14 T.C. 263">*263 The respondent determined a deficiency in petitioner's excess profits tax for the year 1943 in the amount of $ 346,223.18. Certain adjustments made by him are not contested. Respondent has conceded that petitioner was correct in respect of one of the assignments of error. The questions for determination are:

14 T.C. 263">*264 (1) Did petitioner's predecessor, for the purpose of computing the amount of consolidated invested capital, hold the stock of Hall-Scott Motor Car Co. and Fageol Motors Co. with1950 U.S. Tax Ct. LEXIS 270">*272 an "other than cost basis" as prescribed by section 33.31 (c) (2) (iv) (F) of Regulations 110?

(2) Is the petitioner entitled to accrue and deduct on its 1943 consolidated tax return the item of $ 17,896.84 representing Pennsylvania income and franchise taxes of ACF Motors Co. for the years 1938 to 1943, inclusive?

(3) Is petitioner entitled to an additional deduction for 1943 of $ 34,169.55 for California franchise tax based on the 1942 income of its subsidiary, Hall-Scott Motor Car Co.?

(4) Should petitioner be permitted to deduct for the taxable year 1943 an amount paid by Hall-Scott Motor Car Co. for California franchise tax, which tax was based on 1943 income of that subsidiary?

FINDINGS OF FACT.

Part of the facts were stipulated and they are so found.

Petitioner was incorporated under the laws of the State of Delaware on August 1, 1944, with its principal office at Philadelphia, Pennsylvania. It is the successor by merger of American Car & Foundry Motors Co. (hereinafter sometimes referred to as petitioner's predecessor), a Delaware corporation, with the Brill Corporation, also of Delaware. Petitioner's tax returns for the year involved were filed by its predecessor with the1950 U.S. Tax Ct. LEXIS 270">*273 collector of internal revenue for the first district of Pennsylvania. It filed consolidated corporation income and excess profits tax returns under the provisions of section 141 of the Internal Revenue Code for the calendar year 1943 on behalf of itself and its wholly owned subsidiaries, Hall-Scott Motor Car Co., a California corporation (sometimes hereinafter referred to as Hall-Scott); the Fageol Motors Co., an Ohio corporation (hereinafter referred to as Fageol Ohio); the Fageol Co., an Ohio corporation; and the ACF Motors Co. of Delaware.

The American Car & Foundry Motors Co. and all its subsidiary companies used the accrual method of accounting and filed their tax returns on that basis.

Issue 1. -- In the year 1925 it became apparent to the officers of American Car & Foundry Co. of New York, a manufacturer of railroad cars and equipment, and the J. G. Brill Co. (sometimes hereinafter referred to as Brill), of Philadelphia, Pennsylvania, a manufacturer of interurban and street railway cars, that the street railway business was on the downgrade and that the manufacture and sale of buses was becoming increasingly important. Hence, W. H. Woodin, president of American Car & 1950 U.S. Tax Ct. LEXIS 270">*274 Foundry Co., and S. M. Curwen, president of J. G. Brill Co., became interested in the manufacture of buses. 14 T.C. 263">*265 They commenced activities to procure that type of business almost immediately.

In June 1925 Woodin and Curwen commenced negotiations to acquire the assets or the controlling interest of stock of the Hall-Scott Motor Car Co. of California, a manufacturer of a well known engine for buses; the Fageol Motor Co. of California (hereinafter referred to as FageolCalifornia); and the Fageol Motor Co. of Ohio, manufacturers of bus bodies.

Prior to these negotiations, however, Hall-Scott and Fageol California had been contacted relative to the acquisition of their assets or a controlling interest in their stock by a bankers' syndicate. Those companies granted the bankers' syndicate an option to purchase. On July 3, 1925, W. H. Woodin telegraphed E. J. Hall, one of the stockholders of Hall-Scott, asking that consideration be given to a new proposition not less favorable than the bankers' syndicate referred to hereinabove. On July 9, 1925, Curwen telegraphed F. R. Fageol, an officer and stockholder of Fageol California and Fageol Ohio, stating that he was very much interested1950 U.S. Tax Ct. LEXIS 270">*275 in the proposition of securing with American Car & Foundry Co. a large investment in Fageol California and Hall-Scott, with a view to greatly strengthening all Fageol companies.

