in liquidation take a new basis in the hands of such parent corpora

tion.

We are not called on to decide whether respondent should have included the profit in the consolidated return for 1917 for excess profits tax purposes, but the fact that it was not included can not be availed of by respondent as authority for using cost to the Fall River Company instead of cost to petitioner as the basis for determining the depreciation allowance and opening inventory of petitioner for the year 1918. The assets were acquired by petitioner in 1917 at a cost equal to their fair market value. There is no provision in the 1918 Act authorizing or requiring any other basis than cost to the taxpayer of property acquired after March 1, 1913, to be used in computing gain or loss or depreciation. Section 331 of the act relates only to the value at which assets acquired upon reorganization, consolidation or change of ownership can be included in invested capital.

The District Court of Massachusetts in the case of this petitioner, American Printing Co. v. United States, 53 Fed. (2d) 98, had before it the same question for 1919 as is involved in this case, that is, the correct basis for depreciation of the assets acquired from Fall River Company. The respondent found an overassessment for 1919, although he determined depreciation on these assets on the basis of cost to Fall River Company, and the petitioner brought a suit for recovery of the taxes paid resulting from the use of the lower basis. The District Court held that the basis for depreciation was the fair market value of the assets at the time of the transfer to the petitioner. See also Wilmington Steamboat Co. v. Sturgess, 52 Fed. (2d) 510. Both Wilmington Steamboat Co. v. Sturgess and American Printing Co. v. United States, supra, were cited with approval by the Circuit Court of Appeals in Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed. (2d) 568, which decision was affirmed by the Supreme Court in Burnet v. Aluminum Goods Mfg. Co., supra.

The basis for determining the depreciation allowance for 1918 of the assets acquired by the petitioner from the Fall River Company is the cost of such assets to petitioner, which cost is their fair market value at the date acquired by petitioner, and the correct basis for valuing the opening inventories of raw cotton and cotton in process is also cost to petitioner, which was the fair market value of the raw cotton and cotton in process at the date acquired. The parties have stipulated the amount of the depreciation deduction on such basis and also the amount of the inventories. These figures, as set forth in our findings of fact, will be used in the recomputation under Rule 50.

Reviewed by the Board.

Judgment will be entered under Rule 50.

MAY OIL BURNER CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 42772. Promulgated April 26, 1933.

A net loss of a New York corporation for 1924 and 1925 may not be deducted in 1926 by a Maryland corporation with different powers and different capitalization which has bought the New York corporation's shares and business and files a separate return.

Robert Ash, Esq., for the petitioner.
Bruce A. Low, Esq., for the respondent.

The respondent determined a deficiency of $11,705.91 in the petitioner's income tax for 1926, resulting from the adjustment of five items. Of the first three the petitioner makes no complaint, and as to the fourth, disallowing depreciation, the error assigned in the petition has not been pressed and is here treated as abandoned. The remaining item is the only subject of controversy. The Commissioner disallowed an alleged statutory net loss of the petitioner's predecessor, amounting to $85,540.71 for 1924 and 1925, on two grounds-(1) that this petitioner may not deduct any such prior losses sustained by another separate corporation, and (2) that of the $85,540.71 claimed, $45,000 of the amount for 1925 is in no event allowable, since it represents capital shares issued by the predecessor corporation to its officers for alleged services, and such shares are not shown to have had any value when issued and the reasonable value of the services, if any, is not shown.

FINDINGS OF FACT.

The petitioner is a corporation, organized under the laws of Maryland by a certificate of incorporation dated January 21, 1926.

In October 1923, May Burner, Inc., was organized as a corporation under the stock corporation law of New York by May, Zeamans and Sancier, residents of New York State. They were the original shareholders and directors. The corporation began with an authorized capital stock of $20,000, consisting of 200 shares of common stock having a par value of $100 each. Its primary purpose was to manufacture, sell, and install oil burners and oil-burning equipment, and its powers were broadly stated in respect of holding property, real and personal, including corporate securities, patents and inventions, borrowing money and otherwise, to carry out its purpose. In 1924 its certificate was amended to permit an increase in its shares to 5,000 common shares with a par value of $100 each. The corporation carried on its business at a continuing loss. In the spring of 1925 it moved its factory to Maryland. E. M. Fleischmann was at that time

its president, S. J. Wise its vice president, and Albert J. Fleischmann its treasurer. In 1924 and 1925 the corporation needed money and these three officers, in order to keep the company going, subscribed for additional stock for which they paid par of $100 a share.

On January 21, 1926, the petitioner was organized as a Maryland corporation with substantially the same powers as those of the New York corporation and others in addition. Its certificate states as the first purpose of its formation, "to purchase or otherwise acquire, own, operate and dispose of all or any part of the business and properties of May Oil Burner Corporation, a New York corporation; to make payment thereof by the issuance of preferred and common stock of this corporation, or in any other manner permitted by law. and in connection therewith to assume any or all of the bonds, mortgages, franchises, leases, contracts, indebtedness, liabilities and obligations of said corporation." Its principal office was to be in Baltimore. It was authorized to issue 300,000 shares as follows. 50,000 seven per cent cumulative preferred A at $10 par, redeemable for $10.50, having no voting power except after dividend arrears for two years; 50,000 seven per cent cumulative preferred B at $10 par, redeemable for $11 and having voting power; 200,000 common shares without par value. Both classes of preferred were convertible into common.

Shortly after its organization the Maryland corporation took over the New York corporation's assets, assumed its liabilities and issued to its shareholders 10 shares of Maryland stock for each one share of New York stock. It had the same officers, the same stockholders in the same proportions, and carried on substantially the same business.

