Republic Steel Corp. v. United States

JoNES, Chief Judge, delivered the opinion of the court: This is a suit for an income tax refund. The primary issue is whether at the time of the dissolution of a wholly-owned corporation the book indebtedness of such corporation owing to the plaintiff should be reduced by $1,250,000, being the amount represented by a promissory note. Disposition of this issue hinges on the promissory note’s validity as indebtedness for purposes of bad debt and worthless stock loss deductions.1 The facts are set out in detail in the findings. Briefly they are as follows: As of January 1, 1980, The Berger Manufacturing Company, herein referred to as “Berger of Ohio”, was a wholly-owned subsidiary of Central Alloy Steel Corporation, from which it purchased raw materials used in its business of manufacturing, selling, and distributing steel desks, file cabinets, and other steel products. Berger of Ohio, on January 7, 1930, formed a new corporation of the same name — The Berger Manufacturing Company — a New Jersey corporation (hereinafter called “Berger of New Jersey”). It was agreed on that date that — 501 — Berger of New Jersey would carry on the manufacturing business previously conducted by Berger of Ohio, while the latter would continue with its sales and distribution business. Under the agreement, Berger of Ohio transferred to Berger of New Jersey its manufacturing and fabricating plant near the city of Canton, Ohio, consisting of a tract of land and various factories, buildings, and structures situated on the land, and the machinery and equipment located in the plant, and the raw materials, materials in process and the finished products then in the plant. Berger of Ohio also executed a promissory note in the amount of $1,250,000 “to be paid without interest when and as collected from accounts receivable.” The note was made payable to Berger of New Jersey. The above-mentioned transfers were made effective as of January 1, 1930. By the terms of the agreement, Berger of New Jersey assumed part of the indebtedness of Berger of Ohio and issued to that company all of its capital stock. Central Alloy Steel Corporation became the sole stockholder of the new Berger Company and thus of both Berger companies when these newly issued shares were distributed to it by Berger of Ohio. A single set of books for both Berger companies was maintained during J anuary and February 1930, by the same individual who was treasurer and chief accounting officer of each of the companies. No intercompany accounts were kept, and sales and payments were entered on this single set of books monthly. However, in March 1930, the items were segregated and a separate set of books was established for Berger of New Jersey. These accounts for Berger of New Jersey were established retroactive to January 1, 1930. On April 8,1930, the plaintiff, Republic Steel Corporation, acquired as of April 1,1930, in one transaction substantially all the property of Berger of New Jersey and Central Alloy Steel Corporation, paying therefor in the common stock of the plaintiff corporation. In the same transaction the plaintiff acquired all the capital stock of Berger of Ohio. Thereafter, Berger of New Jersey, redesignated as the Berger Division of the plaintiff, continued to do business with Berger of Ohio. At all times after that date, April 8,1930, Republic — 502 — Steel Corporation owned all the outstanding stock of Berger of Ohio until the dissolution of the latter company on November 10,1937. Upon the establishment of intercompany accounts in March 1930, the promissory note in the amount of $1,250,000 was retroactively entered as of January 1,1930, in the books of Berger of New Jersey under “Notes Receivable”. The books of Berger of Ohio reflected the note under the account “Notes Payable”, also effective as of January 1, 1930. Amounts paid by Berger of Ohio to third persons on behalf of Berger of New Jersey during the months of January and •February 1930, were debited and credited in the new inter-company accounts captioned “Accounts Receivable” and “Accounts Payable”. Similar payments in March were also treated in this manner. On March 31, 1930, the “Notes Receivable” and “Notes Payable” accounts indicated the promissory obligation as being outstanding to the extent of $1,250,000. And from April 1, 1930, to December 31, 1932, the accounts relating to the promissory note in the amount of $1,250,000 remained unchanged, notwithstanding a continuation of payments to third persons, now on behalf of the Berger Division of Republic Steel Corporation, by Berger of Ohio,-these payments being entered in the Berger Division’s account captioned “Accounts Payable — Berger of Ohio”. On December 31, 1932, an agreement, was made between the plaintiff and Berger of Ohio, by the terms of which it transferred to Berger of Ohio the business of its Berger Division. At this time there was a setoff of intercompany accounts (see finding 33) which had the effect of covering the note in the amount of $1,250,000 into the total book indebtedness owing by Berger of Ohio to Republic Steel 'Corporation. The note thereafter remained a part of such book indebtedness. As of October 30 and November 1, 1937, Berger of Ohio transferred its assets, subject to its liabilities, to the plaintiff and Berger of Ohio was dissolved on November 10,1937. An assessment for additional income taxes was levied by the Collector of Internal Revenue against the plaintiff in 1943 for the taxable year 1937. The plaintiff paid such — 503 — additional assessment and later filed a timely claim for refund of part of the taxes paid for the year 1937, basing its claim partially on the following grounds: (1) that the plaintiff was entitled to a bad debt deduction of $1,160,085.88 by reason of the book indebtedness owed to the plaintiff by Berger of Ohio, which allegedly became worthless in the year 1937; and (2) that the plaintiff was entitled to a deduction for a worthless stock loss of $1,538,998.02 by reason of its stock investment in Berger of Ohio, which allegedly became worthless in the taxable year 1937. The bad debt loss asserted by the plaintiff was computed by subtracting the net value of the assets that were conveyed to the plaintiff by Berger of Ohio on the dissolution of the latter company from the amount of the book indebtedness of Berger of Ohio to the plaintiff, such indebtedness including the amount of the note which Berger of Ohio in 1930 made to Berger of New Jersey in the amount of $1,250,000. According to the plaintiff’s computations, Berger of Ohio at the time of its dissolution owed the plaintiff $3,361,801.03, and the value of Berger’s assets less its liabilities to third persons as of that date was $2,201,715.15. It is the difference between these two figures, that is, $1,160,085.88 which the plaintiff claims as a bad debt deduction. If the Collector of Internal Revenue was correct in refusing to allow a deduction on account of the note in the sum of $1,250,000, then the book indebtedness reduced by that amount would be $2,111,801.03, which is less than the value of the assets at the time of the dissolution of Berger of Ohio on November 10, 1937. Under those circumstances the plaintiff would not have suffered a bad debt loss and the stock of Berger of Ohio would not have been worthless at the time of its dissolution. Basically, an indebtedness sufficient to give rise to a bad debt deduction presupposes that the parties intended to create a debtor-creditor status. Clark v. Comm’r 18 T. C. 780. However, the declared purpose of the parties is not necessarily controlling. Of