*1086 1. Commissioner's ruling upon the question of affiliation of petitioners and other corporations held under the facts not to have deprived petitioners of their right of election.
2. Where one member of an affiliated group of corporations filed a separate return, held, the remaining corporations may not file a consolidated return, but must file separate returns.
3. Where petitioners elected to file separate returns for 1922, held an amended consolidated return for 1922 can not thereafter be filed, nor can a consolidated return for 1923 be filed without permission of the Commissioner.
4. Upon the evidence, held, petitioners are not entitled to a redetermination of tax liability under the provisions of section 240(d) of the Revenue Act of 1921.
*300 These are proceedings, duly consolidated for hearing and opinion, for the redetermination of asserted deficiencies in income taxes as follows:
| Docket No. | Year | Deficiency |
| 36716 | 1923 | $563.15 |
| 36717 | 1923 | 13,689.81 |
The petitioners in both dockets allege*1087 that the respondent erred as follows:
(a) In holding that Flambeau Paper Company, Flambeau Public Service Company, Wisconsin Realty Company and Flambeau Power Company were not affiliated during the entire calendar year 1923, within the meaning of section 240(c) of the Revenue Act of 1921.
(b) In failing to treat the four corporations named above as being related trades or businesses and failing to consolidate the accounts of said corporations under the provisions of Section 240(d) of the Revenue Act of 1921.
In Docket No. 36717, the petitioner, Flambeau Paper Company, alleges in addition to the above errors that the respondent erred in disallowing, under the provisions of section 202(c)(3) of the Revenue Act of 1921, as a deduction a loss of $1,836.03 on the sale of a transmission line by the petitioner to the Flambeau Power Company. This error was waived by the petitioner at the hearing.
At the hearing the petitioner, Flambeau Paper Company, amended its petition in Docket No. 36717 to allege that respondent erred in failing to allow as a deduction from gross income in the year 1923 the amount of the net loss of the petitioner sustained in 1921, and not deducted or deductible*1088 from the income of the year 1922, in the amount of $15,927.76, or in such amount as may be determined. The respondent admitted that, in determining the tax liability of the Flambeau Paper Company for the year 1923, the excess of the 1921 net loss not used in 1922 was not allowed as a deduction, and, therefore, confessed error as to this issue. Thereafter it was stipulated by the petitioner and the respondent that, regardless of the disposition of the question of consolidation by the Board, the Flambeau *301 Paper Company for the year 1923 is entitled to deduct from its taxable income for the year 1923 an item not heretofore allowed by the Commissioner, amounting to $16,509.80, the same representing the excess of the net loss sustained by such company in the year 1921 over the amount of such net loss applied to the taxable year 1922.
FINDINGS OF FACT.
The Flambeau Paper Company (hereinafter referred to as the Paper Company) was incorporated under the laws of Wisconsin in 1898. Its principal place of business is in Park Falls, Wisconsin. It is engaged in the business of making print paper and so-called specialties which were sold mostly to jobbers.
The Wisconsin Realty*1089 Company (hereinafter referred to as the Realty Company) was incorporated in 1899 under the laws of Wisconsin and is engaged in buying and selling real estate and in making investments. Its principal office is at Milwaukee, Wisconsin. It holds a considerable amount of unproductive assets. It acquired and owned various water power sites on the Flambeau River. It owned timber lands in Iron and Pike Counties. It bought and sold and owns some farms and also owns some lots and about 18 houses in the City of Park Falls, most of which houses are rented to employees of the Paper Company. It built and owned a private railroad from Park Falls to Pixley Water Power, which railroad was originally built by it to construct "Pixley Power" and was later leased to the Paper Company to transport wood for grinding to the pulp mill at Pixley Rapids and to transport the ground wood product back to Park Falls. Upon formation of the Power Company, the Pixley Power Plant was electrified and the railroad was of no further use and was abandoned. In July, 1922, the Realty Company conveyed to the Power Company the Pixley dam and power plant, for which it received 1,322 shares of the preferred stock of*1090 the Power Company of the par value of $100 per share. It also conveyed to the same company at that time certain power or dam sites and rights for which it received 5,197 shares of the common stock of the Power Company of no par value.
