Summary
In Sweets Co. of America v. Commissioner, 40 F.2d 436 (C.C.A. 2), and in Swift Co. v. United States, 38 F.2d 365 (Ct. Cl.) it was held that the mere entry into or withdrawal from a group of a new affiliate did not terminate the group or create a new tax computing unit.
Summary of this case from EXPORT LEAF TOBACCO v. COMMR. OF INTERNAL REVOpinion
Nos. 7-8.
April 7, 1930.
Appeal from the United States Board of Tax Appeals.
Petitions by the Sweets Company of America, Inc., a New York Corporation, and by the Sweets Company of America, Inc., a Virginia Corporation, opposed by the Commissioner of Internal Revenue, to review orders of the United States Board of Tax Appeals.
Orders of the Board of Tax Appeals reversed, and proceedings remanded.
These two proceedings relate to an asserted deficiency in income and profits taxes under the Revenue Act of 1918 (40 Stat. 1057) for the six-month period ending June 30, 1919. Each petitioner has the same corporate name; they will be differentiated by referring to one as the New York corporation and to the other as the Virginia corporation. The first proceeding involves a deficiency tax assessed by the Commissioner against the New York corporation; the second proceeding involves assessment of liability for this same deficiency against the Virginia corporation as transferee of the property of the New York corporation (Revenue Act of 1926 § 280, 44 Stat. 61 [26 USCA § 1069]). The two proceedings were consolidated and heard together by the Board of Tax Appeals, which modified the Commissioner's action and redetermined the deficiency, in accordance with an opinion reported in 12 B.T.A. 1285. Reversed and remanded.
The New York corporation was engaged in the manufacture and sale of special kinds of candies and sweets. During 1918 it acquired all the capital stock of Lance Cough Drop Company, which was also a manufacturer of candies, the two corporations thus becoming affiliated within the meaning of section 240 of the Revenue Act of 1918 (40 Stat. 1081). On July 1, 1919, the Virginia corporation was organized with an authorized capital of 500,000 shares of the par value of $10 each. It forthwith acquired all the capital stock of the New York corporation in exchange for approximately 200,000 of its own shares, and a small cash payment. At about the same time it sold an additional 100,000 of its shares for $350,000 in cash. On October 29, 1919, the Lance Cough Drop Company was merged into the New York corporation, and two days later the latter was merged into the Virginia corporation, which previously had not been an operating company but thereafter carried on the business formerly of the New York corporation and the Lance Cough Drop Company.
A single consolidated return for the calendar year 1919 was filed for the three companies, pursuant to written authority obtained from the Commissioner of Internal Revenue then in office. Subsequently, in 1923, the Commissioner's successor in office reversed the prior ruling and directed that two returns be filed, one for the period from January 1 to June 30, 1919, and another for the last six months of the year. This resulted in the deficiency tax in suit, because there were profits during the first six months of the year, and losses during the last six months which were not set off against the profits of the earlier period.
For the six months ending June 30, 1919, the New York corporation had a net income of $24,567.07, and the Lance Cough Drop Company had a net loss of $132.26, leaving the consolidated net income $24,434.81. For the four-month period from July 1 to October 31, 1929, the New York corporation had a net loss of $18,101.35 and the Lance Cough Drop Company had a net income of $10,155.34, with no income or loss by the Virginia corporation, resulting in a consolidated net loss of $7,946.01. In the last two months of the year the Virginia company sustained a net loss of $74,757.41.
The consolidated invested capital, as adjusted, of the New York corporation and the Lance Cough Drop Company, during the time they were affiliated, was $198,662.30. The Commissioner used one-half of this amount in computing the excess profits credit for the six months ending June 30, 1919. There was no finding as to the invested capital of the Virginia corporation.
Having found the facts as above, the Board of Tax Appeals ruled that three returns should be filed: A consolidated return for the New York corporation and the Lance Cough Drop Company for the six-month period ending June 30, 1919; a consolidated return for the group composed of those two companies and the Virginia corporation for the four-month period from July 1 to October 31, 1919; and a return for the Virginia corporation alone for the last two months of the year. Losses of the Virginia corporation or of the affiliated group which existed between July 1 and October 31, 1919, were held to be nondeductible from the net income of the affiliated group which existed during the first six months of the year.
Felix H. Levy, of New York City (John J. Sweedler, of New York City, of counsel), for petitioners.
G.A. Youngquist, Asst. Atty. Gen., John Vaughan Groner and Sewall Key, Sp. Assts. to Atty. Gen. (C.M. Charest, Gen. Counsel, and F.D. Strader, Sp. Atty., Bureau of Internal Revenue, both of Washington, D.C., of counsel), for respondent.
G. Carroll Todd, of Washington, D.C., and Henry McAllister, of Denver, Colo., with Rollin Browne, of New York City (Taylor, Blanc, Capron Marsh and Carter T. Louthan, all of New York City, of counsel), filed briefs, by leave of court, as amici curiæ.
Before L. HAND, SWAN, and MACK, Circuit Judges.
