Essex Coal Co. v. Commissioner

ESSEX COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Essex Coal Co. v. Commissioner

Docket No. 8540.

United States Board of Tax Appeals

12 B.T.A. 994; 1928 BTA LEXIS 3417;

June 29, 1928, Promulgated

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There was an agreement between the petitioner and its affiliated corporation as to how the tax liability of the two corporations should be apportioned between them.

Evert L. Bono, Esq., for the petitioner.

Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent.

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TRAMMELL

This is a proceeding for the redetermination of a deficiency in income and profits taxes of $33,023.50 for 1920. In the original petition filed in this proceeding it is alleged that the respondent erred in determining the amount of depreciation allowable to the Lost Run Coal Co., a corporation affiliated with the petitioner, and failed to allow as a deduction the full amount of depreciation sustained by that company during 1919 and 1920.

In an amended petitioner filed before the hearing it is alleged that as no agreement existed between the petitioner and its affiliated company, the Lost Run Coal Co., as to how the taxes should be paid by the companies the respondent erred in failing to apportion the tax liability of the petitioner and the Lost Run Coal Co. in accordance with the net income properly assignable to each. The parties, however, have agreed on all questions in dispute except that raised by the amended petitioner.

FINDINGS OF FACT.

The petitioner is an Ohio corporation with its principal office at Columbus.

For 1920 and the preceding year the petitioner and its affiliated corporation, the Lost Run Coal Co., filed a consolidated return. The consolidated return for 1920 was filed with the collector of internal revenue at Columbus, Ohio, on March 14, 1921, and assessment of the tax liability shown thereon was immediately made against the petitioner. The Lost Run Coal Co. for 1920 did not file Treasury Department Form 1122, which is an information return to be filed by a subsidiary or affiliated corporation whose net income and invested capital are included in the return of the parent or principal reporting corporation for purpose of income and profits taxes. Among other things this form contains the following statement and indicated request for information:

7. The department prefers that the entire tax shown on a consolidated return be paid by the parent or principal reporting corporation, instead of being apportioned among the corporations composing the affiliated group.

If apportionment is made, state the amount of income and profits taxes for the taxable period to be assessed against the subsidiary or affiliated corporation making this return $ .

For 1918, however, Form 1122 was filed and showed how the amount of taxes for that year was to be apportioned between the petitioner and the Lost Run Coal Co.

All of the stock of the petitioner and the Lost Run Coal Co. has always been owned by the same ten individuals who own exactly the same percentage in each company.

The original tax liability shown on the original return was paid in four equal installments. The first installment was paid at the time of making the return and the other three installments were paid on notices and demands addressed to the petitioner at 1101 Hayden Building, Columbus, Ohio, the address of the two corporations as shown on the return. The first and fourth installments of the tax were paid by checks of the Lost Run Coal Co. and the second and third installments were paid by checks of the petitioner. The four checks given in payment of the installments were signed by the same person as treasurer-secretary of the respective companies.

During 1920, the Lost Run Coal Co. had no independent sales agency and the sales of coal were made by and through the petitioner. The two companies had one office organization and one office and had a common control and management. The officers of the petitioner were also the officers of the Lost Run Coal Co. holding the same office in each company.

No objection to the assessment of the consolidated tax liability of the petitioner and the Lost Run Coal Co. for 1920 was made prior to the filing of the amended petition in this proceeding.

The net income of $168,007.69 shown on the consolidated return consists of a net income of $82,800.40 of the petitioner and a net income of $85,207.29 of the Lost Run Coal Co. The corrected consolidated net income is $220,410.33, consisting of a net income of $97,292.93 of the petitioner and a net income of $123,117.40 of the Lost Run Coal Co. The corrected additional consolidated tax liability based on the consolidated income of $220,410.33 is $25,327.27 instead of $33,023.50 as shown by the deficiency letter from which the petition in this proceeding was filed.

Attached to the consolidated return filed for the two companies is a statement showing separately for each of the companies the items of income and the items of deductions. There is also attached a schedule of the combined assets and the combined liabilities of the two companies at December 31, 1919, and December 31, 1920. Another schedule shows the assets and the liabilities of each of the companies separately.

OPINION.

TRAMMELL: The original petition alleged that the respondent erred in determining the amount of depreciation deductible by the petitioner's affiliated corporation, the Lost Run Coal Co., and had failed to allow that company the full amount of depreciation sustained during 1919 and 1920. Inasmuch as the parties have stipulated the corrected consolidated net income, the corrected net income of each of the companies and the corrected deficiency as set out in the findings of fact, the only matter now in controversy is whether the respondent may assess the total consolidated deficiency against the petitioner or should he in determining the deficiency due from the petitioner apportion the correct consolidated tax between the petitioner and its affiliated company on the basis of their respective net incomes and assess against the petitioner only its proportion of the deficiency.

