*1096 1. The petitioner and the Gales Creek Logging Company were incorporated prior to the year 1924. During that year the Gales Creek Logging Company's outstanding voting stock was held as follows: 72.701 per cent by petitioner, 21.482 per cent by 11 of petitioner's 28 stockholders, and 5.817 per cent by outsiders. Held, the two companies were not affiliated.
2. Respondent denied a request that the accounts of the two companies be consolidated for the year 1924. Held, no error.
3. The two companies became affiliated on November 15, 1928. Held, under the Revenue Act of 1928 the periods January 1 to November 15, and November 16 to December 31, 1928, each constituted a taxable year for the purpose of computing net loss.
4. One of the affiliates sustained net losses for several successive years prior to and including the year of affiliation. Held, such losses can not be deducted from the combined income of the year when affiliation took place.
*258 These proceedings, which were consolidated for hearing and decision, are for the*1097 redetermination of deficiencies in income tax asserted by the respondent for the years 1924 and 1929 in the amounts of $20,110.41 and $2,045.24, respectively. The errors alleged are: (1) Failing and refusing to allow petitioner and the Gales Creek Logging Company to file consolidated returns as to affiliates for the years 1924, 1926 and 1927, and for the period January 1, 1928 to *259 and inclusive of November 15, 1928, and (2) holding that the periods January 1 to November 15, 1928, and November 16 to December 31, 1928, each constituted a taxable year for the said Gales Creek Logging Company.
FINDINGS OF FACT.
From a stipulation by the parties and the pleadings we find the following facts.
Prior to the year 1923 members of the Crossett, Watzek and Gates families had organized three corporations, which acquired extensive timber interests in Oregon and Washington and conducted logging operations. In 1922 the same interests organized the Gales Creek Logging Company, hereinafter called the Logging Company, to log certain timber in Oregon. In 1923, in order to simplify the Oregon operations, the petitioner was organized as a merger of the three earlier companies, but*1098 the Logging Company was not included in the merger. It was, however, managed and always treated as a unit of the petitioner, and from the first the exchange of personnel and business between the two companies was that of a single organization. Supplies for both companies were purchased by petitioner at wholesale and only the pro rata wholesale price was charged against the Logging Company for what it used. Managers, engineers and similar officials of the petitioner rendered like services to the Logging Company. The latter paid one-fifth the salary of the joint general manager, but paid no part of the salaries of the others. Both companies held their stockholders' and directors' meetings at the same time and place. Equipment was frequently loaned by petitioner to the Logging Company, often without any charge therefor; when charges were made, they were materially lower than the current rental rate for such articles. With one exception, the directorates of both companies were composed entirely of members of the Crossett, Watzek and Gates families. The same was true with respect to the officers of both companies. The Logging Company did not maintain an office and it owned very*1099 little office equipment. All of its office work was carried on in petitioner's offices by petitioner's employees. The Logging Company was considered a branch of petitioner rather than an independent corporation. In January, 1924, a uniform cost-accounting and bookkeeping system was installed at the head office in Chicago. It included all conditions of all the Crossett-Watzek-Gates corporations. The same system was installed in the local Oregon offices of petitioner and the Logging Company during the same month.
At the close of 1924 the voting stock of petitioner and of the Logging Company was held as follows:
| Stockholders of petitioner | Stock held |
| Per cent | |
| Crossett family (6 members) | 57.370 |
| Watzek family (10 members) | 27.434 |
| Gates family (8 members) | 11.289 |
| Employees (3 members) | 3.010 |
| Crossett family (2 members) | 1.853 |
| Watzek family (5 members) | 3.999 |
| Gates family (1 member) | 1.817 |
| Employees (8 members) | 17.086 |
| Petitioner | 72.701 |
| Miscellaneous | 2.544 |
*260 In 1925 nine of petitioner's stockholders held 17.504 per cent of the Logging Company's stock, 79.607 per cent was held by petitioner itself, and the balance by nonholders of petitioner's*1100 stock.
In 1926 only eight of petitioner's stockholders held Logging Company stock, amounting to 13.849 per cent, and petitioner's own holdings were 83.242 per cent. That condition was unchanged throughout the year 1927.
On November 15, 1928, petitioner had acquired a total of 2,695 shares, or 97.966 per cent of Logging Company's stock. Six of petitioner's stockholders held one qualifying share each. The balance of the Logging Company stock, 50 shares, was acquired by petitioner in 1929.
