*1002 1. Where petitioner owned 90 per centum of stock in another corporation, the companies were not affiliated during the fiscal year ending January 31, 1929, in view of section 141, Revenue Act of 1928.
2. Losses sustained by petitioner upon liquidation of a corporation in which it owned stock and to which it had made advances, but with which it was not affiliated, should be allowed, reduced by operating losses previously deducted from consolidated income during years when the companies were affiliated.
3. The fact that petitioner had successfully contended in prior years that it was affiliated with another corporation because of ownership of stock "by the same interests" does not estop it from now contending that it is not affiliated under provisions of section 141, Revenue Act of 1928.
*77 The respondent determined deficiencies in income tax for the period February 1 to September 13, 1928, in the amount of $10,216, and for the period September 14, 1928, to January 31, 1929, in the amount of $6,328.49.
Petitioner's chief contention in*1003 assailing the deficiency determinations is that there should be deducted from its income in the first period the loss sustained upon liquidation of the Taylor Furniture Co., consisting of investment in the stock of that company and unrepaid advances made to it. The question of affiliation is involved. *78 Petitioner contends that it was not affiliated with the Taylor Co. during its taxable year ending January 31, 1929, but that, even if it were affiliated during a period of that year, still those losses should be allowed as deductions from its income.
By amended answer respondent avers that because of representations made by petitioner and upon which the respondent acted, petitioner is estopped to deny that it was affiliated with the Taylor Furniture Co. during the period February 1 to September 13, 1928, and that all of the stock of that company was owned by the same interests.
FINDINGS OF FACT.
The petitioner is a Massachusetts corporation, with its principal office at Boston.
We adopt as a part of our findings the stipulation filed by the parties, together with the exhibits made a part thereof, which is substantially as follows:
For the fiscal year ended January 31, 1928 the*1004 petitioner's books were closed and its return was filed and accepted upon the basis of an established fiscal year ended January 31, 1928; the said return was a consolidated return including the petitioner and the Taylor Furniture Company and no other corporations. The petitioner neither requested nor received any permission to change its basis of reporting for the twelve months following January 31, 1928. The petitioner's original (and only) federal income tax return filed for the succeeding twelve months was a consolidated return with the Taylor Furniture Company for a fiscal year of twelve months ended January 31, 1929.
On or about March 31, 1928 the Taylor Furniture Company was liquidated (as of February 1, 1928) and the petitioner took over all its assets and assumed all its liabilities pursuant to the contract dated January 32, 1928. The principal obligation of the Taylor Furniture Company was an account payable to the petitioner for cash advances in the sum of $357,615.19. The value of the net assets taken over from the Taylor Furniture Company under said contract (not considering said obligation to petitioner) was $200,922.16. The balance of said account in the sum of*1005 $156,693.03 was charged off petitioner's books during the twelve months ending January 31, 1929.
On August 13, 1928 the stockholders and directors of the petitioner met and confirmed said agreement dated January 31, 1928. On the same date stockholders' and directors' meetings of the Taylor Furniture Company were held, in which said contract was ratified and it was voted to proceed with immediate dissolution of that corporation. Petition for dissolution of the Taylor Furniture Company was filed with the State of Massachusetts on August 20, 1928, and the final document in connection therewith (agreement regarding payment of state taxes) was filed with the State on September 13, 1928.
In the deficiency notice in this proceeding the respondent has determined a net income for petitioner of $151,718.16 for the twelve months ended January 31, 1929, without allowing any deduction to the petitioner in regard to the stock of the said Taylor Furniture Company or the account with said company referred to above. In the return filed for the fiscal year ended January 31, 1929 no income or loss is shown for the Taylor Furniture Company *79 but any income or loss attributable to the*1006 business of the company from February 1, 1928 on has been reported by petitioner.
The petitioner filed consolidated returns with the Taylor Furniture Company for the period from March 22, 1925 to January 31, 1928, in which there were deducted and allowed in computing consolidated net income losses of the Taylor Furniture Company as follows:
| March 22 to December 31, 1925 | $86,703.25 |
| Jan. 1 to Dec. 31, 1927 | 62,012.78 |
| Jan. 1 to Jan. 31, 1927 | 2,374.54 |
| Feb. 1, 1927 to Jan. 31, 1928 | 4,490.62 |
From the further evidence introduced we find as follows:
The capital stock of petitioner from September 27, 1918, until after January 31, 1929, was held as follows:
| Shares | |
| Benjamin Stern | 416 |
| Doris Stern (Bachrach) | 361 |
| Julius Stern | 185 |
| Alfred Stern | 38 |
| Total outstanding | 1,000 |
These stockholders were a sister and three brothers. They all took an active part in the management of the company.
