excess depreciation on Burton patents" in the amount of $618,587.18. Petitioner claimed $686,247.51 and respondent allowed $67,687.33. *1472 On March 1, 1913, petitioner owned an invention known as the Burton Process for the cracking of gasoline. This invention was patented January 7, 1913, under the patent laws of the United States as patent No. 1,049.667. Also on March 1, 1913, petitioner owned two applications for patents. One application was filed with the United States on September 23, 1912, and was for an improvement on the Burton Process patent. This improvement was patented March 11, 1913, under the laws of the United States as patent No. 1,055,707. The other application was filed with the Dominion of Canada on December 20, 1912, and was for the same invention which was the subject matter *994 of patent No. 1,049,667. This invention was patented April 8, 1913, under the laws of Canada as patent No. 147,094, and, pursuant to the laws of that country, this patent expired on April 7, 1931. The parties to this proceeding have stipulated that: As of March 1, 1913 petitioner, Standard Oil Company (Indiana) owned an invention known as the Burton Process for the cracking of gasoline. On January 7, 1913 the United States Government had issued a patent on the said invention to "William M. Burton, of*1473 Chicago, Illinois, assignor to Standard Oil Company of Whiting, indiana, a corporation of Indiana." A true and correct copy of said patent is attached hereto as Exhibit A and a true and correct copy of William M. Burton's assignment to petitioner is attached hereto as Exhibit A-1. The fair market value as of March 1, 1913 of the said Burton Process patent was $70,000,000. * * * Both parties agree, as stated in their respective briefs, that: "The real question here is: How much of petitioner's $70,000,000.00 basis should be recognized as remaining at January 1, 1930?" The amount of $686,274.51 claimed by petitioner is exactly equal to 2/12 of 1/17 of $70,000,000. It is accordingly manifest that petitioner has proceeded on the theory that its $70,000,000 basis as of March 1, 1913, should be exhausted over a period of exactly seventeen years from March 1, 1913, and that the amount claimed represents exhaustion for the two months of January and February, 1930. The amount allowed in the deficiency notice, $67,687.33, is exactly equal to 6/365 of 1/17 of $70,000,000. Petitioner contends (1) that respondent's action for 1930 was arbitrary and without rational foundation; (2) that*1474 respondent is estopped from asserting that petitioner's basis should be reduced by additional charges for prior years; and (3) that in any event, respondent's allowances in prior years were reasonable and should be used in determining petitioner's remaining basis as of January 1, 1930, unless respondent can show that the action in prior years was wrong, i.e., that the facts as stipulated will not admit of any interpretation which would support the action in prior years. In support of its contention that respondent's action was arbitrary and without rational foundation petitioner argues that the effect of respondent's determination of allowing only 6/365 of the annual amount which he had allowed for each of the years 1918 to 1929, inclusive, "leaves him in the implied and absurd position of saying that petitioner had an exhaustible patent value as of March 1, 1913, of $70,000,000.00, but that $618,587.18 of that value must have been exhausted prior to that date." Petitioner further argues that, even on the basis that petitioner's patent exhaustion period ended with the expiration of the basic patent, rather than February 28, 1930, as petitioner contends, the respondent also erred*1475 in determining the expiration date to be January 6, 1930, instead of January 7, 1930, citing *995 Burnet v. Willingham Loan & Trust Co.,282 U.S. 437, and cases cited therein. Petitioner then contends that, by pointing out these obvious errors on the part of the respondent, it has brought respondent squarely within that part of the Supreme Court's decision in Helvering v. Taylor,293 U.S. 507, wherein the Court said: * * * The fact that the Commissioner's determination of a deficiency was arbitrarily made may reasonably be deemed sufficient to require the Board to set it aside. We fail to see wherein Helvering v. Taylor is of any help to petitioner, for in that case the Supreme Court also said: "Frequently, if not quite generally, evidence adequate to overthrow the Commissioner's finding is also sufficient to show the correct amount, if any, that is due." The parties have agreed upon the facts with reference to the Burton Process patent and it remains only for the Board correctly to apply the law to those facts. Under these circumstances Helvering v. Taylor has no application. The respondent, in his brief, now*1476 concedes that he "did not correctly compute the amount of