more significance is what the parties actually did. Thus, substance, and not form, governs in this type of controversy. Weiss v. Stearn, 265 U. S. 242. — 504 — It is true separate corporations were formed and were in. existence at the time the note was executed. And the plaintiff, in its brief, directs our attention to rulings by the Supreme Court wherein related corporations were treated as separate entities for Federal income tax purposes, citing Edwards v. Chile Copper Co., 270 U. S. 452, 455; Burnet v. Commonwealth Improvement Co., 287 U. S. 415, 419; Moline Properties, Inc. v. Comm’r, 319 U. S. 436, 439; National Carhide Corp. v. Comm’r, 336 U. S. 422, 429. However, the above authority is not to be understood as barring inquiry into the corporate form, Griffiths v. Comm’r, 308 U. S. 355; Higgins v. Smith, 308 U. S. 473, nor in considering the relationship of affiliated corporations, Kraft Foods Company v. Comm’r, 232 F. 2d 118. On the contrary, as is indicated in the Kraft Foods decision, careful scrutiny is invited where the tax consequences of arrangements between a parent corporation and its wholly owned subsidiary are involved. As the court remarked in that case, this skeptical attitude is prompted by the fact that the sole stockholder can deal as it pleases with the corporate entity it controls. Thus, the protection afforded to business transactions by an “arm’s length deal” is absent in such situations.2 Close examination of the facts in this case reveals that the alleged autonomy of the Berger corporations was little more than a separate paper existence. No separate books of account were kept during the months of January and February ; no intercompany accounts were maintained; Berger of New Jersey sold its products only to Berger of Ohio; the same man was treasurer and chief accounting officer of both companies; and the accounting department of Berger of Ohio maintained the single set of books for the two months* — 505 — period. It is true that during the month of March 1930, a separate set of accounts was opened and maintained for Berger of New Jersey, but as of April 1,1930, the plaintiff, Republic Steel Corporation, purchased not only the capital stock of Berger of Ohio, but also the properties of Berger of New Jersey and Central Alloy Steel Corporation. Whereas the Berger companies had formerly been wholly owned by Central Alloy, they now were under the control of Republic Steel. The note here involved was executed at a time when Berger •of Ohio was establishing a new corporation. The newly formed Berger of New Jersey possessed only the assets that had been transferred to it by Berger of Ohio. When it is seen that the net current assets of Berger of New Jersey would have been only $322,671.14 had the note not been issued, obviously inadequate for the type of business it was to ■engage in, it would appear to us that the primary design of the note was to bolster the balance sheet of Berger of New Jersey.3 Our view would appear to be substantiated by the nature of the payments to Berger of New Jersey’s indebtedness to third persons, as well as its then current operating ■expenses, by Berger of Ohio during the period January through March of 1930. These payments to third persons were made in total disregard of the note, being retroactively entered in the intercompany accounts captioned “Accounts Receivable” and “Accounts Payable”. Even following the plaintiff’s acquisition of the controlling interest in the Berger companies in April of 1930, this pattern of resolute indifference toward the promissory note continued unchanged. From April 8, 1930, to December 31, 1932, Berger of Ohio advanced and transferred more than $2,000,000 to the plaintiff’s Berger Division. Yet nothing was ever applied to the note. In effect, the note had been floating around on the boobs of both companies “as idle as a painted ship upon a painted ocean.” The plaintiff, however, claims that this was a bookkeeping mistake, and that the note had actually been discharged by reason of payments — 506 — made to third persons by Berger of Ohio on behalf of the plaintiff’s Berger Division, or the former Berger of New Jersey. In answer to the plaintiff we need only observe that audits and inspections of the books were conducted at various times. Thus, it would indeed be strange that someone should not have discovered an error of such magnitude. The plaintiff emphasizes the accounting setoff of December 31,1932, pursuant to an agreement transferring the business of its Berger Division to Berger of Ohio, as effecting a discharge of the promissory note, and introduced expert testimony by accountants to substantiate this position. However, it is to be pointed out that this testimony, not uncon-tradicted by expert testimony entered by the Government, was based on the assumption that the note represented a valid indebtedness between the two Berger companies, and it was-their intention that the note be paid. But this is the fundamental issue of the case. The circumstances before us indicate that no real obligation was ever contemplated. Hence the setoff of intercompany accounts, rather than discharging the promissory note, brought it within, to the extent of $1,250,000, the total book indebtedness owing by Berger of Ohio to the plaintiff. See finding 53. We conclude in all the circumstances that an enforceable debt was never intended or recognized by the parties in the execution of the promissory note, and the note did not evidence a valid and subsisting indebtedness of such a nature as could form the basis for a bad debt deduction for Federal income tax purposes. But even if the note had been treated as an enforceable obligation, we think the plaintiff would not be entitled, under the facts of this case, to charge it off as a bad debt. At the time of Republic Steel Corporation’s purchase of the coi’-porate properties, as of April 1, 1930, the note was already outstanding. No doubt the plaintiff, in making the purchase, based the amount of its consideration to Central Alloy Steel Corporation on the net value of the three corporations, Central Alloy and the two Berger companies, so that in the final result it would make no difference to the plaintiff’s taxable position whether the note was paid as between the two Berger companies. Thus, if the $1,250,000 note had — 507 — been paid by Berger of Ohio the plaintiff would have acquired that much more in. the way of value from Berger of New Jersey and that much less from Berger of Ohio. Conversely, if the note were not paid it would have that amount additional in the value of Berger of Ohio and that amount less in the ownership of assets of Berger of New Jersey. Either way, whether the money was in one pocket or the other, its net position was exactly the same. The plaintiff owned both pockets. In brief, the note was lacking in economic reality and had no tax basis. For each and both of these reasons we conclude that the Collector of Internal Revenue was correct in refusing to recognize the book indebtedness owing to the plaintiff as the basis for a bad debt deduction. It may be added that the asserted bad debt and worthless-stock loss deductions have a common source — the promissory note. In view of our decision, the plaintiff has likewise failed1 to establish the foundation for a worthless stock loss, deduction. We hold that to the extent of $1,250,000 the book indebtedness owing to the plaintiff by Berger of Ohio was not a valid and subsisting debt within the meaning of section 23 (k) of the Revenue Act of 1936; and that upon the liquidation of Berger of Ohio its assets exceeded