Hancock Constr. Co. v. Commissioner

HANCOCK CONSTRUCTION CO., AND AFFILIATED COMPANIES, JUMEL REALTY & CONSTRUCTION CO., AND PHILMONT REALTY CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hancock Constr. Co. v. Commissioner Docket No. 11758. United States Board of Tax Appeals 11 B.T.A. 800; 1928 BTA LEXIS 3716; April 24, 1928, Promulgated *3716 1. On the evidence, it is held that the petitioners and the Robbins Construction Co. were, during the year 1920, affiliated. 2. Petitioners and the Robbins Construction Co. were affiliated during 1918 and 1919 and in the year 1919 sustained a consolidated net loss. The consolidation having no net income for 1918, it is held that the consolidated net loss of 1919 should be applied against the consolidated net income for 1920. Jacob Meirowitz, Esq., for the petitioners. P. J. Rose, Esq., for the respondent. LOVE *801 This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar year 1920 asserted against the Hancock Construction Co., Jumel Realty & Construction Co. and Philmont Realty Co., affiliated corporations, in the amounts of $728.80, $252.28, and $1,822.01, respectively. The petitioners allege that, in determining the deficiencies, the Commissioner erred in failing to apply against the consolidated net income the proportionate loss sustained in 1919 by the Robbins Construction Co., during that year an affiliated corporation and which, it is further alleged, was affiliated during*3717 1920. FINDINGS OF FACT. Philip Meirowitz resides in New York City and is, and has been for about twenty-five years, engaged in the real estate business. He conducted his business by and in the name of various corporations, namely, the Hancock Construction Co., the Jumel Realty & Construction Co., the Philmont Realty Co., the Ira Realty Co. and the Robbins Construction Co., all New York corporations with principal offices in New York City. These five corporations were all engaged in some branch of the real estate business during the taxable years 1918, 1919, and 1920, with the exception of the Robbins Construction Co., which, on account of losses sustained by it during the latter part of 1919, suspended its activities for the balance of that year and remained inactive during the year 1920. Philip Meirowitz was the president and secretary of all of the companies and owned or controlled all of the authorized and issued capital stock of the service corporations during the years in question, as follows: Hancock Construction Co.: 50 shares, representing all the stock authorized and issued. Philmont Realty Co.: 20 shares, representing all the stock authorized and issued. *3718 Jumel Realty & Construction Co.: 500 shares, representing all the stock authorized and issued. Ira Realty Co.: 50 shares, representing all the stock issued and subscribed. Robbins Construction Co.: 15 shares issued to Philip Meirowitz out of 20 shares of the total capital stock. One qualifying share was issued to a relative which share was then turned over to Meirowitz. Four shares were issued to Mrs. Meirowitz who, thereupon, placed *802 them in the custody of her husband together with a written proxy to vote the stock as he should choose. There were no changes in stock ownership thereafter and Meirowitz did not own or control any stock of any other corporation. The Robbins Construction Co. was organized in 1912 at which time there were issued in the manner and form above described, 20 shares of stock for the equity in certain real estate in New York City. During 1919 the mortgagee of the property owned by the Robbins Construction Co. became insistent for the payment of the interest and inasmuch as the Robbins Construction Co. was unable to make payment, the mortgagee threatened immediate foreclosure on the property. Shortly thereafter a settlement was reached*3719 with the mortgagee whereby the property was turned over to him, which transfer left the Robbins, construction Co. without any assets whatever. Thereafter, the Robbins Construction Co., although it owned no assets, was still liable to Meirowitz for an obligation assumed at the time the property was transferred to it. The Robbins Construction Co. was not dissolved at any time, voluntarily or involuntarily, but merely suspended its activities awaiting a favorable opportunity again to engage in business. The company had no income or expense in 1920, and, as above stated, was without assets of any kind. However, the company was at all times during 1920, under the law, able to transact business. For the year 1919, the Commissioner determined that the Hancock Construction Co., the Philmont Realty Co., the Jumel Realty & Construction Co., the Ira Realty Co. and the Robbins Construction Co. were affiliated and he computed their tax liability on a consolidated basis. As a result of his computation it was determined that there was for 1919 a consolidated net loss of $20,016.50 which was sustained by reason of losses incurred by the Hancock Construction Co. and the Robbins Construction*3720 Co. For the year 1920, separate returns of income were filed by the Hancock Construction Co., the Philmont Realty Co., the Jumel Realty & Construction Co. and the Ira Realty Co. The Robbins Construction Co., having suspended activity and not having income or expense for 1920, did not file a return. Upon audit of the returns for 1920, the Commissioner determined that the four companies which filed