On August 8, 1925, the option granted by FageolCalifornia and Hall-Scott to the bankers' syndicate expired unexercised.

On August 28, 1925, officers of American Car & Foundry Co. and J. G. Brill Co. submitted to the directors of FageolCalifornia a proposition for the consolidation of Fageol California and Hall-Scott through the formation of a new corporation. The proposition was accepted by the directors of FageolCalifornia, subject to the approval of two-thirds of the stockholders of that company. Those stockholders never approved this proposition.

On August 29, 1925, American Car & Foundry Co. and J. G. Brill Co. entered into an agreement with E. J. Hall, B. C. Scott, and L. S. Scott for the purchase of 667 shares of stock of Hall-Scott out of a total 1,000 shares outstanding, at the rate of $ 4,500 per share, as follows:

1950 U.S. Tax Ct. LEXIS 270">*276 In September, 1925, Curwen of Brill received a written opinion from an attorney in San Francisco, California, respecting the statutory prohibition against the doing of business in the State of California14 T.C. 263">*266 by foreign corporations having a preferred par value stock with no voting rights and no par value common stock having exclusive voting rights. The attorney stated in part as follows:

There is one way in which the difficulty can be avoided and the general features of your proposed capitalization setup still followed. That way is by having the foreign corporation act merely as a holding corporation owning the stock of the already existing California corporations. The mere holding of stock in a California corporation will not be a doing of business in this state on the part of the foreign corporation, but the foreign corporation must be very careful to confine its activities, so far as this state is concerned, solely to the ownership of the stock. If the course is pursued of having an eastern holding company, it is of course quite advisable that as large a proportion as possible of the common stock at least of the local Fageol Company be acquired, but the acquisition of1950 U.S. Tax Ct. LEXIS 270">*277 all of it is not essential.

On September 9, 1925, the directors of Brill held a meeting at which the president explained that it might be desirable for the Brill Co. to subscribe an additional amount of stock in a holding company about to be formed for the purpose of acquiring and holding stock of Hall-Scott and the Fageol companies. The following resolution was passed at that meeting:

Resolved Further, that the President is hereby authorized on behalf of the Company to subscribe for such additional stock as may be agreed upon between him and the American Car & Foundry Company in a holding company to be formed to acquire control, through common stock ownership, of the Hall-Scott Motor Car Company, the Fageol Motors Company of Ohio and, if acquired, the Fageol Motor Car Company of California, not to exceed the total amount of the said stock or an aggregate sum of $ 1,500,000 including the $ 500,000 subscription to the stock of the Hall-Scott Motor Car Company.

Attached to the minutes of the meeting held September 9 is a draft of a plan for the acquisition of controlling interest in a bus-manufacturing business. It states as follows:

The American Car & Foundry Company and The J. 1950 U.S. Tax Ct. LEXIS 270">*278 G. Brill Company have been working for some time to arrange a consolidation between the Hall-Scott Motor Car Company, Incorporated, of Berkeley, California, builders of the well-known Hall-Scott engine and the Fageol Companies (Fageol Motor Company of California, Oakland, California, and Fageol Motors Company of Ohio, Kent, Ohio) who have had exclusive right to use this engine in busses built by them.

To enable such a consolidation to be made, the Car Companies are willing to invest at least $ 3,500,000.00 in a new consolidated company.

It is proposed to form a new company to be called the Fageol-Hall-Scott Company (or some other appropriate name) having an authorized capital stock of $ 10,000,000.00 preferred stock and 150,000 shares of common stock of no par value.

On October 15, 1925, the owners of 2,470 shares of preferred stock (4,553 outstanding) and 6,974 shares of common stock (10,486 outstanding) of FageolOhio submitted to Brill an offer with respect to the exchange of stock of Fageol Ohio for stock in a new corporation to be organized.

14 T.C. 263">*267 On October 31, 1925, ¹ pursuant to the agreement of August 29, 1925, American Car & Foundry Securities Co., a wholly owned subsidiary1950 U.S. Tax Ct. LEXIS 270">*279 of American Car & Foundry Co., paid the sum of $ 2,501,962.50 to the shareholders of Hall-Scott for 556 shares of its stock, and Brill paid the sum of $ 499,537.50 to the shareholders of Hall-Scott for 111 shares of its stock.