There were several reasons for organizing the petitioner. The officers were all residents of Maryland, the operations of the business were carried on in Maryland, and a Maryland corporation was more expedient and practical; foreign corporation taxes were eliminated; credit was more easily obtained in Maryland by a Maryland corporation; and there were statutory advantages in respect of litigation.

In 1925 the New York corporation issued to E. M. Fleischmann. president, $25,000 par value stock; S. J. Wise, vice president, $15,000 par value stock; and A. J. Fleischmann, treasurer, $5,000 par value stock. These shares were regarded by the corporation as compensation for services rendered. The services rendered by E. M. Fleischmann were those of the president actually conducting the affairs of the corporation. The services rendered by S. J. Wise were those of the vice president at New York in charge of the business at that place. The services rendered by A. J. Fleischmann were those of

the treasurer and of deciding policies and securing needed funds for the corporation.

A. J. Fleischmann omitted from the gross income shown in his personal return anything in respect of the shares which he received in 1925 from the New York corporation because he regarded the value of such shares as "problematical." The only transaction in such shares during 1925 was the aforesaid issuance by the corporation to the existing shareholders at par in order to enable the company to secure additional capital to keep it going. The price at which the shares of May and Zeamans were sold in 1923 is unknown. The New York corporation has not been dissolved. It still exists but is not engaged in business.

No consolidated returns have been filed. The New York corporation filed its separate return for 1925, and the Maryland corporation filed its separate return for 1926. The balance sheet of the New York corporation at the end of the year 1925, attached to its return, and the balance sheet of the Maryland corporation at the beginning of 1926, attached to its return, are similar as to some items. The only substantial differences are that good will is shown on the former balance sheet at $154,365.90 and is omitted entirely from the latter balance sheet, and the amount of loans payable is shown on the former balance sheet at $134,222.59 and is omitted from the latter. The omission of these two items, together with five other unsubstantial changes, has the result of reducing the net worth shown on the opening balance sheet of the Maryland corporation to a figure $19,246.44 less than the net worth shown on the closing balance sheet of the New York corporation.

The Maryland corporation has made a profit each year since its organization.

OPINION.

STERNHAGEN: The petitioner, a Maryland corporation, contends that it may compute its net income for 1926, the first year of its existence, by taking as a deduction the alleged statutory net loss of 1924 and 1925 of another corporation, of New York, whose business and shares it acquired immediately upon incorporation. It argues that with a proper regard for "substance" and a proper disregard of "form," it must be found that a continuing business was operated by the same owner, and that as a taxpayer such owner has the legal right in 1926 to deduct its net losses for 1924 and 1925. This proposition has been considered so many times in the period since the Board was created, resulting each time in an adverse decision, that nothing can be added to the discussion of the Board's view of the rule. White House Milk Co., 2 B. T. A. 860 (1925); Maytag Co., 17 B. T. A. 182; West Point Marion Coal Co., 19 B. T. A. 945;

Plumber's Supply Co., 20 B. T. A. 459; Standard Silica Co., 22 B. T. A. 97; Athol Mfg. Co., 22 B. T. A. 105; Industrial Cotton Mills Co., 22 B. T. A. 648; Clark Dredging Co., 23 B. T. A. 503; Overbrook Nat. Bank of Philadelphia, 23 B. T. A. 1390; New Colonial Ice Co.. 24 B. T. A. 886; Hartford-Empire Co., 26 B. T. A. 134; ElliottGranite Linen Corp., 26 B. T. A. 936; Farmers' Cotton Oil Co.. 27 B. T. A. 105. The Circuit Court of Appeals, First Circut, adopted the rule in Athol Mfg. Co. v. Commissioner, 54 Fed. (24) 230. As to a continuing business in an affiliated group, the Supreme Court approved the general rule that the deduction for prior net loss was limited to the particular corporate taxpayer sustaining it, Woolford Realty Co. v. Rose, 286 U. S. 319, even when the same person owned the shares of the affiliated corporations, and the practical incidence of the decision was upon him, Planters Cotton On Co. v. Hopkins, 286 U. S. 332. The doctrine that corporations are in all but extraordinary cases to be dealt with under the income tax laws as separate taxpayers, irrespective of who or how many hold the shares, is firmly and authoritatively established by the recent decisions in Dalton v. Bowers, 287 U. S. 404; Burnet v. Commonwealth Improvement Co., 287 U. S. 415; and Burnet v. Clark, 287 U. S. 410, in the last of which the court said:

A corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances not present here can the difference be disregarded.

But the petitioner urges that these considerations must give way to what it conceives to be a contrary decision of the Circuit Court of Appeals, Fourth Circuit, in Industrial Cotton Mills Co. v. Commissioner, 61 Fed. (2d) 291, the petitioner being within that circuit and hence subject to the jurisdiction of that court on review. Even if this case were quite like the Industrial case, and it appeared that the decisions of the Supreme Court compelled a decision different from that in the Industrial case, this Board, without sacrificing any of its great respect for the Circuit Court of Appeals, would have no alternative to following the rule laid down by the Supreme Court, if the rule seemed to the Board to be clear. But happily we are not called upon to make such a choice. In the Industrial case, the earlier and losing corporation was, by an affiliation and later by a merger, absorbed into the later corporation, which was organized under the laws of the same state and had, so far as appears, the same incidents. Here the old corporation of New York merely sold out to the new corporation of Maryland, which had an entirely different capitalization and broader powers. These differences are as great as those which caused the Supreme Court to distinguish Marr v. United States, 268 U. S. 536, from Weiss v. Stearn, 265 U. S. 242. The