Summerfield Co. v. Commissioner

SUMMERFIELD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Summerfield Co. v. Commissioner

Docket Nos. 33651, 36869, 47462.

United States Board of Tax Appeals

24 B.T.A. 829; 1931 BTA LEXIS 1586;

November 18, 1931, Promulgated

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The petitioner and the Taylor Furniture Company, separate corporations, became affiliated March 21, 1925, and affiliation continued through the year. The Taylor Furniture Company had a net loss in the calendar year 1924, in the period January 1 to March 20, 1925, and also for the period March 21 to December 31, 1925, for each of which periods the petitioner had net income. Held, each of said periods is, within the meaning of the Revenue Act of 1926, a taxable year and the net losses of the Taylor Furniture Company for the calendar year 1924 and the period January 1 to March 20, 1925, may be carried forward and allowed as deductions in computing the consolidated net income of petitioner and the Taylor Furniture Company for the period of affiliation, March 21 to December 31, 1925. (Alabama By-Products Corporation et al.,18 B.T.A. 919">18 B.T.A. 919, followed.)

George M. Morris, Esq., and Frederick L. Pearce, Esq., for the petitioner.

John D. Kiley, Esq., for the respondent.

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SEAWELL

This is a consolidation for hearing of three proceedings. The Commissioner determined deficiencies in income taxes as follows: In Docket No. 33651, for the calendar year 1923 in the amount of $6,180.07; in Docket No. 36869, for 1924, $8,281.47; in Docket No. 47462, for the period from January 1 to March 20, 1925, $3,306.68, and for March 21 to December 31, 1925, $699.58.

At the hearing, counsel for the petitioner stated that the errors assigned with respect to the years 1923, 1924 and for the period January 1 to March 20, 1925, would not be urged. The only issue for the Board's decision is whether the consolidated net income for the period March 21, 1925, to December 31, 1925, for the affiliated group consisting of the Summerfield Company and the Taylor Furniture Company should be reduced by the net losses sustained by the Taylor Furniture Company for the year 1924 and the period January 1 to March 20, 1925. Brief for the petitioner concedes that the Taylor Furniture Company's loss for 1923 does not enter into computation of the tax in the instant cases.

The cases are submitted on the facts shown by allegations of the petitions and admissions in the answers and on a written stipulation.

FINDINGS OF FACT.

The petitioner and the Taylor Furniture Company are Massachusetts corporations.

During the years 1923, 1924, and the period January 1 to March 20, 1925, the Summerfield Company and the Taylor Furniture Company were not affiliated within the meaning of the revenue acts.

During the period March 21 to December 31, 1925, the Summerfield Company and the Taylor Furniture Company were affiliated.

The net income of the Summerfield Company for the respective taxable periods was as follows:

Jan. 1 to March 20, 1925	$44,075.68
March 21 to December 31, 1925	159,565.14

The net loss resulting from the operation of the business regularly carried on by the Taylor Furniture Company, after making adjustment for nontaxable interest and dividends received and for unallowable deductions, was for the respective taxable periods as follows:

Calendar year 1923	$48,440.59
Calendar year 1924	63,404.46
Jan. 1 to March 20, 1925	23,949.50
Mar. 21 to Dec. 31, 1925	86,703.25

In his determination of petitioner's tax liability for the period March 21 to December 31, 1925, the Commissioner has applied the net loss sustained by the Taylor Furniture Company for the period March 21 to December 31, 1925, in the amount of $86,703.25 against the net income of the Summerfield Company for the same period, but has refused to reduce consolidated net income by the amount of the net losses sustained by the Taylor Furniture Company for the years and period prior to affiliation.

OPINION.

SEAWELL: It is the insistence of the petitioner that the net losses sustained in 1924 and in the period January 1 to March 20, 1925, by the Taylor Furniture Company, prior to affiliation with petitioner, should be allowed as deductions in computing net income, consolidated, for the affiliated period, March 21 to December 31, 1925.

Section 200(a) of the Revenue Acts of 1924 and 1926 provides that the term "taxable year" includes, in the case of a return made for a fractional part of a year, the period for which such return is made. See Strain Brothers, Inc.,19 B.T.A. 601">19 B.T.A. 601; Pennsylvania Electric Steel Casting Co.,20 B.T.A. 602">20 B.T.A. 602, 605; Corno Mills Co.,21 B.T.A. 712">21 B.T.A. 712.

