Hernandez v. Charles Ilfeld Co., 787.

• Decision Date: 10 October 1933
• Docket Number: No. 787.,787.
• Citation: 67 F.2d 236
• Parties: HERNANDEZ, Collector of Internal Revenue, v. CHARLES ILFELD CO.
• Court: U.S. Court of Appeals — Tenth Circuit

67 F.2d 236 (1933)

HERNANDEZ, Collector of Internal Revenue, v. CHARLES ILFELD CO.

No. 787.

Circuit Court of Appeals, Tenth Circuit.

October 10, 1933.

Wm. J. Barker, U. S. Atty., of Santa Fé, N. M., and E. Barrett Prettyman, Gen. Counsel, Bureau of Internal Revenue, and D. A. Taylor and Warren W. Cole, Sp. Attys., Bu reau of Internal Revenue, all of Washington, D. C., for appellant.

A. T. Hannett, of Albuquerque, N. M., for appellee.

John G. Buchanan, Paul G. Rodewald, David B. Buerger, and Smith, Buchanan, Scott & Gordon, all of Pittsburgh, Pa., and Robert H. Montgomery, of New York City, amici curiæ.

Before LEWIS and McDERMOTT, Circuit Judges, and POLLOCK, District Judge.

McDERMOTT, Circuit Judge.

In an involved and somewhat confusing petition for rehearing, appellee asserts that it is entitled to a double deduction for the losses of its subsidiaries because of regulations which were not set out in either brief or discussed in written or oral argument, and the court is chided for "ignoring" such regulations. Counsel for other litigants have volunteered to act as friends of the court, all asserting the legal right to deduct losses a second time, and reminding us that if there is a crevice in the dike by which the actual income of affiliated corporations escapes taxation, it is not the function of the judiciary to stop the leak. This widespread and acute interest indicates that the crevice is not of insignificant dimension.

But in all this welter of briefs, no one has suggested any reason why a double credit for the same loss should be allowed, except the inept analogy that an individual stockholder is entitled to his capital loss on sale of his stock without diminution for corporate losses, — an analogy which overlooks the controlling circumstance that the individual's personal tax was not reduced through the years by the losses of his corporation. Counsel for appellee and amici curiæ take the bald position that, right or wrong, the Treasury Department has so enacted.

Counsel on both sides agree that the case is ruled by Tr. Reg. 75, issued pursuant to section 141 (b) of the Revenue Act of 1928, 26 USCA § 2141 (b). We therefore assume, without deciding, that Congress may delegate to the Commissioner the power to legislate and to contract on the troublesome problem of affiliated corporations. An examination of these technical regulations serves to strengthen our conclusion that the Treasury Department intended that losses actually realized from the operation and dissolution of a subsidiary should be deducted once, but not twice, from the income of the parent. Whether, as a matter of accounting, it was intended that such losses or gains should be treated as occurring within or without the consolidated return period is not so clear. The same honest and wholesome result is achieved by either method; the point becomes important only in light of appellee's contention that if the loss is treated as occurring after the consolidated period, it may be taken a second time.

Section 37 (a), Tr. Reg. 75, provides that neither gain nor loss shall be recognized upon a distribution in cancellation of stock made during a consolidated return period. Section 37 (b) provides that a distribution made after such period shall be treated as a sale of stock and adjustments made as provided in Articles 34, 35, and 36. The controversy presented to the court upon the first hearing centered about the question of which of these sections governed. Arguendo, we said that the affiliation was terminated by a liquidating sale of the assets of a subsidiary to an outsider accompanied, as a part of the same transaction, by a distribution of the proceeds. The decision however was distinctly predicated upon the point that whenever it was considered as occurring, a taxable gain or loss resulted.

Counsel for appellee, upon the assumption that we held that section 37 (b) was applicable, now directs our attention to 34 (c) (2) of the Regulations, which provides for a deduction from the aggregate bases of the stock as determined by 34 (c) (1) the aggregate of the losses sustained during each of the consolidated return periods "(including only the taxable year 1929 and subsequent taxable years)." The argument is made that the Commissioner thereby is forbidden to take into account losses prior to 1929. That is to say, counsel contend that operating losses prior to 1929 may be twice deducted by a taxpayer exercising the option given by section 141 (a) of the Revenue Act of 1928, 26 USCA § 2141 (a) — an unjust and anomalous result not lightly to be imputed to the Treasury Department, and the mischiefs of which are sufficient to "tip the scales when arguments are nicely balanced," to borrow the forceful language of Justice Cardozo in Woolford Realty Co. v. Rose, 286 U. S. 319, 52 S. Ct. 568, 570, 76 L. Ed. 1128.

But even upon appellee's assumption, the flaw in its case is that section 34 (e) (2) does not stand alone; it is a part of a section providing for an intricate determination and adjustment of the shares of stock of a...