Alabama By-Products Corp. v. Commissioner

ALABAMA BY-PRODUCTS CORPORATION, BIRMINGHAM COKE & BY-PRODUCTS CO., MAJESTIC COAL CO., AND IMPERIAL COAL & COKE CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Alabama By-Products Corp. v. Commissioner

Docket No. 21808.

United States Board of Tax Appeals

16 B.T.A. 1073; 1929 BTA LEXIS 2454;

June 18, 1929, Promulgated

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Where a corporation sustained a net loss in 1919, prior to becoming a member of an affiliated group in 1920, the excess of such net loss over the net income of the corporation for 1918 may, under section 204(b) of the Revenue Act of 1918, be allowed a as deduction from the net income of such corporation only in computing the consolidated net income of the affiliated corporations for 1920.

Oscar W. Underwood, Jr., Esq., and H. C. Kilpatrick, Esq., for the petitioners.

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

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TRAMMELL

This is a proceeding for the redetermination of a deficiency in income and profits taxes for the 10-month period ended December 31, 1920, determined against the petitioner, Alabama By-Products Corporation, in the amount of $35,689.95. The sole issue is whether, under sections 204 and 240 of the Revenue Act of 1918, the excess of net loss sustained by a corporation in 1919, prior to affiliation, may be used as a deduction in computing the consolidated net income of the affiliated corporations for 1920 within the period of affilation.

FINDINGS OF FACT.

The petitioner, Alabama By-Products Corporation, is a corporation organized and existing under the laws of the State of Delaware, with its principal office at American Trust Building, Birmingham, Ala. The petitioners, Birmingham Coke & By-Products Co., Majestic Coal Co., and Imperial Coal & Coke Co., are all corporations organized and existing under the laws of the State of Alabama, with principal offices at American Trust Building, Birmingham, Ala.

The petitioner, Majestic Coal Co., was organized under the laws of Alabama in 1915 and has since its incorporation been regularly engaged in the business of mining and selling coal. The company has always kept its books upon a calendar year basis. For the calendar year 1918 the Majestic Coal Co. duly filed a return. The said petitioner for that year had a net income of $5,825.45, upon which a tax of $3,998.87 was assessed and upon which the said petitioner paid $144.33 and filed a claim for abatement of $3,854.54. For the calender year 1919 it sustained a net loss of $82,713.20, the same having resulted wholly from the operation of its business of mining and selling coal regularly carried on by it, and constituted the excess of the deductions allowed by law over the gross income. The said petitioner received in 1919 no amounts as dividends from personal service or other corporations, and received no interest fee from taxation in that year. The respondent, pursuant to section 204 of the Revenue Act of 1918, issued a certificate of overassessment, applying said loss as a deduction from the said net income of the company for 1918 and authorizing the refund of the said tax of $144.33 to the Majestic Coal Co. and the allowance of the said claim for abatement. In said certificate of overassessment the respondent determined the said petitioner's net income for the taxable year 1918 to be the aforesaid amount of $5,825.45, its net loss for 1919, for the purposes of section 204 to be $82,713.20, and the excess of the 1919 net loss over its net income for the taxable year 1918 to be $76,887.75.

During the calendar year 1920 the petitioner, Majestic Coal Co., continued its regular operations, kept its separate entity, and kept its separate accounts for said calendar year, but as of March 1, 1920, said petitioner became affiliated with the other petitioners named herein and a consolidated return was filed for these petitioners as affiliated corporations in the name of Alabama By-Products Corporation for the full calendar year 1920, but the respondent determined, and the petitioners are in agreement with that determination, that all of the petitioners were affiliated for the purposes of section 240 of the 1918 Act as of March 1, 1920, the date of the organization of petitioner, Alabama By-Products Corporation. The Majestic Coal Co. had a loss, computed pursuant to the Revenue Act of 1918, for the calendar year 1920, of $51,674.93, of which ten-twelfths thereof, namely, $43,062.50, was its loss from March 1, to December 31, 1920, as correctly determined by the respondent. The respondent allowed the loss of $43,062.50 for the period of March 1, to December 31, 1920, as a deduction against the gross income of the affiliated companies for that period, but refused to allow any portion of the said excess of $76,887.75 as a deduction in computing the net income of the affiliated companies for such period from March 1 to December 31, 1920.

