*620 1. Affiliation of the petitioners with another corporation denied in the absence of proof that the shares of stock issued in favor of and held by the president of the corporations were owned by the parent company.
2. Upon the evidence, held, that the Supply Co. is not entitled to have all of the operating expenses of another corporation allocated to it under the provisions of section 45 of the Revenue Act of 1928.
*975 These proceedings were consolidated for hearing and report and involve the redetermination of the following deficiencies in income taxes:
| Year | Docket No. 68856 | Docket No. 68857 |
| 1929 | $566.03 | $1,938.98 |
| 1930 | 2,362.62 |
The issue is whether the petitioners and the Lucey Manufacturing Corporation of Texas are entitled to have their tax liability computed on the basis of consolidated returns. In the alternative, the T. T. Word Supply Co. claims the right to deduct the operating expenses of the Lucey Manufacturing Corporation of Texas.
FINDINGS OF FACT.
The Lucey Manufacturing*621 Corporation of Texas, a Texas corporation, hereinafter referred to as the Texas corporation, until about the close of 1925 was actively engaged in the sale of oil field supplies, manufactured, in part, by the Lucey Manufacturing Corporation of Tennessee, hereinafter referred to as the Tennessee corporation. The stock of the Texas corporation in 1925 was owned by the Tennessee corporation, and the Lucey Manufacturing Corporation, a New York corporation, hereinafter referred to as the New York corporation, owned all of the stock of the Tennessee corporation.
In January 1926 T. T. Word, who had been identified with the Texas corporation for several years as its vice president and general manager, organized the T. T. Word Supply Co., hereinafter referred to as the Supply Co., under the laws of Texas, to take over the business then being conducted by the Texas corporation. In excess of 95 percent of the capital stock of the Supply Co. was issued to Word.
By the terms of the agreement entered into March 10, 1926, between the receivers of the New York corporation, Word, the Supply Co., and the Texas corporation, the New York corporation sold all of its claims against the Texas corporation*622 and the North Texas Supply Co. and all of the stock it owned of the North Texas Supply *976 Co. for the sum of $190,000, payable $160,000 in cash and $30,000 in notes of the Supply Co., endorsed by Word. The stock was delivered to Word and the claims of the New York corporation against the Texas corporation and North Texas Supply Co. were assigned to the Supply Co. and Texas corporation, respectively. The Supply Co. paid the cash consideration and gave its notes, endorsed by Word, in accordance with the agreement. Of the cash paid, $130,000 was borrowed from a bank by the Supply Co. on its note endorsed by Word.
The entire consideration of $190,000 involved in the acquisition of the assets was charged to Word on the books of the Texas corporation and thereafter, including the taxable years, the amount was included in balance sheets of the Texas corporation as an amount due it from Word. The personal books of Word also show a liability of $190,000 to the Texas corporation on account of transaction. The books of the Supply Co. also have an account showing an investment of $190,000 in the Texas corporation. The Supply Co. paid the notes issued by it in favor of the New*623 York corporation and the Texas corporation paid $100,000 of the amount of the bank note. The interest on the loan was charged to Word, who, in the filing of individual returns for the years 1926 to 1932, inclusive, on the community property basis, claimed one-half of the amount of the interest as a deduction from gross income. None of the corporations claimed any of the interest as a deduction in returns filed by them.
Prior to or in March 1926 Word purchased all of the outstanding stock of the Texas corporation from the Tennessee corporation for the nominal sum of one dollar and some patterns and raw material of a value of about $38,000. The stock was issued to Word. The value of the material was charged to Word on the books of the Texas corporation and during the taxable years the amount was included in the balance sheets of that corporation as an amount due from Word.
At some undisclosed time the Supply Co. purchased the business of the Houston Pump Supply Co. at a receivership sale. The Word Specialty Manufacturing Corporation, hereinafter referred to as the Manufacturing Corporation, was organized November 6, 1928, to manufacture products formerly produced by the Houston*624 Pump Supply Co. for sale through the Supply Co. and others. The Supply Co. furnished the capital of the Manufacturing Corporation. All of the stock of the Manufacturing Corporation, except qualifying shares, was issued to Word.
Word has been president of the Texas corporation since March 1926. He has always held a like office in the Supply Co. and the *977 Manufacturing Corporation. None of the stock issued by the several corporations in favor of Word, except qualifying shares, has been transferred.
