Appeal of G. M. Standifer Construction Corp.

— 547 — OPINION. Teammell : The following questions are presented for decision: 1. Were the Home Company and the Standifer Corporation affiliated during the years involved'? 2. Whether a claim for amortization filed by the Standifer Corporation is a sufficient compliance with the statute when the deduction is claimed on account of facilities acquired by the Home Company, another corporation, which was included in a consolidated return with the Standifer Corporation. 3. Whether the buildings constructed by the Home Company were facilities acquired for the prosecution of the war, within the meaning of section 234 .(a) (8) of the Revenue Acts of 1918 and 1921. 4. Whether the amortization deduction, if any, in so far as it relates to housing facilities acquired by the Home Company, should be allowed only to that company in determining its net income, or should be allowed to the consolidated group in determining the net income of the consolidated group, if the two corporations were affiliated. 5. How the amount of the amortization deduction allowable to each of the corporations should be spread over the different taxable periods within the amortization period. — 548 — 6. Whether, in computing the war-profits tax for 1920, the taxpayer is entitled to deduct from the war profits the amortization deduction to which it is entitled in that year. 7. Whether any portion of the amount received from the Fleet Corporation in settlement of claims of the taxpayer should be considered as a reimbursement of cost of facilities and be applied to reduce the basis on which the amortization deduction is determined. 8. Whether the Standifer Corporation is entitled to have its profits tax computed under the provisions of section 328 of the Revenue Act of 1918. These questions will be discussed in the order stated. Section 240 (b) of the Revenue Act of 1918 provides as follows: (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same- interests. Section 240 (a), however, contains the following proviso: That there shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and not income and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capital and net income. In the stipulation of facts it is stated that the Standifer Corporation owned all of the stock of the Home Company. The Sta-ndifer Corporation, however, was organized after August 1, 1914, and 50 per cent or more of its gross income consisted of gains, profits, commissions, and other income derived from Government contracts made between April 6, 1917, and November 11, 1918, and, under the express language of the proviso quoted above, must be excluded from a consolidated return with any other corporation unless it was the successor to a business which was in existence on August 1, 1914. 1. The only question, therefore, with respect to the affiliation of these two corporations, is whether the Standifer Corporation did in fact succeed to a business which was in existence on August 1, 1914, it being conceded that the other requirements of the statute are fully met. G. M. Standifer and J. F. Clarkson formed a partnership in 1913 which was known as the Standifer-Clarkson Co. This partnership was in existence on August 1, 1914. In 1916 the Standifer-Clarkson Shipyards, Inc., succeeded the partnership, and in 1917 it was in — 549 — turn succeeded by tbe Standifer Corporation. In each of tbe organizations all of tbe property of every nature and kind, as well as the business, was acquired by the successor. It is conceded by tbe Commissioner in his brief that tbe Standifer Corporation was the successor of tbe former corporation known as tbe Standifer-Clarkson Shipyards, Inc., which was the successor of the partnerships, including the one formed in 1913 known as the Standifer-Clarkson Co. It is contended, however, by the Commissioner that the partnership of the Standifer-Clarkson Co., which was in existence prior to August 1.1914, was not engaged on that date in the business of building ships and that the business of the Standifer Corporation was that of shipbuilder exclusively and for this reason it can not be held that the Standifer Corporation was the successor of a business which was in existence on August 1, 1914. The business of the predecessor corporations and partnerships to which the Standifer Corporation succeeded was that of constructing and contracting. The Standifer Corporation was also engaged in the contracting and construction business. The fact that the Standifer Corporation devoted its attention exclusively to constructing ships for the Government is not, in our opinion, a sufficient departure from the business carried on by the predecessor partnership on August 1,1914, to bring the corporation within the scope of the proviso contained in section 240, above quoted. It is a rule of statutory construction long adhered to that provisos and exceptions in a statute must be strictly construed and that the general provisions of a statute are applicable unless it is established that a person or corporation comes well within the words as well as the reason of the exception or proviso. This principle was announced by the United States Supreme Court in the case of United States v. Dickson, 15 Pet. 141, and has never been departed from by that court. See Bank of Commerce v. Tennessee, 161 U. S. 134; Perry Co. v. Norfolk, 220 U. S. 472. When we consider the conditions and circumstances existing at the time of the enactment of the Revenue Act of 1918, we are convinced that the corporations in this case do not come within either the language or spirit of the proviso. It seems to us to be clear that the Standifer Corporation succeeded to the business of the predecessor corporation which itself succeeded to the business of the partnership which was in existence on August 1.1914. It is true, as contended by the Commissioner, that the word “ business ” has many meanings. We do not believe, however, that it is limited to the particular kind of activities engaged in by its predecessor organizations. The contracting business may assume many phases of activity. Before the war the predecessors of the — 550 — taxpayer were constructing railroads, office buildings and other structures. The necessities of the war forced the abandonment of such projects and the devotion of all energy to war projects, but, although the character of the product changed, the business was the same. It follows from the foregoing that, in our opinion, the Standifer Corporation and the Home Company were affiliated during the years involved. 