returns were affiliated and that the consolidated net income was $21,914.05. He also determined that, inasmuch as there had been no income of the consolidation composed of the five companies for 1918, part of the net loss for 1919 should be applied against the consolidated net income for 1920. The Commissioner further determined, however, that the Robbins *803 Construction Co. was not affiliated during 1920 with the other companies and that the proportionate part of the net loss of 1919 attributed to it could not be applied against the 1920 consolidated net income. OPINION. LOVE: The Commissioner concedes that, under the provision of section 204(b) of the Revenue Act of 1918, 1 if the Robbins Construction Co. was affiliated with the other four companies during 1920, *3721 the net loss of the consolidation for 1919 should be applied against the consolidated net income for the year 1920, or, in other words, that he erred in failing to apply against the consolidated net income for 1920 the proportionate part of the consolidated net loss for 1919 which was attributable to the loss sustained by the Robbins Construction Co., which was during 1919 a member of the affiliated group. Thus the question as to whether the Robbins Construction Co. was, during 1920, affiliated with the petitioners and the Ira Realty Co., admittedly affiliated during that year, is presented. *3722 In denying that the Robbins Construction Co. was, during 1920, affiliated with the other four members of the consolidation, the Commissioner takes the positions that (1) substantially all of the stock of the five companies was not owned or controlled by the same interests, as required by section 240(b) of the Revenue Act of 1918, 2 in that Mrs. Meirowitz did not own stock in any of the companies other than the Robbins Construction Co., and that (2) the Robbins Construction Co., even if in existence during 1920, was not active. After carefully considering all of the evidence, we are satisfied that the same interests owned or controlled within the meaning of section 240(b) of the Revenue Act of 1918, supra, substantially all of the stock of the corporations in question. Accordingly, *3723 we must hold the Commissioner's first position to be untenable. *804 We pass, therefore, to the consideration of the second position taken by the Commissioner in support of his contention that the Robbins Construction Co. was not affiliated during 1920. The evidence adduced clearly establishes the fact that during 1920 the Robbins Construction Co. was merely inactive. It had not been dissolved either voluntarily or involuntarily. Its stock was still outstanding, held as above indicated, and it was in a position to transact business. Does the fact that this company was inactive and made no return for 1920 because it had no income or expense preclude it from being a member of an affiliated group of corporations, provided the other requisites of the statute have been met? We think not. It is agreed by the parties hereto that the consolidation sustained in 1919 a net loss, a large proportion of which was attributable to the Robbins Construction Co. It seems clear to us that both the letter and spirit of the law require that, under the circumstances desclosed herein, the proportionate part of the loss for 1919 attributable to that company be reflected in the 1920 income*3724 of the consolidation which, as indicated, should include the Robbins Construction Co. Section 240(b) of the Revenue Act of 1918, supra, does not indicate that activity on the part of a corporation is essential to affiliation. The letter of the statute, as applied to the instant case, requires that substantially all of the stock be owned or controlled by the same interests which own or control the stock of the other companies, a fact which we have hereinabove found to exist. In , we said, at page 519: * * * The record shows merely that the two subsidiaries discontinued business and that the parent company charged off their indebtedness to it and also its investment in their stock. There is no evidence of what assets the subsidiaries had, or that they did not have any, and there is nothing to show that their assets were liquidated. There is nothing showing that the parent corporation did not continue to control the stock. Hence the subsidiaries continued to be members of the affiliated group. During the continuance of this status intercompany obligations are disregarded for the purposes of the tax. We are not called upon, *3725 therefore, to decide questions which would arise if the affiliated group were broken up by the dissolution of some of the members. We are of the opinion, therefore, that the Commissioner erred in determining that the Robbins Construction Co. was not, during 1920, affiliated with the petitioners and the Ira Realty Co. Accordingly, his action in refusing to apply against the consolidated net income for 1920, the proportionate part of the consolidated loss for 1919 attributable to the Robbins Construction Co. is reversed. Judgment will be entered on 15 days' notice, under Rule 50. Footnotes 1. SEC. 204. (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. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. 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 approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year. ↩ 2. SEC. 240. (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests. ↩