Corning Glass Works v. Commissioner , 9 B.T.A. 771 ( 1927 )

CORNING GLASS WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Corning Glass Works v. Commissioner

Docket No. 9826.

United States Board of Tax Appeals

9 B.T.A. 771; 1927 BTA LEXIS 2510;

December 22, 1927, Promulgated

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">*2510 1. Where two corporations were consolidated under the laws of New York, and where the resulting corporation acquired the assets of one of the old corporations in consideration of the exchange of its capital stock for the stock of the old corporation, held that the consolidation resulted in the creation of a new corporation and the dissolution of the old corporations, and that the assets of the old corporation were bona fide paid in for the stock of the new corporation.

2. Corporate entity should not be lightly disregarded.

3. Intangible assets valued.

4. Where a corporation sells its stock at par under a contract which recites that the purchaser is to be paid a certain amount for his services, held that the amount paid in for the stock was the difference between par and the amount paid the purchaser.

5. Cash paid in for stock may be included in invested capital, although the stock can not be issued until later.

6. A contribution by a corporation to a hospital held under the facts of the case, not to be an ordinary and necessary business expense.

Laurence Graves, Esq., for the petitioner.

D. D. Shepard, Esq., for the respondent.

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">*2511 MILLIKEN

">*771 This proceeding involves deficiencies in income and profits taxes for the year 1921, in the amount of $70,119.70, and for 1922 of $57,497.90. Petitioner asserts that respondent committed the following errors with respect to its invested capital for the year 1921: Respondent failed to include in such invested capital, (a) intangible property acquired by petitioner prior to March 3, 1917, in exchange for its capital stock; (b) the cash value of certain promissory notes paid in for common stock by the officers and employees of the petitioner, in the amount of $14,000; (c) cash paid in for preferred stock by petitioner's employees in the amount of $123,880.24; (d) the amount of $250,740.09, which was claimed as depreciation by petitioner in its returns for the years 1917 to 1920, inclusive, and which was disallowed by respondent; and (e) by reducing invested capital by deducting therefrom certain Federal income and profits taxes. Petitioner further asserts that the Commissioner erred (f) in refusing to permit it to deduct from gross income for the years 1921 to 1922, proportionate parts of the March 1, 1913, value of a contract which it had with the General">*2512 Electric Co.; (g) in refusing to permit deduction from gross income for the years 1921 and 1922, of amounts paid for the sale of its preferred stock; and (h) in ">*772 refusing to permit deduction from gross income for the year 1922 of a payment of $25,000 to the Corning Hospital.

At the hearing, petitioner withdrew contentions (b) and (f).

FINDINGS OF FACT.

Petitioner is a corporation organized under the laws of the State of New York in December, 1911, pursuant to the agreement of consolidation hereafter set forth. Petitioner has a corporate life of 50 years from December, 1911. In 1868, the Corning Flint Glass Co. was organized. The stock in this company was owned by A. A. Houghton, a brother, Charles Houghton, and H. P. Sinclaire. In 1875, the Corning Glass Works was organized under the laws of New York and succeeded to the business of the Corning Flint Glass Co. The two Houghtons and Sinclaire, or their families, were the owners of all the stock of the Corning Glass Works until the date of the consolidation hereinafter referred to. The authorized and paid-in capital stock of the Corning Glass Works, was $50,000. In 1911, the net worth of the company was in">*2513 excess of $1,700,000. This amount was accumulated by keeping down dividends and retaining the earnings in the business. In 1911, each share of capital stock had a value in excess of $3,400. At that time, the stockholders desired to increase the capital stock of the corporation so that it would more nearly represent the actual capital employed. At first it was contemplated that the articles of incorporation be amended so as to authorize a capital stock of $900,000, and that there be issued a stock dividend of $850,000, thus giving each stockholder seventeen additional shares. This scheme was abandoned when it was pointed out that two of the stockholders had died and by their wills had created trusts for the benefit of their respective families, including in the corpus of the trusts their holdings in the company, and that under the rule laid down by the New York Courts, a stock dividend would be treated as income with a resulting diminution of the value of the corpus of the trust to the extent of seventeen-eighteenths of the value of the stock the Corning Glass Works held in them. Upon advice of counsel, the following plan was substituted: The Houghton Glass Co. was organized under">*2514 the laws of New York with an authorized capital stock of $900,000, divided into 900 shares of the par value of $100 each. Six shares were issued for which $600 was paid. These six shares were owned by persons who were then directors of the Corning Glass Works. Both corporations had the same officers and directors. On December 13, 1911, the following agreement of consolidation was entered into:

THIS AGREEMENT, Made the 13th day of December, 1911, between CORNING GLASS WORKS, party of the first part, and THE HOUGHTON GLASS COMPANY, party of the second part, under the corporate seals of said companies,

">*773 WITNESSETH: That Corning Glass Works, the party of the first part, is a corporation organized under the laws of the State of New York, for the purpose of carrying on the business of making, manufacturing, vending and selling glass and glassware.

That The Houghton Glass Company, the party of the second part, is a corporation organized under the laws of the State of New York, for the purpose of making, manufacturing, buying, selling and dealing in glass and glassware of any and all kinds and any and all articles of which glass or glassware forms a component part and">*2515 any and all articles which are or may be sold or used in combination with glass or glassware and for the other purposes stated in its certificate of incorporation.

That, in consideration of the mutual covenants and agreements herein contained, the said parties hereto do hereby merge and consolidate such corporations into a single corporation under and in pursuance of the laws of the State of New York in such case made and provided, and by these presents,

THEY DO HEREBY COVENANT AND AGREE upon and prescribe the terms and conditions of such consolidation and the mode of carrying the same into effect, which said terms and conditions and mode of carrying the same into effect, they mutually covenant and agree to observe, as follows:

FIRST: The name of the corporation hereby formed by said consolidation shall be CORNING GLASS WORKS.

SECOND: The number of directors who shall manage its affairs shall be four.

THIRD: The name and post-office addresses of the directors of such new corporation for the first year are as follows, to-wit:

NAMES OF DIRECTORS.	POST-OFFICE ADDRESSES.
Alanson B. Houghton,	Corning, New York.
Arthur A. Houghton,	Corning, New York.
William Sinclaire,	Corning, New York.
George B. Hollister,	Corning, New York.

">*2516 FOURTH: The term of existence of such new corporation shall be fifty years.

FIFTH: The operations of such new corporation are to be carried on in the City of Corning, County of Steuben, State of New York, and in any other County, State or Country.

SIXTH: The principal place of business of such new corporation is to be situated in the City of Corning, County of Steuben, State of New York.