its actual liabilities, and that the plaintiff therefore realized no loss in its stock in Berger of Ohio within the meaning of section 112 (b) (6)' of the Revenue Act of 1936. The petition will be dismissed. It is so ordered. Reed, Justice {Bet.), sitting by designation; MaddeN,. Judge; and LittletoN, Judge, concur. Whitaker, Judge, took no part in the consideration and. decision of this case. FINDINGS OP PACT The court, having considered the evidence, the report of' Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows: — 508 — 1. (a) This is a suit for an income tax refund claimed by the plaintiff on the ground that, upon the liquidation in 1937 ■of its wholly-owned subsidiary, The Berger Manufacturing Company (an Ohio corporation that will be referred to hereinafter as “Berger of Ohio”), the plaintiff was entitled to income tax deductions for a bad debt loss and a worthless •stock loss because the assets which the plaintiff received from Berger of Ohio were insufficient to pay the latter’s indebtedness to the plaintiff. (b) The principal issue is whether Berger of Ohio’s book indebtedness to the plaintiff at the time of the former’s dissolution in 1937 represented, to the extent of $1,250,000, a certain promissory note in that amount, and, if so, whether the book indebtedness should be reduced by $1,250,000 in determining whether there was a bad debt loss for income tax purposes and whether Berger of Ohio’s stock was actually worthless for income tax purposes. 2. (a) The plaintiff is, and at all times involved in this litigation has been, a corporation organized and existing under the laws of the State of New Jersey, with its principal •office located in Cleveland, Ohio. The plaintiff’s name was Republic Iron and Steel Company until April 8,1930, when its name was duly changed to Republic Steel Corporation in accordance with the laws of New Jersey. (b) The plaintiff is engaged in the business of producing and selling steel and steel products. 3. As of January 1,1930, Berger of Ohio was wholly owned by Central Alloy Steel Corporation. Berger of Ohio was then engaged in the business of manufacturing, selling, and distributing steel desks, file cabinets, and other steel products. It purchased its raw materials from its sole stockholder, Central Alloy Steel Corporation. 4. On January 7,1930, Berger of Ohio formed a new corporation, also named The Berger Manufacturing Company, under the laws of New Jersey. (This new corporation will be referred to hereinafter as “Berger of New Jersey”.) Berger of New Jersey was formed to carry on the manufacturing business theretofore conducted by Berger of Ohio, while the latter was to retain and continue to carry on its sales and distribution business. — 509 — 5. (a) A proposed agreement between Berger of Ohio and Berger of New Jersey was drafted. It provided (among other things) that Berger of Ohio would “transfer and convey” to Berger of New Jersey as of January 1,1930: (1) the manufacturing and fabricating plant of Berger of Ohio located near the city of Canton, Ohio, consisting of 13.35 acres of land and various factories, buildings, and. structures situated on the land; (2) all the machinery, equipment, and furniture located in the plant; (3) all the raw materials, materials in process of manufacture, and finished products in the plant; (4) all of Berger of Ohio’s letters patent, inventions, licenses, devices, processes, trade-marks, trade names, symbols,, brands, labels, and slogans; and (5) a promissory note in the amount of $1,250,000, which was “to be paid without interest when and as collected from accounts receivable”. (b) The proposed agreement mentioned in paragraph (a) of this finding further provided as follows: In consideration of said conveyance and transfer of property, which shall also be in satisfaction of all subscriptions to shares made at its organization, the New Jersey Corporation shall execute and deliver to the Ohio-Corporation for distribution pro rata to its stockholders, the entire authorized capital stock of the New Jersey Corporation, consisting of One Thousand Shares (1,000) of the par value of One Hundred Dollars ($100.00) each, and assume and agree to pay the indebtedness of the Ohio Corporation on notes and open account for purchases of raw material or otherwise incurred for the benefit of said manufacturing and fabricating plant,, including real and personal taxes and unpaid payroll,, which indebtedness is estimated at approximately $775,000.00. Said real property, to the amount and value of $100,000, shall be payment at par for said capital stock, and all of the residue of said property, real and personal, shall constitute payment of paid-in surplus. 6. At a meeting on January 8,1930, the board of directors of Berger of Ohio adopted resolutions approving and ratifying the action of the officers of the company in forming Berger of New Jersey, approving the proposed agreement be — 510 — tween Berger of Ohio and Berger of New Jersey mentioned in finding 5, authorizing the officers of Berger of Ohio * * * to sign, execute and deliver any and all deeds and other instruments of conveyance, assignment and transfer, and perform all other acts that may by said officers be found or deemed to be necessary or expedient fully to carry into effect the agreement * * * and to accomplish the purposes thereof * * *, and directing that all the shares of stock in Berger of New Jersey, when received by Berger of Ohio under the agreement, should be distributed to Berger of Ohio’s sole stockholder, Central Alloy Steel Corporation. 7. On January 8,1930, pursuant to the resolutions referred to in finding 6, Berger of Ohio and Berger of New Jersey ■entered into the agreement mentioned in finding 5. 8. (a) Pursuant to the agreement of January 8, 1930, Berger of Ohio conveyed to Berger of New Jersey, as of January 1,1930, all of the former’s manufacturing assets (other than cash and receivables) and executed a promissory note in the face amount of $1,250,000, which was payable to Berger •of New Jersey “without interest when and as collected from •accounts receivable” of Berger of Ohio. (b) The land, factories, buildings, structures, machinery, -equipment, and furniture that Berger of Ohio conveyed to Berger of New Jersey as of January 1, 1930 had a trans-feror’s book value of $989,161.18. (c) The raw materials and work in progress that Berger of Ohio conveyed to Berger of New Jersey as of January 1, 1930 had a transferor’s book value of $1,007,291.32. 9. (a) In accordance with the agreement of January 8, 1930, Berger of New Jersey issued to Berger of Ohio all of the former’s capital stock, consisting of 1,000 shares having a par value of $100 each. (b) Also, Berger of New Jersey assumed and agreed to pay certain then current accounts payable and notes payable •of Berger of Ohio. These accounts payable and notes payable amounted to $684,620.18 as of January 1,1930. 10. (a) Upon receiving the capital stock of Berger of New ■Jersey, Berger of Ohio distributed the same to its parent corporation, Central Alloy Steel Corporation. — 511 — (b) On January 8, 1930 (as of January 1,1930), Central Alloy Steel Corporation was the sole stockholder of both Berger of Ohio and Berger of New Jersey. 