invested capital. In this connection, the Board has recently held, in the Appeal of Guarantee Construction Co., 2 B. T. A. 1145:

We are of the opinion, therefore, that capital and surplus actually paid in remain part of the invested capital of a corporate taxpayer, except where such capital or surplus has been directly or indirectly returned to the stockholders.

In the case at bar, there has been no such return, by distribution of dividends or otherwise. We are of the opinion that the payments here in question were contributions to capital, and, as they are not specifically excluded as inadmissibles under section 325 of the Revenue Act of 1918, they must be included in the taxpayer's statutory invested capital. Lincoln Chemical Co. v. Edwards, 289 Fed. 458; Appeal of Guarantee Construction Co., supra; United States v. Oregon-Washington R. & Nav. Co., 251 Fed. 211.

The expenditure of $63,874.56 by the Columbia Theatre Co., for capital additions to the property of the Mid-City Realty Co., after it had become the owner of all the capital stock of such Mid-City Realty Co., which the taxpayer also seeks to have included in the consolidated invested capital of the affiliated group, must be regarded as an inter-company transaction. Before this money was so used, it was a part of the capital or surplus of the Columbia Theatre Co. Its investment in capital assets belonging to an affiliated company does not change its status. It is already included in the consolidated invested capital of the group.

The taxpayer also contends that the amount of $24,000 paid on the bonded debt of the Mid-City Realty Co., for the most part out of operating income, should be included in the computation of invested capital. Since the repayment of borrowed money out of profits results in the inclusion of the assets represented by such borrowed capital in the earned surplus of the company, the Board holds that this item is already included in the invested capital of the company, if the books of account properly reflect such transactions.

The Board is of the opinion that the statutory invested capital of the Mid-City Realty Co. for the year involved in this appeal was made up of the amounts of $100,000 paid in for shares of capital stock, $85,800 paid-in surplus, and such earned surplus as may be disclosed by the company's balance sheet as of December 31, 1918.

The taxpayer contends that certain expenditures and investments made by the Middleton Theatre Co. should be included in the consolidated invested capital of the affiliated companies. These expenditures fall into three groups: (1) Payments made to obtain the use and enjoyment of the unexpired term of a 30-year lease on the premises occupied by the Grand Opera House and the American Annex Hotel; (2) payments in the form of bonus and expenses, to

secure a 99-year lease on the same premises; and (3) certain socalled carrying charges, incurred during the period of construction of the hotel and reconstruction of the theatre.

The 30-year lease, which was acquired by the taxpayer at a cost of $99,500, expired on July 1, 1912. Its cost or value can not be regarded as an element of invested capital for the year 1919.

Although the 99-year lease on the same property is frequently designated by the witnesses of the taxpayer as the "105 year lease," there is nothing in the evidence to indicate that it was anything more than a 99-year lease, which began to run on July 1, 1912. This lease was not offered in evidence. Any expenditures, in the way of cost or bonus, incurred in connection with its acquisition, should be capitalized and exhausted ratably over the 99-year period beginning July 1, 1912. The $10,000 bonus paid to secure this lease and the $9,999 paid to the St. Louis Theatre Co., in order that the lessee company might enter into full possession of the premises and begin its building operations in season to enable it to enjoy its 99-year lease for the full term thereof, are costs in connection with the acquisition of such lease, and should be included in the consolidated invested capital of the affiliated group.

During the period of its building operations, from 1910 to 1913, the taxpayer was without any substantial income from its property, and was required to make disbursements for ground rentals, taxes and other expenses incident to its ownership of the two leases and its improvement of the ground, as required by the terms of its contract with the owner of the fee. These payments, in the total amount of $103,522.60, the taxpayer seeks to have included in its invested capital. The Board is of the opinion that the amounts of $6,350 attorneys' fees, paid in connection with the acquisition of leases; $5,028.59, cost of insurance during building operations; and $5,067.01, sundry expenses in connection with contracts, are capital expenditures, and, to the extent that they are reflected in the surplus for the years in question, should be included in the statutory invested capital of the taxpayer. The remaining items, listed as carrying charges, appear to be ordinary and necessary expenses. Westerfield v. Rafferty, 4 Fed. (2d) 590; Appeal of Hotel De France Co., 1 B. T. A. 28.

The Board is of the opinion that the following amounts, as the invested capital of the Middleton Theatre Co., should be included in the consolidated invested capital of the affiliated group: $250,000 paid in for common and preferred stock; $19,999 cost of securing 99-year lease and the earned surplus of the Middleton Theatre Co. as of December 31, 1918, with proper adjustment resulting from deducting accrued exhaustion of the 99-year leasehold from July 1, 1912, to December 31, 1918.

APPEAL OF RAY F. MUDD MOTOR CO.

Docket No. 1192. Submitted June 29, 1925. Decided February 9, 1926.

1. Liability incurred within the year for premiums on insurance policies effective during the year is properly deductible as business expenses in the year in which the liability was incurred, where the taxpayer's books of account are kept on the accrual basis.

2. The reasonable allowance for wear and tear and exhaustion of certain assets determined.

3.

Evidence held insufficient to show that certain items treated on the taxpayer's books as capital expenditures were ordinary and necessary business expenses.

D. E. Currier, C. P. A., for the taxpayer.

B. G. Simpich, Esq., for the Commissioner.

Before IVINS and MARQUETTE.

This appeal involves additional income and profits taxes for the years 1919 and 1920, in the amount of $3,448.81, and an overassessment for the year 1921 in the amount of $902.09.

