11 T.C. 894">*894 The respondent determined a deficiency in income tax for the year 1940 in the amount of $ 33,884.75. The deficiency results from several adjustments in petitioner's net income, as reported in its return, which are not contested. Also, respondent now agrees, under amendments to the pleadings, that petitioner is entitled to additional deductions aggregating $ 15,746.53. Effect will be given to respondent's agreement on these items under a Rule 50 recomputation.

One issue is presented by the pleadings. It relates to the 1930 income tax liability of a group of affiliated corporations, of which petitioner is a member, which filed a consolidated return for the year 1930. The deficiency under the1948 U.S. Tax Ct. LEXIS 21">*23 consolidated return was not determined by the respondent until 1940, and interest had accrued on the deficiency in a substantial amount. The deficiency in tax for the 1930 group was determined to be $ 545,898.47, upon which $ 316,621.11 interest accrued. After 1930 the affiliated group of corporations, forty-three, was reduced to six, as a result of several nontaxable reorganizations 11 T.C. 894">*895 and some sales to outside interests. In 1940 the remaining six corporations contributed to the payment of the deficiency and interest, allocating among themselves a proportionate amount of the deficiency and interest; and petitioner paid to the parent corporation $ 501,136.62 of the deficiency and $ 290,659.24 of the interest. Respondent denied petitioner deduction of the entire amount of the interest. Petitioner had agreed to be bound by the Commissioner's regulation, article 15 (a) of Regulations 75, under which a member of an affiliated group is severally liable for the tax of an affiliated group, including any deficiency. Petitioner deducted the above sum as interest upon an obligation of its own.

This proceeding was originally submitted on the pleadings. The question presented was1948 U.S. Tax Ct. LEXIS 21">*24 considered under report of this Court, Koppers Co., 8 T.C. 886. After promulgation of our findings of fact and opinion, petitioner moved for further hearing, and the motion was granted. When this proceeding was submitted on the pleadings the facts upon which petitioner relied were abbreviated in high degree. At the further hearing, the record was enlarged by a substantial amount of evidence, which has enabled the Court to have the aid of much material evidence, which, inter alia, serves to explain the circumstances under which petitioner contributed, in 1940, so large a part of the payment of the deficiency of the 1930 group and of the accrued interest thereon. Also, petitioner filed further amendment to its petition, presenting an alternative ground for the claimed deduction. The question is now reconsidered under the amended petition and upon further evidence.

The question is whether petitioner is entitled to deduct all or part of $ 290,659.24 as interest, under section 23 (b) of the Internal Revenue Code; or, in the alternative, part of that sum as a loss under section 23 (b).

Petitioner filed its return with the collector for the twenty-third1948 U.S. Tax Ct. LEXIS 21">*25 district of Pennsylvania.

The record consists of a stipulation of facts, exhibits, and testimony. Supplemental findings of fact are made from the entire record, and the facts which were found originally are restated in the supplemental findings of fact.

SUPPLEMENTAL FINDINGS OF FACT.

The facts which have been stipulated are found as stipulated. The stipulation is incorporated herein by this reference.

Petitioner is a Delaware corporation, organized on January 25, 1927, with its principal office in Pittsburgh, Pennsylvania. Petitioner's books of account are kept and its Federal income tax returns are filed on the accrual basis of accounting.

11 T.C. 894">*896 A parent company (the Koppers Co. of Delaware) and forty-two other companies, ¹ one of which was the petitioner, were affiliated corporations in 1930; and a consolidated Federal income tax return for the taxable year 1930 was filed for the group under the permissive provisions of section 141 of the 1928 Revenue Act. The tax of the affiliated group, as reported, was about $ 290,774.99, after a credit for the tax liabilities of the nonaffiliated companies. The tax was paid by the parent corporation, the Koppers Co. of Delaware, as1948 U.S. Tax Ct. LEXIS 21">*26 agent for the group, each member thereof consenting to and paying its proportionate share of the tax, the share of each being computed on the basis of the net income of each member of the group reported in the consolidated return.

In October 1940, after extensive negotiations between respondent and representatives of the 1930 consolidated group, it was agreed that the correct net income of the group for 1930 was $ 6,972,278.81; that the correct 1930 tax of the group was $ 836,673.46; and that there1948 U.S. Tax Ct. LEXIS 21">*27 was a deficiency in income tax of the group of $ 545,898.47, with interest, due on the 1930 consolidated return. The total amount of the interest on this deficiency was $ 316,621.11.