SEVENTH: The amount of the capital stock of such new corporation is to be $900,000.

EIGHTH: The number of shares into which said capital stock is to be divided is 9,000 shares of common stock of the par value of $100.00 each.

NINTH. The manner of distributing such capital stock among the holders thereof shall be as follows: The capital stock of the Corning Glass Works, the party of the first part hereto, shall be convertible into the capital stock of the new corporation hereby formed at the ratio of eighteen shares of the latter for one share of the former and upon presentation and surrender of any outstanding certificates of stock in said corporation, party of the first part hereto, the holders thereof shall receive certificates of the new corporation for eighteen times the number">*2517 of shares represented by the certificates of the old corporation so surrendered. The capital stock of The Houghton Glass Company, party of the second part hereto, shall be converted into cash and upon the surrender of any outstanding certificates of stock in said corporation, party of the second part hereto, the holders thereof shall receive the sum of One Hundred Dollars for each share of stock represented by the certificates so surrendered.

">*774 IN WITNESS WHEREOF, the said parties of the first and second parts have executed this agreement in duplicate, and have hereunto set their respective signatures, and have caused to be hereto affixed the corporate seals of the respective corporations, of which they are respectively the directors, the day and year first aforesaid.

This agreement was carried into effect. The stockholders of the old Corning Glass Works exchanged their shares of stock in that corporation for shares of the new Corning Glass Works, hereafter referred to as petitioner, at rate of one share of Corning Glass Works stock for eighteen shares of stock of petitioner. The shares of the Houghton Glass Co. were retired, the shareholders receiving the $600 they">*2518 had theretofore paid.

The balance sheet of the Corning Glass Works as of December 31, 1911, and before the consolidation, was as follows:

ASSETS
Plant accounts:
Real estate	$89,871.48
Buildings	520,992.99
Producers	15,429.32
Furnaces	241,151.42
Machinery and tools	85,615.16
Molds	36,202.55
Furniture and fixtures	39,838.92
Plant No. 3	110,339.08
Total plant accounts		$1,139,440.92
Patent rights		1.00
Current assets:
Cash	$204,085.93
Accounts receivable	188,248.79
Inventory finished goods	129,827.92
Inventory raw materials	208,250.01
Inventory office stationery	350.00
Stock of other companies	850.00
Unexpired insurance	5,978.04
Petty cash	250.00
Mortgages owned	500.00
Total current assets		738,340.69
Total assets		1,877,782.61
CAPITAL STOCK, LIABILITIES, ETC.
Capital stock		$50,000.00
Accounts payable	$22,304.82
Accrued taxes	1,144.09
Tool deposits	246.00
Suspense rebates	6,568.69
Total current liabilities		30,263.60
Reserve for depreciation		88,872.00
Surplus		1,708,647.01
		1,877,782.61

">*775 The balance sheet of petitioner as of December 31, 1911, and after consolidation, was">*2519 as follows:

ASSETS
Plant accounts:
Real estate	$89,871.48
Buildings	520,992.99
Producers	15,429.32
Furnaces	241,151.42
Machinery and tools	85,615.16
Molds	36,202.55
Furniture and fixtures	39,838.92
Plant No. 3	110,339.08
Total plant accounts		$1,139,440.92
Patent rights		1.00
Current assets:
Cash	$204,085.93
Accounts receivable	188,248.79
Inventory finished goods	129,827.92
Inventory raw materials	208,250.01
Inventory office stationery	350.00
Stocks of other companies	850.00
Unexpired insurance	5,978.04
Petty cash	250.00
Mortgages owned	500.00
Total current assets		738,340.69
Total assets		1,877,782.61
CAPITAL STOCK, LIABILITIES, ETC.
Capital stock		$900,000.00
Accounts payable	$22,304.82
Accrued taxes	1,144.09
Tool deposits	246.00
Suspense rebates	6,568.69
Total current liabilities		30,263.60
Reserve for depreciation		88,872.00
Surplus		858,647.01
		1,877,782.61

With the exception of $1 set up for patent rights, no amount was, at any time, set up on the books of petitioner or of the Corning Glass Works for intangibles.

Among the assets acquired by the petitioner from the Corning Glass">*2520 Works were about 14 United States patents. This number does not include foreign patents or design patents, of which petitioner acquired a considerable number. Petitioner also acquired a contract hereafter referred to. Among the patents so acquired were patents on lenses used by railways in their signaling systems on their rights ">*776 of way. These patents produced a high transmission of color and resulted in making over the railway right-of-way signal systems of the leading railroads of the country. Another patent was on a process for the manufacture of thermometer tubing. Nearly one hundred per cent of the clinical thermometers used in this country for many years have been made under this process in the petitioner's factories and those of its predecessor. These companies are the only ones known which have made thermometer tubes under this process.

Petitioner also acquired from the Corning Glass Works, a contract, dated April 6, 1910, a part of which reads:

AGREEMENT made between the GENERAL ELECTRIC COMPANY, a New York corporation located at Schenectady, New York (hereinafter called "General Company"); NATIONAL ELECTRIC LAMP COMPANY, a New Jersey corporation, having">*2521 an office at Cleveland, Ohio (hereinafter called the "Cleveland Company"), said last two-named companies being hereinafter called collectively the "Lamp Manufacturers"; the CORNING GLASS WORKS, a New York corporation, located at Corning, New York (hereinafter called the "Corning Company"), and THE LIBBEY GLASS COMPANY, an Ohio corporation, located at Toledo, Ohio (hereinafter called the "Toledo Company"), both of said last two companies being hereinafter called collectively "Bulb Manufacturers":

WHEREAS the parties hereto desire to co-operate in the introduction of improved machinery and other labor-saving devices and methods, for the purpose of decreasing the cost of bulbs and tubing and the Lamp Manufacturers desire to obtain a permanent supply of bulbs and tubing from the Bulb Manufacturers, and the Bulb Manufacturers in view of the large requirements of the Lamp Manufacturers, are desirous of obtaining a contract under the terms of which the Lamp Manufacturers will purchase exclusively from the Bulb Manufacturers except as herein provided, all the bulbs and tubing used by the Lamp Manufacturers in the manufacture of incandescent lamps, and the Lamp Manufacturers are willing to">*2522 enter into such a long-time contract with the hope of reducing the cost of the bulbs and tubing:

THEREFORE, in consideration of the promises and of the covenants herein contained and of the benefits to accrue to each of the parties by reason hereof, it is agreed:

1. This contract relates solely to the manufacture and sale of bulbs and tubing for incandescent lamps (other than colored bulbs and tubing) and to machinery, processes, improvements and patents insofar as the same relate to or may be used in the manufacture of bulbs and tubing, in the United States of America, its possessions and dependencies.