the basis remaining at January 1, 1930, and consequently the allowable depreciation for the six-day period in the taxable year, in that he used 1/17 of $70,000,000.00 as the annual depreciation charge, whereas the life of the patent from March 1, 1913, to its expiration date was only 16 and 312/365 years." He now contends that the remaining basis at January 1, 1930, and the allowable depreciation for 1930, should be computed as follows: 6/365 of 1/(16 312/365) of $70,000,000=$68,270.47. In making this concession the respondent rejected petitioner's suggestion that January 7, 1930, be treated as the expiration date of the Burton Process patent. He argues that if January 7, 1930, be treated as the expiration date "it would be necessary either to refuse depreciation for the date on which a patent is issued, or to allow depreciation for a life of seventeen years and one day." Every patent grants to the patentee, his heirs or assigns "for the term of seventeen years," the exclusive right to make, use, and vend the invention or discovery throughout the United States and the territories thereof. See U.S. Code, title 35, sec. *1477 40. Upon the reasoning of the Supreme Court in Burnet v. Willingham Loan & Trust Co., supra, we hold that the Burton Process patent expired on January 7, 1930. It may be noted in passing that the same rule apparently does not prevail in Canada, for the Canadian patents offered in evidence in this proceeding have the expiration date recorded therein, which is eighteen years from the date of issue, counting the day of issue as the first day of the period. In the instant proceeding, it is our opinion that the first day of the seventeen-year period of the Burton *996 Process patent was January 8, 1913. If, therefore, the remaining basis at January 1, 1930, and the allowable exhaustion for 1930, should be computed as now suggested by the respondent, it will be necessary to revise his computation, as follows: 7/365 of 1/(16 313/365) of $70,000,000=$79,635.95 Petitioner, however, strongly contends that it should be allowed the entire amount of $686,274.51, upon the ground that the exhaustion period was seventeen years from March 1, 1913, to February 28, 1930, both dates inclusive, and not 16 313/365 years from March 1, 1913, to January 7, 1930, both dates*1478 inclusive. But petitioner's argument in this connection assumes as the major premise a fact which is not a fact in this record, namely, that the $70,000,000 value was the value on March 1, 1913, of the Burton Process patent and the two applications that were pending on that date. In its brief petitioner says: It is at once apparent, therefore, that we are not here considering just one patent, the original patent issued January 7, 1913. If that constituted the only property rights which petitioner had at March 1, 1913, or at any other time with respect to the Burton process and pressure stills, there would probably be no question as to the life of the $70,000,000.00. We have here, however, not only the original patent, but also an application for a Canadian patent thereon, an application for a United States patent on an improvement, and a preemptive right to a Canadian patent on the improvement. Under the facts as stipulated it becomes immaterial that petitioner on March 1, 1913, owned two patent applications in addition to the Burton Process patent. If the value of $70,000,000 agreed to by petitioner and respondent in 1928 was intended to represent the combined value of the*1479 Burton Process patent and the two applications, and if the allowances for the years 1918 to 1929 were intended to represent the allowable deductions for exhaustion of the Burton Process patent and the two applications, the record certainly does not show such to be the facts. Our decision on this issue must rest on the facts. The statements in the deficiency notice referring to "patents" are not on the whole inconsistent with the stipulation, and if they were, the stipulation would control. We need only to apply the law to the facts as stipulated. Section 23(k) of the Revenue Act of 1928, in so far as is material, provides: SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (k) DEPRECIATION. - A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. * * * *997 Article 207, Regulations 74, in so far as is material provides: ART. 207. Depreciation of patent or copyright. - In computing a depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis*1480 of the patent or copyright. The allowance should be computed by an apportionment of the cost or other basis of the patent or copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. * * * The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater amount for depreciation than would otherwise be allowable. * * * The above regulation has the force and effect of law. Hazeltine Corporation v. Commissioner, 89 Fed.