Burnet v. Aluminum Goods Mfg Co

• Decision Date: 09 January 1933
• Docket Number: No. 192,192
• Parties: BURNET, Commissioner of Internal Revenue, v. ALUMINUM GOODS MFG. CO
• Court: U.S. Supreme Court

287 U.S. 544

53 S.Ct. 227

77 L.Ed. 484

BURNET, Commissioner of Internal Revenue,

v ALUMINUM GOODS MFG. CO.

No. 192.

Argued Dec. 13, 14, 1932.

Decided Jan. 9, 1933.

Messrs. William D. Mitchell, Atty. Gen., and G. A.Youngquist, Asst. Atty. Gen., for petitioner.

Mr. Frederic Sammond, of Milwaukee, Wis., for respondent.

Mr. Justice STONE delivered the opinion of the Court.

In 1914 respondent, a New Jersey manufacturing corporation purchased all the capital stock of the Aluminum Sales & Manufacturing Company, a New York corporation. From that time until its liquidation, carried on in 1917, the sales company was principally engaged in selling goods manufactured by respondent. In February, 1918, it was dissolved. The operation of the sales company reflected net losses during the years 1914, 1915, and 1916, as well as in the year 1917. At a result of the operating losses and the liquidation of the sales company respondent suffered the loss of certain sums advanced to the sales company, and of the total investment in its stock.

For 1917 the two corporations filed separate returns for computation of the normal income tax, and a consolidated return for the purposes of the excess profits tax. In its separate return respondent claimed, and the Commissioner allowed, deduction of an aggregate loss made up of respondent's advances to the sales company, and the cost of its stock, less the value of equipment and good will realized on its liquidation. This loss, reduced by the 1917 operating loss of the sales company, was deducted from gross income in the consolidated return. The Commissioner's refusal to allow the deduction was sustained by the Board of Tax Appeals, 22 B.T.A. 1, whose determination was reversed by the Court of Appeals for the Seventh Circuit, 56 F.(2d) 568. The Court of Appeals held that respondent's affiliation with the sales company was ended by the liquidation in 1917, so that the loss was suffered 'outside the period of affiliation,' and that, in any case, as the loss did not result from an 'intercompany' transaction, it could be deducted in the consolidated return. This Court granted certiorari, 287 U.S. 583, 53 S.Ct. 21, 77 L.Ed. —-, to resolve an alleged conflict with the decision of the Court of Claims in Utica Knitting Co. v. United States, 68 Ct. Cl. 77, and see Autosales Corporation v. Commissioner (C.C.A.) 43 F.(2d) 931, 933.

Title 2 of the Revenue Act of 1917, 40 Stat. 300, 302 (section 200 et seq.), imposed a war excess profits tax in addition to the normal tax upon the income of corporations. The statute made no provision for consolidated returns by affiliated corporations, but articles 77 and 78 of Treasury Regulations 41, adopted pursuant to the act, did authorize the Commissioner to require affiliated corporations, including those, the stock of one of which was owned by another, to file a consolidated return of net income and invested capital. And section 1331 of the Revenue Act of 1921, 42 Stat. 227, 319 (26 USCA § 1067) provided that, for the purpose of determining excess profits taxes, the Revenue Act of 1917 'shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917'¹.

The purpose of requiring consolidated returns by affiliated corporations was, as the government contends, to impose the war profits tax, according to true net income and invested capital of what was, in practical effect, a single business enterprise, even though conducted by means of more than one corporation. Primarily, the consolidated return was to preclude reduction of the total tax payable by the business, viewed as a unit, by redistribution of income or capital among the component corporations by means of intercompany transactions. See Handy & Harman v. Burnet, 284 U.S. 136, 140, 52 S.Ct. 51, 76 L.Ed. 207; Appeal of Gould Coupler Co., 5 B.T.A. 499, 514—516; cf. Treasury Regulations 41, art. 77; Treasury Regulations 45, art. 631.

It is not denied that the two corporations became affiliated when respondent acquired all the capital stock of the sales company. But, on the basis of the finding of the Board of Tax Appeals that the sales company was chiefly engaged during 1917 in closing up its business preparatory to formal dissolution, which took place in February, 1918, that all its assets and liabilities were disposed of by the end of 1917, and that it did not do any business after that date, petitioner argues that the affiliation of the two companies was terminated by the liquidation.

Since complete stock ownership is made the test of affiliation applicable here under article 77 of Treasury Regulations 41 and section 1331 of the Revenue Act of 1921, no ground is apparent for saying that the corporations ceased to be affiliated, merely because without change of corporate control, one of them was being liquidated. The findings do not reveal that the liquidation of the sales company was completed, that it ceased to do any business or to function as a corporation before the end of 1917. Neither statute nor regulations recognize that affiliation may be terminated by the mere fact that such liquidation is being carried on, and the reasons for requiring the consolidated return may be quite as valid during that liquidation as before. During that period the unitary character of the business enterprise is not necessarily ended, and intercompany manipulations are not precluded.

In the present case, even though the affiliation continued, it does not follow as a matter of law that the loss was not rightly deducted in the consolidated return. Section 12, Revenue Act of 1916, 39 Stat. 756, 767, governs the computation of the excess profits tax under section 206, Revenue Act of 1917, 40 Stat. 300, 305. That section and the regulation under it (see article 147, Treasury Regulations 33 (1918 Ed.)) direct that taxable net income of a corporate taxpayer shall be ascertained by deducting, from gross income, losses sustained within the year. It is conceded that the loss of respondent's advances to the sales company and the investment in its stock was sustained in 1917, was deductible therefore, if at all, in that year, and might properly have been deducted by respondent in a separate return, if a separate return had been permissible. But the government insists that the loss cannot be deducted in the mandatory consolidated return for 1917 because it occurred as the result of 'intercompany' transactions.

We need not decide whether the loss resulted from intercompany transactions within the meaning of the regulations under later statutes² which broadly exclude from the consolidated returns profit or loss upon all such transactions. For neither the Revenue Act of 1917, nor section 1331 of the Revenue Act of 1921, nor the regulations under them,³ prescribe specifically the method of making up...