27 T.C. 772">*773 Respondent determined deficiencies in income tax and personal holding company surtax, as follows:

1957 U.S. Tax Ct. LEXIS 263">*265 The questions to be decided are: (1) Whether petitioner is entitled to deduct as a net capital loss carryover in 1949, a net capital loss sustained by its liquidated subsidiary in 1948; (2) whether petitioner is entitled to reduce the amount of its net long-term capital gains in 1949, by the amount of a net long-term capital loss sustained by its liquidated subsidiary in the taxable period January 1, 1949, to December 1, 1949; and (3) whether petitioner, a cash basis taxpayer, is entitled to deduct for personal holding company surtax purposes in 1950, the amount of its income tax liability for 1949, which was paid in 1950.

Respondent, by amended answer, has made claim under section 272 (e), 1939 Code, for an alternative increased deficiency in personal holding company tax in the amount of $ 630.91 for the year 1949, on the ground that if the Court decides the third issue against him, and it is held that petitioner may deduct its income tax liability for 1949, in computing its subchapter A net income for personal holding company tax purposes for 1950, the deduction should not be allowed for 1949.

Petitioner argues on brief, that respondent erred in a respect not alleged in the pleadings, 1957 U.S. Tax Ct. LEXIS 263">*266 in computing the amount of the personal holding company tax for 1949.

FINDINGS OF FACT.

General Facts.

Petitioner, Patten Fine Papers, Inc. (hereinafter referred to as Patten Fine), was organized as a corporation under the laws of the State of Wisconsin in 1937. Its principal office is located at Appleton, Wisconsin. Petitioner filed its tax returns for the years 1949 and 1950 with the collector of internal revenue for the district of Wisconsin. The corporation derives its principal income from dealings in securities, dividends, and interest.

27 T.C. 772">*774 Capital Loss Carryover.

Patten Fine was organized to take over the remaining assets of a defunct paper manufacturing corporation, Patten Paper Company, Ltd. It has never operated as a manufacturer. Initially, all of the outstanding stock of Patten Fine, consisting of 500 shares of common stock, was issued to Barbara McNaughton Rosebush. Judson, Sr., and Barbara McNaughton Rosebush were husband and wife. She transferred a portion of the stock by gift to their three children, Judson G. Rosebush, Jr., John M. Rosebush, and Barbara J. R. Weller. On December 31, 1948, and November 26, 1949, the outstanding stock of Patten1957 U.S. Tax Ct. LEXIS 263">*267 Fine was owned as follows:

Rosebush Brothers, Inc. (hereinafter referred to as Rosebush Brothers), was organized as a corporation under the laws of the State of New York in 1913. The corporation was formed by three brothers, Judson, Sr., Waldo, and Steven Rosebush, to acquire and manage certain of the assets of their father's estate. These assets consisted primarily of commercial rental properties in Alfred, New York. In addition to rental income and the proceeds from the sales of its properties, Rosebush Brothers derived income from various securities in which it invested. The principal office of the corporation during the years 1935 through 1948 was located at Appleton, Wisconsin.

The stock of Rosebush Brothers on December 31, 1948, consisted of 250 shares of common stock owned as follows:

Steven C. and Hazel Cass Rosebush were husband and wife.

By the end of 1948, Rosebush Brothers had liquidated all of its real estate interests; on December1957 U.S. Tax Ct. LEXIS 263">*268 31, 1948, its assets were as follows:

For the calendar year 1948, Patten Fine filed a timely Federal income tax return (Form 1120) with the collector of internal revenue for the district of Wisconsin. Patten Fine had a net loss for the year of $ 83.72. For the calendar year 1948, Rosebush Brothers filed a timely Federal income tax return (Form 1120) with the collector 27 T.C. 772">*775 of internal revenue for the district of Wisconsin. Rosebush Brothers had a net capital loss for the year 1948 in the amount of $ 9,887.08.

