Candy Bros. Mfg. Co. v. Commissioner

Candy Bros. Mfg. Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Candy Bros. Mfg. Co. v. Commissioner Docket No. 25692 United States Tax Court 17 T.C. 298; 1951 U.S. Tax Ct. LEXIS 98; September 19, 1951, Promulgated *98 Decision will be entered for the respondent. Petitioner from December 17, 1940, was a wholly owned subsidiary of its parent corporation. For 1941 the parent and subsidiaries, including petitioner, filed a consolidated excess profits tax return, using petitioner's net operating loss for 1941, but not its net operating loss for 1940. The year 1941 was the last consolidated return period for the consolidated group. The Commissioner, in the deficiency notice here involved, for the years 1942 and 1943, denied to petitioner deduction of its net operating losses for 1940 and 1941, in the computation of surtax net income in computation of excess profits tax under section 710 (a) (1) (B), Internal Revenue Code. Held, that the Commissioner did not err in denying the deductions. D. J. Jorden, 11 T. C. 914; Doylestown & Easton Motor Coach Co., 9 T. C. 846; Regulations 110, section 33.31 (d), promulgated March 14, 1941. Elmer K. Weppner, Esq., for the petitioner. George E. Gibson, Esq., for the respondent. Disney, Judge. DISNEY *298 This case involves deficiencies in excess profits tax for the calendar year 1942 in the amount of $ 17,300.02 and for the calendar year 1943 in the amount of $ 840.43. The petitioner contends that instead of deficiencies there are overpayments of $ 8,140.73 for 1942 and $ 10,129.01 for 1943. The only question presented is whether the Commissioner in determining "Corporation surtax and net income" of the petitioner under section 710 (a) (1) (B) of the Internal Revenue Code erred in disallowing*100 deductions of net operating loss carry-overs from the years 1940 and 1941. *299 FINDINGS OF FACT. The parties have stipulated and we find, as follows: The petitioner is a corporation, organized and existing under the laws of Missouri with its principal office at 1501 Locust Street, St. Louis, Missouri. It is now, and during the period here involved was, engaged in the business of manufacturing and selling cough drops, candy fruit drops, and other hard candies. Since December 17, 1940, petitioner has been a wholly owned subsidiary of Universal Match Corporation, a corporation organized and existing under the laws of Delaware, which on or about that date acquired by purchase all of petitioner's capital stock. The petitioner has at all times material kept its books and filed its returns on the accrual basis and for calendar years. Its returns for the period here involved were filed with the collector of internal revenue for the first district of Missouri at St. Louis, Missouri. For the year 1940 petitioner filed a corporation income, declared value excess-profits and defense tax return (Form 1120), reporting a net loss thereon. It did not file a corporation excess profits tax*101 return (Form 1121) for said year, since it had no excess profits net income. Petitioner sustained a net operating loss for the year 1940 in the amount of $ 8,222.24. For the year 1941 petitioner filed a separate corporation income and declared value excess-profits tax return (Form 1120), reporting a net loss thereon. Petitioner sustained a net operating loss for the year 1941 in the amount of $ 45,734.23. For the year 1941, Universal Match Corporation and its subsidiaries, including the petitioner, as an affiliated group of corporations, for the first time filed a consolidated excess profits tax return in accordance with the privilege granted by section 730 of the Internal Revenue Code. Petitioner's net operating loss for 1941 was deducted in said consolidated return and allowed by the Commissioner, and the consolidated excess profits net income of the affiliated group was thereby reduced by the full amount of said net operating loss. No deduction was taken in said consolidated return and none was allowed by the Commissioner for a carry-over of petitioner's net operating loss for the year 1940. The year 1941 was the last consolidated return period of the aforesaid affiliated group. *102 On March 15, 1943, petitioner filed for the year 1942 a corporation income and declared value excess-profits tax return (Form 1120) reporting a net income of $ 21,440.04, and a corporation excess profits tax return (Form 1121) reporting an excess profits net income of *300 $ 20,975.58. In the latter return petitioner reported an excess profits tax liability of $ 8,140.73 which it paid in four installments as follows: March 15, 1943 $ 2,035.19 May 26, 1943 2,035.18 September 15, 1943 2,035.18 December 18, 1943 2,035.18 On January 7, 1946, the Commissioner and the petitioner executed an agreement pursuant to section 276 (b) of the Internal Revenue Code to extend the time within which the Commissioner might assess any additional income and excess profits taxes for the taxable year 1942 to June 30, 1947, and thereafter on March 7, 1947, March 9, 1948, and March 7, 1949, executed additional agreements extending the time to June 30, 1950. On March 15, 1944, petitioner filed for the year 1943 a corporation income and declared value excess-profits tax return (Form 1120) reporting a net income of $ 32,018.65, and a corporation excess profits tax return (Form 1121) reporting*103 an excess profits net income of $ 32,018.65. In the latter return petitioner reported an excess profits tax liability of $ 21,579.42 which it paid in four installments as follows: March 15, 1944 $ 5,394.85 May 27, 1944 5,394.85 September 15, 1944 5,394.85 December 5, 1944 5,394.87 On November 8, 1946, the Commissioner and the petitioner executed an agreement pursuant to section 276 (b) of the Internal Revenue Code to extend the time within which the Commissioner might assess any additional income