2. (a) The Lamp Manufacturers shall purchase and the Bulb Manufacturers shall manufacture and furnish, subject to the terms and conditions herein specified, and not otherwise, all the bulbs and tubing required and used by the Lamp Manufacturers in the manufacture of incandescent lamps in the United States, excepting only such bulbs and tubing as may be manufactured by the Lamp Manufacturers in accordance with the terms and provisions hereof.

(b) Such bulbs and tubing shall be in all respects equal to the quality of bulbs and tubing heretofore furnished by the Bulb Manufacturers">*2523 and suitable to be used in the manufacture of incandescent lamps.

(c) The Lamp Manufacturers shall be permitted (notwithstanding the restrictions of this agreement) to purchase bulbs and tubing from a Company engaged in the manufacture of incandescent lamp bulbs and tubing which may ">*777 hereafter be controlled jointly by the Lamp Manufacturers and the Bulb Manufacturers in proportions agreed to by each and all the parties.

(d) The purchase of bulbs from other sources than the parties hereto by the Lamp Manufacturers for laboratory purposes shall not constitute a violation of the obligations of the Lamp Manufacturers under this agreement, but notice of any such purchase with full information pertaining thereto and the results obtained therefrom shall at once be furnished to the Bulb Manufacturers.

3. (a) Until December 31, 1911, the Corning Company shall manufacture forty-two and one-half percent (42 1/2%), the Toledo Company forty-two and one-half percent (42 1/2%) and the Lamp Manufacturer fifteen percent (15%) of the total amount of bulbs and tubing manufactured by the parties hereto.

(b) From and after December 31, 1911, the percentage of such manufacture shall">*2524 be respectively thirty-seven and one-half (37 1/2%) per cent, thirty-seven and one-half (37 1/2%) per cent, and twenty-five (25%) per cent. The foregoing allotment is to be based on the actual shipments of bulbs and tubing by the Bulb Manufacturers.

(c) If, however, prior to December 31, 1911, in any year the total quantity of bulbs manufactured by the parties exceeds seventy million bulbs with the proportionate amount of tubing for said bulbs, then and in that case the Lamp Manufacturers shall be entitled to thereafter manufacture all bulbs in excess of seventy million per annum and the proportionate amount of tubing, up to twenty-five (25%) per cent of the total.

(d) In case either Bulb Manufacturer or the Lamp Manufacturers shall be unable to furnish, under the provisions hereof, and shall fail to furnish its or their percentage of bulbs and tubing, then in that case, but only during the continuance of such disability, the deficiency shall be divided pro rata between the remaining parties in accordance with their respective percentages.

(e) An estimate shall be made of the probable output of bulbs and tubing by the parties for each year, as of January 1st, and the">*2525 production of each of the three parties shall be based on such estimate, being distributed in accordance with the percentages above stated. If, at the end of the year, however, it shall be ascertained that the production of any party has exceeded the amount corresponding to its respective percentage, as above specified, then the percentage for such party during the following year, shall be decreased by an amount corresponding to the excess of production of such party over the amount represented by its respective percentage above specified, the intention being that each party shall produce the quantity of bulbs represented by its allotted percentage, and that any excess or deficiency of production by any party shall be adjusted in the manner stated.

(f) In case any party shall refuse permanently to furnish bulbs or tubing in accordance herewith, then the percentage of such party so refusing shall be divided pro rata between the remaining parties.

(g) The Lamp Manufacturers shall purchase no bulbs or tubing from any manufacturer unless they shall be unable to obtain the same under the terms and conditions hereof from the Bulb Manufacturers or one of them, but should the Bulb">*2526 Manufacturers and the Lamp Manufacturers, at any time or for any reason fail to furnish bulbs and tubing of the requisite quality with reasonable promptness to an amount required by the Lamp Manufacturers under the provisions hereof, then and in that case the Lamp Manufacturers shall be permitted during the period of such deficiency to purchase bulbs and tubing from sources outside the parties to this agreement.

">*778 The contract fixes the basis for prices to be paid for bulbs and tubing and then provides:

In case other manufacturers or dealers offer bulbs and tubing of like quality, below the prices provided for in this agreement, then and in that case, the Bulb Manufacturers shall meet such reduced prices; but a temporary quotation or reduction for small quantities is not the kind of reduction contemplated by this clause, but a bona fide bid received by the Lamp Manufacturers from reliable manufacturers or dealers other than the Bulb Manufacturers, for approximately one year's requirements of the Lamp Manufacturers, for all classes of bulbs and tubing, shall be a basis or criterion of such reduced prices. The Bulb Manufacturers shall have the right to inspect, upon">*2527 demand, samples of the bulbs or tubing which said other manufacturers offer to supply. In case the Bulb Manufacturers do not, within thirty (30) days meet such reduced prices contemplated in this paragraph, or shall fail to observe the requirements hereof, then and in that case, the Lamp Manufacturers shall be free to purchase from other manufacturers or dealers their requirements, but in case the Lamp Manufacturers shall so purchase their yearly requirements, they shall, within five (5) days after making such purchase or contract, give notice in writing to the Bulb Manufacturers, and this contract shall be and become canceled at the end of sixty (60) days from such notification, but during such period the Bulb Manufacturers shall fill such orders as they shall have previously received and may receive such sixty (60) days from the Lamp Manufacturers, but the orders for such sixty (60) days shall not exceed sixteen and two-thirds per cent (16 2/3%) of the amount ordered for the preceding twelve (12) months; and the Lamp Manufacturers shall order and receive from the Bulb Manufacturers, sixteen and two-thirds per cent (16 2/3%) of their previous twelve (12) months' purchase from the">*2528 Bulb Manufacturers.

Neither the Toledo Company nor the Corning Company shall directly or indirectly become interested in the manufacture or sale of incandescent electric lamps during such time as they may be furnishing bulbs or tubing to the Lamp Manufacturers hereunder.

(a) Each party shall have free access to the plants of the others so far as concerns the manufacture of bulbs and tubing, but each party shall have the right to exclude from its plants persons who for some good reason may be objectionable. Any new improvement or invention of machinery covered by United States patents for use in the manufacture of bulbs or tubing devised or acquired by one of the parties may be adopted by any other or others, provided such other party or parties shall have paid its or their respective share of the cost of acquiring or developing such patented improvement prorata to its or their manufacturing percentage or percentages hereunder; provided, however, that the party acquiring or developing such patented improvement may give notice of the same and may require the other parties to elect whether or not they will pay their proportion of the expense of acquiring or developing said">*2529 patented improvement; and should any other party fail or refuse to adopt such patented improvement and to pay its proportion of the cost of acquiring or developing the same, then such party shall thereafter be barred from the use of such patented improvement until such time as such party shall pay its proportion of such cost.