The consolidated returns filed for the years 1926 to 1929, inclusive, were accompanied by affiliations schedules signed by Word as president of the Supply Co. The schedules for the first two years certify that Word owned in excess of 95 percent of the stock of the Texas corporation and the Supply Co., and the schedules for 1928 certify that the same individual owned a like percentage of the stock of the petitioners and the Texas corporation. The schedules relating to 1926 and 1928 also certify that none of the stock of the corporations was subject to any agreement or control and that there were no equitable owners of the stock. The schedule filed for 1929 certifies that*625 Word owned 97 percent of the stock of the Supply Co., and that it owned more than 95 percent of the stock of the Texas corporation and Manufacturing Corporation.
During the taxable years Word owned directly in excess of 95 percent of the capital stock of the Supply Co., the Texas corporation, and the Manufacturing Corporation.
In his computation of the deficiencies the respondent determined that the petitioners and the Texas corporation were not affiliated and calculated the income tax liability of each corporation on the basis of separate returns.
Pursuant to the provisions of a contract entered into on January 6, 1926, the Texas corporation consigned all of its stock in trade to the Supply Co. for sale in due course of its business. The agreement provided for a commission of 20 percent to the Supply Co. as full compensation for services rendered by it in selling the goods. The instrument authorized the Supply Co. to use one of the plants of the Texas corporation rent-free for a period of one year and all of its other plants and facilities rent-free until sold and disposed of by it.
The directors of the Texas corporation adopted the following resolution on July 28, 1926:
*626 The operating expenses for handling the sale of Texas stock including rents, taxes and other general overhead, being far in excess of the cost contemplated at the time of this contract between the Lucey Manufacturing Corporation of Texas, and the T. T. Word Supply Company, Inc., it now develops that the T. T. Word Supply Company, Inc., being agreeable under the circumstances to standing the cost of operations for the year 1926 and each succeeding year thereafter until such time as a different arrangement may be deemed best, providing the total cost of operation for each year ending December 31st, does not exceed in any year, the net profits accruing to the T.T. Word Supply Company, Inc., this company agrees to stand such cost of operations, and in the event the operating costs may exceed the net profits of the T.T. Word Supply Company, then the Lucey Manufacturing Corporation of Texas agrees to stand the portion beyond. The other items of agreement in the contract shall remain in effect and be subject to adjustment as is necessary.
*978 A like resolution was adopted by the directors of the Supply Co. on January 18, 1927.
After the transfer of its stock of supplies to*627 the Supply Co. for sale on a commission basis, the Texas corporation did not add to its stock of goods or transact any business other than to collect accounts accrued for sales made prior to the transfer and keep an inventory of the goods placed in the hands of the Supply Co. for sale. At all times important here it continued to own its land, buildings, and equipment.
For the years 1926 to 1930, inclusive, all or part of certain expenses incurred by the Texas corporation for compensation of its officers, repairs, interest, taxes, depreciation, salaries, and wages, and other operating expenses were allocated to the Supply Co. The same basis was followed each year. The amounts retained by the Texas corporation in the taxable years were:
| 1929 | 1930 | |
| Compensation of officers | $3,020.00 | $3,000.00 |
| Rents paid | 213.76 | 206.00 |
| Repairs | 127.58 | 200.22 |
| Interest | 186.62 | 53.32 |
| Taxes | 85.08 | 86.56 |
| Depreciation | $2,219.28 | $2,219.28 |
| Selling and general | 3,647.98 | 13,464.25 |
| 9,500.30 | 19,229.63 |
The item for compensation of officers represents salaries paid to the president and treasurer of the Texas corporation. The repairs were made on buildings of the Texas*628 corporation being used by the Supply Co. The interest accrued on indebtedness of the Texas corporation on ground being used by the Supply Co., and the taxes were paid and the depreciation was taken on buildings and equipment of the Texas corporation. The item designated "Selling and general" represents expenses for stationery and printing, legal services, traveling expenses, automobiles and trucks, insurance, miscellaneous charges, and inventory adjustments. These allocations of expenses were accepted by the respondent in his determination of deficiencies against the Supply Co. for the taxable years.
From 1927 to 1930, inclusive, the gross income of the Texas corporation from the sale of goods by the Supply Co. was about $46,000, $23,200, $13,000, and $9,000, respectively. According to its books, in 1929 and 1930 it had other income, including rent of $2,400 charged the Supply Co. for occupancy of space owned by it, of $4,155.90 and $5,979.13, respectively.
OPINION.