(2d) 513, 521. In the instant proceedings the capital sum to be replaced in connection with the Burton Process patent is $70,000,000, the fair market value of that patent as of March 1, 1913. This capital sum must be apportioned over the life of the patent since March 1, 1913. As we have already held, the life of the Burton Process patent expired on January 7, 1930. The proper apportionment for the seven days in 1930, is, as we have indicated above, the amount of $79,635.95. This much of petitioner's $70,000,000 basis remained on January 1, 1930. We hold, therefore, that the amount*1481 of $79,635.95 should be allowed petitioner as a deduction from its gross income for the calendar year 1930 on account of exhaustion or depreciation of its Burton Process patent instead of the amount of $67,687.33 allowed by respondent in his deficiency notice. On the basis of the correct apportionment for each full year of 1/(16 313/365) of $70,000,000 instead of one-seventeenth thereof, petitioner would have been entitled to a deduction of $4,152,445.96 for each of the years prior to 1930 instead of the amount of $4,117,647.06 allowed by the respondent. This fact, however, does not entitle petitioner to deduct in the taxable year a greater amount than would otherwise be allowable. Art. 207, Regulations 74, supra; cf. Burnet v. Thompson Oil & Gas Co.,283 U.S. 301. The second issue is whether the respondent erred in disallowing as a deduction from gross income the amount of $2,901,865.46 claimed by Stanolind on its return for the period January 1 to September 21, 1930. This issue becomes material by reason of the fact that on September 22, 1930, Stanolind became a 100 percent owned subsidiary of petitioner, which fact entitles petitioner in arriving*1482 at the consolidated net income for the calendar year 1930 to deduct any statutory net loss sustained by Stanolind for the period immediately preceding affiliation. Sec. 117, Revenue Act of 1928; art. 41(c), Regulations 75. Stanolind reported a net loss of $3,715,123.57 for the period January 1 to September 21, 1930, and the effect of respondent's disallowance of the claimed deduction of *998 $2,901,865.46 now under consideration was to reduce Stanolind's reported net loss by a like amount. In a statement attached to the deficiency notice set out in full in our findings under paragraph 42, the respondent gave as his reason for disallowing the claimed deduction of $2,901,865.46 the fact that the amount represented a judgment obtained by the United States against Mammoth which was voluntarily paid by Stanolind. The stipulation of facts clearly shows that this was an erroneous finding on the part of the respondent, and respondent now concedes as much. The true facts are that the judgment obtained by the United States against Mammoth in the Wyoming suit has never been paid, except for the small amount of $3,509.19, and that the $2,901,865.46 here in question represents a judgment*1483 for $2,906,484.32 (less a recoupment of $4,618.86) which the United States obtained against Stanolind in the Delaware suit on May 28, 1930, and which Stanolind paid to the United States on June 2, 1930. Although the respondent was mistaken in his determination of the deficiency as to what the amount of $2,901,865.46 actually in fact represented, he now contends that the amount should nevertheless be disallowed for the reason that, in view of what the Supreme Court, in Mammoth Oil Co. v. United States,275 U.S. 13, 53, held with regard to Stanolind's participation in the illegal scheme, it would be against public policy to allow Stanolind to deduct from its gross income an amount which it was compelled to pay on account of such participation. At the outset petitioner contends that, since the respondent has changed his reasons as to why the amount of $2,901,865.46 should not be allowed as a deduction from gross income, the burden is upon the respondent to both plead and prove the facts necessary to support the disallowance upon the new ground. In support of this contention petitioner cites *1484 Alexandria Gravel Co. v. Commissioner, 95 Fed.(2d) 615, and T. G. Nicholson,38 B.T.A. 190, 198. These cases do not support such a contention. The issue here is Stanolind's right to the deduction sought. Upon that issue petitioner has the burden of pleading and proof. Burnet v. Houston,283 U.S. 223; Welch v. Helvering,290 U.S. 111. The respondent correctly argues in his brief that "Deductions may be disallowed by the Commissioner without assigning any reason or theory for his action and if he assigns a reason or advances a theory in his deficiency notice, though it be erroneous, he is not restricted thereto in his defense of an appeal to the Board asserting such disallowance as error." Cf. Edgar M. Carnrick,21 B.T.A. 12, 21; Crowell v. Commissioner, 62 Fed.(2d) 51, 53; James P. Gossett,22 B.T.A. 1279, 1284; affd., 59 Fed.(2d) 365; rehearing denied, 60 Fed.