*1242 1. Cost of securing a long-term lease should be spread ratably over the term of the lease.
2. On the facts consolidation of accounts is denied.
*835 These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners as follows:
| Docket No. | Petitioner | Year | Amount |
| 43809 | The Starr Piano Company | 1924 | $2,125.58 |
| 43810 | Gennett Realty Company | 1924 | 1,793.89 |
| 43811 | Gennett Realty Company | 1925 | 2.329.75 |
In Docket No. 43810 the petitioner claimed an overassessment of $1,029.11.
The proceedings were consolidated for hearing and report.
The issues arise in connection with the following:
*836 Docket No. 43809. - (1) A commission of $40,000 paid to a broker for negotiating a 60-year lease claimed to be deductible as an expense.
(2) Expenses aggregating $19,812.73 claimed to be deductible upon consolidation of the petitioner's accounts with those of the Starr Piano Company of Richmond, Indiana, under the provisions of section 240(d) of the Revenue*1243 Act of 1924.
Docket No. 43810. - (1) The right of the petitioner to file a consolidated return with The Starr Piano Company, Pacific Division.
(2) In the alternative, the petitioner claims the right to deduct 51.46 per cent of the $40,000 commission paid as asserted in the first issue in Docket No. 43809, under section 240(d) of the Revenue Act of 1924.
Docket No. 43811. - (1) Expenses aggregating $20,868.81 claimed as a deduction under the provisions of section 240(f) of the Revenue Act of 1926 (identical with section 240(d) of the Revenue Act of 1924), as set forth in the second issue under Docket No. 43809.
FINDINGS OF FACT.
The Starr Piano Company (Pacific Division), hereinafter known as the Pacific Division, and the Gennett Realty Company, hereinafter known as the Realty Company, are California corporations. The former was organized in 1907, with a capital stock of $10,000, 70 per cent of which was owned by the stockholders of The Starr Piano Company of Richmond, Indiana. The remaining 30 per cent of the capital stock of the Pacific Division was owned by Harry L. Nolder, treasurer and operating manager of the Pacific Division. The latter corporation was*1244 organized in 1922 with a capital stock of $10,000, which was owned entirely by the Pacific Division. There was no change in the specified stock ownership in the years under consideration. The Starr Piano Company of Richmond, Indiana, hereinafter known as the Piano Company, was organized in 1892 under the laws of Indiana. The Piano Company manufactures and sells pianos, phonographs and other musical instruments. The Pacific Division is the exclusive sales agent of the Piano Company and less than one per cent of its sales are of the products of other manufacturers. The Realty Company was organized by the Pacific Division to hold title to real estate and leases.
Upon its organization the Realty Company acquired from the Pacific Division two 99-year leases on real estate known as the Mackay and Pelton properties and located at 630-640 South Hill Street, Los Angeles, California, in exchange for its entire capital stock of $10,000. Such leases had been secured previously by the Pacific Division at a cost of $113.300. The Pacific Division occupied *837 one of the buildings covered by the said leases. On August 1, 1922, the Realty Company subleased to the Pacific Division*1245 both properties for a period of 15 years at a rental of $8,500 per year. The lessor paid all taxes and assessments against the leased property.
On May 1, 1924, the Realty Company and the Pacific Division jointly leased the Mackay property to Bullock's, a California corporation, for a term of 60 years at fixed rentals.
The above mentioned lease was negotiated by the real estate firm of Metcalf & Ryan, who received from the Pacific Division a fee of $40,000 for such services.
All merchandise shipped to the Pacific Division by the Piano Company was shipped on consignment or memorandum, with a memorandum invoice. Reports of all sales by the Pacific Division were made to the Piano Company, without cost figures, on a form specifically adapted to that purpose. Thereupon the Piano Company made the entries of charges and credits, as the case might be, including a complete statement of the month's transactions. These reports were all made in duplicate, after which one original was mailed to the Pacific Division and became its ledger or book of original entry and one copy was kept by the Piano Company and became its original entry of intercompany relations.
The loose-leaf reports*1246 and ledger entries constituted the system of billing between the Piano Company and the Pacific Division. The various sheets were used for different types of merchandise. The records for each class of merchandise showed sales, meaning new merchandise sold by the Pacific Division for the current month, and repossessions, or merchandise for the current month that had been taken back from customers. Each sheet showed the name of the customer, if sold at retail, the manner in which the article was sold, style number and serial number. Division of entries into columns was made to provide for installment accounts. The annual cost of preparing the above described records for the Pacific Division was estimated to be $500 and such expense was borne by the Piano Company.
