George D. Roper and Kate B. Roper are husband and wife, and Mabon P. Roper is their son.

At the time that the shareholders had consented to the consolidation, the legislature of Illinois had under consideration a codification and revision of the law relating to corporations, and, upon advice of counsel, actual merger or consolidation was deferred until the new laws should become effective. It was thereupon decided that the shares of the four companies be deposited in escrow until the new corporation could be organized. An arrangement was made with the Peoples Bank & Trust Company of Rockford, Illinois, to receive deposits of the shares, issue receipts therefor, and eventually to exchange shares in the consolidated corporation for the receipts; and shareholders were notified to deposit their shares with that company. In March and April, 1919, after inventories had been taken and audits had been made, all of the shares, except 20 of the 95 shares of the Rockford Company owned by George D. Roper, were deposited with the Trust Company by the shareholders, who received receipts entitling them to receive shares in the new company when organized, upon surrender of the receipts and payment of a nominal amount of cash.

The new corporation law of Illinois was passed and became effective on July 1, 1919, and on that day the boards of directors of the four companies passed resolutions to consolidate, which were approved by the shareholders of each corporation in resolutions adopted on July 22, 1919. The resolutions contained the terms of consolidation and are as follows:

RESOLVED: That this Corporation [Trahern Pump Co.] consolidate with Eclipse Gas Stove Co., Trahern Pump Company, American Foundry Company, and Rockford Vitreous Enamel Mfg. Co., upon the following Terms and Conditions, to-wit:

(1) The consolidated corporation shall take the name of Geo. D. Roper Corporation.

(2) Said consolidated corporation shall have a capital stock of Sixty-three Thousand, Eight Hundred ($63,800.00) Dollars. All of said capital stock shall be common stock consisting of 638 shares of the par value of One Hundred ($100.00) Dollars each.

(3) Said consolidated corporation shall exchange its capital stock for the present capital stock of said four consolidating corporations on the basis of one share of the capital stock of said consolidated corporation for each Fifteen Hundred and Sixty-nine ($1,569.00) Dollars of par or face value of the capital stock and surplus and undivided profits, as of September 1st, 1918, of said consolidating corporations, respectively.

(4) The capital stock of said consolidated corporation when so exchanged for the capital stock of said four consolidating corporations shall be distributed to the present stockholders of each of the latter in the proportion that the number of shares held by each stockholder bears to the total number of shares, now issued and outstanding, of the consolidating corporation in which the stock is held.

(5) The capital stock of said four consolidating corporations, now issued and outstanding, shall be deposited, by the holders thereof, with the Peoples Bank and Trust Company, of Rockford, Illinois, as Trustee, to be exchanged by said Trustee for the capital stock of the consolidated corporation, on the basis named, and said stock when so exchanged, shall be delivered by said Trustee to said stockholders in the number of shares to which each is entitled on said basis.

On August 14, 1919, the four companies filed with the Secretary of State of Illinois a statement of the action taken by the shareholders and other information respecting the consolidation, and on August 18, 1919, the Secretary of State issued a certificate that the four companies had consolidated into and formed the Geo. D. Roper Corporation. The shares of the Geo. D. Roper Corporation were issued in the names of the shareholders of the four companies on the basis of the book value of their assets as of August 31, 1918, and delivered to the Trust Company, which, in turn, delivered them to the shareholders upon surrender of their temporary receipts.

From August 31, 1918, to August 18, 1919, the four companies were operated as one, and after the latter date the Geo. D. Roper Corporation took over and operated the same business which had theretofore been operated by each of the four companies, without any change other than to combine the several departments to promote efficiency.

The four companies filed a consolidated return for the fiscal year ended August 31, 1919, showing taxes due in the amount of $10,638.93. The respondent determined that the Eclipse and American companies were affiliated, but that the Rockford and Trahern companies were not. He assessed a tax of $22,369.04 against the Trahern Company in November, 1924, and on July 6, 1928, notified that company of the allowance of its claim for abatement in the amount of $1,346.70, and of the rejection of such claim in the amount of $21,022.34.

OPINION.

STERNHAGEN: A motion of the respondent to dismiss for want of jurisdiction because the Trahern Pump Company, to which the deficiency notice was addressed, had been previously dissolved and the Roper Corporation, which, as its successor, had instituted this proceeding, was not the corporation as to which a deficiency had been determined, was denied prior to the hearing. It was renewed at the time of trial. Since the Trahern Corporation was not simply dissolved, but was, with others, consolidated under the Illinois consolidation statute to form the Roper Corporation, the Board has jurisdiction of a proceeding instituted in the name of either, and a fortiori one instituted in the name of both, Bowman Hotel Co., 24 B. T. A. 1193; Oswego Falls Corp., 26 B. T. A. 60.

The petitioners contend that from the beginning of the last fiscal period, i. e., September 1, 1918, until the date of the consolidation into the Roper Corporation, i. e., August 18, 1919, the Trahern Company was affiliated, within section 240 of the Revenue Act of 1918, with the three other corporations, by virtue of which a consolidated return was rightfully filed. The Commissioner held against the inclusion of the Trahern Company in the affiliated group, and computed the deficiency with regard to its separate income.

The evidence is that from August 31, 1918, to February 15, 1919, 370 shares (30.83 per cent) were owned by unidentified persons, and 101 shares (8.41 per cent) were owned by Jilbert, who was not a shareholder in any of the other three corporations. Thus, so far as this record shows, over 39 per cent of the total outstanding shares was owned by persons who had no relation to the other corporations. In the succeeding period until the date of the statutory consolidation, i. e., August 18, 1919, as shown by the list of shareholders on February 15, 1919, and the temporary receipts for shares deposited, the holders of 35 33 per cent of the shares of the petitioner were not shareholders in any of the other three corporations. There is no evidence from which it could be said these shareholders of 39.24 per cent and 35.33 per cent, respectively, were the same interests as those who owned the remaining 60.76 per cent and 64.67 per cent. It needs no demonstration to hold that substantially all the shares are not owned by the same interests, and Handy & Harman v. Burnet, 284 U. S. 136, has settled any lurking doubt.

