Walker Products Corp. v. Commissioner

WALKER PRODUCTS CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THREE RIVERS SECUTRITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PITTSBURGH MELTING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CONTINENTAL LEGAL & PROTECTIVE ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ALLEGHENY GARBAGE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Walker Products Corp. v. Commissioner Docket Nos. 44856-44860, 48880. United States Board of Tax Appeals 30 B.T.A. 636; 1934 BTA LEXIS 1290; May 4, 1934, Promulgated *1290 1. The net losses of affiliated corporations for the years 1924 and 1925 may not be used as a consolidated net loss of the affiliated group to be carried forward as a unit and applied against the consolidated net income for 1926. Delaware & Hudson Co.,26 B.T.A. 520; affd., 65 Fed.(2d) 292; certiorari denied, 290 U.S. 670, followed. 2. Held, a deductible loss was sustained in 1927 by one of the affiliated companies upon the liquidation of its subsidiary in that year, and the amount of the deduction for its investment in the capital stock of the subsidiary should be adjusted on account of the operating losses of the subsidiary for prior years of affiliation which have been availed of to reduce the consolidated income for those years. H. A. Mihills, C.P.A., for the petitioners. James K. Polk, Esq., and Harold F. Noneman, Esq., for the respondent. MATTHEWS *637 These proceedings, which have been duly consolidated, are for the redetermination of deficiencies in income tax asserted against the petitioners as follows: Docket No. Taxpayer Amount of deficiency 44856 Walker Products Corporation $860.93 44857 Three Rivers Securities Corporation 2,369.77 44858 Pittsburgh Melting Co 6,395.19 44859 Continental Legal & Protective Association 56.04 44860 Allegheny Garbarge Co 7,347.84 48880 Three Rivers Securities Corporation 1,599.16 *1291 All of these deficiencies are for the year 1926, with the exception of the one in the amount of $1,599.16 which has been asserted against the Three Rivers Securities Corporation for the year 1927, and which may be identified as being listed under Docket No. 48880. This last named petitioner is also claiming a refund or income tax paid for 1927 in the amount of $6,754.39. With respect to the deficiencies determined for the year 1926 it is alleged in each petition that the respondent erred in failing to allow as a deduction in computing net income for 1926 net losses sustained by affiliated companies in the years 1924 and 1925 in the respective total amounts of $131,727.50 and $23,059.50. It is also alleged that the Allegheny Garbage Co. is entitled to deductions on account of losses which it sustained in 1925 and 1926 from the disposition of horses used for delivery purposes. In the amended petition filed in Docket No. 48880 it is further alleged that the respondent erred in failing to allow a deduction of $114,348.91, representing a loss which the Pittsburgh Melting Co. claimed to have sustained in 1927 on account of closing out the business of its subsidiary, the Charles*1292 R. Luker Co. The cases were submitted on a stipulation of facts and the testimony of one witness. FINDINGS OF FACT. The companies reporting in consolidated income tax returns of Three Rivers Securities Corporation for 1926 and 1927, and of W. and H. Walker, Inc., for 1924 and 1925, were affiliated under section *638 240(c) of the Revenue Acts of 1924 and 1926. The net income or net loss of the individual companies for the years 1924, 1925, 1926, and 1927, as determined by the respondent, is as follows: [1924] Walker Products Corporation 1 ($31,574.01) $10,233.49 Three Rivers Securities Corporation 319,040.60 28,168.44 Pittsburgh Melting Co. (Penn.) 79,378.13 76,016.95 $49,114.44 $35,855.82 Pittsburgh Melting Co. (Del.) 1 (1,966.05) Continental Legal & Protective Assn None. 666.15 1 (86.55) 11.44 Allegheny Garbage Co 79,813.54 87,340.67 62,264.65 W. & H. Walker, Inc 1 (366,969.73) 1 (47,896.92) 1 (150,194.80) 1 (156,547.38) Commercial Storage & Transfer Co 1 (8,302.93) 1 (15,702.17) 1 (7,633.67) 1 (6,814.80) Knadler Soap Co 1 (433.19) 1 (12,680.16) 1 (1,298.70) Chas. R. Luker Co None None 270.88 1 (4,232.58) Dona Giralda, Inc 1 (9,074.23) Net income or loss 61,878.18 126,146.45 1 (49,529.80) 1 (131,727.50) *1293 The net losses shown for 1924 and 1925 represent statutory net losses, as defined by section 206 of the Revenue