*1293 Where two affiliated corporations elected to file separate returns for the years 1925 and 1926, they may not, without permision of the Commissioner, file a consolidated return for 1927, even though in the taxable year two other corporations were added to the affiliated group.
*515 This proceeding is brought for the redetermination of a deficiency in income tax for the year 1927 amounting to $25,946.51.
The issue is whether or not four corporations which were affiliated during the taxable year 1927 may, without the permission of the Commissioner, file a consolidated return for that year when two of the corporations were affiliated during the taxable years 1925 and 1926 and had filed separate returns for each of these years.
FINDINGS OF FACT.
The following facts were stipulated.
The petitioner corporation was organized under the laws of the State of Ohio on February 27, 1922. The Guarantee Liquid Measure Company was incorporated under the laws of the State of Delaware on May 11, 1916. On May 20, 1925, the Guarantee Liquid Measure Company*1294 purchased all of the capital stock of the petitioner corporation. For the calendar years 1925 and 1926 the petitioner and the Guarantee Liquid Measure Company were affiliated and filed separate income-tax returns.
On January 15, 1927, the Fry Equipment Corporation was organized under the laws of the State of Delaware. On February 11, 1927, the Fry Sales Corporation was organized under the laws of the State of Delaware. On October 1, 1927, the Fry Equipment Corporation acquired all of the capital stock of the Guarantee Liquid Measure Company, issuing therefor its own capital stock. At the time of this exchange the Guarantee Liquid Measure Company still owned the capital stock of the Marvel Equipment Company. As of October 1, 1927, through the acquisition of the capital stock of the Guarantee Liquid Measure Company, the Fry Equipment Corporation took over all of the assets of the Guarantee Liquid Measure Company and the Marvel Equipment Company and thereafter the business previously conducted by the Guarantee Liquid Measure *516 Company and the Marvel Equipment Company was operated by the Fry Equipment Corporation. On October 1, 1927, the Fry Equipment Corporation acquired*1295 all of the capital stock of the Fry Sales Corporation.
The Guarantee Liquid Measure Company had a loss during the year 1927. The Marvel Equipment Company, the petitioner, had a profit during the year 1927. The Fry Equipment Corporation had a loss during the year 1927. The Fry Sales Corporation had no gain or loss during the year 1927. The losses of the Guarantee Liquid Measure Company and the Fry Equipment Corporation during the year 1927 exceeded the profits of the Marvel Equipment Company.
The Marvel Equipment Company and the Guarantee Liquid Measure Company were affiliated from January 1, 1927, to January 15, 1927. The Marvel Equipment Company, the Guarantee Liquid Measure Company and the Fry Equipment Corporation were affiliated from January 15, 1927, to February 11, 1927. The Marvel Equipment Company, the Guarantee Liquid Measure Company, the Fry Equipment Corporation and the Fry Sales Corporation were affiliated from February 11, 1927, to the end of the year.
The Fry Equipment Corporation, the Guarantee Liquid Measure Company, the Marvel Equipment Company and the Fry Sales Corporation filed a consolidated return for the year 1927. This consolidated return showed*1296 a loss and no tax due from the consolidated group.
The Marvel Equipment Company was legally dissolved on March 28, 1928, and the Guarantee Liquid Measure Company was dissolved sometime thereafter.
The Commissioner of Internal Revenue rejected the consolidated return filed by the Fry Equipment Corporation, the Guarantee Liquid Measure Company, the Marvel Equipment Company, and the Fry Sales Corporation for the year 1927, for the reason that the Guarantee Liquid Measure Company and the Marvel Equipment Company had filed separate returns for the years 1925 and 1926.
The Fry Equipment Corporation, the Guarantee Liquid Measure Company, the Marvel Equipment Company, and the Fry Sales Corporation did not request permission from the Commissioner of Internal Revenue, either collectively or individually, to file a consolidated return for the year 1927.
If the Fry Equipment Corporation, the Guarantee Liquid Measure Company, the Marvel Equipment Company, and the Fry Sales Corporation are permitted to file a consolidated return for the year 1927, then there is no deficiency due from the petitioner corporation.
*517 OPINION.
VAN FOSSAN: The issue in this proceeding is whether*1297 the petitioner and three other corporations affiliated with it as stated in the findings of fact were entitled to have their income-tax liability for the taxable year 1927 computed on a consolidated basis.
The applicable statute is section 240(a) of the Revenue Act of 1926, which reads as follows:
Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.
During the taxable year 1926 the Guarantee Liquid Measure Company owned all of the capital stock of the petitioner, having acquired it in the year 1925. During 1925 and 1926 the two corporations were affiliated. For each of these years each corporation filed a separate income-tax return. Therefore, they exercised their right to elect between*1298 filing a consolidated return and filing separate returns and, pursuant to the provisions of the above-quoted section of the Revenue Act of 1926, could not file a consolidated return for 1927 without the permission of the Commissioner. The petitioner contends, however, that in 1927 a new affiliated group was created, consisting of the Fry Equipment Corporation, the Fry Sales Corporation, the Guarantee Liquid Measure Company and the petitioner, which corporations were affiliated during the taxable year; that on October 1, 1927, the Fry Equipment Corporation became the "parent" of this new group by its acquisition of all of the capital stock of the Fry Sales Corporation and by the acquisition of all of the capital stock of the Guarantee Liquid Measure Company, which latter company owned all of the capital stock of the petitioner; and that consequently the new parent corporation had the right to elect to file a consolidated return on behalf of the alleged new group for the year 1927.
The courts and the Board have held, in effect, that the addition of one or more corporations to an affiliated group does not create a new tax-computing group and does not give rise to a new right of election. *1299 ; ; ; .
It is true that in the cited cases the "parent" corporation continued to be the same, while the facts in the present proceeding disclose *518 that in October of the taxable year in question the Fry Equipment Corporation acquired all of the capital stock both of the Fry Sales Corporation and of the Guarantee Liquid Measure Company, which last named corporation owned all of the petitioner's stock. This distinction is not controlling. . The relations between the Guarantee Liquid Measure Company and the petitioner remained the same at the time of the acquisition of the former corporation's capital stock by the Fry Equipment Company and, so far as the evidence discloses, this relationship continued throughout the taxable year.
The fundamental question, however, is whether or not there was an affiliated group during the year 1926 which continued throughout the*1300 year 1927. Under the cited decisions that question must be decided in the affirmative. The original affiliated group, although enlarged by additions, still continued during the taxable year. Therefore, notwithstanding that late in the taxable year one of the added corporations acquired all of the capital stock of two others of the -roup, the group was not changed, nor does such acquisition of capital stock modify the legal effect of the action of the two original members of the group in exercising the right of election conferred by the statute by filing separate returns for the taxable year 1926. The corporations composing the original group, which included petitioner, were bound by that election and their right of election under the statute without permission of the Commissioner was extinguished. It follows that under the provisions of section 240(a) of the Revenue Act of 1926 the four corporations herein-before named were not entitled to have their tax liability for the year 1927 computed on a consolidated basis.
In reaching this conclusion we have not overlooked the decision of the Circuit Court of Appeals for the Third Circuit in *1301 . In the present case the facts do not reveal the relative size of the corporations added to the original group, and for that reason it can not be said that the reasoning of the court in the Stonega case would lead to a different result from that announced above. Moreover, we are unable to find in the phraseology of section 240(a) of the Revenue Act of 1926 an indication that it was the intention of Congress to make the right of a new election dependent upon the "size" of the additions to an affiliated group.
Since it appears that the consolidated return for the year 1927 was filed without the permission of the Commissioner, he did not err by rejecting it.
Decision will be entered for the respondent.