Dayton Wright Airplane Co. v. Commissioner , 17 B.T.A. 142 ( 1929 )

DAYTON WRIGHT AIRPLANE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dayton Wright Airplane Co. v. Commissioner

Docket No. 16915.

United States Board of Tax Appeals

17 B.T.A. 142; 1929 BTA LEXIS 2348;

August 23, 1929, Promulgated

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Section 240(a) of the Revenue Act of 1918 does not provide for the filing of consolidated returns of the net income and invested capital of two corporations, one of which owns substantially all of the stock of the other, which corporations were each organized after August 1, 1914, and were not successor to a then existing business, and 50 per cent or more of the gross income of each of which consisted of gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

W. W. Spalding, Esq., for the petitioner.

John D. Foley, Esq., and L. W. Creason, Esq., for the respondent.

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MURDOCK

The Commissioner determined a deficiency in income and profits taxes for the calendar year 1919 in the amount of $832,397.63. The petitioner alleges that in making this determination the Commissioner erred (1) in holding that the petitioner and the Dayton Metal Products Co. were not affiliated and should not be permitted to file a consolidated return for 1919; (2) in increasing income by $8,220 representing additional value of 10,960 shares of 6 per cent debenture stock of the General motors Corporation received by the petitioner in 1919; (3) in failing to credit the petitioner with $569,514.53 paid in 1920 on account of its 1919 tax liability, and (4) in failing to deduct the proper amount from invested capital on account of income and profits-tax liability for the year 1918.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Ohio, with its principal office in Dayton, Ohio.

During the taxable period involved herein, the petitioner was engaged in the manufacture of airplanes near Dayton, Ohio. The Metal Products Co. also had a plant in that city where it manufactured war supplies including airplane parts.

The officers and directors of the two companies were the same individuals.

The Metal Products Co. furnished $1,000,000, the entire amount paid in for the petitioner's capital stock, and also advanced sums of money amounting to several hundred thousand dollars to the petitioner from time to time on open accounts on the books of the two companies when needed by the petitioner for working capital.

In order that the petitioner might secure possession of the plant near Dayton, where its operations were subsequently conducted, the Metal Products Co. built a plant at Dayton at a cost in excess of $500,000 for the Domestic Engineering Co., which latter then gave possession of its old plant to the petitioner.

The Metal Products Co., by lending its credit and otherwise, assisted the petitioner to borrow money and at one time and for some time loaned the petitioner all of the capital stock of the petitioner which the latter deposited with the War Credit Board as collateral security for the repayment of advances made to the petitioner. The Metal Products Co. also assisted the petitioner in arranging for credit with which to purchase raw materials.

The petitioner had contracts with the United States Government for the manufacture of airplanes on a cost-plus basis. Finished parts used in airplane construction were purchased by the petitioner from the Metal Products Co. at cost or less than cost to the Metal Products Co. so that but one profit would be paid by the Government. These transactions ran into hundreds of thousands of dollars and, as a result, the Metal Products Co. suffered an operating loss in 1919. The plant facilities and employees of the Metal Products Co. were loaned by that company to the petitioner whenever they were needed.

The parties have stipulated as follows:

From January 1, 1918, to December 18, 1919, the Dayton Metal Products Co., a corporation organized under the laws of the State of Ohio, owned directly more than 99 per cent of the outstanding capital stock of the petitioner company, that is, all of such stock except qualifying shares held by members of the board of directors of the petitioner company.

The Dayton Metal Products Co. and the petitioner were each organized after August 1, 1914, and neither was the successor to a business existing on that date.

The Dayton Metal Products Co. and the petitioner each derived during the period from January 1, 1918, to December 18, 1919, more than 50 per cent of their respective gross incomes, including gains, profits, commissions and other income, from United States Government contracts made between April 6, 1917, and November 11, 1918.

In computing the petitioner's invested capital for the 1919 taxable period here involved, the Commissioner deducted from the amount thereof, as otherwise computed, $753,883.53 as the petitioner's 1918 income and profits taxes, in the amount of $1,783,905.96, prorated from the various dates of payment, which 1918 income and profits tax liability was computed by the Commissioner in accordance with his determination that the petitioner and the Dayton Metal Products Co. were not affiliated and should not be permitted to file a consolidated return for 1918.

If the Board of Tax Appeals holds that the two companies were affiliated for 1918, the deduction from their consolidated invested capital for taxes of 1918 will be determined under Rule 50 of the Board.

If the Board of Tax Appeals holds that the two companies were affiliated for 1919, viz, for the period January 1, 1919 to December 18, 1919, the effect of such decision upon the tax liability of these two corporations for such period during 1919 will also be determined under Rule 50 of the Board.

The notice of deficiency herein states that no amount was previously assessed against the petitioner for 1919. However, the petitioner paid $569,514.53 as income and profits taxes for 1919, which amount should be credited on its tax liability as determined in this proceeding. Upon such credit being given, the credit heretofore existing in the amount just named, $569,514.53 in favor of the Dayton Metal Products Co. will be canceled.

The Commissioner ruled that the petitioner and the Dayton Metal Products Co. were not affiliated and should not be permitted to file a consolidated return for 1918 or for the 1919 taxable period here involved, and this ruling is reflected in the deficiency letter attached to the petition which computes the tax liability of the petitioner as a separate corporation.

At the time the ruling letter of July 7, 1919, (attached to the petition in this appeal) was issued, Hon. Daniel C. Roper was the Commissioner of Internal Revenue and Mr. J. H. Callan was Assistant to the Commissioner of Internal Revenue. Throughout 1926, in which year the deficiency letter was issued, and now, November 5, 1928, Hom. D. H. Blair was and is the Commissioner of Internal Revenue.