On December 23, 1925, there was formed a new corporation, the American Car & Foundry Motors Co., pursuant to the plan of Woodin and Curwen, under the laws of the State of Delaware. It had an authorized capital consisting of 100,000 shares of 7 per cent cumulative nonvoting preferred capital stock at a par value of $ 100 each and 300,000 shares of no par value common stock having voting rights.

At a meeting of the board of directors of American Car & Foundry Motors Co. held on December 31, 1925, a resolution was passed accepting the offer of the stockholders of Fageol Ohio to exchange their preferred and common capital stock for preferred and common stock of the1950 U.S. Tax Ct. LEXIS 270">*280 former, and in January, 1926, American Car & Foundry Motors Co. issued 19,973-7/21 shares of common stock and 11,437-79/100 shares of preferred stock for 10,486 shares of common stock and 4,543 shares of preferred stock of Fageol Motors Co. of Ohio, deposited December 31, 1925.

At the meeting of the directors of American Car & Foundry Motors Co. held on December 31, 1925, a resolution was passed approving the acquisition by that company of the entire capital stock of 1,000 shares common, $ 100 par value, of Hall-Scott and the additional issuance of 15,000 shares of its preferred capital stock and 240,000 of its common capital stock.

Exchanges of stock of American Car & Foundry Motors Co. for stock of Hall-Scott were made on January 19, 1926, as follows:

On November 29 and December 1 and 2, 1950 U.S. Tax Ct. LEXIS 270">*281 1926, American Car & Foundry Motors Co. issued 27,740 6/21 shares of common stock to 14 T.C. 263">*268 34 different buyers for $ 12.50 per share. On February 15, 1926, it issued to the Brill Corporation for $ 100 per share 19,000 shares of its preferred stock.

The stipulated values of the various stocks of the individual companies at the time of the exchanges were, American Car & Foundry Co. common stock, $ 12.50 per share, and preferred stock, $ 100 per share; Hall-Scott Motor Car Co. common stock, $ 4,500 per share; and Fageol Motors Co. of Ohio common stock, $ 89.56 per share, and preferred stock, $ 100 per share.

A reconciliation of American Car & Foundry Motors Co. stock after the exchanges and the sales made subsequent thereto is as follows:

14 T.C. 263">*269 On each of the individual tax 1950 U.S. Tax Ct. LEXIS 270">*283 returns filed by E. J. Hall, B. C. Scott, and L. S. Scott for the year 1925, there was reported a gain with respect to their sales of Hall-Scott Motor Car Co. stock. However, they did not report for Federal tax purposes any gain or loss with respect to the shares of stock which they respectively exchanged for stock of American Car & Foundry Motors Co.

As shown above, petitioner's predecessor issued and exchanged its own shares of stock for all of the stock of Hall-Scott Motor Car Co. and for all of the stock of FageolOhio, and there was no other consideration for the acquisition of the stock of Hall-Scott and of Fageol Ohio. In addition, subsequent to such exchange petitioner's predecessor issued and sold for cash a quantity of common stock at $ 12.50 per share and a quantity of preferred stock, for which it was paid the total amount of $ 2,246,199.33.

Petitioner claimed the amount of $ 8,140,199.23 as equity invested capital in accordance with section 718 of the Internal Revenue Code. Of this amount respondent disallowed part as follows:

1950 U.S. Tax Ct. LEXIS 270">*284 Issue 2. -- For the years 1936 through 1942 the Commonwealth of Pennsylvania claimed income and franchise taxes were due from ACF Motors Co. Prior to 1943 that company had duly appealed to a court of the Commonwealth of Pennsylvania from income tax resettlements for the years 1936 and 1937 and from a franchise tax resettlement for the year 1937 made against it by the Pennsylvania Board of Finance and Review. Also, for the years 1938 to 1942 proceedings were pending before that body relative to the Pennsylvania income and franchise tax liabilities of ACF Motors Co.