* * *

This contract shall be binding upon and inure to the benefit of the respective parties and their respective successors and assigns, and shall also be binding upon and inure to the benefit of any company engaged in the manufacture of ">*779 incandescent lamps which is controlled by either of the Lamp Manufacturers and shall be binding upon and inure to the benefit of any company which may be organized under section (2), paragraph (c) hereof, and this contract shall continue for a period of fifteen (15) years from the 1st day of January, 1910. * * *

The net income of the Corning Glass Works for the five years immediately preceding the consolidation, was:

Year	Net income
1907	$496,747.18
1908	206,363.30
1909	338,688.50
1910	353,279.95
1911	341,147.19
Total	1,736,226.12
Average	347,245.42

The net value of the tangible">*2530 assets of the Corning Glass Works at the beginning of each of the five years immediately preceding the consolidation, were as follows:

Year.	Before increases in plant accounts due to appraisal in 1909.	After increases in plant accounts due to appraisal in 1909.
1907	$612,524.92
1908	709,272.10
1909	665,635.40
1910	741,157.69	$1,652,971.06
1911	730,686.45	1,642,498.82
Total	3,459,276.56	5,282,902.50
Average	691,855.51	1,056,580.46

Petitioner, after the consolidation, issued additional shares of capital stock and the par value of its outstanding capital stock on March 3, 1917, was $935,000. The par value of petitioner's outstanding capital stock as of the beginning of the year 1921, was in excess of $935,000. Intangibles of the value of at least $1,200,000 were paid in to petitioner in December, 1911, for the whole of its then capital stock.

For many years prior to 1920, petitioner had borrowed no money from banks. The net sales of the company had increased from approximately $8,040,000 in 1919, to approximately $11,300,000 in 1920. The amounts receivable and the inventory of raw material and finished goods showed an increase in round numbers">*2531 of $1,381,000. This large increase in business necessitated borrowing money from banks. Petitioner's balance sheet of November 30, 1920, showed notes payable to the extent of $1,005,000, accounts payable, $649,824.56, and pay rolls payable, $153,633.09. Petitioner's notes ">*780 were discounted by the bank on the basis of 7 per cent per annum. There was distinct understanding that petitioner should keep 20 per cent of the amount of the notes outstanding on deposit without interest. On this basis, the cost of the money to petitioner was 9 3/10 per cent.

The conditions of the money market at the end of 1920 were such that the banks were not willing to increase petitioner's loans and were requesting petitioner to reduce its loans. In this condition of affairs, two plans were proposed. The first plan was that petitioner should issue bonds secured by mortgage on its property. As a part of this plan, petitioner was to set up a sinking fund at the rate of 5 per cent per annum of the amount of the issue, irrespective of earnings or profit. The other plan was to issue its preferred stock which could be called at any dividend date. The sinking fund provided for in this last">*2532 contingency was to be 15 per cent of the net earnings. Petitioner's officers and stockholders seriously objected to the mortgage plan and in December, 1920, adopted the plan of issuing preferred stock. It thereupon proposed to issue its preferred stock as of December 1, 1920, in the amount of $3,000,000. The preferred stock was issued carrying a cumulative dividend of 8 per cent and was redeemable on any dividend date at 110 and accrued dividends.

In December, 1920, petitioner entered into a contract with Estabrook & Co., bankers, of Boston. This contract is evidenced by the following letter dated December 3, 1920, from petitioner to Estabrook & Co.

We have your letter of the 2nd inst. As a result of points arising during our conference yesterday with your counsel, Mr. Morse, your letter has been changed with his assent to read as follows:

We submit the following offers:

We understand that your Company proposes to increase its capital stock by authorizing $7,000,000 par value eight per cent cumulative preferred stock in shares of the par value of $100 each, and to offer forthwith $3,000,000 of such stock to the common stockholders at a price of $100 per share.

We">*2533 offer to purchase at a price of $100 per share and accrued dividends all or any part of the $3,000,000 of stock which is not taken by stockholders on the following terms and conditions and subject to such prior offering to stockholders:

On or before January 5, 1921, we will take up and pay for $1,500,000 par value of such stock and will take up and pay for all of the $3,000,000 par value thereof not later than June 30, 1921. We are to have the right to take up and pay for all or any of such stock at any earlier date in case we wish to do so.

Upon request from your Company at any time after January 5, 1921, we will take up and pay for $750,000 par value of such stock (in addition to the $1,500,000 par value to be taken up on or before January 5, 1920) on March 31, 1921.

">*781 All stock taken by us shall be accompanied by a refusal to take the stock from the stockholder to whom such stock is offered.

We are to receive for our services and as consideration for this contract, the sum of $240,000. This sum is to be paid, if we so elect, pro rata, as the stock is taken up by us.

Your company will pay all expenses in connection with the issue of such stock, except that">*2534 this shall not include payment for legal services of counsel employed by us.

We are to be furnished annually, a complete balance sheet of your Company, and we are to have the right at any time at our expense to have an auditor of our selection make an examination of the books of your Company.

Such stock shall be entitled to the rights and preferences shown in Schedule A, attached hereto.

Our obligation shall be conditioned upon all legal matters in connection with your Company and the issue of such stock being satisfactory to our counsel.

A letter from you accepting this offer will create a contract between us and unless you desire a more formal contract, none will be necessary.

We take pleasure in accepting your offers as above set forth. Nothing further will be required to constitute the contract between us except a letter from you ratifying the changes in your letter of December 2, which changes are embodied herein.

On December 7, 1920, Estabrook & Co., by letter of that date, confirmed petitioner's letter of December 3, 1920.

The preferred stock which petitioner agreed to sell to Estabrook & Co., bankers, was issued to them in the following amounts and on">*2535 the following dates:

Date.	Shares.	Amount
Jan. 6, 1921	15,000	$1,500,000
Jan. 18, 1921	7,500	750,000
Jan. 27, 1921	2,500	250,000
Mar. 1, 1921	5,000	500,000
Total	30,000	3,000,000

The respective amounts making up the said $3,000,000 were deposited by Estabrook & Co., in its bank to the credit of petitioner. The amount of $240,000 which petitioner agreed to pay Estabrook & Co., was paid in the following amounts and on the following dates:

Jan. 7, 1921	$120,000
Jan. 21, 1921	60,000
Jan. 28, 1921	20,000
Mar. 1, 1921	40,000
Total	240,000

Pursuant to due notice, the said issue of petitioner's preferred stock of $3,000,000, was called and retired on or about December 1, 1922. Petitioner sought in its income-tax returns to deduct, on account ">*782 of its payments to Estabrook & Co., $6,000 from its gross income for 1921, and $236,000 from its gross income for 1922. Respondent denied both deductions.