11. No change in the agreement of January 8, 1930, or in the power of Berger of Ohio’s officers to carry out the terms <of that agreement under the resolutions mentioned in finding 6, was ever authorized by the board of directors of Berger of Ohio. 12. Although Berger of Ohio and Berger of New Jersey were separate corporations and transacted business with each other, no separate books of account were established for Berger of New Jersey in the months of January and Feb-Tuary 1930, and no intercompany accounts between Berger of Ohio and Berger of New Jersey were established or maintained during those months. The same man was treasurer •and chief accounting officer of both companies in J anuary and February 1930, and the accounting department of Berger of Ohio maintained a single set of books for Berger of Ohio and Berger of New Jersey. Sales and payments made to others were entered on this set of books monthly, but transactions between the two Berger corporations were not recorded. 13. Berger of Ohio purchased, and then sold and distributed, all the products manufactured by Berger of New Jersey during the months of J anuary and February 1930. The products thus purchased in January had a value of $454,-276.29, and those purchased in February had a value of $332,507.50. 14. In the months of January and February 1930, Berger of Ohio paid to third persons $707,539.93 and $543,899.72, respectively, on account of amounts owed by Berger of New Jersey for current operating expenses and on account of debts assumed by Berger of New Jersey from Berger of Ohio as of January 1, 1930. In making such payments, Berger of Ohio paid all of Berger of New Jersey’s current operating expenses for the months of January and February 1930. 15. In the months of January and February 1930, Berger of Ohio collected $912,414.34 and $848,110.32, respectively, on its accounts receivable. 16. In March 1930, the accounting department of Berger of Ohio established a separate set of books for Berger of — 512 — New Jersey by segregating individual items from the single set of books theretofore maintained for both corporations. At that time, accounts were retroactively established for Berger of New Jersey as of January 1,1930. 17. (a) With the establishment of a separate set of books for Berger of New Jersey in March 1930, the promissory note in the amount of $1,250,000 previously executed by Berger of Ohio in favor of Berger of New Jersey was retroactively entered as of January 1,1930 in the books of account of Berger of New Jersey as an asset under an account captioned “Notes Receivable — Berger of Ohio”. The note was also reflected in the capital surplus item of $2,428,671.08 on the balance sheet of Berger of New Jersey that was prepared as of January 1, 1930. (This balance sheet is set out in finding 57.) (b) The promissory note in the amount of $1,250,000 was retroactively entered as of January 1, 1930 in the books of account of Berger of Ohio as a liability under a new account captioned “Notes Payable — Berger of New Jersey”. 18. When separate books of account were established for Berger of New Jersey in March 1930, the amounts of $454,276.29 and $332,507.50 mentioned in finding 13 as representing the value of the goods purchased by Berger of Ohio from Berger of New Jersey in January and February 1930 were entered in the books of account of Berger of Ohio as credits in a new account captioned “Accounts Payable-^ Berger of New Jersey”, and they were entered in the books of account of Berger of New Jersey as debits in an account captioned “Accounts Receivable — Berger of Ohio”. 19. In March 1930, when separate books of account were established for Berger of New Jersey, the figures of $707,539.93 and $543,899.72 mentioned in finding 14 as representing the amounts paid by Berger of Ohio to third persons on behalf of Berger of New Jersey in January and February 1930 were entered in the books of account of Berger of Ohio as debits in a new account captioned “Accounts Receivable — Berger of New Jersey”, and they were entered in the books of Berger of New Jersey as credits in an account captioned “Accounts Payable — Berger of Ohio”. 20. The items of $912,414.34 and $848,110.32 mentioned in finding 15 as the amounts collected by Berger of Ohio on its — 513 — accounts receivable in January and February 1930 were not entered in any of the accounts referred to in the previous findings as having been set up in March 1930. ' 21. (a) In March 1930, Berger of Ohio purchased, and then sold and distributed, all the products manufactured by Berger of New Jersey during that month. The products thus purchased in March 1930 had a value of $400,803.12. This figure of $400,803.12 was entered as a credit in Berger of Ohio’s account captioned “Accounts Payable — Berger of New Jersey” and as a debit in Berger of New Jersey’s account captioned “Accounts Receivable — Berger of Ohio”. (b) In March 1930, Berger of Ohio paid to third persons a total of $64,493.88 on account of amounts owed by Berger of New Jersey for current operating expenses. This total included $29,781.24 as Berger of New Jersey’s share of the joint operating expenses of the two companies for March, and $34,712.64 to cover one-half of Berger of New Jersey’s plant payroll for March. The figure of $64,493.88 was entered as a debit in Berger of Ohio’s account captioned “Accounts Receivable — Berger of New Jersey” and as a credit in Berger of New Jersey’s account captioned “Accounts Payable — Berger of Ohio”. (c) In March 1930, Berger of Ohio paid $185,000 directly to Berger of New Jersey. This amount of $185,000 was entered as a debit in Berger of Ohio’s account captioned “Accounts Payable — Berger of New Jersey” and as a credit in Berger of New Jersey’s account captioned “Accounts Receivable — Berger of Ohio”. (d) In March 1930, Berger of Ohio collected $793,416.46 on its accounts receivable. This amount was not entered in any of the accounts mentioned in the previous findings. 22. None of the amounts paid by Berger of Ohio to or on behalf of Berger of New Jersey during the period January-March 1930 was entered on the books of either company in the accounts that reflected the $1,250,000 promissory note. As of the close of business on March 31, 1930, the account captioned “Notes Receivable — Berger of Ohio” was shown as an asset on the books of Berger of New Jersey, and the account captioned “Notes Payable — Berger of New Jersey” was shown as a liability on the books of Berger of Ohio. Each account was then in the amount of $1,250,000. — 514 — 23. Except for the $185,000 mentioned in finding 21 (c), none of tbe amounts paid by Berger of Oliio to or on behalf of Berger of New Jersey during the period January-Mareh 1930 was entered on the books of either company in the accounts that reflected Berger of Ohio’s purchases of manufactured products from Berger of New Jersey. As of the close of business on March 31, 1930, the account captioned “Accounts Receivable — Berger of Ohio” was shown as an asset on the books of Berger of New Jersey, and the account captioned “Accounts Payable — Berger of New Jersey” was shown as a liability on the books of Berger of Ohio. Each account was then in the net amount of $1,002,586.91. 24. The following is a condensed summary of the pertinent intercompany accounts for the period from January 1, 1930 to March 31,1930: BERGER MANUFACTURING COMPANY (NEW JERSEY) Notes Accounts Accounts Receivable Receivable Payable BERGER MANUFACTURING COMPANY (OHIO) Notes Accounts Accounts Balance January 1, Payable Payable Receivable 1930_ $1, 250, 000. 00 January— Accounts payable, salaries, wages, etc., of Berger of New Jersey paid by Berger of Ohio_ _ _ $707, 539. 93 Purchases of products of Berger of New Jersey by Berger of Ohio.. _ $454, 276. 29 February— Accounts payable, salaries, wages, etc., of Berger of New Jersey paid by Berger of Ohio. 543, 899. 