"From 1902 to 1922, inclusive, each of the petitioners was a stockholder of the Holmquist Grain & Lumber Company and, together, at all times, owned a majority of the outstanding capital stock of that company, which was organized in May, 1902, then taking over the assets and liabilities of the Holmquist Grain & Lumber Company, a corporation the charter of which had expired, and the business of the Holmquist Company, a partnership. The corporation then took over tangible assets valued at $349,785.79, against which it assumed liabilities in the amount of $114,144.31. It issued capital stock of $125,000 par value and entered the balance of the tangible assets acquired as paid-in surplus in the amount of $110,641.48.
"In 1908 the corporation issued and distributed to its then stockholders a stock dividend of $125,000.
"June 29, 1917, the corporation purchased 789½ shares of its outstanding stock then in the hands of a group of minority stockholders, at an agreed price of $410 a share, amounting to $323,695, which stock was paid by conveying and turning over to the sellers certain assets of the corporation at an agreed value of $51,075.13, and the payment to said sellers of cash in the amount of $272,619.87. In completing this transaction the corporation turned over and conveyed to the sellers grain elevators and yard properties located at several towns in the State of Nebraska at the agreed price of $51,075.13, which amount was then the cost of said properties acquired prior to March 1, 1913, as shown on the books of said corporation. A part of these properties had been acquired in 1902 at a cost of $35,086.18; the balance thereof had been acquired in 1908 at a cost of $15,988.95. Immediately after the purchase of the 789½ shares of minority stock the corporation caused the same number of shares to be reissued and to be distributed to its then remaining stockholders.
"June 15, 1919, the corporation sold certain other of its capital assets which had been acquired in June, 1912, at the agreed selling price of $6,503.19, which amount was the cost of the properties as shown on the books of the corporation.
"December 31, 1922, the corporation made a partial liquidation distribution of its assets in the form of a cash liquidating dividend in the amount of $394,568.68. Of this amount A. C. Holmquist received $151,514.37, J. W. Holmquist received $242,107.35, and H. M. Holmquist, not a party to these actions, received $946.96.
"The corporation had consistently kept its books and from and after the year 1909 made corporation excise and income tax returns on the basis of fiscal years ending March 31, of each calendar year. Prior to its fiscal year beginning April 1, 1912, the corporation had not shown on its books any account of depreciation, upon its depreciable assets. For its fiscal years ending March 31, 1913, and March 31, 1916, inclusive, it entered in its books depreciation reserves computed at the rate of 10 per cent upon the book cost of its depreciable assets, and it claimed the same amount as deductions in its income-tax returns for its said years. For its fiscal years ending March 31, 1917, to March 31, 1919, inclusive, the corporation entered in its books additions to depreciation reserve computed at the rate of 5 per cent upon the cost of its depreciable assets and claimed the same amounts in its income and profits-tax returns for those years. For the fiscal years ending March 31, 1920 to 1922, inclusive, the Commissioner adjusted the corporation's deduction for depreciation on the basis of 4 per cent upon the cost of its depreciable assets and allowed such amount as deductions from gross income for those years.
"In connection with the sales of capital assets occurring in 1917 and 1919 the corporation's books show, and its income and profits-tax returns reported, no gains realized or loss sustained as a result of such disposition. No modification or change of the corporation's income and profits-tax returns for its fiscal years ending March 31, 1913, to March 31, 1919, have been made or attempted to be made on account of the varying rates of depreciation set up on the books and claimed as deductions from gross income during those years.
"Following the distribution of the partial liquidating dividend made December 31, 1922, the Commissioner made a further investigation of the books of account of the corporation for the purpose, among other things, of determining the portion of the liquidating dividend which was made up of earnings and profits accumulated after February 28, 1913, and for this purpose the Commissioner applied to the depreciable assets a rate of depreciation of 4 per cent upon the cost of such assets from the time the corporation was organized until December 31, 1922. He further included in gains and profits realized in 1917 an amount equal to the difference between the cost of the assets then disposed of less the amount of depreciation at 4 per cent applied on cost and the sale price. Similarly for the year 1919 he included as gains and profits realized in that year an amount equal to the difference between the cost of such assets less the amount of depreciation computed at the rate of 4 per cent upon the same and the selling price. He further made adjustments of surplus resulting from the then computation of depreciation reserves, the gains from the sale of capital assets, and the decrease of surplus resulting from the purchase of the minority stock, both with respect to surplus and undivided profits accrued prior to March 1, 1913, and surplus and undivided profits accrued subsequent to February 28, 1913.
"The corporation has not, and these petitioners do not now, dispute the reasonableness of the depreciation rate of 4 per cent as applied to the depreciable assets of the corporation throughout the period of its existence to and including December 31, 1922. The Commissioner reduced surplus account as of June 29, 1917, in the total amount of $323,695, paid for the minority stock purchase as of that date.
"As a result of his investigation the Commissioner...
