Dempster Mill Mfg. Co. v. Burnet, 5044.

• Decision Date: 06 January 1931
• Docket Number: No. 5044.,5044.
• Parties: DEMPSTER MILL MFG. CO. v. BURNET, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

60 App. DC 23, 46 F.2d 604 (1931)

DEMPSTER MILL MFG. CO. v. BURNET, Commissioner of Internal Revenue.

No. 5044.

Court of Appeals of District of Columbia.

Argued November 4, 1930.

Decided January 6, 1931.

Louis B. Montfort, of Washington, D. C., for appellant.

Sewall Key, C. M. Charest, J. Louis Monarch, and A. G. Divet, all of Washington, D. C., for appellee.

Before MARTIN, Chief Justice, and ROBB and VAN ORSDEL, Associate Justices.

VAN ORSDEL, Associate Justice.

This appeal is from the decision of the United States Board of Tax Appeals denying appellant certain deductions from its income tax return for the year 1920.

Appellant, a corporation, in 1894 purchased a business at Florence, Ala., which was engaged in the manufacture of wooden pumps and porch columns from yellow poplar lumber. For about ten years this business was conducted profitably as a branch of appellant corporation. By 1904 or 1905 the investment had reached $135,000. At that time the business was incorporated under the name of the Florence Pump & Lumber Company, as a subsidiary of the appellant corporation. In 1915 the name of the corporation was changed to the Florence Table & Lumber Company. At the time of incorporation, appellant transferred the assets of the business located at Florence, Ala., to the new subsidiary corporation for the sum of $135,000 of preferred stock, which represented the outstanding capital at that time. On March 1, 1913, appellant held $133,700 of the stock of the subsidiary; the balance being owned by one of the company's managers. At the time of the liquidation of the subsidiary corporation, on August 1, 1920, appellant company owned the entire stock of the subsidiary.

About 1905 the supply of yellow poplar in the vicinity of Florence, Ala., became depleted and it was determined to remove the plant to Memphis, Tenn., where it was thought that available lumber could be procured for the manufacture of pumps and porch columns. A large plant was established at Memphis, covering about 15 acres of land, with buildings, water system, and manufacturing plants, together with about 90 houses for the accommodation of employees. On August 1, 1920, the subsidiary was indebted to appellant corporation in the sum of $250,656.87, arising from advances made by appellant to the subsidiary.

It appears that up to 1913 the advances were made, according to the testimony of the president of the appellant corporation, for experimental purposes in attempting to solve the problem of successfully manufacturing the lumber in and about Memphis. Whether the advances were made for experimental purposes between 1913 and 1917, when the companies became affiliated, does not clearly appear. From 1917 to 1920, the business of the subsidiary corporation was affiliated with the appellant corporation, and the amounts advanced during those years were deducted in the returns of the appellant company for taxation; hence the present inquiry concerns only the amounts advanced by appellant up to 1917.

At the time of the liquidation of the subsidiary corporation in August and September, 1920, the appellant corporation acquired and assumed the assets and liabilities of the subsidiary at a net valuation of $183,302.85. This, deducted from the amount advanced by the appellant of $250,656.87, left a balance of $67,354.02, which appellant sought to deduct in its return for 1920. It also deducted as a loss the sum of $135,000, representing its investment in the stock of the subsidiary.

It was found by the Board that from 1909 to 1917 the appellant and the subsidiary filed separate reports, and appellant did not secure any benefit of any deduction on account of the operating losses of the subsidiary. As above indicated, for the years ending November 30, 1918 and 1919, consolidated returns were filed, and appellant was given the benefit of the subsidiary's operating loss.

The Board, in deciding that appellant was not entitled to the deductions claimed, said, "The evidence does not establish a loss. Before a deduction can be taken for loss in respect of property acquired prior to March 1, 1913, the basis of loss must be established, and such basis is the lower of the figures of the value of the asset on ...