72 — 515 — BERGER MANUFACTURING COMPANY (NEW JERSEY) Notes Accounts Accounts Receivable Receivable Payable BERGER MANUFACTURING COMPANY (OHIO) Notes Accounts February — Con. Payable Payable Accounts Receivable Purchases of products of Berger of New Jersey by Berger of Ohio__ _ $332, 507. 50 March— One-half of Berger of New Jersey’s plant payroll for March 1930, and Berger of New Jersey’s share of joint operating expenses for March 1930, paid by Berger of Ohio_ _ _ $64, 493. 88 Purchases of products of Berger of New Jersey by Berger of Ohio__ _ 400, 803. 12 Cash payment by Berger of Ohio to Berger of New Jersey on account for purchases of products_ _ 185, 000. 00 1 Balance March 31, 1930_ $1, 250, 000. 00 $1, 002, 586. 91 $1, 315, 933. 53 (See finding 58 for balance sheets of Berger of Ohio and Berger of New Jersey as of March 31, 1930.) 25. (a) On April 8, 1930, tbe plaintiff acquired as of April 1, 1930 in one transaction substantially all the properties of Berger of New Jersey, of Central Alloy Steel Corporation, and of other corporations. Immediately after such — 516 — transfers of properties to the plaintiff, neither the transferors nor their stockholders, nor any of them, retained an interest or control of 50 percent or more in the transferred properties. (b) As part of the transaction on April 8,1930, the plaintiff acquired the properties of Berger of New Jersey in exchange for 25,000 shares of plaintiff’s own common stock (snch stock being transferred to Central Alloy Steel Corporation as the sole stockholder of Berger of New Jersey) and the assumption by the plaintiff of all the liabilities of Berger of New Jersey. Such properties were operated after April 8,1980 as the Berger Division of the plaintiff. (c) On April 8,1930 (as of April 1,1930), the plaintiff’s common stock had a fair market value of $77.3125 per share, or a total of $1,932,812.50 for the 25,000 shares mentioned in paragraph (b) of this finding. The figure of $1,932,812.50 constituted less than 1 percent of the total value of all the outstanding shares of the plaintiff’s common stock immediately after the property transfers referred to in this finding. 26. (a) In the transaction described in finding 25, the plaintiff acquired all the capital stock of Berger of Ohio by purchase from Central Alloy Steel Corporation at a cost to the plaintiff of $2,486,430.19. The plaintiff thereafter owned all the outstanding capital stock of Berger of Ohio continuously from April 8, 1930 until the dissolution of Berger of Ohio on November 10,1937. (b) The plaintiff’s capital investment in the stock of Berger of Ohio at the several year ends between April 8,1930 and November 10,1937 was as follows: December 31,1930_$1,486,430.18 December 31,1931_ 1, 524,426.18 December 31,1932_ 1,549,458.15 December 31,1933_ 1,549,458.15 December 31,1934_ 1,601, 111. 85 December 31, 1935_ 1,609,301.16 December 31,1936_ 1, 609, 301.16 (c) During the plaintiff’s taxable year 1937, and specifically from the beginning of business on October 30, 1937, until the dissolution of Berger of Ohio, the plaintiff’s adjusted basis under the applicable laws and regulations for its stock in Berger of Ohio was $1,609,301.16. Such stock was not worthless at the beginning of the year 1937. — 517 — 27. (a) During the period from April 1, 1930 to December 31,1932, the Berger Division of the plaintiff continuously transacted business with Berger of Ohio. Separate books of account, which correspondingly recorded such transactions, were maintained by the accounting department of Berger of Ohio. Each account was a continuation of the same account in the respective books referred to in findings 17,18, and 19. (b) Specifically, during the period from April 1, 1930 to December 31, 1932, purchases of goods by Berger of Ohio from the Berger Division of the plaintiff and cash payments by Berger of Ohio directly to the plaintiff’s Berger Division were entered on the books of the plaintiff’s Berger Division as debits and credits, respectively, in the account captioned “Accounts Receivable — Berger of Ohio”. During the same period, payments made by Berger of Ohio to third persons on account of sums owed by the Berger Division of the plaintiff were entered on the books of the plaintiff’s Berger Division as credits in' the account captioned “Accounts Payable— Berger of Ohio”. 28. Throughout the entire period from April 1, 1930 to December 31, 1932, the book entries relating to the promissory note in the amount of $1,250,000 remained unchanged. The note was shown on the books of the Berger Division of the plaintiff as an asset, and on the books of Berger of Ohio as a liability, in the amount of $1,250,000. 29. As of the beginning of business on December 31, 1932, the account on the books of the Berger Division of the plaintiff entitled “Accounts Receivable — Berger of Ohio” showed a balance of $2,706,859.63 in favor of the plaintiff’s Berger Division. Purchases of manufactured products by and payments from Berger of Ohio were recorded as follows in that account for the respective periods indicated: Purchases Payments January 1930- $454,276.29 February 1930_ 332,507.50 March 1930_ 400, 803.12 $185, 000. 00 April 1,1930 through December 31,1930_ 2,761,397. 84 2,179, 633. 83 1931 - 2, 987,284.71 2,298,966.69 1932 - 1,505,247. 97 1, 071,057.28 8, 441, 517. 43 5, 734, 657.80 — 518 — 30.As of the beginning of business on December 31,1932, the account on the books of the Berger Division of the plaintiff entitled “Accounts Payable — Berger of Ohio” showed a balance of $2,044,968.89 appearing to the credit of Berger of Ohio. This account recorded Berger of Ohio’s payments to third persons of amounts owed by Berger of New Jersey and, later, of amounts owed by the plaintiff’s Berger Division, as follows: January 1930_ $701, 539.93 February 1930_ 543,899.72 March 1930_ 64, 493. 88 April 1, 1930 through Dec. 31, 1930- 281,472. 72 1931_ 287, 826. 04 1932 _ 159, 736. 60 Total_ 2, 044, 968.89 31.As of the beginning of business on December 31,1932, the total purchases by Berger of Ohio from Berger of New Jersey and from the Berger Division of the plaintiff exceeded to the extent of $661,890.74 the total payments by Berger of Ohio to or on behalf of Berger of New Jersey and the Berger Division of the plaintiff. The excess is computed as follows: Total purchases by Berger of Ohio_$8,441,517. 43 Total payments by Berger of Ohio_ 7, 779, 626. 69 Excess of total purchases over total pay-ments_ 661, 890. 74 32. At the beginning of business on December 31, 1932, there remained on the books of the Berger Division of the plaintiff the entry of $1,250,000 in favor of the Berger Division of the plaintiff under the account entitled “Notes Beceivable — Berger of Ohio”. 33. Pursuant to an agreement dated December 31, 1932, between the plaintiff and Berger of Ohio, the plaintiff on that day transferred the business of its Berger Division to Berger of Ohio. This was accomplished by leasing the Berger Division’s real estate, plant, and equipment and selling the Berger Division’s remaining net assets to Berger of Ohio for a total obligation of $2,097,447.66. The total obligation was computed as follows: — 519 — Net sales price of assets sold_•- $185, 556. 92 Plus net balance resulting from setoff of intercompany accounts: “Accounts Receivable — Berger of Ohio”_$2, 706, 859. 63 “Notes Receivable— Berger of Ohio”— 1, 250, 000. 00 --- $3, 956, 859. 63 Less “Accounts Payable — Berger of Ohio”_ 2, 044, 968. 89 Net Balance — _ 1, 911, 890. 74 Total obligation_ 2, 097, 447. 66 (See findings 59, 60, and 61 for pertinent balance sheets.) 