44 F.2d 543 (4th Cir. 1930), 2996, Duke Power Co. v. Commissioner of Internal Revenue

Docket Nº:2996.
Citation:44 F.2d 543
Party Name:DUKE POWER CO. v. COMMISSIONER OF INTERNAL REVENUE.
Case Date:October 21, 1930
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
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Page 543

44 F.2d 543 (4th Cir. 1930)

DUKE POWER CO.

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 2996.

United States Court of Appeals, Fourth Circuit.

October 21, 1930

J. H. Marion, of Charlotte, N.C. (H. H. Shelton, of Washington, D.C., on the brief), for petitioner.

Randolph C. Shaw, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Allin H. Pierce, Sp.

Page 544

Atty., Bureau of Internal Revenue, both of Washington, D.C., on the brief), for respondent.

Before PARKER, circuit Judge, and GRONER and ERNEST F. COCHRAN, District Judges.

GRONER, District Judge.

There are two questions involved on this appeal.

The first is this: Where three corporations are affiliated within the meaning of section 240(c) of the Revenue Act of 1921, and the parent corporation has elected to file a separate income tax return, may the two subsidiary corporations file a consolidated return?

The second is: Should interest payments received by one member of the group from another be included in its gross income where the members of the group are required by law to file separate returns?

The Board of Tax Appeals answered the first question in the negative, and the second in the affirmative.

Appellant is the successor of the Southern Power Company, the corporation against which the deficiency in tax here involved was asserted. In the years 1922 and 1923, Wateree Electric Company, Southern Power Company, and Catawba Manufacturing & Electric Power Company were affiliated within the meaning of section 240 of the Revenue Act of 1921. The Wateree Company owned substantially all of the stock of the Southern Company, and the Southern Company owned all of the stock of the Catawba Company. The Wateree Company filed a separate return of its income. The Southern and Catawba Companies filed a consolidated return. The tax in suit results from the disallowance by the commissioner of the filing of a consolidated return by the two last-named companies, and arises out of the fact that during 1922 and 1923 the Southern Company advanced large sums of money to the Catawba Company on open account, and set up against the latter company an interest charge of 6 per cent. per annum, which interest was paid by the Catawba Company out of funds advanced by the Southern Company. The Catawba Company had practically no income, so that the amounts paid by it to the Southern Company as interest represented a deficit for the years in question. By setting off this deficit on account of the interest item against the income accruing to the Southern Company from the same item in a consolidated return, this intercompany transaction was wiped out, and no taxable income was shown, but this the commissioner disallowed. It follows therefore that if the law permitted the consolidated return, the assessment by the commissioner was unlawful. If it did not, and if the interest accruing and paid to the Southern Company was income, the assessment was in order.

Section 240(a), Act of 1921, chapter 136, 42 Stat. 227, is as follows:

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