*2251 Where an individual coming within the conditions of section 229 of the Revenue Act of 1921 exercises the option granted therein to have the 1921 income of the business organized as a corporation taxed as a corporation, such tax may not be assessed against the corporation, overruling James B. Clark,12 B.T.A. 615">12 B.T.A. 615, in so far as it is inconsistent therewith.
*1096 This proceeding involves a deficiency of $66,011.87 in income and excess-profits taxes for 1921. It is alleged that respondent erred in (1) assessing against petitioner taxes computed on certain income of Artemas Ward, an individual, and (2) refusing to allow as a deduction depreciation on a certain contract on the basis of its January 1, 1921, value. The hearing was limited to the first issue. From the stipulation of facts read into the record we make the following findings of fact.
*1097 FINDINGS OF FACT.
The petitioner, a New York corporation, was organized December 30, 1921.
On or about January 3, 1922, Artemas Ward, an individual, now deceased, offered*2252 to transfer to the petitioner, the advertising, vending and news business conducted by him for a number of years prior thereto as a sole proprietor under the name and style of Ward & Gow, in exchange for the petitioner's entire authorized capital stock, consisting of 10,000 shares of no-par-value common stock. This offer was formally accepted by the petitioner's directors on the same date. This offer was subject, however, to the conditions that Artemas Ward obtain the consent of the Interborough Rapid Transit Co. to the assignment to the petitioner of a certain contract theretofore entered into between Artemas Ward and the Interborough Rapid Transit Co. This consent was later obtained and on March 13, 1922, the said business and the assets thereof were transferred to the petitioner in exchange for its authorized stock.
Artemas Ward elected to exercise the option, granted by section 229 of the Revenue Act of 1921, to have the net income of the said advertising, vending and news business from January 1, 1921, to the date of petitioner's organization taxed as the net income of a corporation is taxed under Title II and III of such act.
During 1921 Artemas Ward owned all of the*2253 outstanding stock of the following corporations: Listerated Gum Corporation, Ideal Cocoa & Chocolate Co., Southwestern Farm, Inc., Broadacres Dairy Farms, Inc., King Motor Car Co., King Car Corporation of New York, Intercity Car Advertising Co., and Turkey Knob Orchard, Inc.; and of the Leonia Heights Land Co. from May 21, 1921, to December 31, 1921. In that year the Ideal Cocoa & Chocolate Co. owned all of the capital stock of the Puritan Pure Food Co.
On March 15, 1922, the Listerated Gum Corporation filed a tentative consolidated income and profits-tax return. On the same date a Form 1122 (Information Return of Subsidiary or Affiliated Corporation) was filed by the following corporations: Artemas Ward, Inc., Ideal Cocoa & Chocolate Co., the Southeastern Farms, Inc., Broadacres Dairy Farms, Inc., King Car Corporation of New York, and Puritan Pure Food Co. The parties were unable to say whether a Form 1122 was filed by the King Motor Car Co., Intercity Car Advertising Co., Turkey Knob Orchard, Inc., and Leonia Heights Land Co. No Form 1122 was filed by Artemas Ward.
A tentative income and profits-tax return, showing no items of gross income or deductions, was filed by the*2254 Listerated Gum Corporation and affiliated corporations on Form 1122, September 15, *1098 1922. A final consolidated income and profits-tax return, headed "Listerated Gum Corporation and Affiliated Corporations" was filed on April 25, 1923.
The net income and invested capital of the advertising, vending and news-selling business of Artemas Ward for 1921 were reported in the return filed on April 25, 1923, under the heading "Artemas Ward, Inc." No income was reported in the return under the heading "Artemas Ward."
A tentative income-tax return was filed by Artemas Ward on Form 1040 for 1921. On April 24, 1923, he filed a final return on the same form for 1921 in which he reported his income for that year from all sources other than the advertising, vending and news business, including withdrawals of $112,563.44 from said business reported as distributions or dividends under section 229 of the 1921 Act.
Field examinations of these returns were made by the respondent's representatives and reports of such examinations were made to the respondent during 1924 and 1925 showing the facts with respect to the organization of the petitioner, the transfer to the petitioner of the*2255 assets and business of the advertising, vending and news business conducted by Artemas Ward prior to and during 1921, as well as the fact that Artemas Ward had exercised the option granted by said section 229 to have the net income of the advertising, vending and news business taxed in accordance with the provisions of that section, and the manner in which the income of such advertising, vending and news business for 1921 had been reported to the respondent. The revenue agent disallowed the consolidation of the advertising, vending and news business with the Listerated Gum Corporation and its affiliated companies, and in 1925 proposed a deficiency of $213,195.04 against Artemas Ward solely on account of the advertising, vending and news business. The respondent upon final audit allowed the consolidation and proposed the deficiency in question herein against the petitioner.
In March and September, 1922, and April, 1923, Artemas Ward, Inc., owned and was operating all of the business and assets of the advertising, vending and news business which in 1921 was owned by Artemas Ward, and retained and held in its possession all of the profits and income earned by said business in 1921, *2256 except the distributions of $112,563.44 referred to above.
No objection was made to the assessment of the tax liability of the affiliated group for 1921 against Artemas Ward, Inc., prior to the filing of an amended petition herein.