The Flambeau Public Service Company, previously known as the Park Falls Water, Light & Power Company (hereinafter referred to as the Public Service Company), was incorporated under the laws of the State of Wisconsin in 1902. Its principal office is at Park Falls, Wisconsin. It is engaged in the business of distributing electric power for light, heat and other purposes.
The Flambeau Power Company (hereinafter referred to as the Power Company) is also a Wisconsin corporation and was organized May 8, 1922, to take title to and to develop water power theretofore *302 owned by the Realty Company and the Paper Company. It has its principal office in Milwaukee, Wisconsin, and a branch office at the office of the Paper Company, at Park Falls. Its business activities consist of owning, developing and leasing water power.
The common stock of the four companies was held, during all of the calendar year 1923, as follows:
| Stockholders | Flambeau Paper Co. | Flambeau Public Service Co. | Wisconsin Realty Co. | Flambeau Power Co. |
| Shares | Shares | Shares | Shares | |
| E. P. Sherry | 1,350 | 1,500 | ||
| Abbie Sherry | 450 | |||
| Guy Waldo | 200 | |||
| Flambeau Paper Co | 250 | 2,265 | ||
| Wisconsin Realty Co | 5,197 | |||
| Total | 2,000 | 250 | 1,500 | 7,462 |
*1091 Certain directors' qualifying shares, which are held in trust, are included in the above table under the names of the owners of the beneficial interest. These consist of two shares of stock of the Realty Company and one share of stock of the Paper Company which are of record in the names of directors but are in fact held in trust for E. P. Sherry, who is president and director of each of the above corporations and resides in Milwaukee, Wisconsin.
Abbie Sherry was the widow of Henry Sherry and the mother of E. P. Sherry and died on April 19, 1925, and the stock held by her was distributed to E. P. Sherry on December 15, 1925. During the time that stock was owned by Abbie Sherry, and during all the history of the several corporations, the stock owned by Abbie Sherry was regarded by her as intended to pass to E. P. Sherry, who was her only child and heir, and for many years prior to her death, including the year 1923, she put such stock under his control and disposition and had the certificates for the same in his custody. It was understood between her and E. P. Sherry that he should have the voting power of her stock. In fulfillment of this understanding she gave him proxies*1092 to vote her stock at every meeting of the Paper Company for which he requested them, and did not, at any time, for at least fifteen years, personally attend any meeting of such corporation, or give or attempt to give any proxy to any person other than E. P. Sherry.
Guy Waldo, who owned 10 per cent of the common stock of the Paper Company, is, and was in 1923, the general manager of such corporation and has been in its employ since 1903. As general manager of the corporation, he was not in chief derection of its affairs, because they were all under the direction and control of E. P. Sherry, the president. The stock held by Guy Waldo was *303 sold to him some years prior to 1923 by E. P. Sherry and his father, Henry Sherry, and was and is coupled with an agreement that, if the employment of Waldo by the corporation should be severed by it, the vendors, now represented by E. P. Sherry, are required, at the option of Waldo, to purchase his stock at a basis of value fixed in the contract and, likewise, that should Waldo's employment by the corporation be severed by him and he desire to sell his stock, the vendors have a 30-day option to buy it at a fixed valuation. The money*1093 used for the purchase of this stock was loaned to Waldo by the Realty Company and he is and was in 1923 still indebted to that company on a collateral note for about $12,700 of the purchase price.
Guy Waldo resides at Park Falls, Wisconsin. He is vice president and general manager of the Paper Company; vice president, treasurer and general manager of the Power Company; and vice president and manager of the Public Service Company. He has general supervision of the renting of the houses in Park Falls and also over other real estate interests of the Realty Company in and around Park Falls, for which he receives no compensation from the Realty Company. However, the Paper Company was paid the customary percentage by the Realty Company for collecting its rentals.