Stipulation for judgment dated November 17, 1943, and orders for judgment dated November 18, 1943, were made and entered in the 14 T.C. 263">*270 Pennsylvania court covering the 1936 and 1937 income taxes and the 1937 franchise tax. No assessment of the taxes adjudged due was made in 1943; however, the method used in determining the amount of taxes due was agreed upon. It was determined by using this method that ACF Motors Co. owed the amount of $ 17,896.84, which included interest, to the Commonwealth of Pennsylvania in discharge of its income and franchise tax liabilities. On November 2, 1944, ACF Motors Co. paid this1950 U.S. Tax Ct. LEXIS 270">*285 amount to the proper authorities of Pennsylvania. Petitioner's predecessor deducted the amount of $ 17,896.84 from its income on its tax return for the year 1943. Respondent disallowed such deduction.

Issue 3. -- The California franchise tax return of petitioner's predecessor's subsidiary, Hall-Scott, was examined by a state revenue agent in December, 1946, and January, 1947. The agent increased the subsidiary's allocation for "business done within California" and found it liable for an additional California franchise tax for 1943, based on 1942 income in the amount of $ 36,955.83. Petitioner's predecessor did not contest this additional tax. The total amount of additional California franchise tax and interest in the sum of $ 45,807 was paid to the State of California by Hall-Scott in March, 1947. Petitioner claims an additional deduction on behalf of Hall-Scott in the amount of $ 34,169.55. It does not claim the full amount of $ 36,955.83 principal paid because respondent allowed an increased deduction of $ 2,786.28 for California franchise taxes over that previously claimed.

Issue 4. -- In 1943 the California legislature amended section 4 of Bank and Corporation1950 U.S. Tax Ct. LEXIS 270">*286 Franchise Tax Act, chapter 13, Laws of 1929. This tax is imposed for the privilege of doing business in the state during a given year, which year of privilege is designated the "taxable year." The tax so imposed is a percentage of the income of the preceding year, which preceding year is designated the "income year." Prior to 1943 the tax, by the terms of the act, accrued and a lien therefor attached on the first day of the taxable year. By the amendment in 1943 it was provided that the tax accrued and a lien therefor attached on the last day of the income year. Petitioner, in addition to the franchise tax paid on 1942 income discussed in the findings under issue 3, also claims that Hall-Scott is entitled to an additional deduction in 1943 for franchise taxes imposed for the privilege of doing business in 1944 which is necessarily a percentage of 1943 income, and which by the amendment of 1943 accrued on the last day of the income year, or on December 31, 1943.

OPINION.

Issue 1. -- The respondent determined that petitioner holds the stock of Hall-Scott and Fageol Ohio with an other than cost 14 T.C. 263">*271 basis prescribed by Regulations 110, section 33.31 (c) (2) (iv) (F). Petitioner, 1950 U.S. Tax Ct. LEXIS 270">*287 on the other hand, takes the position that it holds the stock of those companies on a cost basis and that its invested capital is properly computed according to the method set forth in Regulations 110, section 33.31 (c) (2) (iv) (G). The respondent states that the various steps involving the formation of petitioner, as described in our findings, meet the statutory tests of section 203 (b) (4) of the Revenue Act of 1926 ²1950 U.S. Tax Ct. LEXIS 270">*288 for a nontaxable transaction, and hence, that the basis of the stock of Hall-Scott and Fageol Ohio is the same as it would be in the hands of the transferors, as compelled by section 113 (a) (8) of the Internal Revenue Code. ³

Petitioner states that "The law is well settled that where a series of related steps are all part of a plan, the various steps1950 U.S. Tax Ct. LEXIS 270">*289 of the plan are to be regarded as making up one transaction for the purpose of determining the tax consequences."

So petitioner contends here that the cash purchase of stock of Hall-Scott by American Car & Foundry Co. and Brill on August 29, 1925, should be considered as a purchase by American Car & Foundry Motors Co. even though it did not come into being until December 23, 1925. If we so consider it, one of the tests for a tax-free transfer fixed by section 203 (b) (4) is missing, for that section requires that the "property [must be] transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation." (Italics supplied.)

It is respondent's argument that the acquisition of the stock by the two corporations above mentioned was an independent transaction and, consequently, that the various exchanges which took place upon 14 T.C. 263">*272 the organization of the new company constituted a tax-free transaction under the provisions of section 203 (b) (4) of the Revenue Act of 1926.