On January 3, 1949, Patten Fine purchased from Steven C. Rosebush, Waldo Rosebush, and Hazel Cass Rosebush their stock in Rosebush Brothers. After the purchase Patten Fine owned all of the stock of Rosebush Brothers. The certificates representing the shares of stock purchased were surrendered to Rosebush Brothers and canceled. Thereafter, Rosebush Brothers issued 1 qualifying share each to Barbara McNaughton Rosebush, Judson G. Rosebush, Jr., and John M. Rosebush; the balance of the purchased shares were issued to Patten Fine. After the transaction the stockholders of record of Rosebush Brothers were1957 U.S. Tax Ct. LEXIS 263">*269 as follows:

On November 26, 1949, Rosebush Brothers adopted a resolution to dissolve and surrender its charter to the State of New York. On the date of the resolution the corporation distributed all of its assets, which consisted of cash and an account receivable due from Patten Fine, to Patten Fine in exchange for the surrender of all of its stock. On December 1, 1949, Rosebush Brothers filed a certificate of dissolution with the State of New York and was dissolved.

The income, allowable deductions, and credits (without considering any capital loss carryover from Rosebush Brothers from the year 1948) of Patten Fine for the calendar year 1949 and Rosebush Brothers for its taxable period January 1, 1949, to December 1, 1949, are as follows:

For the calendar year1957 U.S. Tax Ct. LEXIS 263">*270 1949, Patten Fine filed a timely consolidated Federal income tax return (Form 1120) reporting the consolidated income, deductions, and credits of Patten Fine and its affiliate, Rosebush Brothers. Attached to the consolidated return filed was an Authorization and Consent of Subsidiary Corporations (Form 1122) executed by Rosebush Brothers. The return and attachment were filed with the collector of internal revenue for the district of Wisconsin.

27 T.C. 772">*776 On the consolidated return, in arriving at the consolidated net income, a capital loss carryover of Rosebush Brothers from the year 1948 was claimed. Respondent, in the statutory notice, disallowed the claimed capital loss carryover. ¹ The petition places this adjustment in issue.

Personal Holding Company Surtax.

Patten1957 U.S. Tax Ct. LEXIS 263">*271 Fine and Rosebush Brothers each maintained its books and records and reported its income on the basis of cash receipts and disbursements.

Patten Fine during the year 1949 was a personal holding company. Its subchapter A net income for the year, without deduction of Federal income, war profits, and excess profits taxes, and without considering any net capital losses of its liquidated subsidiary, Rosebush Brothers, was $ 74,009.98.

No Federal income, war profits, or excess profits taxes were paid by Patten Fine during the year 1949.

Patten Fine, for the calendar year 1949, filed a timely personal holding company return (Form 1120) with the collector of internal revenue for the district of Wisconsin. In computing its subchapter A net income Patten Fine reduced its net income by (a) a net capital loss of $ 7,417.66 incurred by Rosebush Brothers during the period from January 1 to December 1, 1949, and (b) a capital loss carryover of Rosebush Brothers from the year 1948 ² and deducted as accrued Federal income taxes for the year 1949 the amount of $ 11,456.41.

1957 U.S. Tax Ct. LEXIS 263">*272 Respondent, in the statutory notice, determined that Patten Fine could not utilize either the net capital loss or the capital loss carryover of Rosebush Brothers in computing its net income. Respondent further determined that Patten Fine was entitled to a deduction of $ 16,416.85 for accrued Federal income taxes for the year 1949.

During the calendar year 1950, Patten Fine continued to be a personal holding company. Its subchapter A net income for the year, without deduction of Federal income, war profits, or excess profits taxes, was $ 7,108.95. During the year 1950 the corporation paid Federal income taxes in respect to its income tax liability for the year 1949 in the amount of $ 11,456.41.

For the calendar year 1950 Patten Fine filed a timely personal holding company return (Form 1120-H) with the collector of internal revenue for the district of Wisconsin. In computing its subchapter A net income Patten Fine deducted as Federal income tax paid the 27 T.C. 772">*777 amount of $ 11,456.41 which was paid during 1950 with respect to its liability for the year 1949.

Respondent, in the statutory notice, has disallowed the claimed deduction for Federal income taxes paid. The petition places1957 U.S. Tax Ct. LEXIS 263">*273 in issue this disallowance.

The stipulated facts are found as stipulated. The stipulations of facts are incorporated herein by this reference.

OPINION.

Issue 1. Capital Loss Carryover.

Involved in the factual situation out of which this proceeding arises, are two corporations which were owned by related family groups. All of the stock of Patten Fine Papers, Inc., the petitioner, was owned by the wife and three children of Judson G. Rosebush, Sr., and all of the stock of Rosebush Brothers, Inc., the other corporation involved, was owned by Patten Fine, by two brothers of Judson, Sr., and by the wife of one of the brothers. During the year 1949, the income of both corporations was derived entirely from dividends, interest, and long-term capital gains.