Act of 1926, with the exception that the tabulated losses of W. and H. Walker, Inc., should be reduced by the amount of dividends received from domestic corporations, aggregating $25,252.42 in 1924 and $26,470.30 in 1925, which would result in statutory net losses for this company of $131,294.96 for the year 1924 and $123,724.50 for the year 1925. In the years 1925 and 1926 the Allegheny Garbage Co. sustained losses in the respective amounts of $2,428.05 and $1,172.40 on account of the sale of horses used for delivery purposes. In computing the consolidated net income of the affiliated corporations for 1926 and 1927 as determined by the respondent, no amount was allowed as a deduction for loss incurred through the disposition of horses by the Allegheny Garbage Co. in the years 1925 and 1926, and no amount was allowed in 1927 as a deduction on account of loss of investment of the Pittsburgh Melting Co. in the capital stock of the Charles R. Luker Co. The parties have stipulated with respect to the Charles R. Luker Co. as follows: In August, *1294 1919, the Pittsburgh Melting Company acquired the machinery, equipment, rendering plant and business operated by Charles R. Luker as a proprietorship for $25,000 in cash. At the same time, in August, 1919, the Pittsburgh Melting Company acquired a one-half interest in the rendering business of the Monogahela Melting Company, Ltd. For the one-half interest in the Monongahela Melting Company the Pittsburgh Melting Company paid $63,624.63 in cash and/or notes subsequently liquidated into cash. The rendering business of Charles R. Luker, an individual, was merged with that of the Monongahela Melting Company and operated under the direction of Charles R. Luker. In November, 1919, the Charles R. Luker Company was incorporated under the laws of the Commonwealth of Pennsylvania. Under date of September 18, 1920, the directors of the Charles R. Luker Company authorized the purchase of the properties and business of the Monongahela Melting Company, Ltd. as of *639 December 31, 1919 for all of the outstanding capital stock of the Charles R. Luker Company, which was to consist of 1,000 shares of a par value of $100 per share. One-half of the 1,000 shares issued by the Charles R. *1295 Luker Company were issued to W. and H. Walker, Inc., which company was a one-half owner in the Monongahela Melting Company, Ltd. and the other half, or 500 shares, was issued to the Pittsburgh Melting Company. Under date of January 31, 1925, the Pittsburgh Melting Company credited the open account of W. and H. Walker, Inc. with $79,000 for the 500 shares of stock of Charles R. Luker Company owned by W. and H. Walker, Inc. and this balance was liquidated by the Pittsburgh Melting Company prior to December 31, 1925. The 500 shares of stock of Charles R. Luker Company was carried on the books of W. and H. Walker, Inc. at $79,000, which represented the value placed upon the one-half interest in the Monongahela Melting Company at December 31, 1918, when this interest was acquired along with other assets, at the incorporation of W. and H. Walker, Inc. from Hay Walker, Jr. for capital stock of W. and H. Walker, Inc. Although the one-half interest in the Monongahela Melting Company was valued on the books of W. and H. Walker, Inc. at $79,000, it was valued at $49,223.97 in determining the taxable profit to Hay Walker, Jr. upon transfer of this one-half interest to W. and H. Walker, *1296 Inc. Following is an analysis of the Deficit Account of the Charles R. Luker Company showing the operating results of the business from September 1, 1919, the date the books were opened after the Pittsburgh Melting Company acquired its interest in the Monongahela Melting Company, Ltd., and the business of Charles R. Luker, an individual, was merged with the Monongahela Melting Company, Ltd., to December 31, 1927. Profit from date books were opened Sept. 1, 1919 to Dec. 31, 1919 $2,733.90 Dec. 31, 1919 Surplus 2,733.90 January 1, to June 30, 1920 - Profit $14,728.76 July 1 to December 31, 1920 - Loss 40,435.44 25,706.68 Dec. 31, 1920 Deficit 22,972.78 Loss 1921 25,361.91 Dec. 31, 1921 Deficit (Forward) $48,334.69 Loss 1922 4,493.20 Dec. 31, 1922 Deficit $52,827.89 Loss 1923 783.85 Dec. 31, 1923 Deficit $53,611.74 Loss 1924 $4,232.58 Basis of assets sold in excess of book value credited as paid-in-surplus 14,725.00 10,492.42 Dec. 31, 1924 Deficit $43,119.32 Profit 1925 270.88 Other charges - Harrisburg