None of the corporations in 1923 had any outstanding preferred stock which carried with it voting rights to the holder thereof. The preferred stock outstanding did carry certain voting rights after default by the corporation in payment of dividends, but no such defaults occurred at any time. The Realty Company owned preferred stock of the Paper Company in the amount of $135,500; which it received in exchange for money*1094 advanced to the Paper Company for use in its business. During 1923 the Realty Company owned $133,200 par value of the preferred stock of the Power Company. At the beginning of 1923 the Paper Company owned 427 shares of preferred stock of the Power Company, but sold the same on August 1, 1923, to the Winnebago Realty Company. These were all of the shares of preferred stock of the Power Company outstanding.
The Paper Company received a letter from the respondent dated November 19, 1921, advising it that it (Paper Company) and the Realty Company, Public Service Company and Winnebago Realty Company, during the taxable year 1917, were not affiliated, and that each company should file a separate excess profits tax return for that year, but that during the taxable years 1918, 1919 and 1920, the Paper Company and the Public Service Company were affiliated and should have filed consolidated income and profits tax returns for those years; and that the Realty Company and Winnebago Realty *304 Company were not affiliated with the other companies mentioned nor with each other during 1918, 1919 and 1920.
On February 20, 1923, E. P. Sherry, as president of the Paper Company, addressed*1095 a letter to the respondent requesting an early ruling "as to the necessity or possibility of filing a consolidated income return of our own company with the affiliated companies listed in table one of the questionnaire."
The Paper Company on March 8, 1923, received a reply to its inquiry of February 20, 1923, from the respondent, advising it that during the taxable year 1922 the Paper Company and the Public Service Company were affiliated and may elect to file a consolidated income and profits tax return for that year, and that during the taxable year 1922 the Realty Company and the Power Company were not affiliated with any of the companies named nor with each other, and each company should file a separate income and profits tax return for the year 1922.
E. P. Sherry received a copy of the above letter on March 9, 1923.
The Paper Company filed a tentative income tax return for the year 1922, dated March 10, 1923, and later filed its complete income tax return for the year 1922 dated June 11, 1923. The Public Service Company filed its return for the year 1922 under date of March 10, 1923. The Realty Company filed its income tax return for the year 1922 under date of March 12, 1923. *1096 The Power Company filed its income tax return for the year 1922 under date of March 4, 1923. All these returns were signed in behalf of the respective companies by E. P. Sherry as president.
Under date of March 12, 1924, the Paper Company, the Realty Company and the Public Service Company, by E. P. Sherry, as president, sent two letters to the collector of internal revenue at Milwaukee, Wisconsin. One of these letters is in part as follows:
The Flambeau Public Service Company was formerly named Park Falls Water, Light & Power Company, and its right to file a consolidated return with the Flambeau Paper Company has not been questioned by the Internal Revenue Bureau.
For 1922 a separate return was filed by the Wisconsin Realty Company. This, however, was not because of the exercise of an option by either the Wisconsin Realty Company or the Flambeau Paper Company to file separate returns, but in deference to a tentative ruling by the Internal Revenue Department holding them not affiliated and not entitled to file a consolidated return. This ruling is now being reconsidered by the Department; a hearing has been had thereon and the matter is open and undetermined. Accordingly, *1097 the Flambeau Paper Company and Wisconsin Realty Company, and in connection with them also the Flambeau Public Service Company, do hereby exercise their option to file a consolidated return for the year 1922.
The other letter is in part as follows:
We hand you herewith consolidated income tax return for 1923 of the Flambeau Paper Company, Flambeau Public Service Company and Wisconsin Realty *305 Company, and also a return of 1922 income in consolidated form for these three companies.
The Flambeau Public Service Company was formerly named Park Falls Water, Light & Power Company, and its right to file a consolidated return with the Flambeau Paper Company has not been questioned by the Internal Revenue Bureau.
