*1289 1. A loss sustained in 1929 by a corporation through the liquidation, prior to dissolution, of an affiliated corporation of which it owns all the shares is not deductible on consolidated return, Ilfeld Co. v. Hernandez,292 U.S. 62">292 U.S. 62.
2. The exchange by a corporation of shares held by it in an unaffiliated corporation for some of its own shares owned by the other corporation, the value of its own shares received being less than the cost of the shares given up, supports a deduction for loss.
*668 OPINION.
STERNHAGEN: The Commissioner determined a deficiency of $32,132.42 in the consolidated income tax of petitioners for 1929. Several items of the Commissioner's determination are assailed, which will be considered separately. The proceedings were submitted upon a voluminous stipulation of facts with appended exhibits, so there is no occasion for findings. The opinion states as much of the facts as is necessary to an understanding of each point.
1. a. Loss*1290 on liquidation of affiliated corporation. - In August 1929 the Niagara Share Corporation of Delaware acquired shares of American Alliance Management Co., Inc., and of American Alliance Investing Corporation, for some of its own shares, and thus brought about a statutory affiliation. Thereafter, in December 1929 the Alliance companies were liquidated and in February 1930 were dissolved. During the period (August-December 1929) of Niagara's ownership of Alliance shares, Alliance had sold some of its assets at a loss. The petitioners contend that Niagara sustained a loss of $248,819.88 in the liquidation of Alliance and that such loss is a deduction under the Revenue Act of 1928.
*669 The petitioners have clearly miscalculated the effect of the liquidation by the use of an improper method and incorrect factors. But we must pass that by because, whatever the correct loss, its deduction is prohibited by Regulations 75, art. 37(a), .
b. The Niagara Corporation paid a fee of $5,500 to lawyers for services directly related to the acquisition of Alliance shares in August 1929. *1291 It claims a deduction of this amount as a loss on liquidation. This ground for the deduction is as untenable as the general liquidation deduction just considered. Petitioners concede that such fees are not deductible as ordinary and necessary business expenses. . They are not organization expenses, . If they are to be treated as part of the cost of the Alliance shares, they are not deductible when the investment is made, , and the liquidation of such shares is an "intercompany transaction" which, as we have seen, precludes any deduction of such cost.
The items of $41.71 prepaid rent, $4,984.70 organization expenses, and $12,129.39 unrecorded liabilities, of the Alliance companies, are all precluded from deduction on the consolidated return because they serve only to alter the quantum of nondeductible intercompany "loss."
2. Exchange by Niagara of Lincoln Interstate shares for its own shares. - The Niagara Corporation having, in 1928, bought 3,000 shares of the Lincoln Interstate*1292 Holding Co. for $36,750, gave them up in 1929 to the Lincoln Co. in exchange for 225 shares of its own stock which had a value when received of $14,709.37. It claims the right to deduct the difference of $22,040.63 as a loss. The Commissioner relies upon , to support his disallowance of the deduction.
The question in various aspects has long been a vexed one, and the extant decisions are not in harmony. 1 The Commissioner, while acquiescing in the Houston case, appealed from the Woods case, , and the Boca Ciega case, , and those decisions were reversed. , was reversed upon the Commissioner's confession of error. The Commissioner now argues that the latter cases were different from the *670 Houston case and this case because in those cases "the real nature of the transaction" was a sale or a discharge of judgment, while here "the real nature of the transaction" is an exchange of assets for stock. This is a forced distinction which we find it impossible to adopt. If a corporation realizes gain or loss by*1293 receiving its own shares in exchange for an asset consisting of a judgment credit or a tract of land, the proposition seems equally true when the asset given up consists of corporate shares. The "real nature of the transaction" is as much a "sale" in the latter case as in the former, and the legal incidents of both seem to us to be the same.
*1294 The loss should be recognized and the deduction allowed.
Judgment will be entered under Rule 50.
Footnotes
1. ; reversed, ; ; ; ; affd., ; certiorari denied, ; ; ; reversed, ; certiorari denied, ; ; reversed, ; ; reversed, ; ; ; ; . ↩