Full opinion text
OPINION KUNZIG, Judge. This income tax refund case comes before the court on appeal from the Trial Division where findings and an opinion were filed November 9, 1978, by Trial Judge David Schwartz, pursuant to Rule 134(h). The court has reviewed his decision on the briefs, exceptions, and oral argument of counsel, finds itself in agreement with major portions of that recommended decision and adopts them, with minor modification, as Parts I — II and IV-X of its opinion. The court also adopts most of the trial judge’s findings of fact, but modifies portions deemed proper upon consideration of exceptions by the parties. We limit our departure essentially to Parts III and XI of this opinion. In Part I we deal with plaintiff’s claim that it had a right to “expense” certain property costing less than $500 (“minimum rule” property) in its 1942 tax return. In Part II we consider the 1942 deductibility of plaintiff’s payroll taxes paid in 1943. In Part III we treat the issue of whether plaintiff may return $13 million to income based upon 1900-1907 accounting errors. In Part IV we handle plaintiff’s assertion that certain stock subscription rights received could be included in income. In Part V we resolve plaintiff’s request to include stock in certain leased line subsidiaries in its capital assets. In Part VI we answer plaintiff’s demand for interest on a 1948 agreement with the Internal Revenue Service. In Part VII we respond to plaintiff’s plea to include certain land sale proceeds in its earnings and profits. In Part VIII we decide defendant’s “additional defense” that plaintiff erroneously included bond discounts and expenses in its total assets. In Part IX we rule on another additional defense that plaintiff failed to treat other bond discounts, and call premiums as interest. In Part X we pass on plaintiff’s entitlement to include certain donations and grants in its equity. Finally, in Part XI we determine the correct amount of plaintiffs equity invested capital based on the value of its stock issued for its operating assets. We find that plaintiff is entitled to recover in Parts I, V and in some sections of Part X. Plaintiff does not prevail in Parts II, IV, VI and VII. We hold for defendant on its offset claims in Parts VIII, IX and XI. Finally, we remand the issue in Part III for reconsideration by the trial judge. The Union Pacific Railroad Company brings suit pursuant to the Tucker Act (28 U.S.C. § 1491) and the Internal Revenue Code (§ 7422(a), 1954 Code) for a refund of income and excess profits taxes for 1942. Plaintiff has paid over $30 million in income tax and over $7 million in excess profits tax. It seeks a judgment for $13,409,961.46 (consisting of $9,222,801.78 in statutory interest for 1942 and $4,187,159.68 in income and excess profits tax and assessed interest thereon paid for 1942) or such other amount which may be legally refundable for 1942, together with statutory interest thereon. The extraordinary span of time from 1942 to the filing of suit is accounted for by the following. The taxpayer filed returns in 1943 and made payments of a total of some $42 million in 1943, 1944 and 1946. Between that time and the conclusion of the audit of the returns in 1957, various timely claims for refunds were filed in amounts varying from $7.7 million to $348,000, and various credits, adjustments and refunds were made in amounts ranging from $694,000 to $196. The audit, begun in 1945, was completed in 1957. One Internal Revenue agent spent over 5,000 hours, or about 630 working days, on the report, almost 1,000 pages long. The major part of the work was the required preparation of the surplus or accumulated earnings and profits accounts for 25 closely related or subsidiary corporations for the 44 years from 1898, the year of the creation of the taxpayer on the reorganization of the old Union Pacific Railroad. These accounts were directly relevant to the invested capital method chosen by plaintiff for reporting its tax under the World War II excess profits tax act (Title II, § 201, Second Revenue Act of 1940, 54 Stat. 975, 26 U.S.C. §§ 710-752 (1940 ed.)). The primary issue is the valuation of the original Union Pacific Railroad system. This and other major issues required the study of voluminous documents and underlying data located at various points in the country. Various other factors contributing to the length of the audit period included the pendency until 1954 of suits, brought by the taxpayer for earlier tax years, affecting some of the issues involved in 1942 tax liability. The returns were meantime kept open by consents on the part of the taxpayer. Plaintiff did not press for an early submission of the agent’s report, for reasons connected with a certain agreement with the Commissioner concerning freight “cutbacks” or rate refunds, discussed below. It is agreed that the consents were voluntary and without any pressure or coercion and that at no time did plaintiff complain to the Internal Revenue Service concerning the time required to complete the audit of its returns. The audit, completed in 1957, was the basis of a determination in 1959 of a large net overassessment of tax for 1942. On September 16, 1960, after approval of the determination by the Joint Congressional Committee on Internal Revenue Taxation, a deficiency in excess profits tax for 1942 was satisfied by credits in income tax and a post-war credit, and a total of $7,793,219.55 was refunded or paid to plaintiff, consisting of income tax and declared value excess profits tax for 1942 and statutory interest thereon. In 1961 plaintiff filed a timely comprehensive claim for refund of $13,409,-961.46, together with interest, and on notice of disallowance, the instant suit was timely brought, on September 14, 1962. The petition as first filed contained 27 counts, to which seven counts were added by an amended petition in 1966. In an answer and four amended answers filed in 1966 and 1968 the Government pleaded 22 separate additional defenses. Aspects of the case have finally been disposed of as follows. On January 19, 1968, the court pursuant to the Government’s additional defense 11 dismissed counts 27 through 30 and 32 through 34 as claims for refund, allowing them to remain only as offsets to defendant’s set-offs. 389 F.2d 437, 182 Ct.Cl. 103 (1968), cert. denied, 403 U.S. 931, 91 S.Ct. 2254, 29 L.Ed.2d 710 (1971). Summary judgment dismissing counts 29 and 30 was granted in 1968, thus rendering additional defenses 14 and 15 moot. 401 F.2d 778, 185 Ct.Cl. 393 (1968), cert, denied, 395 U.S. 944, 89 S.Ct. 2017, 23 L.Ed.2d 462 (1969), motion for reconsideration denied, 194 Ct.Cl. 1021. Counts 7 and 31 and the additional defenses thereto, Nos. 2, 3, 4 and 10, were ordered separately tried, after final adjudication of the remaining issues, by then Trial Commissioner (now Judge of the U. S. Customs Court) Herbert N. Maletz. The parties have through their able and diligent counsel engaged in extensive and fruitful pretrial proceedings and negotiations. A substantial number of counts and affirmative defenses were in the course of these proceedings conceded by one or the other party, by agreements limited to this proceeding. While counts and additional defenses which have been conceded, by agreements limited to this proceeding, are these: it is conceded that plaintiff is entitled to