The petitioner, Birmingham Coke & By-Products Co., was incorporated under the laws of Alabama on May 13, 1918, for the purpose of taking over and conducting a by-product plant for the production of coke and by-products thereof. The company was engaged in this business from its incorporation and throughout 1919. It has always kept its books upon a calendar year basis. For the year 1918 the said petitioner suffered a loss and duly filed a return showing the same. For the year 1919 it sustained a net loss of $3,584.05, the same having resulted wholly from the operation of its business aforesaid regularly carried on by it, and constituted the excess of the deductions allowed by law over the gross income. The said petitioner received in 1919 no amounts as dividends from personal service or other corporations, and received no interest free from taxation in that year. During the calendar year 1920 the said petitioner kept its separate entity, and kept its separate accounts for the calendar year, but as of March 1, 1920, said petitioner became affiliated with the other petitioners named herein, as elsewhere in these findings is set forth, and the Alabama By-Products Corporation filed a consolidated return as already related. For the period March 1 to December 31, 1920, the said petitioner, Birmingham Coke & By-Products Co., had an individual net income, as correctly determined by the respondent, computed pursuant to the Revenue Act of 1918, of $28,708.07, and the same was merged into the income account of the affiliated companies for tax purposes for said period. This petitioner was the only one of the subsidiaries of petitioner, Alabama By-Products Corporation, which kept its accounts in such a manner that its net income for the period March 1 to December 31, 1920, could be determined, the other subsidiaries having kept their accounts in such manner that their net incomes could be determined only for a full calendar year. In respect of such other subsidiaries, the respondent, in determining their net incomes for the period March 1 to December 31, 1920, for the purpose of consolidating such income accounts into an income account for the affiliated group for such period, used ten-twelfths of the net income for the full calendar year, and the petitioners acquiesce in the use of such method in the case of such other subsidiaries where the books were so kept. The individual net income of petitioner, Birmingham Coke & By-Products Co., for the calendar year 1920, computed pursuant to the Revenue Act of 1918, was $23,267.68 - a net loss of $5,440.39 for the period January 1 to February 28, 1920, and a net income of $28,708.07 for the period March 1 to December 31, 1920.

The Alabama By-Products Corporation filed a consolidated return for the full calendar year 1920, combining its accounts, for tax purposes, with the accounts of the other petitioners, as hereinabove set forth. The Ababama By-Products Corporation, pursuant to a plan whereby it was organized and commenced its operations on March 1, 1920, and pursuant to a plan of reorganization affecting the other petitioners, acquired the ownership of all of the outstanding stock of the other petitioners, namely, Birmingham Coke & By-Products Co., Majestic Coal Co., and Imperial Coal & Coke Co., as of March 1, 1920, as determined by the respondent, with which determination the petitioners are in agreement.

None of these petitioners is a corporation organized after August 1, 1914, and not successor to a then existing business, 5 per centum or more of whose gross income consisted, for the taxable year 1920 or any other year or period, of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

The petitioners, Alabama By-Products Corporation, Birmingham Coke & By-Products Co., Majestic Coal Co., and Imperial Coal & Coke Co., have agreed among themselves that all tax liability, if any, for the period March, 1, 1920, to December 31, 1920, which may be determined to be due from the consolidated group, shall be assessed against and paid by the petitioner, Alabama By-Products Corporation, so that the respondent may look to that corporation alone for payment, should any payment be due, the intercompany quotas to be thereafter privately adjusted among the petitioners. The petitioner, Alabama By-Products Corporation, has paid the taxes heretofore assessed for such period.

During all times covered by these findings, both with respect to 1920 and preceding years, where such may be involved under section 204, all of the petitioners kept their books separately, strictly upon the accrual basis of accounting and upon calendar year accounting periods. All of them maintained their separate corporate entities at all times, and for accounting purposes kept at all times separate books of account. They have at all times conducted their separate operations as distinct entities, and have not merged any of their operations or transactions except in consolidating their separate accounts for tax purposes by reason of their affiliation under section 240 of the Revenue Act of 1918 as aforesaid.

The foregoing facts were stipulated by the parties.

OPINION.

TRAMMELL: The deficiency involved in this proceeding was determined by the respondent against, and the deficiency notice mailed to, the Alabama By-Products Corporation, the parent corporation. This action of the respondent was taken pursuant to an agreement among the affiliated corporations to the effect that any tax due by the affiliated group should be assessed against and paid by the said parent corporation. The three subsidiary corporations have joined with the parent as petitioners, notwithstanding no liability has been asserted against them directly and no deficiency notice mailed to any of them. We have no jurisdiction to redetermine the tax liability of the subsidiaries (), except for the purpose of determining the liability of the petitioner, Alabama By-Products Corporation, under its agreement to pay the tax due by the affiliated group.

