California Wharf & Warehouse Co. v. Commissioner

CALIFORNIA WHARF AND WAREHOUSE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. INTERIOR WAREHOUSE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CROWN MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. NORTHERN WHARF AND WAREHOUSE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. California Wharf & Warehouse Co. v. Commissioner Docket Nos. 41770, 41820-41822, 51797-51800. United States Board of Tax Appeals 28 B.T.A. 509; 1933 BTA LEXIS 1115; June 22, 1933, Promulgated *1115 1. Certain affiliated corporations each sustained net losses in three successive years and the combined net losses in the first and second years exceeded the combined net incomes of the other affiliates for those years. Held, such net losses may not be added together and allowed as a consolidated net loss deduction in computing consolidated net income of the entire group for 1924. 2. Consolidated net losses determined. Henry D. Costigan, Esq., for the petitioners. Eugene Harpole, Esq., for the respondent. MARQUETTE *509 Findings of fact and opinion were promulgated in these proceedings on April 20, 1933, and by order dated June 7, 1933, they were recalled for further consideration. The following findings of fact and opinion will supersede the promulgation of April 20, 1933. These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income tax, asserted by the respondent as follows: [1927] California Wharf & Warehouse Co $4,707.29 $2,817.42 Interior Warehouse Co 342.00 713.91 Crown Mills 18,553.96 7,373.11 Northern Wharf & Warehouse Co 932.70 3,324.70 *1116 The errors assigned are: (1) Disallowance of a deduction in determining consolidated net income of petitioners and affiliates for 1924, of the sum of $136,970.30, which was a net loss in 1922, a net loss also having been sustained in 1923; (2) disallowance of deductions, in determining consolidated net income of petitioners and affiliates for 1927, of the sums of $211,683.89 and $13,814.45, which were consolidated net losses for 1925 and 1926, respectively. *510 The respondent filed amended answers in dockets numbered 41770, 41820, 41821, and 41822, alleging that he had erroneously allowed a net loss deduction for 1924 in the amount of $12,436.79, which was the total consolidated net loss for 1923, whereas the loss properly allowable amounts to $4,867.64, only. He asks that additional deficiencies be determined and allowed on that basis. FINDINGS OF FACT. Balfour, Guthrie & Co. was a partnership extensively engaged in merchandising. It wished to engage in other business enterprises and for convenience in so doing it organized nine corporations, including each of the petitioners. All of the capital stock of each corporation was owned by the partnership during the*1117 year 1922. At or about the close of the year 1922, two of the corporations, Fife Shipping Co. and Irving Dock Co., were dissolved. The business of the former was discontinued. The business and properties of the Irving Dock Co. were transferred to the petitioner, Northern Wharf & Warehouse Co. The nine companies were affiliated during the year 1922. Excepting the two companies which were dissolved, the affiliation continued during the years 1923 to 1927, both inclusive, and the partnership owned all of the corporate stocks during those years. For the year 1922 the nine affiliates filed a consolidated income tax return. For each of the years 1923 to 1927, inclusive, the then remaining seven affiliates filed a consolidated return. The net incomes and losses of the affiliates for the years 1922 to 1924, inclusive, were as follows: [1923] Net income Net loss Net income Net loss Crown Mills $93,440.23 $1,164.64 Northern Wharf 4,700.61 14,115.30 & Warehouse Co. Interior Warehouse 5,840.10 5,372.04 Co. California, Wharf & 5,688.64 $12,950.63 Warehouse Co. Irving Dock Co 6,374.08 Balfour, Guthrie $25,309.12 8,322.85 Investment Co. (Div.) (267.75) Balfour, Guthrie 