DISNEY: The main issue turns upon whether or not the petitioners and the Texas corporation were members of an affiliated group of *979 corporations within the meaning of section 141 of the Revenue Act*629 of 1928, subsection (d) of which reads as follows:
(d) Definition of "affiliated group". - As used in this section an "affiliated group" means one or more chains of corporations connected through stock ownership with a common parent corporation if -
(1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
(2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations. As used in this subsection the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.
The contention of the petitioners is that Word held in excess of 95 percent of the stock of the Texas and Manufacturing corporations as a trustee for the Supply Co. and, accordingly, the latter owned the statutory percentage of stock to entitle the three corporations to file consolidated returns for the taxable years. The position of the respondent is that Word had absolute title to the stock of the Texas and Manufacturing corporations outstanding in his name. The question thus becomes one of whether such*630 stock was, in fact, owned by Word or the Supply Co. If it was owned by Word, the corporations were not affiliated and no right existed to file consolidated returns. Sec. 141(a).
The respondent's finding is in accordance with representations consistently made by Word as president of the Supply Co. for a period of four years and the manner in which the stock was issued. We are asked to ignore such allegations and indications of real ownership and accept, as reflecting the true situation, testimony of Word and another witness of the petitioners that the intent was to have the Supply Co. acquire the stock; that Word took title to the securities merely on the advice of counsel that a Texas corporation may not legally own stock of another corporation; and that the books do not reflect the real facts. We have not been referred to any authority opposed to the right of a Texas corporation to acquire and own stock of another corporation.
It is argued that the allegations of ownership were made at a time when the question was unimportant, and for that reason they have little, if any, probative force. We think otherwise. They represent, in our opinion, a conclusion reached within a*631 short time after completion of the transactions by one chiefly concerned with the result, and adhered to without change of position for a long period of time. It would require strong evidence to overcome the facts so consistently represented by the person primarily concerned with the outcome of these proceedings. See .
*980 The contract of March 10, 1926, involved only the purchase of claims against the Texas corporation and the North Texas Supply Co., and stock of the latter corporation, but the consideration was regarded as part of the cost of the stock of the Texas corporation, apparently under the assumption that the contract and the subsequent acquisition of the stock were one transaction. That Word was fully aware of the fact that he had been charged with the sum of $160,000 as part of the purchase price of the stock of the Texas corporation is shown by clear proof that he claimed interest on so much thereof as was borrowed by the Supply Co. as a deduction in his individual income tax returns, including his 1932 return, filed after he caused these proceedings to be instituted. No part of such interest was claimed as a*632 deduction by the corporation.
The stock was purchased directly from the Tennessee corporation. Whether the transaction was made the subject of a written agreement does not appear. Word testified that the "Tennessee Company gave us the stock of the company in return for some patterns and raw material that we had on hand at Houston." The material testified to seems to have been property of the Texas corporation which the Supply Co. had under consignment. A consulting accountant was requested to advise the Supply Co. the entries to make to reflect the acquisition of the stock and the terms of the March 10, 1926, contract. In a letter addressed to Word, as president of the Supply Co., the accountant stated that "I understand that to acquire the capital stock of the Lucey Manufacturing Corporation of Texas you paid the nominal sum of one dollar and agreed to have the Corporation ship the Tennessee plant, of the New York Corporation, approximately $38,000 worth of raw material." On cross-examination Word testified that the communication set forth the correct facts. It was pursuant to the instructions set forth in the letter that Word was charged with the value of the material. Thereafter*633 the amount was carried on the books of the Texas corporation as a debt due from Word.
As to the ownership of the stock of the Manufacturing Corporation outstanding in the name of Word, the only evidence before us in any way indicating that the Supply Co. was the real owner, is a showing that the Supply Co. furnished the corporation's capital. Such meager evidence proves nothing substantial, in the light of declarations of Word until these appeals were taken that he was the owner of the securities.
The finding of the respondent that the petitioners and the Texas corporation were not affiliated is prima facie correct and is presumed to rest upon a correct determination of the facts. The evidence before us supports, rather than overcomes the determination of the respondent. Accordingly, we find that the respondent did not *981 err in refusing to compute the tax liability of the petitioners and the Texas corporation on the basis of consolidated returns.
Under the alternative issue the Supply Co. seeks the benefit of operating expenses of the Texas corporation as deductions from its gross income. It refers to the resolutions of the respective corporations as making such*634 expenses chargeable to it. No statutory or other authority is cited to support the claimed right, and we find none.