With respect to step transactions we stated as follows in American Bantam Car Co., 11 T.C. 397, 405; affd., 177 Fed. (2d) 513:1950 U.S. Tax Ct. LEXIS 270">*290

In determining whether a series of steps are to be treated as a single indivisible transaction or should retain their separate entity, the courts use a variety of tests. Paul, Selected Studies in Federal Taxation, 2d series, pp. 200-254. Among the factors considered are the intent of the parties, the time element, and the pragmatic test of the ultimate result. An important test is that of mutual interdependence. Were the steps so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series?

We do not believe that under the circumstances of this case the legal relations created by the transaction involving the purchase by American Car & Foundry Co. and Brill of 667 shares of Hall-Scott would have been fruitless without the subsequent organization of petitioner's predecessor. As we have pointed out in our facts, the officers of American Car & Foundry Co. and Brill commenced activities in June, 1925, to purchase either the assets or the controlling stock of companies manufacturing buses, one of which was Hall-Scott. That was the principal goal of the plan, the creation of petitioner's predecessor being only a secondary1950 U.S. Tax Ct. LEXIS 270">*291 consideration. The creation of petitioner's predecessor, however important, was not an indispensable condition of the general plan, "without which no other step would have been taken." American Bantam Car Co., supra, p. 406.

In answer to respondent's statement that "[he] can not understand how any theory can be advanced to support a purchase by a nonexistent corporation at the time when the agreement of purchase was entered into by the two existing corporations and the three individuals," petitioner replies "that the American Car and Foundry Company and The J. G. Brill Company * * * were acting as promoters of a new corporation and their purchase of 667 shares of Hall-Scott stock must be considered as being for the use and benefit and in trust for the corporation to be formed." In support of that statement petitioner cites Tulsa Tribune Co. v. Commissioner, 58 Fed. (2d) 937, reversing 21 B. T. A. 1405. We can not agree that that case is controlling of the issue before us. The court in that case stated:

* * * So, where options on property are procured for a corporation by a promoter of it, 1950 U.S. Tax Ct. LEXIS 270">*292 prior to its creation, the corporation, on its organization, has, by virtue of its right to ratify or adopt his contract, an equitable interest in the property, so that if the promoter takes the deeds he takes title for the use of the corporation. And where the promoter of a corporation takes a lease in his own name for the benefit of the corporation, and after its organization it ratifies his act, the lease becomes the property of the corporation. In a proper case a 14 T.C. 263">*273 promoter who has purchased property for the proposed corporation may be held as a trustee for the corporation in a suit by a creditor of the corporation to subject the land to the payment of his debt.

In Fletcher, Cyclopedia Corporations, vol. 1, ch. 9, sec. 189, p. 598, it is stated:

The term "promoter" involves the idea of exertion for the purpose of getting up and starting a company (or what is called "floating" it) and also the idea of some duty towards the company imposed by or arising from the position which the so-called promoter assumes towards it. A person is not in the position of a promoter, however, except in so far as he is assisting in the formation of the company, in acting, or assuming to 1950 U.S. Tax Ct. LEXIS 270">*293 act, in its behalf, and is dealt with on the strength of his actual or assumed authority.

There is no support whatsoever in the record before us indicating that the two purchasing corporations at the time of the acquisition of 667 shares of Hall-Scott stock were acting as promoters on behalf of petitioner's predecessor. The agreement of August 29, 1925, by which American Car & Foundry Securities Co., the wholly owned subsidiary of American Car & Foundry Co., and Brill purchased 667 shares of stock of Hall-Scott in no way indicates that such shares were being purchased for a corporation thereafter to be organized.

This leaves for our consideration the questions of whether the control and proportionate interests tests of section 203 (b) (4) of the Revenue Act of 1926 were met in the transaction involved. We believe that the stipulated facts show they were. The several transferors of the shares of stock of Hall-Scott and Fageol Ohio were in control of the transferee, petitioner's predecessor, within the meaning of the statute, immediately after the exchange, ⁴ and the value of the stock received by each transferor was in proportion to the respective interests of such transferor in1950 U.S. Tax Ct. LEXIS 270">*294 the property prior to the exchange. See American Bantam Car Co., supra;Bodell v. Commissioner, 154 Fed. (2d) 407.

