Charles Ilfeld Co v. Hernandez, 579

CourtUnited States Supreme Court
Citation54 S.Ct. 596,78 L.Ed. 1127,292 U.S. 62
Docket NumberNo. 579,579
PartiesCHARLES ILFELD CO. v. HERNANDEZ, Collector of Internal Revenue
Decision Date02 April 1934

Mr. A. T. Hannett, of Albuquerque, N.M., for petitioner.

The Attorney General, and Mr. Erwin N. Griswold, of Washington, D.C., for respondent.

Mr. Justice BUTLER delivered the opinion of the Court.

In 1917 petitioner purchased all the capital stock of the Springer Trading Company for $40,000 and in 1920 all that of the Roy Trading Company for $50,000. It held these shares until late in 1929 when both companies were dissolved. In that period it advanced the Springer Company sums amounting to $69,030.27, and the Roy Company $9,782.22. Nothing having been paid it on account of these advances, petitioner had an investment in the former of $109,030.27 and in the latter of $59,782.22. It made consolidated returns which took into account the gains and losses of each subsidiary. Operations of the Springer Company resulted in losses in all but two of the years and those of the Roy Company in all but four. The losses of the former exceeded its gains by $118,510.53, and those of the latter by $57,127.85. In 1929, before the end of November, the subsidiaries sold all their property to outside interests. After paying debts to others, each had a balance—the Springer Company, $22.914.22, and the Roy Company, $15,106.16—which it paid petitioner on December 23. Both subsidiaries were dissolved December 30 in that year.

Petitioner made a consolidated return for 1929 based on the results of operation and the liquidation of each subsidiary but made no deduction of losses resulting to itself from the liquidations. The return showed a tax of $20,836.20 which was duly paid. In May, 1931, petitioner filed an amended return and claimed a refund of $14,406.43. This return does not take into account profits or losses of subsidiaries in that year but deducts the losses above shown to have resulted to petitioner from its investments in them.* The commissioner rejected the claim. Petitioner brought this action in the Federal district court for New Mexico against the collector to recover the amount of its claim. A jury was waived, the court made special findings of fact, stated its conclusions of law and gave petitioner judgment as prayed. The Circuit Court of Appeals reversed. 66 F.(2d) 236. 67 F.(2d) 236.

The question is whether petitioner is entitled to deduct from its 1929 income any part of the losses resulting from its investments in the subsidiaries.

The Revenue Act of 1928 and Regulations 75 made under section 141(b), 26 USCA § 2141(b) govern. Section 141(a), 26 USCA § 2141(a), gives to groups of affiliated corporations the privilege of making consolidated returns, in lieu of separate ones, for 1929 or in subsequent years upon condition that all members consent to the regulations prescribed prior to the return. And, in view of the many difficult problems arising in the administration of earlier provisions authorizing consolidated returns, the Congress deemed it desirable to delegate by section 141(b) the power 'to prescribe regulations legislative in character.' Senate Report No. 960, 70th Cong., 1st Sess., p. 15. That subsection authorizes the commissioner, with the approval of the Secretary, to make such regulations as he may deem necessary in order that the tax liability of an affiliated group and of each member 'may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability.'

The making of the consolidated return constituted acceptance by petitioner and its subsidiaries of the regulations that had been prescribed. No question as to validity is raised. The brief substance of the regulations here involved follows:

Article 37(a) provides: Gains or losses shall not be recognized upon a distribution during a consolidated return period by one member to another in cancelation or redemption of its stock; 'and any such distribution shall be considered an intercompany transaction.' And subdivision (b) requires that any such distribution after a consolidated return period shall be treated as a sale, and directs adjustments to be made in accordance with articles 34, 35, and 36.

Article 34(a) prescribes the basis for determination of gain or loss upon a sale by a member of stock issued by another member and 'during any part of the consolidated return period' held by the seller. Subdivision (c) applies to sales which break affiliation and which are made during the period that the selling corporation is a member of the affiliated group.

Article 40(a) directs that intercompany accounts receivable or other obligations which are the result of intercompany transactions during a consolidated return period shall not 'during a consolidated return period' be deducted as bad debts. Subdivision (c) governs deductions after the consolidated return period on account of such transactions during the period.

1. In the absence of a provision in the Act or regulations that fairly may be read to authorize it, the deduction claimed is not allowable. Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725; Burnet v. Houston, 283 U.S. 223, 227, 51 S.Ct. 413, 75 L.Ed. 991. Cf. Wolford Realty Co. v. Rose, 286 U.S. 319, 326, 52 S.Ct. 568, 76 L.Ed. 1128. Petitioner contends that Articles 37(b) and 34(c) cover the case. We are unable so to construe them. Article 37 relates to dissolutions. Subdivision (b) deals with distributions made after a consolidated return period. The record conclusively shows that each subsidiary handed over the balance before the dissolution was consummated and during the consolidated return period. Article 34 relates exclusively to the sale of stock. No sale of stock was involved. The parent and subsidiary corporations were the only parties. Neither subsidiary acquired stock of the other or that issued by itself. The petitioner retained all the shares of each and at the end voted dissolutions that operated to cancel them.

2. Respondent, relying on Articles 37(a) and 40(a), maintains that the losses petitioner seeks to deduct arose from intercompany transactions during the consolidated return period and therefore may not be allowed.

Article 37(a) forbids the recognition of losses upon distribution during the consolidated return period and declares that such distributions shall be considered intercompany transactions. Article 40(a) forbids during that period the deduction as bad debts of obligations which are the result of intercompany transactions. The payment of the liquidating dividends was made during the return period and was the last step leading up to the action of directors and stockholders for the dissolution of the subsidiaries. The amount handed over by the Springer Company was less than petitioner's advances to it,...

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