*1080 1. After consolidation under Illinois law of T corporation with other corporations to form R corporation and a subsequent determination and notice of deficiency to T, the Board has jurisdiction of a proceeding instituted in the name of either T or R or both.
2. Affiliation under Revenue Act of 1918, section 240, denied in respect of T, since during the taxable period at least 30.83 per cent of its shares were owned by persons who had no relation to the other corporations with which affiliation is claimed, notwithstanding unification of business and other facts incident to the proposed consolidation. Handy & Harman v. Burnet,284 U.S. 136">284 U.S. 136.
3. The deficiency of a taxpayer corporation which with others has incorrectly filed a consolidated return and which is held not to be affiliated with such other corporations should be computed by taking into account the part of the consolidated tax paid by or in behalf of the taxpayer corporation.
*363 The respondent assessed*1081 against the Trahern Pump Company a deficiency in income and profits tax of $22,369.04 for the fiscal year ended August 31, 1919, and notified it of the rejection of its claim for abatement to the extent of $21,022.34.
Near the close of the taxable year the Trahern Pump Company and three other corporations were merged or consolidated into a *364 corporation known as the Geo. D. Roper Corporation. The Trahern Pump Company and the three other corporations filed a consolidated return for the fiscal year ended August 31, 1919, but the respondent computed the tax liability of the Trahern Pump Company on the basis of a separate return. The issues are: (1) Whether the Board has jurisdiction of this proceeding, based on a deficiency notice mailed to the Trahern Pump Company after it and other corporations had been merged or consolidated into the Geo. D. Roper Corporation. (2) Whether the Trahern Pump Company and the three other corporations were affiliated within the provisions of the Revenue Act of 1918 and entitled to a computation of their tax liability on the basis of a consolidated return. (3) Whether the respondent should have credited against the deficiency assessed against*1082 the Trahern Pump Company any part of the tax shown on the consolidated return, which was assessed against one of the other three corporations and which was paid by the Geo. D. Roper Corporation.
The petition also alleged that the respondent erred in increasing the taxable income of the Trahern Pump Company (1) by the amount of $7,907.93, which was charged off on the books on account of obsolete patterns but not claimed as a deduction in the return; and (2) by the amount of $2,782.37, the tax on which was assessed on the consolidated return and was paid by the Geo. D. Roper Corporation. The petitioners have abandoned the former item, and the respondent has conceded the letter.
FINDINGS OF FACT.
Prior to August 18, 1919, the Eclipse Gas Stove Company, the American Foundry Company, the Rockford Vitreous Enamel Manufacturing Company, and the Trahern Pump Company, hereinafter sometimes referred to as the four companies, were corporations organized and existing under the laws of Illinois, with authorized and outstanding capital stock of 250, 300, 250, and 1,200 shares, respectively, of the par value of $100 each. Each of the four companies maintained an office at 707 South Main*1083 Street, Rockford, Illinois. The Eclipse Company was engaged in the manufacture and sale of gas ranges. The business of the American Company consisted of the manufacture of steel castings, and that of the Rockford Company the manufacture of steel and gas parts for the Eclipse Company. The Trahern Company was engaged in the manufacture and sale of pumps, and it also performed certain manufacturing operations for the Eclipse Company which could be done more efficiently with its machinery and equipment.
In about the year 1917 the shareholders active in the management of the four companies discussed the matter of merging or consolidating *365 them, in order to simplify administration and reduce operating expenses, and, prior to August 31, 1918, had definitely decided to effectuate the merger or consolidation as of August 31, 1918, - the close of the fiscal year of each company. The plan contemplated an exchange of shares in the four companies for shares in the consolidated company on the basis of the book value of the assets as of August 31, 1918, with payments of nominal amounts of cash for fractional shares, and it was consented to by all the shareholders prior to August 31, 1918, and*1084 March, 1919, when they deposited their shares in escrow, as hereinafter stated. No dividends were declared after September 1, 1918.
On August 31, 1918, the shareholders of these companies and the amount of their holdings were as follows:
| Eclipse Co. | American Co. | Rockford Co. | Trahern Co. | |||||
| Shareholder | Shares | Per cent | Shares | Per cent | Shares | Per cent | Shares | Per cent |
| Geo. D. Roper | 112 | 44.8 | 146 | 48.7 | 60 | 24.0 | 646 | 53.83 |
| Mabon P. Roper | 120 | 48.0 | 130 | 43.3 | 10 | 4.0 | 4 | .33 |
| Kate B. Roper | 8 | 3.2 | ||||||
| Mrs. W. G. Gaffney | 10 | 4.0 | 12 | 4.0 | 60 | 24.0 | 79 | 6.58 |
| H. J. Jibert | 101 | 8.41 | ||||||
| Total | 250 | 288 | 130 | 830 |
In addition, 12 shares, or 4 per cent of the American Company; 120 shares, or 48 per cent of the Rockford Company; and 370 shares, or 30.83 per cent of the Trahern Company, were owned by persons whose identity is not shown by the record.