2. The second question presented is whether a claim for amortization, which is required to be filed by statute in order to entitle a taxpayer to the deduction, was properly filed in this case. Any question as to whether the claim was filed within the time required by the statute has been answered by section 1209 of the Revenue Act of 1926, which was approved after this case was heard by the Board. Under the above section, the amortization deduction allowed by section 234 (a) (8) of the Revenue Act of 1918 may be allowed for the taxable years 1918, 1919 and 1920, if claim therefor was made before June 15, 1924. The claim in this case was filed prior to that date. This, however, does not fully answer the question. In so far as the deduction which is claimed on account of the housing facilities acquired by the Home Company is concerned, another question is presented. The amortization claimed with respect to such facilities was filed by the Standifer Corporation and not by the Home Company. As to whether one corporation in a consolidated group may file a claim for amortization on account of facilities constructed by another corporation within the group, within the meaning of section 1209 of the Revenue Act of 1926, depends upon the theory of the consolidated return. Where corporations are affiliated and a consolidated return is required, only one return is required to be filed. In that return the net income and the invested capital of all the corporations included in the group are reported. That return is, under the statute, the return of each of the separate companies, and, in our opinion, the filing of an amortization claim by the principal corporation on account of the amortization deduction due to a subsidiary corporation is a sufficient compliance with the statute. A subsidiary corporation which was entitled to a deduction on account of amortization, whose net income and invested capital were included in a return filed by another affiliated corporation, could not literally file a claim for amortization with its return because as such it filed no return. Section 1209 above referred to merely provides that claim shall be made for the amortization, and, considering the theory of the consolidated return, we do not believe that it was the intention of Congress to require each separate affiliated corporation to file such a claim when it was filed by the parent or principal company when the — 551 — consolidated return was filed, or if tbe claim was filed by the parent or principal company within the statutory period. S. The third question presented is whether the buildings constructed by the Home Company were facilities acquired for the-prosecution of the war within the meaning of the amortization section. If the buildings in question had been erected by the Standifer Corporation, which company was actually engaged in building ships for the transportation of articles and men contributing to the prosecution of the war, it seems to us that there could be no question but that such buildings would be considered to be facilities constructed or acquired for the production of articles contributing to the prosecution of the war within .the meaning of the statute. Under the conditions existing at the time when the contracts for the building of the vessels were entered into by the Standifer Corporation, the vessels could not have been constructed on account of labor conditions unless facilities were acquired for the housing of the men. Under the circumstances, the housing of the men was just as essential as the buildings for other purposes and as necessary as the shipways. It was so recognized by the taxpayer and the Fleet Corporation. That the housing facilities were necessary for carrying on the work of shipbuilding does not seem to be denied by the Commissioner, but it is contended that such facilities were not acquired by a corporation which was engaged in producing articles contributing to the prosecution of the war or in building ships for the transportation of men and materials. On the other hand, it is contended that the Home Company, which erected such houses, merely leased them to employees of the shipbuilding company and that its business was renting or leasing houses and not carrying on such work as was contemplated by the amortization section. We held, in the Appeal of Moore Investment Co., 2 B. T. A. 579, that, where one company merely leased a building to another company Avhich was engaged in building ships or producing articles contributing to the prosecution of the war, the company which leased the houses to such building company could not be held to have acquired facilities for the production of articles contributing to the prosecution of the war. We also held there that the benefits of the amortization section were limited to those concerns which manufactured or produced articles contributing to the prosecution of the war. The facts in this case are materially different from those in the Appeal of Moore Investment Co. Here the company which constructed the houses was simply a part of a business unit which was engaged in the shipbuilding business. It did not acquire the buildings as an investment proposition, but for the purpose of contribut — 552 — •ing to the prosecution of the war. It could not have used the buildings for any