and excess profits taxes for the taxable year 1943 to June 30, 1948, and thereafter on March 9, 1948, and March 7, 1949, executed additional agreements extending the time to June 30, 1950. In the aforesaid returns of the petitioner for the years 1942 and 1943, no deductions were taken for carry-overs of the net operating losses sustained by petitioner in the years 1940 and 1941. On September 24, 1948, petitioner filed claims for refund of excess profits taxes paid by it for the years 1942 and 1943, in the respective amounts of $ 8,140.73 and $ 10,129.01, stating as grounds therefor that it is entitled to deductions for the aforesaid net operating loss carry-overs in determining*104 corporation surtax net income for purposes of section 710 (a) (1) (B) of the Internal Revenue Code. If the petitioner's corporation surtax net income for the year 1942, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined without allowing a deduction for the net operating loss carry-over from the years 1940 and 1941, the corporation surtax *301 net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is $ 35,813.02. If the petitioner's corporation surtax net income for the year 1942, for the purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined by allowing a deduction for the net operating loss carry-over from the years 1940 and 1941, the corporation surtax net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is zero. If the petitioner's corporation surtax net income for the year 1943, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined without allowing a deduction for the net operating loss carry-over from the year 1941, the corporation*105 surtax net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is $ 32,456.46. If the petitioner's corporation surtax net income for the year 1943, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, is to be determined by allowing a deduction for the net operating loss carry-over from the year 1941, the corporation surtax net income for such purposes, computed without regard to the credit provided in section 26 (e) of the Internal Revenue Code, is $ 14,313.01. In addition to the above stipulated facts we find as follows: In the notice of deficiency dated August 12, 1949, from which this appeal is taken, the respondent allowed as deductions in determining petitioner's "Corporation surtax net income" for calendar years 1942 and 1943 as computed under section 15 of the Internal Revenue Code for the purpose of the taxes under chapter 1 of the Code, net operating loss deductions of $ 35,813.02 and $ 18,143.45, respectively, with the following explanation: [1942] (e) Net operating losses for the year 1940 in the sum of $ 8,222.24 and for the year 1941 in the sum of $ 45,734.23 are allowed as a net *106 operating loss carry-over. [1943] (d) Net operating loss for the year 1941 in the sum of $ 45,734.23 less $ 27,590.78 allowed as a carry-over for the year 1942 or $ 18,143.45 is allowed as a net operating loss carry-over. However, in determining petitioner's corporation surtax net income for 1942 and 1943 for purposes of section 710 (a) (1) (B) of the Internal Revenue Code he omitted said net operating loss deductions with the following explanation: Your contention that the corporation surtax net income, as computed under Section 15 of the Internal Revenue Code for the purpose of the taxes under Chapter 1, should be used in computing the excess profits tax under Section *302 710 (a) (1) (B) for the years 1942 and 1943 is denied. Under the provisions of Section 33.31 (e) of Regulations 110 the net operating loss sustained by you for the year 1940, for which year you filed a separate excess profits tax return, is not allowable as a net operating loss deduction for the purpose of computing your excess profits net income for any year subsequent to 1941, the last year for which a consolidated excess profits tax return was filed. Accordingly, it is held that such net operating*107 loss may not be availed of in computing your excess profits tax liability under Section 710 (a) (1) (B) for the year 1942. The net operating loss for the year 1941, allowable in computing the corporation surtax net income under Section 15 for the purpose of Chapter 1 tax for the years 1942 and 1943, was availed of in a consolidated excess profits tax return for the year 1941. Accordingly it is held that such net operating loss may not again be availed of in computing your excess profits tax liability for the years 1942 and 1943 under Section 710 (a) (1) (B) of the Internal Revenue Code. Petitioner's corporation surtax net income for the year 1942, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, computed without regard to the credit provided in section 26 (e) of the Code, is $ 35,813.02. Petitioner's corporation surtax net income for the year 1943, for purposes of section 710 (a) (1) (B) of the Internal Revenue Code, computed without regard to the credit provided in section 26 (e) of the Code, is $ 32,456.46. OPINION. The petitioner had net operating losses for the years 1940 and 1941. It seeks to carry them forward for use, as to the taxable years 1942 and *108 1943, in the computation of "Corporation surtax net income" under section 710 (a) (1) (B) of the Internal Revenue Code. Since December 17, 1940, petitioner has been a wholly owned subsidiary of Universal Match Corporation and for 1941, and for that year only, a consolidated excess profits tax return was filed by Universal Match Corporation and its subsidiaries, including petitioner, as an affiliated group. Therein the petitioner's net operating loss for 1941 was deducted and allowed and consolidated excess profits net income was thereby reduced in the full amount of the net operating loss for 1941. No deduction was taken in the consolidated return, or allowed, for the carry-over of the petitioner's net operating loss for 