New Castle Leather Co. v. Commissioner

NEW CASTLE LEATHER COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. New Castle Leather Co. v. Commissioner Docket No. 53437. United States Board of Tax Appeals 26 B.T.A. 282; 1932 BTA LEXIS 1335; June 7, 1932, Promulgated *1335 Held, a net loss sustained by the petitioner's subsidiary in 1927 may not be added to the net loss of the same subsidiary for 1928 and allowed as a deduction in computing the consolidated net income of the affiliated group for 1928. Woolford Realty Co. v. Rose,286 U.S. 319. Joseph J. Klein, Esq., Myron A. Finke, Esq., and George W. Newgass, Esq., for the petitioner. John D. Kiley, Esq., for the respondent. TRAMMELL *282 This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the amount of $4,978.57. The sole issue is whether or not the respondent erred in disallowing a part of the 1927 consolidated net loss of the petitioner and its subsidiary as a deduction in computing the 1928 consolidated net income of the petitioner and said subsidiary. The amount thus disallowed by the respondent in computing the deficiency represents the portion of the 1927 consolidated net loss which was attributable to the petitioner's subsidiary, which also sustained a net loss in 1928. By agreement of the parties the case was submitted upon (1) a written stipulation of facts, (2) the pleadings, *1336 and (3) briefs, without an oral hearing. FINDINGS OF FACT. The following facts were stipulated by the parties. 1. The New Castle Leather Company, Inc., petitioner in the above entitled proceeding, was incorporated under the laws of the State of New York, and during the years 1927 and 1928 maintained its offices and principal place of business at 100 Gold Street, New York, New York. The New Castle Leather Manufacturing Company, its subsidiary, was incorporated under the laws of the State of Delaware, but maintained its office and principal place of business at the above stated address. The New Castle Leather Company, Inc., and the New Castle Leather Manufacturing Company, its subsidiary, filed consolidated income tax returns for the calendar years 1927 and 1928 with the Collector of Internal Revenue for the second district of New York, whose office is located in New York, New York. 2. New Castle Leather Company, Inc., petitioner in the above-entitled proceeding, and its subsidiary, New Castle Leather Manufacturing Company, were in existence and were affiliated with each other but with no other corporations throughout the entire years 1927 *283 and 1928, within*1337 the meaning of the Revenue Acts of 1926 and 1928; consolidated returns for both of these years, including the gross incomes and deductions of both of the aforementioned corporations, were duly filed. The aforementioned corporations were duly entitled to file consolidated returns for 1927 and 1928, under the provisions of the Revenue Acts of 1926 and 1928. 3. The consolidated net income for the year 1928 of New Castle Leather Company, Inc., and New Castle Leather Manufacturing Company, before the inclusion among the deductions of any amount representing a net loss of a prior period, was $163,244.58, determined as follows: New Castle Leather Company, Inc. - Excess of gross income over deductions $429,708.89 New Castle Leather Manufacturing Company - Excess of deductions over gross income (Red) 266,464.31 $163,244.58 4. The excess of the deductions (allowed by section 234 of the Revenue Act of 1926) over the gross income of the New Castle Leather Company, Inc., for the year 1927 (after eliminating intercompany items) was $53,040.33. 5. The excess of the deductions (allowed by section 234 of the Revenue Act of 1926) over the gross income of New Castle*1338 Leather Manufacturing Company for the year 1927 (after eliminating intercompany items) was $41,488.05. 6. All of the deductions taken in determining the amounts set forth in paragraphs 3 and 4 above were attributable to the operation of the business regularly carried on by New Castle Leather Company, Inc., and New Castle Leather Manufacturing Company. These deductions included no allowance for depletion. The deductions included $12,920.83 of dividends deductible under the provisions of paragraph (6) of subdivision (a) of section 234 of the Revenue Act of 1926; the amount of $12,920.83, which was deductible by New Castle Leather Company, Inc., represented the total amount of dividends included in the deductions referred to in paragraphs 4 and 5 above. Neither New Castle Leather Company, Inc., nor its subsidiary, New Castle Leather Manufacturing Company, received during 1927 any interest exempt from Federal income tax. 7. In accordance with the provisions of section 206(a) of the Revenue Act of 1926, the 1927 combined net loss of New Castle Leather Company, Inc., and New Castle Leather Manufacturing Company, amounted to $81,607.55, as follows: New Castle Leather Company, Inc. $40,119.50 New Castle Leather Manufacturing Company 41,488.05 Total $81,607.55 *1339 *284 8. In the notice of determination of deficiency which is the basis of the above entitled proceeding the Commissioner of Internal Revenue determined