FINDINGS OF FACT.

The taxpayer is an Illinois corporation, with its principal office at Chicago, and it is, and was during the years 1919 to 1921, inclusive, engaged in selling Ford and Lincoln automobiles and service parts therefor. Its books of account are, and were during the years named, kept on the accrual basis.

The taxpayer, during the years 1919, 1920, and 1921, purchased from J. A. Mudd, Jr., an insurance agent, large amounts of insurance on its stock of automobiles and equipment. The amount of the premium on each policy of insurance was accrued on the taxpayer's books in the year in which the insurance was purchased, and was also charged to the taxpayer on the books of the insurance agency, but frequently payment was not actually made until the following year. During the years 1919, 1920, and 1921, the taxpayer entered on its books of account premiums on insurance purchased in those years, in the amounts of $5,541.51, $4,912.39, and $5,640.84, respectively. These amounts were deducted as business expenses in the taxpayer's returns for the years mentioned. The Commissioner, upon audit of the returns, allowed as deductions in each year only so much of the cost of the insurance in question as was actually paid in that year.

The Commissioner, upon audit of the taxpayer's returns for the years 1919, 1920, and 1921, allowed deductions for depreciation on small tools, computed at the rate of 10 per cent per annum, and on service trucks and "lesson" cars, commonly known as demonstra

tors, at the rate of 25 per cent per annum. The small tools used by the taxpayer in its business had a very short life and had to be constantly replaced; a considerable part of them was lost each year, and their average life was not to exceed three years. The "lesson cars were used by the taxpayer in teaching its customers to drive and operate cars purchased by them, and were almost continuously operated by inexperienced drivers. They were subjected to unusually hard service and were driven as many miles in one year as cars ordinarily cover in several years. The average life of these cars was not to exceed two years. Service trucks were used by the taxpayer to haul in wrecked and disabled cars and trucks. They were required to be maintained at a high degree of efficiency, in order to be powerful enough to pull loaded trucks out of ditches, and were only serviceable to the taxpayer for periods of 6 to 18 months. The average life of the service trucks was not to exceed 2 years.

DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 10 days' notice, under Rule 50.

OPINION.

MARQUETTE: The taxpayer's books were kept on the accrual basis, and it accrued thereon its liability incurred during each of the years in question for premiums on insurance purchased during those years. It does not appear that any of this insurance extended over a period longer than one year. They constituted ordinary and necessary business expenses in each of the years in question, and must be allowed as deductions from gross income in the years in which accrued.

The evidence satisfies us that a reasonable allowance for the wear and tear and exhaustion of the small tools used in the taxpayer's business is 333 per cent, and that a reasonable allowance for the wear and tear and exhaustion of the "lesson cars is 50 per cent.

The taxpayer alleged in its petition, and it claimed at the hearing, that certain items of expense had been charged to its capital assets account in the amounts of $2,069.09 in the year 1919 and $3 in the year 1921, and that these amounts should be allowed as deductions from gross income in those years. At the hearing the taxpayer offered certain exhibits, which R. F. Mudd, general manager of the taxpayer, testified were copies of original entries on the taxpayer's books. Objection was made by the counsel for the Commissioner to the introduction of these exhibits, for the reason that the taxpayer's witness was unable to verify or substantiate the various items contained therein. In order to determine the character of these items,

it was agreed between the taxpayer and the Commissioner that the exhibits should be sent to a revenue agent for comparison with the taxpayer's books, in order that a stipulation might be entered into by the taxpayer and the Commissioner as to the facts. The exhibits were sent to a revenue agent, who visited the taxpayer's place of business and compared them with the taxpayer's books of account. The agent reported that some of the exhibits consisted of copies of entries found on the taxpayer's books and correctly entered thereon, and that others appeared to be recapitulations from entries on the books. He also reported that the taxpayer refused to permit him to examine the books, in order to ascertain whether or not there were any offsetting entries to the various entries contained in the exhibits, and that it was not possible for him to ascertain whether or not the items in question represented capital expenditures or ordinary and necessary business expenses, inasmuch as there were no invoices from which to check. Under the circumstances, we are unable to determine whether the items are properly ordinary and necessary business expenses or capital expenditures, and we must, therefore, confirm the action of the Commissioner with respect thereto.

The taxpayer in its petition claimed that certain State and county taxes had been improperly treated by the Commissioner in ascertaining its net income. No evidence was presented showing the amount of the taxes or when they became a liability, and, in the absence of such proof, the Commissioner's determination thereon is approved.

APPEAL OF V. J. BULLEIT.

Docket No. 2709. Submitted June 1, 1925. Decided February 9, 1926.

1. A corporation had a contract for the acquisition of oil leases, which it assigned to its stockholders upon their agreement to assume all of the obligations under the contract, each stockholder to pay cash to the seller in an amount equal to 40 per cent of his stockholding in the company and the balance of the purchase. price to be paid out of the oil run. The stockholders, also out of the oil run, were to have returned to them the amount of cash which they had paid. Upon completion of both payments from the oil run, the stockholders were to transfer the oil leases to the company and receive therefor stock of par value equal to the amount of cash they had paid under the contract and for which they had received reimbursement out of the oil run. After the payments had been made by the stockholders to the former owners of the oil leases, of cash and out of the oil run, the agreement between the stockholders and the company was changed. No cash was returned to the stockholders out of the oil run, but the oil leases were transferred to the company for stock in the company having a par value equal to twice the amount of cash that 104881-27-44