34. As of tbe close of business on December 31, 1932, the books of the Berger Division of the plaintiff were closed, and the plaintiff transferred the figure of $2,097,447.66 mentioned in finding 33 as a debit to its general ledger account entitled “The Berger Manufacturing Company of Ohio — Advances”. Immediately before such transfer, there appeared in the advance account a $60,000 credit balance in favor of Berger of Ohio, so that the debit balance of the account as of the close of business on December 31,1932 was $2,037,447.66. 35. After December 31, 1932, intercompany, transactions between the plaintiff and Berger of Ohio were recorded in three accounts on the books of the plaintiff: “Accounts Payable — The Berger Manufacturing Company — Canton, Ohio”, “Accounts Receivable — The Berger Manufacturing Company — Canton, Ohio”, and “The Berger Manufacturing Company of Ohio — Advances”. Corresponding accounts were maintained on the books of Berger of Ohio. 36. (a) From January 1, 1933 to October 30, 1937, the plaintiff’s purchases of finished products from Berger of Qhio and the plaintiff’s payments to Berger of Ohio for such products were recorded on the plaintiff’s books as credits and debits, respectively, in the account entitled “Accounts Payable — The Berger Manufacturing Company — Canton, Ohio”. (b) Prior to January 1, 1936, the plaintiff did not maintain a ledger for the account entitled “Accounts Payable— The Berger Manufacturing Company — Canton, Ohio”, but — 520 — paid Berger of Ohio’s invoices for finished products as they were rendered. The credit balance of such accounts payable ledger at January 1,1936 and at December 31, 1936 was as follows: Year end Credit balance January 1, 1936_$10,224.66 December 31,1936- 10, 548. 62 (c) As of the beginning of business on October 30, 1937, the amount owing from the plaintiff to Berger of Ohio in this account was $5,800.21. 37. (a) Prom January 1, 1933 to October 30, 1937, Berger of Ohio’s purchases of raw materials from the plaintiff and Berger of Ohio’s payments to the plaintiff for such materials were recorded on the plaintiff’s books as debits and credits, respectively, in the account entitled “Accounts Receivable— The Berger Manufacturing Company — Canton, Ohio”. (b) The balance of the account entitled “Accounts Receivable — The Berger Manufacturing Company — Canton, Ohio” in favor of the plaintiff at the respective year ends between January 1,1933 and October 30,1937 was as follows: Year end Debit balance December 31,1933-$111,860.33 December 31,1934_ 279,104.90 December 31,1935_ 359,145. 71 December 31,1936_ 348,521.61 (c) As of the beginning of business on October 30, 1937, the amount owing from Berger of Ohio to the plaintiff in this account was $971,909.19. 38. (a) Between January 1, 1930 and the date of its dissolution in 1937, Berger of Ohio had the following profits or losses during the respective periods indicated: Period Annual profit (or loss) Jan. 1 through March 31, 1930. . $(207,264.92) April 1 through Dec. 31,1930_ - (551,193.03) 1931_ _ (1,094,002.39) 1932_ (565,694. 68) 1933 _ _ (415, 670.35) 1934_ _ (109,107.21) 1935 _ 167. 09 1936 _ 186,170. 30 1937 (10 months)-92,950. 59 — 521 — (b) Berger of Ohio and the plaintiff were affiliated and filed consolidated returns for the taxable years 1930 through 1933. Berger of Ohio’s losses were not availed of by the plaintiff to reduce the plaintiff’s taxes during that period, since the plaintiff had losses of its own in each of the years 1930,1931,1932, and 1933, as follows: Period, Annual profit (or loss) 1930_$(7,161,334.41) 1931_ (6,498,407.51) 1932_(10,422,117.18) 1933_ (3,637,823.18) 39. (a) As of the beginning of business on October 30, 1937, the plaintiff’s books of account (and also Berger of Ohio’s corresponding accounts) indicated that Berger of Ohio was at that time indebted to the plaintiff in the amount of $3,361,801.03, computed as follows: “The Berger Manufacturing Company of Ohio — Advances” as of close of Dee. 31, 1932 (see findings 33 and 34)_$2,037,447.66 Plus debits to advance account for inter-account transfers and rental of leased premises by Berger of Ohio from Jan. 1, 1933 to Oct. 30, 1937_ 662,318. 56 2,699,766. 22 Less credits to advance account for expenditures made by Berger of Ohio on behalf of plaintiff from Jan. 1, 1933 to Oct. 30, 1937_ 304,074.17 2,395,692.05 “Accounts Receivable — The Berger Manufacturing Company — Canton, Ohio,” as of Oct. 30, 1937_ 971,909.19 3,367,601. 24 “Accounts Payable — The Berger Manufacturing Company — Canton, Ohio,” as of Oct. 30, 1937_ 5, 800.21 ■ Amount owed to plaintiff by Berger of Ohio as of Oct. 30, 1937_ 3,361,801.03 (b) Therefore, the book indebtedness of Berger of Ohio to the plaintiff as of October 30, 1937 in the amount of $3,361,801.03 resulted from bookkeeping entries which included the entry in the amount of $2,097,447.66 that was made by the plaintiff on December 31,1932 in its account captioned — 522 — “The Berger Manufacturing Company of Ohio — Advances”. The figure of $2,097,447.66 was computed by adding to the net sales price of the assets that were sold by the plaintiff to Berger of Ohio the net balance resulting from the setoff of intercompany accounts. Among the intercompany accounts taken into consideration in arriving at such net balance on December 31,1932 was the account in which had been entered as of January 1,1930 the $1,250,000 promissory note executed by Berger of Ohio in favor of Berger of New Jersey. 40. (a) On October 30 and November 1, 1937, Berger of Ohio transferred all its assets, subject to its liabilities, to the plaintiff. As of the dates of transfer, the aggregate value of Berger of Ohio’s properties, reduced by the amount of that company’s liabilities to persons other than the plaintiff, was $2,201,715.15. (b) Berger of Ohio was dissolved on November 10, 1937. 41. The plaintiff filed its tentative United States corporation income and excess profits tax return for the taxable year 1937 on March 15,1938, and filed its final United States corporation income and excess profits tax return for such year on July 15, 1938, disclosing total income taxes due for such year in the amount of $434,291.55. The taxes in the amount stated were timely paid by the plaintiff. 42. In 1943, the Commissioner of Internal Revenue assessed against the plaintiff additional income taxes allegedly due for the taxable year 1937 in the amount of $2,525,426.97, and interest thereon in the amount of $834,221.18. On October 26, 1943, the plaintiff paid the amounts of $2,525,426.97 and $834,221.18 to the defendant through the Collector of Internal Revenue at Cleveland, Ohio. 43. Neither the plaintiff nor the Commissioner of Internal Revenue, in computing the amount of the plaintiff’s income taxes for the year 1937 as outlined in findings 41 and 42, made any deduction for a bad debt loss or a worthless stock loss because the assets that the plaintiff received from Berger of Ohio were insufficient to pay the latter’s book indebtedness to the plaintiff when Berger of Ohio was dissolved in 1937. 44. On or before November 30,1944, the plaintiff filed with the collector of Internal Revenue at Cleveland, Ohio, a claim for refund of income taxes in the amount of $1,714,701.93 for the taxable year 1937. Of that amount, $865,133.06 repre — 523 — sented a claim for refund of income taxes based upon the asserted grounds: (a) that the plaintiff was entitled to a bad debt deduction of $1,160,085.88 by reason of the book indebtedness owed to the plaintiff by Berger of Ohio, which allegedly became worthless in the taxable year 1937; and (b) that the plaintiff was entitled to a deduction for a worthless stock loss of $1,538,998.022 by reason of its stock investment in Berger of Ohio, which allegedly became worthless in the taxable year 1937. 