Fred Gennett was secretary of the Piano Company and president of both the Realty Company and the Pacific Division. During 1924 and 1925 his salary as secretary of the Piano Company was $10,000 per year and was paid by that company. He received no salary from the other two companies. He had been paid the same salary prior to assumption of his directional work for the Pacific Division. It was estimated that approximately*1247 25 per cent of his time during the years under consideration was devoted to his duties on behalf of the Pacific Division. Working capital was furnished by the Piano Company to the Pacific Division and was in the form of open accounts, *838 representing inventories and merchandise on hand. No interest on either item was charged to the Pacific Division by the Piano Company. All cash in excess of the current needs of the Pacific Division was sent by it to the Piano Company, with no allocation to any particular account, and was applied on the open account against the Pacific Division.
The monthly open account balances on the books of the Piano Company against the Pacific Division for 1924 and 1925 were as follows:
| 1924 | Amount | 1925 | Amount |
| January 31 | $232,580.30 | January 1 | $215,504.76 |
| February 29 | 227,800.55 | February 1 | 237,142.81 |
| March 31 | 225,366.12 | March 1 | 241,999.54 |
| April 30 | 214,401.99 | April 1 | 243,308.10 |
| May 31 | 208,686.12 | May 1 | 240,785.46 |
| June 30 | 212,338.85 | June 1 | 246,421.27 |
| July 31 | 212,004.87 | July 1 | 248,500.30 |
| August 31 | $201,521.12 | August 1 | $251,498.72 |
| September 30 | 211,699.95 | September 1 | 209,097.88 |
| October 30 | 206,773.24 | October 1 | 222,731.37 |
| November 30 | 216,984.14 | November 1 | 238,709.06 |
| December 31 | 213,504.76 | December 1 | 254,043.09 |
*1248 The inventories of goods in the possession of the Pacific Division consisted of pianos and phonographs shipped to it by the Piano Company. The balances of such inventories were as follows:
| January 1, 1924 | $61,606.36 |
| July 1, 1924 | 87,061.78 |
| January 1, 1925 | 59,075.69 |
| June 30, 1925 | 94,121.79 |
| December 31, 1925 | 83,279.40 |
During the years 1924 to 1927, inclusive, in determining its own taxable net income the Piano Company deducted the amounts chargeable to the Pacific Division relating to bookkeeping costs and to the proportion of the salary of Fred Gennett. The Piano Company included in its return no items of interest due from the Pacific Division on the monthly balances or on inventories. A closing agreement with respect to the years 1924, 1925 and 1926 has been concluded between the Piano Company and the Commissioner of Internal Revenue and approved by the Secretary of the Treasury.
The Piano Company and the Pacific Division kept their books on the accrual basis, while the income-tax return of the Realty Company was made on the basis of actual receipts and disbursements.
Consolidated income-tax returns were filed by the Piano Company and its subsidiaries, *1249 other than the Pacific Division, for the years 1921 to 1924, inclusive. Affiliation was granted by the respondent for the years prior to 1924 to the Piano Company, such other subsidiaries and also to the Pacific Division and the Realty Company as additional subsidiaries. A refund of tax was allowed on that basis. For the year 1924, however, the Pacific Division and the *839 Realty Company filed separate returns. Such returns were filed prior to the receipt of the ruling of the respondent granting their affiliation with the Piano Company and its other subsidiaries. Subsequent to that ruling the Piano Company filed a consolidated income-tax return for the year 1925 for itself and all subsidiaries, including the Pacific Division and the Realty Company.
The Pacific Division and the Realty Company filed their separate returns for the year 1924 on the advice of a public accountant, named Day, who informed Fred Gennett that the Internal Revenue Department would order that a consolidated return should be made for that year in case the Commissioner of Internal Revenue should grant affiliation for the prior years. Gennett did not discuss the matter with officials of the Internal*1250 Revenue Bureau.
OPINION.
