*692 This proceeding is brought to redetermine deficiencies in the income tax of the petitioner for the year 1923 and for the period from January 1, 1924, to June 30, 1924, inclusive, amounting to $194.48 and $1,929.60, respectively.
The petitioner alleges the following errors:
(1) The refusal of the respondent to allow affiliation of the petitioner and Duplex Envelope Building Corporation for the year 1923 under the provisions of section 240 of the Revenue Act of 1921.
(2) The refusal of the respondent to allow as a deduction from consolidated net income for the year 1923 the net loss of the Duplex Envelope Building Corporation for that year amounting to $13,188.58.
It is stipulated that the Duplex Envelope Building Corporation sustained a loss of $13,188.58 for the year 1923 and therefore the disposition of the second allegation of error is dependent upon the determination of the first.
*693 FINDINGS OF FACT.
The following facts were stipulated:
Duplex Envelope Co., Inc., the petitioner, was organized in 1903 under the laws of the*1810 Commonwealth of Virginia and was engaged in the manufacture of a special type of envelope. It reported on the calendar year basis for 1923. With permission duly granted, it changed to a fiscal year June 30 basis of reporting and filed a return for the period January 1 to June 30, 1924.
Duplex Envelope Building Corporation was incorporated under the laws of the Commonwealth of Virginia on July 22, 1922. Of a maximum authorized capital stock of $250,000 par value, $155,000 par value was subscribed for on July 19, 1922, but no stock certificates were issued until June, 1923. Its accounting records were opened by journal entries dated July 2, 1923. For 1922 it filed no return. A loss of $27,257.44 for the period July 2, 1923, to June 30, 1924, was included in the six-months' return of the petitioner for the period January 1 to June 30, 1924. This loss was divided by the respondent into $13,188.58 for the last six months of 1923 and $14,068.86 for the first six months of 1924, which the parties agree is correct. In the audit of the 1924 period return of the petitioner, no part of the loss of the Duplex Envelope Building Corporation for 1923 was allowed and neither has any of*1811 said loss been allowed in the audit of the petitioner's return for 1923. The petitioner and the Duplex Envelope Building Corporation, however, have been audited on the consolidated basis for the period January 1 to June 30, 1924.
The petitioner filed a separate income-tax return for 1922. For the calendar year 1923 in answer to the question on the face of the return, "Is this a consolidated return?," it said "See 7, page 4."
In answer to Question 7, paragraphs (c) and (d), it reported as follows:
(c) Did the corporation elect to file a consolidated return for this and subsequent years? Yes. No business transacted by subsidiary in 1923.
(d) Did the corporation file a consolidated return for the preceding taxable period? No. If the answer is "Yes," when did such taxable period begin? Company owns all stock of Duplex Envelope Building Corporation which company has not yet begun business as a separate organization. All being handled through this company during year. Consolidated return will be filed in future.
No record has been found of any information return, Form 1122, for the Duplex Envelope Building Corporation for either 1922 or 1923. The petitioner was not*1812 affiliated during 1922, 1923, or 1924 with any corporation other than Duplex Envelope Building Corporation.
By 1922 the petitioner had acquired a piece of property upon which it was proposed to erect a building for commercial purposes. *694 The Duplex Envelope Building Corporation was organized for the purpose of taking title to this property. Transfer of the property to the building corporation and the issuance of the latter's capital stock in exchange therefor were delayed, however, until July, 1923. During the calendar year 1923 the petitioner advanced monies to the building corporation to cover interest, taxes, and other items of the latter company, and carried the total of these advances in its balance sheet at the end of 1923 as an account receivable from the Duplex Envelope Building Corporation. When the petitioner's return for the year 1923 was prepared the item of advances was not disturbed and the income reported was entirely that of the petitioner without being reduced by any loss of the Duplex Envelope Building Corporation. It has been contended that up to the time of filing the petitioner's 1923 return all of these items had been considered by both corporations*1813 as capital items.
The subscription list of the Duplex Envelope Building Corporation, as found on page 2 of its corporate minute book, reads as follows:
SUBSCRIPTION LIST
We, the undersigned hereby severally subscribe for the number of shares set opposite our respective names to the capital stock of DUPLEX ENVELOPE BUILDING CORPORATION and in consideration of our mutual promises, do hereby severally agree to, and with each other, to pay the said Company for each share the sum of $100.00 dollars.
Witness our hands and seals.
Dated at RICHMOND State of VIRGINIA
This 19th day of JULY 1922
| Name | Address to which notices | No. of | Common of |
| should be sent | shares | preferred | |
| Arthur G. Jones | 203 W. Franklin | 1 | |
| M. Osborne Jones | 203 W. Franklin | 1 | |
| M. S. Rackett | 1502 Westwood Ave | 1 | |
| The Duplex Envelope Company, | |||
| Inc | Box 1656 | 1,547 |
By M. S. RACKETT, Secretary
The subscription list of the Duplex Envelope Building Corporation, as indicated above, was dated July 19, 1922, the certificate of incorporation was dated July 20, 1922, and the receipts for charter fees and notice of issuance of the charter by the commonwealth are dated*1814 July 22, 1922. The first stockholders' meeting was held on July 24, 1922. Waiver of notice of stockholders' meeting called for July 24, 1922, in signed by the stockholders indicated in the subscription list dated July 19, 1922. Consideration was given at said meeting to a proposition received from the petitioner offering to convey certain property to the building corporation subject *695 to a mortgage or deed of trust for the issuance of the building corporation's capital stock of the par value of $155,000. Directors were elected and by-laws were adopted at such meeting. This was the only action taken in 1922.
The first directors' meeting was held on the same date, July 24, 1922, at which meeting consideration was given to the same proposition of the exchange of capital stock for property.
A further stockholders' meeting was held on June 1, 1923, at which the following action is recorded as having been taken:
Mr. Jones presented the following preamble and resolution which was unanimously adopted:
WHEREAS on the twenty-second day of July, 1922, Duplex Envelope Building Corporation accepted an offer from the Duplex Envelope Company, Incorporated, by which the Duplex*1815 Envelope Company, Incorporated, agreed to convey to this Company two hundred and fifty (250) feet of property at Broad and Laurel Streets.
AND WHEREAS the Duplex Envelope Company prepared a deed (bearing date of July 22, 1922, but not yet executed) conveying said property subject to the lien of the mortgage or deed of trust, to secure certain unpaid notes, then aggregating a total of $95,000 secured on said property, said property to be paid for by full paid and non-assessable stock of this Company of the par value of $155,000;
AND WHEREAS on August 1st, 1922, which was since the date of the agreement and deed above referred to, the Duplex Envelope Company Incorporated paid an additional $10,000 on the lien, reducing the total amount from $95,000 to $85,000.
NOW THEREFORE BE IT RESOLVED: That the stockholders of Duplex Envelope Building Corporation recommend to the directors that after the deed dated July 22, 1922 shall have been executed, one hundred (100) additional shares of stock be issued to the Duplex Envelope Company Incorporated, in consideration of the said $10,000 paid on the said lien August 1, 1922, by the Duplex Envelope Company, Incorporated.
We find the following*1816 additional facts:
The Duplex Envelope Building Corporation did not file a return for the year 1922 because its officers considered that there was no occasion to file one. The corporation had no income, no liabilities or assets, no issued capital stock and had opened no books, during the year 1922.
The return filed for the year 1923 by the petitioner was a consolidated return of the petitioner and the Duplex Envelope Building Corporation.
OPINION.
VAN FOSSAN: The only question at issue is whether or not the income-tax return of the petitioner for the year 1922 was, in fact, a separate return and made during a taxable year in which the petitioner and its subsidiary, the Duplex Building Corporation, were affiliated, thus binding the petitioner to file a separate return *696 for the year 1923 unless permission to change the basis thereof were granted by the respondent.
