Thomas J. Corcoran Lamp Co. v. Commissioner

THE THOMAS J. CORCORAN LAMP COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Thomas J. Corcoran Lamp Co. v. Commissioner Docket No. 27689. United States Board of Tax Appeals 24 B.T.A. 284; 1931 BTA LEXIS 1668; October 6, 1931, Promulgated *1668 Loss sustained on sale of a building owned by a corporation with which petitioner was affiliated held to have been the loss of the affiliate and not the petitioner's loss. J. Marvin Haynes, Esq., for the petitioner. John E. Marshall, Esq., and C. R. Marshall, Esq., for the respondent. ARUNDELL *284 This proceeding is for the redetermination of a deficiency of $20,994.71 in income tax for 1923. The issues not waived at the hearing are: (1) Whether a loss of $142,336.42 arising out of the sale of a portion of a certain business was sustained by petitioner, and (2) whether a statutory net loss of $143,592.76 sustained in 1922 by the Corcoran Victor Company, with which petitioner was affiliated after March 1, 1923, is deductible in 1923. FINDINGS OF FACT. The petitioner, an Ohio corporation, during and prior to 1923 was engaged in the business of manufacturing automobile lamps for sale to manufacturers of automobiles for use as initial equipment. It did not sell to jobbers. In 1923 its preferred stock was increased to 7,500 shares and common stock to 71,000 shares. Of the common stock, 60,000 shares, known as Class A, carried*1669 voting privileges, and 11,000 shares, designated as Class B, was nonvoting stock. The Corcoran Victor Company, an Ohio corporation, hereinafter called the Victor Company, was engaged in a like business. Its product was sold both to manufacturers of automobiles and jobbers. Its authorized capital stock consisted of 15,000 shares of common and 7,500 shares of preferred. It operated two plants in Cincinnati, Ohio, designated Plant A and Plant B. Its so-called jobbing business was conducted in Plant A and initial equipment business in Plant B. The Victor Company had been operating at a loss and by 1923, its stockholders were concerned about the corporation's future. As a *285 result of these conditions the directors of the Victor Company appointed a committee to seek assistance from petitioner. The negotiations carried on for that purpose resulted in the execution of an agreement on January 13, 1923, between the committee and petitioner, which provided, among other things, for the exchange of preferred stock of the Victor Company for like stock of petitioner, share for share, and the issuance of 10,000 shares of Class B common stock of petitioner to the Victor Company's*1670 common stock holders. By about February 19, 1923, a sufficient number of the stockholders had consented to the provisions of the agreement to make it effective. As the Victor Company stock was received by petitioner it was delivered to a depositary. The last block of stock was received during the early part of 1925. At the time of execution of the agreement of January 13, 1923, the directors of petitioner and the Victor Company had a verbal understanding that the operations of the corporations would be consolidated in one plant, the surplus property sold in such manner as petitioner "saw fit," and the Victor Company dissolved immediately. Dissolution proceedings could not be instituted at once because of the failure of some of the Victor Company stockholders to turn over their stock to petitioner and the necessity of carrying out some buying and selling commitments of the Victor Company. On January 14, 1923, petitioner assumed complete charge of the operation and maintenance of Plant A and within a few days thereafter some of the plant equipment was removed to petitioner's plant for use therein. As the result of negotiations started within a few days after January 14, 1923, on*1671 February 17, 1923, James J. Corcoran arranged for the sale of Plant A and the jobbers' business conducted therein to outside interests. The directors of the Victor Company ratified and approved the contract of sale on February 19, 1923, and authorized Thomas J. Corcoran to execute on behalf of the corporation "any and all deeds, bills of sale and other documents necessary to carry said agreement into effect." The directors of petitioner also adopted a resolution authorizing its president and secretary to sign on petitioner's behalf "any and all instruments necessary and proper to carry out the agreement." Thomas J. Corcoran, president and general manager of petitioner in 1923 and thereafter until 1925, was elected president and general manager of the Victor Company on February 19, 1923. At the same meeting the secretary of petitioner was elected secretary of the Victor Company. The sale was closed on March 31, 1923. The deed conveying title to the real estate was executed by the Victor Company in favor of the buyer. Petitioner never held legal title to the property sold. The remaining assets of the Victor Company were sold or incorporated into petitioner's assets by the end of*1672 1924. *286 The Victor Company and petitioner became affiliated on March 1, 1923. The Victor Company continued to operate its business until on or about February 24, 1925, when it was liquidated and dissolved. At that time the stock of the Victor Company which had been received by petitioner pursuant to the terms of the agreement of January 13, 1923, was delivered to the Victor Company. The Victor Company maintained a separate set of books of account. The Victor Company sustained a statutory net loss of $143,592.76 in 1922. It did not file a separate return for 1923 or any period within that year. Petitioner