VAN FOSSAN: There are two underlying issues in these proceedings: (1) The right to deduct as an expense the commission of $40,000 paid to a broker for negotiating the 60-year lease executed by the Realty Company and the Pacific Division jointly to Bullock's, and (2) the right to consolidate accounts under the provisions of sections 240(d) of the Revenue Act of 1924 and section 240(f) of the Revenue Act of 1926. A secondary issue is the right of the petitioners to file consolidated returns for the year 1924.
We have held repeatedly that commissions paid by an owner of a leasehold in order to secure a tenant under a sublease are deemed capital expenditures and are spread over the term of the lease. ; affd., ; ; ; ; .
The petitioner further contends that even if such a charge should be held not deductible as a business expense, its return to capital should be spread over a 15-year period*1251 covered by the lease from the Realty Company to the Pacific Division. We can not agree with this alternative contention. The Realty Company and the Pacific Division were joint lessors in the lease to Bullock's. They received equal benefits thereunder for the full term of 60 years. Even if we disregard the fact that the Pacific Division owned the entire capital stock of the Realty Company and thus indirectly enjoyed the profits arising from the lease, we may well conclude that the inclusion of the Pacific Division as a joint lessor for the period not comprehended in its lease from the Realty Company was in consideration of its relinquishment of its rights under the latter agreement. The brokerage fee was paid to secure a lease for the entire 60-year period and should be spread over that period.
*840 Section 240(d) of the Revenue Act of 1924 (identical with section 240(f) of the Revenue Act of 1926) provides as follows:
In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request*1252 of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.
The petitioner claims that, pursuant to the above section, certain expenses paid during 1924 and 1925 by the Piano Company should be allocated to the Pacific Division. Those expenditures were as follows:
| Item | 1924 | 1925 |
| Interest on amount due the Indiana company | $12,918.26 | $14,238.65 |
| Interest on inventory consigned by the Indiana | ||
| company, manufacturer | 4,460.04 | 4,595.91 |
| Proportion of salary of Fred Gennett, president | ||
| of The Starr Piano Company (Pacific Division) | 2,500.00 | 2,500.00 |
| Proportion of bookkeeping costs | 500.00 | 500.00 |
| Total | 20,378.30 | 21,834.56 |
An analysis of these items shows that they contain no factors which either in themselves or in conjunction with other elements of the case entitle the petitioners to the relief afforded by sections 240(d) and 240(f) above quoted. No interest was actually paid on the monthly balances and inventories nor was any liability incurred therefor. *1253 The proportions of the amounts paid by the Piano Company for the salary of Fred Gennett and for bookkeeping costs are mere estimates. The record discloses no charges or accounts on the books of either the Piano Company or the Pacific Division indicating what, if any, benefit the latter company derived from such services. As in , no effort was made to segregate accurately any of the expenses of any of the specific accounts in order to determine the amounts applicable to each company.
Furthermore, we are not asked to marshall all the accounts of both the Piano Company and the Pacific Division in order to reallocate such accounts or parts thereof for the purpose of making an accurate distribution of the gains, profits, income, deductions or capital between those corporations as provided by the statute, but, instead, we are given two interest items unsupported by any charge, payment or agreement to pay, and two charges for services also based on no payment or liability to pay. No attempt has been made to show how the proposed reallocation of expenditures would affect the gains, profits, etc., of each company. *1254 ; *841 ; . Cf. ; affd., . Under these circumstances we must deny the petitioners the relief sought under section 240(d) of the 1924 Act and section 240(f) of the 1926 Act.
Though it be unnecessary to this opinion, in view of the failure of proof, it should be observed that the Piano Company received the full benefit of the deductions claimed by the Pacific Division for the bookkeeping costs and the proportion of Fred Gennett's salary. Moreover, the Piano Company entered into a closing agreement with the respondent covering the years under consideration in this case. The allowance of deductions claimed by the petitioner would result in a double benefit.
The Realty Company also claimed the right to file a consolidated return with the Pacific Division. Each of those companies, however, filed a separate return upon the advice of a public accountant. We have held that when affiliated corporations have elected to file separate returns for*1255 a given year they may not later, without consent of the Commissioner, file a consolidated return for that year and have their incomes determined on a consolidated basis. ; affd., ; ; ; ; . See also .
The fact that the petitioners were ill advised prior to their filing of returns can not relieve them of the consequences of filing separate returns - they made their election and must abide by the results of that act.
Judgment will be entered for the respondent.