None of the employees who subscribed for stock in either company ever attended stockholders' meetings and their stock was always voted by proxies given to members of the Crossett, Watzek, or Gates families.
The net income or loss for the period here involved, for each company, is as follows:
| Petitioner | Logging Company | |||
| Year | Losses | Gains | Losses | Gains |
| 1924 | $160,883.24 | $47,409.46 | ||
| 1925 | $56,903.86 | 35,005.60 | ||
| 1926 | 119,115.72 | 37,399.38 | ||
| 1927 | 57,582.62 | 42,961.29 | ||
| 1928 | 96,066.20 | 42,035.73 | ||
| 1929 | 227,021.13 | 33,444.02 | ||
Petitioner duly requested respondent to consolidate the accounts of the two companies for the year 1924. For the years*1101 1924 to 1929, inclusive, petitioner and the Logging Company filed consolidated income tax returns. Respondent denied the request for consolidation of accounts in his deficiency notice dated September 27, 1929, respecting petitioner's 1927 tax liability.
Petitioner's stockholdings in the Logging Company were increased from 83.242 per cent to 97.966 per cent on November 15, 1928. Respondent determined the companies became affiliated on that date and treated the period January 1 to November 15, 1928 as one *261 taxable year, and the period November 16 to December 31, 1928, as a second taxable year.
OPINION.
MARQUETTE: The principal question in these proceedings is whether the petitioner and the Gales Creek Logging Company were entitled to file consolidated returns for 1924 and subsequent years by reason of affiliation. Respondent determined with respect to the year 1924 that there was no showing of a disproportion in the intercompany accounts such as would warrant the consolidation of accounts under section 240(d) of the Revenue Act of 1924. That section reads as follows:
In any case of two or more related trades or businesses * * * owned or controlled directly or*1102 indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.
The evidence here presented shows a close business relationship between the two companies, joint purchasing of supplies, frequent exchange of equipment and of employees' services, and that both companies used the same accounting system. But that is not sufficient, we think, to prove that a proper apportionment of gains, profits, income, deductions, or capital between the two companies could not be made without consolidating the accounts. Respondent has in fact made such apportionment without consolidation, and petitioner has failed to sustain the burden of showing that respondent's determination was erroneous.
The Revenue Act of 1924 also provides that:
SEC. 240. (a) Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner, with the approval*1103 of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.
* * *
(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. * * *.
The Revenue Acts of 1926 and 1928 contain the same provisions.
At the close of the year 1924, eleven of the twenty-eight persons holding all of petitioner's capital stock owned 21.472 per cent of *262 the Logging Company's voting stock. Another 72.701 per cent was owned by petitioner itself, while the remaining 5.827 per cent was owned by seven persons holding none of petitioner's stock. Manifestly, there was no affiliation of the first class, for petitioner did not own 95 per cent of Logging*1104 Company stock until November, 1928. Then, did the same interests own the required amount of stock in both companies for affiliation of the second class? We think not.
The statute requires such common holdings to amount to at least 95 per cent. That is, not less than 95 per cent of stock in both companies must be held by the same interests before the benefit of the statute may be invoked.
In the present case, unless we regard petitioner as of the "same interests" as its stockholders, there is not even an approximation of meeting the statutory requirement.
The petitioner asks us to treat the ownership of its stock by groups, rather than by individuals, and to consider its own holdings of Logging Company stock as being proportionately owned by the persons composing the various groups. On that basis, for 1924 we have stockholdings as follows:
| Groups | Petitioner's stock | Logging company stock |
| Per cent | Per cent | |
| Group A. - Crossett family (6 members) | 57.370 | 43.562 |
| Group B. - Watzek family (10 members) | 27.434 | 23.944 |
| Group C. - Gates family (8 members) | 11.289 | 10.024 |
| Group D. - Employees (8 members) | 3.010 | 19.274 |
| Total | 99.103 | 96.804 |
*1105 As a matter of record, however, the Logging Company stock was held, 1.853 per cent by two members of Group A, 3.999 per cent by five members of Group B, 1.817 per cent by one member of Group C, and 17.086 by the eight members of Group D, five of whom held none of petitioner's stock. Petitioner, itself, a separate entity, owned 72.701 per cent of the Logging Company stock. Substantially similar results obtained until November 15, 1928, although the personnel of the above groups, and their respective stockholdings, varied somewhat from year to year.
