*3722 1. The sale by a corporation of all of the capital stock of an affiliated corporation results in neither a taxable gain nor a deductible loss.
2. The Baker-Vawter Co., making its return for the calendar year 1920, and being affiliated with the Commercial Stationery & Loose Leaf Co. from January 1 to February 28, 1920, included in its invested capital the surplus of the subsidiary company for the entire year. Since the Baker-Vawter Co. sold the entire capital stock of the subsidiary on February 28, 1920, the Commissioner reduced invested capital by a prorated portion of the surplus of the subsidiary from March 1 to December 31. The action of the Commissioner in making such reduction is sustained.
*774 This is a proceeding for the redetermination of a deficiency in income and profits tax for 1920 in the amount of $18,036.25. The petitioner admits that it is the transferee of the property and assets of the Baker-Vawter Co. within the meaning of section 280 of the Revenue Act of 1926, and that as such transferee it is liable for any and all additional*3723 income and profits taxes that may be finally determined to have been payable by the Baker-Vawter Co. for the year 1920 (including interest, additional amounts, and additions to taxes), and consents that the amount of such liability may be used against the petitioner as such transferee and collected from it. Certain assignments of error contained in the petition have been waived by a stipulation filed by the parties. The assignments of error not waived are:
(1) That the Commissioner erred in determining a profit upon the sale by the Baker-Vawter Co. (hereinafter called the parent company), of the capital stock of the Commercial Stationery & Loose Leaf Co. (hereinafter called the subsidiary company), in the amount of the difference between the purchase price originally paid for such stock and the price at which such stock was sold by the parent company.
(2) That the Commissioner erred in disallowing to the parent company a loss upon the sale of the stock of the subsidiary company in the amount of $13,454.35, which loss it found by adding to the original cost of the stock the net aggregate profits of the subsidiary company during the period of ownership of the stock by the parent*3724 company and deducting therefrom the price at which it sold the stock.
(3) In taxing the income of the subsidiary company which is income of the "single business enterprise" of the parent company as income when earned and again as profit when the subsidiary company's stock was sold.
(4) That the Commissioner erred in eliminating from the consolidated invested capital of the parent company and the subsidiary company for the year 1920 the surplus on January 1, 1920, of the subsidiary company for the period from February 28, 1920, to the end of the year.
FINDINGS OF FACT.
The petitioner is a Delaware corporation with its principal business office in New York City. On June 1, 1927, it acquired all the property and assets of the parent company in consideration of (a) the issue of 21,453 shares of the 7 per cent first preferred stock of the petitioner fully paid and nonassessable for which certificates were duly issued and delivered by the petitioner, and (b) the assumption by the petitioner of and its agreement to pay all the liabilities *775 of the parent company then existing, including any additional liabilities for income and profits tax for the year 1920.
On March 1, 1916, the*3725 parent company purchased and acquired all the issued and outstanding capital stock of the subsidiary company, an Illinois corporation, for the sum of $45,000, which the parent company paid in cash or its equivalent. The par value of the stock thus acquired by the parent company was $45,000. All of this stock of the subsidiary company was continuously held by the parent company until it was sold by it on February 28, 1920, as hereinafter stated. The subsidiary company never issued any additional stock.
During the period from March 1, 1916, to February 28, 1920, both dates inclusive, the subsidiary company made net profits in the aggregate amount of $28,454.35, resulting from losses and profits as follows:
| Loss. | Profit. | |
| 10 months, Mar. 1 to Dec. 31, 1916 | $5,357.30 | |
| Calendar year 1917 | 2,248.46 | |
| Calendar year 1918 | $9,338.31 | |
| Calendar year 1919 | 23,708.96 | |
| Jan. 1 to Feb. 28, 1920 | 3,012.84 | |
| Aggregate net profits for total period | 28,454.35 |
During the period from January 1, 1918, to February 28, 1920, the subsidiary company was affiliated with the parent company under the provisions of section 240 of the Revenue Act of 1918. For the calendar years*3726 1918, 1919 and 1920 consolidated income and profits-tax returns were filed by and on behalf of the parent company and the subsidiary company under and in accordance with the provisions of the Revenue Act of 1918, and the regulations prescribed by the Commissioner with the approval of the Secretary, and said returns included the net income of the subsidiary company and of the parent company for the calendar years 1918 and 1919, and the first two months of 1920, respectively. Income and profits taxes were duly assessed on the basis of the consolidated returns and were duly paid by the taxpayers.
