American Paper Exports v. Bowers, 87.

• Decision Date: 14 December 1931
• Docket Number: No. 87.,87.
• Citation: 54 F.2d 508
• Parties: AMERICAN PAPER EXPORTS, Inc., et al. v. BOWERS.
• Court: U.S. Court of Appeals — Second Circuit

54 F.2d 508 (1931)

AMERICAN PAPER EXPORTS, Inc., et al. v. BOWERS.

No. 87.

Circuit Court of Appeals, Second Circuit.

December 14, 1931.

Donald Horne and Victor E. Cappa, both of New York City, for appellants.

George Z. Medalie, U. S. Atty., of New York City (Leon E. Spencer, Asst. U. S. Atty., of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

L. HAND, Circuit Judge.

This action was brought to recover taxes wrongfully exacted by the defendant, a collector of internal revenue. The substance of the complaint is as follows: The second of the two plaintiffs named in the title, the United States Paper Company, was a corporation in existence throughout the year 1918, and was engaged actively in business for the first six months. On April 10, 1918, the first named of the plaintiffs, the American Paper Exports, Inc., was organized to take over the second, and acquired all its assets and assumed all its liabilities on June 29, 1918. On that day it also acquired all the second's outstanding shares, giving its own shares in exchange. For the rest of the year it operated the business of the second, and in due season filed a consolidated income and war profits tax return for the year 1918, including their joint income for the second half year, and the separate income of the second plaintiff for the first half. The Commissioner demanded of the second plaintiff a separate return for the first half, and levied a tax accordingly, which the first plaintiff paid under protest, and for which both now sue. The difference between the taxes as returned and as levied, therefore, arises from refusing to allow the separate income of the second plaintiff to go into hotch-pot with the joint income for the second half year.

The question raised is whether there should be one or two returns, in case a "parent" corporation, organized in the course of a year, affiliates with a "subsidiary," already in existence and active from the beginning of the year. A consolidated return is in any case required for so much of the year as the companies were affiliated. Fidelity National Bank v. Com'r, 39 F.(2d) 58 (C. C. A. 8); Lucas v. St. Louis Nat'l Baseball Club, 42 F.(2d) 984 (C. C. A. 8). If both affiliates are in existence and active before affiliation, obviously more than one return becomes therefore necessary, and so it has been held. Appeal of American La Dentelle, Inc., 1 B. T. A. 575; Appeal of Green River Distilling Co., 16 B. T. A. 396. At least for the period of its separate activity each must file a separate return. Affiliation does not, however, merge the taxpayers, and indeed the section — section 240 (a), 40 Stat. 1081 — apparently expects them to file the consolidated return jointly. Hence, if all the affiliates are conceived as joining in the consolidated return, they have each filed two returns for one year, and that is contrary to the general theory of an income tax, which does not allow the splitting of years. The regulations of 1921 and later (Regs. 62, art. 634) required the "parent" to file the return, and by long use and legislative recognition this is probably now law, regardless of the language of section 240 (a). If the "parent" files a return only for the affiliated period, even though the "subsidiaries" may thus escape splitting their returns, the "parent" has done so; it has filed a separate and a consolidated return. If, however, the "parent" be permitted to file a single return, containing not only its own income while separate, but the joint income during the affiliation, no taxpayer, formally at any rate, has filed two returns for the year. If it be argued that,...