The capital stock of the Taylor Furniture Co. from March 1925, to January 31, 1928, was held as follows:
| Shares | |
| Summerfield Co. (90%) | 1,350 |
| Benjamin Stern, guardian for | |
| his three (minor) sons (10%) | 150 |
| Total | 1,500 |
The Summerfield*1007 Co. had purchased its stock in the Taylor Co. at par for $135,000, and paid for it in cash and merchandise valued at cost. The stock held by Benjamin Stern as guardian was purchased on May 1, 1924, with a cash legacy of $15,000, bequeathed to his three sons equally under the will of a deceased relative. Under the terms of the instrument creating it, the guardianship of Benjamin Stern was to terminate as to each boy as he attained his majority, which occurred in September 1925, April 1927 and April 1928, respectively. The stock remained in the personal possession of Benjamin Stern until August 21, 1928, when it was purchased by petitioner for $17,572.50 cash, the amount in excess of $15,000, the par value of the stock, being considered equivalent to interest upon the investment.
The agreement referred to in the stipulation of facts was dated January 31, 1928, and was in part, as follows:
Taylor Furniture Company, a corporation, of Boston, Massachusetts, in consideration of the assumption of liabilities of Taylor Furniture Company by Summerfield Company, a corporation of said Boston, as hereinafter recited, hereby sells, transfers, assigns and sets over unto said Summerfield*1008 Company, *80 all its goods, estate and property of whatever name and whatever nature, and wherever situated, and all rights, titles and interest thereto and therein, whether at law, in equity or otherwise.
TO HAVE and TO HOLD the same unto said Summerfield Company and its successors and assigns to its and their own use and behoof forever.
The ratification of this agreement on August 13, 1928, by the stockholders of both corporations was couched as follows:
The President reported that Summerfield Company through its President and Treasurer has entered into an agreement with Taylor Furniture Company of which agreement a copy was presented at the meeting and read.
On motion, duly made and seconded, it was
VOTED: That the copy of the agreement referred to be attached to the minutes of this meeting; that the acts of the President and Treasurer in entering into the agreement in question in all ways be ratified and confirmed.
For years prior to the periods before us respondent first ruled that petitioner and the Taylor Furniture Co. were not affiliated, but upon consideration of petitioner's representation that they should be so affiliated because the stockholders, *1009 being brothers and a sister, constituted the "same interest", he reversed his stand and allowed affiliation in those years.
OPINION.
GOODRICH: Respondent has determined and maintains that petiti0ner and the Taylor Co. were affiliated during the period between February 1 and September 13, 1928; that this period should be covered by a consolidated return and the remainder of the fiscal year by a separate return, and that the liquidation of the Taylor Co. as of February 1, 1928, from which arose the losses claimed by petitioner, was an intercompany transaction and the losses therefore are not allowable. His determination that the companies were affiliated he bases upon two grounds; first, that petitioner owned all of the stock of the Taylor Co., regarding as petitioner's property the shares, amounting to 10 per centum, standing in the name of Stern as guardian; and, second, that petitioner, having elected under section 141(a), Revenue Act of 1928, to file a consolidated return covering the year 1929, is bound by Regulations 75, art. 37(a), providing that distributions during consolidation by one member of the affiliated group in cancellation or redemption of its stock shall*1010 be regarded as an intercompany transaction on which neither gain nor loss is to be recognized. In the alternative, respondent maintains that, even though petitioner did not itself own all of the stock of the Taylor Co. under section 142(c), Revenue Act of 1928, these companies were affiliated from February 1 to September 13, 1928, because all the Taylor stock was owned "by the same interests" and, petitioner having previously so represented, is now estopped to deny that fact, and the affiliation resulting.