During the entire period from March 1, 1916, to February 28, 1920, all the dealings of the subsidiary company were with and all its net earnings resulted from trading with the outside public. All the aggregate net earnings of the subsidiary company during such period, or $28,454.35, were reinvested in the business of the subsidiary company and no dividends were ever declared by it.
On February 28, 1920, the parent company sold to outside interests the entire capital stock of the subsidiary company for $60,000, which *776 was paid in cash or its equivalent. The affiliations between*3727 these two companies ceased with the sale, because thereafter neither the parent company nor any of its stockholders owned or controlled any of the stock of the subsidiary company. At that date, after deducting all of its accrued unpaid charges and liabilities, the earned surplus of the subsidiary company was $28,454.35. The surplus on its books was $35,003.69 and the book value of its stock was $80,003.69.
The respondent determined that the parent company realized on the sale of the stock of the subsidiary company a profit of $15,000, the difference between the amount originally paid for the stock and the amount received for it, and in determining the deficiency against the parent company added that amount to its taxable net income.
The net assets of the subsidiary company, as shown by its books at the date of its acquisition of the capital stock by the parent company, were $51,549.34, and the balance sheet of the subsidiary company at that date showed a surplus of $6,549.34. On January 1, 1920, the surplus of the subsidiary company amounted to $31,990.85. This amount, less $6,549.34, the surplus of the subsidiary company at the time of the acquisition of its stock by the*3728 parent company, or $25,441.51, was included by the parent company in its invested capital for 1920. The respondent eliminated this surplus of the subsidiary company from invested capital of the parent company from the date of the sale, February 28, 1920, resulting in a reduction in invested capital of the parent company for the year in the amount of $21,270.77, which is the $25,441.51 prorated for the last ten months of 1920.
OPINION.
SMITH: The identical issues involved in this proceeding were before the Board in . The present proceeding was submitted upon a stipulation of facts and no briefs were filed by either party in support of the contentions raised. In , the petitioner claimed, as the petitioner claims in this proceeding, that upon the sale of the capital stock of the Commercial Stationery & Loose Leaf Co. by the Baker-Vawter Co. on February 28, 1920, it sustained a loss of $16,454.35, which is the difference between the amount that the petitioner claimed was the basis for determination of loss or gain on the sale of the stock in the hands of the parent company, or $73,454.35, and*3729 the amount received by the parent company for the stock, namely, $60,000. This basis is found by adding the cost to the parent company of the stock of the subsidiary company, $45,000, and the aggregate amount of the net profits of the subsidiary company from March 1, 1916, to February 28, 1920, inclusive, $28,454.35. The petitioner further claimed *777 that this loss was deductible by the parent company in determining its net taxable income for 1920. The respondent contended that the petitioner derived a taxable profit of $15,000 from the transaction, the difference between the amount which it paid for the capital stock of the subsidiary company and the amount which it received upon the sale thereof. We held that the Baker-Vawter Co. sustained no deductible loss from the sale of the stock and derived no taxable income therefrom. A like decision must be made in the proceeding at bar.
In its petition the petitioner alleges as error that the respondent taxed the income of the Commercial Stationery & Loose Leaf Co. when it was received prior to March 1, 1920, and when the subsidiary company was affiliated with the parent company, and then is taxing it again as profit when*3730 the parent company sold the shares of stock of the subsidiary company.
To the extent that the respondent added to the net taxable income reported by the Baker-Vawter Co. $15,000 arising from the sale of the stock of the subsidiary company on February 28, 1920, the action was in error; but to the extent that he disallowed the deduction of a loss of $13,454.35 the action was not in error. For reasons stated in , we are of the opinion that the Baker-Vawter Co. derived no income and sustained no loss from the sale of the capital stock of the subsidiary company on February 28, 1920.
With respect to the reduction of the invested capital of the Baker-Vawter Co. by a prorated portion of the surplus of the subsidiary company which went out of the affiliated group as of February 28, 1920, we see no reason to modify the opinion or decision with reference thereto contained in
Judgment will be entered on 15 days' notice, under Rule 50.