Commissioner of Internal Revenue v. Death Valley R. Co., 6810.

• Decision Date: 05 December 1932
• Docket Number: No. 6810.,6810.
• Citation: 62 F.2d 160
• Parties: COMMISSIONER OF INTERNAL REVENUE v. DEATH VALLEY R. CO.
• Court: U.S. Court of Appeals — Ninth Circuit

62 F.2d 160 (1932)

COMMISSIONER OF INTERNAL REVENUE v. DEATH VALLEY R. CO.

No. 6810.

Circuit Court of Appeals, Ninth Circuit.

December 5, 1932.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Wm. Cutler Thompson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, and J. T. Haslam, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for petitioner.

Albert R. Palmer, of New York City (Harry W. Stelle, Jr., of New York City, of counsel), for respondent.

Before WILBUR and SAWTELLE, Circuit Judges, and CAVANAH, District Judge.

WILBUR, Circuit Judge.

This is a petition by the Commissioner to review the action of the Board of Tax Appeals in reference to the claim of respondent, Death Valley Railroad Company, for a deduction of its losses during the fiscal year ending September 30, 1921, from its net income for the calendar year beginning January 1, 1923.

The Board of Tax Appeals found that the loss of the respondent for the fiscal year beginning September 30, 1920, and ending September 30, 1921, was $21,594.68, that the proportion of this loss for the nine months of the fiscal year (January 1, 1921, to September 30, 1921) included in the calendar year beginning January 1, 1921, and ending December 31, 1921, was $16,196.01. This amount is conceded to be correct if the theory of the Board of Tax Appeals is sustained. The Board allowed this deduction from the gross income of the respondent for the calendar year 1923.

The difficulty in the case arises from the fact that the respondent had always reported its income on the calendar year basis, but, by reason of its affiliation with the parent corporation, the Borax Consolidated, Limited, and with other subsidiary companies, the Commissioner computed the taxes of the affiliated corporations for the fiscal year of the parent corporation from September 30 to September 30 under the mandate of section 240 of the Revenue Act of 1918 (40 Stat. 1081), which required affiliated corporations to make a consolidated return of net income and the computation of taxes upon the basis of such consolidated return.

Subsequent to the enactment of a corresponding provision in the Revenue Act of 1921, § 240 (42 Stat. 260) which made it optional with the affiliated corporations after January 1, 1922, to make either separate returns, or a consolidated return under the regulations prescribed by the Commissioner, as they might elect, respondent filed a separate return for the calendar year beginning January 1, 1923.

The statutory provision allowing the deduction of losses in the previous taxable year from revenue in subsequent taxable years is section 204 of the Revenue Act of 1921, subds. (b) and (d), as follows:

"Sec. 204. * * * (b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary. * * *

"(d) If it appears, upon the production of evidence satisfactory to the Commissioner, that a taxpayer having a fiscal year beginning in 1920 and ending in 1921 has sustained a net loss during such fiscal year, such taxpayer shall be entitled to the benefits of this section in respect to the same proportion of such net loss which the portion of such fiscal year falling within the calendar year 1921 is of the entire fiscal year."

The government, however, contends that, although the fiscal year, or calendar year, is ordinarily twelve months, where a taxpayer amends his method of return from a fiscal year to a calendar year, or vice versa, as authorized by section 226 of the Revenue Act of 1921 (all sections hereinafter referred to are in that act), that this shorter period for which a special return is made in the case at bar three months from September 30, 1921, to January 1, 1922, becomes the next succeeding "taxable year" to the fiscal year ending September 30, 1921, within the meaning of section 204 of the Revenue Act of 1921, supra, permitting a deduction of net loss from the succeeding "taxable year." The question involves the right to carry over into the calendar year beginning January 1, 1923, that portion of the loss suffered during the calendar year ending December 31, 1921, which was suffered between January 1, 1921, and September 30, 1921, and not deducted from the calendar year 1922 because a further loss was suffered during such calendar year. The only question necessary for our determination is whether or not the three months' period from September 30, 1921, to January 1, 1922, for which a separate return is made under the provisions of section 226 of the Revenue Act of 1921, supra, constitutes the "succeeding taxable year," so that the period from January 1, 1922, to December 31, 1922, is the "next succeeding taxable year" mentioned in section 204 after which deductions of losses suffered prior to September 30, 1921, cannot be allowed. The contention of the Commissioner is based upon the clause in section 200 of the Revenue Act of 1921 (42 Stat. 227) which we italicize in the following quotation therefrom:

"(1) 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...