Torrington Co. v. Commissioner

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. , PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. , PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. , PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Torrington Co. v. Commissioner Docket Nos. 32156, 32157, 32158, 32159, 32160. United States Board of Tax Appeals 21 B.T.A. 1431; 1931 BTA LEXIS 2189; January 31, 1931, Promulgated *2189 Held that petitioner corporations were entitled to have their taxes determined on the basis of a consolidated return. William Wallace, Jr., Esq., for the petitioners. Harry Leroy Jones, Esq., for the respondent. VAN FOSSAN *1431 These proceedings, which were consolidated for hearing and decision, were brought for a redetermination of income taxes for the fiscal year ended June 30, 1923, under the Revenue Act of 1921. The alleged deficiencies are as follows: Torrington Co. (of Connecticut) $4,001.96 Puritan Manufacturing Co 5,296.11 Sewing Machine Supplies Co 2,592.52 C. B. Barker & Co., Ltd 375.57 Los Fabricantes Unidos, Inc 6,168.90 Total 18,435.06 *1432 The only issue is whether the tax liability for the year in question of a group of corporations which were admittedly affiliated, including the petitioners in these proceedings, should be determined upon a consolidated basis, or upon a basis of separate returns. The facts were stipulated by the parties and from such stipulation we find the facts as follows: FINDINGS OF FACT. Before June 30, 1917, the Torrington Co., a corporation of the State*2190 of Maine (herein for brevity called "Maine"), whose business year had always ended on August 31, held or controlled, by direct or indirect ownership, all the capital stock of each of the seven subsidiary companies hereinafter named (which for brevity will be collectively termed "subsidiaries," and the business years of which ended at times other than that of Maine), except the Torrington Co. of Delaware, which company was not organized until 1920. Maine also owned certain real estate and machinery in the city of Torrington, Conn., that was used in the manufacturing business there carried on and had certain other assets. Then and for a long time before, such manufacturing business and the companies engaged therein were and had been controlled and their policies shaped by one John Alvord, since deceased, whose father had created the business. The Alvord family belonged in the city of Torrington, Conn., where John Alvord was born. In 1917 Alvord determined to put the business in the hands of a corporation of his native State, with headquarters in his native city, and to bring the closing of the business year to a uniform date, in the middle of the year, for all the operating companies. *2191 Accordingly, before June 30 of that year he caused to be organized under the laws of Connecticut a new corporation, "The Torrington Company of Connecticut" (herein called "Connecticut"), with its principal place of business in the city of Torrington and with its business year ending on June 30. To this new corporation, as of June 30, 1917, Maine conveyed all its property of every kind, receiving in exchange therefor all the capital stock of Connecticut. At the same time the business year of each of the subsidiaries (other than Torrington of Delaware, which was not then organized), which had theretofore ended on various dates, some of them using the calendar year, was *1433 changed to June 30 and thus put in correspondence with Connecticut. The original plan had been to dissolve Maine, forthwith, but this step was postponed, and never has been taken, and so Maine's fiscal year never was changed. But its books were never kept on an accrual basis, and there never was any receipt or disbursement by Maine in July or August of any year after August 31, 1917, nor any net taxable income, because its only income (aside from a negligible amount of interest on bank balances, etc. *2192 ) was dividends from a domestic corporation, viz., Connecticut. As a result, ever since June 30, 1917, when the property passed, Maine has been the sole stockholder (aside from certain directors' qualifying shares, issued to directors, but really owned by Maine) of Connecticut and has owned no other property and had no other business; while Connecticut at all times since June 30, 1917, has been the chief and directing company and, in addition to manufacturing, itself, has owned (at first, in part, indirectly, but during all of the fiscal year ended June 30, 1923, and for some years prior thereto, directly) all the capital stock of each of the following subsidiary corporations that had been operating and manufacturing respectively since the years declared opposite their several names: Sewing Machine Supplies Co. of Massachusetts — 1880 — C. B. Barker & Co., Ltd., of New York — 1883 — Puritan Manufacturing Co. of Massachusetts — 1893 — Manufacturers Supplies Co. of Pennsylvania — 1901 — Los Fabr cantes Un dos, Inc., of Massachusetts — 1911 — Domestic Vacuum Cleaner Co. of Massachusetts — 1912 — Torrington Co. of Delaware — 1920 — During all of the fiscal year ended June 30, 1923, and*2193 