*976 1. Two affiliated corporations filed separate returns for 1927 and the affiliation was terminated in that year; a new group of seven corporations was formed in 1928, which included the two corporations formerly affiliated. Held, the new group has an election and may make a consolidated return under section 142(a) of the Revenue Act of 1928.
2. Net losses sustained prior to affiliation may not be deducted from the consolidated net income in 1928.
*252 The deficiency of $4,650.21 here in controversy is in income tax for the year 1928. It is alleged that the respondent erred (a) in failing to compute the tax liability of petitioner and its six affiliated corporations on a consolidated basis for the taxable year 1928; (b) in failing to compute the tax liability of petitioner and Albert Leon & Sons, Bound Brook, New Jersey, on a consolidated basis for the year 1928; (c) in the computation of the net income of the petitioner for the taxable year 1928; (d) in failing to allow in computing consolidated net income deduction for losses sustained by subsidiary*977 companies prior to affiliation.
The principal facts in the case were stipulated as follows:
Albert Leon & Son, Inc., Perth Amboy, N.J. was incorporated under the laws of the state of New Jersey in May, 1923. Its principal place of business being located at 93 Smith St., Perth Amboy, N.J.
Green Furniture Co., Elizabeth, N.J. was incorporated under the laws of the state of New Jersey in April, 1917. Its principal place of business being located at 77 Broad St., Elizabeth, N.J.
Albert Leon & Son, Elizabeth, N.J. was incorporated under the laws of the state of New Jersey in April, 1924. Its principal place of business being located at 1122 Elizabeth Avenue, Elizabeth, N.J.
Albert Leon & Son, Plainfield, N.J. was incorporated under the laws of the state of New Jersey in November, 1926. Its principal place of business being located at 230 W. Front St., Plainfield, N.J.
Albert Leon & Son, New Brunswick, N.J. was incorporated under the laws of the state of New Jersey in June, 1924. Its principal place of business being located at 3 Livingston Avenue, New Brunswick, N.J.
Albert Leon & Son, Bound Brook, N.J. was incorporated under the laws of the state of New Jersey*978 in March, 1928. Its principal place of business being located at 217 E. Main St., Bound Brook, N.J.
Regina Realty Co., Perth Amboy, N.J., was incorporated under the laws of the State of New Jersey in January, 1922. Its principal place of business being located at 93 Smith St., Perth Amboy, N.J.
During the years 1926 and 1927 each of the above companies with the exception of Albert Leon & Son, Bound Brook, N.J., filed separate income tax returns with the Collector of Internal Revenue at Newark, N.J.
For the taxable year 1928 a consolidated return was filed, which return included the income and expenses of the following corporations:
Albert Leon & Son, Inc., Perth Amboy, N.J.
Albert Leon & Son, Elizabeth, N.J.
Green Furniture Co., Elizabeth, N.J.
Albert Leon & Son, Plaintifield, N.J.
Albert Leon & Son, New Brunswick, N.J.
Albert Leon & Son, Bound Brook, N.J.
Regina Realty Co., Perth Amboy, N.J.
On December 30, 1927, an agreement (copy of which is in evidence) was entered into between Albert Leon & Son, Inc., Perth Amboy, N.J. and the stockholders of the following companies:
Albert Leon & Son, Inc., Perth Amboy, N.J.
Albert Leon & Son, Plaintifield, *979 N.J.
Albert Leon & Son, New Brunswick, N.J.
Albert Leon & Son, Elizabeth, N.J.
*253 Green Furniture Co., Elizabeth, N.J.
Regina Realty Co., Perth Amboy, N.J.
The exchange of stock mentioned in said agreement was subsequently consummated.
Prior to the execution of this agreement the stockholdings in the above mentioned companies were as follows:
| STOCKHOLDERS | PERTH AMBOY | PLAINFIELD | NEW BRUNSWICK | REGINA REALTY | GREEN FURN. | ELIZABETH |
| Albert Leon | 67.58% | 69.23% | 66 2/3% | 100% | 50% | none |
| Marcus Leon | 32.42% | 30.77% | none | none | none | none |
| J. Melniker | none | none | none | none | 25% | none |
| J. Lipman | none | none | none | none | 25% | none |
| A. Kummer | none | none | 33 1/3% | none | none | none |
| W. Goldstein | none | none | none | none | none | 33 1/3% |
| Green Furn. Co | none | none | none | none | none | 66 2/3% |
After the execution of the agreement, the stockholdings in the above mentioned companies were as follows:
| STOCKHOLDERS | PERTH AMBOY | PLAINFIELD | NEW BRUNSWICK | REGINA REALTY | GREEN FURN. | ELIZABETH |
| Albert Leon | 62.49% | none | none | none | none | none |
| Marcus Leon | 15.60% | none | none | none | none | none |
| J. Melniker | 10% | none | none | none | none | none |
| J. Lipman | 10% | none | none | none | none | none |
| A. Kummer | 0.83% | none | none | none | none | none |
| W. Goldstein | 1.08% | none | none | none | none | none |
| Albert Leon & Son, Inc | 100% | 100% | 100% | 100% | 100% |
*980 As a result of the execution of the agreement above mentioned, Albert Leon & Son, Inc., Perth Amboy, N.J., became the sole owner of the stock of the following corporations:
Albert Leon & Son, Plainfield, N.J.
Albert Leon & Son, New Brunswick, N.J.
Albert Leon & Son., Elizabeth, N.J.
Green Furniture Co., Elizabeth, N.J.
Regina Realty Co., Perth Amboy, N.J.
