Swift & Co. v. United States

• Decision Date: 17 February 1930
• Docket Number: No. H-101.,H-101.
• Citation: 38 F.2d 365
• Parties: SWIFT & CO. v. UNITED STATES.
• Court: U.S. Claims Court

38 F.2d 365 (1930)

SWIFT & CO. v. UNITED STATES.

No. H-101.

Court of Claims.

February 17, 1930.

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G. Carroll Todd, of Washington, D. C. (Albert H. Veeder, Henry Veeder, and Francis E. Baldwin, all of Chicago, Ill., and T. Hardy Todd, of Washington, D. C., on the brief), for plaintiff.

Fred K. Dyar and Frank D. Strader, both of Washington, D. C., and Herman J. Galloway, Asst. Atty. Gen. (C. M. Charest and Ottamar Hamele, both of Washington, D. C., on the brief), for the United States.

Holmes, Brewster & Ivins, of Washington, D. C., amici curiæ.

Before BOOTH, Chief Justice, and WILLIAMS, LITTLETON, GRAHAM, and GREEN, Judges.

GREEN, Judge.

This is a suit on a claim for the refund of income and profits taxes for the taxable year 1918, based on section 204(b) of the Revenue Act of 1918 (40 Stat. 1061), which provided that:

"If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, * * * any taxpayer has sustained a net loss, the amount of such net loss shall * * * be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title Income taxes and by Title III Profits taxes for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252."

The plaintiff is the parent corporation of a large group of affiliated corporations engaged in the meat-packing business and kindred occupations. For the years 1918 and 1919, the plaintiff and affiliated corporations made a consolidated return of their net income for the purpose of assessment of income and profits taxes on the basis of the calendar year, and each of the group was assessed its share of the taxes for 1918, which it paid. The plaintiff does business nearly all over the world and, together with the affiliated corporations, in 1918 and 1919, made sales to the amount of over $1,000,000,000 each year. The corporations which constituted the affiliated group in 1918 had a net income for that year of $39,465,221.11. The affiliated group consisted of about sixty corporations (the total number is not shown definitely) until November 30, 1918, at which time Libby, McNeill & Libby, a member of the group, dropped out and was no longer affiliated with any of the other corporations; the remaining fifty-nine corporations in the group continued until the end of that year, and throughout the year 1919.

On March 21, 1919, a corporation known as the Union Meat Company became affiliated with the plaintiff and the other members of the affiliated group, and remained a member thereof until June 2, 1919, at which time it was dissolved and its assets were acquired by the plaintiff.

For the calendar year 1919, the consolidated group, including the Union Meat Company during the period it was a member thereof, had a net loss of $24,534,929.44. In the consolidated return for 1919 it was sought to have this consolidated net loss deducted from the consolidated net income for the previous year, and to have the tax for 1918 redetermined in accordance with section 204(b) set out above. The Commissioner refused to make this deduction. Thereupon plaintiff filed a claim for refund, maintaining that it, and the corporations affiliated with it, had made an overpayment of taxes in excess of $8,000,000 for the year 1918, and specifying the amount of refund claimed to be due to each member of the affiliated group. The Commissioner denied the claim for refund, and plaintiff brings this suit to recover the amount alleged to have been overpaid by it for 1918.

The grounds of the denial of the refund were:

First, that plaintiff should have made its consolidated return on the basis of a fiscal year ending approximately November first of the years in controversy instead of upon a calendar year.

Second, that during the years 1918 and 1919 changes were made in the affiliated group or groups of which the plaintiff was the parent corporation, in that one corporation was separated therefrom in the year 1918 and one was added in 1919, and as a result thereof there were, in fact, three separate taxable groups, with the result that section 204(b) above quoted was not applicable.

The issue in the case is whether the refund was properly denied upon either of the grounds above stated.

As the second of these matters which constituted grounds for refusing the refund would prevent plaintiff from recovering anything whatever herein, the question as to whether the ruling thereon was in accordance with law will be first considered. In defendant's brief the contention on the part of the government is stated more at length, as follows:

"* * * that each time there is a change in an affiliated group a new taxpayer appears, a new tax status is created, a new tax return is required, and a new taxable period or `year' is developed."

