Arnold Constable Corp. v. Commissioner of Int. Rev.

• Decision Date: 12 March 1934
• Docket Number: No. 3.,3.
• Citation: 69 F.2d 788
• Parties: ARNOLD CONSTABLE CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

69 F.2d 788 (1934)

ARNOLD CONSTABLE CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.

No. 3.

Circuit Court of Appeals, Second Circuit.

March 12, 1934.

Joseph R. Little, of Washington, D. C., for petitioner.

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

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

AUGUSTUS N. HAND, Circuit Judge.

This petition for review involves a deficiency of $36,584.54 in the income taxes of Arnold Constable Corporation, a Delaware company. The taxes in controversy are for the fiscal year of that company from February 1, 1927, to January 31, 1928. The deficiency resulted from the holding of the Commissioner that no part of the loss suffered in the fiscal year ended January 31, 1926, by petitioner's affiliate Arnold Constable & Co., Inc., could be allowed in computing consolidated net income for the year ended January 31, 1928. We think that the assessment of a deficiency by the Commissioner was erroneous and the order of the Board of Tax Appeals affirming it should be reversed.

For the fiscal years ended January 31, 1925, and January 31, 1926, Arnold Constable & Co., Inc., sustained net losses of $308,216.45 and $342,461.23, respectively. For the period February 1, 1926, to May 6, 1926, inclusive, it had a net income of $70,730.56, and for that period filed a separate return. On May 7, 1926, approximately 98 per cent. of its capital stock was acquired by the petitioner, Arnold Constable Corporation, the parent of an affiliated group, and in the consolidated return of the affiliated group the net income of Arnold Constable & Co., Inc., for the period May 7, 1926, to January 31, 1927, was included. During this last period Arnold Constable & Co., Inc., had a net income of $185,677.85. For the fiscal year ended January 31, 1928, petitioner filed a consolidated return showing a net income of Arnold Constable & Co., Inc., of $618,646.68, and claimed an offset to such income of a portion of the net loss sustained by such company during the fiscal year ended January 31, 1926. The Commissioner disallowed the offset and determined a deficiency accordingly. The Board of Tax Appeals affirmed the ruling of the Commissioner and held that the period February 1 to May 6, 1926, for which Arnold Constable & Co., Inc., had filed a separate return and the period May 7, 1926, to January 31, 1927, for which its income was included in the consolidated return, constituted two taxable years, and that therefore the net loss could not be carried past the second taxable year ended January 31, 1927.

The taxpayer contends that the fiscal years from February 1, 1926, to and including January 31, 1927, and from February 1, 1927, to and including January 31, 1928, were each taxable years within the meaning of the applicable provisions of the Revenue Acts of 1926 and 1928, so that the net losses of Arnold Constable & Co., Inc., for both the fiscal years which ended January 31, 1925, and January 31, 1926, should be carried forward and allowed as deductions from the net income for the year ended January 31, 1927, and the net income for the year ended January 31, 1928. The right to do this depends upon the proper interpretation of section 206 (a) and (b) and section 226 (b) and section 240 (a) of the Revenue Act of 1926, 26 USCA §§ 937 (a, b), 968 (b), 993 (a), taken in connection with section 200 (a) thereof (26 USCA § 931 (a), and corresponding provisions of the Revenue Act of 1928 (sections 47, 48, 117, 142 26 USCA §§ 2047, 2048, 2117, 2142).

Section 200 (a) provides that: "The term `taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232 section 953 or 984 of this title. The term `fiscal year' means an accounting period of twelve months ending on the last day of any month other than December. The term `taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the commissioner with the approval of the Secretary, the period for which such return is made. The first taxable year, to be called the taxable year 1925, shall be the calendar year 1925 or any fiscal year ending during the calendar year 1925."

Section 206 (b) of act of 1926 (26 USCA § 937 (b) provides: "If, for any taxable year, it appears upon the production of evidence satisfactory to the commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called `second year') and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called `third year'); the deduction in all cases to be made under regulations prescribed by the commissioner with the approval of the Secretary."

It is argued that the words in section 200 (a), "The term `taxable year' includes, in the case of a return made for a fractional part of a year * * * the period for which such return is made," are...