(2d) 484; *1485 John I. Chipley,25 B.T.A. 1103, 1106; Charles J. O'Laughlin,30 B.T.A. 1327; affd., 81 Fed.(2d) 269; Alexander Sprunt & Son, Inc. v. Commissioner, 64 Fed.(2d) 424, 427; Raoul H. Fleischmann,40 B.T.A. 672. *999 Petitioner was not taken by surprise. In his opening statement to the Board, counsel for respondent said that, on the question of the deductibility of the payment by Stanolind, the respondent had two positions, namely, (1) that as a matter of public policy the deduction was not permissible, and (2) that in any event the amount of $2,901,865.46 should be excluded from Stanolind's net loss for the period immediately preceding affiliation because it was not of such a character as may be carried forward as a net loss under section 117(a)(1) of the Revenue Act of 1928. All of the facts upon which the respondent relies are in the record. Consideration of those facts is not precluded by reason of the absence of a special pleading on the part of the respondent. If, upon the consideration of all the evidence, petitioner has failed to establish Stanolind's right to the claimed deduction, the*1486 respondent's disallowance thereof must stand, even if it be for a reason other than that given in the deficiency notice. Aside from the public policy feature of the case, petitioner contends that the payment in question falls squarely within the general rule that payments made in connection with, or as a result of, litigation affecting the taxpayer's business are deductible in computing taxable net income; that the part of the payment in question representing principal was deductible either as an expense, loss, or bad debt under subsection (a), (f), or (j), respectively, of section 23 of the Revenue Act of 1928; and that the part representing interest was deductible as interest under subsection (b) of the same section. These contentions, however, become unimportant if the respondent is upheld in either one of his two positions mentioned in the preceding paragraph. Lawrence A. Wagner, infra. We shall, therefore, consider first the respondent's position that it would be against public policy to allow any deduction for the item in question, because of the Supreme Court's decision in *1487 Mammoth Oil Co. v. United States, supra. In approaching the position that an allowance of any part of the $2,901,865.46 as a deduction from Stanolind's gross income would be against public policy, the respondent in his brief says: "The factual question, with which this appeal is concerned, is the bad faith and/or fraud of Stanolind. A direct finding on that subject should be made. The evidence to be considered includes the entire record in the Wyoming suit. If, from an examination of that record, it is found that the question of the bad faith and/or fraud of Stanolind was there presented and decided, this Board is bound to so find in this case if such a finding is material, as respondent contends it to be." Later in his brief the respondent requests a direct finding on this subject, as follows: (13). The lease and agreement were executed without warrant or authority of law and contrary to the policy of the Federal Government to conserve its *1000 petroleum resources. The lease and agreement were fraudulent. Stanolind is charged with notice that those instruments were executed contrary to law, and with knowledge of the fraud perpetrated. Stanolind*1488 acted in bad faith and as a mala fide trespasser upon the Government-owned lands in acquiring the oil in question. The basis for the above requested finding is, as counsel for respondent says, "the entire record in the Wyoming suit." There are in evidence in this proceeding true copies of all the pleadings filed in the Wyoming suit, the Teapot Dome lease, the supplemental agreement of February 9, 1923, the order of the District Court appointing the receiver, the argument made before the District Court, the briefs filed before the Eighth Circuit and Supreme Courts on behalf of Stanolind, a reference to the volume and page in the printed reports of the decisions of the District, Circuit, and Supreme Courts, respectively, the mandate of the Supreme Court, and the final decree of the District Court. We think that the holdings of the Eighth Circuit and Supreme Courts in the Mammoth case, that Stanolind was a mala fide trespasser, that Stanolind was presumed to have known that no law authorized the making of the lease, that the use of the tanks by Stanolind to take oil from the Government's reserve was a part of the illegal scheme, that Sinclair's knowledge of the conspiracy*1489 to defraud was imputed to Stanolind, and that the lease and supplemental agreement were fraudulently made to circumvent the law and to defeat public policy, are res judicata as to those matters in the instant proceeding. Three principal objections to respondent's requested finding No. 13 (our finding No. 44) are argued