prevail on counts 1 and 16; it is conceded that plaintiff is not entitled to prevail on counts 3, 10 through 14, and 27 (thus rendering additional defense 5 moot); and it is conceded that the defendant is not entitled to prevail on additional defenses 12 and 13. Count 28 is entirely disposed of by agreement. A number of partial concessions of counts were also made as to counts 17, 20, 21 and 22 and additional defense 20. Various items in counts 19-25 not agreed upon by the parties are disposed of in other counts. The pretrial proceedings culminated in a stipulation of facts of approximately 500 pages, over 500 exhibits agreed by the parties to be received in evidence or ruled upon in advance of trial and an exchange before trial of the direct testimony of the experts to be called by the parties on the valuation issue. The case was tried between February 26 and March 6, 1969. Testimony consisted of the cross and redirect examination of the expert witnesses, and testimony by three additional witnesses. Proposed findings of fact, objections to proposed findings of fact and briefs were filed between October 13, 1969 and January 5, 1971, and further memoranda were filed in May and June, 1973. I. “MINIMUM RULE” ACQUISITIONS The Interstate Commerce Commission’s rules for accounting by railroads, effective in 1940-1942, required that items of road and equipment property costing less than $500 be charged to operating expenses rather than to a capital account. Such a rule, known as the “minimum rule,” had been in effect for many years; in 1940 the break point was raised from $100 to $500. The Government challenges the effectiveness for tax purposes of the change in the rule. The contention is that (1) items of property costing between $100 and $500, concededly of a capital nature and having a useful life of longer than a year, are “permanent improvements” under section 24(a)(2) of the 1939 Code, must be capitalized, and only depreciation deducted, and (2) the minimum rule does not constitute a method of accounting under section 41 of the Code. Plaintiff deducted $113,717.84 for such items, and it is this deduction which is in dispute in count 2. A similar case has been considered by the court and decided in favor of the taxpayer in Cincinnati, N. O. & Tex. Pac. Ry. v. United States, 424 F.2d 563, 191 Ct.Cl. 572 (1970). The minimum rule items, the court held, “are not of such nature or character in relation to the plaintiff’s business to constitute permanent improvements or betterments as is contemplated by section 24(a)(2)”; further, that the minimum rule treatment of the items was “in accordance with genérally accepted accounting principles and is not such that it inhibits the ability of plaintiff’s financial statements to clearly reflect income for tax purposes”; and, finally, that “the minimum rule constitutes a method of accounting as contemplated by section 41 and Treas. Reg. Ill, § 29.41-3.” 424 F.2d at 572-73, 191 Ct.Cl. at 587-588. Defendant seeks to distinguish the decision on the ground that the tax consequences there were de minimis while here they are substantial. Substantiality is attempted to be shown by pointing to such facts as the excess of the deductions taken by plaintiff pursuant to the minimum rule over the depreciation allowed by the Commissioner, amounting to $109,926 in 1942, $147,017 in 1943, $175,682 in 1944, $171,850 in 1945 and $115,551 in 1946. The total of $720,026 for the 5 years is said to be substantial. Dollar figures, even large ones, are not a showing of substantial tax consequences in a case of this type. Whether an accounting method distorts the reflection of income must depend on a whole picture. As the court said in Cincinnati, N. O. & Tex. Pac. Ry. v. United States, supra, “[t]he most convincing evidence that the Commissioner has abused his discretion in prohibiting the plaintiff from treating items [in accordance with the minimum rule] ... is the statistical analysis . . . which indicates the relationship of the quantum of minimum rule expenses to other substantial income and balance sheet figures.” 424 F.2d at 571, 191 Ct.Cl. at 584. Let us therefore compare the relationships in the instant case with those held by the court not to inhibit the ability of the Cincinnati’s financial statements to reflect its income clearly. In 1942 the Cincinnati’s total operating expense was $16,291,053; total investment account was $69,391,628; and challenged minimum rule items were $9,688. For plaintiff the comparable figures were $218,-307,770, $442,726,752 and $113,718. The ratio of minimum rule items to total investment account for the Cincinnati was thus .00014; for plaintiff it is .00026. The ratio of minimum rule items to total operating expense for the Cincinnati was .00059; for plaintiff it is .00052. The relationships are, therefore, as minimal in plaintiff’s fiscal picture as they were in Cincinnati’s. There is accordingly no reason not to follow the court’s recent decision and affirm the right of the plaintiff to account for the items in question in 1940-1942, pursuant to the ICC’s minimum rule. Plaintiff is entitled to prevail on count 2. II. PAYROLL TAXES The dispute, raised by count 4, is over whether the plaintiff, having been permitted by the Commissioner of Internal Revenue to deduct from its 1942 income, as a business expense, the amount of vacation pay earned by plaintiff’s employees in that year and paid to them in 1943, should also be permitted to deduct the payroll taxes applicable to the vacation pay, which were payable and paid in 1943. Plaintiff is on the accrual and calendar year basis. The payroll taxes were those imposed by section 1520 of the Internal Revenue Code of 1939, 26 U.S.C. § 1520 (1940) and Section 8(a) of the Railroad Unemployment Insurance Act, ch. 680, 52 Stat. 1094, 1102 (1938), 45 U.S.C. § 358 (1940). Plaintiff’s contentions were apparently not reflected in its tax returns as first filed. In its return for 1942, plaintiff deducted, as business expenses, $1,103,-413.31 in vacation pay earned by its employees in 1941 and paid to them in 1942, and payroll taxes on the vacation pay, in the amount of $64,108.31, paid in 1942. Consistently, on its return for 1943 plaintiff deducted $1,518,624.02 in vacation pay earned by employees in 1942 and paid to them in 1943, and the applicable payroll taxes of $90,358.13, paid in 1943. During the audit of its 1942 return, the plaintiff claimed, and the Commissioner allowed, a deduction of the entire amount of the vacation pay earned by its employees in 1942, $1,518,624.02. Relying on the allowance, the plaintiff then made a claim for refund on the ground that it was entitled in 1942 to accrue and deduct the payroll taxes on the entire amount of vacation pay whose deduction had been allowed. The claim was actually one for $26,249.82, the difference between $90,358.13, the amount of the payroll tax claimed as a deduction, and the deduction of $64,108.31 taken on the return. The Commissioner denied the claim and count 4 of the petition seeks the $26,249.82 involved. The question for decision is whether plaintiff may in 1942 accrue and deduct payroll taxes to be paid in 1943 on vacation pay which was earned, accrued and allowed to be deducted in 1942, though not to be paid until 1943. The answer here given is, no. The reasons follow. A tax not assessed and paid until a