Our decision on similar facts in General Box Corporation,22 B.T.A. 725">22 B.T.A. 725, is not applicable here, being under the Revenue Act of 1921, in which the definition of "taxable year" is different from such in the 1924 and 1926 Acts and includes no reference to periods of less than twelve months.

Treasury Regulations 69, promulgated under the Revenue Act of 1926, in article 634, requires separate returns prior to affiliation and a consolidated return thereafter. See American La Dentelle, Inc., et al.,1 B.T.A. 575">1 B.T.A. 575; Weber-King Lumber Co.,20 B.T.A. 1011">20 B.T.A. 1011; and article 1523 of Regulations 69.

In view of the revenue law and regulations mentioned, the period from January 1 to March 20, 1925, in the instant proceeding, is one "taxable year" and the period from March 21 to December 31, 1925, is another "taxable year."

The provisions of the Revenue Act of 1926 in regard to net losses, so far as here pertinent, are in part as follows:

SEC. 206. (b) If, for any taxable year, if appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called "second year"), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the net succeeding taxable year (hereinafter in this section called "third year") * * *.

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(e) * * * if for the taxable year 1924 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1924, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.

With respect to the year 1924, the period from January 1 to March 20, 1925, is the "succeeding taxable year" ("second year"), and the period from March 21 to December 31, 1925, is the next succeeding taxable year ("third year").

The succession of the taxable years having been thus determined and the net incomes and net losses having been stipulated as indicated in our findings of fact, there remains to be determined merely the method of application of the net losses to the proper years under the state and our decisions.

The basic principles of the application of net losses of affiliated companies to other years have been laid down by the Board in a number of cases. Alabama By-Products Corporation et al.,18 B.T.A. 919">18 B.T.A. 919; Buckie Printers' Ink Co.,19 B.T.A. 943">19 B.T.A. 943; General Box Corporation, supra;Arrow Coal & Ice Co. et al.,22 B.T.A. 1341">22 B.T.A. 1341; Hawley Investment Co. et al.,23 B.T.A. 953">23 B.T.A. 953; and others.

The principles enunciated by the Board in the foregoing cases have been approved by the Circuit Court of Appeals for the Third Circuit in National Slag Co. v. Commissioner, 47 Fed.(2d) 846, and upon a somewhat analogous issue by the Fourth Circuit in Burnet v. Moore Cotton Mills Co., 49 Fed.(2d) 59.

On November 2, 1931, the Circuit Court of Appeals for the second Circuit reversed the Board in Ben Ginsburg Co.,19 B.T.A. 81">19 B.T.A. 81, which was decided on the authority of Alabama By-Products Corporation et al., supra, which latter case is now pending on appeal before the Circuit Court of Appeals for the Fifth Circuit, and the principles enunciated therein have been approved, as heretofore stated, by the Circuit Court of Appeals for the Third Circuit in National Slag Co., supra.

In the instant case, the facts are similar to those in the Ben Ginsburg Co. case, supra, and it, therefore, becomes necessary for the Board to determine whether it will decide the instant case on the authority of the decision of the Circuit Court of Appeals for the Second Circuit in the Ben Ginsburg Co. case, supra, or adhere to the principles enunciated by the Board in Alabama By-Products Corporation et al., supra, and other cases, approved by the Circuit Court of Appeals for the Third Circuit in National Slay Co., supra, and upon a somewhat analogous issue by the Circuit Court of Appeals for the Fourth Circuit in Burnet v. Moore Cotton Mills Co., supra.

As was well said by the United States District Court in Planters' Oil Co. v. Hopkins, 47 Fed.(2d) 659: "The question is troublesome. The use that may be made of a loss is not clear." But in view of the conflicting decisions in the United States Circuit Courts of Appeals on the question in issue and the fact that the case of Alabama By-Products Corporation et al., supra, which we have followed since deciding the same, is yet undecided by the Circuit Court of Appeals for the Fifth Circuit, we now hold, on the authority of that case and Arrow Coal & Ice Co., supra;Hawley Investment Co. et al., supra; and National Slag Co. v. Commissioner, supra, that the net losses of the Taylor Furniture Company for the calendar year 1924 and the period January 1 to March 20, 1925, may be carried forward and allowed as deductions in computing the consolidated net income of petitioner and the Taylor Furniture Company for the period March 21 to December 31, 1925.

In Docket Nos. 33651 and 36869 judgment will be entered for the respondent. In Docket No. 47462 judgment will be entered under Rule 50.