Elec. Sensing Prods., Inc. v. Comm'r of Internal Revenue
| Decision Date | 22 November 1977 |
| Docket Number | Docket No. 5112-76. |
| Citation | 69 T.C. 276 |
| Parties | ELECTRONIC SENSING PRODUCTS, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner organized a wholly owned subsidiary (H) on Oct. 6, 1972, and another wholly owned subsidiary (D) on Feb. 15, 1973. Petitioner and H filed separate income tax returns for their respective taxable years ended Oct. 31, 1972 (Nov. 1, 1971, to Oct. 31, 1972, for petitioner and Oct. 6, 1972, to Oct. 31, 1972, for H). Petitioner and H and D filed a consolidated return for the taxable year ended Oct. 31, 1973, reflecting a net operating loss attributable to all three corporations. Because of losses incurred by petitioner for its taxable year ended Oct. 31, 1968, through its taxable year ended Oct. 31, 1971, the taxable year ended Oct. 31, 1972, is the only year to which the loss sustained in the taxable year ended Oct. 31, 1973, can be carried back. Held, under sec. 1.1502-79(a)(2), Income Tax Regs., that portion of the consolidated net operating loss for the taxable year ended Oct. 31, 1973, attributable to H cannot be offset against the income of petitioner for the taxable year ended Oct. 31, 1972, because H filed a separate return for that short taxable year Oct. 6, 1972, to Oct. 31, 1972. Rev. Rul. 64-93, 1964-1 C.B. (Part 1) 325, and Nibur Building Corp. v. Commissioner, 444 F.2d 1020 (7th Cir. 1971), revg. 54 T.C. 835 (1970), distinguished. Jules Silk, for the petitioner.
Howard W. Gordon, for the respondent.
The Commissioner determined a deficiency of $429,327 in the Federal corporation income tax of petitioner for the taxable year ended October 31, 1972. This matter is before this Court on a joint motion for partial summary judgment pursuant to Rule 121 of the Court's Rules of Practice and Procedure. The motion raises one issue for decision, whether the net operating loss of Homecraft Products, Inc. (a wholly owned subsidiary of petitioner, referred to hereafter as Homecraft), for the taxable year ended October 31, 1973, in which it filed a consolidated return with petitioner, can be carried back by petitioner and offset against the income of petitioner for the taxable year ended October 31, 1972, a year in which petitioner and Homecraft filed separate returns, under sec. 1502,1 I.R.C. 1954, and sec. 1.1502-79(a)(2), Income Tax Regs.
All of the facts have been stipulated and are incorporated by this reference. Petitioner is a corporation organized under the laws of Pennsylvania on November 17, 1967. Its principal place of business is Hatboro, Pa., and it is an active company engaged in the manufacture and sale of electronic equipment. During the taxable years in question, petitioner utilized a fiscal year ended October 31.
Homecraft Products, Inc., is a corporation organized on October 6, 1972, as a wholly owned subsidiary of petitioner. Homecraft has been a subsidiary of petitioner from the time of its inception to and including the taxable years in issue and has utilized a fiscal year ended October 31.
Homecraft Creative Decor Centers, Inc. (hereinafter referred to as Decor), is a corporation organized on February 15, 1973, by petitioner as a wholly owned subsidiary. It has been a subsidiary of petitioner from its inception. Decor has utilized a fiscal year ended October 31.
For the taxable years ended October 31, 1968, through the taxable year ended October 31, 1971, petitioner filed separate income tax returns and sustained net operating losses aggregating $284,117 which were carried forward to petitioner's taxable year ended October 31, 1972. Petitioner filed a separate return for the taxable year ended October 31, 1972, which reflected taxable income in the amount of $2,144,763, exclusive of net operating loss carryovers or carrybacks. Homecraft filed its initial return which was a separate return for the taxable year ended October 31, 1972, which reflected a net operating loss of $3,324.
