The opinion of the court was delivered by: GANEY
In the first action, Commonwealth Title Company of Philadelphia ('New Commonwealth') seeks to recover amounts totaling $ 762,891.03
plus interest representing income and excess profits taxes alleged to have been erroneously paid by it for the period April 1 to December 31, 1944, and for the calendar year 1945 and 1946. In the second action Central-Penn National Bank of Philadelphia ('Central-Penn') seeks recovery of $ 118,689.67
paid by it for the year 1944. Since the issues posed arise out of the 'consolidation and merger' of the same title insurance companies, the actions were tried together. The issues are five in number and they are, stated broadly, as follows:
1. Was New Commonwealth entitled to the carry over unused excess profits credits and carry over losses of Old Commonwealth for 1942, 1943 and for the period January 1 to March 31, 1944, under the provisions of § 710(c)(3) and § 122(b)(2)(A) of the Internal Revenue Code, 26 U.S.C.A. § 710(c)(3), 122(b)(2) (A). (If this question is answered in the negative, Old Commonwealth and New Commonwealth were required to compute their excess profits taxes for 1944 on the annualization basis provided in § 711(a)(3) of the Code);
3. (A) Whether certain expenditures made by New Commonwealth in 1945 and 1946 in rearranging information and improving its title plant under a contract with Remington Rand, Inc. were ordinary and necessary expenditures under §§ 204(c)(1) and 23(a)(1), or constituted capital expenditures according to § 117(a) of the Code as determined by the Commissioner; (B) If the expenditures were for capital improvements, is New Commonwealth entitled to deductions on account of depreciation of the materials purchased under the contract by virtue of §§ 204(c) (8) and 23(l)(1) of the Code;
4. Were attorney's fees paid in connection with the Remington Rand contract deductible by New Commonwealth as ordinary and necessary expenses; and
5. Was New Commonwealth in 1945 and 1946 entitled to a deduction for a reasonable allowance for exhaustion, wear and tear or obsolescence in connection with its title plants under §§ 204(c)(8, 10) and 23(l)(1) of the Code.
From the stipulations of facts and the evidence presented to it, the court makes the following
I and II. Facts Concerning the
1. The plaintiffs are as follows: (a) Commonwealth Title Company of Philadelphia ('New Commonwealth') a corporation organized under the laws of Pennsylvania on March 31, 1944 for the purpose of insuring owners of real estate, mortgagees and others interested in insuring real estate from loss by reason of defective titles, liens and encumbrances; and (b) Central-Penn National Bank of Philadelphia ('Central-Penn'), a national banking association created and existing under the laws of the United States. Both plaintiffs have their principal places of business in Philadelphia, Pa.
2. In April of 1929 Commonwealth Title Company of Philadelphia ('Old Commonwealth') was incorporated and succeeded to the rights and liabilities of both The Title Company of Philadelphia and Commonwealth Title Insurance Company, and in so doing it acquired the title plants of those companies.
At that time Provident Trust Company, with the exception of qualifying shares, owned all the shares of Commonwealth Title Insurance Company, the successor to Commonwealth Title Insurance & Trust Company.
3. Upon the formation of Old Commonwealth, the name of Commonwealth Title Insurance Company was changed to Provident Title Company. The latter was allowed to remain inactive until it was dissolved in 1945, so as to permit most of the possible liabilities on outstanding policies to become 'washed out' by virtue of the running of the statute of limitations. Prior to its dissolution, a reinsurance premium of $ 50,000 was paid by Provident Title Company to Old Commonwealth in consideration of the latter's reinsuring the almost 'washed out' risks.
4. In 1929 Central-Penn absorbed American Title & Trust Company which had at that time about 25 million dollars of outstanding title policies. Central-Penn, through its subsidiary, then orgainzed American Title which assumed these liabilities. Central-Penn then paid American Title a reinsurance premium of $ 25,000 which was ...