On December 31, 1948, petitioner owned 68 per cent of the stock of Rosebush Brothers. On January 3, 1949, petitioner purchased the remaining shares, so that it then owned 100 per cent of the Rosebush Brothers stock. On November 29, 1949, Rosebush Brothers distributed, to petitioner, all of its assets, consisting of cash and an account receivable due from petitioner, in return for surrender of its stock. Rosebush Brothers was 1957 U.S. Tax Ct. LEXIS 263">*274 dissolved on December 1, 1949, by the filing of a certificate of dissolution with the State of New York.

Rosebush Brothers sustained net capital losses in the taxable year 1948 in the amount of $ 9,887.08. Petitioner realized net long-term capital gains, in the year 1949, in the amount of $ 73,085.05. For the year 1949, petitioner filed a consolidated income tax return with the consent of its affiliate, Rosebush Brothers, and a personal holding company tax return. In determining its net income for income tax purposes, and in determining its subchapter A net income for personal holding company tax purposes, petitioner deducted the net capital loss sustained by Rosebush Brothers in the taxable year 1948, from its own net capital gain for 1949. Respondent disallowed deduction of the net capital loss sustained by Rosebush Brothers in 1948, for both income tax and personal holding company tax purposes. Petitioner claims deduction for 1949, of the amount of net capital loss sustained in 1948, $ 9,887.08, by its liquidated subsidiary, Rosebush Brothers, as a capital loss carryover under section 117 (e) (1), 193927 T.C. 772">*778 Code. ³ Petitioner argues that it is entitled to this deduction1957 U.S. Tax Ct. LEXIS 263">*275 as the successor in liquidation of Rosebush Brothers. Respondent argues that petitioner is a separate taxpayer from Rosebush Brothers, and that petitioner is therefore not entitled to take the deductions of Rosebush Brothers.

Regulations 104, section 23.31 (d) (10), ⁴1957 U.S. Tax Ct. LEXIS 263">*277 issued pursuant to section 141 (a) and (b), 1939 Code, ⁵ provide that1957 U.S. Tax Ct. LEXIS 263">*276 a capital loss carryover from a year in which a consolidated return was not filed, to a year in which a consolidated return is filed, shall be allowed only to the extent of the net capital gain, in the year for which a consolidated return is filed, of the corporation which sustained the net capital loss to be carried over from a prior year. Petitioner consented to Regulations 104 under section 141 (a), 1939 Code. Respondent argues that, since a consolidated return was not filed in 1948 and Rosebush Brothers realized no net capital gain in 1949, the net capital loss sustained 27 T.C. 772">*779 by Rosebush Brothers in 1948 may not be carried over in the consolidated return for 1949, under Regulations 104.

1957 U.S. Tax Ct. LEXIS 263">*278 However, petitioner does not base its claim for deduction of the capital loss carryover from 1948 upon the filing of consolidated returns. Petitioner's claim for this capital loss deduction is grounded upon the theory that, as the successor in liquidation of Rosebush Brothers, having absorbed all of the assets of Rosebush Brothers in exchange for all of its stock, petitioner acquired the capital loss deductions of Rosebush Brothers. In support of its position, petitioner cites Stanton Brewery v. Commissioner, 176 F.2d 573 (C. A. 2, 1949), reversing 11 T.C. 310; E. & J. Gallo Winery v. Commissioner, 227 F.2d 699 (C. A. 9, 1955), reversing a Memorandum Opinion of this Court; Koppers Co. v. United States, 134 F. Supp. 290">134 F. Supp. 290 (Ct. Cl., 1955); Newmarket Manufacturing Co. v. United States, 233 F.2d 493 (C. A. 1, 1956), reversing 130 F. Supp. 706">130 F. Supp. 706; and Moldit, Inc. v. Jarecki, (D. Ill., Aug. 11, 1953) 53-2 U. S. T. C. par. 9551, 45 A. F. T. R. 1014.1957 U.S. Tax Ct. LEXIS 263">*279

