year 1919 having been found. The taxpayer claims that the Commissioner erred in disallowing as a deduction $1,200 interest paid in each of the said years. FINDINGS OF FACT. The taxpayer is a Kentucky corporation with its principal office in Louisville. On October 7, 1910, the following written contract was executed by and between certain stockholders of the Ohio Valley Tie Co.: THIS CONTRACT entered into this 7th day of October, 1910, between Augusta F. McCracken of first part, in her own right and as executrix and sole legatee and advisee [sic] under the will of A. M. McCracken, deceased (hereinafter called Mrs. McCracken), and C. P. Bush of the second part, and Mr. W. Ford, J. H. Dean, W. P. Semple, H. M. McCracken, W. B. Fowlkes and S. B. Lynd, hereinafter called "Associates", as parties of the third part, bears witness: WHEREAS, Mr. Bush on September 7, 1910 by written contract of that date with Mrs. McCracken purchased from her 225 shares of stock in the Ohio Valley Tie Company, upon the terms stated in said contract, including in such purchase the 200 shares of stock standing in the name of A. M. McCracken on the books of the corporation, and also his one-half interest in 50 shares of stock of the Ohio Valley Tie Company standing in the name of J. H. Dean on the books of said corporation, and WHEREAS, such purchase was made by Mr. Bush for the benefit of himself and his "Associates" hereinbefore named, parties of the third part, and whereas Mr. Bush and "Associates" are now the owners of preferred stock of the Ohio Valley Tie Company of the par value of Fifty Thousand Dollars ($50,000.00) which Mrs. McCracken desires to acquire as an investment. NOW THIS INDENTURE WITNESSETH that Bush and his "Associates" have this day assigned and transferred to Mrs. McCracken all their interest in the preferred stock of the Ohio Valley Tie Company, being the entire issue of preferred stock of the par value of Fifty Thousand Dollars ($50,000.00), and in addition thereto, said Bush has executed and delivered to Mrs. McCracken his obligation for the principal sum of Twenty-Thousand Dollars ($20,000.) payable in four equal installments of Five Thousand Dollars ($5,000.00) each in one, two, three and four years respectively from October 1, 1910, and said Bush has also pledged to Mrs. McCracken as security for said obligation 250 shares of his common stock in the Ohio Valley Tie Company of the par value of Twenty-five Thousand Dollars ($25,000.00), and in consideration of the premises Mrs. McCracken has this day released said Bush and his "Associates" from all the obligations imposed upon them, or any of them, by said written contract of September 7, 1910, between Augusta F. McCracken and C. P. Bush. IT IS FURTHER AGREED herein between said Bush and his "Associates" above named that in view of the fact that the purchase of Mrs. McCracken's stock was in part for the benefit of the "Associates" said "Associates" hereby agree with said Bush each for himself and not one for the other, to assume and pay said Bush such portion of his obligation to Mrs. McCracken for TwentyThousand Dollars ($20,000.00) and interest as such "Associate's" share in the common stock of the Ohio Valley Tie Company now bears to the total outstanding issue of common stock of said corporation. The minutes of the meeting on October 7, 1911, of the directors of the taxpayer corporation are as follows: Mr. Bush, the President, then called the attention of the Board of Directors to the issuance of a contract dated October 7, 1910 (which contract is on file in the record book of the corporation) calling for the payment to Mrs. Augusta F. McCracken, for value received, by said Bush and the other Stockholders of the corporation, the sum of Twenty-Thousand Dollars ($20,000.00) no part of which has been paid, and, pursuant to the terms of the contract aforesaid, on motion of Mr. Bush duly seconded, it was unanimously resolved by the Board of Directors that this corporation do now declare and order paid, out of the earnings and profits of the corporation, a further special dividend of $1,200.00, being for interest at the rate of 6% per annum for one year on the $20,000. owing to Mrs. Augusta F. McCracken as per contract aforesaid. The minutes of the directors' meeting on October 8, 1912, are as follows: The attention of the Board of Directors was then called to the existence of a contract dated October 7, 1910 (which contract is on file in the record book of the company) calling for the payment to Mrs. Augusta F. McCracken, for value received, by all the holders of Common Stock in the Company, the sum of Twenty Thousand ($20,000.00) Dollars, no part of which has been paid, and, pursuant to the terms of the contract aforesaid, it was unanimously resolved by the Board of Directors that the Secretary be and he is hereby authorized to pay to said Augusta F. McCracken, out of the earnings of the corporation, one year's interest on said amount at the rate of six per cent (6%) per annum, or Twelve Hundred Dollars ($1,200.00) which amount instead of being handled on the books of the company as a special dividend as heretofore, shall upon the suggestion of Mr. James S. Escott (Auditor) be charged to the Company's current interest account. The principal of the $20,000 referred to in the said contract was not paid, and the taxpayer during each of the taxable years in question took a deduction of $1,200 as interest paid on the $20,000, which deduction was disallowed by the Commissioner. DECISION. The determination of the Commissioner is approved. APPEAL OF VIRGINIA LUMBER & BOX CO. Docket No. 3546. Submitted July 15, 1925. Decided January 16, 1926. In 1919 taxpayer changed its annual accounting period from a fiscal year ending November 30 to one ending October 31, and filed a return for the 11-month period commencing December 1, 1918, and ending October 31, 1919. The Commissioner denied that he had approved the computation of the net income upon the basis of the new accounting period. Held, that the net loss for the 12-month period ending November 30, 1919, should be applied J. M. Cumming, C. P. A., for the taxpayer. Before JAMES, LITTLETON, and SMITH. This is an appeal from the determination of a deficiency in income and profits tax for the fiscal year ended November 30, 1918, in the amount of $4,160.19. FINDINGS OF FACT. Taxpayer is a Virginia corporation with its principal office at Petersburg. Prior to 1919 its accounting records were maintained