During the period 1930 to 1940 the composition of the affiliated group of corporations changed considerably. In 1940 the group comprised only six affiliated corporations instead of the forty-three corporations which were affiliated in 1930 and for which the consolidated return had been filed. In 1940 the parent corporation was Koppers United Co., which had been the sole stockholder of and had succeeded the Koppers Co. of Delaware (the parent company in 1930 of the 1930 group) under a reorganization in 1937, when Koppers of Delaware had been liquidated into Koppers United, and then dissolved. Of the other forty-two corporations in the 1930 group, only five remained, namely, the Koppers Co. (petitioner), the Wood Preserving Corporation, the Koppers Erecting Corporation, Southern States Mineral Co., and the White Tar Co. of New Jersey, Inc.

A. -- The changes which took place after 1930 in the composition of the group of forty-three affiliated corporations and the corporations which remained and constituted1948 U.S. Tax Ct. LEXIS 21">*28 a group of six in 1940 were, briefly, as follows: ²

11 T.C. 894">*897 (1) Four corporations in the group were merely "shell" corporations at all times, in 1930 and thereafter. They had no assets and no income in 1930.

(2) Two corporations, Cincinnati, Georgetown Railroad Co. and J. M. Guffey Co., went out of the 1930 group in 1931 and 1934, when the stock of these corporations was transferred to other corporations which were outside the group. Neither one of these corporations had any net income in 1930.

(3) Three corporations maintained the same status from 1930 to 1940, namely, the Koppers Erecting Corporation, Southern States Mineral Co., and the White Tar Co. of New Jersey, Inc.; and these corporations were in the group in 1940.

(4) Five corporations were absorbed by the Koppers Co. of Delaware, which, in turn, was liquidated into Koppers United Co., the parent, in 1940, of the group.

(5) Ten corporations were liquidated into the Wood Preserving Corporation.

(6) Sixteen corporations were owned or controlled by Koppers Co. (petitioner). Of these, thirteen were liquidated into petitioner, directly, or into other corporations which were liquidated into petitioner, all in nontaxable reorganizations; 1948 U.S. Tax Ct. LEXIS 21">*29 the stock of two corporations was sold to outside interests; and the stock of one corporation became worthless.

(7) Three corporations in the original 1930 group remained in the group in 1940, but their assets were different because of the mergers of other corporations with them, as noted above, as follows: Koppers United Co., the Wood Preserving Corporation, and petitioner Koppers Co.

B. -- When, in 1940, the six remaining corporations received the Commissioner's notice of his final determination of the deficiency in the 1930 income tax of the 1930 group, under the consolidated return, they agreed that as a step towards allocating the deficiency and interest among themselves (six1948 U.S. Tax Ct. LEXIS 21">*30 corporations), they should first make the allocation, on paper, to and among those corporations which had been in the 1930 group which had realized net income for 1930.

There were nineteen corporations which did not have net income in 1930, and there were twenty-four corporations which did have net income in 1930. ³

Of the six remaining corporations in the group in 1940, three had net income in 1930, as follows: The Koppers Erecting Corporation, Southern States Mineral Co., and the White Tar Co. of New Jersey. Also, three did not have net income in 1930, as follows: Koppers United Co., Koppers Co. (petitioner), and the Wood Preserving Co.

The other twenty-one corporations which had net income in 1930 were, in 1940, no longer in existence; fourteen had been liquidated into petitioner; six had been liquidated into the 1948 U.S. Tax Ct. LEXIS 21">*31 Wood Preserving Co., and one had been liquidated into the former parent, Koppers of Delaware.

The other sixteen corporations which did not have income in 1930 comprised two corporations which went out of the group after 1930 upon sales of their stock to outsiders; four were "shell" corporations; two were liquidated into petitioner; four were liquidated into the 11 T.C. 894">*898 Wood Preserving Corporation, and four were liquidated into the Koppers Co. of Delaware, which was liquidated into Koppers United Co.

The method followed in 1940 of allocating the deficiency among the twenty-four corporations which realized net income in 1930 was as follows: The corrected net income of each corporation and the corrected total net income of the twenty-four corporations were set forth in a schedule. The 1930 tax attributable to each corporation was determined by computing the proportion of each corporation's net income to the total net income of the group, times the total tax for the group:

From the proportion of the total1948 U.S. Tax Ct. LEXIS 21">*32 tax thus attributed to each corporation, there was deducted the amount of the tax as originally reported which had been charged to each corporation, and paid; and the balance was regarded as the proportionate part of the deficiency which was to be attributed to each of the twenty-four corporations. Statutory interest was then computed on each proportionate amount of the deficiency. The statutory interest on the portions of the deficiency totaled $ 316,621.11.