other purpose under the operating agreement with the Fleet Corporation and the Standifer Corporation. In a. consolidated group each of the separate corporations is a part of a single unit of a business enterprise. These companies may be compared to the different departments in a department store. The Standifer Corporation; which was engaged in building the ships, in order to carry on its business, required houses for its employees. It could not erect them itself on account of the requirements of the Fleet Corporation, and the Home Company was organized to erect such houses merely to comply with requirements of the Fleet Corporation. They were acquired by that company, not for any purposes of its own, but to enable the shipbuilding company to build ships for the Government. We think such a situation is entirely different from a case where an entirely separate company builds houses for the purpose of leasing them to another company. For this reason we are of the opinion that the facilities erected or acquired by the Home Company were facilities acquired or constructed for production of articles contributing to the prosecution of the war within the meaning of the amortization section, and that a reasonable deduction on account of the amortization of such facilities should be allowed. 4. The fourth question presented is whether the amortization deduction, in so far as it relates to the housing facilities of the Home Company, should be allowed only to that company in determining its net income, or should be allowed the consolidated group or to the Standifer Corporation. It was contended by both the Commissioner and the taxpayer that the solution of this question rests upon the nature of the consolidated return. The question thus presented is whether, in a consolidated group of corporations, the separate entities are obliterated, or whether the deductions allowed each company are to be deducted from the gross income of each company in arriving at its net income, or, in other words, whether it is the net income and invested capital of each of the companies which are to be included in a consolidated return, or whether it is the income and invested capital of the entire group determined as one business in which the separate entities included therein are fused. In the Appeal of American La Dentelle, Inc., 1 B. T. A. 575, we said: From July 1, 1919, however, Congress has said that the generally recognized principle of corporate identity was to he overridden for the purpose of the income and profits tax and that a consolidated return should he filed “ if substantially all the stock of two or more corporations is owned or controlled by the same interests,” which is the situation here. From July 1, in other words, the separate existences ceased for tax purposes just as effectually as — 553 — if under a State statute the corporations had been consolidated for all corporate purposes. A new tax status was created. See also Appeal of Frank G. Shattuck Co., 2 B. T. A. 7. The language above quoted sets forth our view with respect to the nature and effect of a consolidated return. It must follow that the amortization deduction is a deduction allowable to the affiliated group of corporations in a consolidated return. This means, under the circumstances of this case, that the amortization deduction with respect to the housing facilities erected, constructed or acquired by the Home Company should be allowed as a deduction in determining the net income to be included in the consolidated return, irrespective of whether in arriving at such consolidated net income the deduction is in the first instance applied to or by the Home Company. 5. It was stipulated that the amortization period extends from January 1, 1918, to February 12, 1920. During the year 1918 the affiliated group of corporations had no net income, but, on the other hand, had a large loss in that year. It had a large net income in 1919 and in the period from January 1, 1920, to February 12, 1920. The question then arises as to how the amortization deduction should be spread or allocated to the different taxable years within the amortization period, that is, whether it should be spread on the basis of net income or upon the basis of gross sales, or some other basis. Since there was no income during the taxable year 1918, the Commissioner contends that a reasonable allowance on account of amortization of war facilities should be prorated or spread in accordance with the gross sales, as otherwise there would be no deduction in 1918 and the entire deduction would be spread over the period between the year 1919 and the fiscal period ending February 12, 1920. The taxpayer, on the other hand, contends that such method of spreading or allocating the deduction allowed would be inequitable and would not permit the full benefit of the deductions to which the affiliated group is entitled; that, since it did not have any income in 1918, a deduction allowed to it in that year on account of the amortization of war facilities would mean nothing and would be of no advantage whatever, and for this reason a reasonable deduction in each of the years would be arrived at by spreading the total amount allowable over the different periods in accordance with the net income during each of the periods. The statute makes no provision with respect to the method of allocating or spreading the deduction allowed over the different taxable years or periods within the amortization period, but merely provides for a reasonable deduction in determining the net income subject to tax. After the enactment of the Bevenue Act of 1918, the Commis — 554 — sioner, with the approval of the Secretary, promulgated article 185 of Regulations 45, which, in part, is as follows : Amortization period. — The amortization allowance shall be spread in proportion to the net income (computed without benefit of the amortization allowance) between January 1, 1918 (or if the property was acquired subsequent to that date, January 1st of the year in which acquired) and either of the following dates: (a) If the claim is based on (1) of article 184, the date when the property was or will be sold or permanently discarded as a war facility; or (5) if the claim is based on (2) of article 184, the actual or estimated date of cessation of operation as a war facility. The situation with which Congress was confronted when the amortization provision was being considered was an extraordinary one. This provision is admittedly a relief measure. This fact should be kept in mind in interpreting the provision. Relief provisions are to be given a liberal construction. With respect to the construction of remedial statutes, Lewis’ Sutherland Statutory Construction, section 583, states as follows: Remedial statutes to be liberally construed — What are remedial statutes.