by petitioner. They are: (1) that the doctrine of res judicata is not available to respondent because he has not specially pleaded it; (2) that Stanolind's good faith or bad faith was not an issue in the Wyoming suit; and (3) that the character of the payment in question for tax purposes must be determined and limited by the pleadings and proceedings in the Delaware suit. We shall consider these objections in the order given. We think petitioner's first objection is without merit. The rule with respect to this subject is stated in 34 C.J. 1056, 1066 as follows: * * * Where a second suit between the same parties involves a different cause of action which depends upon the existence or nonexistence of a fact adjudicated in the first suit, the judgment rendered in the first case, being evidence showing or tending to show that fact, may be introduced, even*1490 though it is not specially pleaded. * * * * * * Moreover, where the judgment is relied on, not as a bar to the present action, but as a judicial determination of given facts, issues, or controversies, it is not necessary to plead it specially, but it is conclusive when given in evidence. *1001 The rule is stated by the Supreme Court in Southern Pacific Railroad Co. v. United States,168 U.S. 1, at page 48, to be: The general principle announced in numerous cases is that a right, question, or fact distinctly put in issue and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and even if the second suit is for a different cause of action, the right, question, or fact, once so determined, must, as between the same parties or their privies be taken as conclusively established, so long as the judgment in the first suit remains unmodified. The parties, Stanolind and the United States, are the same in the instant proceedings as they were in the Wyoming suit. Cf. *1491 Tait v. Western Maryland Railway Co.,289 U.S. 620; Sunshine Anthracite Coal Co. v. Adkins,310 U.S. 381. The instant proceeding involves a different cause of action. If, therefore, the present cause of action, namely, the right of Stanolind to deduct the amount paid in settlement of the Delaware judgment, depends upon the existence or nonexistence of a fact adjudicated in the Wyoming suit, namely, the good faith or bad faith of Stanolind, the Wyoming judgment may be introduced, even though it is not specially pleaded, and when given in evidence it is conclusive of the fact adjudicated. Southern Pacific Railroad Co. v. United States, supra (see pages 59 and 60 of that opinion). Petitioner's second principal objection to respondent's requested finding No. 13 is, we think, likewise without merit. The opinion of the Supreme Court in the Wyoming suit, in so far as it applies to Stanolind, is set out in paragraph 27 of our findings. We do not think the Supreme Court intended these statements to be obiter dicta. In the separate brief which Stanolind filed on its behalf in the Supreme Court in the Wyoming suit, Stanolind*1492 alleged that the Court of Appeals erred (1) "in finding that there was any evidence as matter of law to establish fraud in the making of the lease of April 7th, 1922, and the supplemental agreement of February 9th, 1923"; (2) in holding that Stanolind "was a trespasser mala fides on the government land, as no fraud was alleged or proved as to it"; (3) in holding that Stanolind "should be enjoined and restrained from entering upon Naval Petroleum Reserve No. 3"; and (4) in enjoining and restraining Stanolind "from entering upon Naval Petroleum Reserve No. 3 without affording it the right to remove from said reserve the property it had in good faith purchased and constructed thereon." If Stanolind's transactions with Mammoth had been in good faith, as Stanolind contended before the Supreme Court, it seems clear that it would have been permitted to remove its seventeen tanks that were located on the lands covered by the Teapot Dome lease. There can be no doubt but that Stanolind's good faith or bad faith in its transactions with Mammoth was an issue in the Wyoming suit and that the issue was decided adversely to Stanolind. *1002 Neither are we impressed with petitioner's*1493 third principal objection to respondent's requested finding No. 13. Under this heading petitioner emphasizes all the facts directly pertaining to the Delaware suit, as it is the amount of the judgment which the United States obtained against Stanolind in that suit which Stanolind seeks to deduct from its gross income. Petitioner argues that the Board should look no further than the Delaware suit in determining whether Stanolind's transactions with Mammoth were made in good or bad faith, and that when this is done no finding of bad faith can be made. Petitioner points to the letter of April 3, 1930, which counsel for the United States wrote to the United States Senate recommending that Stanolind's offer to terminate the suit be