For 1922 a separate return was filed by the Wisconsin Realty Cmpany. This, however, was not because of the exercise of an option by either the Wisconsin Realty Company or the Flambeau Paper Company to file separate returns, but in deference to a tentative ruling by the Internal Revenue Department holding them not affiliated and not entitled to file a consolidated return. This ruling is now being reconsidered by the Department; a hearing has been had thereon and*1098 the matter is open and undetermined. Accordingly, the Flambeau Paper Company and Wisconsin Realty Company, and in connection with them also the Flambeau Public Service Company, do hereby exercise their option to file a consolidated return for the year 1922, as well as for the year 1923.
The Paper Company, Public Service Company and Realty Company filed an amended consolidated income tax return for the year 1922 and a consolidated income tax return for the year 1923, both signed by E. P. Sherry, as president, and Guy Waldo, as secretary, as of March 11, 1924.
The Power Company filed its income tax return for the calendar year 1923 under date of March 11, 1924, signed by E. P. Sherry, as president, and M. A. Batchelor, as secretary.
In a letter dated July 7, 1925, the respondent advised the Paper Company that the affiliation issue had been conceded by the Bureau and that the Realty Company was affiliated with the Paper Company during the taxable years 1919, 1920, and 1921 within the purview of section 240 of the Revenue Acts of 1918 and 1921.
Each of the four companies during 1923 at its principal office kept its own separate books of account. The books of account of the*1099 Realty Company do not indicate or show that certain or any of its assets were held for the benefit of the Paper Company.
The income tax returns, heretofore referred to in these findings, respondent's Exhibits A, B, C, D, E, F and G, are hereby made a part of these findings by reference, as well as petitioners' Exhibits 7, 8 and 9. The latter are commented upon in the opinion.
OPINION.
MCMAHON: In both petitions herein it is alleged that substantially all of the common stock of the Paper Company, Realty Company and Power Company is now and was during all of 1923 owned or controlled by the same interests and that the Paper Company owns directly all of the stock of the Public Service Company. The respondent admitted such allegations in both answers.
*306 Petitioners on brief state that, because the facts necessary to constitute affiliation under the Revenue Act of 1921 are pleaded and are admitted by the respondent, it is, "therefore, undisputed that Wisconsin Realty Company and Flambeau Power Company, and both petitioners were affiliated during 1923." The respondent in his brief states that the:
* * * statement of facts shows conclusively that the four companies*1100 involved in these proceedings meet the statutory requirements for affiliation within the meaning of Section 240 of the Revenue Act of 1921, since the petition alleges and the answer admits that "substantially all of the common stock of the Flambeau Paper Company, the Wisconsin Realty Company and the Flambeau Power Company is now and was during all of 1923 owned or controlled by the same interests and the Flambeau Paper Company owns directly all of the stock of the Flambeau Public Service Company."
In view of the position taken by the parties and of our disposition of the issues raised, we deem it unnecessary to determine whether or not the four companies were affiliated.
However, the respondent, although admitting the affiliation of the four corporations, contends that the petitioners elected to file separate returns for the year 1922 and, therefore, having made an election to file separate returns for such year, under section 240(a) of the Revenue Act of 1921, 1 returns must be made upon the same basis for the year 1923 unless permission to change the basis is granted by the Commissioner.
*1101 It appears that the question of the affiliation of the two petitioners and the Realty Company during the years 1917, 1918, 1919, 1920 and 1921, was before the Commissioner for consideration prior to 1922, and that the respondent by letter dated November 19, 1921, advised the Paper Company that it and the Public Service Company were affiliated for the years 1918, 1919 and 1920, but that the Realty Company was not so affiliated. While the affiliation issue of prior years was still pending, and before the income tax returns for 1922 were filed, E. P. Sherry, president of the four companies involved, by letter under date of February 20, 1923, in behalf of the Paper Company, requested a ruling from the Bureau of Internal Revenue as to the "necessity or possibility of filing a consolidated income tax return" for the four companies. In reply to this letter, under date of March 8, 1923, the Paper Company was advised by the respondent that, during the year 1922, it and the Public Service Company*307 were affiliated within the purview of section 240 of the Revenue Act of 1921 and could elect to file a consolidated income tax return for that year, but that during such year the Realty*1102 Company and the Power Company were not affiliated with any of the Companies named or with each other, and such companies should file a separate return. Within a few days thereafter all four companies filed separate returns for the year 1922. In March, 1924, the petitioners and the Realty Company filed an amended consolidated return for the year 1922 and also a consolidated return for the year 1923, with the letters under date of March 12, 1924, which are set forth in our findings.