If this statement is correct, then, in the case at bar, there would be different taxpayers for the taxable years 1918 and 1919, and the group last formed would be the only one that sustained any loss in 1919. It follows that if defendant's contention on this point is sustained, the plaintiff and its affiliated corporations will derive no benefit from section 204(b). Upon this, counsel for both sides agree.

At the outset it should be noted that the principle for which the defendant now contends is contrary to the practice and procedure which the Revenue Bureau hitherto had uniformly followed. For more than ten years prior to the time when this controversy arose, the Revenue Bureau had both by regulation and application of the law held that a change in an affiliated group caused by the dropping out of one corporation or the addition of another, or both, did not end the existence of the affiliated group for the purpose of computing the tax, and had never held that by such changes in an affiliated group new and separate groups were thereby created for the purposes of taxation. This is shown by article 634 of the regulations, under the Revenue Acts of 1918, 1921, 1924, and 1926, which provides, in part, that:

"Where there are more than two corporations affiliated at the beginning of the taxable year, and due to a change in stock ownership (or control)¹ the affiliated status of one or more is terminated, but there remain at least two corporations affiliated during the entire year, the parent or principal corporation should file a consolidated return for the entire year, excluding from its return the income of the corporations whose affiliated status is terminated from the date of the change in stock ownership; or where two or more corporations are affiliated at the beginning of the taxable year, and through change in stock ownership (or control)¹ additional corporations become affiliated, the parent or principal corporation should file a consolidated return and include the income of such corporations from the date of change of stock ownership. In either case, the subsidiary or subordinate corporation whose status is changed during the taxable year should make a separate return for that part of the taxable year during which it was outside of the affiliated group." (Regs. 45, art. 634, as amended by T. D. 4022, Cum. Bul. VI-1, p. 258; Regs. 62, art. 634, as amended by T. D. 4023, Cum. Bul. VI-1, p. 259; Regs. 65, art. 634, as amended by T. D. 4024, Cum. Bul. VI-1, p. 148; Regs. 69, art. 634.)

It is clear that this regulation is not in conflict with the law, and we think it further appears, from what will hereinafter be said upon consideration thereof, that it is not unreasonable, but is just and fair. The Revenue Bureau disregarded it, not because it was unreasonable, but because of the decision of the Board of Tax Appeals in Sweets Company of America v. Commissioner, 12 B. T. A. 1285. Following this decision, the Commissioner reversed his former findings under which he had held that the plaintiff and its affiliated corporations had been overassessed for the calendar year 1918 in the sum of $8,744,053.58, and refused to allow them any deduction on account of losses in the year 1919. If, in fact, the regulation was not in conflict with law and was reasonable, just, and fair, as we shall undertake to show, it ought not to have been set aside after the practice of the department had so long been regulated by it, and in so doing the Commissioner erred.

The regulation quoted expressly required that, where two or more corporations are affiliated at the beginning of a taxable year, and one of the subsidiary corporations drops out, or a new one is added, the parent corporation shall file a consolidated return for the group for the entire taxable year (excluding, of course, the income of the subsidiary which dropped out from the date of its separation, and including the income of the new subsidiary from the date it was taken in). It is clear that by this regulation the Treasury Department recognized that the affiliated group does not cease to exist in such cases, but continues for the purpose of computing the tax as long as the parent corporation remains the same. This construction prevailed at all times prior to the decision of the Board of Tax Appeals in Sweets Company of America v. Commissioner, supra, and up to the present time has not been changed by any published regulation or ruling. In fact this construction was carried forward into the new regulations 75, under the Revenue Act of 1928, and made more definite in that the new regulations required specifically that the parent corporation should remain as a parent in order that an affiliated group should remain in existence. The Revenue Act of 1928, of course, does not apply to the case at bar, but we think that this long-continued practice, in which Co...