45.The bad debt loss asserted by the plaintiff in its claim for refund referred to in finding 44 was computed by subtracting the net value of the assets that were conveyed to the plaintiff by Berger of Ohio on the dissolution of the latter from the amount of the book indebtedness of Berger of Ohio to the plaintiff at the time of the latter’s dissolution, in the manner following: Amount owed plaintiff by Berger of Ohio as of Oct. 30, 1937-$3, 361, 801.03 Value of Berger of Ohio's assets, less its liabilities to third parties, as of Oct. 30, 1937_:_ 2,201, 715.15 1,160,085. 88 46. The plaintiff’s claim for refund, in so far as it was based upon the grounds that the plaintiff was entitled to a bad debt deduction of $1,160,085.88 and to a worthless stock deduction of $1,538,998.023 as outlined in finding 44, was formally disallowed by the defendant through a registered notice of disallowance that was mailed to the plaintiff on March 10,1948. 47. (a) The plaintiff is, and at all pertinent times has been, the sole and absolute owner of the claims presented in this case. No transfer or assignment of any such claim, or of any part of or any interest in any such claim, has ever been made. — 524 — (b) No action on these claims, other than as set forth in the previous findings, has been taken by the Congress of the •United States, or by any of the departments of the Government, or in any judicial proceeding, including any proceeding in the Tax Court of the United States. 48. The plaintiff has made no waiver of its claim to the refund sought in this litigation. 49. This action was timely filed. 50. The plaintiff has not claimed, in connection with its income taxes for any year prior to 1987, any deduction because of a bad debt loss or a worthless stock loss on the basis of the transactions involved in these findings. 51. (a) In computing for the taxable year 1937 the plaintiff’s normal-tax net income and the plaintiff’s adjusted net income and undistributed net income for purposes of the surtax on undistributed profits, additional deductions in the amount of $29,591.48 for accrued Federal, State, and local taxes should have been allowed, and claimed deductions in the amount of $141,793.62 for royalties should have been disallowed, thereby changing the plaintiff’s normal tax net income for the taxable year 1937 to $11,183,740.54 before making any deduction because of the alleged bad debt and worthless stock losses claimed in this suit. (b) For purposes of the surtax on undistributed profits, the plaintiff’s undistributed net income for the taxable year 1937 (before making any deduction because of the bad debt and worthless stock losses claimed in this suit, and also before deducting the plaintiff’s normal tax for the taxable year 1937, which is to be determined in this suit) was $9,333,600.30. That amount was $3,846,567.00 less than the plaintiff’s adjusted net income for the taxable year 1937. 52. The evidence does not establish that any of the bookkeeping entries referred to in these findings were improper or failed to reflect the intentions of the parties at the times when the various entries were made. 53. (a) The setoff of intercompany accounts on December 31, 1932 (see finding 33) had the effect of covering the promissory note in the amount of $1,250,000 into the total book indebtedness owing by Berger of Ohio to the plaintiff. The note became, and thereafter remained, a part of such book indebtedness. — 525 — (b) Berger of Ohio’s book indebtedness to the plaintiff in the amount of $3,361,801.03 at the time of the former’s dissolution in 1937 represented and was based upon, to the extent of $1,250,000, the promissory note which Berger of Ohio executed in favor of Berger of New Jersey under the agreement of January 8,1930. 54. To the extent of $1,250,000, the book indebtedness of $3,361,801.03 owing to the plaintiff by Berger of Ohio as of the time of Berger of Ohio’s dissolution was lacking in economic reality and had no tax basis. 55. Berger of Ohio’s book indebtedness to the plaintiff as of the time of the former’s dissolution should be reduced by $1,250,000 in determining whether there was an excess of indebtedness owing to the plaintiff over assets transferred to the plaintiff and whether the plaintiff’s stock in Berger of Ohio was worthless. The book indebtedness, so reduced, is $2,111,801.03. 56. The value of Berger of Ohio’s assets as of the time when they were transferred to the plaintiff, less Berger of Ohio’s liabilities to third parties, exceeded the amount of the true indebtedness owing to the plaintiff by Berger of Ohio at that time. 57. The following are the balance sheets of Berger of Ohio and Berger of New Jersey as of January 1,1930, as reflected by their separated books of account: Assets Berger Berger of of Ohio New Jersey Current Assets: Cash---- $212, 661. 74 0 Notes Receivable: Customers- 132, 483. 16 0 Berger of Ohio_ _ $1, 250, 000. 00 Accounts Receivable — Customers».. 1, 741, 435. 30 0 Inventories-- 1, 474, 534 27 1, 007, 291. 32 3, 561,114. 47 2, 257, 291. 32 Investments: Stocks of Subsidiary Companies_ 35, 000. 00 0 Miscellaneous Stocks_ 8, 675. 55 0 43, 675. 55 0 — 526 — Berger Assets of Ohio Berger of New Jersey Permanent Assets: Buildings__ $477, 291. 27 $808, 333. 23 Machinery and Equipment_ 132, 339. 37 1, 127, 166. 46 Furniture and Fixtures_ 103, 111. 64 167, 541. 25 Autos_ 68, 367. 99 7, 830. 00 Less: Depreciation_ (510, 128. 46) (1, 184, 280. 36) Land_ 176, 885. 17 30, 000. 00 New Construction_ 0 32, 570. 60 447, 866. 98 989, 161. 18 Other Assets: Sundry Accounts_ 25, 212. 40 0 Deferred Charges_ 57, 609. 40 0 82, 821. 80 0 4,135, 478. 80 Total Assets_ 3, 246, 452. 50 Liabilities Current: 151, 337. 18 Accounts Payable_ 50, 470. 23 43,108. 14 Accrued Accounts_ 0 194, 445. 32 50, 470. 23 Intercompany: Notes Payable — Berger of New Jersey_ 1, 250, 000. 00 Notes Payable — Central Alloy Steel Corporation_ _ 350, 000. 00 Accounts Payable — Central Alloy Steel Corporation_ _ 284, 149. 95 1, 250, 000. 00 634,149. 95 Capital and Surplus: Reserves for Contingencies. 204, 603. 30 33,161. 24 Capital Stock_ 100, 000. 00 100, 000. 00 Capital Surplus_ 1, 984, 080. 63 2, 428, 671. 08 Earned Surplus_ 402, 349. 55 0 2, 691, 033. 48 2, 561, 832. 32 Total Liabilities, Capital and Sur-plus_ 4, 135, 478. 80 3, 246, 452. 50 — 527 — 58. The following are the balance sheets of Berger of Ohio and Berger of New Jersey according to their respective books of account as of March 31,1930: Assets Berger of Ohio Berger of New Jersey Current Assets: Cash__ $410, 994. 56 $16, 546. 48 Notes Receivable: Customers_ 132, 009. 16 0 Berger of Ohio_ 1, 250, 000. 00 Accounts Receivable: Customers_ 1, 556,122. 54 2, 556. 00 Berger of Ohio_ 1, 002, 586. 91 Berger of New Jersey_ 1, 315, 933. 53 Inventories_ 1, 007, 163. 71 882, 779. 79 4, 422, 223. 50 3, 154, 469. 18 Investments: Stocks of Subsidiary Companies_ 35, 000. 00 Miscellaneous Stocks_ 8, 675. 55 43, 675. 55 0 Permanent Assets: Buildings_I_ 367, 889. 74 808, 333. 23 Machinery and Equipment_ 73, 912. 75 1, 147, 091. 38 . Furniture and Fixtures_ 85, 637. 25 167, 975. 49 Autos_ 37, 787. 11 7, 830. 00 Less: Depreciation_ (388,000.20) (1, 192, 481. 82) Land- 170,186. 42 30, 000. 00 New Construction_ 0 54, 970. 11 347,413. 07 1, 023, 718. 39 Other Assets: Sundry Accounts-. 41, 270. 42 Deferred Charges-68, 238. 49 109, 508. 91 Total Assets-__ 4, 922, 821. 03 4, 178, 187. 57 — 528 — Berger Liabilities of Ohio Berger of New Jersey Current: Accounts Payable_ $74, 861. 