The only issue presented for consideration here is one of law, namely, whether the excess of net loss, sustained in 1919, over the net income for 1918, of a corporation which in 1920 became a member of a group of affiliated corporations, may be deducted from the consolidated net income of such group for 1920.

The Revenue Act of 1918 provides, in respect of net losses, as follows:

(b) If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. * * * If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Commissioner with the aprroval of the Secretary be allowed as a deduction in computing the net income for the secceeding taxable year. (Section 204.)

The petitioner corporations were affiliated during the period from March 1 to December 31, 1920, within the meaning of section 240 of the Revenue Act of 1918.

Section 204 is a relief provision, designed to alleviate hardship resulting from the imposition of a tax on the income received in one year in those cases where a taxpayer suffers a loss in the succeeding year. Such a loss may, in accordance with the provisions of section 204, be offset against the income of the taxpayer for the preceding year, and in the event that such loss exceeds the income of the preceding year, the excess is allowable as a deduction in computing the net income for the succeeding year. This relief is, by the express terms of the statute, given to "any taxpayer" who has suffered a "net loss" for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920.

Each corporation in the affiliated group is a "taxpayer," as defined by section 1 of the statute, otherwise, we would have the anomalous situation where corporations were assessed and paid taxes, and yet were not "taxpayers." The fact that for the purpose of the computation of the tax in the first instance, the corporations are considered as a unit, does not mean that the separate corporations are not "taxpayers." See ; ; ; . Each individual corporation is a taxpayer and the same taxpayer, regardless of the fact that for one year it is and for another year it is not, affiliated with other corporations.

We do not believe that it was the intention of Congress to deprive any taxpayer of the benefits afforded by section 204 by the statutory provision relating to consolidated returns. In our opinion there is nothing contained in the statute, either in express terms or by necessary implication, which would deprive a corporation of the benefit of the net loss provision of the statute merely because it was affiliated with another corporation.

Since, under the statute, each member of an affiliated group is a "taxpayer" and the relief granted by section 204 is given to "any taxpayer," it is our opinion that an affiliated corporation, which suffered a net loss in 1919, prior to the beginning of the period of affiliation, and which net loss exceeded the amount of its net income for 1918, is entitled to deduct the excess of such net loss from its individual net income for 1920, and to that extent the consolidated net income is thus reduced.

However, if the corporation which sustained the net loss in 1919 has no individual net income for 1920, the excess of such net loss over its 1918 net income may not be taken as a deduction, for the reason that such taxpayer has no income from which it can be deducted, and a net loss sustained by one taxpayer may not be deducted from the net income of another taxpayer or group of taxpayers, even though it be an affiliated corporation and included in a consolidated return with another or other corporations.

Applying the foregoing principles to the facts in the instant case, it follows that the excess of the 1919 net loss of the Majestic Coal Co. over its 1918 net income in the amount of $76,887.75 can not be allowed as a deduction for 1920, since that corporation had no individual net income for 1920.

The Birmingham Coke & By-Products Co. had an individual net income of $28,708.07 for the period March 1 to December 31, 1920, and, while the amount of its net loss for 1919, in excess of its net income for 1918, in the amount of $3,584.05, can not be applied directly as a deduction in computing the consolidated net income of the affiliated group, it should be allowed as a deduction from the individual net income of this company for said period ended December 31, 1920, and thus, to that extent, the consolidated group has the benefit of such net loss.

The respondent relies on previous decisions of the Board in support of his contention that the net loss here is not deductible. But we do not consider our previous decisions inconsistent with the conclusion here reached. , in fact is in accord with our conclusion in this case. We there held that the net loss, suffered in 1919 by one corporation which itself had no net income either in 1918 or 1920, was not deductible.

The facts in the case of , are clearly distinguishable from the facts in this case, notwithstanding certain language used as to the principle involved, we think that the result is not contrary to our decision here. In the case of , there were no facts as to the separate incomes of the individual corporations during 1918 or 1920 and no facts as to whether the net loss occurred while affiliated or not. In that case we said:

The Board is unable to determine what net loss, if any, should be used to reduce the net income of the petitioner for the calendar year 1918.

Reviewed by the Board.

Judgment will be entered under Rule 50.