6,884.29 748.37 Trust Co (Div.) (200.00) Strathmore Land Co 15,151.73 11,716.02 (Div.) (181.35) Fife Shipping Co 206,225.82 116,043.66 253,570.96 20,651.98 33,088.77 Add: Dividends 557.00 116,600.66 Consolidated 136,970.30 12,436.79 (RAR) net loss 253,570.96 253,570.96 33,088.77 33,088.77 *1118 [1924] Net income Net loss Crown Mills $272,325.78 Northern Wharf 13,846.07 & Warehouse Co. Interior Warehouse 5,086.10 Co. California, Wharf 49,722.67 & Warehouse Co. Irving Dock Co Balfour, Guthrie $56,330.96 Investment Co. Balfour, Guthrie 7,335.84 Trust Co. Strathmore Land Co 3,509.42 Fife Shipping Co 340,980.62 67,176.22 Add: Dividends Consolidated net (Income) 273,804.40 loss 340,980.62 340,980.62 *511 In their consolidated return for 1924, the seven affiliated companies, including the petitioners, deducted the net loss of $136,970.30 sustained in 1922 by the affiliated group. They also deducted the net loss of $12,436.79 sustained in 1923 by the affiliated group. Respondent disallowed entirely the deduction for loss in 1922. In respect of the loss sustained in 1923, respondent at first allowed it, but now contends that it should be computed by taking that proportion of $12,436.79, the consolidated net loss, which the net loss of the California Wharf & Warehouse Co., namely, $12,950.53, bears to the total net losses of individual affiliates, namely, $33,088.77. By that computation*1119 he derives $4,867.64 as the deductible consolidated net loss for 1924. The net incomes and losses of the affiliates for the years 1925 to 1927, inclusive, were as follows: [1926] Net income Net loss Net income Net loss Crown Mills $146,802.31 $35,794.87 California Wharf $4,582.36 884.16 & Warehouse Co. Northern Wharf 13,093.02 26,367.14 & Warehouse Co. Interior Warehouse Co 5,813.04 6,360.61 Strathmore Land Co 6,290.52 $10,166.18 Balfour, Guthrie 49,904.07 26,974.71 Trust Co. Balfour, Guthrie 44,757.35 100,029.76 Investment Co. 29,779.84 241,463.73 96,381.49 110,195.94 Consolidated net loss 211,683.89 13,814.45 241,463.73 241,463.73 110,195.94 110,195.94 [1927] Net income Net loss Crown Mills $146,802.31 California Wharf $4,582.36 & Warehouse Co. Northern Wharf 13,093.02 & Warehouse Co. Interiro Warehouse Co 5,813.04 Strathmore Land Co 6,290.52 Balfour, Guthrie 49,904.07 Trust Co. Balfour, Guthrie 44,757.35 Investment Co 29,779.84 241,463.73 Consolidated net loss 211,683.89 241,463.73 241,463.73 *1120 Dividends received by the affiliated group from domestic corporations amounted to $525 in 1925 and to $140 in 1926. In the consolidated return filed by the affiliates for the year 1927, the aggregate amounts of consolidated net losses for 1925 and 1926 were deducted. Respondent reduced the total amount of said deductions to $128,697.11. In determining deductible amounts, respondent first allocated consolidated net losses for 1925 and 1926 to the companies which suffered individual losses during those years, as follows: Net loss [1926] The Balfour, Guthrie Investment Co $39,237.40 $12,539.99 Balfour, Guthrie Trust Co 43,749.38 Crown Mills 128,697.11 Strathmore Land Co 1,274.46 211,683.89 13,814.45 *512 Respondent next allocated consolidated net income for 1927 to the companies having individual gains for that year, with the following result: Net income Crown Mills $183,312.71 California Wharf & Warehouse Co 20,869.80 Northern Wharf & Warehouse Co 24,627.43 Interior Warehouse Co 5,288.22 234,098.16 The final adjustments of 1927 consolidated net income and income tax allocable to petitioners, *1121 as fixed by respondent, were: Company Allocated Prior years' Net Tax income allocated taxable loss income Crown Mills $183,312.71 $128,697.11 $54,615.60 $7,373.11 Northern Wharf & 24,627.43 24,627.43 3,324.70 Warehouse Co. Interior Warehouse Co 5,288.22 5,288.22 713.91 California Wharf 20,869.80 20,869.80 2,817.42 & Warehouse Co 234,098.16 128,697.11 105,401.05 14,299.14 Each of the affiliated companies was at all