of destructive wood distillation. The Mississippi Chemical Company, with its principal office at Charleston, Mississippi, was incorporated prior to 1926 to engage in the same business. On May 14, 1926, petitioner acquired all the stock of the Mississippi Chemical Company and thereafter the two corporations were affiliated.

The petitioner and the Mississippi Chemical Company filed separate income tax returns for the year 1926. Beginning January 1, 1927, the two corporations were operated as a unit and their accounts were consolidated in a single set of accounting records. Prior to March 15, 1928, the assistant secretary-treasurer of the petitioner had several conversations with a revenue agent at Memphis in connection with an income tax return for 1927 and was informed that petitioner had the right to file a consolidated return for such year for itself and its wholly owned subsidiary corporation. Such agent advised that a request be made to the collector's office at Nashville for the necessary forms, which was done. On March 15, 1928, petitioner filed a consolidated return which included all the information necessary to determine its tax liability. Petitioner was never advised that permission from the Commissioner to file a consolidated return was necessary. It made no application for such permission other than in the conversation with the revenue agent and received no such permission in writing either from the Commissioner or any agent of the Bureau of Internal Revenue. Upon audit of the consolidated return the Commissioner rejected the same and, held that, having elected to make separate returns for 1926, such election was effective until permission to change to a consolidated basis was received in conformity with section 240 (a) of the Revenue Act of 1926.

In the year 1927 the president of the petitioner and a chemical engineer employed by it went to Europe for the purpose of investigating the production of acetic acid by the so-called Suide process. The expenses of this trip, including salary of the engineer for one month, were paid by the petitioner in the amount of $4,236.82, were taken into its accounts as "deferred charges" and were not claimed as a deduction from income in its income tax return for that year. The president of the petitioner hoped to make an arrangement for the exclusive use of the Suide process in America. This was not done, but the petitioner installed a so-called pilot plant at its works for the purpose of manufacturing acetic acid. This plant was only partially successful. In 1929 petitioner obtained a license on a royalty basis for the use of the patented Suide process during the life of the patent, which expires some time in 1944. This license is not exclusive and any improvements of the process developed in the petitioner's plant becomes the property of the licensor..

On January 12, 1926, the petitioner by proper corporate action authorized its president to pay bonuses in stock to certain of its employees. Acting upon such authority the president authorized such bonus payments in the respective amounts of $5,000 and $500 to be made for the year 1927 to H. N. Brisen, Jr., sales manager and T. C. Albin, chemical engineer, whose regular salaries for that year were $5,000 and $6,000, respectively. The total compensation so authorized for such employees was reasonable compensation for services rendered in the taxable year. The corporate authorization specified that bonus arrangements with employees should be evidenced by contracts, but this was not done except by verbal agreements between the employees and the president in conformity with which the bonuses in question were credited on the books of the petitioner as of December 31, 1927, by order of the president and later discharged by the issue of shares of common stock which had a value at the date of such audit of $100 per share.

OPINION.

LANSDON: The petitioner's contention that for the year 1927 it was entitled to file a consolidated return for itself and a 100 per cent owned subsidiary is without merit. Affiliation after May 14, 1926, is admitted by the respondent, but the record shows that for that year each of the affiliated corporations filed a separate income tax return. That procedure was an election to file separate returns as provided in section 240 (c) of the Revenue Act of 19261 and article 632 of Regulations 69.2 Petitioner's sole contention on this issue is that through conversations between one of its employees and a revenue agent it satisfied the requirements of the statute and the regulations. This is not sufficient. The Commissioner was never asked to grant the necessary permission to change to the consolidated basis, nor did he even delegate his discretion or authority to the revenue agent. On this issue the determination of the respondent is affirmed.

1 For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. This subdivision shall be applicable to the determination of affiliation for the taxable year 1925.

Consolidated returns.-Affiliated corporations as defined in section 240 (d), irrespective of the basis upon which returns were filed prior to 1926 under section 240 (a) of the Revenue Acts of 1924 and 1926, may for 1926 elect to make separate returns or file a consolidated return in which will be reported the consolidated net income of the affiliated group. If return is made upon either of these bases, all subsequent returns must be made upon the same basis except as permission to change may be granted by the Commissioner. In applying for permission to change from one basis to the other there should be submitted a statement in the form of an affidavit executed by a person or persons qualified to sign the returns (see section 239) setting forth completely the reasons for making the request.

Lucas v. St. Louis National Base Ball Club, 42 Fed. (2d) 984; certiorari denied, 282 U. S. 283; A. S. Siracusa Sons, Inc., 23 B. T. A. 53. Cf. Gustave Rader Co., 19 B. T. A. 12; L. V. Estes, Inc., 22 B. T. A. 806; M. Morgenthau-Seixas Co., 25 B. T. A. 1235.

On the second question it is clear that in the taxable year the petitioner spent the amount of $4,236.82 in an investigation of the Suide method of manufacturing acetic acid. It is equally clear that in subsequent years it erected a plant for the use of that method and that it eventually secured a license from the patentee of such method, permitting its use during the life of the patent. The cost of this investigation, of the plant additions and any other expenses incurred in securing such license and in the installation of machinery and equipment for the production of acetic acid were all capital expenditures which we think are deductible ratably from income during the term of the license. Gilliam Mfg. Co., 1 B. T. A. 967; GoodellPratt Co., 3 B. T. A. 30; Dempster Mill Mfg. Co. v. Burnet, 46 Fed. (2d) 604; United Profit-Sharing Corp., 66 Ct. Cls. 171. We are of the opinion that this amount was properly accounted for on the books of the petitioner as deferred charges and that it is not deductible from income in the taxable year, as is now contended.