Hide & Rendering Co. $300 less adjustment $2.03 297.97 27.09 Dec. 31, 1925 Deficit $43,146.41 Surplus charges and credits 1927 - Mortgage charged off $3,000.00 Deferred charges charged off 71.88 Account receivable from Pittsburgh Melting Co 53,275.72 56,347.60 Reserve for contingencies closed off 221.57 56,126.03 Dec. 31, 1927 Deficit $99,272.44 *1297 *640 From April 20, 1921 and continuously to and including December 31, 1927 the Charles R. Luker Company, the Pittsburgh Melting Company, and the W. and H. Walker Company were affiliated, and from date of its incorporation, March 17, 1925, the Three Rivers Securities Corporation was also affiliated with the abovenamed companies, and consolidated returns were filed for the years 1921 to 1927, inclusive, including among other companies those above-named, with exception of Three Rivers Securities Corporation which was included only for the period of actual operations which commenced February 24, 1926. The amount of net losses of the Charles R. Luker Company, as shown in the foregoing schedule, which were availed of by it through deducting same from net income of a consolidated return, which could not have been availed of by the Charles R. Luker Company in computing its income tax liability in the various years it was in existence, if it had made separate returns for each period, is as follows: Year 1921 Portion of net loss of Charles R. Luker Company from April 20, 1921 to December 31, 1921 deducted from consolidated income of W. & H. Walker, Inc. and Pittsburgh Melting Company (IT:CR:A:ECE-60D May 25, 1925) $17,759.13 Year 1922 Loss of Charles R. Luker Company deducted from consolidated income of W. & H. Walker, Inc. and Pittsburgh Melting Company (GC:A May 6, 1929) 4,493.20 Total $22,252.33 *1298 For the year 1923 the Charles R. Luker Company sustained a net loss of $783.85 and the consolidated group an aggregate net loss of $150,606.73, the net income or net loss (x) of the individual companies being as follows: W. & H. Walker, Inc $167,388.60(x) Pittsburgh Melting Company 23,670.57 Charles R. Luker Company 783.85(x) Commercial Storage & Transfer Company 6,301.04(x) Continental Legal & Protective Asso 196.19 Net loss(x) $150,606.73(x) On June 28, 1924 the Charles R. Luker Company sold its plant located at Altoona, Pa., to individuals not connected with the company or its affiliated companies, and as part consideration took back a purchase money mortgage on the property maturing June 28, 1927. At the end of 1927 this mortgage, upon which a balance of $3,000.00 was then owing, was disposed of and the account receivable of $53,275.72 against the Pittsburgh Melting Company, which represented the only other asset of the *641 Charles R. Luker Company, was closed off and the Charles R. Luker Company has had no assets or done any business since the year 1927. The Three Rivers Securities Corporation is a holding company for the interests*1299 of the Walker family, and all the corporations involved herein are operated or dominated by the same interests. The affiliated companies constituted in effect one business with different departments, each department being a separate corporation. The officers paid by one company performed services for the other companies. Loans were made from one company to another company at different times, without the charging of any interest, if one company was short and another was flush with money. Sometimes one company would buy supplies and distribute them to the other companies. OPINION. MATTHEWS: In the brief filed on their behalf the position of the petitioners is stated to be that the combined net loss sustained by the affiliated corporations in 1924 and 1925 should be carried forward as a unit and applied against the taxable net income of the affiliated group for 1926, and that the combined net loss sustained by the affiliated group in 1925 should be carried forward against the consolidated net income of the affiliated group for 1927 to the extent that it was not absorbed in being carried forward as a net loss deduction against income for 1926. We cannot agree with the petitioners' *1300 contention. The record discloses that there was no taxable net income of the affiliated group until 1926, and that none of the companies sustaining a net loss in 1925 had any net income for 1926 or 1927, with the exception of the Continental Legal & Protective Association, which had a net loss of $86.55 in 1925 and a net income of $666.15 in 1926. This Board and the courts have repeatedly held that the statutory net loss of a corporation can be applied only to the income of that corporation and that this is as true in respect of affiliated corporations as of independent corporations. The principle is well established that net losses sustained by members of an affiliated group for a prior year may enter into the computation of consolidated net income only to the extent that the net loss is allowed as a deduction in determining the net income of the member entitled to claim the deduction. Sweets Co. of America v. Commissioner, 40 Fed.