The petitioners contend that the ruling of the respondent with respect to 1922 "effectively and legally deprived the petitioners of all choice, option or election"; that in filing separate returns for 1922 they did not make an election under the law, but filed such returns pursuant to respondent's ruling; and that they were justified in accepting the respondent's specific instructions.
The petitioners rely mainly on the case of Dexter Sulphite Pulp & Paper Co.,23 B.T.A. 227">23 B.T.A. 227, in which the Board held that the filing of a separate return by one company under the peculiar facts in that proceeding was not an exercise of the option provided by section 240(a), 1921 Act. However, that case*1103 is not controlling here and is distinguishable for the reason that it was impossible for taxpayer in that case to determine the fact of affiliation, because of litigation arising from the repudiation of a contract involving the properties of the Dexter Company and ownership of stock of subsidiaries, which litigation was instituted in 1921 and continued through 1922 and 1923. Such is not the situation here. As far as appears from the record, there was nothing which prevented the petitioners from determining the status of the companies and from exercising their option either to make separate returns or a consolidated return, except the respondent's letter of March 8, 1923. In our opinion, the respondent's ruling did not deprive the petitioners of their right of election under section 240(a). Pictorial Review Co.,26 B.T.A. 472">26 B.T.A. 472; Radiant Glass Co.,16 B.T.A. 610">16 B.T.A. 610. In Radiant Glass Co., supra, the petitioner based the deprivation of its right of election in 1922 on the Commissioner's ruling of nonaffiliation for 1921. An appeal was taken to the Court of Appeals of the District of Columbia, and the court, in *1104 Radiant Glass Co. v. Burnet, 54 Fed.(2d) 718, 719, affirmed the decision of the Board and in its opinion stated the following:
When appellant came to make out and file its return for the year 1922, it was entitled, if affiliated with the Times-Record Company, to file either a separate or consolidated return. The ruling of the Commissioner upon the *308 questionnaire in the prior years did not prevent or impair the free exercise of that right. Such a ruling does not have the force of law; nor are the courts bound by it. United States v. Hurst, D.C. 2 F.(2d) 73. The status of affiliated, to file a consolidated return if it so elected, and to appeal to the courts, and not by the Commissioner. Fidelity Nat. Bank v. Commissioner (C.C.A.) 39 F.(2d) 58, 61. Accordingly it was the right of appellant, if affiliated, to file a consolidated return if it so elected, and to appeal to the Board of Tax Appeals and to the courts for a judicial determination of its rights. * * * [Italics supplied.]
Although the Commissioner's ruling in this proceeding applied to the taxable year in question, nevertheless, in*1105 our opinion, such ruling did not deprive the petitioners of their right of election.
There is no evidence that the petitioners, or E. P. Sherry, president of all the companies, were so influenced by the rulings of the Commissioner relative to 1922 or previous years as to deprive them of their right of election. On the contrary it appears that the ruling of the Commissioner was not considered binding upon them, as separate returns for the year 1922 were first filed in behalf of the Paper Company and the Public Service Company instead of a consolidated return as permitted under such ruling. Furthermore, E. P. Sherry testified that he could not recall the circumstances relative to the filing of separate returns for 1922 for the Paper Company and the Public Service Company instead of filing a consolidated return for such companies, and testified further that, "In 1924, when we were considering the matter again" the amended consolidated return for the year 1922 was filed.
