Mills v. Commissioner , 17 B.T.A. 257 ( 1929 )

ARAGON MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mills v. Commissioner

Docket No. 18044.

United States Board of Tax Appeals

17 B.T.A. 257; 1929 BTA LEXIS 2332;

September 13, 1929, Promulgated

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">*2332 Held that an agreement among the affiliated corporations for assessment upon the petitioner of the total tax computed on the basis of a consolidated return may not be implied from the facts herein, and since there was no such express agreement, the deficiency determined by the respondent may be assessed upon the petitioner only on the basis of the net income properly assignable to it. Section 240(a), Revenue Act of 1918.

Lyle T. Alverson, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

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TRAMMELL

">*257 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $35,265.66. During 1918 the petitioner was affiliated with certain other corporations, and the only issue raised by the pleadings is whether the respondent erred in assessing against the petitioner the whole amount of the additional tax instead of only that part thereof which bears the same ratio to the total tax as the income of the petitioner bears to the total income of the affiliated group for 1918.

FINDINGS OF FACT.

The petitioner is a Georgia corporation, with its principal office at Aragon, ">*2333 and is engaged in the manufacture of cotton goods. During 1918 all or substantially all of the stock of petitioner, ">*258 Aragon Mills, and of New York Mills, Oneida Bleachery, Inc., and Brookford Mills Co., was owned or controlled by A. D. Juilliard & Co., a partnership, whose principal office was in New York, N.Y.

New York Mills and Oneida Bleachery, Inc., were located at New York Mills, N.Y. The Brookford Mills Co. had its place of business at Brookford, N.C. Each corporation had its own separate officers, who were different individuals from the officers of the other corporations.

Each corporation duly made and filed an original return of its net income and invested capital for 1918 on or about June 15, 1919, and paid the amount of tax computed thereon, except that New York Mills and Oneida Bleachery, Inc., filed a consolidated return of net income and invested capital for 1918, and said New York Mills paid the amount of tax computed thereon. Brookford Mills also filed an amended return about November 15, 1919, and paid the additional tax shown thereon.

Under date of September 20, 1922, the respondent by letter advised A. D. Julliard & Co. that the above named">*2334 corporations were affiliated during the year 1918 and should have filed a consolidated return. The respondent also stated in said letter that in the event a consolidated return should be needed in auditing the case, the company would be notified. No such notification was given and no consolidated return was ever filed by or on behalf of said affiliated corporations.

No written agreement for the assessment of the respective amounts of 1918 tax legally due from said corporations was ever had or made between them, except that New York Mills agreed to pay all of the 1918 tax which might be legally due from Oneida Bleachery, Inc., and receive reimbursement from said last named corporation of its proportionate part thereof.

In March, 1924, the respondent assessed against the petitioner, Aragon Mills, on account of additional taxes alleged to be due from the affiliated corporations computed on the basis of a consolidated return, the sum of $629,969.67. Said additional taxes were not paid, but a claim for the abatement of the full amount thereof was duly filed by the petitioner. Final action on said claim was taken by the respondent on May 11, 1926, as shown by the deficiency">*2335 letter which is the basis of this proceeding. Said claim was allowed for $594,704.01, and rejected for $35,265.66.

The total additional tax liability was allocated by the respondent to the petitioner, Aragon Mills, without reference to the net income of the respective affiliated corporations included in the consolidated audit. At no time has any part of said additional taxes been assessed against or demanded from Brookford Mills Co., New York Mills, or Oneida Bleachery, Inc.

">*259 The petitioner made no protest against such allocation and assessment prior to the filing of its petition herein on June 29, 1926.

OPINION.

TRAMMELL: There is no controversy here with respect to the amount of the deficiency in tax due from the affiliated group of corporations. The single issue raised by the pleadings is whether the respondent erred in assessing the entire amount thereof upon the petitioner instead of assessing it upon the respective affiliated corporations on the basis of the net income properly assignable to each.

The Revenue Act of 1918 provides, in section 240(a), that:

In any case in which a tax is assessed on the basis of a consolidated return, the total tax">*2336 shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each.

The primary facts are not in dispute here. The four corporations in question were affiliated during 1918, and should have filed a consolidated return for that year. However, each corporation filed a separate return, except that New York Mills and Oneida Bleachery filed a consolidated return. In 1922 the respondent audited the case on the basis of a consolidated return and determined an additional tax of $629,969.67 to be due from the affiliated group, but did not require the filing of a consolidated return. The entire amount of the additional tax respondent assessed upon the petitioner in March, 1924, and later allowed a claim in abatement for $594,704.01 of said assessment.

It is clearly indicated from the record that at the time of this assessment there was no express agreement, written or otherwise among the corporations that the whole tax should be so assessed upon the petitioner. The respondent's">*2337 contention is that such an agreement should be implied from the subsequent actions of the petitioner in seeking abatement of the additional assessment without making complaint or objection to the assessment of the whole tax upon it. This contention, we think, is unsound.

Each corporation originally filed a separate return, and paid the tax shown thereon, with the exception above mentioned. The corporations were located at widely separated points. Each operated a separate and independent business. Each corporation had its own separate officers, who were different individuals from the officers of the other corporations. They were affiliated solely by reason of the fact that substantially all the stock of each was owned by the partners of Juilliard & Co., a New York partnership.

">*260 At the time the assessment was made, no fact is shown to have existed which would have justified the respondent in assuming that there was an agreement among the affiliated corporations that the whole tax should be assessed upon the petition. Certainly there was no such express agreement, and, under the facts and circumstances disclosed, it is our opinion that such an agreement may not">*2338 be implied from the actions of the parties. There must be an agreement between the corporations in order to authorize the tax to be assessed otherwise than against the respective corporations on the basis of their respective incomes. In this case, however, a consolidated return was not filed by the four corporations for the year involved, although the deficiency tax was determined by the respondent on that basis.

The respondent contends that the fact that the petitioner did not protest after the assessment upon the ground that the tax was assessed against it before it instituted this proceeding is evidence that the assessment was in accordance with the agreement of the respective corporations, but to our minds this is not indicative of an agreement made before the tax was assessed. If there was in fact no such an agreement in effect when the tax was assessed, such an assessment wa illegal, and the only question here is if there was an agreement made by the corporations which would warrant such an assessment. We find no evidence of it in the record.

In ">*2339 , we held that where no agreement was ever had between the corporations as to the apportionment of the tax to be assessed upon the basis of a consolidated return, and where the one corporation had not agreed to assume the tax liability of the other, it was mandatory upon the respondent to assess the tax upon the basis of the net income properly assignable to each. In that connection we said:

As we interpret the statute, it is incumbent upon the respondent to ascertain the proper parties against whom the tax is to be assessed, through inquiry, if necessary, as to any agreement or lack of agreement as to the apportionment of the tax. If there be no such agreement the tax must be assessed upon the basis of the net income of the separate companies.

Of the four corporations referred to herein, the petitioner, Aragon Mills, is the only one before us. Hence, we express no opinion as to the tax liability of the other corporations not parties to this proceeding.

With respect to the petition, we hold that the deficiency may be assessed upon it only on the basis of the net income properly assignable to it. ">*2340 ; .

Reviewed by the Board.

Judgment will be entered under Rule 50.