following year may nevertheless be deducted in the prior year, if it meets the “all events” test of United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347 (1926). By that test a deduction may be taken, in advance of assessment, in the year when all the events take place determining liability and fixing the amount of the tax. Thus (id. at 441, 46 S.Ct. at 134): In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee’s books. The “all events” test has been restated and applied many times, often in cases similar to the instant case. E. g., United States v. Consolidated Edison Co., 366 U.S. 380, 385, n. 5, 81 S.Ct. 1326, 6 L.Ed.2d 356 (1961); Clevite Corp. v. United States, 386 F.2d 841, 843, 181 Ct.Cl. 652, 658 (1967); Denver & Rio Grande Western Railroad Co. v. Commissioner, 38 T.C. 557, 572 (1962); Turtle Wax, Inc. v. Commissioner, 43 T.C. 460, 466-67 (1965). The test is phrased in the current income tax regulations as follows: “Under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.” Treas.Reg. § 1.461-l(a)(2) (1970), promulgated by T.D. 6282, 1958-1 Cum. Bull. 215, 22 F.R. 10686, Dec. 25, 1957, 26 C.F.R. § 1.461 — 1(a)(2) (1970). So long as a liability remains contingent or if the liability has attached but the amount cannot be reasonably estimated, a business expense deduction is not allowed. Treas.Reg. § 1.461-l(a)(2), supra; Clevite Corp. v. United States, supra; Texaco-Cities Service Pipe Line Co. v. United States, 170 F.Supp. 644, 645, 145 Ct.Cl. 274 (1959); Denver & Rio Grande Western Railroad Co. v. Commissioner, supra; Turtle Wax, Inc. v. Commissioner, supra. In the instant case, both the fact of liability and the amount of tax were as of December 31, 1942 still in doubt. Uncertainty as to two events as of that date made it impossible then to determine the tax. One of the facts lacking was knowledge of the total vacation pay which plaintiff’s employees would actually receive. Under at least some of plaintiff’s labor contracts, the employee forfeited the right to a vacation with pay or to pay in lieu of a vacation, if his employment were terminated, for a reason other than retirement, prior to the time scheduled for his vacation in 1943. Since it could not be known by the end of December of the prior year, 1942, which of plaintiff’s employees, would remain in its employ until the beginning of their respective vacations in 1943, it could not in 1942 be determined how much vacation pay plaintiff would be required to pay and, therefore, what would be plaintiff’s tax liability. The uncertainty would not be resolved until the time in 1943 of the actual payment of vacation wages or allowances. All events fixing liability not yet having occurred, a deduction in advance, in 1942, is not permitted, under the foregoing authorities, and particularly Texaco-Cities Service Pipe Line Co. v. United States, supra, and Turtle Wax, Inc. v. Commissioner, supra. Compare similar rulings with respect to the excise tax on payrolls of employers other than carriers. G.C.M. 19692, 1938-1 Cum.Bull. 148; Rev.Rul. 69-587, 1969-2 Cum.Bull. 108. Plaintiff urges that in allowing it to deduct vacation pay earned in 1942, the Commissioner has ruled, pursuant to I.T. 3956, 1949-1 Cum.Bull. 78, that the liability for vacation pay is not made contingent for purposes of the “all events” test by the possibility that the employee might forfeit his right to a vacation by leaving the employ prior to his scheduled vacation. The Government’s position on I.T. 3956 is that the ruling was mistaken and has been revoked in Rev.Rul. 54-608, 1954 — 2 Cum.Bull. 8, 9 — 10; moreover, that it concerned vacation pay and should not be extended to payroll taxes. In revoking I.T. 3956 the Commissioner ruled “that no accrual of vacation pay can take place until the fact of liability to a specific person has been clearly established and the amount of the liability to each individual is capable of computation with reasonable accuracy.” Rev. Rui. 54-608, supra. In reaching this decision, the Commissioner relied on three decisions of the Tax Court: Tennessee Consolidated Coal Co. v. Commissioner, 15 T.C. 424 (1950); Morrisdale Coal Mining Co. v. Commissioner, 19 T.C. 208 (1952); and E. H. Sheldon & Co. v. Commissioner, 19 T.C. 481 (1952). In these cases it had been held that liability for payment of vacation pay depended on the condition precedent that the recipient employee be working for the employer-taxpayer on the date required by the contract, and that until that date liability remained uncertain. The reasoning of Rev.Rul. 54-608 and of the cases it relied upon is preferred over that of I.T. 3956. This court has recently ruled that where “payment of vacation pay * * * is contingent upon employment up to the beginning of the vacation period, a taxpayer cannot accrue expenses for vacation pay before the taxable year in which the payments are made. Until the vacation period begins, the ‘all events’ test * * * has not been satisfied.” Clevite Corp. v. United States, supra. Plaintiff urges that the effective date of Rev.Rul. 54-608 has been repeatedly postponed (most recently in Section 903 of the Tax Reform Act of 1969, P.L. 91-172, 83 Stat. 487, 711), and thus that I.T. 3956 is “still the law.” The question at hand, however, is not the present effectiveness of I.T. 3956, as governing deductibility of vacation pay by certain classes of taxpayers, but whether its rationale should be extended to the deductibility of payroll taxes on vacation pay. That question is here answered in the negative. The nature of the payroll tax itself is the source of the second “event” or fact so unknown or uncertain at the close of 1942 as to make the liability contingent and thereby prevent deduction of payroll taxes in that year. The two payroll tax acts (notes 2 and 3, supra) subjected to tax only the first $300 of compensation paid to an employee in any calendar month. Under plaintiff’s labor contracts, in the event plaintiff could not release an employee for a vacation in 1943, it was obligated to pay the employee an allowance in lieu of the vacation. Where such an allowance was paid in a calendar month in which the employee had already received $300 or more in other compensation, no tax would be due on the excess of $300. Plaintiff did not know, as of December 31, 1942, which of its employees it would and which it would not be able to release for a vacation in 1943, and to which, therefore, it would pay allowances in lieu of vacation. Unknown, therefore, was how many would receive more than $300, in combined regular pay and vacation allowance, in one calendar month, and thus to what extent the payment of vacation allowances would be free of tax. Liability for the tax was necessarily contingent, until the time of the scheduled vacation in 1943. Only then would it appear how much of the payments to the employee would be liable to tax. The effect of the $300 maximum on a taxable monthly compensation is confirmed by the facts of plaintiff’s actual payments of vacation pay and tax. Plaintiff paid $1,103,413 in vacation pay in 1942. Six percent of this amount— the tax rate in 1942 (notes 2 and .3, supra) — is $66,205, yet plaintiff paid payroll taxes of only $64,108. In 1943 plaintiff paid vacation pay of $1,518,624. At 6.25 percent, the tax rate in 1943 (notes 2 and 3, supra), it would have paid $94,914, yet plaintiff paid