*81 Upon examination of the statutory provisions mentioned it is readily apparent that section 141 and Regulations 75 promulgated thereunder apply to the taxable year 1929 and subsequent years, while section 142 applies to the taxable year 1928. Upon brief, the parties agree that petitioner's fiscal year ending January 31, 1929, was a "taxable year 1929." Section 141 is explicit in its requirements as to the stock ownership necessary to constitute an affiliated group of corporations. At least 95 per centum of the stock of each of the corporations, except the parent, must be owned by one or more of the other corporations, or the parent must own directly at least 95 per*1011 centum of the stock of at least one of the other corporations. No provision is made for affiliation based upon an ownership "by the same interests." Here, petitioner owned 90 per centum of the stock of the Taylor Co. Consequently, the question determinative of the issue of affiliation is one of fact - Who owned the other 10 per centum? Respondent argues it was owned by petitioner, pointing out that apparently the minority stockholders were not consulted concerning the liquidation of the Taylor Co. and that, although worthless, their stock was bought up by petitioner at par plus an amount equivalent to interest on the investment, thus showing that the investment by Stern as guardian was in reality a loan to petitioner, which, therefore, in fact owned the stock. We do not agree with that argument. The evidence is that the stock was bought by Stern as guardian, with the legacy left his sons. The stock was issued to him as fiduciary, and was retained by him in his personal possession until purchased by petitioner. There is nothing in the record to indicate that the transaction was a loan to petitioner; no evidence of indebtedness was issued, no arrangement concerning repayment appears. *1012 We cannot reject the direct evidence to the contrary to adopt the inferences which respondent would have us make. We can understand how Stern, who was not only guardian for his sons, but president of petitioner and its largest stockholder, might successfully insist that the company protect the investment which he had made on behalf of his wards by purchasing the stock. It was to his interest to bring that about, not only for the benefit of his sons, but possibly to protect himself against a charge of mismanagement of his trust. We are of opinion that, so far as petitioner is concerned, its purchase of the stock of the Taylor Co. from Stern as guardian must be regarded as a gift. We conclude also that the 10 per centum of the Taylor stock was owned, not by petitioner, but by Stern, as guardian. Consequently, under the provisions of section 141, there could be no affiliation between petitioner and the Taylor Co. during their taxable year 1929.
*82 This view of the case makes unnecessary prolonged discussion of respondent's alternative contention, but he has urged so vigorously that because of representations made in connection with its affairs for prior years petitioner*1013 is now estopped to deny affiliation in 1929, that it becomes incumbent on us to give our view as to that argument. What representations were made by petitioner which caused respondent to change his ruling as to the status of affiliation in prior years, we are not told. We assume that the facts concerning the stockholdings and the personal relationships between the owners were presented. But, as we see it, those matters are immaterial. Respondent's ruling that these corporations were affiliated because of ownership of their stocks by the same interests, under the decision in , became an error in law. See also . Where both parties have knowledge of the facts, an expression of opinion by one of them on a question of law creates no estoppel. ; . Nor will a mistake in law in a prior decision work an estoppel to prevent a correct decision, even for the same year, *1014 ; nor in a later year, . The fact that petitioner previously successfully contended it was affiliated for prior years upon a basis since judicially declared fallacious does not serve to estop it from now demanding that its status be determined under the later applicable statutory provisions.
It remains to determine the deductibility of the losses sustained by petitioner upon the liquidation of the Taylor Co., which the parties agree occurred as of February 1, 1928, although the company was not formally dissolved until September of that year. The amount of the losses is not in dispute. The investment in the stock of the Taylor Co. totaled $135,000; the excess of the liabilities assumed over the assets received amounted to $156,693.03. Respondent contends that no loss upon the liquidation may be recognized under article 37(a) of Regulation 75, which reads as follows:
(a) During Consolidated Return Period.
Gain or loss shall not be recognized upon a distribution during a consolidated return period, by a member of an affiliated group to another member of such group, in*1015 cancellation or redemption of all or a portion of its stock; and any such distribution shall be considered an intercompany transaction.
There are several answers to that argument. One is that, as we have pointed out, these corporations were not affiliated during the fiscal year in which the liquidation occurred; consequently, there was not transaction between members of an affiliated group during a consolidated return period. Under article 18(b) and (c) of Regulations 75, both companies must be treated as if separate returns had been filed for the year 1929. Moreover, there was no distribution *83 upon the stock of the Taylor Co.; petitioner assumed its liabilities and took over its assets, and the stock became worthless. But, even had the companies been affiliated, that relationship was terminated by the liquidation and consequently the losses were not intercompany transactions, but were sustained outside of affiliation and therefore are deductible. . The loss sustained upon the stock investment should be allowed in full.
But that view does not completely dispose of the loss sustained upon the advances made to*1016 the Taylor Co. During the previous period of affiliation the consolidated income was offset by operating losses of the Taylor Co. totaling $155,581.19. Respondent maintains that the loss sustained at liquidation upon open account must be reduced by that amount, citing ; affd., ; ; . With that we agree. Petitioner cannot deny that during these prior years it was treated as affiliated - whether rightly or not we need not decide - and that it obtained a benefit from that affiliation through the reduction of its taxable income on account of the operating losses of its then subsidiary. To hold that it may now deduct the advances in their entirety would be to allow a second time the amounts deducted during the period of affiliation. That is contrary to our understanding of the view expressed in the cases above cited. Cf. . Accordingly, the loss on open account should be reduced by the amount of the Taylor Co.'s operating*1017 losses previously included in the consolidated returns during affiliation, leaving a balance of $1,111.84, which may now be deducted.
Judgment will be entered under Rule 50.