Ben Ginsburg Co. v. Commissioner

BEN GINSBURG CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ben Ginsburg Co. v. Commissioner Docket No. 45556. United States Board of Tax Appeals 19 B.T.A. 81; 1930 BTA LEXIS 2470; February 27, 1930, Promulgated *2470 Affiliated corporations filing a consolidated return under the provisions of the Revenue Act of 1926 are entitled to use as a deduction in determining consolidated net income for 1927 the loss of one of the group in 1926 when not affiliated, even although such last-named corporation still has a net loss in 1927 - (Alabama By-Products Corporation et al.,18 B.T.A. 919, followed). Maurice S. Preville, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. BLACK *81 This proceeding is for the redetermination of a deficiency in income tax, amounting to $6,011.05, for the year 1927. The sole question urged by the petitioner is that the respondent erred in increasing the taxable income of the petitioner for the year 1927 by refusing to allow as a deduction an amount of $48,340.18, representing the net loss of the Mendelson & Sussman Co. for the year 1926, which company was affiliated with petitioner in 1927 but not prior thereto. FINDINGS OF FACT. The petitioner, the taxpayer, is a New York corporation with its principal office, New York City. The Mendelson & Sussman Co. is a New York corporation with its principal*2471 place of business, New York City. On January 2, 1927, all the stockholders of the petitioner acquired all the capital stock of Mendelson & Sussman Co. in the same proportions in which they owned the shares of the Ben Ginsburg Co. and the two corporations thereby became affiliated for the taxable year 1927. The Mendelson & Sussman Co. sustained, in the calendar year 1926, a net loss of $48,340.18, and for the year 1927 sustained a net loss of $57,407.79. The net income for 1927 of the petitioner, Ben Ginsburg Co., was $101,934.11. For the taxable year 1927 the two affiliated corporations elected to file, and did file, consolidated income-tax returns. In arriving at the consolidated net *82 income of the two affiliated corporations for 1927, they deducted the 1927 loss of $57,407.79 sustained by the Mendelson & Sussman Co. from the $101,934.11 income of the Ben Ginsburg Co. and used as a further deduction a loss of $48,340.18 sustained by Mendelson & Sussman Co. in 1926, at a time when not affiliated with petitioner. This last named deduction the Commissioner refused to allow, on the ground that the loss was sustained prior to the affiliation and was not the loss of petitioner. *2472 The act of the Commissioner in refusing to allow as a deduction from the consolidated income of the affiliated group the loss of $48,340.18 sustained in 1926 by the Mendelson & Sussman Co. left consolidated net income amounting to $44,526.32, and this forms the basis for the deficiency. The Mendelson & Sussman Co. having no net income for 1927, all the deficiency asserted by the Commissioner was asserted against the petitioner, the Ben Ginsburg Co., and from the determination of the deficiency it has appealed. OPINION. BLACK: This proceeding was submitted upon the pleadings. All the facts alleged by the petitioner are admitted by the respondent in his answer. The sole issue is whether petitioner is entitled to have $48,340.16, net loss of Mendelson & Sussman Co. in 1926, used as a deduction in determining net income of the affiliated group in 1927. The Revenue Act of 1926, section 206(b), provides: If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year*2473 (hereinafter in this section called "second year"), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called "third year"); the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary. In , recently decided by this Board, we construed similar language to that just above quoted to mean that such a loss sustained by a corporation in a year when not affiliated could be brought forward and used as a deduction in determining net income of the affiliated group even although the corporation having a loss in such prior year, still has a net loss in the taxable year. So on the authority of that case we decide in favor of the petitioner on the only issue presented by the pleadings. *83 We deem it proper to say, however, that the term "net loss" as used in section 206 of the Revenue Act of 1926 is not necessarily the loss reflected by the return filed for the purpose*2474 of the income tax, nor the net loss shown by the taxpayer's profit and loss account. The loss which is allowed as a deduction must be computed in accordance with section 206(a)(1) to (5) of the Revenue Act of 1926 and article 1621 of Regulations 69, relating to income tax under the Revenue Act of 1926. That method should be used in the instant case in determining whether petitioner has any taxable income for the year 1927. Decision will be entered under Rule 50.