only $90,-358. The differences between the amount of the tax payable, if the entire amount of vacation pay were taxable, and the amount of tax actually paid, not explained by plaintiff, can only be attributed to payments of regular pay and vacation allowances in total amounts of over $300 in a month, of which the portion over $300 was free of tax. Plaintiff contends that the effect of the tax freedom for compensation over $300 in one month is not so great as to disqualify the tax from deductibility because, it is said, plaintiff was able, in 1942, to estimate the amount of tax to be paid with the accuracy required by the “all events” test. Not so. While the amount of a tax may be reasonably estimated and need not be precisely known, liability for the tax must have attached and cannot be approximated or estimated. “[T]he fact that the percentage of items which will be paid can be estimated with reasonable accuracy is not sufficient to support accruals. The individual items must represent fixed liabilities.” Denver & Rio Grande Western Railroad Co. v. Commissioner, supra. The accruability test is not whether there is certainty of payment, or if a reasonable estimate can be made, but whether there is certainty of liability. Trans-California Oil Co., Ltd., 37 B.T.A. 119, 127 (1938). Here, liability was not certain or fixed. The effect of the $300 provision was to make the liability for tax uncertain, un til the time when the employee actually went on vacation or received both pay and vacation pay. Liability for payroll tax was thus under the “all events” test not certain or fixed in 1942. Texaco-Cities Service Pipe Line Co. v. United States, supra; Helvering v. Russian Finance & Construction Corporation, 77 F.2d 324, 327 (2d Cir. 1935). Lastly, plaintiff urges that since it has been allowed a deduction for vacation pay earned in 1942, a comparable deduction for the tax on such vacation pay is appropriate or necessary in order clearly to reflect its income for 1942. The effect on income in any year of the prospective payroll tax may be clearly enough reflected by a reserve for the tax as a contingent liability. The need for such a reserve is not the equivalent of a right to a deduction. Lucas v. American Code Co., 280 U.S. 445, 452, 50 S.Ct. 202, 74 L.Ed. 538 (1930). Plaintiff is not entitled to prevail on count 4. III. $13 MILLION DEDUCTIONS Plaintiff’s count 8 also seeks a refund of excess profits taxes based upon an alleged series of accounting errors in 1900-1907. It asserts that certain “betterments and improvements” during these years were “expensed” rather than debited to its investment account. It further contends that in later years, these “betterments” were depreciated and thus “expensed” for a second time. Plaintiff wants to “reverse” this $13 million accounting error by adding it back into accumulated earnings and profits. The trial judge rejected this claim. He found insufficient proof that the accounting transactions were erroneous, and noted that plaintiff had failed to succeed on this same argument in a case before the Interstate Commerce Commission. 44 ICC Val.Rep. 1, 22 (1933). The trial judge discredited plaintiff’s contention that later depreciation deductions created a “double expensing” of a single item of property. He found that the evidence shows that plaintiff in fact made “substantial unrecorded retirements'” rather than later retirement deductions. It is this point which troubles the court. The “unrecorded retirement” issues are still before the trial judge. Plaintiff contends that if the court denies its “$13 million” claim for the sole reason that these accounting entries were made to correct earlier “retirement errors,” and if it is later found that its “retirement” practices were correct, plaintiff will have lost the right to alter the “$13 million” entries. Since the retirement issue is still before the trial judge, the court remands this “$13 million” issue to the trial judge for clarification of the relationship between the retirement issue and the “$13 million” issue. Although it appears that the trial judge rejected plaintiff’s claims solely for insufficient proof of a “$13 million” error, we wish to make absolutely certain that his conclusion is not tied to any findings of “erroneous retirement” practices by plaintiff, or that plaintiff was not lured into failure to present proof on the “$13 million” issue because it believed the issue would be tried with the retirement issues. IV. STOCK SUBSCRIPTION RIGHTS In each of the years 1922, 1923, and 1925 plaintiff and its wholly owned subsidiary, the Oregon Short Line, both holders of common stock in the Illinois Central Railroad Company, received, as such holders, a distribution of rights to subscribe to Illinois Central convertible preferred stock at $100 per share. The rights were exercised in the year received. At both the time of distribution and exercise, the market value of the stock was higher than the subscription price. The lower of the two aggregate “spreads” between market and distribution prices was some $670,000. The question presented, determinative in count 15, and determinative in part in other counts, is whether the “spread” at either time was income properly to be included in accumulated earnings and profits of the recipient for excess-profits-tax purposes. The answer, here given in the negative, hinges on the checkered history of the taxation of stock dividends prior to the enactment of the excess profits tax in 1940. That history begins with the 1918 decision holding the 1913 tax on income inapplicable to a dividend in stock, on the ground that the “proportional interests of each shareholder remains the same” after the receipt of the dividend. Towne v. Eisner, 245 U.S. 418, 426, 38 S.Ct. 158, 159, 62 L.Ed. 372. In 1916, however, Congress had by statute directed that a “stock dividend shall be considered income, to the amount of its cash value.” Section 2(a), Revenue Act of 1916, ch. 463, 39 Stat. 757 (1916). This statute the Supreme Court soon held in violation of the Sixteenth Amendment, in Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920), on the ground that no income had been received. Though the two cases had involved simple dividends of common stock to common stockholders, Congress took the decisions as forbidding the taxation as income of any stock dividends, and accordingly provided in the 1921 Act and thereafter, through the 1934 Act, that a “stock dividend shall not be subject to tax.” The premise of this statutory exemption of stock dividends from taxation was upset in 1936 when the Supreme Court decided in Koshland v. Helvering, 298 U.S. 441, 56 S.Ct. 767, 80 L.Ed. 1268, that a dividend in common stock to holders of preferred stock gave rise to income (though not subjected to tax), because the resulting interest of the stockholder was different than before. Now appreciating that Eisner v. Macomber was not an absolute, and that some stock dividends could be taxable, Congress promptly provided, in the 1936 Act, that dividends in stock or in rights should be taxable to the extent constitutionally permissible. Such taxation as was thereby imposed was to be prospective. These provisions were repeated in the 1939 Code. Under these provisions, such stock dividends as gave rise to income, that is, those that created interests in the recipient different than before, were taxed. See Helvering v. Griffiths, 318 U.S. 371, 63 S.Ct. 636, 87 L.Ed. 843 (1943); Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, Sec. 5.60 (2d ed.). Such briefly had been the prior treatment of stock dividends when the excess profits tax was being considered in 1940. Though the change in the taxation of stock dividends in 1936 did not rake up stock dividends of earlier years, the excess profits tax would do so, by its provision that accumulated earnings and profits be an element of equity invested capital. 