Helvering v. Morgan

• Decision Date: 05 November 1934
• Docket Number: No. 12,12
• Citation: 55 S.Ct. 60,79 L.Ed. 232,293 U.S. 121
• Parties: HELVERING, Com'r of Internal Revenue, v. MORGAN'S Inc., et al
• Court: U.S. Supreme Court

293 U.S. 121

55 S.Ct. 60

79 L.Ed. 232

HELVERING, Com'r of Internal Revenue,

v MORGAN'S Inc., et al.

No. 12.

Argued Oct. 11, 12, 1934.

Decided Nov. 5, 1934.

The Attorney General and Mr. H. Brian Holland, of Philadelphia, Pa., for petitioner.

Messrs. Lawrence E. Green and Haskell Cohn, both of Boston, Mass., for respondents.

Mr. Justice STONE delivered the opinion of the Court.

This petition for certiorari, 292 U.S. 618, 54 S.Ct. 717, 78 L.Ed. 1475, presents for determination the single question, whether the two separate periods in 1925, for which the taxpayer made separate income tax returns, constitute two 'taxable years' within the meaning of section 206 of the Revenue Act of 1926, c. 27, 44 Stat. 9, 17 (26 USCA § 937), which permits the taxpayer suffering a net loss in any taxable year to deduct it from taxable gains in the two succeeding taxable years.

On June 1, 1925, respondent Morgan's, Incorporated, acquired all the voting stock of respondent Haines Furniture Company. Later, and in due course, in compliance with section 240(a) of the act (26 USCA § 993(a), and article 634 of Treasury Regulations 69, the Haines Company filed its separate income tax return for the first five months of 1925 preceding the affiliation and the two affiliated corporations filed a consolidated return for the last seven months of the year and for the calendar years 1926 and 1927. During the seven months' period of 1925, and in 1926 and 1927, Morgan's, Incorporated, reported net income. In the first five and the last seven months of 1925, and in 1926, the Haines Company suffered net losses. In 1927 it made a net profit. Its net loss in the first five months of 1925, before affiliation, was shown in its separate return for that period. Its net losses for the last seven months of 1925 and for the year 1926 were shown in the consolidated returns of the two corporations for those periods and were deducted from the net income of Morgan's, Incorporated, in the returns for each of these periods. In the consolidated return for 1927, the Haines Company brought forward its loss for the first five months of 1925 and deducted it from its net income for 1927, under the provisions of section 206(b) of the act (26 USCA § 937(b). The Commissioner disallowed this deduction, and determined a corresponding deficiency for the taxable year 1927. The order of the Board of Tax Appeals sustaining his action, was set aside by the Court of Appeals for the First Circuit. 68 F.(2d) 325. Like rulings have been made by the Courts of Appeals in other circuits. Arnold Constable Corporation v. Commissioner of Internal Revenue, 69 F.(2d) 788 (C.C.A.2d); Crossett Western Co. v. Commissioner, 73 F. (2d) 307 (C.C.A.3d); Joseph & Feiss Co. v. Commissioner, 70 F.(2d) 804 (C.C.A.6th). A different conclusion was reached in Wishnich-Tumpeer, Inc., v. Commissioner, 77 F.(2d) 774, decided March 12, 1934, by the Court of Appeals of the District of Columbia, under the Revenue Act of 1928 (26 USCA § 2001 et seq.), applied in circumstances and under regulations not involved in the present case.

Section 206(b) permits the taxpayer to carry forward a net loss sustained 'for any taxable year' and to deduct it from 'net income of the taxpayer for the succeeding taxable year.' If the net loss to be deducted is in excess of the net income for that year, he is permitted to deduct the excess from 'the net income for the next succeed- ing taxable year,' referred to in the section as the 'third year.' In all cases the deduction is to be made under regulations made by the Commissioner.