— In the modern sense remedial statutes not only include those which so remedy defects in the common law, but defects in our civil jurisprudence generally, embracing not only the common law, but also the statutory law. They are in a general sense remedial whether they correct defects in the declaratory, directory or remedial parts, as the author just quoted has defined them. There are also the three points mentioned by the author to be considered in the construction of all remedial statutes — the old law, the mischief, and the remedy; that is, how the law stood at the making of the act; the mischief for which that law did not adequately provide, and what remedy the legislature has supplied to cure this mischief. And it is the duty of judges so to construe the act as to suppress the mischief and advance the remedy. Under the law as it would have stood without the benefit of the amortization section, taxpayers who were required on account of war conditions to acquire or construct facilities at the extraordinary high prices then prevailing for the purpose of producing articles contributing to the prosecution of the war would have been required to capitalize such facilities and would not have had the benefit of any deduction on that account, excepting a deduction on account of the exhaustion, wear and tear of such facilities in use. It was clearly the purpose of Congress to afford relief to such taxpayers by permitting them to take a reasonable deduction on account of such facilities. The language used in the amortization section is general in its nature and does not specifically provide how this deduction may be taken where it must be spread over more than one taxable year. In order' that taxpayers may have the full benefit of such a deduction and obtain a full measure of relief, it seems to us that the deduction should be allocated in accordance with the amount of the net income during the different periods before taking into considera555 lion the amortization allowance. When relief is given by statute to a taxpayer by means of a deduction, that relief can be more adequately given by determining the amount of the deduction in each of the years in accordance with the income; otherwise, as in this case, a taxpayer may be required to expend large sums of money during a taxable year and, on account of the changes in its business conditions and other circumstances, may have no net income from which it can take a deduction or get the benefit which was intended to be given. The contention of the Commissioner that the deduction should be spread in accordance with the use to which the facilities were put, as determined by the gross sales during each of the years, is not persuasive. The use to which facilities are put by a taxpayer during the amortization period as compared to the use- to which they are put in the postwar period may be taken into consideration in determining the gross amount of the amortization deduction which is to be spread over the different taxable years, but it seems to us that it has no place in determining the amount of deduction to be taken in each of the years within the amortization period. In our opinion, article 185 of Regulations 45, promulgated by the Commissioner, with the approval of the Secretary, interpreting the amortization section contained in the Revenue Act of 1918, is a fair and reasonable interpretation of that section. The amortization deduction should therefore be spread over the years within the amortization period in accordance with the net income before taking into consideration the amortization allowance. 6. The next question presented is whether, in computing the war-profits tax for 1920, the corporations are entitled to deduct against the income from Government contracts the amortization deduction to w'hich they are entitled in that year. In determining the amount of the net income from Government contracts in 1920, the Commissioner has allowed as a deduction against the net income from such contracts, determined before taking amortization, 35.18 per cent of the amount allocated to such year for the amortization deduction. The remaining 64.22 per cent of the amortization deduction has been applied and allowed against the net income from peace-time work. Section 301 (c) of the Revenue Act of 1918 provides as follows: For the taxable year 1919 and each taxable year thereafter there shall he levied, collected, and paid upon the net income of every corporation which derives in such year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following: (1) Such a portion of a tax computed at the rates specified in subdivision (a) as the part of the net income attributable to such Government contract or contracts bears to the entire net income. In computing such tax the excess556 profits credit and the war-profits credit applicable to the taxable year shall be used; (2) Such a portion of a tax computed at the rates specified in subdivision (b) as the part of the net income not attributable to such Government contract or contracts bears to the entire net