for some time prior thereto, the directors and officers of Connecticut were also (and still are) the directors and officers of Maine, always drawing compensation from Connecticut, but none from Maine except nominal fees for attending directors' meetings of Maine. Their duties as directors and officers of Maine have been merely to receive dividends from Connecticut, and from time to time to declare and pay therefrom dividends to the stockholders of Maine, after defraying the almost nominal expense of Maine. On September 13, 1923, Connecticut and the seven subsidiaries, whose fiscal year so ended on June 30, caused to be filed with the collector of internal revenue for the district of Connecticut, their consolidated income tax return for all eight companies for the fiscal year ended on June 30, 1923. In that return appears the following: It (Connecticut) is itself controlled by the Torrington Company, a Maine corporation, but that company is simply a holding company and has no income except from the dividends of the Connecticut Corporation * * *. A Consolidated *1434 Corporation Income and Profits Tax Return is accordingly rendered for The Torrington Company (Connecticut)*2194 and affiliated domestic corporations (enumerating its seven subsidiaries as above). On October 30, 1923, Maine caused to be filed, with the collector of internal revenue for the district of Connecticut, an income tax return showing a net loss (excess of deductible expenses over taxable income) of $3,695.98. Said return, on its face, purports to cover the period beginning July 1, 1922, and ending August 31, 1923. The Commissioner, after requesting and obtaining an affidavit that said return in reality covered the period beginning September 1, 1922, and ending August 31, 1923, accepted said return as covering the fiscal year ended August 31, 1923. The 1923 taxes were paid on regular installment dates, save that certain deductions for credits due on the taxes of previous years had been claimed at or about the time of filing the return, which were not allowed in full by the Bureau. This required additional payments at later dates. Therefore, the taxes for that year as actually paid were at times and in amounts as follows: Total tax assessed on the 8-company return $224,190.47 Paid Dec. 7, 1923 $2,073.42 Paid Mar. 6, 1924 56,047.62 Paid June 13, 1924 56,047.61 Paid Sept. 14, 1925 73,219.88 Credit a/c 1920 tax allowed by Tax Dept 22,066.36 Paid June 5, 1926 14,735.58 224,190.47 *2195 On September 6, 1926, a field agent of the Revenue Bureau, after examining said returns and evidence in connection therewith for the purpose of enabling the Commissioner of Internal Revenue to determine the taxes of said taxpayers for that year, made report to the Commissioner of Internal Revenue of the results of his said examination, and he (or another field agent) also on January 12, 1927, made a supplemental report to the Commissioner with respect thereto. In his said reports the field agent included the income and outlay reported for Maine with that of Connecticut and the subsidiaries. As Maine's only income (except for $565.37 interest on bank balances, etc.) was dividends from Connecticut (a domestic corporation), Maine had no taxable income, and the result of this union was to slightly lessen the 1923 tax if it should be computed on a consolidated basis as returned by Torrington and the subsidiaries. On April 8, 1927, after considering the above reports and returns. the Commissioner of Internal Revenue disapproved of the above action of the field agent in bringing Maine into the consolidated return of Connecticut and its seven subsidiaries, and ruled that the *1435 *2196 action of Maine on October 30, 1923, must be deemed an election conclusively binding on all and each of the nine companies to make separate returns for each. On June 30, 1927, pursuant to the above ruling, the Commissioner recomputed the income and tax liability of each company of the nine separately, as if each had filed a separate return. So that instead of declaring an overassessment and resulting tax refund of $77,753.25, as would have been the case had the field agent's course and reports been approved by the Commissioner, the latter determined additional taxes to be payable by Connecticut and four of its subsidiaries in amounts for each declared respectively as follows: The Torrington Co. (of Connecticut) $4,001.96 Puritan Manufacturing Co. (of Mass.) 5,296.11 Sewing Machine Supplies Co. (of Mass.) 2,592.52 C. B. Barker & Co., Ltd. (of New York) 375.57 Los Fabricantes Unidos, Inc. (of Mass.) 6,168.90 These additional taxes total 18,435.06 Each of the above companies and Maine duly protested the ruling and determination as hereinbefore set forth. Such protests were in writing and filed with the Commissioner. After consideration these protests*2197 were overruled by him and on September 12, 1927, he issued and served on each of the five last named companies a notice of deficiency in form as set forth respectively in Exhibit A attached to the petitions in each of the cases, Docket Nos. 32156, 32157, 32158, 32159, and 32160, before this Board. Ever since it took over the business and assets of Maine as of June 30, 1917, Connecticut has been the directing and controlling head of the group of manufacturing companies consisting of the seven above named operating subsidiaries (Torrington of Delaware from 1920; one or two additional companies in 1918) and itself. Since June 30, 1917, Maine has had no separate office, but its disbursements, amounting to about $3,000 per annum (for expenses), have been paid and its dividends declared and paid to its stockholders from the general offices of Connecticut, where its affairs are handled without any payment of rent by it. The Federal income tax returns prepared and filed with the collector of internal revenue in the district of Connecticut for each year next after June 30, 1917, and until June 30 and August 31, 1922, respectively, were prepared and filed in the same way as they were*2198 prepared for the year 1923 as above outlined - that is, there was a general or consolidated return for Connecticut and all its operating subsidiaries covering their fiscal year ending June 30, and a separate return for Maine covering its fiscal year ending August 31. This procedure of so preparing and filing a single general return *1436 for Connecticut and its domestic subsidiaries, and separately for Maine, was begun when Maine was still undissolved in 1918, in the belief that such a course would avoid confusion over fiscal years, and the practice once so begun was continued year after year. With respect to those returns of earlier years, when the revenue field agent came to make his examination for each, he found that Maine had no net income during the year and no receipts or disbursements whatever in July or August in any of those years. In each year he combined Maine with the other eight companies by carrying it into their return in the same manner as he did for the year 1923. And in each of the years 1918 to 1922, both inclusive, the Commissioner determined the tax liability of the nine companies on a June 30 fiscal year basis, consolidating all nine companies*2199 through use of the figures shown in the June 30 return of Connecticut and its subsidiaries and in the following August 31 return of Maine. The collector of internal revenue at Hartford, Conn., had on January 29, 1918, granted permission in writing to Connecticut to adopt a June 30 basis for filing its return, Connecticut having in writing requested such permission. Before filing the return of Connecticut and its seven subsidiaries mentioned hereinbefore, the officers of Connecticut (being also officers of Maine) consulted with the company's counsel and accountants to determine whether to continue to file a consolidated return or whether it was advisable to file separate returns for the fiscal year 1923. On August 8, 1923, counsel for Connecticut wrote to its treasurer a letter, in words as follows: [Letterhead of] Chadbourne, Babbitt & Wallace August 8, 1923. C. B. Vincent, Esq., Treasurer, The Torrington Company, Torrington, Connecticut. Dear Sir: We have today discussed with Mr. Park the question of the advisability of filing separate returns for The Torrington Company and its various subsidiaries. The particular points which we think you should consider*2200 in connection with this matter are these: Under Section 236 of the law, domestic corporations having incomes of less than $25,000 are allowed a specific credit of $2,000. This credit could not, of course, be availed of by any of the subsidiaries whose income happened to be less than $25,000 if a consolidated return is filed. If you elect to file separate returns, you will not in future years be permitted to change back to the consolidated return basis without the consent of *1437 the Treasury Department, based on a sworn statement indicating to the satisfaction of the Treasury Department good cause for the change. With regard to net losses: The Department has ruled that the deduction of a net loss is limited to the first two taxable years succeeding the year in which the net loss was sustained. This means, of course, that any of your corporations which sustain a net loss will have to offset that net loss against the income of the next two succeeding years, and if the income in those two years is insufficient to offset the loss the excess cannot be availed of as a setoff against income. You should also bear in mind the possibility that this provision of the law may*2201 be stricken out, in which case there is a possibility that the benefit of the offset of the net losses of subsidiaries might be lost, which would not be the case if a consolidated return were filed and the combined income were greater than the net losses. We are sending a copy of this letter to Mr. Park and shall be glad to discuss the matter further with you or with him, if you wish. Very truly yours, (Signed) CHADBOURNE, BABBITT & WALLACE. As a result of said consultations and said letter, said officers determined to continue to file a consolidated return. The returns for the fiscal year 1923, prepared and filed as hereinbefore set forth, were accordingly prepared exactly as had been the returns for previous years when the filing of consolidated returns was obligatory and in the belief that such returns were proper consolidated returns. On November 7, 1924, Connecticut filed with the respondent, pursuant to the latter's request, Affiliations Schedule No. 1 and Affiliations Schedule No. 4, relating to the fiscal years ended June 30, 1919, 1920, 1921, 1922, and 1923. On Affiliations Schedule No. 4 there appears the question: "Did the corporations elect to file separate*2202 returns or a consolidated return for the first taxable year commencing after December 31, 1921? (See Section 240(a) of the Revenue Act of 1921.)" This question is answered on said schedule: "elected to file Consolidated Return," such answer being written across columns numbered 1 to 8 in such manner as to refer, by reference to Affiliations Schedule No. 1, to Connecticut and its seven subsidiaries. On Affiliations Schedule No. 4 there appears also the following question: "If a consolidated return was filed, indicate by 'X' which companies were included therein," which is answered by the mark "X" in each of the columns numbered 1 to 8, inclusive, in such manner as to refer, by reference to Affiliations Schedule No. 1, to Connecticut and its seven subsidiaries. On Affiliations Schedule No. 4 there also appears the following question: "State manner of election, whether by notice to Collector or by kind of return originally filed." which is answered as follows: "By kind of Return originally filed." *1438 The taxable net income or net loss (excess of lawful deductions over taxable income) of each of the companies for the fiscal year ended June 30, 1923, is as follows: *2203 Taxable net income: Torrington Co. (of Connecticut) $2,730,452.94 Puritan Manufacturing Co 42,368.85 Sewing Machine Supplies Co 22,740.12 C. B. Barker & Co. Ltd 5,004.57 Los Fabricantes Unidos, Inc 49,351.21 Total 2,849,917.69 Net losses: Torrington Co. (of Maine) $3,695.98 Manufacturers Supplies Co 2,189.32 Domestic Vacuum Cleaner Co 36,259.17 Torrington Co. of Delaware 731,361.91 773,506.38 Consolidated taxable net income applicable if tax is to be computed on a consolidated basis 2,076,411.31 OPINION. VAN FOSSAN: The question to be answered in this group of cases is whether the nine affiliated companies, of which five are here petitioners, made a consolidated return for the fiscal year ended June 30, 1923, pursuant to the permissive provisions of section 240 (a) of the Revenue Act of 1921, which reads as follows: That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose*2204 of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner. The stipulated facts show that the nine companies were admittedly affiliated and therefore entitled to take advantage of the above provision for a consolidated return. The facts further show that the officers of the Connecticut company, which entirely dominated the group, after advice, determined to file consolidated returns and filed returns which were believed to be proper consolidated returns. On the return filed by the Connecticut company, speaking for all nine companies, that company stated: It (Connecticut) is itself controlled by the Torrington Company, a Maine corporation, but that company is simply a holding company and has no income except from the dividends of the Connecticut Corporation * * *. A Consolidated Corporation Income and Profits Tax Return is accordingly rendered for The Torrington Company (Connecticut) and affiliated domestic corporations (enumerating its seven subsidiaries*2205 as above.) *1439 For the five previous years in exactly this situation the respondent had consolidated the Maine company with the eight others and had determined taxes accordingly. For the taxable year, however, respondent ruled that the filing of the return by the Maine company constituted an election to file separate returns binding on all nine companies. In , the court said: * * * it was realized by Congress that while the mandatory feature of the law should be repealed, the permissive feature should be retained because instances would arise in which it would be just as unreasonable to require for tax purposes the breaking up of a business operated as a unit, though conducted through several corporations, into as many parts, as it would be for the same purpose to require an individual engaged in two or more businesses to treat each separately, and this upon the theory that unless the affiliated group as a whole earned a profit, those who own and conduct its business would realize no gain, and that the substance rather than the shadow should be the determining factor. We are of the opinion that the returns filed by*2206 petitioner constituted a consolidated return for the entire group and that their taxes should be computed accordingly. The return made by Connecticut revealed all of the facts necessary for the computation of taxes for the entire group - the affiliation - the income and deductions - the fact that the Maine company had no taxable income, and the desire to have the taxes of the group computed on the basis of a consolidated return. Reviewed by the Board. Judgment will be entered under Rule 50.