New Colonial Ice Co. v. Commissioner of Internal Rev.

• Decision Date: 17 July 1933
• Docket Number: No. 218.,218.
• Citation: 66 F.2d 480
• Parties: NEW COLONIAL ICE CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

66 F.2d 480 (1933)

NEW COLONIAL ICE CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 218.

Circuit Court of Appeals, Second Circuit.

July 17, 1933.

Joseph Sterling, of New York City, for petitioner.

Sewall Key and John H. McEvers, Sp. Assts. to Atty. Gen., for respondent.

Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.

MANTON, Circuit Judge.

The petitioner seeks a review of deficiencies of income taxes for the year April 14, 1922, to December 31, 1922, and for the calendar year 1923. Revenue Act 1926, §§ 1001-1003, 44 Stat. 9 (26 USCA §§ 1225, 1226, and § 1224 and note).

The Colonial Ice Corporation, a New York corporation, had authorized capital stock of $750,000 divided into 6,500 preferred shares at $100 par value and 20,000 common shares at $5 par value. It owned an ice plant and entered into extensive contracts for the alteration and improvement of its buildings and machinery. It became financially involved, and a creditors' committee took charge and formed a new corporation, the petitioner, with a capitalization of $700,000 consisting of 6,000 shares of preferred stock at $100 par value and 20,000 common shares at $5 par value. The assets of the old corporation were transferred to the new, and the new corporation issued 3,385 shares of preferred stock to the old corporation, and it returned the stock to the new corporation with directions that the certificate be canceled and the stock be reissued to such persons as the new corporation might direct; 3,385 shares of common stock of the new company were issued to voting trustees who issued a certificate for a like number of shares to the old company, which indorsed and redelivered said certificate of 3,385 shares to the voting trustees with directions to issue trustees' certificates to such persons as the old company might direct. The stockholders of the old company, with the exception of some owning 247 shares of each class of stock, surrendered their stock to the old company and received from the new company, on direction from the old company, share for share of preferred stock and received voting trust certificates of common stock in the new company share for share. The old company retired and canceled the preferred and common stock so surrendered. The owners of 247 shares of preferred and a like number of common stock of the old company did not surrender their stock up to December 31, 1922. The old company's corporate existence continued throughout the years in question, but subsequent to April 13, 1922, it had no assets or income and carried on no business.

During the period from April 14 to December 31, 1922, the petitioner had a net income of $48,763.43, and, during the calendar year 1924, $56,242.55. For the years 1922 and 1923, the petitioner and the old company filed consolidated returns and claimed a net loss of $40,676.52 sustained by the old company in 1921, thus reporting a net loss of $6,624.59 which they sought to carry forward and use as a deduction from the new company's income of 1923. The Commissioner disallowed this loss, but allowed the new company the benefit of the loss sustained by the old company during the period from January 1 to April 13, 1922, but before the Board of Tax Appeals, in his answer, the Commissioner claimed an additional deficiency for this period based upon the claim that the petitioner was not entitled to deduct the loss sustained by the old company during the period from January 1 to April 13, 1922. It was held by the Board that the two companies were not entitled to file consolidated returns and were separate taxpayers. It refused to allow petitioners the benefit of the net loss sustained by the old company.

The taxing acts recognized the distinction between corporate entities. Dalton v. Bowers, 287 U. S. 404, 53 S. Ct. 205, 77 L. Ed. 389; Burnet v. Commonwealth Improvement Co., 287 U. S. 415, 53 S. Ct. 198, 77 L. Ed. 399; Burnet v. Riggs Natl. Bank, 57 F.(2d) 980 (C. C. A. 4); Athol Mfg. Co. v. Comm'r, 54 F.(2d) 230, 231 (C. C. A. 1); Ins. & Title Guarantee Co. v. Comm'r, 36 F.(2d) 842 (C. C. A. 2). Under the statute, deductions are personal to the taxpayer. Planters' Cotton Oil Co. v. Hopkins, 53 F.(2d) 825 (C. C. A. 5); Busch v. Comm'r, 50 F.(2d) 800 (C. C. A. 5). Moreover, deductions are restricted usually to the taxable year to which they are properly allocated under the accounting method adopted by the taxpayer. In any case, to support the right of deducting a loss, the taxpayer must come within the terms of the statute permitting the loss. Choteau v. Burnet, 283 U. S. 691, 51 S. Ct. 598, 75 L. Ed. 1353; A. Schrader's Son v. United States, 51 F.(2d) 1038 (C. C. A. 2); Heiner v. Colonial Trust Co., 275 U. S. 232, 48 S. Ct. 65, 72 L. Ed. 256. A taxpayer who seeks to charge off a loss suffered in an earlier year must do so by virtue of some statute permitting the deduction, and must bring himself within the terms thereof; otherwise his losses are confined to the current year. Woolford Realty Co. v. Rose, 286 U. S. 319, 52 S. Ct. 568, 76 L. Ed. 1128. Here the appellant seeks to maintain its position by virtue of the Revenue Act of 1921 (42 Stat. 227, 229, 231, 260) section 202, defining nontaxable transactions, section 204, net loss provisions, and section 240, relating to affiliations.

Section 240 permits consolidated returns. When the transactions of exchange of stock were consummated as stated above, there were outstanding in the old company only 247 shares of each class of stock. The holders of those shares owned no stock in the petitioner. The owners of the remaining preferred stock and of the voting trustees' certificates for a like number of shares of common stock of petitioner owned no stock of the old company. The two companies were not entitled to file a consolidated return. Handy & Harman v. Burnet, 284 U. S. 136, 52 S. Ct. 51, 76 L. Ed. 207. Section 240 does not permit such a return.

Subsection (a) of section 204 specifies the formula for determining...