Petitioner had a loss rather than net income in 1930, as did the Wood Preserving Corporation and Koppers United. But, since the above corporations had taken over the assets of certain corporations after 1930, it was agreed to allocate the deficiencies, and the interest thereon, of the twenty-one corporations which had realized net income in 1930 but were no longer in existence among the six remaining corporations which had absorbed the others. That is to say, the Koppers Erecting Corporation, Southern States Mineral Co., and the White Tar Co. of New Jersey were allocated $ 5,774.36, $ 104.16, and $ 1,979.82, of the deficiency, plus interest, respectively, on the basis of the corrected 1930 income of each corporation, none1948 U.S. Tax Ct. LEXIS 21">*33 of these three having acquired any of the members of the 1930 group; and Koppers Co. (petitioner), Koppers United Co., ⁴ and the Wood Preserving Co. were allocated $ 501,136.62, $ 23,066.22, and $ 13,837.29, respectively, of the deficiency, plus interest, on the basis of the twenty-one corporations which had been in the 1930 group which had been merged with them in reorganizations.

On November 9, 1940, the six remaining corporations agreed that the proportionate share1948 U.S. Tax Ct. LEXIS 21">*34 of each corporation of the deficiency in the 11 T.C. 894">*899 1930 tax, computed under the consolidated return, and the interest on each share, were as follows:

The six remaining corporations, on November 9, agreed to contribute to the total amount of the deficiency, and the interest thereon, the amounts which are set forth in the above schedule, and each corporation paid its agreed proportionate share in 1940.

The following table shows the fifteen corporations which realized income in 1930 whose assets were acquired by petitioner after 1930 under various circumstances, the corrected net income of each corporation, the proportionate parts of the original tax and of the deficiency in tax of the group which was allocated to each corporation under the method 1948 U.S. Tax Ct. LEXIS 21">*35 heretofore described, and the total amount of the shares of the deficiency and interest so allocated. The following table illustrates the basis of the agreement of the six remaining corporations as to their respective, proportionate shares of the deficiency and interest.

1948 U.S. Tax Ct. LEXIS 21">*37 11 T.C. 894">*900 Petitioner was allocated the tax deficiencies of eleven corporations in the above schedule because their assets had been acquired by petitioner after 1930 in tax-free reorganizations. Of these, Koppers Products Co. was in existence in 1940, but the assets which it had in 1930 had been transferred to American Tar Products, Inc., and then to petitioner when the latter company was liquidated, and Koppers Products Co. had been a "shell" company from 1931 to 1936. In 1936 Koppers Products Co. began a new line of activities wholly unrelated to those of 1930, with new assets. The circumstances under which petitioner was charged with the deficiencies in the 1930 tax of four corporations listed in the above schedule are as follows:

(1) Koppers Kokomo Co.: Petitioner owned all of the stock of Kokomo until May 1935, when petitioner sold the stock to outside interests, agreeing, as part of the sale, to pay all Federal income and excess profits taxes which might be owing on income of Kokomo received by it prior to December 31, 1934.

(2) Chicago By-Product Coke Co.: Petitioner owned the stock of By-Product Coke until November 1938. In February 1928 all of its operating properties1948 U.S. Tax Ct. LEXIS 21">*38 were sold to Peoples Gas Light & Coke Co., which was outside the Koppers group. Petitioner agreed to save the vendee of the properties from any Federal income or excess profits taxes for the period prior to February 2, 1938, which might grow out of the purchase and sale of the operating properties. In November 1938 petitioner sold the stock of By-Product Coke to Peoples Gas Light. In its income tax return for 1938 petitioner claimed and was allowed a loss on the sale of the stock in the amount of $ 801.73. This loss did not reflect the portion of the 1930 deficiency and interest which petitioner paid in 1940 on behalf of By-Product Coke on its 1930 income.

(3) Koppers United Co.: Petitioner owned all the stock of Koppers United until it was dissolved in 1936. Koppers United Co.'s stock became worthless in 1936. Petitioner charged off as a loss in its return for 1936, its investment in the stock of Koppers United in the amount of $ 1,224,741.55. This loss did not reflect any part of the deficiency and interest which petitioner paid in 1940 on behalf of Koppers United Co. on its 1930 income.

