Gottesman & Co. v. Comm'r of Internal Revenue, Docket No. 667-79.
| Decision Date | 23 November 1981 |
| Docket Number | Docket No. 667-79. |
| Citation | 77 T.C. 1149 |
| Parties | GOTTESMAN & COMPANY, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner is the parent corporation in a group of affiliated corporations which filed consolidated returns for the years in issue. Respondent determined that accumulated taxable income for purposes of the accumulated earnings tax under sec. 531, I.R.C. 1954, should be computed on a consolidated basis. In 1966, the Secretary promulgated a new set of consolidated return regulations which superseded then-existing regulations. Secs. 1.1502-0 through 1.1502-80, Income Tax Regs. Respondent asserts that these regulations dealt with the manner in which the accumulated earnings tax (sec. 531) was to be imposed on affiliated groups of corporations making consolidated returns. Held: The 1966 consolidated return regulations fail to provide affiliated corporations making consolidated returns with sufficient guidance as to how accumulated taxable income is to be computed for purposes of applying the accumulated earnings tax. Accordingly, petitioner is not liable for the accumulated earnings tax based upon accumulated taxable income determined on a consolidated basis. Franklin L. Green, for the petitioner.
Ralph A. Eppensteiner, for the respondent.
Respondent determined deficiencies in petitioner's income tax for the following years:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1972 ¦$27,950.09 ¦
+------+-------------¦
¦1973 ¦481,701.88 ¦
+------+-------------¦
¦1974 ¦511,298.25 ¦
+------+-------------¦
¦1975 ¦675,195.81 ¦
+--------------------+
Due to concessions, the year 1972 is no longer in dispute.
The issues presented are: (1) Whether during the years in dispute the regulations promulgated by the Secretary under section 15021 for affiliated groups of corporations filing consolidated returns required a consolidated calculation (as respondent contends) or a separate calculation (as petitioner contends) of accumulated taxable income for purposes of computing the accumulated earnings tax under section 531; and (2) whether, even if a consolidated calculation is required, these regulations adequately provide a method for determining accumulated taxable income on a consolidated basis.
Petitioner has moved for summary judgment under Rule 121, Tax Court Rules of Practice and Procedure,2 contending that a ruling favorable to petitioner on either of these issues of law will substantially dispose of this case. Respondent, in his memorandum of law in opposition to petitioner's motion for summary judgment, states that “Although respondent does not admit all of the facts set forth in the affidavit * * * accompanying petitioner's motion for summary judgment, respondent does agree that this legal issue may be resolved without the need for further factual inquiry by the Court.” On the basis of this concession, no further evidence will be received regarding the above-mentioned issues herein presented.
In a footnote to respondent's aforementioned memorandum, he further states:
Petitioner recognizes that, as a result of slight adjustments to its taxable income, there resulted increases in petitioner's separately computed accumulated taxable income in the amount of $86,488.44 for 1974 and $16,602.64 for 1975. Petitioner recognizes, apparently, that even if the Court resolves this issue in its favor, there is still a possible tax liability under section 531 for the years 1974 and 1975. Respondent cannot say at this time that computation of the liability on a separate basis would produce a de minimis tax, as petitioner maintains.
In the motion for summary judgment, the relief sought by petitioner is an order granting summary judgment that petitioner was not required as a matter of law to compute its accumulated taxable income on a “combined” basis, and such other relief as the Court may find just and proper. This leaves remaining for trial the issue of whether petitioner had any accumulated taxable income on a nonconsolidated basis. Furthermore, in paragraph 7 of its petition, the petitioner raises an issue unrelated to the accumulated earnings tax issue raised in the motion for summary judgment. Respondent's answer denies part of the allegations of paragraph 7 of the petition.
It is thus apparent that our decision on petitioner's motion will not dispose of all of the issues in the case. Accordingly, petitioner's motion will be dealt with as a motion for partial summary judgment, and the case will be restored to the general docket for further adjudication of the issues remaining in the case which are not herein decided. Rule 121(b) and (c).
l
l
Petitioner is the common parent of an affiliated group of corporations. Its principal office at the time the petition was filed in this case was located in New York City. The affiliated group duly filed consolidated returns for the taxable years 1973, 1974, and 1975.