26 U.S.C. § 718 (1940 ed.). Computation of equity invested capital would require a review and determination of the earnings and profits account of at least some corporate taxpayers from the beginning (one of the causes of the long time spent in auditing the return of the instant plaintiff). On such a review, in the absence of special statutory provision, at least some long-past stock dividends would now by hindsight be understood as having given rise to income and thus includible in earnings and profits, though the dividend had been exempt from tax under the statutes in force between 1921 and 1936. Special statutory provision was, however, made. Congress dealt explicitly with the effect upon earnings and profits of past, untaxed stock dividends. The draftsmen added to the excess profits tax law a provision that earnings and profits should not be increased by receipt of a dividend, not taxed, whose only effect had been to cause a reallocation of the basis of the old stock to the old and the new stock. This section, quoted in the note, was section 115(7), 1939 Code, 26 U.S.C. § 115(a)(1) (1940 ed.), added by § 501, Second Revenue Act of 1940, ch. 757, 54 Stat. 1004 (1940). Retroactivity was explicit. Section 501(c), Second Revenue Act of 1940, ch. 757, 54 Stat. 1005. The precise question for present decision is simply whether the distributions of rights to plaintiff and Oregon Short Line were tax-free dividends subject to the bar of § 115(7) to their inclusion in the earnings and profits of the recipient corporation. The issues are those of construction of § 115(7) and related sections. A first issue is whether the distribution of rights to subscribe to the preferred stock of Illinois Central, the distributing corporation, was a “dividend.” It is agreed, incidentally, that Illinois Central had sufficient income available for dividends in the amounts involved. Distribution of rights to subscribe to stock in the issuer, such as are presently involved, are for tax purposes the equivalent of stock dividends. It is settled that a distribution of rights to subscribe to stock is governed by the same rules as determine taxability of the stock itself, had it been directly distributed. Miles v. Safe Deposit Co., 259 U.S. 247, 42 S.Ct. 483, 66 L.Ed. 923 (1922); Choate v. Commissioner, 129 F.2d 684 (2d Cir., 1942); Charles M. Cooke, Ltd. v. Commissioner, 2 T.C. 147 (1943). Thus a distribution of rights to subscribe is not subject to tax as a dividend, when the stock itself, had it been distributed directly, would not be subject to tax, whether because of the nature of the stock dividend or because of a statutory exemption from tax. Miles v. Safe Deposit Co., supra; Charles M. Cooke, Ltd. v. Commissioner, supra. And a distribution of rights is taxable when distribution of the stock would be taxable, as it was under the 1936 Act, which taxed stock dividends to the extent constitutionally permissible. Choate v. Commissioner, supra. Why, then, was the distribution of rights not a dividend? Plaintiff claims that the transactions in which the rights were distributed were not distributions of dividends but offers to sell corporate property to the corporation’s stockholders at less than its value, which on acceptance by the exercise of the rights gave rise to income in the amount of the lesser of the spreads between market and subscription price at the times of distribution and exercise. Palmer v. Commissioner, 302 U.S. 63, 58 S.Ct. 67, 82 L.Ed. 50 (1937) and Commissioner v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 20 L.Ed.2d 448 (1968), cited by plaintiff, do support the proposition for which they are invoked — that the sale of corporate property to stockholders at less than its value is as much a distribution of profits subject to tax as income as the formal declaration of a dividend in money. In these cases the property distributed to stockholders was stock in a corporation other than the distributing corporation. Such stock is when distributed as a dividend no differently treated than is other property. Dividends consisting of stock in the issuing corporation are, however, another matter, subject, as has been seen, to special statutory treatment. The rule governing dividends by offer to sell property is therefore not relevant to the problem at hand. The aspect of that rule, much emphasized by plaintiff, fixing the realization of income at the time of acceptance of the offer as against the time of distribution of the right to buy is as irrelevant as the rule itself. Accordingly, the criticisms of treatment of the instant distribution as a dividend are invalid. The distributions are dividends within the meaning of § 115(7), if the section is otherwise applicable. The remaining questions have to do with the two conditions for its application stated in § 115(7) (note 8, supra). The first of these is whether the distributions involved were free from tax, for § 115(7) by its terms governs only a distribution “which (under the law applicable to the year in which the distribution was made) was not a taxable dividend.” Note 9, supra. The distributions, made in 1922, 1923 and 1925, were in fact not taxed. In the years in question, petitioner and Oregon Short Line, in their consolidated returns, did not include in gross income any amounts as attributable to the receipt of the rights in question. The omission cannot, however, be regarded as a conclusive recognition by the taxpayer that the distributions were not taxable income, for in those years 100 percent of dividends received from domestic corporations were deductible. Section 234(a)(6)(A), Revenue Act of 1921, ch. 136, 42 Stat. 255 (1921); § 234(a)(6)(A), Revenue Act of 1924, ch. 234, 43 Stat. 283 (1924). The text of the applicable statute is, however, clear enough. The law applicable to the distributions is the law in force in the years they took place, 1922, 1923 and 1925. The law in force in each of those years provided that “A stock dividend shall not be subject to tax.” Section 201(d) of the 1921 Act and § 201(f) of the 1924 Act, note 5, supra. This explicit exemption from taxation fully satisfies the condition of § 115(7) that the distributions have been tax-free under the law in force at the time they were made. To dispute this conclusion, plaintiff relies upon Choate v. Commissioner, supra, as holding that the distributions were taxable as income. The reliance is misplaced. Choate was a decision under § 115(f) of the 1936 Act (note 6, supra). Stock dividends were taxed, as far as constitutionally permissible, both by that Act and by its successor law, the 1939 Code (note 6, supra). Both statutes, however, were applicable only prospectively (notes 6, 7, supra), and so neither can govern in determining whether the distributions in the 1920’s were tax-free. How clearly Choate depends on the prospective