*747 1. AFFILIATION - CONSOLIDATED RETURNS - REVENUE ACTS OF 1924, 1926 AND 1928. - Where no change in the parent of an affiliated group occurred in the taxable years, no right of election between the consolidated and separate basis of return accrued to petitioner because of the addition, in those years, of other companies to that group. Export Leaf Tobacco Co. v. Commissioner, 78 Fed.(2d) 163, affirming 31 B.T.A. 28">31 B.T.A. 28; certiorari denied, 296 U.S. 627">296 U.S. 627; Huntington Beach, Inc.,30 B.T.A. 731">30 B.T.A. 731, followed.
2. Id. - Under the provisions of the Revenue Acts of 1924, 1926 and 1928, the right of election, to file a consolidated return, can only be exercised through the joint action of all the companies affiliated. If one of the affiliated companies files a separate return, even though the others joined in a consolidated return, the tax liability of all must be determined upon a separate basis. Export Leaf Tobacco Co. v. Commissioner, supra, followed.
3. Id. - In the absence of permission by the Commissioner to change their basis of return, unless possibly arbitrarily withheld, the right of affiliated*748 taxpayers to have their income tax liabilities determined upon either a consolidated or separate basis for 1927 and 1928 depends, essentially, not on the intent of the taxpayers in filing their returns for the preceding year, but upon the legal effect of their actual returns for that year. Export Leaf Tobacco Co. v. Commissioner, supra, followed.
*454 These proceedings, properly consolidated, ask redetermination of deficiencies asserted by respondent for the years and in amounts as follows:
| Petitioner | Docket No. | Year | Amount of deficiency |
| Fletcher American National Bank | 43712 | 1924 | $14,083.46 |
| Do | 43712 | 1925 | 18,632.23 |
| Do | 47585 | 1926 | 8,045.65 |
| Do | 51120 | 1927 | 12,724.86 |
| Do | 58968 | 1928 | 17,445.34 |
| R. H. Syfers Realty Co | 43713 | 1924 | 160.45 |
| Do | 43713 | 1925 | 245.78 |
| Do | 47150 | 1926 | 1,065.78 |
| Do | 51121 | 1927 | 159.29 |
| Do | 58967 | 1928 | 21.82 |
| Fletcher American Co | 47149 | 1924 | $9,293.82 |
| Do | 47149 | 1925 | 29,558.50 |
| Do | 47149 | 1926 | 13,512.09 |
| Do | 58969 | 1928 | 9,447.00 |
| Henry Severin Realty Corporation | 51122 | 1927 | 4,324.87 |
| Do | 58966 | 1928 | 4,233.80 |
| Warman Avenue Realty Co | 51123 | 1927 | 126.54 |
| American Foundry Co | 51124 | 1927 | 24,589.28 |
*749 The only issue presented is the right of petitioners to compute their disputed income tax liabilities for each of the years 1924 to 1928, inclusive, upon a consolidated basis, as affiliated corporations within the provisions of the applicable sections of the Revenue Acts of 1924, 1926, and 1928 and the regulations of the Commissioner promulgated thereunder. There appears to be no dispute on the facts, most of which are stipulated and proof introduced as to the remainder.
FINDINGS OF FACT.
The petitioner, Fletcher American National Bank, hereinafter called the bank, was, during the taxable years involved, a banking corporation doing business in Indianapolis, Indiana. The petitioner, Fletcher American Co., hereinafter called the American Co., was an iinvestment corporation and dealer in securities, all of whose voting stock during the periods here in question, was owned by the stockholders of the bank. This stock was held by trustees for the stockholders, in propertion to their holdings of bank stock.
*455 The bank prior to 1923 acquired 95 percent of the voting capital stock of the American Foundry Co., an Indiana corporation located at Indianapolis. This stock*750 it owned until January 1, 1928, when it reduced its holdings to 70 percent. The American Foundry Co. in turn owned from 1923 to 1927, inclusive, all the voting stock of the Warman Avenue Realty Co. This latter company owned property occupied by the foundry company.
In 1926 the bank organized, under the Federal Farm Loan Act, the Indianapolis Joint Stock Land Bank. It owned all of the stock of this bank from that time through the year 1928.
In January 1924 the bank acquired all of the voting stock of the Inter-Continental Tire & Rubber Co. The name of this company was subsequently changed to Majestic Rubber Co. The bank continued to own this stock through 1928. The Inter-Continental Tire & Rubber Co. in turn owned during this period all of the voting stock of the R. H. Syfers Relty Co., which company owned the premises occupied by the Tire & Rubber Co. The bank acquired on December 28, 1922, all of the voting stock of the Division Street Realty Co., which stock it owned during the years here in controversy.