Upon the record we are convinced that the bonus credits of $500 and $5,000 made to Albin and Boisen in the taxable year were duly authorized and were corporate obligations at December 31 of such year. The officer authorized to make the contracts with the employees ordered the credits. The total amount received by each employee was reasonable compensation for services rendered in 1927. The fact that the stock certificates were not issued until some time in 1928 is not material, since the petitioner was on the accrual basis. Moreover, the credit made as of December 31, 1927, vested the ownership of the specified amount of common stock in the employees as of that date, regardless of the time at which the certificates, which are no more than evidence of stock ownership, were issued. The uncontradicted evidence indicates that the stock was worth $100 per share when the credits were made. On this issue the determination of the respondent is reversed.

27 B. T. A.

Decision will be entered under Rule 50.

PIDGEON-THOMAS IRON COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 46093. Promulgated January 31, 1933.

When a corporation that has just acquired all the stock of its predecessor pays attorney's fees for services rendered prior to its incorporation, such fees are not deductible as operating expenses during its first taxable period, since they represent payments in acquiring the stock of the predecessor.

Homer K. Jones, Esq., and Frank J. Albus, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent.

OPINION.

LANSDON: The respondent has asserted a deficiency in income tax for the period from February 1 to December 31, 1927, in the amount of $2,589.24. The only question involved is whether the respondent erroneously disallowed as a deduction from income in the taxable period, the amount of $20,000 paid out by the petitioner for legal services. At the hearing the parties filed the following stipulation:

That the petitioner was duly organized on February 1, 1927, under the laws of the State of Delaware, and is engaged in the wholesale and retail iron and steel business, with its principal office at Memphis, Tennessee.

That the Pidgeon-Thomas Iron Company, a corporation organized under the laws of the State of Tennessee, was incorporated in 1998 with capital stock of $100,000. That with the exception of a few qualifying shares the stock was owned by P. Pidgeon and George W. Thomas. That P. Pidgeon died in 1918 and his stock went to the members of his family. That on December 28, 1922, George W. Thomas and the members of his family (who controlled the corporation) executed a contract with Philip Pidgeon, Frank Pidgeon and James Pidgeon, under the terms of which the members of the Pidgeon family were given an option to purchase the stock then owned by George W. Thomas and family within one year after the date of the death of George W. Thomas; said contract also provided the method to be used in computing the price to be paid. That George W. Thomas died during 1925.

That the members of the Pidgeon family failed to exercise the option to purchase the stock held by the Thomas family. That the question was then presented as to whether the corporation should liquidate or continue in business. That thereafter the plan agreed to by all the stockholders was that the Tennessee corporation would surrender its charter; a Delaware corporation of the same name would be organized with a capital of $600,000 to take over the business; and immediately thereafter all of the stock of the new corporation owned by the Thomas family would be taken up by the corporation as follows: Par value Delaware corporation stock__ Premium on stock____

$337,000,00 631,258.34

That the plan thus agreed to by the stockholders of the Pidgeon-Thomas Iron Company (Tennessee) was carried out; on February 1, 1927, the certificates of the Delaware corporation were issued, that with the formation of the new company there were issued to the stockholders of the old company six shares of the new stock for one share of the old. The members of the Thomas family endorsed their new certificates back to the new corporation the same day, thus leaving the members of the Pidgeon family in control of the outstanding stock, to-wit, $263,000 of the Delaware corporation.

That the members of the firm of Holmes, Canale, Loch & Glankler are engaged in the practice of law at Memphis, Tennessee. That during the early part of 1926 this firm was engaged to represent the Pidgeon-Thomas Iron Company, Memphis, Tennessee. That the services of this firm were engaged after the officers of the Iron Company had had many conferences with the Bank of Commerce & Trust Company as Executor and Trustee under the will of G. W. Thomas, deceased, said G. W. Thomas having been a majority stockholder in said corporation.

That it at once became necessary for counsel to familiarize themselves with the financial condition of the corporation (Pidgeon-Thomas Iron Company (Tennessee)), going into full detail as to its items on its balance sheet such as inventory and nature thereof, accounts receivable and nature thereof, real estate and buildings and appraisals thereof, depreciation and obsolescence, machinery and nature thereof, and all other items comprising the balance sheet, then checking up the liabilities of the company, the nature and maturities thereof, and, in a detailed way, going over the whole financial structure of said corporation. That the Bank of Commerce & Trust Company, as trustee, was charged with the responsibility for the proper conduct of the affairs of the corporation, and numerous conferences were held during 1926 between the officers of said trust and counsel, as to the policy to be pursued in the conduct of the company's business.

That many months were devoted to conferences looking toward the corporation itself buying out the shares of stock of the Thomas Estate and the Thomas sisters. That conferences were held looking toward the basis upon which the Thomas stock could be purchased by the corporation. That numerous other conferences were held with the Bank and with representatives of the Thomases, wherein the amount of cash to be paid by the corporation and the period of time over which deferred payments were to be made were gone into; matters of rate of interest on deferred payments and other terms and provisions relating to a transaction of this character were gone into in minute detail, all over a period of months.

That in addition thereto, the building contracts of the corporation received careful consideration.

That in order to put into effect the agreement finally reached by all interested parties it was necessary to form a new corporation under the laws of the State of Delaware for the purpose of enabling such new corporation under its charter powers to purchase the stock out of its available surplus. That thereupon a new charter was devised under the laws of Delaware calling for an authorized capital of 6,000 shares of the par value of $100 per share, aggregating $600,000. That minutes of stockholders' and directors' meetings, by-laws for the Delaware corporation and instruments conveying the assets of the old corporation to the new corporation în exchange for the stock of the new corporation had to be prepared and adopted at meetings of the old and the new corporation.

That numerous contracts were drafted and re-drafted by counsel to carry into effect the negotiations of the parties.