Section 240 of the Revenue Act of 1918 provides as follows:

(a) That corporations which are affiliated within the meaning of this section shall under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III and the taxes thereunder shall be computed and determined upon the basis of such return: * * *

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In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. * * *

The petitioner contends that no agreement existed between it and the Lost Run Coal Co. as to how the consolidated income and profits taxes of the companies for 1920 should be assessed; that attached to the consolidated return was a schedule of the net income of each of the consolidated companies providing the respondent with the necessary information with which to determine and assess the tax against each company in proportion to the net income of each and that in the absence of an agreement between the companies the taxes are to be computed as a unit and assessed against each company on the basis of the net income properly assignable to each.

The respondent contends that in view of the facts in the case there existed an express or implied agreement between the corporations that assessment of all taxes are to be made against the petitioner. He also contends that irrespective of the existence of an agreement between the corporations the petitioner, under the circumstances in the case, is estopped from denying that there was an agreement between the companies that all taxes found due from the affiliated group were to be assessed against the petitioner.

The action of the petitioner in permitting the full amount of the original tax shown on the consolidated return to be assessed against it without protest, in permitting without protest the notices and demands for the payment of three quarterly installments thereof to be served on it and payment to be made in accordance therewith and in permitting the respondent's determination of the full amount of deficiency against it to go unchallenged until almost the date of the trial indicates that there was an agreement between the companies that the full amount of the tax liability of the affiliated group is to be assessed against the petitioner. Is the evidence, taken as a whole, sufficient to establish the fact that no agreement was in fact entered into between the two companies?

Fred Essex, an officer in both corporations during 1920 and who signed the four checks in payment of the installments of tax shown on the return as filed, testified that no agreement was entered into between the two companies with respect to the assessment of the tax.

Sumner Cottingham, who was active in the management in both companies in 1920, corroborated the testimony of Essex.

The agreement referred to in this statute is one between the corporations included in the consolidated return. It is not required to be in writing or to be in any particular form or language. Such a contract may be implied as well as express. Such as agreement does not relate to the payment of the tax but only to its assessment. Whether such an agreement was made may be shown by circumstantial evidence and the conduct of the parties as well as the testimony of witnesses. Here the officers of the two corporations were the same individuals. The individual who represented and acted for one company as president, acted in the same capacity for the other. An agreement between the said officers in one capacity and the same individuals in another capacity might have been a more mental process evidenced only by the outward acts and conduct of the parties. It would have been a useless process for the president of one company to agree with himself as president of another company, and for the other officers in their respective capacities to agree with themselves by any express language. An agreement which is inferred from the acts and conduct of parties is just as effective as any other kind of an agreement.

We think that this case is governed by the principles set forth in the case of , wherein the court stated:

It is finally contended on behalf of the trustee in bankruptcy that, even though the tax here in question was properly computed on the basis of the consolidated return, the government in making the assessment should have apportioned the tax between the two companies, as provided in section 240 of the Revenue Act of 1918. The evidence shows that the tax was computed as a unit, and was not apportioned, but was all assessed against the Temtor Company. Under the statute it was proper for the two corporations concerned to agree as between themselves as to the proportion of the entire tax to be assessed against each. As the entire tax appears to have been assessed against the Temtor Comapny, and as that company, without objection or request for an apportionment, paid three quarterly installments of the tax, it must be inferred that both companies agreed to the assessment as made. As already stated, the companies had practically the same officers and directors, and the course followed by them was the legal equivalent of an agreement and request that the entire tax be assessed against the Temtor Company. In the present posture of the case, I do not think it is open to either company to object to the course taken by the government in assessing the tax.

Considering all the evidence in the case, it is our opinion that an agreement was entered into between the two corporations to the effect that the total tax might be assessed against the petitioner. It is immaterial how the parties actually paid the tax or how they agreed the tax should be paid. We are concerned here only with the question as to how it should be assessed. In a consolidated group the tax may well be assessed against the parent or principal company and the subsidiaries contribute to the parent company their proportionate part of the tax. The fact that they do contribute their proportionate part of the tax does not indicate that it was not to be assessed against one of the companies.

We do not think that the statement contained in Form 1122 filed for the previous year with respect to the assessment of the tax has any relation or evidentiary value for the purpose of showing that the same agreement was effective for the taxable year. On the other hand, if it has any weight at all, it supports the conclusion that we have reached that there was an agreement or understanding that the entire tax should be assessed against the petitioner for the taxable year. For the previous year when there was no such agreement or understanding to the effect that the entire tax should be assessed against the petitioner, the Commissioner was notified in that form to assess the tax as therein stated, that is, against both companies. No such form, statement or information was conveyed to the Commissioner with respect to the taxable year. On the other hand, the acts of the parties and the other circumstantial evidence convince us that there was an understanding or agreement between the two corporations that the entire tax should be assessed against the petitioner for the taxable year.

Reviewed by the Board.

Judgment will be entered under Rule 50.

GREEN dissents.