Even if we were of the opinion that under the facts herein the petitioners were deprived of their right of election under section 240(a) of the 1921 Act, and that the filing of the amended consolidated return for*1106 1922 by the petitioners and the Realty Company and the consolidated return for 1923 by the same companies in March 1924, constituted an election, nevertheless, it would be necessary for the petitioners to file separate returns for such years, as the Power Company filed a separate return for both 1922 and 1923. Where one corporation which is a member of an affiliated group files a separate return, the remaining corporations may not file a consolidated return of their income, but must also file separate returns. Fontana Union Water Co.,24 B.T.A. 1045">24 B.T.A. 1045; Southern Power Co.,17 B.T.A. 962">17 B.T.A. 962; affd., Duke Power Co., 44 Fed.(2d) 543; Apartment Corp.,17 B.T.A. 876">17 B.T.A. 876.
The amended consolidated return for 1922 was filed by the petitioners and the Realty Company. The Power Company was organized in May, 1922, and filed a separate return for 1922. Again, for the year 1923 the petitioners and the Realty Company filed a consolidated return and the Power Company filed a separate return. A consolidated return must include the income of all members of an *309 affiliated group and one member of the group may not file a separate*1107 return and the others a consolidated return. The fact that the power Company was organized in May, 1922, and therefore could have been affiliated for only a part of a year, is immaterial. Lucas v. St. Louis National Base Ball Club, 42 Fed.(2d) 984; certiorari denied, 282 U.S. 883">282 U.S. 883; A. S. Siracusa Sons, Inc.,23 B.T.A. 53">23 B.T.A. 53.
The petitioners, having elected in 1923 to make separate returns for the year 1922, can not thereafter change the basis by filing an amended return for the same year and can not change the basis for subsequent years by filing a consolidated return, without permission of the Commissioner. Pictorial Review Co., supra;Pine Ridge Coal Co.,23 B.T.A. 489">23 B.T.A. 489, 491, 492, and cases cited therein.
The petitioners contend in the alternative that the accounts of the petitioners, the Realty Company and the Power Company should be consolidated, under section 240(d) 2 of the Revenue Act of 1921.
*1108 Section 240(d) provides that accounts may be consolidated for the purpose therein stated "in any case of two or more related trades or businesses * * * owned or controlled directly or indirectly by the same interests." That the four companies were owned or controlled directly or indirectly by the same interests may be assumed for the purpose of this discussion.
On brief the petitioners stated that upon hearing there was "no showing by petitioners of intercompany relations" between the Public Service Company and the other three companies as the Public Service Company "was operating along an unrelated line of business" and was involved only because of stock ownership and that consolidation of the accounts of such company with the accounts of the other three companies was a matter of indifference to the petitioners.
Petitioners argue that the books of account do not reflect true income because the Realty Company and the Power Company were created and existed for the benefit of and to serve the Paper Company to the detriment of the Realty Company and the Power Company and that the "intercompany relations" and particularly the "intercompany leases" resulted in distortion of income.
*1109 Petitioners apparently interpret "related business" to mean "intercompany transactions" or that businesses become "related" by transactions with each other. The term "related business" was discussed in Nowland Realty Co. v. Commissioner, 47 Fed.(2d) 1018; *310 affirming Nowland Realty Co.,18 B.T.A. 405">18 B.T.A. 405. In that case the Nowland Realty Company was created for the purposes of one Schmidt, who conveyed certain real estate and other property to the corporation for stock and the corporation in turn leased certain of the realty to Schmidt. The court in its opinion states that Schmidt's individual activities were not interrelated with or interdependent upon the activities of the corporation and that:
The statute requires that the businesses be both related and owned by the same interests. Owned by the same interests they were, but it cannot be said that the two businesses were related. "Related" means "standing in relation; connected; allied; akin.