that the consolidated taxable net income of New Castle Leather Company, Inc., and New Castle Leather Manufacturing Company for the year 1928 was $123,125.08, which amount was determined by the Commissioner in the following manner: Consolidated net income, before inclusion among the deductions of any amount, representing a prior year's net loss $163,244.58 Net loss of New Castle Leather Company, Inc., for 1927, allowed by Commissioner 40,119.50 Consolidated taxable net income, as determined by Commissioner of Internal Revenue 123,125.08 OPINION. TRAMMELL: The petitioner and its subsidiary were affiliated during the year 1927, in which year each sustained a net loss, and they were also affiliated during the taxable year 1928, in which year the petitioner had net income and the subsidiary again sustained a net loss. In determining the deficiency the respondent allowed as a deduction, in computing the consolidated net income for the taxable year, the amount of the net loss sustained by the petitioner*1340 in 1927, and disallowed the net loss sustained in that year by the subsidiary. The correctness of the respondent's action in this regard is the basis of the sole issue of law raised by the pleadings herein. The question presented is governed by the following provisions of the Revenue Act of 1928, viz: SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (i) Net losses. - The special deduction for net losses of prior years, to the extent provided in section 117. * * * SEC. 117. NET LOSSES. (a) Definition of "Net loss." - As used in this section the term "net loss" means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations: * * * (6) NET LOSS NOT TO PRODUCE NET LOSS. - In computing the net loss for any taxable year a net loss for a prior year shall not be allowed as a deduction. (b) Net loss as a deduction. - 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*1341 income of the taxpayer for the succeeding taxable year (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 *285 the next succeeding taxable year (hereinafter in this section called "third year"); * * * * * * (e) Net loss for 1926 or 1927). - If for the taxable year 1926 or 1927 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1926, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years. Our decision of the issue here must be controlled, we think, by the principles stated in the opinion of the Supreme Court of the United States in , and in *1342 . In the Woolford Realty Co. case, the court said: Under that section of the statute [Sec. 206(b) of the Revenue Act of 1926], the losses suffered by the Piedmont Company in 1925 might have been deducted from its net income in 1926, and might thereafter if not extinguished, have been deducted to the extent of the excess from its net income in 1927, the year in which its shares were acquired by the petitioner. But the Piedmont Company did not have any net income in 1927. Its operations for that year resulted in a loss. There was therefore nothing from which earlier losses could be deducted, for the net income without any such deductions was still a minus quantity. The tax for the year was nothing, and the losses of other years could not serve to make it less. The petitioner would have us hold that the minus quantities for all the years should be added together, and the total turned over by the company suffering the loss as an allowance to be made to the company realizing the gain. * * * the statute has given notice to the taxpayer that the aggregate of minus quantities is not to be turned over as a*1343 credit to an affiliated company, but is to be used in another way. If the loss for the first year is more than the income for the second, the excess is to be carried over to a third year, and deducted from the net income, if any, returnable for that year, at which time the process of carrying over is to end. * * * Obviously, the direction to apply the excess against the income of a later year is inconsistent with a purpose to allow it to an affiliated company as an immediate deduction from income of the current year. Adherence to the one practice excludes adherence to the other. The petitioner in this case contends that because the first net loss of the subsidiary was sustained during the period of affiliation, the aggregate of its net losses for both years should be allowed as a deduction from the petitioner's income in computing the consolidated net income for the second or taxable year. However, if the net loss of a subsidiary corporation is allowable as a deduction only from the income of the subsidiary for the subsequent years and may not be added to a net loss of the same corporation for the second year and allowed as a deduction from the income of another affiliated corporation, *1344 then, under the decisions of the Supreme Court above cited, and under the provisions of the Revenue Act of 1928, above quoted, *286 it is unimportant whether the first net loss of the subsidiary was suffered prior to the beginning of or during the period of affiliation and the petitioner's contention can not be sustained. Judgment will be entered for the respondent.