The petitioners argue, however, that the express intention to consolidate, with its mere postponement to await the modification of the state statute, the deposit of shares with the trust company, the unified operation of the business of the four corporations, and the consummation of the consolidation upon the basis of values on September 1, 1918, was within the intendment of the affiliation provision of the revenue act and a substantial compliance with its conditions; and, furthermore, that this contention is consistent with the exposition of the statute in Handy & Harman v. Burnet, supra. The argument must, we think, be rejected. Notwithstanding the deposit of shares and the unification of management and operation, there continued until August 18, 1919, a want of that "legally enforceable control" which the Supreme Court held to be indispensable to affiliation. During the period of suspense of the plan of consolidation, the minority shareholders of the Trahern Company were still the owners of their shares in that corporation. They owned no shares in any of the other corporations, and no one else had legally enforceable control of their shares. Prior to the proposed consolidation, they were not, as petitioners argue, beneficial owners, proportionate or otherwise, in any of the shares of the other corporations. The clause of the Handy

& Harman case which petitioners invoke is "unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations." This may not be forcibly expanded to include the tentative expectancy of the separate shareholders which is here. Lafayette-South Side Bank v. Commissioner, 33 Fed. (2d) 646. Nor is the test of legally enforceable ownership or control of shares satisfied by control of the business, even though the shareholders of all corporations tolerate a shifting of profits or expenses, Commissioner v. Gong Bell Mfg. Co., 48 Fed. (2d) 205 (certiorari denied, 284 U. S. 670), reversing 15 B. T. A. 152; Black Diamond Coal Co. v. Commissioner, 61 Fed. (2d) 573. That the basis of measuring the individual shareholder's right in the consolidated corporation when formed was the face value of capital, surplus and undivided profits as of September 1, 1918, is not determinative of the legally enforceable control during the interim period, nor is the fact that during that period there was no distribution of surplus or profits. They only indicate the existence and fulfillment of the plan of consolidation of which they were incidents; but, as we have seen, the plan and its incidents are not the determinants of the statutory control of shares.

The petitioners claim that the deficiency determined on the basis of a separate return is excessive in so far as it does not take into the computation the amount paid by or for the Trahern Company as its share of the tax assessed upon the consolidated return. The petitioners are obviously entitled to offset the deficiency by such payment of 1919 tax already made, Washburn Wire Co., 26 B. T. A. 1146; Folger & Co., 27 B. T. A. 1.

Judgment will be entered under Rule 50.

WALTER G. WINNE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 60900. Promulgated December 19, 1932.

1. Compensation paid to the petitioner for services rendered as counsel to several political subdivisions of a state is not exempt from Federal taxation.

2. Compensation received by the petitioner as master or special master in chancery is exempt from Federal taxation. David K. Cochrane, 26 B. T. A. 1167, followed.

B. G. Carson, Esq., for the petitioner.

C. A. Ray, Esq., for the respondent.

The Commissioner determined a deficiency of $150.20 in the petitioner's income tax for 1929. The pleadings admit the taxability of interest received upon obligations of the City Housing Corporation

of New York City, and the deductibility of interest paid in carrying those obligations. The issues for our determination are, first, the taxability of compensation for services rendered by the petitioner to certain political subdivisions of the State of New Jersey and the fees received by him as a master or special master in chancery; second, the amount of the said compensation to be included in this petitioner's income. The respondent duly asserts claim for any increased deficiency that may result from our redetermination.

FINDINGS OF FACT.

The petitioner is a resident of Hackensack, New Jersey. Since 1922 the petitioner has been a member of the law partnership of Winne & Banta, of Hackensack.

On January 1, 1929, the petitioner was appointed counsel for the Hackensack Improvement Commission, the governing body of the City of Hackensack. The petitioner's salary as counsel was fixed by municipal ordinance, which, in so far as material here, is as follows:

CITY OF HACKENSACK.

AN ORDINANCE FIXING SALARIES OF THE OFFICERS AND EMPLOYEES OF THE HACKENSACK IMPROVEMENT COMMISSION, THE GOVERNING BODY OF THE CITY OF HACKENSACK.

Be it ordained by the Hackensack Improvement Commission:

11. That the Counsel to the Commission shall receive a salary of twelve hundred (1200) dollars per year, which salary shall cover all legal services excepting services rendered in tax matters, tax adjustment matters, foreclosures of tax liens, special opinions, sale of property, construction of sewers and contracts therefor, local improvements including contracts therefor, assessments for sewers, sidewalks and local improvements, bond issues, examinations of titles to land, acquisition of property and actual litigation.

On January 7, 1929, the petitioner subscribed to the following oath:

I, WALTER G. WINNE, being duly sworn according to law do solemnly swear that I will faithfully and impartially discharge all the duties imposed upon me by law as attorney for the City of Hackensack to the best of my knowledge and understanding without favor and I do solemnly swear that I will support the Constitution of the United States and the Constitution of the State of New Jersey and that I will faithfully, impartially and justly perform the duties of the office as Attorney for the City of Hackensack according to the best of my ability and understanding, so help me God.

During the taxable year 1929, the petitioner received payments in the sum of $7,184.35 for services rendered to the City of Hackensack. Of this amount, $1,200 represented salary, authorized by the above