Petitioner, together with its subsidiaries, Homecraft and Decor, filed a consolidated return for the taxable year ended October 31, 1973. The consolidated return reflected a net operating loss of $1,077,672. The loss attributable to each corporation was as follows: petitioner—-net operating loss of $584,747; Homecraft—-net operating loss of $451,456 ($3,324 for the taxable year ended October 31, 1972, and $448,132 for the taxable year ended October 31, 1973); Decor—-net operating loss of $41,469. The income tax returns for the periods here involved were timely filed. Homecraft and Decor each filed a Form 11222 with the consolidated return for the taxable year ended October 31, 1973.
On February 1, 1974, petitioner filed Form 1139 (Corporation Application for Tentative Refund from Carryback of Net Operating Loss) wherein petitioner claimed as a deduction for its separate return year for the taxable year ended October 31, 1972, the net operating loss from the taxable year ended October 31, 1973. The claim was allowed and a refund of $696,131 was paid to petitioner.
The Commissioner, in his statutory notice of deficiency, allowed and disallowed the following deductions, resulting in a net deduction of $554,155:
+-----------------------------------------------------------------------------+
¦R and D costs ¦$30,293 ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦Professional fees ¦1,000 ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦Salaries ¦13,816 ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦Payroll taxes ¦1,000 ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦R and D costs ¦17,397 ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦R and D costs ¦(6,643) ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦State income taxes ¦(20,802) ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦State franchise taxes ¦36,000 ¦$72,601 ¦
+-------------------------------------------------------+-----------+---------¦
¦Net operating loss for the taxable year ended 10/31/73 ¦(1,077,672)¦ ¦
¦as corrected ¦ ¦ ¦
+-------------------------------------------------------+-----------+---------¦
¦Net operating loss attributable to Homecraft ¦451,456 ¦(626,216)¦
+-------------------------------------------------------+-----------+---------¦
¦Agreed adjustments ¦ ¦554,155 ¦
+-----------------------------------------------------------------------------+
As a result of the Form 1139 filed by petitioners, the Commissioner made two determinations: (1) That the consolidated net operating losses attributable to petitioner and Decor amounting to $584,747 and $41,469, respectively, or $626,216, are allowable as a net operating loss deduction in the taxable year ended October 31, 1972, a separate return year of petitioner; and (2) that $451,456 ($1,077,672 less $626,216) of the consolidated loss is attributable to Homecraft, which was in existence and filed a separate return for the period ended October 31, 1972, and is not allowable as a net operating loss carryback to the separate return year of petitioner ended October 31, 1972, under the provisions of section 1.1502-79(a)(2), Income Tax Regs.
The issue for our decision is whether section 1.1502-79 (a)(2), Income Tax Regs., allows petitioner to carry back and apply against its separate return income for the taxable year ended October 31, 1972, the net operating loss of Homecraft for the taxable year ended October 31, 1973. Section 1.1502-79(a)(2), Income Tax Regs., provides:
(2) Nonapportionment to certain members not in existence. Notwithstanding subparagraph (1) of this paragraph, the portion of a consolidated net operating loss attributable to a member shall not be apportioned to a prior separate return year for which such member was not in existence and shall be included in the consolidated net operating loss carrybacks to the equivalent consolidated return year of the group (or, if such equivalent year is a separate return year, then to such separate return year), provided that such member was a member of the group immediately after its organization.
Petitioner argues that under the provisions of section 172(b) a net operating loss is carried back to the third prior taxable year of the taxpayer, and then if any of the loss remains, it is carried back to the second prior taxable year, and if any loss still remains, to the first prior taxable year. Petitioner concedes that the first prior taxable year of Homecraft ended October 31, 1972. Petitioner further argues that because Homecraft was not in existence for either the third prior taxable year or the second prior taxable year, its attributed net operating losses for the taxable year ended October 31, 1973, should be included in the consolidated net operating loss carrybacks of the equivalent consolidated return year of the group or, if such equivalent year is a separate return year, then to such separate return year (i.e., petitioner's separate return year ended October 31, 1972). Petitioner had net operating losses for the taxable years ended October 31, 1968, through the taxable year ended October 31, 1971. Because the net operating losses attributable to Homecraft cannot be utilized for petitioner's taxable year 1971 and prior years, petitioner argues...
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