income. Por the purpose of determining the part of the net income attributable to such Government contract or contracts, the proper apportionment and allocation of the deductions with respect to gross income derived from such Government contract or contracts and from other sources, respectively, shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Congress anticipated that there would be taxpayers who would derive income from Government contracts in years subsequent to 1918. It was its desire to impose the high profits tax prescribed for 1918 on the income derived in such subsequent years from such contracts. That is why the above-quoted section was placed in the statute. Congress also realized that, by separating the income of a particular year into two classes and imposing a much higher rate of tax on one class than on the other, it would also be necessary to make a similar separation or division of the expenses of the year, so that the purpose of the provision would not be defeated by allowing the deduction of the expenses incurred in earning the income from one source against the income from another source. The regulation promulgated by the Commissioner for the administration of this section of the statute is article 715 of Regulations 45, which reads: Whenever it is necessary to determine the portion of the net income derived from or attributable to a particular source, the corporation shall allocate to the gross income derived from such source, and to the gross income derived from each other source, the expenses, losses, and other deductions properly appertaining thereto, and shall apply any general expenses, losses, and deductions (which can not properly be otherwise apportioned) ratably to the gross income from all sources. The gross income derived from a particular source, less the deductions properly appertaining thereto and less its proportion of any general deductions, shall be the net income derived from such source. The corporation shall submit with its return, a- statement fully explaining the manner in which such expenses, losses, and deductions were allocated or distributed. The cost of the war facilities for which the amortization deduction is allowed relates or appertains only to the income from Government contracts, and such war-cost deduction has no relation whatever to the peace-time income from which a deduction for depreciation on such war facilities is allowed. The effect of the Commissioner’s action is to allow 64.22 per cent of the amortization deduction against peace-time profits up'on which the rates of tax are much lower than on income from Government contracts, and accordingly not to permit the taxpayer to recover out of its war income its extraordi — 557 — nary war costs, but, on the other hand, to make a portion of such costs recoverable out of peace-time profits. The result reached by the Commissioner is, in our opinion, contrary to the intent of the statute. The deduction should be allowed against income from war contracts. 7. The next question for consideration is whether any portion of the amount received from the Fleet Corporation in settlement of claims of the Standifer Corporation should be considered as a reimbursement of cost of facilities and be applied to reduce the basis on which the amortization deduction is determined. The Revenue Act of 1918, in so far as it is pertinent to-the discussion of this question, provides as follows: Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: ^ ❖ ❖ ❖ h* at # (8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the ease of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the preserit war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * * (Italics ours). When the amortization provision of the statute, as contained in the foregoing section, was being discussed on the floor of the House of Representatives, an amendment was offered by Representative Anderson of Minnesota, in the following language: Provided, That whenever the contract for the production of war material or articles contributory to the prosecution of the war or additional plant extensions or facilities necessary therefor, makes provision or allowance for the amortization of plant extensions or facilities or for the depreciated value of the same, either before or upon the expiration of the contract, no allowance or deduction shall be made under this paragraph. Representative Green, a member of the Committee on Ways and Means in charge of the bill in the course of its passage, in discussing this amendment, said: Of course the gentleman has examined the provisions at the top of page 15 where it provides that there may be allowed a reasonable deduction for the amortization of such part of the cost of such facilities as has been borne by the taxpayer. The Oommittee thought, or at least I thought, that that would cover just such cases as the gentleman mentioned.' Mr. Green further said: The amendment of the gentleman from Minnesota, as I view it, is entirely unnecessary. The provisions of the paragraph go even further than his own amendment in providing that where the loss is not borne by the taxpayer there — 558 — shall be no amortization. For that reason I can see no necessity for bis amendment. The amendment was rejected, and it seems a fair assumption to say that it was rejected because the purpose sought to be attained thereby was already embodied in the section, as contended for by Mr. Green. Only the cost of facilities borne by the taxpayer is subject to the amortization deduction. Whether the Government contracts under which a taxpayer produced articles contributing to the prosecution of the war specifically provided for amortization as such or, in other words, provided that the Government would pay the cost, or any part thereof, of the facilities acquired or constructed by a taxpayer in order to carry out the contracts, seems to us to be not controlling. The real question is: Did the Government