Southern Power Co. v. Commissioner

OPINION.

Phillips:

It appears that during the years 1922 and 1923 the Wateree Electric Co. owned substantially all of the capital stock of Southern Power Co., which in turn owned all of the capital stock of the Catawba Manufacturing' & Electric Power Co. The Wateree Electric Co. filed a separate return of its income for those years, while the petitioners filed a consolidated return of their income. The Commissioner determined that the three corporations were affiliated and this determination is not questioned. The Commissioner further determined that since one of the affiliated corporations had filed a separate return, separate returns must be filed on behalf of all of those corporations and that a consolidated return on behalf of two of three affiliated corporations did not comply with the provisions of sections 239 and 240 of the Revenue Act of 1921. Petitioners, on the other hand, contend that where three or more corporations are affiliated, some of them may file separate returns and others may file consolidated returns. We have heretofore had occasion to examine this question in B. B. Bathing Park, Inc., 17 B. T. A. 748; and Apartment Corporation, 17 B. T. A. 876. There we reached the conclusion that under the provisions of sections 239 and 240 of the Eevenue Act of 1921 a consolidated return must include the income of all affiliated corporations and that if one or more of such corporations elects to file a separate return, there being no question whether or not it is properly a member of the affiliation, the remaining corporations may not file a consolidated return of their income but must file separate returns. Upon authority of those decisions the action of the Commissioner in separately computing the income of the two petitioners is approved.

The alternative contention of the petitioner, Southern Power Co , is that the interest which accrued to it during the taxable years upon its advances to Catawba Manufacturing & Electric Power Co. and which was paid to it during those years is not to be included as income; that the payment was nothing more than a bookkeeping transaction. It seems clear that the interest was paid to Southern Power Co. out of amounts advanced by that company to its subsidiary and to that extent the payment may be said to have been a mere bookkeeping transaction, the taking of something out of one pocket and placing it in another. This, however, is not decisive of the question before us. The Southern Power Co. was engaged in the business of developing, distributing, and selling hydroelectric power. While there is no evidence upon that point, its accounts must be kept upon an accrual basis if they are to accurately reflect its income. The Catawba Manufacturing & Electric Power Co. owned a power site which the Southern Power Co. determined to develop and which unquestionably had a substantial value. The Southern Power Co. advanced money to its subsidiary to develop this site and to erect a power plant. The money advanced bore interest at 6 per cent. The obligation of the subsidiary was to pay to the Southern Power Co. tbe amounts advanced and interest thereon at the rate of 6 per cent per annum. There is nothing to indicate that collection of the amounts so advanced and the interest thereon was at all doubtful. The interest appears to have bpen as much an asset of the Southern Power Co. as the principal of the loan. Under sections 212 and 213 of the Revenue Act of 1921 such interest became income to the Southern Power Co. whether or not paid to it in those years.

We may therefore disregard the payment and the fact that payment was made out of the funds loaned by the Southern Power Co. It is also immaterial that the income of the debtor was insufficient to pay the interest. The interest accrued to the Southern Power Co. during the taxable year in the same manner as would any other interest on money loaned and is to be included as a part of its income, in the absence of a showing that its ultimate collection was extremely doubtful. Great Northern Railway Co., 8 B. T. A. 225. The action of the Commissioner in computing the income of Southern Power Co. by including the interest which accrued to that company during the taxable years is approved.

Reviewed by the Board.

Decision will he entered for the respondent.

Smith dissents.