(2d) 436; Swift & Co. v. United States, 38 Fed.(2d) 365; *1301 Commissioner v. Ben Ginsburg Co., 54 Fed.(2d) 238. Thus, in the instant case, the net loss attributable to any one of the affiliated companies for 1925 may not be used as a deduction in 1926 beyond the point where there is income of that company to absorb it; that is, it may not be used to produce a loss which would enter into the computation of consolidated net income. Although the citation of cases in support of this *642 principle may be multiplied, it will suffice to refer to Woolford Realty Co. v. Rose,286 U.S. 319; and Delaware & Hudson Co.,26 B.T.A. 520; affd., 65 Fed.(2d) 292; certiorari denied, 290 U.S. 670. Under the ruling laid down in Kaiwiki Sugar Co., Ltd.,21 B.T.A. 997; affd., 63 Fed.(2d) 822, we hold that the portion of the consolidated statutory net loss assignable to the Continental Legal & Protective Association should be applied against the company's net income for 1926, which would bring about a slight reduction in the consolidated income of the affiliated group for 1926. One of the affiliated companies, the Allegheny Garbage Co., is entitled*1302 to deductions from its income for the years 1925 and 1926 in the respective amounts of $2,428.05 and $1,172.40 on account of losses incurred through the disposition of horses used for delivery purposes. We accordingly hold that the sum of $1,172.40 should be deducted from that company's income for 1926, which deduction will also reduce the consolidated net income of the affiliated group for 1926. The sum of $2,428.05 is likewise deductible from that company's income for 1925 and this deduction will increase the consolidated net loss of the affiliated group for 1925. No deficiencies have been asserted for 1925, for which year there was no taxable income of the affiliated group, and since we have held that the consolidated net loss for 1925 cannot be carried forward as a deduction, under the circumstances presented herein, the deduction of $2,428.05 to which the Allegheny Garbage Co. is entitled for 1925 will have no effect upon the recomputation of the deficiencies for 1926 except to increase slightly that portion of the consolidated statutory net loss for 1925 which is assignable to the Continental Legal & Protective Association, which corporation alone had a net loss in 1925 and*1303 a net income in 1926. One issue remains for our determination. The amended petition filed in Docket No. 48880 contains the allegation that the respondent erred in failing to allow the loss of $114,348.91 sustained in 1927 by the Pittsburgh Melting Co., one of the affiliated corporations, on account of closing out the business of its subsidiary, the Charles R. Luker Co. The loss claimed represents the difference between the sum of $167,624.63, which was the cost to the Pittsburgh Melting Co. of the entire capital stock of the Charles R. Luker Co., and the amount of $53,275.72, representing an account receivable from the Pittsburgh Melting Co. to the Charles R. Luker Co. This alleged loss was not deducted on the consolidated income tax return filed by the Three Rivers Securities Corporation for the year 1927 and has not been allowed by the respondent. The Charles R. Luker Co. was incorporated in November 1919 and, like the Pittsburgh Melting Co., was engaged in the business of gathering scraps from butchers, turning them into tallow, and *643 rendering them to make cracklings which were resold or ground into chicken feed. The Charles R. Luker Co. never paid any dividends. *1304 Its books show an operating profit of $14,728.76 for the period January 1 to June 30, 1920, but it sustained a loss of $40,435.44 for the next six-month period. The company continued to operate at a loss and in June 1924 its plant located at Altoona, Pennsylvania, was sold to persons not connected with