actually pay or bear the expense of any part of the cost of such facilities? If it did, such part of the cost borne by the Government must be subtracted from the cost of facilities acquired by the taxpayer upon which the amortization deduction is allowed. There is no deduction allowed to a taxpayer with respect to such part of the cost of facilities which was not borne by him. Whether such cost of facilities was actually borne by the Government originally when the facilities were acquired, or whether it was borne by the Government subsequently when the settlements of the contracts were made between the Government and the taxpayer, is immaterial. We believe that the contention of the Government in this regard, as a matter of law, is well founded, but whether such principle is applicable to the facts in this case presents more difficulty. We find nothing in the contracts entered into by the taxpayer and the Fleet Corporation which would indicate that the Government intended, at the time of entering into the contracts, to bear any part of the cost of facilities acquired for carrying them out. The taxpayer, however, filed claims aggregating an amount in excess of $11,000,000, and included therein amounts which represented reimbursement in part for the cost of their shipyard and housing facilities. These claims were considered by the Fleet Corporation and recognition was made in part of the validity of such claims, and an award was made by the Fleet Corporation accepting this principle as well as setting a limitation within which the entire claim was to be allowed subject to audit. This was known as the Benson award. The Benson award, however, was not the basis of the final settlement. The Fleet Corporation considered that it was not bound by that award and further negotiations were entered into by the taxpayer with the Fleet Corporation for the purpose of reaching a settlement of these claims. From 1920 to July 15, 1922, the taxpayer and the Fleet Corporation had many conferences with respect — 559 — to these claims. All of the negotiations and conflict between the taxpayer and the Fleet Corporation ended suddenly on July 15, 1922. The chairman and the general counsel of the Shipping Board disregarded all past negotiations and the Benson award and agreed to settle for $1,000,000. On July 15, 1922, Standifer, the president of the Standifer Corporation, was in the office of the Fleet Corporation in conference with Schlesinger, the general counsel. At that time Schlesinger stated: “ While I believe that we can beat you in court it will be only at great expense to the Government and to you and may be after a great many years.” He further said: “ In other words, you have a nuisance value which amounts to a considerable sum of money.” He further said: “ I will agree to pay you a little something to get rid of you on that ground. I am tired of seeing you around the place here.” Standifer said: “Would you mind estimating to me what my nuisance value is, Mr. Schlesinger?” Schlesinger replied: “How would a million dollars strike you?” Standifer said: “Is that an offer?” whereupon Schlesinger replied that it was. Standifer then said: “ If you will give me a check right immediately I will accept it.” • In order not to make the settlement in round numbers of a million dollars, it was agreed to accept a check for $998,416.23. The voucher accompanying the check was as follows: (For Purchases and Services other than Personal) G. M. Standifer Construction Corp. Portland, Oregon. E. F. C. 3-WC: 176-WC: and July 15, 1922. Order or Contract No. 156 SC, 503-SC: 508-WH: 509-WC. Article or Service Amount In full and final settlement of all claims under and in connection with the above contracts, under settlement approved by resolution of the U. S. Shipping Board, dated July 12, 1922_ Pay Claims 69 Voucher No. $998, 416. 23 This voucher does not mention amortization or depreciation of plant, nor reimbursement of any part of the cost of facilities, but refers to six contracts, none of which were on a cost-plus basis. The settlement agreement sets forth the basis of the settlement as follows: 1. Payment to taxpayer of $998,416.23. 2. Settlement of Commitments, including Ballin Royalties. 3. Assumption of Pacific Marine Iron Works liability by taxpayer. 4. Unclaimed wages were taken over by Fleet Corporation. 5. $1,300,00 mortgage was released by Fleet Corporation. — 560 — 6. $350,000 bond and mortgage of tbe Home Company were reassigned to the Standifer Corporation. 7. Leases were reassigned to the Standifer Corporation. 8. The Standifer Corporation agreed to indemnify the Meet Corporation against claims of the Home Company. 9. General release by taxpayer. 10. General release by Meet Corporatiqn. It does not necesarily follow that, because the Standifer Corporation made a claim for reimbursement of a part of the cost of facilities, any part of such claim was allowed in the final lump sum settlement. The taxpayer filed claims exceeding $11,000,000. Included therein were damages for breach of contract, settlement for facilities, and various other claims. The allowance by the Fleet Corporation of a small proportion of the claims does not necessarily mean that a portion of each of the claims was allowed as contended for by the Commissioner. The Benson award was not followed or recognized in'the final settlement, which was independent of all other proposed settlements. From a consideration of all the evidence, we are of the opinion that no part of the cost of the facilities on which amortization is allowable can be considered to have been borne by the Government, and that the taxpayer is entitled to the deduction for amortization without reduction of the cost of facilities by any part of the amount of the settlement with the Fleet Corporation. 