E. P. Sherry, testified that the Realty Company acquired power sites "with the idea that they would be a benefit to the Flambeau Paper Company ultimately"; that the Realty Company's investments*1110 in timber land, in lots and houses in Park Falls, most of which were rented to employees of the Paper Company, in the railroad from Park Falls to Pixley Water Power, used by the Paper Company under rental, in preferred stock of the Paper Company, in preferred stock of the Power Company, and in the collateral note of Waldo, were "the principal investments" of the Realty Company "held for the benefit of" the Paper Company. He testified that the Realty Company is "more or less a holding company" in the sense that it merely holds title to the investments referred to for the benefit of the Paper Company. That such investments were made and held "for the benefit of" the Paper Company is a conclusion of the witness.
The evidence does not support such a conclusion. The books of account of the Realty Company do not bear out this assertion. Each company kept separate books of account. There is no evidence showing that such books were inaccurate or that they did not correctly show the assets, income and expenses of each company. The books of account of the Realty Company did not show that any of its investments were made or held for the benefit of the Paper Company. The Paper Company*1111 was not a gratuitous recipient of property or money from the Realty Company or Power Company, but paid for what it received. It paid rent for the use of the railroad and for power furnished to it pursuant to agreements. It issued preferred stock for money advanced to it, upon which it paid during 1923 to the Realty Company a very substantial amount in dividends. The corporations were organized for business purposes and obviously because of certain advantages to be gained thereby. We can not disregard the separate entitled of these corporations because transactions between the corporations dealing with each other as separate entities were more advantageous to one than the other. As stated in *311 Broadway Strand Theatre Co.,12 B.T.A. 1052">12 B.T.A. 1052, where a corporate form is resorted to for its business benefits, the burdens, if any, must also be assumed. See also Evelyn F. Gregory,27 B.T.A. 223">27 B.T.A. 223, and 112West 59th Street Corp.,23 B.T.A. 767">23 B.T.A. 767.
The Public Service Company is engaged in the business of distributing electric power for light, heat and other purposes; the business activities of the Power Company consist of owning, *1112 developing and leasing water power; the Realty Company is engaged in buying and selling real estate and investments; and the Paper Company is engaged in the business of making paper. The businesses carried on by these four companies in our opinion are not related trades or businesses. Cf. Crossett Western Co.,27 B.T.A. 258">27 B.T.A. 258; Starr Piano Co.,26 B.T.A. 835">26 B.T.A. 835; Herald News Co.,26 B.T.A. 688">26 B.T.A. 688; Western Hide & Fur Co.,26 B.T.A. 354">26 B.T.A. 354; Roessler & Hasslacher Chemical Co.,25 B.T.A. 915">25 B.T.A. 915; Nowland Realty Co.,18 B.T.A. 405">18 B.T.A. 405.
Furthermore, even if the four corporations here involved were engaged in "related trades or businesses" and entitled to the benefit of section 240(d), it is incumbent upon them to prove facts from which the Board can make an accurate distribution or apportionment. Starr Piano Co., supra;Herald News Co., supra;Western Hide & Fur Co., supra,Roessler & Hasslacher Chemical Co., supra;*1113 Broadway Strand Theater Co., supra.
We turn then to a consideration of the evidence in this proceeding.