accepted. (See paragraph 37 of our findings.) It particularly emphasizes the portions which say that "this suit was for the conversion of the oil by the Sinclair Crude Oil Purchasing Co. based upon the theory that as the Mammoth Oil Co. had never acquired a valid title to the leasehold it could not give good title to the oil taken therefrom", and "Under the proposed arrangement the Government is, we think, getting as favorable a result as it could get by*1494 pursuing the litigation to judgment and execution." Petitioner says there is no suggestion of bad faith on Stanolind's part in that letter. The United States Senate accepted Stanolind's offer (see findings, par. 34) to terminate the Delaware suit. By so doing petitioner argues that the United States in effect dropped all the allegations of fraud and bad faith on the part of Stanolind, for the settlement included only the value of the oil as represented by the prices which Stanolind had paid Mammoth, less the value of the tanks which were the subject of the litigation in the Wyoming suit, and included nothing for the exemplary or punitive damages asked for in counts 2 and 3 of the Delaware suit. Petitioner further argues that, if the Wyoming suit adjudicated Stanolind's good or bad faith in its transactions with Mammoth in the manner contended for by the respondent, then counsel for the United States in the Delaware suit did not obtain for the United States all that the latter were entitled to, in that, if Stanolind were guilty of bad faith, it should not have been given credit for the seventeen tanks and should have been assessed exemplary or punitive damages, as alleged in counts*1495 2 and 3 of the declaration. We do not think it is necessary to enter upon a discussion of the reasons which caused the Congress to accept Stanolind's offer to terminate the Delaware litigation. Suffice it to say Stanolind's good or bad faith in its transactions with Mammoth was not litigated in the Delaware suit, that suit being settled by compromise, whereas it was litigated in the Wyoming suit and passed upon by the United States Supreme Court. Stanolind's good or bad faith in its transactions with Mammoth is now an issue of fact in the instant proceedings. That issue having been litigated and adjudicated in the Wyoming suit *1003 and the record in that case having been offered and received in evidence in the instant proceedings, the judgment of the Supreme Court determining that issue is conclusive here. Southern Pacific Railroad Co. v. United States, supra.We, therefore, grant respondent's requested finding No. 13, which is set out in paragraph 44 of our findings. Under the facts found in our findings, would it be against public policy to allow Stanolind to deduct from its gross income any part of the payment of $2,901,865.46 here in question? *1496 Deductions are frequently disallowed upon the ground that it would be against public policy to allow them. The cases uniformly hold that fines paid because of violation of law are not deductible. Great Northern Ry. Co. v. Commissioner, 40 Fed.(2d) 372; certiorari denied, 282 U.S. 855; Burroughs Building Material Co. v. Commissioner, 47 Fed.(2d) 178; Chicago R.I. & P. Ry. Co. v. Commissioner, 47 Fed.(2d) 990; certiorari denied, 284 U.S. 618; Tunnel R.R. of St. Louis v. Commissioner, 61 Fed.(2d) 166; certiorari denied, 288 U.S. 604. In the Burroughs case the Second Circuit said: "The disallowance may properly rest on a refusal to sanction expenditures of such a character as we have here on grounds of public policy." In Easton Tractor & Equipment Co.,35 B.T.A. 189, we held that certain commissions paid by the taxpayer to an agent who was to use his personal influence with the state government in making sales could not be deducted from gross income because the agreement under which the commissions were paid was void as against public policy. *1497 To the same effect is T. G. Nicholson, supra. In Lawrence A. Wagner,30 B.T.A. 1099, the Board sustained the disallowance of a deduction of a loss arising from the operation of a loan business prohibited by state statutes "upon the ground of public policy" and said that "In our view it is immaterial whether the deduction is classified as an ordinary and necessary expense or as a loss." On the other hand, deductions have been allowed in Commissioner v. Continental Screen Co., 58 Fed.(2d) 625, involving attorney fees paid for the successful defense of a charge of operating in violation of the Sherman Act; W. R. Hervey,25 B.T.A. 1282, involving cash profits and stock surrendered by Hervey in order to avoid a suit threatened by the receivers of a corporation whose stock had been dealt in by a syndicate or pool composed of Hervey and his associates, the receivers charging that the members of the syndicate or pool had violated the usury laws of the State of California; *1498 Foss v. Commissioner, 75 Fed.