on the basis of an annual accounting period ending November 30. The return for the year 1918 was filed on such a basis. In 1919, without first obtaining the permission of the Commissioner to do so, taxpayer changed its annual accounting period to one ending October 31. It filed a return for the 11-month period commencing December 1, 1918, and ending October 31, 1919, in which it showed a net loss. For the 11-month period ended October 31, 1919, the taxpayer sustained a net loss of $20,085.76, and for 12-month period ended November 30, 1919, a net loss of $19,265.97. In computing the tax liability for the fiscal year 1918, the Commissioner did not deduct from the net income of that year the loss sustained during the 11-month period ended October 31, 1919, or the loss sustained during the 12-month period ended November 30, 1919. DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days' notice in accordance with Rule 50. OPINION. LITTLETON: In its petition taxpayer alleges error on the part of the Commissioner in failing to deduct either the net loss for the 11-month period ended October 31, 1919, or, as an alternative, that of the 12-month period ended November 30, 1919, from the net income of the fiscal year under consideration and with respect to which the Commissioner has determined a deficiency. One of the alleged facts upon which taxpayer relies in support of its allegation of error is that, in the month of July, 1919, it requested permission from the Commissioner to change its accounting period from one ending on November 30 to another ending on October 31, and that such permission was granted. In his answer the Commissioner denies that permission was granted the taxpayer to change its fiscal closing from November 30 to October 31. No evidence was adduced by either party upon this point. Under the provisions of section 212 (b) of the Revenue Act of 1918, where a taxpayer changes its annual accounting period from one fiscal year to another, the net income must, with the approval of the Commissioner, be computed on the basis of such new accounting period. We interpret that section as requiring the taxpayer to secure the approval of the Commissioner to a computation of its net income upon the basis of the new accounting period as a condition to the filing of a return for that period. Appeal of The Clendening Co., 1 B. T. A. 622. In this appeal we have no evidence that the Commissioner approved the change in the accounting period. On the other hand, the Commissioner expressly denies that he extended such approval. We are forced, therefore, to conclude that the taxpayer did not, with the approval of the Commissioner, change its accounting period to enable it to make a return for the 11-month period ended October 31, 1919, and that the net loss for the taxable year 1919 must be computed upon the basis of the full 12-month period ended November 30, 1919, such period being the only fiscal year which the taxpayer has established under the provisions of section 212 (b). The taxpayer sustained a net loss of $19,265.97 for the 12-month period ended November 30, 1919, which, under the provisions of section 204 of the Revenue Act of 1918, it is entitled to have deducted from the net income of the fiscal year ended November 30, 1918, and it is entitled to have its tax liability for the latter year redetermined accordingly. In view of the foregoing we find it unnecessary to pass upon the contention of the Commissioner that the provisions of section 204 (a) of the Revenue Act of 1918 are inapplicable to a period of less than 12 months. APPEALS OF LEE S. SMITH & SON CO. AND DENTAL COMPANY OF AMERICA. Docket Nos. 3328 and 3331. Submitted September 14, 1925. Decided January 16, 1926. Three corporations, all organized by the same persons, all engaged in related businesses and operated as a single enterprise, and all the stock of which is owned by the organizers and a few of the employees, held, affiliated corporations under the provisions of section 240 of the Revenue Act of 1918. 104881-27-26 S. Leo Ruslander, Esq., for the taxpayers. P. S. Crewe, Esq., for the Commissioner. Before LITTLETON, SMITH, and TRUSSELL. These are appeals from determinations of deficiencies in income. and profits taxes for the calendar year 1919 against the taxpayers, Lee S. Smith & Son Co. in the sum of $5,305.28, and the Dental Company of America in the sum of $2,163.62, all of which is in controversy. The deficiencies arose from the refusal of the Commissioner to permit the taxpayers to file a consolidated return as affiliated corporations. FINDINGS OF FACT. 1. This appeal involves the consolidation of the returns of three corporations, to wit, Lee S. Smith & Son Co., Dental Company of America, and Lee S. Smith & Son Manufacturing Co. The taxpayer Lee S. Smith & Son Co. was held affiliated with the Lee S. Smith & Son Manufacturing Co., but the taxpayer Dental Company of America has been denied such affiliation by the Commissioner. The Lee S. Smith Son Co. was incorporated December 29, 1915, with a capitalization of $200,000, divided into 8,000 shares of the par value of $25 each, and was engaged in the business of selling dental supplies. The original incorporators were Lee S. Smith and his son, W. L. Smith, who had been operating this business as a partnership for many years. Lee S. Smith founded the business in 1866. Lee S. Smith & Son Manufacturing Co. was incorporated in 1912 with a capitalization of $100,000, divided into 500 shares of common stock and 500 shares of preferred stock of the par value of $100 each, and was engaged in the business of manufacturing cement and other dental supplies, for which the taxpayer Lee S. Smith & Son Co. was the exclusive selling agent. The taxpayer Dental Company of America was organized in 1917 to manufacture teeth, for which Lee S. Smith & Son Co. was also the exclusive selling agent. Its capitalization was $100,000, divided into 1,000 shares of the par value of $100 each. 2. Lee S. Smith was president of the Lee S. Smith & Son Co. and the Lee S. Smith & Son Manufacturing Co. At this time, however, he was quite an old man and left the active management of these companies in the hands of his son, W. L. Smith. W. L. Smith was vice president and general manager of the Lee S. Smith & Son Co. and the Lee S. Smith & Son Manufacturing Co., and also president and general manager of the taxpayer Dental Company of America. One Charles Petersen was treasurer and director of all three com |