On December 17, 1920, petitioner issued a circular to its employees whereby it agreed to accept their subscriptions for its preferred stock to be paid for by them either in cash or on the installment plan. The price to">*2536 be paid by the employees for the preferred stock was $94 per share and accrued dividends from December 1, 1920, to January 1, 1921, in the amount of 67 cents per share. The material portions of this circular read:

Corning, N.Y. Dec. 17, 1920.

To the Employees of Corning Glass Works: -

During the past few years the Company has been passing through a period of unusual growth. New furnaces and equipment have been installed in Corning. The Steuben plant has been enlarged and modernized. The Wellsboro plant has been doubled. A complete new factory has been constructed at Kingsport, Tennessee. The financing of home building for employees on a considerable scale has been undertaken. Many lesser improvements and additions have been made. It is altogether likely, moreover, that still further expansion will be necessary in the immediate future. Under these circumstances, an increase of the Company's capital has seemed prudent and advisable. To provide that capital the Company has authorized and sold to Estabrook & Company, bankers, of Boston, Mass., $3,000,000 of preferred stock of the Company which they in turn will sell to the investing public.

It has seemed to us probable">*2537 that many of our employees would wish to become financially interested in the Company and that this association would tend to bring us all closer together in a real spirit of co-operation. We have, therefore, arranged to repurchase from Estabrook & Co., a limited but substantial amount of this stock, which they agree we may sell to employees at a lower price than that at which the bankers will sell to the public, provided certain conditions stipulated by them are complied with.

No employee need feel that the Company will in any way regard him with disfavor if he does not subscribe. The entire issue is sold. The stock now offered you is provided at a considerable expense to the Company. The Company hopes, however, that in providing this opportunity, the habit of saving may be encouraged among you, and that every share for which you may subscribe will be fully paid and laid away as a definite saving and with a feeling of pride in the future welfare of the Company.

* * *

Each purchaser shall enter into a contract with the Company providing

That the purchaser is buying in good faith for himself and for no other person;

That the Company shall register the stock in the name">*2538 of the purchaser as soon as it has been fully paid for and thereafter shall pay the dividends to the purchaser, but the Company shall at its option, retain the certificates of stock in its possession for one year after full payment therefor (this is a condition imposed by Estabrook & Co.);

That in case it is necessary for the purchaser to sell the stock within one year after payment is completed, the Company will repurchase it at the same price paid plus the accrued dividend, if any;

That if an employee leaves the service of the Company for any reason before he has completed his payments or during the following year, he shall surrender ">*783 his rights to the stock and shall be paid by the Company the amount he has paid upon the stock, with an adjustment of dividends and interest, if payment has been completed and without interest if payment has not been completed.

On December 20, 1920, petitioner wrote to Estabrook & Co. the following letter:

We have sent out a notice to our employees giving them a right to subscribe for the stock as per arrangement made with you, at the price of 94 per share, a copy of which you will find enclosed.

There has been no definite arrangement">*2539 made as to how this was to be taken care of as between us, but we have taken it for granted that we are at liberty to go ahead and accumulate these subscriptions in advance of any details.

By January 1st we will have a complete list of these subscriptions, and can then inform you of the amount which we wish to take under the arrangement. Any subscriptions now being paid for in cash we are merely giving the Company's receipt for, until such time as the temporary certificates are issued, and we have a full plan worked out as to how it is to be handled with you.

We shall appreciate a letter from you at your early convenience outlining a plan that should be adopted in your opinion; also a statement as to when the temporary certificates will be issued, in order that we may notify such of our employees as are paying for their stock in cash.

To the above letter, Estabrook & Co. replied under date of December 22, 1920, as follows:

We are in receipt of your favor of the 20th instant with its inclosures.

Your letter to your employees is clear and explicit and the subscription agreement conforms to the terms of your letter. Our understanding of our agreement is that we are to">*2540 reserve for the company not less than 2500 shares at 94 and accrued dividend and that you are to have the option to take up 4500 shares, this option to be acted upon as soon as you are able to ascertain the amount necessary to cover your subscription.

We expect to have temporary certificates ready by December 31st and will forward them to you for the signatures of your officials. The certificates you will then forward to the transfer agent, who will issue the stock to us upon payment of par and accrued dividend. The stock that is to be used for your purpose will be issued to you as you may order. We will render you a statement for the total amount at 94 and accrued dividend and we will ask you to remit the amount due, together with our 8% commission on the entire 15,000 shares which we have then taken up. The two transactions should be done simultaneously.

Petitioner's employees, prior to January, 1921, subscribed for 1,711 shares of petitioner's preferred stock. Of this number of shares, 1,307 had been fully paid for on December 31, 1920, at $94 per share, making a total payment of $122,858. On December 31, 1920, $170 had been raid by employees on the remaining 404 shares. ">*2541 The balance due on said 404 shares was paid during the months of February and March, 1921. None of this stock was issued or delivered to employees during the year 1920. All of it was issued in 1921 with the exception of 22 shares which were purchased by petitioner in ">*784 1921. This paid up stock was issued to the employees on January 26, 1921, and delivered to them in August, 1921. The amounts paid in by the employees, pursuant to their subscription, were treated on petitioner's books as accounts payable by a charge to cash and credit to accounts payable under the account of Estabrook & Co., and does not appear in the petitioner's surplus account as of January 1, 1921. At the hearing, petitioner waived its contention in so far as the $170 which had been paid in by purchasers of the stock on the installment plan was concerned, and limited its claim to the $122,858 which had been paid in full by subscribers for petitioner's preferred stock.

In determining petitioner's net income for the years 1917-1920, inclusive, respondent adjusted depreciation taken on petitioner's books and claimed in Federal income-tax returns and disallowed as deductions the total sum of $250,740.09">*2542 for said years. Respondent has not increased petitioner's surplus and invested capital as of January 1, 1921, by such $250,740.09, in determining the deficiency for 1921.

In the deficiency letter attached to petition, respondent computed petitioner's Federal income and profits-tax liability for the year 1920 in the amount of $783,788.96, and reduced invested capital for 1921 in the amount of $331,229.21. Petitioner's correct tax liability for said year was $661,675.29. Petitioner's invested capital as of January 1, 1921, should be reduced by $279,624.97 instead of $331,229.21.