On February 15, 1919, the shareholders and the amount of their holdings were as follows, and no changes were made in their holdings from that date until the consolidation was effected.
| Eclipse Co. | American Co. | Rockford Co. | Trahern Co. | |||||
| Shareholder | Shares | Per cent | Shares | Per cent | Shares | Per cent | Shares | Per cent |
| Geo. D. Roper | 112 | 44.8 | 146 | 48.7 | 95 | 41.3 | 626 | 52.17 |
| Mabon P. Roper | 120 | 48.0 | 142 | 47.3 | 70 | 30.4 | 71 | 5.93 |
| Kate B. Roper | 8 | 3.2 | ||||||
| Mrs. W. H. Gaffney | 10 | 4.0 | 12 | 4.0 | 60 | 26.1 | 79 | 6.58 |
| H. J. Jilbert | 101 | 8.41 | ||||||
| T. J. Reynolds | 5 | 2.2 | ||||||
| Edith W. Robertson | 12 | |||||||
| A. D. Early | 67 | |||||||
| Laura S. Frost | 67 | |||||||
| Bridget Hayes | 36 | |||||||
| W. T. Robertson | 50 | |||||||
| Guy D. Randle | 10 | 26.92 | ||||||
| Hanson F. Randle | 11 | |||||||
| Ellen H. Randle | 16 | |||||||
| Stanley H. Hobson | 20 | |||||||
| Peachy R. Forrester | 10 | |||||||
| John P. Curtin | 24 | |||||||
| Total | 250 | 300 | 230 | 1,200 |
At the time that the shareholders had consented to the consolidation, the legislature of Illinois had under consideration a codification and revision of the law relating to corporations, and, upon advice of counsel, actual merger or consolidation was deferred until the new laws should become effective. It was thereupon decided that the shares of the four companies be deposited in escrow until the new corporation could be organized. An arrangement was made with the Peoples Bank & Trust Company of Rockford, Illinois, to receive deposits of the shares, issue receipts therefor, and eventually to exchange shares in the consolidated corporation for the receipts; and shareholders were notified to deposit their shares with that company. In March and April, 1919, after inventories had been taken and audits had been made, all of the shares, except 20 of the 95 shares of the Rockford Company owned by George D. Roper, were deposited with the Trust Company by the shareholders, who received receipts entitling them to receive shares in the new company when organized, upon surrender of the receipts*1086 and payment of a nominal amount of cash.
The new corporation law of Illinois was passed and became effective on July 1, 1919, and on that day the boards of directors of the four companies passed resolutions to consolidate, which were approved by the shareholders of each corporation in resolutions adopted on July 22, 1919. The resolutions contained the terms of consolidation and are as follows:
RESOLVED: That this Corporation [Trahern Pump Co.] consolidate with Eclipse Gas Stove Co., Trahern Pump Company, American Foundry Company, and Rockford Vitreous Enamel Mfg. Co., upon the following Terms and Conditions, to-wit:
(1) The consolidated corporation shall take the name of Geo. D. Roper Corporation.
(2) Said consolidated corporation shall have a capital stock of Sixty-three Thousand, Eight Hundred ($63,800.00) Dollars. All of said capital stock shall be common stock consisting of 638 shares of the par value of One Hundred ($100.00) Dollars each.
(3) Said consolidated corporation shall exchange its capital stock for the present capital stock of said four consolidating corporations on the basis of one share of the capital stock of said consolidated corporation for each*1087 Fifteen Hundred and Sixty-nine ($1,569.00) Dollars of par or face value of the capital stock and surplus and undivided profits, as of September 1st, 1918, of said consolidating corporations, respectively.
(4) The capital stock of said consolidated corporation when so exchanged for the capital stock of said four consolidating corporations shall be distributed to the present stockholders of each of the latter in the proportion that the number of shares held by each stockholder bears to the total number of shares, now issued and outstanding, of the consolidating corporation in which the stock is held.
*367 (5) The capital stock of said four consolidating corporations, now issued and outstanding, shall be deposited, by the holders thereof, with the Peoples Bank and Trust Company, of Rockford, Illinois, as Trustee, to be exchanged by said Trustee for the capital stock of the consolidated corporation, on the basis named, and said stock when so exchanged, shall be delivered by said Trustee to said stockholders in the number of shares to which each is entitled on said basis.
On August 14, 1919, the four companies filed with the Secretary of State of Illinois a statement of*1088 the action taken by the shareholders and other information respecting the consolidation, and on August 18, 1919, the Secretary of State issued a certificate that the four companies had consolidated into and formed the Geo. D. Roper Corporation. The shares of the Geo. D. Roper Corporation were issued in the names of the shareholders of the four companies on the basis of the book value of their assets as of August 31, 1918, and delivered to the Trust Company, which, in turn, delivered them to the shareholders upon surrender of their temporary receipts.