8. The next question is whether the profits tax for each of the years should be computed under sections 327 and 328 of the Revenue Acts of 1918 and 1921. It is contended by counsel for the taxpayer that the taxpayer comes within the provisions of section 327 (d) of the respective Acts and for that reason is entitled to assessment under the provisions of section 328. Section 327, in so far as it is pertinent, is as follows: That in the following cases the tax shall be determined as provided in section 328: ###**#* (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost561 plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. This section of the statute is admittedly relief legislation and should be liberally construed in accordance with the well-accepted rule of statutory construction with respect to such legislation. We will now consider whether, under the facts of this case, the taxpayer had abnormalities in income or invested capital of a nature and character sufficient to entitle it to have its profits tax determined by comparison with the taxes paid by other concerns. In the year 1919 the taxpayer did a gross business of $24,524,066.70 on a statutory invested capital of $20,917.22. In 1920 its gross sales amounted to $15,654,538.09 on a statutory invested capital of $20,916.66. Its business for 1921 was $4,623,766.98 with no statutory invested capital. The taxpayer borrowed money from the Government and others during the taxable years in the following amounts: [[Image here]] The loans made to the corporation by the Government were secured by the personal guarantees of Menefee, Jones and Standifer, the principal stockholders of the Standifer Corporation. These three men also were required to execute guarantees for the performance of the contracts entered into with the Fleet Corporation for the construction of ships, and with respect to one contract with the Government for the construction of ships they were required to execute a bond as security of the Standifer Corporation for $1,300,000 guaranteeing the performance of the contract. Section 327 of the respective Bevenue Acts does not specifically provide that the use of borrowed money in carrying on business creates an abnormality of capital or affects income abnormally. Whether it does or not is a question of fact to be determined in each case. It is not necessarily true that such a situation creates an abnormality. We think, however, that where capital is a material income-produc- ¡ ing factor, but where, because of the fact that the capital employed is in a large part borrowed, there is no invested capital or the invested capital is materially disproportionate to the net income as compared with representative corporations engaged in a like or similar trade or business, an abnormality of invested capital is produced which is clearly contemplated by section 327. — 562 — As originally introduced in the House, section 327 contained such a provision in the following language: Where capital is a material income-producing factor, but where, because of the fact that the capital employed is in a large part borrowed, there is no invested capital or the invested capital is materially disproportionate to the net income as compared with representative corporations engaged in a like or similar trade or business. When the bill reached the Senate it was fully discussed and other provisions were added, but this provision, which was contained in the House bill as originally introduced, remained and it was contained in the bill as it passed the Senate. After the bill passed the Senate it was referred to the Conference Committee. Mr. Kitchen, who was a member of the Conference Committee and had charge of the bill in the House, in his report from the committee to the House, said, with respect to this section: The House bill in the so-called relief provisions provided that in certain specified cases the invested capital of a corporation shall be the amount which bears the same ratio to the net income of the corporation for the taxable year as the average invested capital for the taxable year of representative corporations engaged in a like or similar trade or business bears to their average net income for such year. The Senate amendment increases the class of cases in which the tax is to be fixed by reference to the experience of representative corporations; included therein all foreign corporations, and provides that in such eases the tax shall be the amount which bears the same ratio to the net income of the taxpayer for the taxable year as the average tax of representative corporations engaged in a like or similar trade or business bears to their net income for such years. The House recedes with amendments: (1) Making clerical changes ; (2) Consolidating a number of separate classes of cases differentiated in the Senate Amendment into a single class of cases in which upon application by the corporation * * *. From a consideration of the legislative history of sections 327 and 328, we believe that, where the capital used by a taxpayer was in a large part .borrowed, an abnormality of invested capital may be created within the meaning of section 327. In this case the borrowed money, which was an income-producing factor in the business, was many times the amount of the capital invested. In fact, the capital invested was insignificant in comparison with the capital borrowed. The business done and the net income of the taxpayer are materially disproportionate to the capital which was invested in the enterprise. For the foregoing reasons, we are of the opinion that the taxpayer is entitled to have its profits taxes compared with the taxes paid by comparative corporations to be selected by the Commissioner and the tax computed upon the basis of such comparison if any relief — 563 — is thereby granted. The determination of the tax on this basis will be considered as final. Appeal of The Viscose Co., 3 B. T. A. 444. Judgment for the petitioners. Sternhagen concurs in the result only. Marquette dissents on the fourth point. AkuNdell and Milliken did not participate.