The Corning Hospital, which is situated in the City of Corning, New York, is maintained to meet the hospital needs of Corning and is the only public hospital in Corning. The hospital also affords its facilities to a large manufacturing plant 2 miles distant from Corning. In the year 1921, it had about 50 rooms available for patients. At times all of these rooms were occupied. It was found necessary to double the capacity of the hospital in 1922, and, in addition thereto, to purchase new, modern equipment. This required between $250,000 and $300,000. The money was raised by public subscription. ">*2543 The two principal stockholders of petitioner each subscribed about $25,000. In 1922, petitioner's board of directors adopted the following resolution:

On motion of Mr. A. A. Houghton, seconded by Mr. G. B. Hollister, it was unanimously resolved that the Corning Glass Works donate $25,000 to the building fund of the Corning Hospital.

This amount was paid by petitioner to the Corning Hospital in the year 1922. The average number of persons employed in petitioner's plant in the City of Corning, in the year 1922, was 2,167. The population of Corning was about 15,000. Accidents suffered by employees of petitioner were divided into two classes - reported or compensation cases, which were those cases where employees were expected to be ">*785 absent from work more than a week, and minor accidents. There were 796 reported cases in 1920, 463 in 1921, and 574 in 1922. The number of cases involving minor injuries averaged about five times the number of reported cases. The largest part of the injuries resulted from hot flying glass, also injuries resulting from the operation of machinery. Petitioner paid to the Corning Hospital for treatment of its employees, $1,308.23 in 1921">*2544 and $586 in 1922. The daily rate of the hospital for rooms was $2 per day. Prior and subsequent to 1922, petitioner maintained at its plant a dispensary having four rooms and two beds and employed a full-time nurse. Prior to 1922, it employed a physician who called at the plant twice a day. In 1922, it employed a full-time physician. This physician complained that the facilities furnished him were inadequate and requested that they be enlarged. This would have been very expensive. About this time, the plans for the enlargement of the Corning Hospital were under way and it was determined that it would be better for the corporation to make a contribution to the hospital building fund than to go to the expense of enlarging its dispensary facilities at the plant. The contribution of $25,000 was then made.

Petitioner's books of account were kept on the accrual basis.

Petitioner filed its income-tax return for the years 1921 and 1922 with the collector of internal revenue at Buffalo, N.Y.

OPINION.

MILLIKEN: Six questions are presented for decision. Four of them relate to petitioner's invested capital in the year 1921, and two to deductions.

(1) We will first consider">*2545 petitioner's contention that respondent erred in excluding from its invested capital for the year 1921, intangibles consisting of good will, patents, and a contract, all of which it asserts it acquired in 1911 in exchange for the whole of its then existing capital stock. Petitioner asserts that these intangibles had, at the beginning of the year 1921, a value of at least $233,750 for invested capital purposes.

Respondent contends that, since the primary purpose sought to be accomplished by the consolidation of the Corning Glass Works and the Houghton Glass Co. was to increase the capital stock of the former company, we should disregard the corporate entity of petitioner and hold that the assets of the Corning Glass Works were not bona fide paid in for petitioner's capital stock; and if not sustained in this position, then, that there is not sufficient evidence in the record upon which to base a computation of the value of the intangibles, if any, acquired by petitioner or by reason of the consolidation.

We are thus met at the threshold with the question, What were the legal consequences of the consolidation of the Corning Glass ">*786 Works and the Houghton Glass Co.? If">*2546 respondent's first contention is sound, the result will be that the corporate existence of petitioner must be disregarded and the additional stock, which was issued, held to be in fact a stock dividend paid by the Corning Glass Works. While it was at first the purpose of the officers and stockholders of the Corning Glass Works to increase its capital stock, this plan was abandoned when they discovered that, if adopted, it would result in reducing the corpus of certain trusts to the extent of seventeen-eighteenths of the value of all the stock of the Corning Glass Works included in the trusts. They then resorted to the plan of consolidation set forth in the findings of fact. This plan, when carried into effect, resulted in the dissolution of the Corning Glass Works and the Houghton Glass Co. and the organization of petitioner, which was a new corporate entity entirely distinct from the two old corporations. See sections 7, 8, 9, and 10 of the Business Corporations Law of New York; People v. New York, Chicago & St. Louis R. Co.,129 N.Y. 474">129 N.Y. 474; ">*2547 29 N.E. 959">29 N.E. 959; People v. Rice11 N.Y.S. 249">11 N.Y.S. 249; affd. 128 N.Y. 591">128 N.Y. 591; 28 N.E. 251">28 N.E. 251. By virtue of the consolidation, petitioner acquired, without deed or other formal transfer, all the assets, tangible and intangible, of the Corning Glass Works. See section 10 of the Business Corporations Law of New York, and Tonawanda Power Co.,3 B.T.A. 1195">3 B.T.A. 1195. Thus a new and distinct corporation acquired the tangible and intangible assets of another corporation in consideration of the issue of its capital stock, or to put the matter in the language of the Revenue Act (section 326 of the Revenue Act of 1921), the assets, tangible and intangible, of the old corporation, were paid in for the stock of the new corporation. No contention is made to the effect that petitioner is not a corporation de jure. If respondent's contention is sustained, we would be forced to hold that the issue of stock by petitioner, to the extent that it exceeded the amount of the outstanding stock of the old corporation, was a stock dividend of the latter corporation. Compare ">*2548 LaBelle Iron Works v. United States,256 U.S. 377">256 U.S. 377; 3 Am.Fed. Tax Rep. 3113. But this is the very thing which did not happen.

We have before us for consideration, entities and realities which we can not and should not disregard. In Regal Shoe Co.,1 B.T.A. 896">1 B.T.A. 896, we were urged to disregard a corporate entity and substitute therefor what was suggested to have been the intention of the parties. We there said:

* * * A corporation is not a mere form; it is a substantial legal being whose existence, rights and obligations are matters of substance, the recognition of which has permeated the entire economic existence of the Nation, and neither the Government nor the taxpayer will be heard in a bona fide case, except in extraordinary circumstances, to say that it is a mere fiction to be lightly disregarded. Cannon Mfg. Co. v. Cudahy Packing Co.,267 U.S. 333">267 U.S. 333.

">*787 Again we said:

We must, therefore, hold that the subsequent expression of original intent can not convert the fact of stock issued for stock into a transaction of stock issued for tangible and intangible corporate assets. We must give heed to">*2549 the statement of the Supreme Court in United States v. Phellis,257 U.S. 156">257 U.S. 156, that "in such matters, what was done, rather than the design and purpose of the participants, should be the test."

