Olivier Company v. Patterson

• Decision Date: 20 May 1957
• Docket Number: Civ. A. No. 8037.
• Citation: 151 F. Supp. 709
• Parties: OLIVIER COMPANY, a Corporation, Plaintiff, v. George D. PATTERSON, Director of Internal Revenue of the District of Alabama, Defendant. United States of America, Intervenor.
• Court: U.S. District Court — Northern District of Alabama

151 F. Supp. 709

OLIVIER COMPANY, a Corporation, Plaintiff, v. George D. PATTERSON, Director of Internal Revenue of the District of Alabama, Defendant United States of America, Intervenor.

Civ. A. No. 8037.

United States District Court N. D. Alabama, S. D.

May 20, 1957.

D. H. Markstein, Jr., Birmingham, Ala., Louis F. Oberdorfer, W. R. Perlik, Cox, Langford, Stoddard & Cutler, Washington, D. C., and, Oberdorfer & Oberdorfer, Birmingham, Ala., for plaintiff.

William L. Longshore, U. S. Atty., and Atley A. Kitchings, Jr., Asst. U. S. Atty., Birmingham, Ala., and Andrew F. Oehmann and Charles Mehaffey, Attys., Dept. of Justice, Washington, D. C., for defendants.

LYNNE, Chief Judge.

This is an action for the recovery of income and excess profit taxes for the fiscal years ending March 31, 1954 and 1955, brought by Olivier Company, Inc., a New York corporation (hereinafter referred to as Olivier). This cause has been submitted upon a stipulation of facts agreed to by the parties. On March 2, 1953, Olivier became affiliated with C. I. Whitten Transfer Company, a West Virginia corporation (hereinafter referred to as Whitten) through the acquisition by Olivier of all the outstanding capital stock of Whitten. Olivier filed its federal income tax returns on the basis of fiscal years ending March 31. Whitten previously filed its federal income tax returns on a calendar year basis.

Consolidated federal tax returns were filed by Olivier and Whitten for the fiscal years ended March 31, 1953, 1954 and 1955, the last two being filed in the State of Alabama and the first being filed in the State of New York.

Whitten filed Form 1122 "Return of Information and Authorization and Consent of Subsidiary Corporation" included in a United States consolidated income tax return for the period it was affiliated with Olivier during the taxable year ended March 31, 1953. This consolidated return included the income and expenses of Olivier for the twelve-month period ended March 31, 1953, and the income and expenses of Whitten for the twenty-nine day period, March 2, 1953, through March 31, 1953. In this consolidated return Olivier claimed a net operating loss deduction of $465,067.50 sustained after April 1, 1952, but before March 2, 1953.

For fiscal year ending March 31, 1954, Olivier filed a federal tax return showing tax liability of $179,970.23 on taxable income of $295,584.94 and herein claims the full amount of this tax as a refund.

For fiscal year ending March 31, 1955, Olivier filed a return showing tax liability of $130,914.84 on taxable income of $252,620.27 and herein claims a refund for this year in the amount of $97,425.52.

Defendant has proposed a deficiency of $29,980.27 for the fiscal year ended March 31, 1953, and $4,459.32 for fiscal year ended March 31, 1954.

The single issue in this case is whether Olivier has a right to carry forward to its fiscal years ending March 31, 1953, 1954, and 1955 its net operating loss sustained prior to March 2, 1953, but after April 1, 1952, and offset said loss against the income of Whitten earned after March 2, 1953, the date of affiliation.

This issue is controlled by the applicable provisions of Section 141 of the Internal Revenue Code of 1939, 26 U.S. C.A. § 141, which provides as follows:

"§ 141. Consolidated returns.

"(a) Privilege to file consolidated returns. An affiliated group of corporation shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all corporations which at any time during the taxable year have been members of the affiliated group consent to all the consolidated return regulations prescribed under subsection (b) prior to the last day prescribed by law for the filing of such return. The making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year, the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.

"(b) Regulations. The Secretary shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income-and excess-profits-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability."

Treasury Regulations 129, promulgated under this code section, provide as follows:

"Sec. 24-31. Bases of tax computation.

"(b) Computations. In the case of affiliated corporations which make, or are required to make, a consolidated return, and except as otherwise provided in these regulations—

"(1) Net income. The net income of each corporation shall be computed in accordance with the provisions covering the determination of net income of separate corporations, except—

* * * * * *

"(vi) In the computation of the net income of a corporation for the taxable year in which it became the common parent corporation of the affiliated group filing a consolidated return, the aggregate deductions of such corporation for such year otherwise allowable in excess of the gross income of such corporation for such year shall be excluded to the extent that such excess is attributable to that portion of such year preceding the date upon which such corporation became the common parent corporation of the group. Any amount excluded under this subdivision shall, to the extent that it constitutes a net operating loss within the provisions of section 122 or a net capital loss within the provisions of section 122 or a net capital loss within the provisions of section 117, be considered as a net operating loss or a net capital loss, as the case may be, separately sustained by such corporation and subject to the provisions of (a) (3) (ii) or (a) (9) (ii) of this section; * * *."

Olivier in substance complains that said regulations are invalid for that they do not allow the pre-affiliation loss of Olivier to be offset and carried forward against the post-affiliation income of Whitten.

In asserting this contention Olivier charges that the long established integrity of the annual accounting period as a basis for the result of tax liability has been violated and that said regulations include Olivier's pre-affiliation income as group income, but exclude Olivier's pre-affiliation loss as group loss. Olivier further states that the heart of its claim rests upon a "cardinal principle" of taxation, "the pragmatic concept of annual accounting", the recognized and settled principle that the federal income tax system is based on an annual accounting. The defendant does not take issue with the principle of annual accounting, but merely states that said principle is not involved in, or violated by, said regulations.

The courts have uniformly held that the act of affiliation or disaffiliation so as to create a short taxable year for the subsidiary does not create a new taxable year for the subsidiary insofar as the carry forward or carry-back of a net operating loss is concerned, and that in the computation of said loss the annual accounting period of each affiliated corporation should be maintained, as each corporation is a separate taxpayer notwithstanding affiliation.¹

There is no merit in the contention of plaintiff that the principle of annual accounting has been violated, and the cases upon which it relies lend it neither support nor comfort insofar as the issue involved in this case is concerned.

All contentions of Olivier seem to be fully answered by Trinco v. Commissioner, 1954, 22 T.C. 959. In that case Trinco filed separate returns for the fiscal years ending June 30, 1948, and 1949. On November 17, 1949, within its fiscal year ending June 30, 1950, Trinco acquired the stock of Minute Mop Corporation. In the consolidated return for fiscal year ended June 30, 1950, net losses were claimed for Trinco of $11,347.99 and for Minute Mop of $13,259.93. Trinco claimed a net operating loss carry-back for fiscal year 1948, in which it filed a separate return, of the Minute Mop loss of $13,259.93 sustained in fiscal year ending June 30, 1950. The court disallowed this carry-back, and stated:

"The petitioner's principal contention is that it is entitled to carry back to its taxable year ending June 30, 1948, and apply against its income for that year not only the loss which it sustained for the taxable year ending June 30, 1950, but also the loss sustained for the taxable year ending June 30, 1950, by its subsidiary, the Minute Mop Factory (Canada), Limited. We think that the deduction thus claimed on account of the loss sustained by the subsidiary is not allowable under the statute and applicable regulations. The problem is one that does not come to us without guidance from prior decisions.

"Section 23(s) of the Internal Revenue Code 26 U.S.C.A. § 23(s) provides for the deduction of the net operating loss computed under section 122, which defines a net operating loss as well as the carry-back and the carry over to which the `taxpayer' is entitled with respect to such loss. Under our tax laws each corporation is a separate taxpayer notwithstanding the relationship of parent and subsidiary. National Carbide Corp. v. Commissioner, 336 U.S. 422 69 S.Ct. 726, 93 L.Ed. 779; Interstate Transit Lines v. Commissioner, 319 U.S. 590 63 S.Ct. 1279, 87 L.Ed. 1607. Having selected the multiple corporate form as a mode of conducting business the parties cannot escape the tax consequences of

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