As of the date of incorporation of Albert Leon & Son, Bound Brook, New Jersey, in March, 1928, the petitioner acquired more than 95% of its outstanding capital stock and the petitioner thereafter throughout the year 1928 continued to own said stock.
The net income or loss for the taxable year 1928 of the above mentioned companies was as follows:
| NET INCOME | LOSS | |
| Albert Leon & Son, Inc., Perth Amboy, N.J. | $37,506.07 | |
| Albert Leon & Son, Inc., Plainfield, N.J | 2,522.94 | |
| Albert Leon & Son., Elizabeth, N.J | $7,552.46 | |
| Green Furniture Co., Elizabeth, N.J | 6,866.18 | |
| Albert Leon & Son., New Brunswick, N.J | 114.76 | |
| Albert Leon & Son, Bound Brook, N.J | 10,981.89 |
For the calendar years 1926 and 1927, Albert Leon & Son, Elizabeth, New Jersey, sustained net losses of $12,141.40 and $7,554.68, *981 respectively.
*254 For the calendar years 1926 and 1927, Albert Leon & Son, Plainfield, N.J., sustained net losses of $19,114.47 and $21,495.32, respectively.
None of the corporations named herein ever requested permission to file a consolidated return for the year 1928 or has such permission to file a consolidated return for 1928 been granted by the Commissioner either before or after the filing of such return.
Prior to the execution of the agreement on December 30, 1927, all of these companies were operated and managed by their respective stockholders and directors as separate enterprises. After the execution of the agreement they all were operated under one management from the central office at Perth Amboy. No records were kept at the other stores except accounts receivable and cash collections. The books were kept and bills were paid by the Perth Amboy store and the other stores were treated as branches of the business. All of the corporations maintained their corporate existences throughout the taxable year.
OPINION.
GOODRICH: It is agreed that during 1926 and 1927 all the stock of Albert Leon & Son, Inc., Perth Amboy, and Albert Leon & Son, Plainfield, *982 New Jersey, was owned by the same interests. Therefore, these two corporations were affiliated within the meaning of section 240 of the Revenue Act of 1926, but they elected to file separate returns for 1926 and 1927. They were included in the new affiliated group formed in 1928. Respondent maintains that they had no election to file a consolidated return for 1928, under section 142 of the Revenue Act of 1928, and could not do so without first obtaining from him permission to change the basis. It is admitted that such permission was neither requested nor granted.
The applicable statute, section 142(a) of the Revenue Act of 1928, 1 has provided a limitation on the right of election for 1928 where an affiliation existed and an election was made in the prior year. Under earlier revenue acts (in which the applicable sections of the statute are practically identical with the one before us) it has been held that where an election has been made and separate returns filed by affiliated corporations, the addition to the affiliated group of one or more corporations in a succeeding year does not entitle the several companies to make a new election to file a consolidated return without*983 the consent of the Commissioner. Bowie Lumber Co.,*255 ; ; ; . And in those cases where affiliation existed during the prior year and a consolidated return had been filed, the corporations thereafter coming into the group had no right of election to file a separate return because it was required that a consolidated return include the entire group. ; affd., ; certiorari denied, ; ; . Seemingly, the 1928 Act, together with Regulations 74, article 731 et seq., promulgated thereunder, requires no change in the rules laid by these decisions with respect to returns of affiliated corporations for the taxable year 1928, but, as we see it, we have in the case at bar not the addition of new members to a continuing affiliated*984 group, but a dissolution of the group previously existing and the creation of a new group.
During 1927 all the stock of the Perth Amboy and Plainfield companies was owned by Albert and Marcus Leon, and these two corporations were affiliated. Under the agreement of December 30, 1927, the Leons disposed of about 22 percent of their stock in Perth Amboy and their entire holdings in Plainfield. The disposal of this stock terminated the affiliation which had resulted from its ownership. *985 ; certiorari denied, ; . Cf. ; ; affd., ; ; ; affd., .
After the execution of the agreement as of January 1, 1928, the Perth Amboy Co., the petitioner here, owned all the stock of Albert Leon & Son companies of Plainfield, New Brunswick, and Elizabeth, and of the Green Furniture Co. and Regina Realty Co. Thus a new group was formed. Upon the incorporation of the Bound Brook company, in March 1928, petitioner acquired more than 95 percent of its stock and thus it became affiliated with the group. All these subsidiaries were thereafter managed and controlled by petitioner, the parent corporation, and the affiliation continued throughout the taxable year 1928. But it was not the same affiliated group*986 which existed in 1927; that affiliation had been dissolved. The new group was comprised of seven corporations and was a distinctly different unit, affiliated through petitioner's ownership of more than 95 percent of the stock of the six subsidiaries. *256 For that reason, we are of opinion that the corporations comprising the affiliated group in 1928 were not bound by the election made by the 1927 affiliated group, but that they themselves had an election and might file a consolidated return for 1928 without the consent of the Commissioner. Cf. ; , reversing .
The remaining question is whether net losses sustained by the Plainfield and Elizabeth companies in 1926 and 1927 may be deducted from consolidated net income in 1928.
Net losses are personal to the taxpayer and may be applied only against net income of the taxpayer in a succeeding taxable year. ; *987 .
It follows that the application of the net loss of Albert Leon & Son, Plainfield, New Jersey, is limited to the net income of that corporation in the taxable year 1928, which is in the amount of $2,522.94. Albert Leon & Son, Elizabeth, New Jersey, had no net income in 1928 against which its net loss may be applied. Cf. ; ; ; ; .
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. (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.