The American Co. on January 30, 1923, acquired all of the voting stock of the Henry Severin Realty Corporation. This stock it held through 1928. In May 1924 it*751 acquired all of the voting stock of the Belmont Realty Co. In April 1923 it acquired all of the voting stock of the Boyer Realty Co. In 1924 it acquired all of the voting stock of the Greene County Farms Co. and in 1925 all of the voting stock of the Black Crystal Mining Co. The stock of the these four last named corporations it owned through the years here in question. In 1923 it acquired all of the voting stock of the Seeds Oil Co. This stock it owned until the oil company was dissolved in 1927.
In 1928 a company known as 412 North Alabama Realty Co. became affiliated with the corporations here involved. This fact is stipulated, but in which company ownership of the realty company stock lay is not disclosed.
For the calendar year 1922 the bank and the American Co. filed a consolidated return, reporting the income of these two companies alone. For the calendar year 1923 a similar consolidated return was filed by the bank and the American Co. For this year the American Foundry Co. filed a consolidated return for itself and the Warman Avenue Realty Co. Likewise the Boyer Realty Co. filed a consolidated return for itself and the Seeds Oil Co. Separate returns were filed*752 for that year by the Henry Severin Realty Corporation, the Inter-Continental Tire & Rubber Co., R. H. Syfers Realty Co., and Division Street Realty Co.
*456 For the calendar year 1924 the returns were on, identically, the same basis for these companies as in the preceding year. In addition, the Belmont Realty Co. and the Greene County Farms Co. filed separate returns. For the calendar year 1925 returns continued to be filed by these companies upon the same basis as in the preceding year and, in addition to the affiliated companies filing upon a separate basis, there was a separate return filed by the Black Crystal Mining Co. which had been added to the affiliated companies. For the calendar year 1926, the bank and the American Co. filed the customary consolidated return, but, for this year, included with their income that of the Indianapolis Joint Stock Land Bank, which had that year been organized by the bank. For that year the American Foundry Co. and the Warman Avenue Realty Co. filed their customary consolidated return, as did the Boyer Realty Co. and the Seeds Oil Co., but for this year the Majestic Rubber Co. (the successor of the Inter-Continental Tire & Rubber*753 Co.) filed a consolidated return with R. H. Syfers Realty Co. The five remaining companies in the affiliation filed separate returns.
For each of the calendar years 1927 and 1928 a consolidated return was filed by all of the affiliated companies, there being included in the return for 1928 a new addition to the affiliated group, 412 North Alabama Realty Co. The consolidated returns filed for these two years were rejected by respondent and the tax liabilities of the several companies were computed upon the basis of separate returns.
In 1931 all the affiliated corporations joined in written requests, filed with the Commissioner, for permission to file consolidated returns covering the years 1923 to 1928, inclusive. These requests were denied and the deficiencies here in question arise by computation of the tax liabilities of the several petitioners upon a separate basis for the years in question.
During the years in question it was the practice of the officer in charge of the accounts of the American Co. to prepare a balance sheet and income statement from the records of that company and deliver it to the officer of the bank charged with preparing all income tax returns. *754 The latter consolidated the incomes of the two companies and prepared and filed the so-called consolidated return.
The officer of the bank who prepared that so-called consolidated return, was not familiar with the fact of ownership by the American Co. of stock control in the various other companies, as heretofore detailed, but was aware of the ownership by the bank of 95 percent of the stock of the American Foundry Co. The question as to whether or not the American Foundry Co. should be included in the consolidated return was at times discussed, but the conclusion *457 was reached that only companies in related types of business were contemplated in the provisions of the acts permitting consolidation of income.
The official of the American Co. charged with the duty of supervising its accounts and preparing a transcript of its income for the purpose of preparing the so-called consolidated return filed for it and the bank, was aware of the ownership by that company of the several other companies as heretofore set out. He was an officer or director in several of these companies and prepared the separate returns which were filed for the Henry Severin Realty Corporation. *755 It was his belief that all of the affiliated corporations were not entitled to file one consolidated return, due to the fact that certain of them were engaged in lines of business in no way related to one another except through stock ownership.
OPINION.
LEECH: This controversy apparently presents no original question.
Since there was no change in the parent of the affiliated group during the pending tax years, no right of election accrued to petitioners because of the addition, in those years, of other companies to that group. , affirming ; certiorari denied, ; .
The rule appears to be established beyond question that under the provisions of the Revenue Acts of 1924, 1926 and 1928 the right of election, to file a consolidated return, can only be exercised through the joint action of all of the companies affiliated. If one of the affiliated companies files a separate return, even though the others join in a consolidated return, the tax liability of all must be determined upon a separate basis. *756 ; certiorari denied, ; ; ; ;
It is not disputed that petitioners were affiliated during all of the years here involved and that for the years 1924, 1925, and 1926 some of them filed consolidated and others separate returns. It necessarily follows, that for those years, the action of respondent, in computing the tax liabilities of all the companies upon the basis of separate returns, was correct.