change made in the law by § 115(f) appears from this excerpt from the opinion (129 F.2d at 688): In Miles v. Safe Deposit & Trust Co., 259 U.S. 247, 42 S.Ct. 483, 66 L.Ed. 923, * * * it was said that rights issued to its common stockholders, to subscribe to a company’s unissued common stock, are analogous to stock dividends. Such stock dividends were not constitutionally taxable under Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 * * *. But under § 115(f) stock dividends are now taxable so far as such a tax is constitutional, and so are rights to the extent that they are dividends. A stock dividend in preferred stock issued to common stockholders is, therefore, now subject to a valid tax. The second condition for the application of § 115(7) is that the distributions have had the effect only of reallocating the basis of the stock originally held, as between the old stock and the new stock received in the distribution. Before 1936, when stock dividends were not taxed in the belief they were not constitutionally taxable, they were treated by the Treasury as having the effect only of a reallocation of basis as between the old and new stock. The practice was thereafter codified in § 214(e) of the Revenue Act of 1939, ch. 247, 53 Stat. 874 (1939). The authority for the proposition that the section is a codification of prior Treasury practice is no less than the House Committee which wrote the section. In reporting with approval what became § 214(e), the Committee said (H.R.Rep.N0.2894, 76th Cong., 3d Sess. 42-43 (1940)): Tax-free distributions in stock or in rights, whether or not constituting income within the meaning of the sixteenth amendment or exempt to the distributee under section 115(f) of the Revenue Act of 1934 or a corresponding provision of a prior Revenue Act, and tax-free distributions of stock or securities in a corporation a party to a reorganization, have consistently been treated by the Treasury as not resulting upon receipt in an increase in earnings or profits, but as causing the basis of the stock in respect of which the distribution was made to be allocated between such stock and the stock securities received, with the result that earnings or profits are increased, upon the sale of such stock or property, by the entire amount of the recognized gain computed upon the basis so determined by allocation. * * [The section] explicitly states the rules heretofore applied by the Treasury. Section 214(e), plaintiff says, cannot be applied, for it is by its terms limited to distributions which are not income (and, plaintiff would go on to say, the distributions here did create income). The portion of the section (note 12, supra) relied upon is this: “if the new stock was acquired in a taxable year beginning before January 1, 1936, or acquired in a taxable year beginning after December 31, 1935, and its distribution did not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.” The particular words invoked are: “and its distribution did not constitute income.” Plaintiff would read the last clause, beginning with “and,” as applicable to acquisitions both “before January 1, 1936” and “after December 31, 1935.” Such a reading is erroneous in that it overlooks the disjunctive effect of the “or” which insulates the condition “if the new stock was acquired in a taxable year beginning before January 1, 1936” from the remaining words, including the “and” clause, and leaves the category of acquisitions “before January 1, 1936” unaffected by the conditions placed on the acquisitions “after December 31, 1935.” The section embodies a purposeful differentiation, which plaintiff would ignore, between the two stated classes of transfers — 1935 and earlier, and 1936 and later. Plaintiff’s view, were it accepted, would reduce the clause to a great many unnecessary words and phrases. The words should rather be taken as if they were punctuated as emphasized in the following: “if the new stock was (/) acquired in a taxable year beginning before January 1, 1936, or (77) acquired in a taxable year beginning after December 31, 1935, and its distribution did not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.” Punctuation of this type appears in a successor statute, § 113(a)(19)(A) of the 1939 Code, 26 U.S.C. § 113(a)(19)(A), added by § 214(a) of the Revenue Act of 1939, ch. 247, 53 Stat. 872 (1939). Properly read, the language of the section says that an acquisition before January 1, 1936, alone and without regard to the “and” clause, fulfills the condition for applicability of the section. The “and” clause is applicable only to the words, following the word “or,” dealing with acquisitions after December 31, 1935. Section 214(e), thus being applicable to the acquisitions in 1922, 1923 and 1925, serves to satisfy the second and last disputed condition of § 115(7) — that the dividend have an effect only on allocation of basis. Accordingly, § 115(7) is operative, and directly forbids the inclusion in a recipient’s earnings and profits of the value of the rights distributed in 1922, 1923 and 1925. Plaintiff is not entitled to recover on this issue in count 15 and in all of the counts in which it is raised. V. LEASED LINE SUBSIDIARIES Plaintiff owns all of the stock of the Oregon Short Line Railroad Company, approximately 99 percent of The St. Joseph & Grand Island Railroad Company and (together with Oregon) all of the stock of the Los Angeles & Salt Lake Railroad Company. A large part of the stockholdings was acquired soon after plaintiff’s reorganization in 1898 and most of it has been owned by plaintiff for many years. The Oregon Short Line was acquired in exchange for shares in plaintiff whose valuation is the subject of count 5; the stock in the latter two roads cost approximately $8 million. During 1942 and for several of the years earlier, plaintiff operated substantially all of the properties of these subsidiaries under leases. For practical purposes, the arrangement was a consolidation of railroad operations. Plaintiff paid all of the roads’ expenses, including the expenses of maintaining their corporate existence and dividends on the publicly-owned 1 percent of the stock of The St. Joseph & Grand Island, and recorded in its books and reported in its tax returns all the income and expenses of the operations of the lines of the subsidiaries. Equity invested capital, the basis on which plaintiff computes its excess profits credit, is under the 1939 Code subject to a reduction by the percentage of “inadmissible assets” among total assets. Sections 715, 720, Internal Revenue Code of 1939, 26 U.S.C. §§ 715, 720 (1952 ed.). An “inadmissible asset” is by Section 720(a)(1)(A) of the 1939 Code, as amended in 1941, defined to mean “[s]tock in corporations . . . except stock which is not a capital asset.” Admissible assets are by section 720(a)(2) “all assets other than inadmissible assets.” That is, while corporate stock held by a taxpayer entity is presumptively to be considered as a capital asset and as such “inadmissible” as an asset for purposes of invested capital, where the circumstances are such as make the stock a noncapital-asset, it becomes “admissible.” The ultimate question raised by count 18 is therefore whether or not the plaintiff’s stock in these subsidiaries is to be treated as an “admissible asset” under Section 720 of the 1939 Code, and thus not be