In this, as in the Regal Shoe Co. case, the proceedings which we are asked to disregard occurred long prior to the adoption of the Sixteenth Amendment and when it could not possibly have been anticipated that there would have been any tax liability under that Amendment. There is no suggestion of lack of good faith.

The first step in the computation is the determination of petitioner's invested capital. Invested capital is purely a statutory concept which is defined in technical and arbitrary terms. In many respects, this conception differs from that adopted in the accounting world. It matters not how inequitably this concept may work out in so far as the taxpayer is concerned, it must be applied strictly. The taxpayer is entitled to have the same character of construction placed upon the statute when it works in his favor as when applied to his detriment. In this proceeding, petitioner has brought itself squarely within the words of the Revenue Act and we should">*2550 not deprive him of its benefit by speculating as to what might have been the result if another method of procedure had been adopted.

This brings us to the question whether the Corning Glass Works possessed intangibles, whether such intangibles were Bona fide paid in for petitioner's capital stock; and what value should be attributed to such intangibles at the date of the consolidation, and in 1921, for the purpose of invested capital in the latter year.

Petitioner, in 1911, acquired in consideration of the issue of its then whole capital stock, a business which had been in successful operation since 1868, which out of earnings after the payments of dividends had increased its net worth in the period 1875-1911, thirty-four fold; which owned patents under one of which was produced about 100 per cent of the clinical thermometers used in this country, and others on signal lighting devices which resulted in the revolution of the signal systems of the great railroads, and which had a very valuable contract with the General Electric Co. Since all the assets, both tangible and intangible, of the Corning Glass Works were paid in for the entire capital stock of petitioner, both the">*2551 tangibles and intangibles of the old company should be held to have been paid in for petitioner's capital stock and such stock should be allocated between them in proportion to the cash value of each to the date of consolidation. See St. Louis Screw Co.,2 B.T.A. 649">2 B.T.A. 649.

">*788 In finding that the intangibles of the Corning Glass Works had at the date of the consolidation a value of not less than $1,200,000, we have taken into consideration the fact that some of the factors which go to make up the real valuation, such as the remaining life of the patents, are not shown by the evidence. We have attributed to the average value of the tangibles for the five years next preceding the consolidation, an earning capacity of 10 per cent, and then capitalized the average net earnings for the same period on the basis of a five-year purchase. This is a formula applicable to a business of a hazardous nature and, generally speaking, would not be applicable to the business of the Corning Glass Works, which at the date of the consolidation, had a record of 43 years of successful, solid, business achievements. The use of this formula in this case takes care of all the absent">*2552 factors. On the whole case, we are satisfied that the intangibles of the Corning Glass Works, at the date of consolidation, were worth at least the amount found. Compare Otis Steel Co.,6 B.T.A. 358">6 B.T.A. 358; Hampton Company,2 B.T.A. 302">2 B.T.A. 302.

Petitioner should be permitted to include in its invested capital for the year 1921, intangibles acquired in the consolidation to the amount of $233,750, which is 25 per cent of the par value of petitioner's outstanding capital stock on March 3, 1917. This amount is less than the actual cash value of the intangibles at the date of consolidation, is less than the par value of petitioner's capital stock attributable to their purchase, and is less than 25 per cent of the par value of the total stock of petitioner outstanding at the beginning of the year 1921.

(2) Petitioner, in its income-tax return, sought to deduct from its gross income for that year, $6,000 of the $240,000 paid to Estabrook & Co. in that year. In its return for 1922, it sought to deduct from its gross income for that year, the remaining $234,000. Respondent refused to allow both deductions. The deduction for the year 1921, was based on the theory">*2553 that the whole $240,000 paid was a capital expenditure which should be amortized through the remaining life of the corporation, which was 40 years. The remaining $234,000 was sought to be deducted in 1922, for the reason that since the preferred stock was retired in that year, the corporation did not, thereafter, receive any further benefit from the expenditure.

It may be pointed out by way of parenthesis, that it is difficult to say that the life of the stock and the remaining life of the corporation would be the same, since the stock could be retired at any dividend pay period, and was in fact retired in the year 1922.

The first question for solution is whether the whole or any part of the $240,000 paid Estabrook & Co. is deductible at any time. Petitioner has introduced no evidence to add to the provisions of the contract between it and Estabrook & Co. as evidenced by their respective ">*789 letters of December 3, 1920, and December 7, 1920. We have before us only the written words of the contract and testimony as to how the contract was performed. The fact that a lump sum of $240,000 was agreed upon as the compensation of Estabrook & Co., the fact that Estabrook">*2554 & Co. were to take up and pay for all of the $3,000,000 issue before June 30, 1921, and the fact that the whole issue of $3,000,000 was taken by them, clearly indicate that the whole issue was in fact sold. Taking these facts into consideration, the pertinent parts of the contract can be stated in few words. By the contract, Estabrook & Co. agreed to purchase the whole issue of stock ($3,000,000) and pay par therefor. Petitioner agreed to sell the whole issue at that price and to pay Estabrook & Co. $240,000, or $8 per share, for their services and in consideration of the contract, the payments to be made at the option of Estabrook & Co. pro rata as they took the stock.

What is the real meaning and what is the actual result of this contract? On this point we make the following excerpt from Heryford v. Dovis,102 U.S. 235">102 U.S. 235:

What, then, is the true construction of the contract? The answer to this question is not to be found in any name which the parties may have given to the instrument, and not alone in any particular provisions it contains, disconnected from all others, but in the ruling intention of the parties, gathered from all the language they have">*2555 used. It is the legal effect of the whole which is to be sought for. The form of the instrument is of little account.

Though the contract industriously and repeatedly spoke of loaning the cars to the railroad company for hire, for four months, and delivering them for use for hire, it is manifest that no mere bailment for hire was intended.

