Aluminum Co. of America v. United States

• Decision Date: 29 September 1933
• Docket Number: No. 5105.,5105.
• Citation: 67 F.2d 172
• Parties: ALUMINUM CO. OF AMERICA v. UNITED STATES.
• Court: U.S. Court of Appeals — Third Circuit

67 F.2d 172 (1933)

ALUMINUM CO. OF AMERICA v. UNITED STATES.

No. 5105.

Circuit Court of Appeals, Third Circuit.

September 29, 1933.

William Watson Smith, John G. Buchanan, Paul G. Rodewald, and Smith, Buchanan, Scott & Gordon, all of Pittsburgh, Pa., for appellant.

Louis E. Graham, U. S. Atty., and John A. McCann, Sp. Atty., Bureau of Internal Revenue, both of Pittsburgh, Pa. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Floyd A. Toomey, Asst. Gen. Counsel, Bureau of Internal Revenue, both of Washington, D. C., of counsel), for the United States.

Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.

WOOLLEY, Circuit Judge.

Under the law as it stood in 1917, affiliated corporations were required to file consolidated returns for excess-profits taxes and separate returns for income taxes. In consonance with the law, Aluminum Company of America and its twenty-seven affiliated corporations made returns of both kinds for that year. During the year various units of this group of corporations had inter-company transactions of sale and purchase of commodities in which, pursuant to a recognized business policy of the group, profits were allowed and made. They were excluded from the consolidated return for excess-profits tax purposes and included in the separate returns of the trading companies for income tax purposes. These profits, though actual between the trading companies, were merely book profits with respect to the entire group for, obviously, nothing coming in and nothing going out, they involved no gains to the enterprise as a whole. The plaintiff paid the excess-profits taxes and the several affiliated corporations paid the income taxes (including taxes on these profits) for 1917 as they were required to do. But when they came to prepare their returns for the tax year 1918, there having been a change in the taxing acts, they were confronted by a statute which compelled affiliated corporations to file consolidated returns for both excess-profits taxes and income taxes and — what is here critically important — required that the net income for taxes of both kinds should be determined upon the same basis, which for the purposes of this case was cost or inventory value. Revenue Act 1918, §§ 230, 240, 320, 40 Stat. 1075, 1081, 1091. The plaintiff and its affiliated corporations in preparing a consolidated return for income taxes for 1918 found certain merchandise sold in 1917 by some of the corporations and purchased by others still in the inventories of the latter as of the first day of 1918. Accordingly, in making their consolidated or group income tax return for 1918, they eliminated the inter-company profits thereon and calculated cost to the group upon the figures at which the inter-company purchases had been made in 1917 (which included profits), not upon original cost to the inter-company sellers. As these inter-company profits had not been included in the 1917 consolidated return for excess-profits taxes, the group of course did not include them in its 1918 consolidated return for such taxes but, quite properly, took original cost as a basis. Thus it appears that the group returns for excess-profits taxes and income taxes for 1918 were not computed upon the same basis but upon markedly different bases; one original cost and the other cost stepped up by book profits.

With sections 240 and 320 of the Revenue Act of 1918 before him, the Commissioner of Internal Revenue, in assessing the plaintiff's income taxes for 1918 on its consolidated return, disregarded entirely the inter-company sales in 1917 on which an aggregate profit of $1,694,355.17 had been computed for the determination of the income tax liability of the several trading companies and took the original cost price of such merchandise before any inter-company sales for the basis. As will readily be seen, the practical result of that official action was to impose a tax not only on the profits the taxpayer had earned as a group in 1918 but also on some of the book profits earned by the affiliated corporations in their inter-company business in 1917 upon which they had already paid income taxes. Of this the plaintiff, having paid the consolidated income taxes for 1918, complains bitterly. The grounds of its complaint in its suit in the District Court to recover these taxes, and on this appeal from a judgment dismissing its petition, are several; the first being that profits of the selling corporations on inter-company sales in 1917 of merchandise remaining in the inventories of the purchasing corporations at the beginning of 1918 should, for income tax purposes, be included as costs in computing profits made by the group on the sales of the same merchandise to the public in that year. In other words, it says profits earned by the underlying selling corporations became a part of the cost to the underlying purchasing corporations and that cost to the purchasing corporations was, in consequence, cost to the affiliated group of which they were members.

The trouble with this proposition is two-fold: first, that the income tax returns for 1917 were made by separate corporations having to do exclusively with their separate profits on which they separately paid income taxes; second, that the income tax return for 1918 was a consolidated or group return. It had to do with the entire enterprise. In it, loss of one corporation could be set off against profits of another. On it, group taxes were assessed and paid, which, in case of loss by one corporation or another, might conceivably be less than the aggregate of the taxes of the members of the group. Such a situation was clearly recognized when the legislation providing consolidated income tax returns by affiliated corporations was enacted. However, and without regard to the practical effect, sometimes advantageous and sometimes disadvantageous to a group, the Congress by the tax law in force in 1918 prescribed the basis of determining the taxable net income of corporations — cost or inventories — and very definitely provided that the basis of determining income taxes and excess-profits taxes due upon consolidated returns of affiliated corporations should be the same. It is clear that by this legislation the Congress was trying to give uniformity to taxation of corporations and particularly to deal with closely affiliated or group corporations, as it had to do, in view of their number, the complexity of their organization and their...