From August 31, 1918, to August 18, 1919, the four companies were operated as one, and after the latter date the Geo. D. Roper Corporation took over and operated the same business which had theretofore been operated by each of the four companies, without any change other than to combine the several departments to promote efficiency.
The four companies filed a consolidated return for the fiscal year ended August 31, 1919, showing taxes due in the amount of $10,638.93. The respondent determined that the Eclipse and American companies were affiliated, but that the Rockford and Trahern companies were not. He assessed a tax of $22,369.04*1089 against the Trahern Company in November, 1924, and on July 6, 1928, notified that company of the allowance of its claim for abatement in the amount of $1,346.70, and of the rejection of such claim in the amount of $21,022.34.
OPINION.
STERNHAGEN: A motion of the respondent to dismiss for want of jurisdiction because the Trahern Pump Company, to which the deficiency notice was addressed, had been previously dissolved and the Roper Corporation, which, as its successor, had instituted this proceeding, was not the corporation as to which a deficiency had been determined, was denied prior to the hearing. It was renewed at the time of trial. Since the Trahern Corporation was not simply dissolved, but was, with others, consolidated under the Illinois consolidation statute to form the Roper corporation, the Board has jurisdiction of a proceeding instituted in the name of either, and a fortiori one instituted in the name of both, ; .
*368 The petitioners contend that from the beginning of the last fiscal period, i.e., September 1, 1918, until the date of the consolidation into*1090 the Roper Corporation, i.e., August 18, 1919, the Trahern Company was affiliated, within section 240 of the Revenue Act of 1918, with the three other corporations, by virtue of which a consolidated return was rightfully filed. The Commissioner held against the inclusion of the Trahern Company in the affiliated group, and computed the deficiency with regard to its separate income.
The evidence is that from August 31, 1918, to February 15, 1919, 370 shares (30.83 per cent) were owned by unidentified persons, and 101 shares (8.41 per cent) were owned by Jilbert, who was not a shareholder in any of the other three corporations. Thus, so far as this record shows, over 39 per cent of the total outstanding shares was owned by persons who had no relation to the other corporations. In the succeeding period until the date of the statutory consolidation, i.e., August 18, 1919, as shown by the list of shareholders on February 15, 1919, and the temporary receipts for shares deposited, the holders of 35.33 per cent of the shares of the petitioner were not shareholders in any of the other three corporations. There is no evidence from which it could be said these shareholders of 39.24 per cent*1091 and 35.33 per cent, respectively, were the same interests as those who owned the remaining 60.76 per cent and 64.67 per cent. In needs no demonstration to hold that substantially all the shares are not owned by the same interests, and , has settled any lurking doubt.
The petitioners argue, however, that the express intention to consolidate, with its mere postponement to await the modification of the state statute, the deposit of shares with the trust company, the unified operation of the business of the four corporations, and the consummation of the consolidation upon the basis of values on September 1, 1918, was within the intendment of the affiliation provision of the revenue act and a substantial compliance with its conditions; and, furthermore, that this contention is consistent with the exposition of the statute in The argument must, we think, be rejected. Notwithstanding the deposit of shares and the unification of management and operation, there continued until August 18, 1919, a want of that "legally enforceable control" which the Supreme Court held to be indispensable*1092 to affiliation. During the period of suspense of the plan of consolidation, the minority shareholders of the Trahern Company were still the owners of their shares in that corporation. They owned no shares in any of the other corporations, and no one else had legally enforceable control of their shares. Prior to the proposed consolidation, they were not, as petitioners argue, beneficial owners, proportionate or otherwise, in any of the shares of the other corporations. The clause of the Handy& *369 Harman case which petitioners invoke is "unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations." This may not be forcibly expanded to include the tentative expectancy of the separate shareholders which is here. . Nor is the test of legally enforceable ownership or control of shares satisfied by control of the business, even though the shareholders of all corporations tolerate a shifting of profits or expenses, *1093 (certiorari denied, ), reversing ; . That the basis of measuring the individual shareholder's right in the consolidated corporation when formed was the face value of capital, surplus and undivided profits as of September 1, 1918, is not determinative of the legally enforceable control during the interim period, nor is the fact that during that period there was no distribution of surplus or profits. They only indicate the existence and fulfillment of the plan of consolidation of which they were incidents; but, as we have seen, the plan and its incidents are not the determinants of the statutory control of shares.
The petitioners claim that the deficiency determined on the basis of a separate return is excessive in so far as it does not take into the computation the amount paid by or for the Trahern Company as its share of the tax assessed upon the consolidated return. The petitioners are obviously entitled to offset the deficiency by such payment of 1919 tax already made, *1094 ; .
Judgment will be entered under Rule 50.