(4) Brooklyn Coke & By-Products Corporation: During 1930, the only income of 1948 U.S. Tax Ct. LEXIS 21">*39 Brooklyn Coke & By-Products was interest paid by petitioner on a note of petitioner in the amount of $ 7,000,000, which bore interest at the rate of 6 per cent. Brooklyn Coke & By-Products was owned by Koppers of Delaware in 1930, and was liquidated into that company in 1932. In allocating the portion of the 1930 deficiency and interest of Brooklyn Coke & By-Products to petitioner, consideration was given to the benefit petitioner had received from the loan and from interest deduction which petitioner was allowed in 1930, and the fact that Brooklyn Coke & By-Products had taken such interest into its income in 1930.

Petitioner paid Koppers United Co. $ 791,795.86 ($ 501,136.62, plus $ 290,659.24) by its check dated November 23, 1940, and charged that amount, on its books, to its reserve for Federal income tax contingencies account. Thereafter, on November 27, 1940, Koppers United Co. paid the collector of internal revenue, by its check, the entire amount of the deficiency, plus $ 316,621.11 interest, or a total of $ 862,519.58.

Petitioner, along with other members of the 1930 consolidated 11 T.C. 894">*901 group, executed and filed Form 1122 as part of the 1930 consolidated return, consenting1948 U.S. Tax Ct. LEXIS 21">*40 to the provisions of the regulations applicable to members of the consolidated group, which provides, in part, as follows:

The above-named subsidiary corporation, in consideration of the privilege of joining in the making of a consolidated return with the above-named parent corporation, hereby consents to and agrees to be bound by the provisions of Regulations 75 prescribed prior to the making of this return.

In the notice of deficiency upon which this proceeding is based, respondent disallowed the $ 290,659.24 interest deduction for the following reason:

(g) The amount of $ 290,659.24 claimed as a deduction in your return as representing your portion of the interest paid by the Koppers United Company on deficiencies in income taxes imposed upon the income of certain transferor corporations for the year 1930, has been disallowed for the reason that this item is not considered to be a proper deduction from your gross income.

The sum of $ 501,136.62 is the petitioner's proportionate share of the deficiency in the 1930 tax of the consolidated group. The statutory interest thereon is $ 290,659.24.

SUPPLEMENTAL OPINION.

The only question to be decided is whether petitioner is entitled1948 U.S. Tax Ct. LEXIS 21">*41 to deduct, under section 23 (b), interest in the amount of $ 290,659.24, the statutory interest on the part of the tax deficiency which it paid in 1940.

Both parties recognize that petitioner is severally liable for the tax imposed upon the group, including any deficiency in respect thereof. See Regulations 75, art. 15. Petitioner filed Form 1122, consenting to be bound by the regulations governing consolidated returns. See also Mississippi River & Bonne Terre Railway, 39 B. T. A. 995, 1004. But because, as between the members of the affiliated group, each affiliate was mutually obligated under principles of general law to pay only its fair share of the common burden, Phillips-Jones Corporation v. Parmley, 302 U.S. 233">302 U.S. 233, respondent challenges the claim of the petitioner to deduct the full amount of the interest which it paid in 1940, upon the theory that petitioner had a claim against other corporations in the group for contributions to reimburse it for all of the deficiency which it paid, and that such claim constituted an account receivable which petitioner has not shown to have been uncollectible in 1940. Respondent1948 U.S. Tax Ct. LEXIS 21">*42 originally contended that his determination should be sustained because of failure of proof of the petitioner, assuming that respondent's theory was, in general, correct. Also, respondent has laid considerable emphasis upon the fact that petitioner reports its income on the accrual basis. The 11 T.C. 894">*902 reason for this emphasis is, apparently, that respondent takes the view that the rule of F. C. Nicodemus, Jr., 26 B. T. A. 125, and the other cases which have followed the rule set forth therein, is not applicable in the case of taxpayers who are on the accrual basis. It is unnecessary to set forth respondent's theory in this proceeding other than has already been stated. The question is before us for a second time and it is of some importance that we state the reason why the question raised by the pleadings is now being reconsidered.

