The parties have entered into a stipulation as follows:

The value on March 1, 1913 of the land and building at 16 East 37th Street, New York City, was $115,000 of which $104,000 was the value of the land and $11,000 was the value of the building.

On March 1, 1913 the building had an estimated future life of twenty-five years.

On January 6, 1920, the petitioner leased the aforesaid land and building to the American Mutual Liability Insurance Company of Boston, Massachusetts, for ten years and in accordance with the terms of the lease improvements to the building were made by the lessee during 1920 to the value of ninety-five thousand, one hundred and eighty-two dollars ($95,182) which were to revert to the lessor upon the termination of the lease.

On December 31, 1920 the estimated future life of the building after improvements was forty years.

No part of the cost of the improvements made by the lessee which pursuant to the lease revert to the lessor at the termination of the lease has been reported by the petitioner as taxable income.

The petitioner sold the land and building (and all improvements thereto) during the year 1927 for $175,125.00.

In his income tax return for the calendar year 1927 the petitioner reported a loss of $5,906.80 from the sale of the land and building. This amount is the difference between the net selling price of $175,125 and $181,031.80. The latter figure included March 1, 1913, value of $127,500, less depreciation of $13,095.60, plus $66,627.40, representing value to the lessor of improvements made in 1920 by his lessee on a 10-year lease, being 70 per cent of $95,182. The Commissioner computed a profit of $75,658.33 upon the sale of this property. He used the same net sale price as the petitioner used, but he subtracted from it only $99,466.67, representing March 1, 1913, value of $105,000 less $5,533.33, depreciation at the rate of 4 per cent for 135% years on a building valued at $10,000.

OPINION.

MURDOCK: Except as otherwise provided in section 202 of the Revenue Act of 1926, gain or loss under that act is the difference between the amount realized from a sale and the basis provided in subdivision (a) or (b) of section 204. Section 204 (b), which is applicable here, provides that the basis shall be the fair market value of the property as of March 1, 1913. This must be diminished by depreciation allowable up to the date of sale. Section 202 (b) (2). The parties have agreed upon March 1, 1913, value. There is no dispute about any figures nor is any argument made as to the effect of depreciation. The only question presented to the Board is whether or not, in computing gain or loss on the sale of the real estate, any adjustment should be made representing the cost or value of improvements made by the lessee.

No portion of the value of the improvements placed upon the property by the lessee has ever been reported as income by the petitioner. The Commissioner contends that because of this fact no adjustment representing value or cost of the improvements should be made in computing gain or loss. The improvements were made in 1920. The petitioner states that under the regulations in force for the year 1920 he should have included in his income for that year the value of the improvements to him. But he argues that his failure to properly report his income for 1920 has no effect upon the sale in 1927. He says that the law entitles him to add the cost of the improvements to March 1, 1913, value. As authority for this statement he cites section 202 (b) (1) of the Revenue Act of 1926 and article 1561 of Regulations 69. Section 202 (b) (1) provides that "proper adjustment shall be made for any expenditure or item of loss properly chargeable to capital account." The language of the regulations relied upon by the petitioner is, "In computing the amount of gain or loss, however, the cost or other basis of the property must be increased by the cost of capital improvements and betterments made to the property since the basic date." This article should not be read alone. Article 48 of Regulations 69 is pari materia. Read together, the two show that the Commissioner intended to allow an adjustment only to the extent that the value of the improvements had been included in income. The petitioner contends that article 48 does not cover the question of how gain or loss shall be computed in a case such as his, because it does not purport to deal with a sale of property subject to a lease. We agree that the article does not precisely cover his case, but it certainly points the way if there is no other article more nearly in point. If he had reported a profit at some time based upon the added value given to his property by the improvements placed thereon by his lessee, he might well argue that article 48 would authorize an adjustment to the extent of the amount reported as income. But he reported no profit and he can find no comfort in the regulations now.

The petitioner has not called our attention to any regulation which fits his case. Therefore, he must go back to section 202 (b) (1). What expenditure was properly chargeable to capital account in his case? He made no actual expenditure. If he should argue that he acquired the building after February 28, 1913, so that the basis is cost, this basis is nihil, since the improvement cost him nothing. Furthermore, he is not in position to charge himself with any amount of increase in capital value as he might have been had he first taken some part of the increase into income. Prior to the sale he never recognized the receipt of any benefit from the expenditures made by his lessee. Until he has recognized the receipt of the asset, he can not set up capital value for it.

The petitioner never gets to the question of whether or not any provision of the law prevents the adjustment for which he contends. He first must show some provision of the revenue act entitling him to the adjustment. He argues that the Commissioner should have taxed him with a profit in 1920, but, since the bar of the statute of limitations prevents any additional assessment for 1920, the Commissioner can not avoid the effect of the statute and correct his mistake in 1927 by refusing to recognize a proper adjustment under the law. In many cases this reasoning would be quite forceful. It would be more forceful here if the petitioner could point to any specific provision of the revenue acts or regulations as authority for his position. But he has not done so. Under such circumstances he should not have an adjustment for which he never laid a proper foundation. Reviewed by the Board.