(2d) 326, involving attorney fees paid by Foss in unsuccessfully defending a suit in equity brought against him by the minority stockholders of a corporation in which Foss was the majority stockholder, alleging that Foss and certain others were in combination to waste the assets of the corporation and to violate the Sherman Anti-Trust *1004 Act; Helvering v. Hampton, 79 Fed.(2d) 358, involving the amount paid in settlement of a judgment against Hampton and in favor of a lessee upon the cancellation of a lease for fraud in a prior tax year in negotiating for the lease and for other expenditures claimed by Hampton to have been made in defense of the suit; Alexandria Gravel Co. v. Commissioner, supra, involving commissions paid to a state senator as salesman on sales to the state highway commission in the absence of evidence that the state senator agreed or attempted to use any personal or political influence in making the sales; and International Shoe Co.,38 B.T.A. 81, involving attorney fees and an amount paid in settlement of a suit for damages brought against petitioner*1499 and its officers and directors by the Menzies Shoe Co. Petitioner makes the statement in its brief that in most of the cases where the claimed deduction was denied upon the ground of public policy the particular taxpayer involved was charged with conduct that either was or could have been made the subject of criminal action. It contends that these cases can not be applied to the instant proceeding, because: "First, Stanolind was never guilty of, nor charged with even reprehensible conduct, much less conduct which could have been made the subject of criminal action; Second, there not only has never been any determination or admission, either actual or implied, that Stanolind was guilty of criminal or reprehensible conduct, but the record completely negatives culpability on its part; Third, the payments certainly can not be said to have been made for the purpose of influencing legislative, or any other kind of Governmental, action." In support of these contentions petitioner relies particularly upon W. R. Hervey; Helvering v. Hampton; and International Shoe Co., all supra. We do not deem it necessary in this proceeding to determine whether Stanolind's participation*1500 in the illegal scheme to defraud the United States of its oil could have been made the subject of a criminal action. The Supreme Court held in the Wyoming suit, in which Stanolind was a party defendant, that the lease and supplemental agreement between Mammoth and the United States were fraudulently made to circumvent the law and to defeat public policy; that Sinclair's knowledge of that conspiracy to defraud was imputed to Stanolind and that Stanolind was a mala fide trespasser; that Stanolind was presumed to have known that no law authorized the making of the lease; and that Stanolind participated in the illegal scheme by using the tanks to take oil from the Government's reserve. This is enough, we think, to deny Stanolind the right to deduct from its gross income an amount which it was compelled to pay by reason of its participation in the scheme. The Supreme Court held it was against public policy for Mammoth to produce the oil. We think it was equally against public policy for Stanolind*1005 to buy the oil from Mammoth with the imputed knowledge of the fraud and corruption by which Mammoth had obtained the lease, and that it would likewise be against public policy*1501 to allow the deduction sought in this proceeding. The cases relied upon by petitioner, we think, do not hold to the contrary. They are cases where private rights were invaded and not where wrongs were committed in bad faith against the Government. The court in the Hampton case clearly draws the distinction, wherein it says: In none of these rules is it suggested that if the defendant in a civil suit charging medical malpractice, or tortiously wounding a person, or infringing a patent, is unsuccessful, the private wrongdoing so adjudged infects the payment for its defense. On the contrary, the italicized portion of the solicitor's opinion shows that the distinction it makes is between the defense of offenses against the government, of which governmental policy prohibits consideration as ordinary incidents of a business, and defending private wrongdoing in the course of business, the cost of which is ruled deductible. [Italics by the court.] We hold, therefore, in view of what the Supreme Court held in Mammoth Oil Co. v. United States, supra, that it would be against public policy to allow Stanolind to deduct from its gross income any part*1502 of the payment of $2,901,865.46 here in question. The respondent's disallowance of this deduction in determining Stanolind's net loss for the period in question is sustained. It thus becomes unnecessary to consider issue (4). Reviewed by the Board. Decision will be entered under Rule 50.