times controlled and managed, and its directors and officers chosen, by the partnership of Balfour, Guthrie & Co. None of the corporations maintained its own office, all corporation affairs being handled entirely in the offices of the partnership. The partners, and in some cases managers of departments of the firm's business, were the directors of the various companies. OPINION. MARQUETTE: The affiliated group of which the petitioners were members sustained consolidated net losses in 1922 and 1923 and again in 1925 and 1926. The group had a consolidated net income in 1924 and also in 1927. The fact of affiliation, and the propriety of filing consolidated returns, is admitted. The*1122 only question before us is what portion of the net losses sustained in 1922 and 1923 and in 1925 and 1926 may be deducted in computing taxable net income for 1924 and 1927, respectively. It is the petitioner's contention that the consolidated net losses of 1922 and 1923 and of 1925 and 1926 are deductible in computing taxable net income for 1924 and 1927, respectively. This contention is disposed of adversely to the petitioners, upon authority of Woolford Realty Co. v. Rose,286 U.S. 319; Planters Cotton Oil Co. v. Hopkins,286 U.S. 332; Swift & Co. v. United States, 38 Fed.(2d) 365; Delaware & Hudson Co.,26 B.T.A. 520; and New Castle Leather Co.,26 B.T.A. 282. *513 Computing the amounts thereof in accordance with the principles laid down in Swift & Co. v. United States, supra, and Delaware & Hudson Co., supra, the following are the unabsorbed net losses for the years 1922 to 1927, inclusive, of those members of the affiliated group which sustained net losses in those years: [1927] Balfour, $13,671.11 $3,027.60 None $40,041.01 $69,518.73 None Guthrie In- vestment Co. Balfour, 3,718.66 206.11 None 44,645.40 None None Guthrie Trust Co. Strathmore 8,184.44 4,335.44 None None 7,065.30 None Land Co. Fife Shipping 111,396.09 Out Out Out Out Out Co. California None 4,867.64 None None None None Wharf & Warehouse Co. Crown Mills None None None 131,332.92 None None *1123 It will be noted from the above statement and the statements of net income and net losses set forth in the findings of fact that, of the four companies which had unabsorbed net losses for 1922, three sustained net losses in 1924, while the fourth, the Fife Shipping Co., passed out of the affiliated group at the close of 1922. Under the cited cases, therefore, the respondent correctly disallowed the deduction of the unabsorbed net losses of 1922 in computing taxable net income for 1924. It will also be noted that three of the four companies which had unabsorbed net losses for 1923 also sustained net losses in 1924, while the fourth, the California Wharf & Warehouse Co., had a net income in 1924. The respondent, therefore, erred in allowing the deduction of the 1923 unabsorbed losses of the first three mentioned companies in computing taxable net income for 1924, and his prayer for increased deficiencies for that year, based upon the ground that he so erred, is allowed. The total amount deductible in 1924 on account of 1923 losses is $4,867.64. Of the three companies which had unabsorbed net losses for 1925, two, the Balfour,Guthrie Trust Co. and the Balfour, Guthrie Investment*1124 Co., also sustained net losses is 1927. Therefore, the 1925 unabsorbed net losses of those two companies are not properly deductiable in computing 1927 taxable net income. The third company, Crown Mills, had an unabsorbed 1925 net loss which is $95,538.08 in excess of its net income for 1926, and, since its net income for 1927 is greater than that amount, such excess is a proper deduction in computing taxable net income for 1927. Both of the companies which had unabsorbed net losses for 1926 sustained net losses in 1927. Consequently, the 1926 unabsorbed losses of those companies are not proper deductions in computing taxable net income for 1927. Judgment will be entered under Rule 50.