Continental Oil Co. v. Helvering

• Decision Date: 03 October 1938
• Docket Number: No. 6918.,6918.
• Citation: 69 App. DC 236,100 F.2d 101
• Parties: CONTINENTAL OIL CO. v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

69 App. DC 236, 100 F.2d 101 (1938)

CONTINENTAL OIL CO. v. HELVERING, Com'r of Internal Revenue.

No. 6918.

United States Court of Appeals for the District of Columbia.

Decided October 3, 1938.

COPYRIGHT MATERIAL OMITTED

Arthur B. Hyman, of New York City, for petitioner.

James W. Morris, Sewall Key, Morrison Shafroth, Frank M. Thompson, and Ellis N. Slack, all of Washington, D. C., for respondent.

Before MILLER and EDGERTON, Associate Justices, and PROCTOR, Associate Justice of the District Court of the United States for the District of Columbia.

MILLER, Associate Justice.

This is a petition to review a decision of the Board of Tax Appeals¹ determining transferee liability for deficiencies in income taxes for the period January 1 to March 15, 1920, in the amount of $37,344.59.

During the period involved, the Mutual Oil Company of Maine, hereinafter referred to as Maine, owned the entire capital stock of the Mutual Oil Company of Arizona, Mutual Refining and Producing Company, and Northwestern Oil Refining Company, which, for convenience, will be referred to as Arizona, Mutual Refining, and Northwestern, respectively. On March 15, 1920, Maine transferred all of its assets to petitioner's predecessor, also a Maine corporation, originally organized under the name of Elk Basin Consolidated Petroleum Company, in exchange for 600,000 shares of the capital stock of the latter. The name of Elk Basin Consolidated Petroleum Company was changed on December 22, 1921, to the Mutual Oil Company; subsequently, in the year 1925, the said Mutual Oil Company changed its name to the Continental Oil Company, which latter company is the petitioner herein; and for convenience both petitioner and its predecessors will be referred to hereinafter as petitioner.

In 1921, petitioner filed a consolidated income and profits tax return for the calendar year 1920 on behalf of itself and its affiliates, and included therein the income of Maine, Arizona, Mutual Refining, Northwestern, and itself, for the entire year, and set up and asserted the consolidated invested capital of all the companies as of January 1, 1920. The return disclosed a net tax liability of $200,707.45, which was paid by petitioner.

On April 30, 1921, Mutual Refining and Northwestern, without consideration therefor, transferred their assets to Arizona and dissolved. The value of these assets was sufficient in each instance to satisfy the liability for income and excess profits taxes which respondent contends existed against the transferors. On December 31, 1921, Arizona, also without consideration for the transfer, conveyed all its assets to petitioner and dissolved. The value thereof was sufficient to meet all tax liabilities of Arizona as well as those of Mutual Refining and Northwestern, should such liabilities exist.

The Commissioner of Internal Revenue, respondent herein, audited the consolidated return filed by petitioner for itself and its affiliates and determined that two separate corporate affiliations existed within the time covered by the return — one with Maine as parent and Arizona, Mutual Refining and Northwestern as subsidiaries for the period January 1, 1920 to March 15, 1920; the other with petitioner as parent and Maine and the other three as its subsidiaries for the period March 15 to December 31, 1920. Upon the theory that this required the filing of two consolidated returns instead of one, respondent determined deficiencies for the first period and asserted liability therefor against the petitioner as transferee, by the usual sixty-day letter.² In determining these deficiencies, which are the subject of this proceeding, respondent gave no credit thereon for the payment of $200,707.45, which was the amount of the tax shown to be due upon the consolidated return filed by petitioner for the year 1920. Respondent, however, issued a certificate of overassessment to the petitioner in the sum of $12,779.97 for the year, which certificate gave credit for the payment of taxes in the sum of $200,707.45.³

In computing the amount of the deficiencies, respondent fixed the invested capital of Maine and its subsidiaries at $3,192,636.27 as of January 1, 1920, and apportioned to the period January 1 to March 15, 1920, two and one-half twelfths thereof, i. e., $665,132.55. The accuracy of these figures is conceded although the method of apportionment is not. For the year 1920 the income of Arizona was $187,905.41; that of Northwestern, $420,977; and that of Mutual Refining, $403,672.45. Respondent apportioned to the period in question two and one-half twelfths thereof in the following amounts: $37,991.80 for Arizona; $85,115.57 for Northwestern; and $81,616.83 for Mutual Refining. Maine, however, suffered a loss of $8,255.02, and consequently, no transferee liability was asserted against petitioner in respect of that company.