The questions which are said to be presented by these appeals, and to which counsel have directed their argument, are the following: (1) Has the Commissioner authority to reverse his predecessor's ruling that a single consolidated return be made for the year 1919? (2) Under section 240 of the Revenue Act of 1918 (40 Stat. 1081), does the addition or loss of a member of an affiliated group bring into being a new and different taxpayer? (3) If a change in the membership of an affiliated group brings into being a new taxpayer, may a net loss sustained by one such group be offset against the net income of another such group for the preceding period, under section 204(b) of the Revenue Act of 1918 (40 Stat. 1061)?
The first question was properly answered by the Board of Tax Appeals in the affirmative. The initial ruling was made pursuant to article 634, Treasury Regulations 45 (1920 Edition), which reads as follows:
"Art. 634. Change in Ownership during Taxable Year. When one corporation owns or controls substantially all the stock of another corporation at the beginning of any taxable year, but during the taxable year sells or parts with the control of all or a majority of such stock to outside interests not affiliated with it, or when one corporation during any taxable year acquires the ownership or control of substantially all the capital stock of another corporation with which it was not previously affiliated, a full disclosure of the circumstances of such changes in ownership shall be submitted to the Commissioner. In accordance with the peculiar circumstances in each case the Commissioner may require separate or consolidated returns to be filed, to the end that the tax may be equitably assessed."
The regulation remained substantially the same in 1923, when Commissioner Blair reversed the prior ruling. See article 634, Regs. 62 and 65. Whether he believed his predecessor's ruling to be erroneous in law or in fact is immaterial. There were no facts creating an estoppel in favor of the petitioners, even if it be assumed that estoppel may be raised against a tax liability — a question not now necessary to consider. Within the statutory period of limitations and in the absence of a binding settlement, the Commissioner had authority to re-examine and redetermine the petitioners' tax liability. See Botany Mills v. United States, 278 U.S. 282, 49 S. Ct. 129, 73 L. Ed. 379; Loewy Son v. Commissioner, 31 F.2d 652, 654 (C.C.A. 2); Holmquist v. Blair, 35 F.2d 10 (C.C.A. 8); Austin Co. v. Commissioner, 35 F.2d 910, 912 (C.C.A. 6); McIlhenny v. Commissioner (C.C.A. 3), 39 F.2d 356.
In requiring three returns for the calendar year 1919, the Board of Tax Appeals held, in effect, that an affiliated group is the taxpayer, that each change in the membership of an affiliated group creates a new taxpayer, resulting in a new taxable period or "year," and requiring a separate consolidated return for each group of different membership. With such construction of section 240 we do not agree. It was rejected by the Court of Claims in a very recent opinion, Swift Co. v. United States, reported in 38 F.2d 365, for reasons so fully explained that we need not here repeat them. It will suffice to say that we concur with the Court of Claims in the view that the several members of the affiliated group remain the taxpayers and that the statutory provisions for a consolidated return declare merely a method of computing the taxes of the corporate members of the group. A change in the group does not create a new taxpayer nor change the "taxable year" of those members whose affiliation continues. It does, however, affect the computation of the consolidated net income of the group. The second question stated at the beginning of this opinion must be answered in the negative.
Under this construction of the statute it is apparent that the affiliation of the New York corporation and the Lance Cough Drop Company continued until their merger. Their consolidated net income from January 1 to October 31 was $16,488.80. During the last four months of this period, the Virginia corporation was also affiliated with them, but, as it had neither income nor loss during this time, its addition to the group could affect the tax only in so far as its invested capital might change the invested capital of the affiliated group. There is no finding by the Board as to the invested capital of the Virginia corporation.
It is true that in Swift Co. v. United States, supra, the "parent or principal" corporation continued the same and the new member which was added for a part of the taxable year, was a subsidiary; while in the case at bar it may perhaps be said that the addition of the Virginia corporation substituted a new parent company, although the New York corporation (the "parent" of Lance Cough Drop Company) continued in the same relation to it as before. The affiliation between these two companies continued until their merger, and we can see no reason why their tax should not be computed upon a consolidated return for this entire period, whether the additional member which joined the group for part of the period be a "parent" or a "subsidiary" company.
The petitioners argue that affiliation continued after merger of the New York corporation into the Virginia corporation, which, if true, would permit one consolidated return for the entire calendar year, with the result that the Virginia corporation's losses during the last two months would wipe out all consolidated net income. Counsel relies upon Western Maryland R. Co. v. Commissioner (C.C.A. 4) 33 F.2d 695, and Grand Rapids National Bank v. Commissioner, 9 B.T.A. 1119. Whether they may be differentiated from the case at bar, we do not stop to inquire. It will suffice to say that in our opinion, affiliation under the statutory definition necessarily ceased when, after the final merger, only one corporation remained in existence. Hence the Virginia corporation must file a separate return for the last two months of the year. A consolidated return for all three of the corporations should cover the period up to October 31, 1919.
The Virginia corporation having had no income during the period ending October 31, 1919, we need not consider section 204(b), for, even if it were construed to be applicable, the Virginia corporation could gain no benefit from crediting its losses of the last two months against its income of the prior period.
Accordingly, the orders are reversed, and the proceedings remanded for further proceedings in conformity with this opinion.