It is plain that under this section the Haines Company, had it not taken advantage of the statutory provision authorizing consolidated returns, would have been permitted to carry over its net loss of 1925 for the next two succeeding years, and as it made no profit in 1926 its entire net loss for 1925 could have been deducted from its profit in 1927. But the government contends that the taxpayer has forfeited that privilege by making a return for the first five months of 1925, as it was required to do in order to avail itself of the privilege of making consolidated returns after the date of affiliation. It is said that the two periods in 1925, for which separate returns were made, are two separate taxable years within the meaning of the tax act, so that the 'third year' within which section 206 permits the deduction is, in this case, the year 1926. This construction is required, it is urged, by the definition of 'taxable year' in section 200(a), which reads: '(a) 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 212 or 232 (section 953 or 984 of this title). The term 'fiscal year' means an accounting period of twelve months ending on the last day of any month other than December. The term 'taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the commissioner with the approval of the Secretary, the period for which such return is made. The first taxable year, to be called the taxable year 1925, shall be the calendar year 1925 or any fiscal year ending during the calendar year 1925.' U.S.C., title 26, § 931(a), 26 USCA § 931(a).

The provision that the term 'taxable year' 'includes' the period of less than twelve months for which a separate return is made. when read only with its imme- diate context, is not free from ambiguity. It may be admitted that the term 'includes' may sometimes be taken as synonymous with 'means,' and the subsection may be taken to require, as the Government contends, that a fractional part of a normal taxable year of twelve months for which a return is made shall be treated, for all purposes, as a separate taxable year.

But the phraseology is also open to the construction that the word 'includes' is used as the equivalent of 'comprehends' or 'embraces,' and that by it the section merely adopts a familiar device in aid of statutory construction, by providing that wherever other sections refer to a 'taxable year' that phrase may, if the context requires, be taken also to refer to or to 'include' a fractional part of that taxable year, for which a separate return is made.¹ If the language is so construed and ap- plied here, 'the loss sustained for any taxable year,' which section 206 permits to be carried forward, would include the loss sustained for the first five months of the taxable year for which the separate return was made, and that loss, as well as any other loss separately reported for the remaining part of the taxable year, not otherwise absorbed, could be carried forward to the taxpayer's next two succeeding taxable years, here the calendar years of 1926 and 1927. This construction finds support in the final sentence of the subsection which declares that the 'first taxable year,' which by definition 'includes' a fractional part of the year, 'shall be the calendar year 1925 or any fiscal year ending during the calendar year 1925.' Obviously the first five months of 1925 could not be the calendar year 1925. But a return made for those months, a fractional part of the year, might be treated, within the meaning of the section, as a return for the calendar year of which they are a part. It plainly is not contemplated that the five months are to be treated as a taxable year different from the calendar year.

But the true meaning of a single section of a statute in a setting as complex as that of the revenue acts, however precise its language, cannot be ascertained if it be considered apart from related sections, or if the mind be isolated from the history of the income tax legislation of which it is an integral part. See Helvering v. New York Trust Co., 292 U.S. 455, 464, 54 S.Ct. 806, 78 L.Ed. 1361. The revenue acts since the Sixteenth Amendment have consistently assessed income taxes on the basis of annual accounting periods, either the calendar year or the different fiscal year which the taxpayer may adopt. From the beginning these periods have been known as taxable years and the provisions of the taxing statutes have been drafted and enacted with primary reference to such normal accounting periods. Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363, 51 S.Ct. 150, 75 L.Ed. 383; Woolford Realty Co., Inc., v. Rose, 286 U.S. 319 326, 52 S.Ct. 568, 76 L.Ed. 1128. The statutes since 1917, and related regulations, have uniformly required the taxpayers' returns to be made on the basis of the twelve months' accounting period shown by the taxpayer's books, whether it be the calendar year or a different fiscal year. The change of this period by the taxpayer from the calendar to a different fiscal year or the reverse, has been permitted only on consent of the Commissioner and upon compliance with appropriate regulations. These dominating features of income tax legislation were incorporated in the 1926 Act by sections 212, 232 (26 USCA §§ 953, 984), to which section 200(a) expressly refers.

The definition of 'taxable year' in section 200(a) is therefore incomplete unless it be understood that the period for which a return is made, whether it be for a year or a fractional part of it, is to be related to the twelve months' accounting period of the taxpayer. Where the return is for a period of less than twelve months, the year of which it is a fractional part is the annual accounting period of the taxpayer, which is his taxable year. Here the taxpayers' taxable year, both before and after the year of affiliation, was the calendar year. After affiliation, as before, the affiliated corporations, although filing consolidated returns, continued to be separate taxable units. The consolidated returns operated only to unite them for the purpose of tax computation and the equitable apportionment between them of the tax thus computed. See Woolford Realty Co., Inc., v....