The entry designated "marketable securities" denotes the market value of certain stocks and bonds maintained as an investment portfolio. In December of 1938 this portfolio consisted of securities having a value of $348,175. At that time a considerable portion of these stocks was sold, with a cash realization of approximately $326,000. Of that sum, $78,000 was immediately reinvested, and at the close of the year the portfolio amounted to $156,450. The balance of approximately $248,000, from the amount realized upon the transaction was held uninvested at the close of the year. During the year

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1939 securities were bought and sold, and at the close of the year the market value of the portfolio was $196,934. The difference between this figure and the value as of the beginning of the year represents reinvestment of a part of the proceeds of the sale of securities in December 1938.

At the close of 1940 the market value of the portfolio was $174,269.25. By December 31, 1941, all of the securities had been disposed of, except United States savings bonds totaling $15,600. On December 31, 1942, the portfolio consisted of savings bonds in the amount of $16,000.

In 1939 the stockholders were indebted to the corporation in the amount of $347,768.54. This amount originated for the most part in loans to the late C. E. Whitney and to his estate. At the time of his death in 1933, C. E. Whitney was indebted to the corporation in the amount of $143,050, which, with interest in the amount of $28,846.14, amounted to $171,869.14 at the close of 1938. From 1933 to 1938, inclusive, loans totaling approximately $160,000 had been made to the estate of Whitney to enable it to pay certain claims and taxes without resorting to the sale of petitioner's stock on the open market. Repayments in the amount of $55,000 had been made by the estate, so that at the close of 1938 the total indebtedness of the estate, including interest, was $282,920.87. No loans to the estate were made after 1938.

The balance of the total stockholders' indebtedness originated in loans to three stockholders in the total amount of $54,947.67. This amount had been loaned to these stockholders in years prior to 1939 for personal reasons. No loans to stockholders were made in 1939, with one exception. On January 9, 1939, a loan in the amount of $11,000 was made to W. H. Whitney, secured by his stock and bearing interest at 3 percent. Monthly repayments of $100, plus interest, have been made regularly by him on this loan. The interest and collateral provisions were incorporated in compliance with a Connecticut statute regulating loans to directors of corporations. The only loan made subsequent to 1939 was an interest-bearing loan of $3,200 in 1941 to W. H. Whitney, which was repaid within the year in accordance with its terms.

In 1939 a novation was effected among the corporation, the estate, and the heirs, whereby the stock held by the estate was distributed to the heirs in consideration of their assumption of the debt owed the corporation by the estate. This new debt was evidenced by demand notes bearing no interest except as to the amount assumed by W. H. Whitney, which was to bear interest at a rate not exceeding 4 percent, to be determined by agreement upon payment of the principal amount. It was provided that reasonable collateral could be requested, limited, however, to shares of stock of the petitioner.

At all times during 1939 and since that time, the stockholder-debtors were solvent. Of the stockholders, Laura Whitney Hawkinson's assets consisted only of her home, her stock in the petitioner, and a small investment in an insurance company paying $100 in annual dividends. Mrs. C. E. Whitney's assets consisted only of her home and a lot, her stock in the petitioner, and other stocks worth between $10,000 and $12,000. Winthrop H. Whitney's assets consisted only of his home, with a mortgage on it, and his stock in the petitioner. Lawrence A. Whitney's assets consisted solely of his stock in the petitioner. As of December 31, 1939, the above described debts of the stockholders to the petitioner stood as follows:

All of said debts incurred in 1939 were incurred as the result of the assumption of the debts of the estate of C. E. Whitney, except that the debts shown above as incurred in 1939 by Winthrop H. Whitney include the loan made to him by petitioner on January 9, 1939, of $11,000.

The Hanson-Whitney Machine Co. was organized in 1923 by B. M. W. Hanson and C. E. Whitney, and thereafter it engaged in the manufacture of machine tools and related products. At the time of organization Hanson contributed for his corporate interest various patents covering certain of his own inventions, and Whitney contributed the money needed as operating capital. As additional capital was required over the course of years, Whitney induced the petitioner to make loans to the Hanson-Whitney Co. and during the same period. Hanson made loans to that company. Upon the death of Whitney in 1933, the assets of Hanson-Whitney were insufficient to pay its debts to petitioner and the estate of Hanson. A settlement was finally reached by all parties in interest, the effect of which was to cancel the Hanson-Whitney indebtedness to petitioner and to give to petitioner a 75 percent stock interest in that company. The Hanson estate was given a 25 percent stock interest in settlement of the debts due it. The Whitney estate lost all its stock and other interest in the HansonWhitney Co. as a result of the settlement. The Hanson-Whitney stock was carried on the books of the petitioner at a figure of $381,867.51, but was worth more than this. In 1939 there was no ready market for this stock.

Hanson-Whitney operated in a plant leased from the petitioner. From 1931 to 1940, inclusive, the annual rental paid the petitioner was $17,280. In 1939 it was apparent that Hanson-Whitney would be forced to expand to meet the acceleration of its business due to war contracts. In October of that year the petitioner undertook to expand the plant to meet the needs of its tenant, and additions constructed during the next two years cost the petitioner $247,849.15. Since 1939 rents and dividends have been paid to the petitioner by HansonWhitney as follows:

Since the outbreak of war in Europe in September 1939, petitioner has converted part of its manufacturing facilities and has acquired additional facilities for production of products not theretofore produced by it, as well as of an additional volume of its regular line.

On August 23, 1940, and on December 6, 1940, respectively, petitioner entered into contracts for the production by it of machinery parts and munitions, products not theretofore produced by it; and in November 1942, petitioner began negotiations for the production of a large quantity of airplane engine starters, which are likewise a product not theretofore produced by petitioner and are now being produced by it. The amounts expended by the petitioner for additional facilities and the conversion of its war plant were as follows:

Except for ordinary repairs and replacements no similar outlays were made by the petitioner prior to 1939.

During these four years 1939-1942, inclusive, the expenditures for petitioner's own expansion and for the additions to the plant leased to Hanson-Whitney totaled $831,142.66.

The net profit and dividend records of the petitioner during the years 1939 to 1942, inclusive, were as follows:

*Although a comparison of these figures discloses a discrepancy, they are taken from the stipulation.

At the end of 1939 petitioner owed nothing to banks. In 1941 $250,000 was borrowed from banks, which amount the petitioner still owes.

Petitioner's net sales and inventories for the years 1938 to 1942, were as follows:

Petitioner's net profits and losses from all sources as disclosed by its books for each year from 1931 through 1942, and also the dividend record for that period, are as follows:

The petitioner's net operating profits and losses for the same period, as disclosed by its books, are set forth in the following table:

The accumulation of the amount of $70,447.23 in earnings and profits resulted in surtax savings to the shareholders in the total amount of $12,042.28, as follows: