National Securities Corp. v. Com'r of Internal Revenue
| Decision Date | 28 July 1943 |
| Docket Number | No. 8172.,8172. |
| Citation | 137 F.2d 600 |
| Parties | NATIONAL SECURITIES CORPORATION v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Third Circuit |
H. Cecil Kilpatrick, of Washington, D. C. (William H. Harding, of New York City, and Mills & Kilpatrick, of Washington, D. C., on the brief), for petitioner.
Newton K. Fox, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, and Helen R. Carloss, Sp. Assts. to the Atty. Gen., on the brief), for respondent.
Before BIGGS, MARIS, and GOODRICH, Circuit Judges.
The petitioner, National Securities Corporation, is the successor of the taxpayer, American Gas & Electric Securities Corporation, and is liable by reason of its merger with the taxpayer for all obligations of the latter, including federal income taxes. During its entire existence the taxpayer was a wholly owned subsidiary of American Equitable Assurance Company of New York. The taxpayer's income and expenses were recorded in separate books of account kept by it and its accounts were not commingled with those of the parent. In August and September, 1929 the parent purchased as an investment 1,000 shares of the common stock of Standard Gas and Electric Company at a cost of $140,378.06. By 1933 the parent's purchases of Standard stock had increased to a total of 3,500 shares, at a cost of $418,780.19. During 1935 reorganization of Standard was commenced under Section 77B of the Bankruptcy Act. 11 U.S.C.A. § 207. At the close of that year the Standard stock, for which the parent had paid an average of approximately $120 per share, had decreased in value to $6.25 per share. In January, 1936 the parent sold 2,500 shares of Standard stock in the open market at prices ranging from $7.75 to $9.125 per share. On February 13, 1936 the parent delivered its remaining 1,000 shares of Standard to the taxpayer in exchange for the latter's capital stock having a stated value of $10 per share and a market value of more than $92 per share. These shares on the date when delivered to the taxpayer had a market value of $8,562.50. On December 11, 1936 the taxpayer sold the Standard stock for $7,175.00. The proceeds of the sale were received and kept by the taxpayer. In its income tax return for 1936 the taxpayer claimed as a deductible loss $133,203.06 representing the difference between the cost of the 1,000 shares to the parent ($140,378.06) and the amount for which the taxpayer sold them ($7,175.00.)
The Commissioner disallowed in its entirety the deduction claimed by the taxpayer and assessed a deficiency. At the hearing before the Board of Tax Appeals, however, he conceded that the taxpayer was entitled to that part of the claimed deduction which represented the difference between $8,562.50, the fair market value of the Standard shares when acquired by the taxpayer, and $7,175.00, the amount for which the taxpayer sold them, or $1,387.50. The Board of Tax Appeals sustained the Commissioner's action as thus modified. 1942, 46 B.T.A. 562.
The Commissioner disallowed the loss upon authority of Section 45 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, p. 840, which provides: "In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, of businesses."
The taxpayer's first contention is that since Section 45 is a general statute dealing with the allocation of gross income and deductions it cannot be controlling here because Congress has specifically provided by Sections 112(b) (5) and 113(a) (8) of the same revenue act1 that a corporation, which has acquired property from its controlling stockholder and which sells that property for an amount less than the original cost of the property to its stockholder, may deduct the difference as a loss in computing its own net income for the year of the sale.
We think, however, that the petitioner misconceives the distinct functions of these provisions of the statute. Sections 112 and 113 were intended to regulate the time when certain gains or losses are to be recognized for tax purposes and the cost bases to be used in determining the amounts of such gains or losses. It is true that they likewise lay down a general rule to determine which taxpayer shall take such gains or losses into account. These sections were followed in the present case by the Commissioner when he determined that no loss should be recognized upon the transfer of the Standard shares by the parent to the taxpayer and that the loss sustained by the taxpayer upon the later sale of these shares should be measured by their original cost to the parent.
Section 45 on the other hand is addressed to the wholly different problem of providing a more appropriate manner of allocating income and deductions when the application of the general rules of the statute will not clearly reflect the true income. To understand this we must go back to the provisions of Section 240 of the Revenue Act of 1926, 26 U.S.C.A. Int.Rev. Acts, page 191. That section authorized affiliated corporations to file consolidated returns. Subsection (f) of Section 240 authorized the Commissioner "In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests" to consolidate the accounts of such related trades or businesses "if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses." The Revenue Act of 1928 entirely eliminated the right of affiliated corporations to file consolidated returns and the provisions of Section 240 of the 1926 Act accordingly do not appear in the 1928 Act. In lieu of them Congress inserted the provisions of Section 45, 26 U.S.C.A. Int.Rev.Acts, page 364, which as the report of the Ways and Means Committee2 of the House of Representatives pointed out were based upon Subsection (f) of Section 240 of the 1926 Act, "broadened considerably in order to afford adequate protection to the Government made necessary by the elimination of the consolidated return provisions of the 1926 Act."
It has not been suggested that Sections 203 and 204 of the 1926 Act, 26 U.S. C.A. Int.Rev.Acts, pages 148, 151 (the precursors of Sections 112 and 113) were inconsistent with Section 240 so as to prevent a corporation in the situation of the present taxpayer from joining with its parent in filing a consolidated return. We see no greater inconsistency between Section 45 and Sections 112 and 113. Section 45 is directed to the correction of particular situations in which the strict application of the other provisions of the act will result in a distortion of the income of affiliated organizations. In every case in which the section is applied its application will necessarily result in an apparent conflict with the literal requirements of some other provision of the act. If this were not so Section 45 would be wholly superfluous. We accordingly conclude that the application of Section 45 may not be denied because it appears to run afoul of the literal provisions of Sections 112(b) (5) and 113(a) (8) if the Commissioner's action in allocating under the provisions of Section 45 the loss involved in this case was a proper exercise of the discretion conferred...
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