cause for any reduction of the plaintiff’s invested capital. Resolution of the question depends on whether the assets are capital assets, which in turn is determined by whether the plaintiff acquired and holds the stock in the lessor roads for a business or for an investment purpose. The parties are agreed that the legislative purpose was to make a non-capital-asset admissible, and thereby part of equity invested capital, when the income generated by it was includible in a taxpayer’s excess profits net income. The simplest illustration of such an asset, prominent in the minds of the drafters of the relevant amendment of the section, is the corporate stock held by a securities dealer for sale to his customers. When such sales take place, there is generated ordinary excess profits net income, the committee reports said, “no different from any other article held for sale by a dealer.” H.R.Rep.No.146, 77th Cong., 1st Sessv 20 (1941); S.Rep.No.75, 77th Cong., 1st Sess., 20-21 (1941); 87 Cong.Ree., Part 2, 1638 (1941). The regulations thus provide that the term “inadmissible assets” means “stock in all corporations, domestic or foreign, . except stock which is not capital asset (such as stock held primarily for sale to customers by a dealer in securities).” Treasury Regulations 112, Sec. 35.720-1. Litigation has produced illustrations of non-capital-assets other than the stock on the security dealer’s shelf. One is stock in a restaurant, a going business, bought not for investment but to conduct a restaurant business by the use of the corporate assets, there having been some doubt as to the assignability of the lease of the restaurant premises. John J. Grier Co. v. United States, 328 F.2d 163 (7th Cir. 1964). Another illustration, one of a number of cases involving stock bought as a source of inventory for regular business, is stock in a distillery, bought by a liquor dealer to obtain rights to purchase whiskey and sold promptly after the rights were exercised. Western Wine & Liquor Co. v. Commissioner, 18 T.C. 1090 (1952). A relatively recent case in this court involved stock in a manufacturer of yarn, held to be a non-capital-asset because it was bought by the taxpayer, a yarn sales agency, in order to obtain an extremely valuable source of supply of yarn. Waterman, Largen Co. v. United States, 419 F.2d 845, 189 Ct.Cl. 364 (1969), cert. denied, 400 U.S. 869, 91 S.Ct. 103, 27 L.Ed.2d 109 (1970). United States v. Mississippi Chemical Corp., 405 U.S. 298, 92 S.Ct. 908, 31 L.Ed.2d 217 (1972), does not make Waterman, Largen less authoritative. The rule that emerges from the cases is that corporate stock which is held for a business purpose, that is, one intimately related to the taxpayer’s normal source of business income, is not a capital asset. Stock not so related, and held for investment purposes, is a capital asset. Plaintiff claims that the stock involved here meets the business purpose test for a non-capital-asset, in that plaintiff acquired and has held the stock in these subsidiaries in pursuance of its railroad operations, and not as an investment or speculation; that the operation of the leased lines was intended to produce excess profits taxable income, to be reported in plaintiff’s return. Plaintiff is upheld, and the issue is decided in favor of non-capital-asset status. The result is, however, not free from doubt. It is quite true, as the Government emphasizes, that the case of the securities dealer is far different from that of a leased railroad subsidiary. It is also true that decision in favor of plaintiff permits the money invested in a subsidiary to be treated as invested capital (and thus reduce excess profits taxes) twice, once as part of plaintiff’s invested capital and again as part of the invested capital of the subsidiaries. Neither statute nor regulation, however, limits non-capital-asset status to the stock on the dealer’s shelf. The business-purpose-investment-purpose test is at best imprecise. Nuances of the application of the test could doubtless be discussed at length, and a case made for the Government’s view, on the basis of the considerations it emphasizes. The consideration which to my mind tips the scales in favor of plaintiff’s position is the historical evidence in this case of the intimate relationship of the subsidiaries to plaintiff’s success as a railroad system. The loss of its subsidiaries prior to reorganization was a low point in the decline of the old Union Pacific Railroad, plaintiff’s predecessor. The reacquisition of at least the Oregon Short Line was among the first thoughts for the future of the reorganizers and the new management. There can be no doubt that these subsidiary and connecting railroads, led by the Short Line, had great significance for the prosperity of the plaintiff as a transcontinental railroad system, in the years after it came out of reorganization in 1898. This significance appears in the course of the discussion of the valuation of the shares issued in the reorganization for the old road and for the Oregon Short Line, in count 5. With these origins, the acquisition of the stock cannot be treated as a mere investment unrelated to the business operations of the plaintiff. It was accomplished for an operating, business purpose and the stock was held as part of the operation of plaintiff’s business as a railroad. If anything, the leases that followed confirm the conclusion of business and not investment purpose, even assuming that they were entered into only to reduce costs. As different as are a railroad and a restaurant, the case presented is in essence similar to the case of the restaurant stock, John J. Grier Co. v. United States, supra. The plaintiff bought the stock to run the railroad and not to make an investment, and thus the stock is a non-capital-asset “admissible” for purposes of equity invested capital under Sections 715 and 720. Cf. Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955); Booth Newspapers, Inc. v. United States, 303 F.2d 916, 157 Ct.Cl. 886 (1962). Plaintiff is entitled to prevail on count 18. VI. INTEREST ON 1948 AGREEMENT Count 26 makes a claim for interest of over $12 million under a certain 1948 “cutback” agreement between plaintiff and the Commissioner relating to plaintiff’s tax liabilities for 1942 and subsequent years. “Cutbacks” are refunds of railroad freight charges which have been paid by the Government. There is little or no dispute as to the facts; only a dispute as to their significance in the light of the agreement. In transporting war material in 1942, when considerations of secrecy or the novelty of the material made it impossible to determine that a preferential, land-grant rate should be applied, plaintiff charged the Government the full commercial tariff. Thereafter, on audit by the General Accounting Office between 1943 and 1957 (delayed because of the great volume of auditing of wartime charges), the correct rates were determined, and plaintiff refunded the overcharges as they were determined. The refunds of overcharges for 1942 amounted to $12.8 million. Plaintiff had accrued the full charges made in 1942 as income in that year and reported them as such in its tax return for that year. The charges having been received under a claim of right, income for 1942 could not be recomputed to exclude the amount of the refunds or cutbacks. Under normal tax