and the Victor Company filed a consolidated return for 1923. The respondent computed the consolidated net income of the two corporations to be $287,429.20. In reaching such amount he treated a loss of $142,336.42 arising out of the sale of Plant A as the loss of the Victor Company. The net income of the Victor Company for 1923 before deducting the loss of $142,336.42 was $137,870.67, and the net income of petitioner for the taxable year was $291,105.66. The respondent also determined that the Victor Company sustained a loss of $4,465.75 in 1923 and allowed*1673 five-sixths, or $3,731.46, as a deduction in the computation of consolidated net income for that year. The statutory net loss sustained by the Victor Company in 1922 was not carried forward into 1923 by respondent on the ground that it had no net income against which the loss could be applied. OPINION. ARUNDELL: It is stipulated by the parties that on March 1, 1923, the Corcoran Lamp Company and the Corcoran Victor Company became affiliated within the meaning of the revenue statute. This affiliation was the outgrowth of an agreement entered into whereby the Lamp Company agreed to issue certain shares of its own stock to the stockholders of the Corcoran Victor Company for stock in the latter company. It was the intention of the Corcoran Lamp Company, after acquiring all the stock of the Corcoran Victor Company, to liquidate the latter company and consolidate the two businesses. Due to the failure of some of the stockholders of the Victor Company to deliver their stock to petitioner and certain outstanding contracts of the former, the Victor Company continued to operate as a separate legal entity until February, 1925, when it was liquidated and dissolved. The transaction*1674 for the sale of Plant A was closed March 31, 1923, a date within the affiliation period, resulting in a loss of $142,336.42. This loss the petitioner seeks to take as its own on the theory that, by reason of its ownership of stock of the Victor Company and intention *287 to eventually liquidate its affairs, it was the equitable owner of the assets of the Victor Company. This argument is clearly without merit. Under the facts here the petitioner was no more the equitable owner of the assets of the Victor Company than any stockholder may be said to be the equitable owner of corporate property. ; . The title to Plant A remained in the Victor Company and the deed to the property was executed by it. At no time did petitioner have title to the asset. The petitioner does not claim that by the exchange of stock it became the owner of all the assets and business of the Victor Company. On the contrary, it appears that the Victor Company continued throughout the taxable year as an operating concern with its own assets and business and separate income. In view of this situation it*1675 is difficult to understand on what theory petitioner singles out the one asset, Plant A, and claims that as its own. The respondent's action in holding the loss to have been one sustained by the Victor Company is sustained. It is argued that the net loss of $143,592.76 sustained by the Victor Company in 1922 should be brought forward into the year 1923 and applied against the net income of petitioner. The two corporations filed a consolidated return for the entire year 1923, although affiliated only for the last ten months thereof. The respondent found that the net income of the Victor Company for the full year as a separate company was $137,870.67, without applying the loss of $142,336.42 sustained from the sale of Plant A. Giving effect to the loss on the sale of Plant A, respondent found that the Victor Company had a net loss of $4,465.75 for the year 1923. This net loss the respondent prorated over the year, one-sixth to the period prior to affiliation and five-sixths to the ten months after March 1, 1923. The latter figure, amounting to $3,731.46, was used in determining consolidated net income. There being no net income of the Victor Company in 1923 from which to deduct*1676 the net loss for 1922 no part of the 1922 net loss may be used in determining consolidated net income for 1923. See ; ; ; . The petitioner contends, however, that, inasmuch as the Victor Company had net income of $137,870.67 in 1923 without considering the loss sustained from the sale of Plant A and such loss occurred after March 1, 1923, we should attribute one-sixth of the net income as having been earned in January and February, 1923, and the remaining five-sixths to the last ten months of the year. Clearly, the proposal of petitioner is wrong. The figure of $137,870.67 was reached by the subtraction of various deductions from gross income *288 and there appears to be no more reason to disregard the loss sustained on the sale of Plant A in determining the net income of the Victor Company for the whole year than any other allowable deduction. The record does not indicate the periods in 1923 during which the income was earned and the fact may be that*1677 there were no profits made in the first two months of the taxable year. Following the decision in , the entire calendar year 1923 is still the Victor Company's taxable year despite its affiliation beginning March 1, 1923, and income is to be determined on the basis of the full year. The respondent's method of proration takes into consideration the result of operations for the full year, and under the circumstances is the only practicable one. The respondent's action in refusing to allow the net loss sustained by the Victor Company in 1922 as a deduction in 1923 is sustained. Decision will be entered for the respondent.