In Kelly, Maus & Co. v. Sibley (C.C.A.), 137 F. 586, it was held that the recital in a contract that a certain amount was to be paid as a "commission" did not convert a contract of sale into a contract of agency. So in this case the recital in the contract that the sum of $240,000 was to be paid to Estabrook & Co. for their services is of no importance if in fact that firm was not the agent of petitioner. The contract does not attempt to create the relation of principal and agent. The only obligations which Estabrook & Co. owed petitioner were to purchase at an agreed price and take and pay for within a specified time, the whole of the issue of petitioner's preferred stock. When they did this they discharged every obligation imposed upon them by the contract. Nor does the recital, that this sum was to be">*2556 paid in consideration of the contract, serve to make its payment the true consideration. That consideration is to be found in the mutual promises to sell and to buy. Based upon this consideration, petitioner agreed to sell to Estabrook & Co., its stock at par and upon the receipt of any part of the purchase price to at once return 8 per cent thereof. Boiled down to its essence, the contract was one of ">*790 purchase and sale of petitioner's preferred stock for the net price of $92 per share. Compare Emerson Electric Manufacturing Co.,3 B.T.A. 932">3 B.T.A. 932. Petitioner incurred no deductible loss by reason of the fact that it sold its stock below par. See Simmons & Hammond Mfg. Co.,1 B.T.A. 803">1 B.T.A. 803; Cooperative Furniture Co.,2 B.T.A. 165">2 B.T.A. 165; Chas. H. Lilly & Co.,2 B.T.A. 1058">2 B.T.A. 1058; and 3 B.T.A. 932">Emerson Electric Manufacturing Co., supra.

If, however, we go behind the contract and indulge in the supposition that this was a transaction in which Estabrook & Co. acted as the agent of petitioner, the result would be the same. See ">*2557 Simmons Company,8 B.T.A. 631">8 B.T.A. 631.

We are of the opinion that respondent did not err in refusing to permit petitioner to take the deductions sought. We are further of the opinion that the $240,000 paid Estabrook & Co. is not deductible in any event.

(3) The next question grows out of the one just discussed. It is whether petitioner is entitled to include in its invested capital, as of January 1, 1921, the amount of $122,858, which had been paid in to it prior to January 1, 1921, by its employees in full, for their subscriptions for 1307 shares of its preferred stock. Respondent insists that since petitioner had, previous to accepting the subscriptions of its employees, sold the entire issue to Estabrook & Co., it had no stock to issue to its employees, and that the payments made to it were received by it for the purpose of being paid over to Estabrook & Co. He further insists that the restrictions placed upon these subscriptions were such as to show that the stock did not belong to the employees until it was actually delivered to them in the year 1922.

We have just held that petitioner sold its stock to Estabrook & Company at $92 per share. It thereupon acquired">*2558 from Estabrook & Co. an option on a certain number of shares at $94 per share. Some of these shares it at once sold to its employees. Of the shares so subscribed, 1,307 were fully paid up prior to January 1, 1921. Looking through all the forms of bookkeeping and check exchanging, we find that petitioner sold its stock at $92, bought it back at $94 and sold again at $94. To the extent of $92 a share, the money paid in by the employees pursuant to their subscriptions never in fact left petitioner's treasury. To that extent the money paid in by the employees for the shares of stock subscribed by them was at once available to the petitioner as capital which it could use in its operations. The fact that the stock was not issued and delivered until 1921, does not alter the fact that petitioner had invested capital to the extent of $92 per share prior to January 1, 1921. Cf. Manville Jenckes Co.,4 B.T.A. 765">4 B.T.A. 765, and Middleton Compress & Warehouse Co.,1 B.T.A. 1145">1 B.T.A. 1145. Neither do we think that the restrictions placed upon the subscribers affect the conclusion which we have ">*791 reached. The stock belonged to the employees from the time they paid">*2559 for it. The fact that they could not sell it for a certain period was only a temporary limitation on the right of disposition and did not go to the fact of ownership itself. The right of petitioner to repurchase this stock under certain conditions did not transfer to it ownership of the stock. An unexercised option does not confer ownership. See Western Union Telegraph Co. v. Brown,253 U.S. 101">253 U.S. 101. Petitioner should, therefore, be permitted to include in its invested capital as of January 1, 1921, the 1,307 shares which it had sold to its employees and which were fully paid for at the rate of $92 per share, or in all, $120,244, if not already allowed to petitioner.

(4) Petitioner asserts that the $25,000 paid the Corning Hospital in 1922 was an ordinary and necessary expense and was, therefore, deductible from gross income under section 234(a)(1) of the Revenue Act of 1921. It is to be noted that a corporation does not, like an individual, possess the right to deduct up to a certain percentage of its income, donations made to charities. In cases like this, a donation to a charity can be sustained as a deduction only when it is an ordinary and necessary expense">*2560 of its business. We have held that payments made to assist in the erection of or repair to churches or similar charities were deductible as ordinary and necessary business expenses in those cases where the payments were made pursuant to a consistent policy of welfare work, and where the result of such payments had a direct and reasonable effect upon the corporation. See Superior Pocahontas Coal Co.,7 B.T.A. 380">7 B.T.A. 380, and cases cited. In nearly all of these cases, the church or other building was erected in a mill village, the population of which was almost exclusively composed of employees of the corporation and their dependents. In the present case, the hospital was not erected in a village where nearly all of the inhabitants were employees or represented by employees of the corporation, but in a city of over 15,000 people. It also served a large manufacturing plant about two miles from Corning. It was erected at a cost of between $250,000 and $300,000, for the benefit of the whole city. While the fact that petitioner's employees were liable to suffer and did suffer numerous accidents, and while it was a benefit to the corporation that its employees could be hospitalized">*2561 in their home city, and while no doubt the hospital conferred benefits upon the families of petitioner's employees, it is our opinion that the benefits were incidental, rather than direct. This view is confirmed by the comparatively small amounts paid by petitioner to the hospital during 1921 and 1922. The amount paid in 1922 was less than would have paid for one patient for a whole year. A business expense which is deductible under section 234(a)(1) must be both an ordinary and necessary expense. While not giving to thse words a too narrow construction, we can not hold, in this ">*792 case, that the contribution to the Corning Hospital was a necessary and ordinary business expense. We are, therefore, of the opinion that respondent did not err in refusing to permit the deduction.

(5) The next question is whether petitioner should have restored to his invested capital as of January 1, 1921, the $250,740.09, which had theretofore been taken as depreciation on petitioner's books and in its income-tax returns and which had been disallowed by respondent.

The facts relative to this issue were stipulated and our findings correspond with the stipulation. While it might have">*2562 been better if the stipulation had not been stated in such narrow terms, we are of the opinion that upon the facts as stipulated, petitioner should have restored to its invested capital the amount that has heretofore been disallowed by respondent as depreciation for the years 1917 to 1920, inclusive. We are confirmed in this conclusion by the fact that respondent's counsel, at the hearing, in effect confessed error.

(6) Petitioner contends that in computing its invested capital for the year 1921, respondent erred in computing its tax liability for the year 1920. The facts with reference to this issue were stipulated and our findings of fact correspond with the stipulation. Petitioner's invested capital should be readjusted in this respect in accordance with the facts found.

Reviewed by the Board.

Judgment will be entered on 20 days' notice, under Rule 50.