the company or its affiliated companies. The Charles R. Luker Co. conducted little business after the sale of this plant. One of the officers of the Pittsburgh Melting Co., who was the only witness at the hearing of these proceedings, testified with respect to closing out the business of the Charles R. Luker Co.: Each year we would send a man out to see where we could locate a new plant, the New England states, New York, Ohio, Indiana, or some other place. We kept this Luker Company, figuring we were going to use it for one of these plants we would open up, but in 1927 we decided not to open any plants on the outside, and that was the end of the Luker Company. It was testified that upon the sale of its plant in June 1924 the company took a purchase money mortgage of $6,000 on the property sold and that there was a balance of $3,000 due on this mortgage in 1927. One of the*1305 officers of the company had advanced more than $7,000 of his own money for the benefit of the company and the mortgage was turned over to him in 1927. The Altoona plant had sold for $22,000 and the proceeds of the sale, over and above the amount of the mortgage, were turned over to the Pittsburgh Melting Co. Apparently this cash payment was treated as an advance to the Pittsburgh Melting Co., for it is stated in the brief filed on behalf of the petitioners that the account receivable of $53,275.72 on the books of the Charles R. Luker Co. consisted of advances made to the Pittsburgh Melting Co., together with charges for services rendered or supplies furnished, and it was testified that any advances to the Pittsburgh Melting Co. would have been included in this account receivable. Since the company had no assets in 1927 except this account receivable and the above mentioned mortgage and they were both disposed of during that year, it would seem that the company was completely liduiated in 1927, even though it does not appear to have been dissolved. A formal dissolution of the subsidiary company is not essential to establish the loss of the parent corporation growing out of the subsidiary's*1306 liquidation in the taxable year. Burnet v. Aluminum Goods Mfg. Co.,287 U.S. 544. And for years prior to 1929 the liquidation of a subsidiary during the period of affiliation is not considered as an intercompany transaction. G.C.M. 11676, C.B. XII-1, p. 75. The case of Ilfeld Co. v. Hernandez,292 U.S. 62, relates to the loss on the liquidation of subsidiaries in 1929 and is therefore not in point. We are of the opinion that *644 the Pittsburgh Melting Co. sustained a deductible loss in 1927 on account of its ownership of the capital stock of the Charles R. Luker Co. The deduction to which the Pittsburgh Melting Co. is entitled is measured by the cost of its investment in the capital stock of the Charles R. Luker Co., or $167,624.63, less the amount received by the Pittsburgh Melting Co. on the liquidation of the Charles R. Luker Co., or $53,275.72 (the amount of the account receivable which the subsidiary held against the parent corporation), and the loss thus arrived at should be adjusted on account of any operating losses of the Charles R. Luker Co. during the period of affiliation which are reflected in the consolidated*1307 income for such period, as set out in the stipulation entered into between the parties hereto. W. M. Ritter Lumber Co.,30 B.T.A. 231. The losses of the Luker Co. during the period of affiliation, which are to be taken into consideration, are $17,759.13 in 1921 and $4,493.20 in 1922, and that portion of the loss of $783.85 in 1923 which was used as an offset against the income of the companies having income in that year and which is not reflected in the consolidated net loss for the year. In Kaiwiki Sugar Co., supra, we held that the statutory net loss assignable to each member, which, considered separately, sustained a net loss, is the same proportion of the consolidated net loss which the net loss of the member is to the sum of the net losses of all the members sustaining net losses. The difference between the net loss sustained by the Luker Co. in 1923 and that portion of the consolidated net loss assignable to it is the amount which has been offset against the income of the companies having income, and this amount should be added to the losses of 1921 and 1922, which were deducted from income of those years. Reviewed by the Board. Judgment*1308 will be entered under Rule 50. Footnotes 1. Net loss. ↩