Manatee Crate Co. v. Commissioner

MANATEE CRATE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

NOCATEE CRATE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Manatee Crate Co. v. Commissioner

Docket Nos. 36648, 36649.

United States Board of Tax Appeals

22 B.T.A. 996; 1931 BTA LEXIS 2030;

March 31, 1931, Promulgated

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Stock purchased in 1918 by the parent company of an affiliated group became worthless in 1924. During the years prior to 1924 the profits and losses of the two were reported in consolidated returns. The two companies were not affiliated in 1924. Held, that the parent company is entitled to a deduction in 1924 on account of the stock becoming worthless. Riggs National Bank,17 B.T.A. 615">17 B.T.A. 615, distinguished.

Fred A. Woodis, Esq., for the petitioners.

Arthur H. Murray, Esq., for the respondent.

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ARUNDELL

In these proceedings the respondent has asserted deficiencies for the year 1924 as follows:

Manatee Crate Company	$1,573.95
Nocatee Crate Company	2,196.51

The petitioners allege that the respondent erred in determining the consolidated net income of an affiliated group of which they were members, through failure to allow a loss to the parent company on stock of a nonaffiliated company which became worthless in the taxable year.

FINDLNGS OF FACT.

On July 17, 1918, the King Lumber and Manufacturing Company, hereinafter called the King Company, acquired 255 shares of the capital stock of the ConwellLumber Company, hereinafter called the Conwell Company, at a cost of $25,500, which it continued to hold during the taxable years 1918 to 1924, inclusive.

During the taxable year 1924 the stock of the Conwell Company became worthless.

For the fiscal year ended May 31, 1919, the taxable period June 1, to December 31, 1919, and the calendar years 1920 and 1923, inclusive, the net income and/or losses of the Conwell Company were included in consolidated returns filed by the King Company in amounts as follows:

Year or period ended	Profit	Loss
May 31, 1919	$4,407.02
Dec. 31, 1919	1,137.54
Dec. 31, 1920	10,136.30
Dec. 31, 1921		$37,504.56
Dec. 31, 1922		27,622.80
Dec. 31, 1923		35,498.85
Total	15,680.86	100,626.21

In 1924 the petitioners and certain other companies not here involved were affiliated with the King Company and for that year the gains and losses of the petitioners and the other affiliated companies, and also the Conwell Company, were included in a consolidated return filed by the King Company. The respondent held that the Conwell Company and certain others were not affiliated with the King Company for the year 1924, and excluded from consolidated Net income the operating loss of the Conwell Company for that year.

The deficiencies in controversy determined by the respondent against both petitioners for the calendar year 1924 are their proportionate parts of the tax liability of the affiliated group properly allocable to each and are based upon the following consolidated net income:

NET INCOME.
Manatee Crate Co	$82,876.22
Nocatee Crate Co	116,752.29
Nocatee Ice and Power Co	2,511.92
		$202,140.43
NET LOSSES.
King Lumber and Manufacturing Co	$37,555.20
Woodmere Lumber Co	121,370.77
West Coast Lumber and Supply Co	927.92
		159,853.89
Consolidated net income		42,286.54

The above-stated consolidated net income of the corporations allowed affiliation by the respondent, namely, $42,286.54, is the consolidated net income exclusive of any loss on account of stock of the Conwell Company owned by the King Company.

No loss on account of the worthlessness of the Conwell Company stock was charged off on the books of the King Company until after the Conwell Company was denied affiliation with the King Company, and no loss on account of the worthlessness of the Conwell Company stock was deducted in the consolidated return filed by the King Company for itself and its affiliated group of corporations for the year 1924.

OPINION.

ARUNDELL: The parties have stipulated that the stock of the Conwell Company became worthless in 1924. For that year the respondent excluded that company from affiliation with the group of which the King Company was the parent, and in the absence of evidence to the contrary we must assume that his action in that respect was correct. If the Conwell and King companies had not been affiliated at any time, there would be no question that the King Company would be entitled to a loss deduction of $25,500, the cost to it of the stock in 1918. The difficulty arises out of the fact that for a period of years prior to 1924 the two were affiliated and the gains and losses of the Conwell Company were taken into account in determining the consolidated net income of the King Company and its affiliated companies.

In , we held that the sale of stock of a subsidiary by the parent company, where the sale did not serve to destroy the affiliation and the two companies continued to file consolidated returns, was not a transaction which would give rise to gain or loss and was essentially a sale by the consolidated group of its own capital stock.

On the other hand, it has been held that the disposition of stock by a member of an affiliated group which results in termination of the affiliation may give rise to gain or loss, on the theory that the disposition occurred outside of the affiliated group. ; ; . In the Riggs National Bank case we cited the Remington Rand case with approval, but reached the conclusion that under the peculiar facts present in the Riggs case the amount of the loss would be limited by excluding the operating losses sustained by the subsidiary company during the period of affiliation. It appears that the Riggs Bank owned 100 per cent of the stock of the Hamilton Bank and by reason thereof filed a consolidated return in which the operating losses of its affiliated company, the Hamilton Bank, were used as an offset against the profits of the Riggs Bank. When within the year the Hamilton Bank was liquidated and the Riggs Bank took over its assets, we held that the Riggs Bank could not take a loss on the stock of the Hamilton Bank without first taking into account the losses of the Hamilton Bank of which it had already had the benefit for tax purposes.

In the instant case the King Company and the Conwell Company were not affiliated during the taxable year 1924 though they had been for several years prior thereto. The facts on which the affiliation was based in those prior years are not disclosed by the stipulation which is the basis for our decision. The 1924 Revenue Act permitted affiliation of two or more companies only when there was a 95 per cent ownership of stock. The test under the Revenue Acts of 1918 and 1921 was ownership and/or control of substantially all of the stock of two or more companies, and this difference in the requirements of the several revenue acts may account for the fact that the companies were not held to be affiliated in 1924. In any event the liquidation of the Conwell Company occurred at a time when the two companies were not affiliated, and on the stipulated facts it is apparent that the King Company suffered a loss of its entire investment of $25,500 and this amount constitutes a deduction within the meaning of the Revenue Act of 1924.

Reviewed by the Board.

Decision will be entered under Rule 50.