In re Temtor Corn & Fruit Products Co. , 299 F. 326 ( 1924 )

FARIS, District Judge

(in memorandum). There was presented to the court some time since a petition for review of allowance of the claim of the United States for balance on income taxes for 1920. The referee allowed the claim of the United States against the bankrupt for an alleged balance of some $36,000 for income taxes for the year stated. The trustee in bankruptcy immediately sued out a petition for review of this order of the referee, and, as said, this was heretofore argued and submitted to the court.

There are three questions presented by the briefs of counsel in the case, and argued pro and con. These are: Did the sum of $1,000,000, deducted from the purchase price of the Granite City glucose plant, constitute rent for that plant, or was it a part payment of the purchase price thereof? Second. Was the bankrupt required to make a joint income tax return with the Best-Clymer Company, an alleged affiliated corporation? Third. Was it estopped to deny that it was compellable to make such joint return, having in fact made that sort of return voluntarily?

The referee, in the report which he has filed with the court, has very ably discussed all three of these points, or, at least, enough of them to reach a conclusion. I might, so far as the result which is in my mind is concerned, adopt as my conclusion the conclusion reached by the referee; but, regrettably, I am unable to concur in all of the conclusions of law which he has reached, and I have thought it advisable, therefore, to state my own reasons for the conclusion that I have come to.

Without going into the evidence adduced, I find no particular fault with the findings and conclusions of the referee touching the facts. But, as forecast, I have in mind different reasons for the conclusions that I have come to, especially upon the question of whether there ought to have been made a consolidated or joint return. The statute (Comp. St. Ann. Supp. 1919, § 6336%ss) provides that a consolidated return shall be made when one corporation owns “substantially all of the stock of the other.”

The statute also provides that the Commissioner of Internal Revenue shall require consolidated returns from affiliated corporations under regulations which he is empowered to prescribe. But the question of the fact of affiliation is left, by the very definition of what constitutes affiliation, even in the statute itself, a matter of judicial construction, and not a matter of administrative or departmental regulation; for the language of the section is:

“That corporations which are affiliated within the meaning of this section shall, under regulations to be 'prescribed by the Commissioner, * * * make a consolidated return.”

Further on in this section there is a statutory definition of what constitutes affiliation. So it is too obvious for argument that it is not left to the Commissioner to prescribé what constitutes affiliation, for the statute fixes that-, but what is left to be prescribed by the Commissioner’s regulation is the manner of the making of the return. In short, the law itself says who shall make a consolidated return. The Commissioner may only say how such return shall be made.

The Commissioner, then, had no power to say, as he has said by his regulation, that “substantially all of the stock of the other” means “95 per cent, of the voting stock.” It is a matter for the courts to construe, and not a matter about which the Commissioner may promulgate a regulation binding upon the courts.

Here in this case all of the voting stock was held by the bankrupt, though there were some 3,000 other stockholders holding preferred stock, which had no voté until dividends were passed for a stated period. I readily appreciate that the control of one corporation over another is ordinarily had by reason of control of the voting stock therein, and not through control of the nonvoting stock. It is also true that no one is to be taxed, unless there exists a statute which authorizes the imposition of the tax. Such a statute is, however, to be given a reasonable construction, when it in fact exists, with a 'view to carrying out its purpose and intent. Here the purpose of Congress was to forestall such manipulation ■ of profits of one corporation, through control by reason of voting stock, as would prevent the government from ascertaining correctly, and from collecting the sums justly due it, from excess profit taxes, of the controlled and affiliated corporations.

I reach, then, but by another method, the conclusion reached by the referee; that is, that Congress had in mind voting stock only, or such stock as carried control by one corporation over its affiliated corporation. Unless this was the purpose and meaning of Congress, the statute is practically worthless and wholly incapable of enforcement. From what is said, it follows that the construction of the word “substantially” is also a matter for the courts, however valuable as a rule of practice and administration it may be to have fixed by the Commissioner a merely arbitrary standard.

The petition for review ought to be denied, and the report of the referee confirmed, which is- accordingly ordered.