In our opinion the petitioner's theory does not correctly interpret the statutory requirements. It is elementary that property owned by a corporation is not the property, pro rata, of the corporate shareholders unless and until distribution is made. The Supreme Court, in , held that the "same interests" within the meaning of the revenue acts, are "the *263 beneficial owners in like proportions" of stock of the corporations involved. The court further said:
It would require very plain language to show that Congress intended to permit consolidated returns to depend*1106 on a basis so indefinite and uncertain as control of stock without title, beneficial ownership or legal means to enforce it. Control resting solely on acquiescence, the exigencies of business, or other considerations having no binding force, is not sufficient to satisfy the statute.
Although the court was there considering a statute which provided for affiliation when "substantially all" the stock of the corporations was owned or controlled by the same interests, we think the words above quoted are definitely applicable here. The stock of the Logging Company owned by petitioner was not owned by petitioner's individual stockholders. Lacking, as they did, all the necessary elements laid down by the Supreme Court, title, beneficial ownership, or the legal power to enforce it, we certainly can not say that petitioner's stockholders were also the owners, pro rata of the Logging Company stock owned by petitioner. We therefore sustain the respondent's determination that there was no affiliation of petitioner and the Logging Company by reason of common ownership of the stock of the two companies.
On November 15, 1928, petitioner had acquired more than 95 per cent of the Logging Company*1107 stock. For that calendar year the two companies filed consolidated returns, but respondent required the Logging Company to file one return as a separate corporation for the period January 1 to November 15, 1928, and also a return as an affiliate with the petitioner from November 16 to December 31. Respondent contends that each part of the calendar year for which he required return to be filed constitutes a taxable year with respect to carrying forward deductible losses.
The Revenue Act of 1928, section 48, provides in part that:
"Taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made.
That wording is identical with like provisions in the Revenue Acts of 1924 and 1926, section 200(a).
Under that provision each portion of the year of affiliation becomes a taxable year with respect to the allowance of net loss deductions and, where then existing corporations are affiliated during a fiscal or calendar year, separate returns may be required for the period prior to affiliation and a consolidated*1108 return for the subsequent period. See ; ; . In the present case petitioner filed a consolidated *264 return for the entire year of 1928, which was disallowed with respect to the period January 1 to November 15. Respondent allowed a consolidated return for the remainder of the year and there is no complaint on that score. The circumstances bring this proceeding squarely in line with the decisions above cited and we sustain the respondent's determination on that point.
By article 41(c) of Regulations 75, it is provided, respecting the year 1929 and subsequent years, that:
A net loss sustained by a corporation prior to the date upon which its income is included in the consolidated return of an affiliated group * * * shall be allowed as a deduction in computing the consolidated net income of such group in the same manner, to the same extent, and upon the same conditions as if the consolidated income were the income of such corporation. * * *
The petitioner contends that under the above provision of Regulations*1109 75 the net losses of the Logging Company for the years 1927 and 1928 are deductible in computing consolidated net income for the year 1929; that in no other way can the full privileges of that provision be enjoyed.
In our opinion the contention is not valid. It disregards the fact that under section 48 of the controlling statute, supra, each taxable portion of the year 1928 became a taxable year. If there is any conflict between the statute and the regulations interpreting it, the latter must yield. But we think they are not conflicting in his instance. The provision of Regulations 75 upon which petitioner relies is but one paragraph of several, all dealing with the general subject of net losses of affiliates sustained during taxable years. The paragraph immediately following the one in question provides that any period of less than twelve months for which either a separate return or a consolidated return is filed shall be considered as a taxable year. It is clear to us that the specific paragraph relied upon by petitioner can not be treated as isolated and independent, but must be considered in connection with, and as a part of the whole regulation respecting net loss*1110 deductions by affiliated groups. Under section 117 of the Revenue Act of 1928 net loss deductions are limited to losses occurring in the two taxable years immediately preceding that for which the deduction is to be made.
In , corporation A suffered net losses for each of the years 1925, 1926 and 1927. Corporation B had net gains for the year 1927, and in that year the two companies became affiliated. The court held that A's net losses for 1925 and 1926 could not be deducted from the combined income of A and B for the year 1927. See, also, . Those decisions are applicable here, so far as the year 1928 is involved, but not to the year 1929, because of changes in the law. It does not appear that respondent has violated the principles followed *265 in those cases in computing the deficiency for the year 1929. In our opinion that determination should be sustained.
Decision will be entered for the respondent.