74 $161, 230. 69 Accrued Accounts_ 97, 057. 00 44, 204. 64 171, 919. 74 205, 435. 33 Intercompany: Notes Payable — Berger of New Jersey_ 1, 250, 000. 00 - Accounts Payable — Berger of New pi Jersey___ 1,002,586.91 _ Accounts Payable — Berger of Ohio_ 1, 315, 933. 53 2, 252, 586. 91 1, 315, 933. 53 Capital and Surplus: Reserves for Contingencies, 219,149. 12 42, 026. 34 Capital Stock_ 100, 000. 00 100, 000. 00 Capital Surplus_ 1, 984, 080. 63 2, 428, 671. 08 Earned Surplus_ 195, 084. 63 86,121. 29 2, 498, 314 38 2, 656, 818. 71 Total Liabilities, Capital and Sur-plus_ 4, 922, 821. 03 4,178,187. 57 59. The following are the balance sheets of Berger of Ohio and the Berger Division of the plaintiff according to their respective books of account as of the close of business on December 31,1932, except for recording the transaction referred to in finding 33: Berger Berger Assets of Ohio Division Current Assets: Cash___ $48, 264. 44 $2, 442. 96 Notes Receivable: Customers_ 70, 553. 58 0 Berger of Ohio__ 1, 250, 000. 00 Accounts Receivable: Customers_ 393, 913.16 289. 83 Berger of Ohio__ 2, 706, 859. 63 Berger Division_ 2, 044, 968. 89 Republic Steel Corp.__ 62, 551. 92 Inventories_ 168,115. 26 301, 665. 41 2, 788, 367. 25 4, 261, 257. 83 — 529 — Berger Assets of Ohio Berger Division Permanent Assets: Buildings__ $311, 971. 12 $815, 827. 74 Machinery and Equipment_ 22, 403. 86 1, 202, 506. 14 Furniture and Fixtures_ 44, 421. 26 170, 635. 78 Automobiles_ 100. 00 2, 830. 00 Less: Depreciation_ (296, 381. 76) (813, 612. 08) Land. 164, 386. 17 30, 000. 00 New Construction_ 0 2, 381. 81 246, 899. 66 1, 410, 569. 39 Other Assets: Sundry Accounts_ 108, 454. 45 1,158. 74 Deferred Charges_ 9,148. 78 1, 915. 96 117, 603. 23 3, 074. 70 Total Assets_ 3,152, 870. 13 5, 674, 901. 92 Liabilities Current: Accounts Payable_ 17, 961. 83 27, 008. 53 Accrued Accounts_ 9, 345. 52 12, 000. 00 27, 307. 35 39, 008. 53 Intercompany: Notes Payable — Berger Division_ 1, 250, 000. 00 Accounts Payable — Berger Division. 2, 706, 859. 63 Accounts Payable — Berger of Ohio._ 2, 044, 968. 89 Accounts Payable — Republic Steel Corp....... 71.15 12,604.31 3, 956, 930. 78 2, 057, 573. 20 Capital and Surplus: Reserves for Contingencies_ 145, 628. 01 70, 303. 14 Investment Account-Republic Steel Corp__ 3, 472, 045. 51 Capital Stock_ 100, 000. 00 Capital Surplus_ 938, 809. 46 Earned Surplus_(2, 015, 805. 47) 35, 971. 54 (831, 368. 00) 3, 578, 320. 19 Total Liabilities, Capital & Surplus. 3,152, 870. 13 5, 674, 901.92 — 530 — 60. The following is the balance sheet of Berger of Ohio according to its books of account as of the close of business on December 31, 1932, after recording the transaction referred to in finding 33: ' Assets Berger of Ohio Current Assets: Cash_-___ $50, 707. 40 Notes Receivable — Customers_ 70, 553. 58 Accounts Receivable: Customers_ 394, 202. 99 Republic Steel Corp_ 62, 551. 92 Inventories_ 469, 780. 67 1, 047, 796. 56 Permanent Assets: Buildings_ 311, 971.12 Machinery and Equipment_ 22, 403. 86 Furniture and Fixtures_ 44, 421. 26 Automobiles_ 100. 00 Less: Depreciation_ (296, 381. 76) Land_ 164, 385. 17 New Construction_ 0 246, 899. 65 'Other Assets: Sundry Accounts_ 109, 613. 19 Deferred Charges_ 11, 064. 74 120, 677. 93 Total Assets.____ 1, 415, 374. 14 Liabilities Current: Accounts Payable_ 44, 970. 36 Accrued Accounts_ 21, 345. 52 66, 315. 88 Intercompany: Accounts Payable-Republic Steel Corp- 12, 675. 46 Investment Account-Republic Steel Corp_ 2, 061, 476. 12 2, 074, 151. 58 — 531 — Liabilities Berger of Ohio Capital and Surplus: Reserves for Contingencies_ $215, 931. 15 Capital Stock_ 100, 000. 00 Capital Surplus_ 938, 809. 46 Earned Surplus_.- (1, 979, 833. 93) (725, 093. 32) Total Liabilities, Capital and Surplus_ 1, 415, 374 14 61. The following is the balance sheet of Berger of Ohio as of the close of business on December 31,1932, after recording the transaction referred to in finding 33 and after having been corrected in accordance with an audit by Ernst & Ernst, certified public accountants: Assets Berger of OMo Current Assets: Cash__'_ $50, 707. 40 Notes Receivable — Customers_ 70, 553. 58 Accounts Receivable: Customers_ 394, 202. 99 Republic Steel Corporation_ 2, 551. 92 Inventories_ 469, 780. 67 987, 796. 56 Permanent Assets: Buildings______ 311, 971. 12 Machinery and Equipment_ 22, 403. 86 Furniture and Fixtures_ 44, 421. 26 Automobiles_ 100. 00 Less: Depreciation_ (296,381.76) Land_ 164, 385. 17 New Construction_ 0 246, 899. 65 Other Assets: Sundry Accounts_ 109, 613. 19 Deferred Charges_■___ 11, 064 74 120, 677. 93 Total Assets_ 1, 355, 374. 14 — 532 — Liabilities Berger of Ohio Current: Accounts Payable_ $44,-970. 36 Accrued Accounts_ 21, 346. 62 66, 316. 88 Intercompany: Accounts Payable — Republic Steel Corporation 12, 675. 46 Advance Account — Republic Steel Corporation. 2, 037, 447. 66 2, 060, 123. 12 Capital and Surplus: Reserves for Contingencies 215, 931. 15 Capital Stock_ 100, 000. 00 Capital Surplus_ 938, 809. 46 Earned Surplus_ (2, 015, 805. 47) (761, 064. 86) Total Liabilities, Capital and Surplus. 1, 355, 374. 14 CONCLUSION OP LAW Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover, and the petition is therefore dismissed. Footnotes [1] The plaintiff seeks a bad debt deduction under section 23 (k) of the Revenue Act of 1936, c. 699, 49 Stat. 1648. Its claim for a worthless stock loss deduction is based on section 23 (f) of that act, c. 690, 49 Stat. 1648. In disregarding $1,250,000 of the indebtedness, the Bureau of Internal Revenue disallowed the plaintiff’s claim for refund, relying on section 112 (b) (6) of the Revenue Act of 1936, c. 690, 49 Stat. 1648. The latter section provides, under certain circumstances, for the nonrecognition of gain or loss upon the receipt by a corporation of property distributed in complete liquidation of another corporation. [2] In Kraft Foods Company v. Comm’r, 232 F. 2d 118, the court found, on the facts of the case, the existence of a genuine transaction between a parent corporation and its subsidiary. On that basis, the court held as deductible “interest on indebtedness” debenture interest payments made by the taxpayer to its parent corporation. This court had occasion to consider the question of corporate affiliation as bearing on a bad debt deduction in George E. Warren Corporation v. United States, 135 C. ClS. 305, 312. There a finding of a bona fide debtor-creditor relationship between the plaintiff and its subsidiary resulted from an application of the following test: The common ownership factor requires a close scrutiny of the transaction to see that it was one of substance and one that could have reasonably been made between parties dealing at arm’s length. * * * [3] The figure referred to Is computed by deducting $1,250,000, the amount of the note, from $2,257,291.32, such figure representing the value of the raw materials and work in progress transferred to Berger of New Jersey plus the amount of the note. The resulting figure of $1,007,291.32, subject to current liabilities of $684,620.18, shows its net assets to be only $322,671.14. [1] Indicates red figure. [2] The petition in the present case also uses the figure of $1,538,998.02 as the amount of the worthless stock loss claimed by the plaintiff. The evidence shows, however, that the plaintiff actually claims a worthless stock loss in the amount of $1,609,301.16 (see finding 26) ; and the defendant has stipulated that the figure of $1,609,301.16 may be regarded as the amount of the deduction claimed by the plaintifE in this litigation because of the alleged worthless stock loss. [3] See footnote 2.