PENNSYLVANIA CO., ETC. v. Commissioner of Internal Rev.

• Decision Date: 05 February 1935
• Docket Number: No. 5535.,5535.
• Citation: 75 F.2d 719
• Parties: PENNSYLVANIA CO. FOR INSURANCES ON LIVES AND GRANTING ANNUITIES v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

75 F.2d 719 (1935)

PENNSYLVANIA CO. FOR INSURANCES ON LIVES AND GRANTING ANNUITIES v. COMMISSIONER OF INTERNAL REVENUE.

No. 5535.

Circuit Court of Appeals, Third Circuit.

February 5, 1935.

Walter Biddle Saul, of Philadelphia, Pa., for petitioner.

Warren F. Wattles, of Washington, D. C., Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., for respondent.

Before BUFFINGTON and WOOLLEY, Circuit Judges.

WOOLLEY, Circuit Judge.

Long prior to 1929, the Bank of North America and Trust Company, hereinafter called the Bank, and The Pennsylvania Company for Insurances on Lives and Granting Annuities, hereinafter called the old Pennsylvania Company, were separately engaged in a general banking, trust and safe-deposit business in Philadelphia. Both were Pennsylvania corporations. On April 25, 1929 the old Pennsylvania Company and the Bank entered into an "Agreement of Consolidation and Merger" within the provisions of section 3 of the Pennsylvania Act of May 3, 1909 (P. L. 1909, p. 408, as amended, P. L. 1915, p. 205, 15 PS Pa. § 423), concerning merger of corporations, in a manner with which we are not presently concerned. That agreement became effective when, on June 1, 1929, the Governor of the Commonwealth of Pennsylvania issued letters patent to the "consolidated corporation" under authority of the cited Act. Then (pursuant to the Act) the merger was "deemed to have taken place and the said corporations to be one corporation under the name adopted" (which was the same as the old Pennsylvania Company), and all the assets, estates, privileges, franchises and rights theretofore vested in each of the constituent corporations were deemed and taken to be transferred to and vested in the "new corporation" without any further act or deed; and all debts, duties and liabilities of each of the constituent corporations became thenceforth attached to and were enforceable against the "new corporation." Thereupon the new Pennsylvania Company took over, and has ever since carried on as its own, the business of its constituent corporations.

The Bank filed an income tax return for the period January 1 to May 31, 1929, being the five months of the taxable year before, on the merger, its "existence ended, so far as being a going, operating entity." Petry v. Harwood Electric Co., 280 Pa. 142, 124 A. 302, 303, 33 A. L. R. 1249. The return disclosed that the Bank had, during that period, sustained a loss for income tax purposes amounting to $120,320.04, and had received interest and dividends amounting to $57,543.49, leaving a statutory net loss of $62,776.55, determined in accordance with the provisions of section 117 of the Revenue Act of 1928, c. 852, 45 Stat. 791, 825, 26 USCA § 2117.

The new Pennsylvania Company filed a tax return for the fiscal year ending November 30, 1929. Conceiving it a right or privilege or an asset which it had acquired through the merger, it deducted from its own gains for the taxable year the net loss sustained by the Bank for the five months before the merger.

The Commissioner of Internal Revenue refused to allow as a deduction to the new Pennsylvania Company the net loss or any part thereof sustained by the Bank before the merger, and assessed against it a deficiency tax in the amount of $46,307.14 of which $13,327.30 is in controversy. The new Pennsylvania Company appealed to the United States Board of Tax Appeals which, after hearing, sustained the Commissioner. The matter is here on the petition of the new Pennsylvania Company for review.

The question, on these facts, is whether the new corporation, taking over the assets, liabilities and business of two old corporations by merger under state law, may deduct the loss of one of the old corporations from the net gain of the new corporation in computing the latter's taxable income. The answer to this question turns on two matters of law; one, federal law, as to permissible deductions; the other, state law, as to the character of a consolidated corporation.

Deductions in calculating federal income taxes are not matters of personal right. "Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed." New Colonial Ice Co. v. Helvering, 292 U. S. 435, 54 S. Ct. 788, 78 L. Ed. 1348. And further, the right of deduction, when accorded by statute, is available only to the taxpayer who suffered the loss. New Colonial Ice Co. v. Helvering, supra; Busch v. Commissioner (C. C. A.) 50 F.(2d) 800. Whether, in this case, the petitioning taxpayer sustained the loss which it seeks to deduct from its gains depends on its character. If after merger of two corporations, theretofore legal strangers, the consolidated corporation becomes a sort of corporate confederation and retains the corporate characteristics of its constituents, it is conceivable that a loss of one may be deducted from a gain of the other for income tax purposes, as in the case of affiliated corporations. But if the consolidated corporation absorbs the old corporations and becomes a new legal entity, it must pay taxes as such and, in estimating them, is allowed to deduct only its own losses from its own gains. The character of the new corporation — whether a composite of its predecessors or a distinct entity — depends on the law of the state that created it, Chicago Title & Trust Co. v. Doyle, 259 Ill. 489, 102 N. E. 790, 47 L. R. A. (N. S.) 1066, to which we may look for enlightenment. Freuler v. Helvering, 291 U. S. 35, 54 S. Ct. 308, 78 L. Ed. 634; Gottlieb v. White (C. C. A.) 69 F.(2d) 792; Id., 292 U. S. 657, 54 S. Ct. 867, 78 L. Ed. 1505; Continental Ins. Co. v. Reading Co. (Continental Ins. Co. v. United States), 259 U. S. 156, 176, 177, 42 S. Ct. 540, 66 L. Ed. 871.

It is clear from reading the Pennsylvania Act (whose substance we have given) that the legislature intended that by a merger or consolidation of several Pennsylvania corporations the result shall be a "new corporation," which, according to judicial interpretation by courts of that state, is "an entity entirely distinct from that of its constituents. It draws its life from the act of consolidation." Pennsylvania Utilities Co. v. Public Service Commission, 69 Pa. Super. 612; Continental Ins. Co. v. Reading Co. (Continental Ins. Co. v. United States), 259 U. S. 156, 176, 177, 42 S. Ct. 540, 66 L. Ed. 871. "Upon consolidation thereunder the...