Fire Companies Bldg. Corp. v. Commissioner of Int. Rev., 117.

• Decision Date: 14 December 1931
• Docket Number: No. 117.,117.
• Citation: 54 F.2d 488
• Parties: FIRE COMPANIES BUILDING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

54 F.2d 488 (1931)

FIRE COMPANIES BUILDING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.

No. 117.

Circuit Court of Appeals, Second Circuit.

December 14, 1931.

James L. Fort and Bloodworth & Fort, all of Washington, D. C., for appellant.

G. A. Youngquist, Asst. Atty. Gen., and John H. McEvers and Sewall Key, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and J. W. Edwards and P. S. Crewe, Sp. Attys., Bureau of Internal Revenue, all of Washington, D. C., of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

L. HAND, Circuit Judge.

The only question raised by this appeal is whether the Commissioner should have accepted a consolidated return of the appellant for the year 1926, which included not only its own income, but that of two subsidiaries. He refused to do so and assessed the appellant on its separate income; the Board affirmed the ruling on the taxpayer's appeal and this appeal is from the Board's decision. The appellant's business is to manage its real estate and to invest and dispose of the income arising from its assets, among which are all the shares of the American Eagle Investment Company, which in turn owns all but a few shares of the American Eagle Fire Insurance Company, a corporation doing a fire insurance business, as its name implies. If an insurance company may become affiliated with a holding company under section 240 (a) of the Act of 1926 (26 USCA § 993), all conditions of affiliation existed, and the Commissioner and the Board were wrong. The appellant had filed a consolidated return for each year from 1917 to 1925 inclusive which the Commissioner had accepted. In 1930 he changed his interpretation of the statute and assessed a deficiency for the year 1926. It is agreed that the income of the appellant and the American Eagle Investment Company should be consolidated; the question is only whether that of the fire insurance company may be included.

The regulations under the Act of 1926 did not make any distinction between insurance companies and others as to affiliation, and in May, 1927, the solicitor of the Tax Bureau ruled that the consolidated income should be taxed at the higher rate, 13½% in 1926, instead of 12½%, which was applicable to insurance companies. This ruling presupposed that there might be a consolidation, but in January, 1929, it was overruled, and the tax at bar assessed accordingly. By the Act of 1928, Congress had meanwhile provided that insurance companies should not so affiliate (section 141(e), 26 USCA § 2141(e), but that section went into effect only on January 1, 1929, and section 142 (26 USCA § 2142) substantially reenacted section 240(a) of 1926 (26 USCA § 993) for the year 1928.

There appear to us insuperable obstacles to construing section 240(a) as permitting the consolidation of the incomes of an insurance company and any other, certainly after the Act of 1926 went into effect. Affiliation does not merge the taxpayers; they remain as before, and their incomes are consolidated only for purposes of appraisal; the tax is levied upon the affiliates individually. Swift & Co. v. U. S., 38 F.(2d) 365, 374 (Ct. Cl.); Sweets Co. v. Commissioner, 40 F.(2d) 436, 438 (C. C. A. 2). Before the Act of 1926, and while the rates for insurance companies were the same as for other corporations, such affiliation was perhaps possible, though even then the deductions allowable to each affiliate were different and the result really perverted the purpose of the statute. First National Bank v. U. S., 283 U. S. 142, 51 S. Ct. 378, 75 L. Ed. 913. But we are dealing with 1926, after which the rates were different, and it is impossible at once to consolidate the incomes and to find any rate at which to tax the resultant, which is neither the income of an insurance company, nor of an ordinary corporation, but a hotch-pot of the items and cross items of each. To tax it at...