Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.
The case at bar concerns the 1947 income tax of Pennroad Corporation and its affiliates. In 1929 The Pennsylvania Railroad Company caused the taxpayer, Pennroad, to be created so that it might do for Pennsylvania the things which Pennsylvania could not legally do for itself: the protection and extension of Pennsylvania's empire in the fiercely competitive field of railroad transportation. Pennsylvania caused Pennroad to invest its capital in stocks of railroad companies and, later, to embark on disastrous freight-forwarding ventures referred to generically hereinafter as "Freight Forwarding transactions." The details of these investments and transactions are set out in full in the findings and opinions listed in the footnote*fn1 and need not be repeated here.
It is sufficient to state here that a stockholders' derivative suit (Perrine) was commenced against Pennsylvania on behalf of Pennroad in the Court of Chancery of Delaware, and two other similar suits (Overfield and Weigle, later consolidated for trial) were filed against Pennsylvania in the United States District Court for the Eastern District of Pennsylvania. A judgment of $22,104,515.92, based on three of Pennroad's eight railroad investments and the Freight Forwarding transactions, was obtained by Pennroad against Pennsylvania in the Weigle and Overfield suits. Recovery was had on proof that Pennroad, dominated by Pennsylvania, was compelled by it to invest in the stocks of railroad companies at exorbitant prices, and to conduct Freight Forwarding transactions to the great benefit of Pennsylvania and to the great loss of Pennroad. Recovery was based on the items and in the amounts set out in the footnote.*fn2
The judgment was appealed to this court and was reversed, the majority ruling that a Pennsylvania statute of limitations barred Pennroad's recovery. The present writer dissented. Thereafter negotiations were commenced and all three suits were finally settled by Pennsylvania paying to Pennroad the sum of $15,000,000 on February 9, 1947. The net amount remaining to Pennroad after the payment of counsel fees and other expenses was $12,202,804.31, and this was credited on Pennroad's books to capital surplus.
In its 1947 tax return, Pennroad did not report any part of the settlement as income. Its unrecovered bases for the three railroad investments and the Freight Forwarding transactions, for which the District Court had allowed recovery, at the time of settlement were no less than the amounts listed below:
Boston & Maine Railroad Co $23,637,708.38
Pittsburgh & West Virginia Railway Co. 37,898,100.00
Seaboard Air Line Railway Co. 3,312,179.40
Freight Forwarding transactions 1,532,460.30
The Commissioner assessed a deficiency. As stated in his brief, he "first deducted from the $15,000,000 settlement proceeds $2,939,190.27 of various expenses and fees which had been incurred as a result of the litigation, and then allocated the balance to the various items for which the United States District Court had awarded recovery, and in the same proportions as it had, as follows:
Pittsburgh & West Virginia Railway Company ...