In the Stanton Brewery case and in the E. & J. Gallo Winery case, it was held that a corporation formed by a statutory merger was entitled to carry over from a period prior to the merger, the unused excess profits credits of its component corporations, under section 710 (c) (3) (B), 1939 Code. In the Koppers Company case, the unused excess profits credit of a corporation formed by a statutory merger was held to be allowed to be carried back against the excess profits of its component corporations for a period prior to the merger, under section 710 (c) (3) (A). In the Newmarket Manufacturing Company case, and in the Moldit case, it was held that the net operating loss of a corporation formed by a statutory merger, can be carried back as a deduction from the income of the merged corporations in years prior to the merger. However, in Libson Shops v. Koehler, 229 F.2d 220 (C. A. 8, 1956), certiorari granted June 4, 1956, which involved a statutory merger, the court refused to follow Stanton Brewery v. Commissioner, supra, and E. & J. Gallo Winery v. Commissioner, supra,1957 U.S. Tax Ct. LEXIS 263">*280 quoting from the dissenting opinion of Chief Judge Learned Hand in the Stanton Brewery case.

Respondent relies upon Gramm Trailer Corporation, 26 T.C. 689 (on appeal C. A. 6). In that case we held that the petitioner was not entitled to deduct a net operating loss sustained by its liquidated subsidiary, as a net operating loss carryover under sections 23 (s) and 122 (b) (2) (C), 1939 Code. We think that the rationale of the Gramm Trailer case applies to a net capital loss carryover under section 117 (e) (1), involved in the case at bar. There, it was held that a liquidated corporation is not the same "taxpayer" as the parent corporation, within the meaning of section 122 (b) (2) (C). We think that a liquidated corporation is not the same "taxpayer" as the 27 T.C. 772">*780 parent corporation, also within the meaning of section 117 (e) (1). When Rosebush Brothers was liquidated, its legal life was brought to a close, and there was no transfer of its powers, privileges, and immunities to petitioner.

In Gramm Trailer Corporation, supra, we distinguished Stanton Brewery v. Commissioner, supra;1957 U.S. Tax Ct. LEXIS 263">*281 E. & J. Gallo Winery v. Commissioner, supra; and 134 F. Supp. 290">Koppers Co. v. United States, supra, upon the ground that those cases involved statutory mergers and the decisions in those cases were based upon the theory that, by operation of law, the merged corporations continued to exist as components of the surviving corporation into which they were merged.

The cases of Newmarket Manufacturing Co. v. United States, supra; and Moldit, Inc. v. Jarecki, supra, are distinguishable upon the same ground. As in the Gramm Trailer case, in the instant case, Rosebush Brothers was not merged into petitioner, but it was liquidated. Therefore, its existence was terminated and it did not survive as a component of petitioner.

Petitioner relies also upon Helvering v. Metro. Edison Co., 306 U.S. 522">306 U.S. 522. In that case, the question was whether a surviving corporation could deduct the unamortized bond discount and expense of its two predecessor corporations. The Court held that these deductions were available to the surviving1957 U.S. Tax Ct. LEXIS 263">*282 corporation, because in the case of one of the predecessor corporations, there was a statutory merger, and in the case of the other predecessor corporation there was a de facto merger, under State law. In the instant case, there is nothing to show that there was a de facto merger of Rosebush Brothers into petitioner, or that its assets passed to petitioner by any means other than a liquidation. It is stipulated that Rosebush Brothers was dissolved under New York law. Therefore, the Metropolitan Edison case is distinguishable on the same ground as the other cases cited by petitioner.

Rosebush Brothers and petitioner were separate entities. The net capital loss carryover of Rosebush Brothers is personal to it and may not be deducted by petitioner. See New Colonial Co. v. Helvering, 292 U.S. 435">292 U.S. 435.

It is held that respondent did not err in disallowing deduction of the capital loss carryover in 1949.

Issue 2. Net Long-Term Capital Loss Deduction.

Rosebush Brothers sustained a net long-term capital loss in the amount of $ 7,417.66, for its taxable period January 1, 1949, to December 1, 1949. It was liquidated on the latter date, petitioner1957 U.S. Tax Ct. LEXIS 263">*283 receiving all of its assets in exchange for surrender of all of its stock, 27 T.C. 772">*781 without recognition of any gain or loss on the exchange, under section 112 (b) (6). In its consolidated income tax return, and in its personal holding company tax return, for the year 1949, petitioner deducted the net capital loss sustained by Rosebush Brothers, $ 7,417.66, in its taxable period January 1, 1949, to December 1, 1949. Respondent allowed the deduction for income tax purposes, but disallowed it for personal holding company tax purposes, on the ground that the filing of a consolidated income tax return was authorized, but that there is no authority for the filing of a consolidated personal holding company tax return.