Decision will be entered under Rule 50.

TRAHERN PUMP COMPANY AND GEO. D. ROPER CORPORATION, SUCCESSOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 40498. Promulgated December 19, 1932.

1. After consolidation under Illinois law of T corporation with other corporations to form R corporation and a subsequent determination and notice of deficiency to T, the Board has jurisdiction of a proceeding instituted in the name of either T or R or both.

2. Affiliation under Revenue Act of 1918, section 240, denied in respect of T, since during the taxable period at least 30.83 per cent of its shares were owned by persons who had no relation to the other corporations with which affiliation is claimed, notwithstanding unification of business and other facts incident to the proposed consolidation. Handy & Harman v. Burnet, 284 U. S. 136.

3. The deficiency of a taxpayer corporation which with others has incorrectly filed a consolidated return and which is held not to be affiliated with such other corporations should be computed by taking into account the part of the consolidated tax paid by or in behalf of the taxpayer corporation.

Albert W. Torbet, C. P. A., and B. B. Early, Esq., for the petitioner.

Elden McFarland, Esq., and William S. Delaney, Esq., for the respondent.

The respondent assessed against the Trahern Pump Company a deficiency in income and profits tax of $22,369.04 for the fiscal year ended August 31, 1919, and notified it of the rejection of its claim for abatement to the extent of $21,022.34.

Near the close of the taxable year the Trahern Pump Company and three other corporations were merged or consolidated into a

corporation known as the Geo. D. Roper Corporation. The Trahern Pump Company and the three other corporations filed a consolidated return for the fiscal year ended August 31, 1919, but the respondent computed the tax liability of the Trahern Pump Company on the basis of a separate return. The issues are: (1) Whether the Board has jurisdiction of this proceeding, based on a deficiency notice mailed to the Trahern Pump Company after it and other corporations had been merged or consolidated into the Geo. D. Roper Corporation. (2) Whether the Trahern Pump Company and the three other corporations were affiliated within the provisions of the Revenue Act of 1918 and entitled to a computation of their tax liability on the basis of a consolidated return. (3) Whether the respondent should have credited against the deficiency assessed against the Trahern Pump Company any part of the tax shown on the consolidated return, which was assessed against one of the other three corporations and which was paid by the Geo. D. Roper Corporation.

The petition also alleged that the respondent erred in increasing the taxable income of the Trahern Pump Company (1) by the amount of $7,907.93, which was charged off on the books on account of obsolete patterns but not claimed as a deduction in the return; and (2) by the amount of $2,782.37, the tax on which was assessed on the consolidated return and was paid by the Geo. D. Roper Corporation. The petitioners have abandoned the former item, and the respondent has conceded the latter.

FINDINGS OF FACT.

Prior to August 18, 1919, the Eclipse Gas Stove Company, the American Foundry Company, the Rockford Vitreous Enamel Manufacturing Company, and the Trahern Pump Company, hereinafter sometimes referred to as the four companies, were corporations organized and existing under the laws of Illinois, with authorized and outstanding capital stock of 250, 300, 250, and 1,200 shares, respectively, of the par value of $100 each. Each of the four companies maintained an office at 707 South Main Street, Rockford, Illinois. The Eclipse Company was engaged in the manufacture and sale of gas ranges. The business of the American Company consisted of the manufacture of steel castings, and that of the Rockford Company the manufacture of steel and gas parts for the Eclipse Company. The Trahern Company was engaged in the manufacture and sale of pumps, and it also performed certain manufacturing operations for the Eclipse Company which could be done more efficiently with its machinery and equipment.

In about the year 1917 the shareholders active in the management of the four companies discussed the matter of merging or consoli

dating them, in order to simplify administration and reduce operating expenses, and, prior to August 31, 1918, had definitely decided to effectuate the merger or consolidation as of August 31, 1918,-the close of the fiscal year of each company. The plan contemplated an exchange of shares in the four companies for shares in the consolidated company on the basis of the book value of the assets as of August 31, 1918, with payments of nominal amounts of cash for fractional shares, and it was consented to by all the shareholders prior to August 31, 1918, and March, 1919, when they deposited their shares in escrow, as hereinafter stated. No dividends were declared after September 1, 1918.

On August 31, 1918, the shareholders of these companies and the amount of their holdings were as follows:

In addition, 12 shares, or 4 per cent of the American Company; 120 shares, or 48 per cent of the Rockford Company; and 370 shares, or 30.83 per cent of the Trahern Company, were owned by persons whose identity is not shown by the record.

On February 15, 1919, the shareholders and the amount of their holdings were as follows, and no changes were made in their holdings from that date until the consolidation was effected.