Sweets Co. of America v. Com'r of Internal Revenue, 7-8.

• Decision Date: 07 April 1930
• Docket Number: No. 7-8.,7-8.
• Citation: 40 F.2d 436
• Parties: SWEETS COMPANY OF AMERICA, Inc., v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Second Circuit

40 F.2d 436 (1930)

SWEETS COMPANY OF AMERICA, Inc., v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 7-8.

Circuit Court of Appeals, Second Circuit.

April 7, 1930.

Felix H. Levy, of New York City (John J. Sweedler, of New York City, of counsel), for petitioners.

G. A. Youngquist, Asst. Atty. Gen., John Vaughan Groner and Sewall Key, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, and F. D. Strader, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

G. Carroll Todd, of Washington, D. C., and Henry McAllister, of Denver, Colo., with Rollin Browne, of New York City (Taylor, Blanc, Capron & Marsh and Carter T. Louthan, all of New York City, of counsel), filed briefs, by leave of court, as amici curiæ.

Before L. HAND, SWAN, and MACK, Circuit Judges.

SWAN, Circuit Judge (after stating the facts as above).

The questions which are said to be presented by these appeals, and to which counsel have directed their argument, are the following: (1) Has the Commissioner authority to reverse his predecessor's ruling that a single consolidated return be made for the year 1919? (2) Under section 240 of the Revenue Act of 1918 (40 Stat. 1081), does the addition or loss of a member of an affiliated group bring into being a new and different taxpayer? (3) If a change in the membership of an affiliated group brings into being a new taxpayer, may a net loss sustained by one such group be offset against the net income of another such group for the preceding period, under section 204(b) of the Revenue Act of 1918 (40 Stat. 1061)?

The first question was properly answered by the Board of Tax Appeals in the affirmative. The initial ruling was made pursuant to article 634, Treasury Regulations 45 (1920 Edition), which reads as follows:

"Art. 634. Change in Ownership during Taxable Year. When one corporation owns or controls substantially all the stock of another corporation at the beginning of any taxable year, but during the taxable year sells or parts with the control of all or a majority of such stock to outside interests not affiliated with it, or when one corporation during any taxable year acquires the ownership or control of substantially all the capital stock of another corporation with which it was not previously affiliated, a full disclosure of the circumstances of such changes in ownership shall be submitted to the Commissioner. In accordance with the peculiar circumstances in each case the Commissioner may require separate or consolidated returns to be filed, to the end that the tax may be equitably assessed."

The regulation remained substantially the same in 1923, when Commissioner Blair reversed the prior ruling. See article 634, Regs. 62 and 65. Whether he believed his predecessor's ruling to be erroneous in law or in fact is immaterial. There were no facts creating an estoppel in favor of the petitioners, even if it be assumed that estoppel may be raised against a tax liability — a question not now necessary to consider. Within the statutory period of limitations and in the absence of a binding settlement, the Commissioner had authority to re-examine and redetermine the petitioners' tax liability. See Botany Mills v. United States, 278 U. S. 282, 49 S. Ct. 129, 73 L. Ed. 379; Loewy & Son v. Commissioner, 31 F.(2d) 652, 654 (C. C. A. 2); Holmquist v. Blair, 35 F.(2d) 10 (C. C. A. 8); Austin Co. v. Commissioner, 35 F.(2d) 910, 912 (C. C. A. 6); McIlhenny v. Commissioner (C. C. A. 3), 39 F.(2d) 356.

In requiring three returns for the calendar year 1919, the Board of Tax Appeals held, in effect, that an affiliated group is the taxpayer, that each change in the membership of an affiliated group creates a new taxpayer, resulting in a new taxable period or "year," and requiring a separate consolidated return for each group of different membership. With such construction of section 240 we do not agree. It was rejected by the Court of Claims in a very recent opinion, Swift & Co. v. United States, reported in 38 F.(2d) 365, for reasons so fully explained that we need not here repeat them. It will suffice to say that we concur with the Court of Claims in the view that the several members of the affiliated group remain the taxpayers and that the statutory...