The net taxable income of the advertising, vending and news business for 1922, both before and after its transfer to the petitioner, amounted to $319,678. Such income was offset by losses of *1099 $366,229.62 of other corporations included in the consolidated return for that year, and no tax was assessed or paid by any taxpayer on account of such income of either Artemas Ward or Artemas Ward, Inc.
OPINION.
ARUNDELL: The single issue before us is whether where an individual takes advantage of the provisions of section 229 of the 1921 Act, set forth in full below, the tax computed on the 1921 income of the individual from the business organized as a corporation may be assessed against the corporation or must be assessed against the individual:
SEC. 22. That in the case of the organization as a corporation within four months after the passage of this act of any trade or business in which capital is a material income-producing factor, *2257 and which was previously owned by a partnership or individual, the net income of such trade or business from January 1, 1921, to the date of such organization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1921, and the undistributed profits or earnings of such trade shall not be subject to the surtaxes imposed in section 211, but amounts distributed on and after January 1, 1921, from the earnings or profits of such trade or business accumulated after December 31, 1920, shall be taxed to the recipients as dividends; and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business: Provided, That this section shall not apply to any trade or business, the net income of which for the taxable year 1921 was less than 20 per centum of its invested capital for such year: Provided further, That any taxpayer who takes advantage of this section shall pay the tax imposed by section*2258 1000 of the Revenue Act of 1918 as if such taxpayer had been a corporation on and after January 1, 1921.
The decision turns upon a construction of the statute. Exclusive of the conditions an individual or partnership must meet to obtain the benefits of the law, about which no question is being made, the statute provides, in effect, that where a trade or business of an individual or a partnership is incorporated within four months after the passage of the Act, the net income of such trade or business from January 1, 1921, to the date of incorporation, may, at the option of the individual or partnership, be taxed as the net income of a corporation is taxed. There is nothing in the statute relieving the individual of his liability for the tax after it has been determined in the manner provided for therein, or indicating an intention that the tax should be imposed upon the corporation organized to take over the business of the individual. Had Congress intended to make the newly formed corporation, rather than the individual, liable for the tax on the income of the business from January 1, 1921, to *1100 the date of its organization, it certainly would not have limited the*2259 application of Titles II and III of the 1921 Act in the calculation of the tax, or required the individual exercising the option to pay the capital-stock tax imposed by section 1000.
In introducing the provisions of section 229 as amendment 354 to H.R. 8245, which was subsequently enacted as the Revenue Act of 1921, Senator Frelinghuysen remarked on the floor of the Senate:
Mr. President, this simply provides that where a partnership or business desires to incorporate, and does so within four months after the passage of this Act, they shall be taxed as to net income as if the corporation had been in existence of January 1, 1921; that is, they shall be taxed as a corporation and not as a partnership or incorporated [unincorporated] business.
The belief of the conferees of the House of Representatives on the pending bill, that the proposed provision operated so as to continue the liability of the individual for the tax, is clearly shown by their report of the conference had with representatives of the Senate on the bill, in which the following appears:
The amendment grants to individuals and partnerships the privilege, if exercised within four months after the passage of*2260 this act, of organizing their trade or business as a corporation and paying taxes as if the corporation had been in existence from January 1, 1921, to the date of organization. (No. 486, page 32.)
These excerpts from the proceedings of Congress on the Act show legislative intention to preserve the liability of the individual for the tax rather than to impose it upon the corporation organized to take over the trade or business.
The action of the respondent in proposing to assess against the petitioner the tax on the income derived by Artemas Ward in 1921 from the business taken over by the corporation appears to be directly contrary to his regulations and the position he took in other cases. Article 933, Regulations 45; I.T. 1857, C.B. II-2, 193; A.R.R. 6745, C.B. III-1, 404; James B. Clark,12 B.T.A. 615">12 B.T.A. 615 (Non-acquiescence, C.B. VIII-2); Reuben Sadowsky,2 B.T.A. 281">2 B.T.A. 281; Sadowsky v. Anderson, 25 Fed.(2d) 1014, and 29 Fed.(2d) 677. In A.R.R. 6745, supra, in interpreting section 330 of the 1918 Act, which, in respect to the question involved here, does not materially differ from section 229 of the 1921 Act, the*2261 individual exercising the option granted by the statute was expressly held to be liable for the tax calculated on the income of his business from January 1, 1919, to the date of organization of the corporation.
The respondent contends that, as Artemas Ward elected under section 229 to be taxed as a corporation and petitioner corporation in fact returned the income of Artemas Ward, the individual, as its own, and the tax liability of petitioner and its affiliated corporations was determined on the basis of such return, petitioner should be *1101 estopped to deny that the income is its own. We agree that the stipulated facts on their face indicate that Artemas Ward, the individual, was materially benefited by respondent's determination, which permitted losses sustained by various corporations entirely owned by Ward to be offset against the income in question. We know of no way, however, whereby petitioner may be compelled to report and pay a tax on income it did not in fact receive, or, how it can now be estopped from showing what the true facts are. Ward is dead and the ownership of petitioner has passed to others. We think respondent's contention as a matter of law is*2262 without merit.
The case of James B. Clark, supra, is hereby overruled in so far as it is contrary to the conclusion reached herein.
Reviewed by the Board.
Decision will be entered for the petitioner.