We conclude, therefore, that in the circumstances of this case petitioner holds the stock of Hall-Scott and FageolOhio with an1950 U.S. Tax Ct. LEXIS 270">*295 other than cost basis, as respondent contends.

Issue 2. -- Petitioner claims the right to deduct in 1943 the amount of $ 17,896.84 for Pennsylvania taxes paid in 1944. That payment 14 T.C. 263">*274 arose from litigation involving income and franchise taxes of ACF Motors Co. due the Commonwealth of Pennsylvania for the years 1936 through 1942. We have found as a fact that the controversy was settled by a judgment of a court of Pennsylvania in 1943 and that the method used in determining the amount of taxes due was established in that year. Only the mathematical computation remained before the final determination of the exact amount due.

Our finding is based upon the stipulation of facts, the testimony of D. C. Pockels, assistant treasurer and auditor of ACF Motors Co. at the time of the litigation involving those taxes, and Theodore L. Harrison, an attorney who handled details concerning them. Harrison testified that:

* * * There had been a stipulation signed [in 1943] agreeing to the allocation that should be used in determining those taxes, and from that allocation, it was merely an arithmetical computation of the amount of the tax.

The United States Supreme Court, in Dixie Pine Products Co. v. Commissioner, 320 U.S. 516">320 U.S. 516,1950 U.S. Tax Ct. LEXIS 270">*296 stated as follows:

* * * It has long been held that, in order truly to reflect the income of a given year, all the events must occur in that year which fix the amount and the fact of the taxpayer's liability for items of indebtedness deducted though not paid [citing United States v. Anderson, 269 U.S. 422">269 U.S. 422]; and this cannot be the case where the liability is contingent and is contested by the taxpayer [citing Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445]. * * * It must, in the circumstances, await the event of the state court litigation and might claim a deduction only for the taxable year in which its liability for the tax was finally adjudicated.

In the case of Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893, the court, in applying what it conceived to be the holding in United States v. Anderson, 269 U.S. 422">269 U.S. 422, stated:

* * * The computation was uncertain, but its basis was unchangeable; it was unknown, not unknowable on December 31, 1918. That is the test [of deductibility] * * *.

See Koppers Coal Co., 6 T.C. 1209, 1225;1950 U.S. Tax Ct. LEXIS 270">*297 Security Flour Mill Co. v. Commissioner, 321 U.S. 281">321 U.S. 281; and G. C. M. 25298, C. B. 1947-2, p. 39.

In the case at bar all the events had occurred which fixed the liability and there was no longer any contest by ACF Motor Co. as to its liability for the years in question. We therefore hold that the amount of $ 17,986.84 is deductible in the year 1943.

Issue 3. -- Both parties agree that, if there was no protest of the additional deficiency of $ 36,955.83 determined by the California taxing authorities in 1947 as the amount owed by Hall-Scott for the year 1943 based on its income for 1942, petitioner may have the deduction claimed by that company in the consolidated return filed for 1943. See Oregon Pulp & Paper Co., 47 B. T. A. 772, 780; Burton-Sutton Oil Co., 3 T.C. 1187, 1196.

14 T.C. 263">*275 The competency of certain evidence in the record separates the parties on this point. Respondent contends that "There is no competent evidence in the record * * * relative to whether or not the deficiency [determined by the California taxing authorities] was controverted1950 U.S. Tax Ct. LEXIS 270">*298 or protested by Hall-Scott Motor Car Company" because "The knowledge of Mr. Hoell [comptroller of petitioner] with respect to this additional California franchise tax was gained solely through communication with Mr. Watts [attorney in California]." Therefore "the record contains no competent evidence which would support a finding * * * by this Court that the deficiency asserted by the California taxing authorities in 1947 was not protested by Hall-Scott Motor Car Company."

Hoell testified on cross-examination as follows:

Q. You don't know of your own knowledge as to what steps were taken by Mr. Watts with respect to the asserted deficiency by the California taxing authorities, do you?

A. Mr. Watts took no steps whatsoever.

Q. What is your basis for your answer there, sir?

A. Well, in talking to him over the telephone, he told us the only possibility that we might have would be to get some mediation of this interest.