1940. The petitioner filed separate excess profits tax returns for 1942 and 1943 and did not therein take deductions for the carry-overs for net operating losses for 1940 and 1941, but has since filed claim for refund, claiming deduction of such net operating loss carry-overs. The claims have been denied. It is the petitioner's contention, in substance, that its corporation surtax net income for 1942 and 1943 for the purposes of section 710 (a) (1) (B) should *109 be computed in the same manner as for purposes of chapter 1 by inclusion of deduction of net operating loss carry-overs. *303 In our opinion, this case is controlled by our conclusions in D. J. Jorden, 11 T. C. 914 (923-7). We there considered net operating loss for 1940 which had in large part been included in a consolidated excess profits tax return, and after interpretation of the statute and regulations concluded that the operating loss for 1940 sustained by the petitioner during the consolidated return periods could not be used in computing its excess profits tax net income for 1941, a taxable year subsequent to the last consolidated return period; also that operating loss sustained by the petitioner prior to the consolidated return period, that is, in 1939, could not be used in computing its excess profits tax income for 1941. We there relied upon Regulations 110, section 33.31 (d), which was promulgated, pursuant to section 730 of the Internal Revenue Code, on March 14, 1941. Section 730 of the Internal Revenue Code, added by section 201, Second Revenue Act of 1940, authorized the Commissioner to prescribe such regulations as he deemed *110 necessary in order that tax liability of affiliated groups making consolidated returns and of each corporation therein both during and after the period of affiliation might be determined in such manner as clearly to reflect excess profits tax liability and to prevent avoidance thereof. Regulations were issued in reliance thereon, and Regulations 110, section 33.31 (d), provides in pertinent part that: * * * no net operating loss sustained during a consolidated return period of an affiliated group shall be used in computing the net income of a subsidiary * * * for any taxable year subsequent to the last consolidated return period of the group. No part of any net operating loss sustained by a corporation prior to a consolidated return period of an affiliated group * * * shall be used in computing the net income of such corporation for any taxable year subsequent to the consolidated return period * * *. As above seen, it was this regulation that was interpreted in D. J. Jorden, supra.Petitioner argues, in substance, that although [as required by section 730 (a) of the Internal Revenue Code] participation in the filing of the consolidated return for *111 1941 was consent to Regulations 110, such regulations were prior to the enactment on October 21, 1942, of section 710 (a) (1) (B) as to limitation of excess profits tax by percentage of "Corporation surtax net income" so that it did not by such consolidated return consent to disallowance of its 1940 and 1941 net operating losses in determination of corporation surtax net income under section 710 (a) (1) (B). We can not agree with such contention. The regulations, so consented to, not only cover both the period prior to the consolidation and the period of consolidation, as here involved, but also provide in general terms against use, after the consolidated period -- and the taxable years here are after such period -- of operating losses during or prior to the consolidated period in computing the net income of a subsidiary. Since the computation of "Corporation surtax net income" involves the *304 computation of net income, being net income minus a credit, it becomes apparent that the regulations promulgated in 1941 are properly applicable to the statute and problem here involved. We deem immaterial the fact that the Commissioner did not disallow the net operating losses for*112 1940 and 1941 in the deficiency as to taxes under chapter 1 of the Code, for petitioner had filed separate corporation income and declared value excess-profits tax returns for 1940 and 1941 so that consolidation was not therein involved. D. J. Jorden, supra.The petitioner does not attack the validity of the regulation and we discern no reason against its application here. It is clear, we think, that the language of section 730, above referred to, authorized regulations, as to consolidated returns, to cover the situation here presented; and further that Regulations 110 do, somewhat carefully, cover the instant question and factual situation. Therefore we need not consider Basalt Rock Co., 10 T. C. 600, revd. 180 F. 2d 280, or Sokol Bros. Furniture Co. v. Commissioner, 185 F. 2d 222, disagreeing with the reversal in the Basalt case, which cases petitioner sees as distinguished from the present situation. Further, and only as to the carry-forward of operating losses from 1941, the year of consolidation, it is apparent, we think, that such carry-forward would*113 involve duplication of deductions since petitioner's net operating loss for 1941 was deducted in the consolidated excess profits tax return for 1941. Such a result was not intended. Doylestown & Easton Motor Coach Co., 9 T. C. 846 (850). Petitioner argues, in substance, that there is no such duplication because the benefit to the parent corporation is subject to regulations with respect to the basis of the stock of petitioner in the hands of the parent. In our view this is immaterial. Therefore regardless of Regulations 110 we think that the disallowance by the Commissioner of the carry-over net operating loss from 1941 was within the statute. We conclude and hold that the Commissioner did not err in denying deduction of the operating losses for 1940 and 1941. Decision will be entered for the respondent.