procedures, the cutbacks could be treated only as deductions from taxable income in the years in which the cutbacks were paid over to the Government. See Healy v. Commissioner, 345 U.S. 278, 73 S.Ct. 671, 97 L.Ed. 1007 (1953); United States v. Lewis, 340 U.S. 590, 71 S.Ct. 522, 95 L.Ed. 560 (1951). Large amounts of income, reported in years of high, wartime tax rates, were thus, by virtue of the delays in the audit, about to be reversed by reductions in income in postwar years of lower, peacetime tax rates. In recognition of the prospective inequity, the Commissioner of Internal Revenue and the plaintiff agreed, on November 29, 1948, that normal practice would not be followed — that plaintiff would be permitted to allocate the amounts of the cutbacks not to the years of their payment but to the years in which the original charges had been included in taxable income. Accrued income for 1942, for instance, would be retroactively reduced by the amount of the cutbacks of rates included in income in that year and the cutbacks would be disallowed as reductions in income in the various years— 1943 through 1957 — in which they were actually made. The letter from the Commissioner to plaintiff embodying this agreement, called the Cutback Agreement, stated as follows: In view of the facts and circumstances presented, permission is granted under the authority conferred in section 43 of the Internal Revenue Code to allocate, on the terms and conditions hereinafter stated, repayments heretofore or hereafter made of excessive transportation charges of the class described above to the years in which such charges were included in taxable income. However, the allocation of any such repayments of excessive transportation charges to any year shall be made only to the extent the refund or credit of the overpayment of income and/or excess profits tax, if any, resulting therefrom is not prevented for any reason, and the deficiency if any, of income and/or excess profits tax resulting therefrom may be assessed. The letter then goes on to set out the “terms and conditions” of the agreement, in numbered paragraphs: In this connection, it is understood that you agree, as follows: 1. All amounts received by you as transportation charges from the Federal Government Departments and Agencies shall be included in taxable income on the accrual basis. 2. All refunds of transportation charges made by you to the Federal Government shall be allowed as deductions in the year or years in which such transportation charges were included in income, and any deductions claimed in the year or years such refunds were made will be disallowed. sk * * The result of the permitted reduction in income for 1942 and the corresponding increase in income, distributed over 1943 — 1957, all other things being equal, would be an overpayment of tax for 1942 and underpayments in 1943-1957, and thus a refund for 1942 and deficiencies for 1943-1957. (This would all the more be true if, as seems to have been the case, plaintiff did not in the years following the making of the cutback agreement in 1948 cease its practice, in its tax returns, of reducing its annual income by the respective amounts of cutbacks made in those years.) And interest payable to plaintiff on the refund would exceed interest payable by plaintiff on the deficiencies, by reason of the longer span of time involved in the refund than in the deficiencies. To relieve the Commissioner of such a net interest liability, the parties further agreed, in the Cutback Agreement, that the maximum interest payable to the plaintiff on a refund caused by the cutbacks should be limited to the amount of interest payable by the plaintiff on the deficiencies caused by the cutbacks, as follows: 3. The amount of interest on refunds of income and excess profits taxes resulting from these adjustments shall be allowed only to the extent of, and limited to, the amount of interest on deficiencies resulting from these adjustments. Plaintiff’s tax returns for 1942 were, as noted above, not finally audited until 1959. The tax years following 1942 are by reason of waivers still open; deficiencies for these years resulting from the cutbacks, have thus not been assessed, although they have been disallowed in revenue agents’ reports for those years. Plaintiff filed an excess profits tax return (Form 1121 under the 1939 Internal Revenue Code) for 1942 showing no liability; there followed certain additional payments by plaintiff in anticipation of a deficiency. (The precise amounts, and other details not here necessary, are set out in the accompanying findings of fact.) On audit, and after making general adjustments, the Commissioner computed a deficiency of $15.9 million unrelated to the cutbacks reduction in income. The cutbacks reduction in income of $12.8 million, alone, would have resulted in an overassessment of $11.3 million. An adjustment attributable to cutbacks therefore required a deduction of $11.3 million from the deficiency of $15.9 million. When this adjustment was made, there remained a total proposed deficiency of $4.6 million, on which $.3 million in interest was payable, or a total assessed deficiency of $4.9 million. Plaintiff’s income and declared value excess profits tax return (Form 1120) showed a tax of $38.4 million. On audit, the Commissioner determined that liability for income tax was $30.4 million and that plaintiff had no liability for declared value excess profits tax. The consequent overassessment of income tax, with adjustments for certain subsequent assessments, was $7.9 million. The computations for the two taxes were netted out as follows. The deficiency of $4.9 million in excess profits tax was satisfied by a credit of $4.2 million of the $7.9 million overassessment in income tax, and a certain postwar credit of $.7 million. This left $3.7 million due to plaintiff as the net balance of the $7.9 million overassessment of income tax, on which interest of $4 million was payable. The total, $7.7 million, was then paid to plaintiff. The cutbacks had played a part only in the excess profits tax; the adjustment for cutbacks, the parties are agreed, had no effect on plaintiff’s income tax. While the cutbacks of $12.8 million reduced plaintiff’s 1942 income subject to income tax by that amount, the effect of the reduction was completely offset by the reduction of an allowable credit, under Section 26(e) of the Internal Revenue Code of 1939, for income subject to excess profits tax. There was, also, no connection between the cutbacks and the payment of the deficiency in excess profits tax by credit of a portion of the overassessment of income tax and the interest paid to plaintiff on the refund. It is agreed that the interest of $4.0 million, paid as part of the $7.7 million refunded to plaintiff, was attributable to the overassessment of income tax and was not related to the cutback adjustment or the interest in respect of cutbacks now claimed by plaintiff. With the apparent complexities created by two tax returns stripped away, and, thereby, the income tax return, the refund of income tax and the interest thereon all set aside, the remaining relevant facts, all related to excess profits tax, are seen to be quite simple. The cutbacks reduced excess profits tax income and had there been no other factors the reduction would have meant an overassessment and a refund