Under section 1502, Congress granted authority to the Secretary to prescribe regulations for the filing of consolidated returns by affiliated groups of corporations. The filing of a consolidated return is a “privilege,” but “The making of a consolidated return shall be upon the condition that all corporations which at any time during the taxable year have been members of the affiliated group consent to all the consolidated return regulations prescribed under section 1502 prior to the last day prescribed by law for the filing of such return.” Sec. 1501.
Petitioner contends that to avoid the accumulated earnings tax of section 531 it made distributions to its shareholders prior to the end of each of the taxable years in issue in amounts sufficient to eliminate completely any accumulated taxable income. Petitioner alleges it was advised by counsel that pursuant to the consolidated return regulations (secs. 1.1502-0 et seq., Income Tax Regs.), for purposes of the accumulated earnings tax, its accumulated taxable income was to be determined by reference to its separate taxable income and other relevant items and not on a consolidated basis with the other members of its affiliated group.
Respondent maintains this interpretation by petitioner's counsel was erroneous. Respondent argues that the plain meaning of the language of the regulations is that accumulated taxable income must be computed on a consolidated basis for purposes of the calculation of the accumulated earnings tax.
Petitioner disputes respondent's interpretation. Further, petitioner argues, if the respondent's interpretation is upheld, then the consolidated return regulations dealing with the accumulated earnings tax violate the notice requirement of the Administrative Procedure Act, 5 U.S.C. sec. 553 (1976). In addition, petitioner argues that since the accumulated earnings tax is a penalty tax ( Ivan Allen Co. v. United States, 422 U.S. 617, 627 (1975)), any ambiguity in the regulations should be strictly construed against the respondent, and petitioner's attempt to comply with the regulations should relieve it of any liability under section 531.
The first issue for our determination is: How, for the years 1973, 1974, and 1975, did the consolidated return regulations require accumulated taxable income to be computed for purposes of the accumulated earnings tax? To answer this question, we must examine the administrative history of various regulations and proposed regulations under the consolidated return provisions of the Code.
Prior to 1966, affiliated corporations making consolidated returns were required to compute their accumulated taxable income on a consolidated basis for purposes of applying section 531. This consolidated calculation was clearly mandated by the regulations then in effect. At that time, section 1.531-1, adopted by T.D. 6377, 1959-1 C.B. 125 (May 12, 1959), provided, in part:
Sec. 1.531-1 IMPOSITION OF TAX .—-Section 531 imposes * * * a graduated tax on the accumulated taxable income of every corporation described in section 532 and sec. 1.532-1. In the case of an affiliated group which makes, or is required to make, a consolidated return, see paragraph (a) of sec. 1.1502-30. * * *
Paragraph (a) of section 1.1502-30, Income Tax Regs., adopted by T.D. 6140, 1955-2 C.B. 317 (Aug. 29, 1955) (redesignated sec. 1.1502-30A(a) by T.D. 6894, 1966-2 C.B. 362) provided a general list of the various taxes imposed on consolidated filers and how the taxes were to be added to come to a single figure for group tax liability. As to the accumulated earnings tax, the paragraph provided as follows:
Sec. 1.1502-30 COMPUTATION OF TAX .—-(a) General rule.—-In the case of an affiliated group which makes, or is required to make, a consolidated return for any taxable year, the tax liability of each corporation * * * shall be computed * * * in the case of the taxes imposed by section 531 * * * upon the consolidated accumulated taxable income * * * determined * * * in accordance with the regulations under section 1502. * * *
A detailed definition of “consolidated accumulated taxable income” was given in section 1.1502-31, Income Tax Regs., also adopted by T.D. 6140, supra. That definition is reproduced below.3
On October 1, 1965, the Internal Revenue Service proposed new consolidated return regulations to replace the 1955 regulations promulgated under section 1502 by T.D. 6140, supra. 30 Fed. Reg. 12564 (Oct. 1, 1965). In the new proposed regulations, section 1.1502-2, entitled “Computation of tax liability,” assumed essentially the function of section 1.1502-30 of the 1955 regulations, namely stating in one place the various taxes that were to be added together to determine the total tax liability of the affiliated corporations.
Section 1.1502-2 of the proposed 1965 regulations stated in part:
Sec. 1.1502-2. Computation of tax liability.—-The tax liability of a group for a consolidated...
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