For the calendar years 1927 and 1928 the affiliated companies filed consolidated returns and the question, as to those years, is the correctness of respondent's action in refusing to accept returns on this *458 basis. Section 240(a) of the Revenue Act of 1926 2 granted affiliated corporations a new right of election as to the basis of the return for that year, but provides, as did the preceding*757 revenue acts, that, if the return was made upon either a consolidated or separate basis, subsequent returns should be upon the same basis unless permission to change the basis be granted by the Commissioner. By article 632 of Regulations 69, 3 the Commissioner has prescribed the rules under which a change of basis may be granted.
*758 In the present case it is shown that for 1927 and 1928 the corporations filed consolidated returns, whereas for 1926 the returns filed had not been upon a proper consolidated basis and, therefore, must be considered to have been upon a separate basis. It again follows that the return filed for 1927 was upon a different basis from that of the 1926 return and that petitioners were not entitled to file upon the consolidated basis without permission of the Commissioner to make the change.
The record does not disclose permission, but shows refusal on the part of the Commissioner. In fact, it is indicated that permission to make a change was not asked until 1931, three years subsequent to the filing of the consolidated return for 1927. Under these conditions we find no error in the action of the Commissioner in refusing to accept the consolidated return and in computing the tax liabilities of the petitioners upon the basis of separate returns. Such action by him is not an arbitrary, capricious and unreasonable exercise of the discretion, reposed in him by the act, to grant or deny a change of basis for the filing*759 of the returns. .
Not only is this true, but the requests were not made until after the date for the filing of the returns, at which time petitioners' right to file upon a consolidated or separate basis became fixed by the conditions *459 then existing. If those conditions then lacked the statutory prerequisite for a legal consolidated return, the deficiency could not be supplied by a later request for permission to file such form of return, as the Commissioner was then without authority to change the fixed obligation to file a separate return, by approving the belated request. ;; ; . Cf. .
Petitioners contend that there was no necessity on their part to request and be granted permission to file a consolidated return for 1927, as they had elected to and did file consolidated returns for*760 1926, or, at most, had not in that year elected to file upon either a consolidated or separate basis. But, the fact that five of the then affiliated groups filed separate returns for that year, legally characterized the returns of all the group as being upon that basis. (See authorities cited supra. )
It is argued that for that year, petitioners' intention was to file upon a consolidated basis and the fact that 11 of the affiliated companies were not included in the so-called consolidated return filed for the bank, the American Co. and the Indianapolis Joint Stock Land Bank, was due to mistake or inadvertence.
To this it is answered that petitioners have failed to sustain their burden in establishing any effective mistake of fact or inadvertence. Assuming such was legally possible, the only mistake disclosed here is not of the fact of affiliation, but ignorance of its legal consequences. That ignorance, of course, does not avoid those consequences. , affirming *761 ;
The fact of affiliation admittedly existed, definitely and unclouded, during 1926, as well as the other years in dispute. Cf. ; . Thus the law granted petitioners permission to file their returns on either basis for 1926. It is not the intent of the petitioners in filing their returns for 1926 which controls us here, but what returns were actually filed by them for that year. The record shows that they did not, in fact, file a consolidated return for 1926. As we have heretofore held, their actual returns for that year must all be considered as separate returns. Their right to file a consolidated return for 1927 is determined by the statute which precludes, in such case, the filing of a consolidated return unless permission is granted by the Commissioner. As this Board said in that case: "It must be remembered we are considering here the question of the *460 existence of a statutory conditional right. Cf. *762 , and petitioners, to enjoy its advantages, must bring themselves clearly within the specified conditions precedent to its grant. ."
The petitioners here, to support their right to file a consolidated return for 1927, must show either the filing of a proper consolidated return for 1926 or permission granted by respondent to make the change to a consolidated basis. Neither one of these conditions is shown. The same reasoning and the same result apply to the return for 1928. We hold that petitioners were not entitled to file a consolidated return for 1927 and in such case section 142(a) of the Revenue Act of 1928 4 requires the return for the latter year to be on the 1927 basis in the absence of permission granted to make the change.
*763 Judgment will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: R. H. Syfers Realty Company; Fletcher American Company, and Perry E. O'Neal, Receiver; The Henry Severin Realty Corporation, and Frank C. Bopp, Receiver; Warman Avenue Realty Company; and American Foundry Company. ↩
2. 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 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. ↩
3. ART. 632. Consolidated returns. - Affiliated corporations as defined in section 240(d), irrespective of the basis upon which returns were filed prior to 1926 under section 240(a) of the Revenue Acts of 1924 and 1926, may for 1926 elect to make separate returns or file a consolidated return in which will be reported the consolidated net income of the affiliated group. If return is made upon either of these bases, all subsequent returns must be made upon the same basis except as permission to change may be granted by the Commissioner. In applying for permission to change from one basis to the other there should be submitted a statement in the form of an affidavit executed by a person or persons qualified to sign the returns (see section 239) setting forth completely the reasons for making the request.
* * * ↩
4. SEC. 142. CONSOLIDATED RETURNS OF CORPORATIONS - TAXABLE YEAR 1928.
(a) Consolidated returns permitted.↩ - Corporations which are affiliated within the meaning of this section may, for the taxable year 1928, 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 for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner.