*726 The corporations of an affiliated group of which in 1933 one was a bankrupt, its business and properties being operated by a trustee in bankruptcy, were not entitled to have their tax for 1933 determined on a consolidated return, since no consent on form 1122 was filed by the bankrupt corporation. Revenue Act of 1932, secs. 52 and 141.
*1315 The Commissioner determined deficiencies of $31,715.54 and $3,037.57 in income tax of the Trinity Buildings Corporation of New York and Rockwood Alabama Stone Co., respectively, for the calendar year 1933, computing their tax liabilities as separate corporations rather than as members of an affiliated group.
FINDINGS OF FACT.
During the entire calendar year 1933 the United StatesRealty & Improvement Co. (hereinafter called the Realty Co.) was the parent of a group of affiliated corporations including the two petitioners and including the Savoy-Plaza Corporation.
The Realty Co. filed a consolidated Federal income tax return for the affiliated group for the calendar year 1933. It also filed "Affiliation*727 Schedule Form 851" for the calendar year 1933. Each of the affiliated corporations except the Savoy-Plaza Corporation duly filed, in accordance with Regulations 78, form 1122 for the calendar year 1933.
*1316 The consolidated return filed by the Realty Co. for the calendar year 1933 included therein the net income of the Trinity Corporation of $230,744.86, of which $86.40 represented bond interest paid or accrued by the petitioner to the Realty Co. during 1933 and the net income of the Rockwood Co. of $22,091.89. The taxable year of the Realty Co. was the calendar year 1933.
During the calendar year 1933 the Realty Co. owned all of the outstanding and issued common voting stock and all of the preferred stock of the Savoy-Plaza Corporation. The preferred stock was nonvoting except that in the event of failure to pay four quarterly dividends thereon, it had equal voting rights with the common. Because of arrears in the payment of dividends the preferred stock had equal voting rights with the common stock throughout 1933.
The capital stock of the Savoy-Plaza Corporation as of December 31, 1932, and at all times thereafter, consisted of 200,000 shares of 7 percent cumulative*728 preferred stock of the par value of $100 each, of which 55,577 shares were issued and outstanding, and 500,000 shares of no par value common stock, of which 95,000 shares were issued and outstanding. The cumulative dividends in arrears on the preferred stock at December 31 ,1932, were $2,187,123.03.
The books of account kept by the Savoy-Plaza Corporation were separate from those of the parent Realty Co. and were kept upon the basis of a fiscal year ending November 30 of each year.
The books of account of the Savoy-Plaza Corporation showed deficits (excess of liabilities including capital stock over assets) as follows:
| December 31, 1932 | $4,071,015.87 |
| November 30, 1933 | 5,930,339.63 |
| November 30, 1934 | 7,883,442.21 |
| November 30, 1935 | 9,704,559.18 |
| October 30, 1936 | 11,235,026.47 |
On November 30, 1932, the Savoy-Plaza Corporation filed a petition in the United States District Court for the Southern District of New York setting out that it owed debts which it was unable to pay in full and praying that it be adjudged bankrupt within the meaning of the Acts of Congress relating to bankruptcy. On December 1, 1932, the District Court entered its order declaring*729 and adjudging the corporation to be bankrupt. The Irving Trust Co. was appointed receiver in bankruptcy and on December 13, 1932, was elected trustee in bankruptcy. It continued to act as trustee from December 13, 1932, to January 19, 1936, at which date the president of the Savoy-Plaza Corporation succeeded to the trusteeship and continued to act in that capacity until October 30, 1936.
Prior to its adjudication in bankruptcy, the Savoy-Plaza Corporation owned and operated the Savoy-Plaza Hotel, located on Fifth *1317 Avenue, New York City. This was the only real estate it owned. The property was assessed for real estate tax purposes at $15,000,000 for 1933, $13,200,000 for 1934, $12,800,000 for 1935, and $12,300,000 for 1936.
As of November 30 and December 31, 1932, the real estate was carried on the books of the Savoy-Plaza Corporation, before deducting reserve for depreciation, at $24,563,221.51, and at the same figure for 1933, 1934, 1935, and the period ending October 30, 1936.
During the entire period from December 13, 1932, to October 30, 1936, the assets of the Savoy-Plaza Corporation were in possession of the trustees in bankruptcy and the business of*730 operating the hotel was conducted by them, the gross operating profit and the net loss being as follows:
| Gross operating profit | Net loss | |
| 1933 | $316,905.38 | $2,013,269.02 |
| 1934 | 450,302.30 | 1,953,102.58 |
| 1935 | 584,460.54 | 1,821,116.97 |
| 1936 | 444,856.85 | 1,530,467.29 |
On January 17, 1936, two committees representing respectively holders of first mortgage fee and leasehold 20-year 6 percent sinking fund gold bonds and holders of realty extension first mortgage 5 1/2 percent sinking fund gold loan certificates of the Savoy-Plaza Corporation commenced reorganization proceedings by filing a petition in the District Court under section 77(b) of the Bankruptcy Act. The president of the Savoy-Plaza Corporation was temporarily appointed trustee on that date, and on February 7, 1936, his appointment was made permanent. On June 29, 1936, the committees submitted to the holders of the bonds and certificates a plan for the reorganization of the Savoy-Plaza Corporation under section 77(b) of the Bankruptcy Act. On August 11, 1936, the District Court entered its order of confirmation of the plan of reorganization, as amended August 6, 1936. On October 28, 1936, the District*731 Court entered its order directing consummation of the plan of reorganization. The plan provided, among other things, for the organization of a new corporation under the name of Savoy-Plaza, Inc., to acquire the assets of the Savoy-Plaza Corporation and for the issuance of securities and stock of such new corporation to the bondholders and certificate holders and certain other creditors of the Savoy-Plaza Corporation, but made no provision in respect of claims of holders of old preferred stock and old common stock of the Savoy-Plaza Corporation. The real estate of the Savoy-Plaza Corporation was appraised on January 27, 1936, for the purposes of the reorganization at $12,626,000.
The Savoy-Plaza Corporation was not included in the consolidated return for 1933, and its operating loss for such calendar year was not *1318 included. The Savoy-Plaza Corporation did not file form 1122 for 1933.
In February 1933 the Realty Co. charged to reserve for eventual losses on investments the entire amount of its investment in the common and preferred stock of the Savoy-Plaza Corporation. This was approved by the board of directors of the Realty Co. on March 15, 1933. It did not write*732 off its investment in first mortgage bonds of the Savory-Plaza Corporation.
A separate income tax return was filed by the trustee in bankruptcy covering the operations of the Savoy-Plaza Corporation for the calendar year 1933. No income tax was paid on behalf of the corporation for 1933.
OPINION.
STERNHAGEN: The Commissioner held that the consolidated return filed by the Realty Co., as parent would not be recognized because the Savoy-Plaza Corporation had omitted to file form 1122. He determined deficiencies as on separate returns. The petitioners, members of the affiliated group, demand the recognition of the consolidated return, arguing primarily that the Savoy-Plaza Corporation was in bankruptcy during the taxable year, its shares worthless, its corporate organization a "mere shell", and that hence it was not properly to be regarded as affiliated.
A similar question as to the year 1932 was presented by the same affiliated group of taxpayers in ; affirmed sub nom *733 . It was held that, since the adjudication in bankruptcy was not made until December 1, 1932, the corporation was properly regarded as a member of the affiliated group under section 141(d), and that its failure to file its consent on form 1122 prevented the filing of a consolidated return. In the present case the bankruptcy existed throughout the entire year 1933 and the petitioners urge that this distinction in fact makes the decision inapplicable and requires a different result. This is not so.
Bankrupt corporations are dealt with in section 52 of the Revenue Act of 1932, 1 providing that returns for the corporations shall be *1319 made by the trustee, and any tax due collected from the trustees in the same manner as from the corporations. By a reference to section 141, affiliated corporations were brought within the section. Regulations 77, article 392, implements the statute. Section 52 is not discussed in argument by either party here, although it was clearly suggested in *734 , as support for the Commissioner's refusal to recognize the consolidated return. On appeal, the court apparently found it unnecessary to consider section 52 because to support the decision it was enough that the Savoy-Plaza Corporation had not been in bankruptcy during the entire year and had withheld the consent which the regulations required and the corporation was free to give. While, therefore, the court's opinion affords no authority for the decision of the present case, the Board's opinion clearly pointed the way.
*735 Looking alone, therefore, at section 52 and section 141, it seems clear that the bankrupt corporation was, by reason of the Realty Co.'s ownership of its shares, a member of the affiliated group for which a consolidated return could not as of right be filed unless all members of the group consented on form 1122 to the applicable regulations; and that this is none the less so because the shares of the bankrupt corporation may have been worthless 2 or because its business and properties were being operated by a trustee in bankruptcy.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. SEC. 52. CORPORATION RETURNS.
(a) REQUIREMENT. - Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.
(b) CONSOLIDATED RETURNS. - For provision as to consolidated returns of affiliated corporations, see section 141. ↩
2. It may not be amiss to say that despite the alleged worthlessness of the Savoy-Plaza Corporation shares they were not charged off the Realty Co.'s books until February 1933. ↩