Operating expenses of the Texas corporation in and after 1926 were allocated between it and the Supply Co. in accordance with a plan proposed by the consulting accountant of the Texas corporation in January 1927, and as so apportioned were claimed as deductions by the respective corporations in the consolidated returns filed for the taxable years. The deductions so claimed were allowed by the respondent in his determination of the deficiencies. From this course of action it would seem that the terms of the resolutions were never carried into effect, even though they were adopted prior to the time allocation instructions were issued by the accountant consulted for that purpose. No reason is assigned for failing to apportion the expenses in accordance with the resolutions.
The expenses in controversy were incurred in the first instance by the Texas corporation and, in the absence of any evidence to the contrary, we assume that it paid, and if not, accrued, the liabilities on its books. It does not appear that the Supply Co., aside from the allocations referred*635 to, was ever charged with or reimbursed the Texas corporation for any of the operating costs. Thus there is no proof that the Supply Co. ever paid or accrued the expenses on its books during or since the taxable year. Neither is any assurance given us that the Supply Co. proposes to recognize the obligation at this late date.
If there were proof in the record of the payment or accrual of the expenses as liabilities of the Supply Co., we would be compelled to disallow the claim.
Deductions from gross income are a matter of legislative grace. , and may not be allowed unless plainly authorized. . Authority for the deduction from gross income of items such as are involved in this issue are contained in section 23 of the Revenue Act of 1928. Business expenses are limited to "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses * * *; and rentals*636 * * *." Subsection (a). Interest paid or accrued *982 within the taxable year on indebtedness may be deducted. Subsection (b). The same section authorizes the deduction of "Taxes paid or accrued within the taxable year" and a reasonable allowance for exhaustion of property used in the trade or business. Subsections (c) and (k).
The Supply Co. voluntarily and without consideration agreed to assume the operating costs of the Texas corporation. The statute contemplates the deduction of only such ordinary and necessary business expenses as are personal to the taxpayer. It does not embrace such operating costs of a separate and distinct taxpayer. . To the same effect are ; and . A husband who pays taxes on property in his wife's name may not deduct the amount thereof in his individual return even though he assumed the obligation at the time of his gift of the property to his wife. *637 ; ; affd., ; certiorari denied, .
The Supply Co. also contends under its alternative issue that the operating expenses of the Texas corporation should be allocated to it under the provisions of section 45 of the Revenue Act of 1928, reading as follows:
In any case of two or more trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such trades or businesses.
As already pointed out all of some, and a portion of other, operating expenses of the Texas corporation were allocated to the Supply Co. each year in and after 1926, on the basis of advice given by a consulting accountant. The allocations*638 so made were reflected in the consolidated returns filed by the corporations for the taxable years and accepted by the respondent in fixing the income tax liability of the Supply Co. and the Texas corporation. We are asked to go a step further under the statute and apportion all of the deductions of the Texas corporation, except a small amount for rent, bad debts, and net losses for previous years, to the Supply Co.
A taxpayer claiming the benefits of the statute must prove the necessity for the consolidation and a reasonable, accurate method of allocation. , affirming ; ; ; .
*983 The Supply Co. says that the activities of the Texas corporation decreased each year, making it necessary, in order to clearly reflect the income of the corporations, to apportion a greater part of the expenses of the Texas corporation to the Supply Co. in succeeding years. The respective corporations represented to the respondent*639 that the apportionments made were sufficient to clearly reflect their income, and a mere showing of decreased business income is not sufficient for us to hold to the contrary.
The Texas corporation had gross income each year from sales of material, interest, and other activities, which was reported as "Other Income", and a net loss without the benefit of the amounts in controversy as a deduction. If we allocated its operating expenses to the Supply Co., the accounts of the Texas corporation would show no expense to offset the earning of such income. Such a distribution, under the circumstances, would distort, rather than clearly reflect, the income of the respective corporations.
No evidence was offered to show that there was a commingling of accounts of the respective corporations and, in the absence of such proof, we may assume that the income and expenses of the respective corporations are accurately recorded in books of account separately kept by each. From such books the taxable income of each corporation can be clearly determined. Where such a condition exists there is no need to consolidate accounts to clearly reflect income. *640
From the record made, we hold that the Supply Co. is not entitled to a greater apportionment of the expenses of the Texas corporation than that claimed by the respective parties and allowed by the respondent.
Decision will be entered for the respondent.