This proceeding was submitted originally upon the pleadings, under which the agreed facts were extremely brief. In order properly to consider the argument of the respondent, which laid such stress upon the point that petitioner was on the accrual basis, we considered it necessary to have before use, if possible, the 1948 U.S. Tax Ct. LEXIS 21">*43 facts which would explain the basis for the agreement made by the six remaining corporations in 1940, that petitioner would pay $ 501,136.62 of the deficiency and the statutory interest upon that amount. There was further hearing, and full explanation is found therein of the basis upon which the allocation was made, which was, in the last analysis, determined by the reorganizations of corporations within the group which took place after 1930. Respondent no longer contends that there is any failure of proof in this proceeding, and it appears that he has abandoned his original argument.

The facts now before us show that the remaining six companies have recognized the principle that each one is mutually obligated under principles of general law to pay all of its fair share of the income tax deficiency which was computed upon the net income of the group. After the deficiency was determined in 1940 the six corporations computed their proportionate shares of the tax deficiency, and petitioner has not set up on its books any account or accounts receivable to represent the accrual of a claim against any affiliated corporation under a right of contribution. Assuming, for purposes of argument, 1948 U.S. Tax Ct. LEXIS 21">*44 that respondent contended correctly in the first instance that, since petitioner is on the accrual basis, any right of contribution which petitioner had against others resulted in the accrual of an account receivable in 1940 which was not shown to be uncollectible in 1940, that contention is no longer one which must be considered. The evidence shows and we have found as fact that $ 501,136.62 represented petitioner's proportionate share of the tax deficiency.

Under section 23 (b), a taxpayer may deduct interest only upon its own indebtedness. William A. Simon, 36 B. T. A. 186. Under the agreement which was made in November 1940 among the six corporations which now constitute the group, the proportionate share of each member of the group to the entire indebtedness for income tax was 11 T.C. 894">*903 determined upon a reasonable, equitable, and fair basis. Petitioner no longer has a claim against the other members for any contribution. Restatement Restitution, sec. 85; Williston on Contracts, Rev. Ed., sec. 345. Its claim for contribution from other members of the group would be based upon overpayment of its proportionate share. The interest which has been1948 U.S. Tax Ct. LEXIS 21">*45 paid in the amount of $ 290,659.24 can not be said to be interest upon the indebtedness of any other member of the group than petitioner. Petitioner is, therefore, entitled to deduct the amount in question.

Under the above holding, it is unnecessary to consider the alternative contention of the petitioner.

Respondent, in his supplemental brief, advances a new contention that, if petitioner is entitled to any interest deduction in the instant proceeding, it would result from its obligation as a transferee to pay the deficiencies of a number of affiliates liquidated into it in nontaxable transactions, and the amount of the deduction would be limited, under Koppers Co., 3 T.C. 62; affd., 151 Fed. (2d) 267, to the interest which accrued on the deficiencies after the date of receipt of the transferred assets. Respondent apparently would concede that under Koppers Co., supra, petitioner might be entitled to a small loss deduction in an amount equal to the deficiency and interest of one affiliate (Koppers Kokomo Co.), the stock of which petitioner sold in 1934 under an agreement to pay any taxes on income for years prior1948 U.S. Tax Ct. LEXIS 21">*46 to 1934.

We do not believe that the principles established in Koppers Co., supra, which serve as the foundation of respondent's present contention, apply in the instant proceeding. In the Koppers case, the problem related solely to the nature of the taxpayer's obligation as transferee of certain corporations and as vendor of stock of a corporation under a contractual obligation to pay the deficiency of that corporation. It was held that the taxpayer, as transferee, was entitled to deduct the interest paid on the deficiencies of the transferor corporations for the period after receipt of the transferred assets, it appearing that the value of such assets exceeded the amount of deficiencies and interest. And with respect to the sale of stock issue, it was held that the amount of deficiency and interest paid by the taxpayer served to reduce the price received for the stock and was deductible as a loss. However, the taxpayer in that case had not filed a consolidated return with the corporations in question for the years for which the deficiencies and interest were subsequently paid, and thus the impact of the several liability of a member of a consolidated group was not1948 U.S. Tax Ct. LEXIS 21">*47 before the courts, nor was it commented upon.

It may be noted that if petitioner were resisting the collection of the deficiency and interest of the consolidated group on the ground 11 T.C. 894">*904 that its liability was limited to that of a transferee, respondent in all likelihood would earnestly invoke petitioner's several liability for the entire deficiency and interest under the consolidated return.

Decision will be entered under Rule 50.