Petitioner concedes that it was not authorized to file a consolidated personal holding company tax return, but it argues that, as the successor in liquidation of Rosebush Brothers, it was entitled to deduct the net long-term capital loss sustained by Rosebush Brothers in 1949, as a net long-term capital loss for the same year. Petitioner's argument in favor of allowing the deduction under this issue, is the same as its argument, under the first issue, in favor of allowing1957 U.S. Tax Ct. LEXIS 263">*284 the capital loss carryover. For the same reasons that we hold it is not entitled to the capital loss carryover deduction, we hold that petitioner is not entitled to deduct the net long-term capital loss sustained by Rosebush Brothers in its taxable period January 1, 1949, to December 1, 1949.

Rosebush Brothers was a separate entity from petitioner. Its life was terminated by liquidation, and it did not survive as a component of petitioner. Its deductions are personal to it and may not be taken by petitioner. 292 U.S. 435">New Colonial Co. v. Helvering, supra;Gramm Trailer Corporation, supra.

Issue 3. Deduction of Amount of Income Taxes in Computing Subchapter A Net Income.

Petitioner, which reports its income on the cash basis, paid in 1950 the amount of $ 11,456.41, in respect of its income tax liability for 1949. In computing its subchapter A net income for personal holding company tax purposes in the year 1950, petitioner deducted that amount. Respondent disallowed the deduction for 1950, but determined a deduction of the amount of petitioner's 1949 income tax liability, in computing its personal holding company tax liability1957 U.S. Tax Ct. LEXIS 263">*285 for 1949. He advances the alternative contention that if the deduction is allowed for 1950, no amount should be deducted for 1949 income tax liability in computing subchapter A net income for 1949.

Petitioner claims deduction, in 1950, of the amount of its 1949 income tax liability which was paid in 1950, $ 11,456.41, in computing 27 T.C. 772">*782 subchapter A net income, under section 505 (a) (1). ⁶ It argues that the words "paid or accrued" in that section, have reference to the taxpayer's accounting method, and since petitioner was on the cash basis, it may take the deduction in the year in which it paid its income tax, 1950.

1957 U.S. Tax Ct. LEXIS 263">*286 The question of whether the amount of income tax liability is deductible for personal holding company tax purposes in the year paid or in the year in respect of which the income tax liability was incurred, has been before this and other courts in numerous cases. We recently had occasion to review the authorities in Mills, Inc., 27 T.C. 635. A long quotation from that case should dispose of the issue now before us:

The argument is sound if, and only if, the words "paid or accrued" in the statute have reference to the method of accounting regularly employed by the taxpayer in keeping its books. That is what we early held in M. W. Alworth, 38 B. T. A. 656, and Clarion Oil Co., 1 T.C. 751. But the Clarion Oil Co. case was reversed by the Court of Appeals for the District of Columbia in Commissioner v. Clarion Oil Co., 148 F.2d 671, certiorari denied 325 U.S. 881">325 U.S. 881, and we decided to follow the latter case in Wm. J. Lemp Brewing Co., 18 T.C. 586.

The rule of Commissioner v. Clarion Oil Co., supra,1957 U.S. Tax Ct. LEXIS 263">*287 to which we are committed, is that these words "paid or accrued" do not have reference to a particular accounting method employed by the taxpayer. We had held in our Opinion in the Clarion Oil Co. case, supra, that the cash basis taxpayer, in computing its 1937 personal holding company tax, could only deduct taxes paid in that year, being the sum of $ 452.53, the amount of its income tax for 1936. The Court of Appeals opinion held this was wrong, stating:

The scheme as a whole contemplates the application of the penalty tax solely to the income transactions of a single tax year, and it is income remaining after dividend disbursements and tax payments for the taxable year which is attacked by this surtax. Hence taxes paid for a previous year, just as net income from a previous year, have no proper place in the calculation. For these purposes it is a fair conclusion that income taxes are deemed to be paid out of income for the year for which they are levied. Accordingly the allowance, as a deduction, of taxes amounting to $ 452 paid on 1936 income, as the Tax Court here found permissible, was wrong. * * *