The petitioner and the Metal Products Co. were not during the years 1918 and 1919 so affiliated within the meaning of section 240 of the Revenue Act of 1918 as to entitle them to file consolidated returns for those years.

On December 18, 1919, the 6 per cent debenture stock of the General Motors Corporation had a value of $86.6875 per share.

OPINION.

MURDOCK: The principal issue in this case is that of affiliation and it turns entirely upon the proper interpretation of section 240(a) of the Revenue Act of 1918. That section is, so far as pertinent hereto, as follows:

That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return: Provided, That there shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capital and net income.

The petitioner contends that while the proviso above quoted undoubtedly has the effect of separating, for tax purposes, Government war contractors from peace-time industries, it has no effect upon the affiliation of peace-time industries with each other or Government war contractors with each other, therefore, the petitioner and the Dayton Metal Products Co. both being Government war contractors and the one owning directly substantially all of the stock of the other, were affiliated within the meaning of section 240 and entitled to file a consolidated return of net income and invested capital. In support of its contention, the petitioner quotes as follows from :

In the first place, it is, as I conceive, a general rule in the interpretation of all statutes levying taxes or duties upon subjects or citizens, not to extend their provisions, by implication beyond the clear import of the language used, or to enlarge their operation so as to embrace matters, not specifically pointed out, although standing upon a close analogy. In every case, therefore, of doubt, such statutes are construed most strongly against the Government and in favor of the subjects or citizens, because burdens are not to be imposed, beyond what the statutes expressly and clearly import. Revenue statutes are in no just sense either remedial laws or laws founded upon any permanent public policy, and, therefore, are not to be liberally construed.

The petitioner also quotes from , as follows (p. 791):

The provision of the statute is a relief provision and, under the well known rules of statutory construction, if there is any doubt concerning its meaning, it must be liberally construed in favor of the taxpayer. Language may not be added or an interpretation made which deprives taxpayers of rights which the wording of the section construed in its ordinary meaning grants.

It will be noted that the two rules of statutory construction set forth in the above quotations are only to be applied in cases of doubt as to the meaning of a statute. . Where the language of a statute is clear and free from doubt, there is no reason to apply these rules of statutory construction. In our opinion, section 240(a) very clearly provides that the net income and invested capital of any corporation organized after August 1, 1914, and not successor to a then existing business, 50 per cent or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, shall be taken out of any consolidated net income and invested capital of which it might otherwise form a part, and in such case, the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income. In the present case there are two such corporations, the net income and invested capital of which must be taken out of what might otherwise be consolidated net income and invested capital, and each of these corporations so taken out must be separately assessed on the basis of its own invested capital and net income. The use of the words "any, " "corporation," "separately," and "own" is most convincing of the intent which we have attributed to Congress in this connection. The petitioner would have us read the last sentence of the above quoted part of section 240(a) as if a number of the nouns were used in the plural and the sentence were as follows:

In such case the corporations so taken out shall be separately assessed on the basis of their own invested capital and net income * * *.

In our opinion Congress did not intend that this sentence should be read in this way. The fact that section 240(a) further provides that the remainder of such affiliated group shall be assessed on the basis of the remaining invested capital and net income is not inconsistent with the decision we have reached nor does it make the other language of the section, including the proviso, doubtful. In this case there happens to be no remainder. Congress could have provided that the corporations taken out of the consolidated group might, in a proper case, be assessed on the basis of their consolidated invested capital and net income, but so far as we can see it did not so provide and no rule of statutory construction would allow us to extend the provisions of the statute by implication beyond the clear import of the language used or to enlarge their operation so as to embrace matters not specifically pointed out, although standing upon a close analogy.

The report of the Committee on Finance, relating to the Revenue Bill of 1918, contained the following language relating to consolidated returns:

Provision has been made in section 240 for a consolidated return, in the case of affiliated corporations, for purposes both of income and profits taxes. A year's trial of the consolidated return under the existing law demonstrated the advisability of conferring upon the commissioner explicit authority to require such returns.

So far as its immediate effect is concerned consolidation increases the tax in some cases and reduces it in other cases, but its general and permanent effect is to prevent evasion which can not be successfully blocked in any other way. Among affiliated corporations it frequently happens that the accepted intercompany accounting assigns too much income or invested capital to company A and not enough to company B. This may make the total tax for the corporation too much or too little. If the former, the company hastens to change its accounting method; if the latter, there is every inducement to retain the old accounting procedure, which benefits the affiliated interests, even though such procedure was not originally adopted for the purpose of evading taxation. As a general rule, therefore, improper arrangements which increase the tax will be discontinued, while those which reduce the tax will be retained.

Moreover, a law which contains no requirement for consolidation puts an almost irresistible premium on a segregation or a separate incorporation of activities which would normally be carried as branches of one concern. Increasing evidence has come to light demonstrating that the possibilities of evading taxation in these and allied ways are becoming familiar to the taxpayers of the country. While the committee is convinced that the consolidated return tends to conserve, not to reduce, the revenue, the committee recommends its adoption not primarily because it operates to prevent evasion of taxes or because of its effect upon the revenue, but because the principle of taxing as a business unit what in reality is a business unit is sound and equitable and convenient both to the taxpayer and to the Government.

This report does not lead us to believe that section 240(a) as interpreted by us is not exactly what Congress intended. We therefore have found as a fact that the petitioner and the Dayton Products Corporation were not entitled to file a consolidated return under section 240(a) of the revenue Act of 1918.

Our findings of fact sufficiently dispose of the question of the value of the General Motors Corporation stock at the time received by the petitioner and also of the question of the credit of $569,514.53 paid on account of its 1919 tax liability. The fourth allegation of error need not be discussed, bucause it only arises in case we hold that the two companies were entitled to file a consolidated return.

Judgment will be entered under Rule 50.