The consolidated return of the Paper Company, the Public Service Company and the Realty Company (respondent's Ex. F) and the separate return of the Power Company (respondent's Ex. E), both for the year 1923, are before us. The petitioners introduced in evidence the balance sheet and the profit and loss statement of the Realty Company (petitioners' Exs. 7 and 9) and the balance sheet of the Power Company (petitioners' Ex. 8). These statements were prepared by E. P. Sherry from the books of the respective companies. In such statements he allocated certain of the assets, liabilities, income and disbursements of the Realty Company and the Power Company, respectively, as "for the benefit" of the Paper Company. Although the totals on such statements agree with the books of account of the respective companies, such allocation does not appear in the books of account of such respective companies, but represents the opinion and judgment of E. P. Sherry, nor do the books of account of the Realty Company indicate or contain an account showing that the assets as allocated*1114 were held for the benefit of the Paper Company. On the profit and loss statement of the Realty Company it appears that 84 per cent of the "Milwaukee office expense," "General expenses" and "Interest paid" were allocated to the Paper Company. He arrived at this percentage by *312 determining the assets of the Realty Company which in his judgment were "held for the benefit" of the Paper Company, the book value of which assets on January 1, 1923, was 84 per cent of the total assets of the Realty Company. He testified that this ratio prevailed throughout 1923, approximately, so that, at the end of 1923, 81.6 per cent of the assets of the Realty Company "were held for the benefit" of the Paper Company and 18.4 per cent were not so held. These percentages were used in allocating such expenses. On such statement all of the railroad earnings during 1923 of $1,387.50, and a loss of $21,747.75 resulting from the abandonment of such railroad, were allocated to the Paper Company. Out of a total of $17,765, representing dividends on investments received by the Realty Company during 1923, the amount of $17,477 was allocated to the Paper Company. Nearly all of that amount represents*1115 dividends paid by the Paper Company on its preferred stock held by the Realty Company and a very small part thereof represents dividends paid by the Power Company on its preferred stock owned by the Realty Company.
On the balance sheet of the Power Company (petitioners' Ex. 8) Sherry allocated $288,555.37 out of the total assets of such company of $293,243.73 as of January 1, 1923, and $445,193.40 out of total assets of such company of $454,983.68 as of January 1, 1924, as held for the benefit of the Paper Company. The greater part of such amounts so allocated as held for the benefit of the Paper Company represents the cost of hydroelectric developments and the transmission line which were under lease to the Paper Company.
To the balance sheet of the Power Company (petitioners' Ex. 8) there is attached a statement showing that the Power Company on July 1, 1922, leased to the Paper Company for 25 years the so-called "Lower Power" and "Pixley Power" and the transmission line for an annual rental of $22,000, $24,400, and $1,200, respectively, the lessee to pay all real estate taxes and repairs. There is no evidence from which we can determine whether or not such rentals were fair*1116 or were not comparable to rentals paid for similar property by others. The only testimony in this regard is that such leases were very advantageous to the Paper Company. This is also true relative to the rent paid for the railroad.
Petitioners suggest on brief that a proper consolidation of the accounts would be to assign a percentage of the net income and net loss of the Realty Company and the Power Company to the Paper Company, but that they consider that the choice of actual methods may more properly be worked out under Rule 50.
In Roessler & Hasslacher Chemical Co., supra, the Board stated:
* * * Where some allocation is proper under section 240(d) it is incumbent upon a petitioner before this Board to prove a more accurate method *313 of distribution or allocation than those suggested by this petitioner or at least to show sufficient justification for failure to do so. Even if every other question in this case were decided in the petitioner's favor, nevertheless, we could not make any allocation. We need decide nothing more.
In our opinion the petitioners have failed to prove a reasonably accurate method of distribution or allocation, nor*1117 have they proved sufficient facts to enable the Board to make a proper or reasonably accurate distribution or allocation. As, in our opinion, the petitioners, the Realty Company and the Power Company are not entitled to consolidation of accounts under section 240(d), supra, it is unnecessary to decide the questions raised by the respondent that section 240(d) applies only to corporations entitled to the benefits of section 262 of the Revenue Act of 1921, and that permitting the consolidation of accounts under section 240(d) is within the sole discretion of the respondent. Roessler & Hasslacher Chemical Co., supra.
The determination of the Commissioner is approved in all respects except as to disallowance of a deduction in the amount of $16,509.80, representing the excess of net loss sustained by the Flambeau Paper Company in the year 1921 over the amount of such net loss applied to the taxable year 1922, as to which the Commissioner confessed error.
Reviewed by the Board.
As to petitioner Flambeau Public Service Company judgment will be entered for the respondent. As to petitioner Flambeau Paper Company judgment will be entered under Rule 50.
Footnotes
1. SEC. 240. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval 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. ↩
2. SEC. 240. (d) For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided,↩ That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses.