Warren-Nash Motor Corp. v. Commissioner

WARREN-NASH MOTOR CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Warren-Nash Motor Corp. v. Commissioner Docket No. 23573. United States Board of Tax Appeals 21 B.T.A. 897; 1930 BTA LEXIS 1776; December 23, 1930, Promulgated *1776 Where a corporation filed a separate return for the year 1922, in which year it sustained a net loss, and for the year 1923 filed a consolidated return with other affiliated corporations, its net loss for 1922 is deductible only to the extent of its own net income, and where it has no net income no deduction from the consolidated net income is allowable. Alabama By-Products Co.,18 B.T.A. 919. Oscar W. Underwood, Jr., Esq., and H. C. Kilpatrick, Esq., for the petitioner. Harry Le Roy Jones, Esq., for the respondent. MCMAHON *897 This is a proceeding for the redetermination of deficiencies in income tax for the fiscal years ended July 31, 1922 (hereinafter sometimes referred to as the fiscal year 1922), and July 31, 1923 (hereinafter sometimes referred to as the fiscal year 1923), in the amounts of $7,000.28 and $970.31, respectively. The petitioner alleged that the respondent committed error in the denial of a deduction from consolidated net income for the fiscal year ended July 31, 1923, of an alleged net loss sustained by the Nash-Newark *898 Co. during the previous fiscal year. The respondent has determined*1777 that the two companies named were affiliated during the last mentioned taxable period. All the facts are admitted or stipulated. FINDINGS OF FACT. The petitioner is a New York corporation with its principal place of business at New York City. The Nash-Newark Co. was a corporation organized under the laws of the State of New Jersey in August, 1920, with an authorized capital consisting of $2,500 shares of common and 1,250 shares of preferred stock. The petitioner and the Nash-Newark Co., for each year involved in this proceeding, kept their books and, with the approval of the respondent, made their Federal income-tax returns upon the basis of a fiscal year ending July 31. For the fiscal year 1922 the net income of the petitioner amounted to $46,969.82. For the fiscal year 1922 the Nash-Newark Co. sustained a net loss of $49,428.13, in detail as follows: Gross income $86,745.46 Deductions: Expenses $117,860.13 Compensation of officer 5,568.97 Repairs 1,049.51 Interest 5,503.44 Taxes 1,376.09 Bad debts 1,115.10 Exhaustion, wear and tear 3,700.35 136,173.59 Net loss 49,428.13 None of the above described deductions consists*1778 in any part of deductions not attributable to the operation of a trade or business regularly carried on by Nash-Newark Co. during the said fiscal year. The gross income of $86,745.46 did not include any dividends from domestic or foreign corporations, nor any interest received free from tax under Title I, of the Revenue Act of 1921. During the fiscal year 1922 a number of the stockholders of the petitioner owned stock in the Nash-Newark Co. The petitioner and that company filed a consolidated return of net income for that year, claiming the status of affiliated corporations under the provisions of section 240 of the Revenue Act of 1921. Upon that basis the return indicated a consolidated net loss in the amount of $14.22. The petitioner and the Nash-Newark Co. were not affiliated during the fiscal year 1922. *899 July 31, 1922, the petitioner acquired 98.04 per cent of the authorized an issued common stock and 98.96 per cent of the authorized and issued preferred stock of the Nash-Newark Co. and it held such stock throughout the fiscal year 1923. The petitioner and the Nash-Newark Co. filed a consolidated return for the fiscal year 1923 in accordance with the provisions*1779 of section 240 of the Revenue Act of 1921. The two companies were affiliated during that year. The consolidated net income of the petitioner and the Nash-Newark Co. for the fiscal year 1923, before allowance of any deduction by reason of the net loss of the Nash-Newark Co. for the fiscal year 1922, was $97,281.32, as follows: Petitioner Nash-Newark Co. Gross income $964,131.65 ($9,057.13) Deductions; Salaries $62,500.00 $2,800.00 Rent 70,667.37 4,450.00 Interest 43,499.71 1,037.67 Taxes 7,753.13 6,495.21 Bad debts 33,900.00 28,823.89 Depreciation 13,713.67 8,393.09 General expense 544,096.21 29,633.25 776,130.09 81,663.11 Operating income or loss 188,001.56 (90,720.24) Consolidated net income 97,281.32 The "gross income" of the Nash-Newark Co. indicated above as "($9,057.13)" represents the excess of cost of goods sold, namely $197,386.13, over the gross sales of $188,329. The taxable net income shown upon the consolidated return for the fiscal year 1923 was $89,518.818 and the tax liability shown thereon, was $11,189.85, which amount was assessed and paid. OPINION. MCMAHON: *1780 The petitioner concedes the correctness of the respondent's determination of a deficiency for the fiscal year ended July 31, 1922, in the amount of $7,000.28. Accordingly, judgment will be entered for the respondent as to that year. With respect to the fiscal year ended July 31, 1923, the petitioner now asserts the right to a deduction from the $98,281.32 consolidated net income, of $49,428.13, representing the net loss sustained by the Nash-Newark Co. for the preceding year during which the companies were not affiliated. The net loss of the Nash-Newark Co. for the fiscal year 1923 has been deducted from consolidated net income. *900 The petitioner's claim is predicated upon section 204 of the Revenue Act of 1921, which, after defining the term "net loss," provides: SEC. 204. (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess*1781 shall be allowed as a deduction in computing the net income for the next succeeding taxable year. * * * In , which involved the Revenue Act of 1918, providing that if the net loss is in excess of net income for the preceding taxable year the amount of such excess shall be allowed as a deduction in computing the net income for the succeeding year, we held that the net loss was in the same category as an operating loss or deficit of one corporation and was reflected in determining the consolidated net income of the group even if the corporation which sustained the net loss had no net income for the taxable year. As pointed out above, the Alabama By-Products Co. case involved the Revenue Act of 1918, while this proceeding involves the Revenue Act of 1921. So far as this proceeding is concerned, the only change in the Revenue Act of 1921 is that it provides that the net loss sustained in one year shall be deducted from the net income of the first succeeding taxable year, instead of from the preceding taxable year, as was provided in the Revenue Act of 1918. The first succeeding taxable year in the instant proceeding*1782 is, in principle, the same as the preceding taxable year in the Alabama By-Products Co. case. Following the principle of the Alabama By-Products Co. case, the net loss sustained in 1922 is deductible by the corporation which sustained that loss from its net income of the first succeeding taxable year, that is, 1923, to the extent of that net income. Since, in the first succeeding taxable year the deduction may not exceed the net income of that year, there being no net income, there may be no deduction. We, therefore, agree with the respondent that the deduction in 1923 is allowable only to the extent that the Mash-Newark Co., which sustained the net loss in 1922, had net income in 1923. Since it had no net income in 1923, there is no basis for the deduction claimed by the petitioner in that year. Reviewed by the Board. Judgment will be entered for the respondent.