Cincinnati Underwriters Agency Co. v. Commissioner

MOORMAN, Circuit Judge.

The question in this case is whether the petitioner, an Ohio corporation engaged in soliciting insurance on a commission basis, but not engaged in assuming insurance risks or issuing insurance policies, should have been permitted to file consolidated tax returns for the years 1926 and 1927 with another Ohio corporation, the Eureka Security Fire & Marine Insurance Company, which was engaged in issuing insurance policies and assuming insurance risks common to insurance companies.

The Revenue Act of 1926, § 240 (a), 26 USCA § 993 (a), gave to affiliated corporations the right to make consolidated returns for 1926 and subsequent years. In defining such corporations, it provided in part that two or more domestic corporations should be deemed to be affiliated if one corporation owned at least 95 per centum of the voting stock of the other or others. The Eureka Company owned all of the capital stock of the petitioner, and, as the general language of the act is broad enough to include all domestic corporations, insurance companies, and others, it is contended by the petitioner that the decision of the Board of Tax Appeals in disallowing its affiliation with the Eureka Company is contrary to the provisions of the act.

There would he much force in the petitioner’s contention were it possible to give it effect without defeating the legislative intent of other provisions of the act. One of such purposes, as appears from provisions made exclusively applicable to insurance companies, was to segregate such companies from other corporations for tax purposes. Pursuant to this purpose, it was provided that, in lieu of the tax rates of 13 and 13% per cent, levied upon the income of other corporations, the rate applicable to insurance companies should be 12% per cent. Nowhere was provision made for a tax rate applicable to the consolidated income of these differently taxed units. It is contended by the petitioner that this deficiency in the act may be supplied by an application by the Commissioner of the higher class rate to the consolidated result, but this contention finds denial in the circumstance that there is no authority in the Commissioner so to do, and that tax rates are fixed by statute and not by administrative proee-' dure. There being, therefore, no statutory rate for such consolidated result nor any authority for applying cither of the class rates, the only solution of the situation that is practicable is to construe the general provisions relied upon as permitting only such affiliation as could he effected without affecting the other purposes of the act. This was what was done in circumstances almost identical with those here involved in Eire Cos. Building Corporation v. Commissioner (C. C. A.) 54 F.(2d) 488. It was fully warranted under the rule forbidding constructions which lead to absurd consequences. In re Chapman, 166 U. S. 661, 667, 17 S. Ct. 677, 41 L. Ed. 1154; United States v. Katz, 271 U. S. 354, 357, 46 S. Ct. 513, 70 L. Ed. 986.

: It is true that under earlier aets, and to some extent under the act of 1926, the Internal Revenue Department permitted affiliations between insurance companies and other corporations. There were provisions even in the earlier acts which made it impracticable to permit the affiliation, and we can find.no justification for the department’s practice under those acts. While the Revenue Aets of 1921 and 1924 (§ 242 et seq., 42 Stat. 261, and 43 Stat. 288) made special provision for the taxing of insurance companies, neither of them fixed the rate of taxation differently from that provided for other corporations. The act of 1926, having erected this additional barrier to affiliation, cannot be said to have approved a practice indulged in though not justified under the earlier aets. Nor was there recognition or approval of the practice under the act of 1926 in the passage of the act of 1928 (26 USCA § 2001 et seq.). The argument for the petitioner is that, as the later act expressly excluded insurance companies from affiliations, it must be assumed that Congress regarded the earlier one as permitting it. We agree with the view expressed in Eire Companies Building Corporation Case, supya, that this difference in the two acts is “too fragile” to indicate an intention to interpret the law of 1926 as permitting affiliation, and that it is just as reasonable to assume that the intent of the ehange was “to leave the situation as it had been” and “to make it clear that for the future, at any rate, affiliation should be limited to corporations of the same sort.” Besides, as already stated, there was no provision in any of the prior acts for a tax rate applicable to the consolidated income of these differently taxed units, and in' our view the Commissioner had no authority to apply the higher class 'rate to the consolidated result.

The order of the Board is affirmed.