The Revenue Act of 1918, 40 Stat. 1057, which is the applicable statute in this case, not merely permitted the filing of consolidated returns — as in the case of later Acts⁴ — but required that affiliated companies must file such returns.⁵

There is no question that two separate affiliations existed during the year 1920. During the period January 1 to March 15, there was an affiliation consisting of Maine, Arizona, Mutual Refining and Northwestern, of which Maine was the parent. After March 15 there was a new affiliation consisting of the four corporations named above, together with petitioner, of which the latter was the parent. Consequently, only by the filing of a consolidated return for each affiliation which existed during the year could the statute be complied with.⁶ The affiliation of which Maine was parent terminated on March 15, when petitioner took over control thereof;⁷ consequently, a return for the two and one-half months' period was properly required by the Commissioner. By so doing he was better able to comply with the requirement that he levy the tax according to the true net income and invested capital of the business enterprise involved in each case,⁸ for the reason that each affiliation constituted a different tax computing unit for the taxable year. The case of Sweets Co. of America v. Commissioner, 2 Cir., 40 F.2d 436, is distinguishable because, in that case, "* * * there was no period in which any two affiliates were in existence at the same time but unaffiliated. The business of all was thus strictly a unit throughout the year, though managed by successive companies."⁹ In the present case (1) all the five companies were in existence throughout the year; (2) the petitioner was in existence and was unaffiliated with the others during the two and one-half months' period in question; (3) the business of all was definitely not a unit throughout the year for tax computing purposes, or otherwise; (4) the petitioner was not organized during the year as a management company, and (5) was not taken into the previously existing affiliation for management purposes.

Moreover, American Paper Exports, Inc., v. Bowers, 2 Cir., 54 F.2d 508, although relied upon by petitioner, is not analogous to the present case. There an affiliation occurred during the taxable year; one of the two affiliated corporations had no prior existence; there was no prior or other affiliation; and a consolidated return was filed by the only affiliation which existed during the taxable year. Nevertheless, the court said: "A consolidated return is in any case required for so much of the year as the companies were affiliated. Authorities cited If both affiliates are in existence and active before affiliation, obviously, more than one return becomes therefore necessary, and so it has been held. Appeal of American La Dentelle, Inc., 1 B.T.A. 575; Appeal of Green River Distilling Co., 16 B.T.A. 396. At least for the period of its separate activity each must file a separate return." The necessity for separate returns is even more obvious in the present case, where each of two affiliations had a separate existence and each engaged in separate activities during the taxable year.

In Swift & Co. v. United States, Ct.Cl., 38 F.2d 365, and American-Hawaiian S. S. Co. v. United States, Ct.Cl., 46 F.2d 592, also relied upon by petitioner, the Court of Claims approved a Treasury regulation¹⁰ which provided that when an affiliation existed at the beginning of a year and additional corporations entered the affiliation during the year, "* * * the parent or principal corporation should file a consolidated return and include the income of such additional corporations from the date of change of stock ownership. * * * the subsidiary or subordinate corporation whose status is changed during the taxable year should make a separate return for that part of the taxable year during which it was outside the affiliated group." In the present case it was the parent which was changed. Each of the two affiliations had a separate parent — Maine in the one and petitioner in the other. It was the duty of the parent in each case to make a consolidated return for the affiliation of which it was parent, covering that portion of the taxable year during which the affiliation of which it was parent existed.

The error of petitioner's contention lies in the assumption that only one affiliation existed during the year; that petitioner merely became a new member of the existing affiliation; hence, that only a single consolidated return was necessary. Whatever may be the situation when a new subsidiary corporation is added to an existing affiliation, the parent remaining the same,¹¹ or when a new management corporation is created for the sole purpose of parenthood of an existing affiliation, without other change in the business unit,¹² it is certainly not true that the same affiliation existed here, where one going business unit, petitioner, acquired control of and took over another going business unit, the affiliation of which Maine was parent.

The situation of the present case is that...