The respondent's position is that under the stipulated facts the petitioner elected to file a separate return for the year 1922, although it was affiliated with its subsidiary within the definition of section 240(c) of the Revenue Act of 1921. The respondent asserts that, although the subsidiary filed*1817 no return for the year 1022, it should have done so, and regards as done that which should have been done.
The Duplex Envelope Building Corporation was organized in July, 1922, for the purpose of taking title to certain real estate owned by the petitioner on which the subsidiary intended to erect a building for commercial uses. That property was to be paid for in the capital stock of the subsidiary of the par value of $155,000. Upon the incorporation of the subsidiary the petitioner had subscribed for 1,547 shares of capital stock of the initial issue, the remaining three shares being subscribed by officers of the petitioner. On June 1, 1923, 100 additional shares of the par value of $100 each were authorized to be issued to the petitioner in consideration of its curtailment of a lien against the property.
In July, 1922, the Duplex Envelope Building Corporation formally perfected its corporate organization and "considered" the exchange of its capital stock for property, but it transacted no business, had no assets or liabilities, kept no books and had no income during the year 1922. It does not appear what, if any, amount was paid in by the incorporators at the time of incorporation*1818 or that the petitioner paid its proportion thereof, but no capital stock was issued until June, 1923. Therefore, from the date of its incorporation until June, 1923, the building corporation was wholly dormant. Until the issuance of its stock to the petitioner, its officers regarded the corporation as in a formative stage and not ready to perform the functions for which it was organized.
We believe that under the circumstances of this case it should be held that the year 1923 was the first taxable year in which petitioner was confronted with the election of filing either separate returns or one consolidated return. Petitioner filed a consolidated return for 1923.
In its return for 1923 petitioner elected to file consolidated returns for that and subsequent years. The taxes here in controversy should be computed on the basis of the consolidated returns filed.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK dissents.
*697 TRAMMELL, dissenting: In my opinion the only possible ground upon which the conclusion of the Board could be justified is that the Duplex Envelope Building Corporation, although it had received its charter, had*1819 not perfected its organization, had transacted no business and had no income from any source and was therefore justified in not filing a return at all for 1922.
I think, however, that in any event, the corporation, to be relieved from the necessity of filing a return even under the circumstances above stated, should have complied with article 621, Regulations 62.
The facts, however, in this case were stipulated and I think that these facts are sufficient to show that the corporation was legally organized. The corporation was not in such an unorganized condition as to be relieved from filing a return in accordance with section 239 of the Revenue Act of 1921. All corporations, except exempt corporations, are required to file returns regardless of whether they have any income or transact business.
On the other hand, the prevailing opinion regards the corporate organization as having been perfected in 1922. This being true, the opinion is clearly contrary to the case of , and the decision of the same court in the case of *1820 .
I think that it is immaterial in this case that the stock had not actually been issued and delivered. It is unnecessary to cite authorities of the courts to support the view that a corporation may be completely organized and even transact business without the certificates of stock having been issued to the stockholders.
The fact remains that the Duplex Envelope Building Corporation was in existence as a corporation during a portion of the year 1922 and that the petitioner corporation did not file a consolidated return with it for the portion of the year 1922 when the Building Corporation was in existence, and the statute provides that under such circumstances the affiliated corporations may file either a consolidated return or separate returns. The petitioner before us filed a separate return for 1922, although it was affiliated with the Building Corporation during a portion of that year. Having filed a separate return for 1922, in my opinion, it was not entitled to change to another basis in 1923 without the permission of the Commissioner. The petitioner owned substantially all the stock of the Building*1821 Corporation and was in a position to determine what kind of return should have been filed. I fully appreciate the equities in this case, but I do not believe that we should permit a hard case to cause us to overlook what in my opinion is the plain language of the statute.