Commissioner of Internal Rev. v. General Mach. Corp.

• Decision Date: 07 April 1938
• Docket Number: No. 7485.,7485.
• Citation: 95 F.2d 759
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: COMMISSIONER OF INTERNAL REVENUE v. GENERAL MACHINERY CORPORATION.

95 F.2d 759 (1938)

COMMISSIONER OF INTERNAL REVENUE v. GENERAL MACHINERY CORPORATION.

No. 7485.

Circuit Court of Appeals, Sixth Circuit.

April 7, 1938.

F. E. Youngman, of Washington, D. C. (Robert H. Jackson and Sewall Key, both of Washington, D. C., on the brief), for petitioner.

John Hollister, of Cincinnati, Ohio (Robert A. Taft, Perry T. Garver, and Taft, Stettinius & Hollister, all of Cincinnati, Ohio, on the brief), for respondent.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

SIMONS, Circuit Judge.

As in Joseph & Feiss Co. v. Commissioner, 6 Cir., 70 F.2d 804, decided by us May 7, 1934, in accord with Arnold Constable Corp. v. Commissioner, 2 Cir., 69 F.2d 788, and as in Helvering, Commissioner, v. Morgan's, Inc., et al., 293 U.S. 121, 55 S.Ct. 60, 79 L.Ed. 232, the question is whether two periods in the same calendar or fiscal year for which affiliated corporations are required to make income tax returns constitute two "taxable years" within the meaning of the sections of the revenue acts which permit a taxpayer suffering a loss in any taxable year to deduct it from taxable gains in the two succeeding taxable years. The distinction which creates the controversy notwithstanding the references, is that there section 206 of the Revenue Act of 1926, 44 Stat. 17, was construed, while here the Revenue Act of 1928 controls.

The taxpayer filed a consolidated income tax return for the calendar year 1929, which included along with the income of other subsidiary companies that of the Niles Tool Works Company, which had become affiliated with it on March 27th of that year. The consolidated return reported the income of the Niles Tool Works Company for the full year, and deducted for that year the statutory net loss of Niles carried over from its return for the year 1927 and through 1928. The Commissioner in computing the tax upon the consolidated return deducted statutory net loss from income upon the basis of separate return for Niles only for the period January 1st to March 26th on the ground that it constituted the third taxable year of the subsidiary. No portion of the net loss of Niles for 1927 was allowed as a deduction from income for the period of affiliation. The result was the determination of a deficiency, reviewed by the Board of Tax Appeals, which reversed the Commissioner and determined an overassessment.

Section 117(b) of the 1928 Act, 26 U.S. C.A. § 117 note, as does section 206(b) of the 1926 Act, 44 Stat. 17, permits a net loss suffered in one year to be deducted in computing net income for the succeeding taxable year, and if such net loss is in excess of that year's income, it permits the excess to be deducted in computing net income for the third taxable year. The Commissioner had contended that the carry-over privilege of the statute was exhausted whenever a corporation which had carried a loss to one succeeding year was required to make a return for a period of less than a year. He relied upon the definition of "taxable year" in section 200(a) of the 1926 Act, 44 Stat. 10, which defines the term to include, "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 Supreme Court in Helvering v. Morgan's, Inc., supra, however, ruled that its meaning must be ascertained in connection with related sections, that income taxes had consistently been assessed on the basis of annual accounting periods, either calendar year or fiscal year as the taxpayer might adopt, and that where the return is for a period of less than twelve months the year of which it is a fractional part is the annual accounting period of the taxpayer, and is his taxable year.

The Commissioner concedes that Helvering v. Morgan's, Inc., supra, would be controlling in this case were it not for new provisions incorporated in the 1928 Act relating to the filing of consolidated returns, and these separate provisions must now be considered. While there is no substantial difference between the 1926 and 1928 Acts in definition of "taxable year" or provisions for loss carry-over, section 141 of the latter, 26 U.S.C.A. § 141 and note, is new. It provides as follows:

"(a) An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year, in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) * * * prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.

"(b) The Commissioner, with the...