UNION ELECTRIC COMPANY OF MISSOURI v. United States

• Decision Date: 18 July 1962
• Docket Number: No. 551-58.,551-58.
• Citation: 158 Ct. Cl. 479,305 F.2d 850
• Parties: UNION ELECTRIC COMPANY OF MISSOURI v. The UNITED STATES.
• Court: U.S. Claims Court

158 Ct. Cl. 479, 305 F.2d 850 (1962)

UNION ELECTRIC COMPANY OF MISSOURI v. The UNITED STATES.

No. 551-58.

United States Court of Claims.

July 18, 1962.

Norris Darrell, New York City, for plaintiff. M. Bernard Aidinoff, Edward G. Beimfohr, and Sullivan & Cromwell, New York City, were on the brief.

Mildred L. Seidman, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, Jr., for defendant. Lyle M. Turner and Philip R. Miller, Washington, D. C., were on the briefs.

DURFEE, Judge.

This is an action brought by the Union Electric Company of Missouri (hereinafter "Union Electric") as successor of The North American Company (hereinafter "North American") for refund of $1,181,178.97 plus interest thereon representing alleged overpayments of income tax and interest by the chain of corporations of which North American was the common parent, filing a consolidated tax return for 1952. The case comes before us on defendant's motion for summary judgment, and the facts insofar as they are material to this motion are not in issue.

North American was incorporated in New Jersey in 1890. As of December 31, 1940, it was the parent corporation of a corporate system embracing some eighty corporations engaging in divergent business activities. Beginning in 1942 North American filed consolidated returns with its subsidiaries, which, with North American, constituted for each of the years at least through 1949 an affiliated group of corporations under the applicable provisions of the Internal Revenue Code.¹ Until 1949, Union Electric and its subsidiaries were not includible in the North American affiliated group because North American did not own the percentage of the Union Electric shares required by § 141(d) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 141 (d). During December 1948 North American acquired the requisite proportion of Union Electric shares and the Union Electric group became includible and was in fact included in the North American group for consolidated return purposes for the taxable year 1949.

As of January 1, 1950, North American owned at least 95 percent of the voting power of all classes of stock, and at least 95 percent of each class of non-voting stock (excluding stock limited and preferred as to dividends) of four subsidiary corporations, and certain of these subsidiary corporations themselves held at least 95 percent of the voting power of all classes of stock and each class of non-voting stock (exclusive of stock limited and preferred as to dividends) of other corporations, so as to constitute a corporate chain as set forth below:

                Corporation Business
                  North American ..............................  Holding Company
                      (1) Hevi-Duty Electric Company ..........  Manufacturer of electric
                                                                   furnace equipment
                      (2) 60 Broadway Building Corporation ....  Real Estate
                      (3) Union Electric Company of Missouri ..  Electric, heating, and
                                                                   public utility holding
                          (a) Union Electric Power Company ....  Electric and gas utility
                              (i) Union Colliery Company ......  Coal mining
                          (b) St. Louis & Belleville Electric    Electric railway transportation
                              Railway Company
                          (c) Geyer Realty Company ............  Real estate
                          (d) Poplar Ridge Coal Company .......  Coal
                      (4) North American Light & Power           Holding company
                          Company
                          (a) Missouri Power & Light Company.    Electric and gas utility
                

For the taxable year 1949 all of the corporations included in the list above joined in a consolidated tax return pursuant to § 141 of the Internal Revenue Code of 1939. For the subsequent tax years through 1954, however, this was not the case. The Excess Profits Tax Act of 1950, in § 101,² 26 U.S.C. (1952 ed.) § 448, provided an optional excess profits tax credit for regulated public utility corporations which was not available to corporations generally. To qualify for this special excess profits tax credit § 448(d) required that the corporation derive a minimum of 80 percent of its gross income (exclusive of dividends and capital gains and losses) from utilities operations described in § 448(c). In the Excess Profits Tax Act of 1950, Congress also, in § 301³ thereof, amended § 141 of the Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.) § 141, to alter consolidated returns provisions applicable to regulated utilities electing to take advantage of the special excess profits tax credit afforded by § 448. Thus, § 141(e) (8) provided that a regulated public utility corporation electing to compute its excess profits tax credit under § 448 was not an "includible" corporation in an affiliated group which included any corporations not computing excess profits credits under § 448, and thus could not join in filing a consolidated return with such corporations. Section 141(j) provided, however, that two or more regulated public utilities electing to compute their excess profits tax pursuant to § 448 could be includible corporations in an affiliated group composed exclusively of regulated public utility corporations electing to compute excess profits tax credits pursuant to § 448, and that a group so constituted could join in filing a consolidated return.

During each of the years 1950, 1951, 1952 and 1953 four companies of the North American chain — Union Electric, Union Electric Power Company, Missouri Power and Light Company, and St. Louis & Belleville Electric Railway Companies — were regulated public utility corporations as defined in § 448(d), and thus eligible to elect the special excess profits tax credit provided by § 448. In addition, North American itself, pursuant to § 448(e) was eligible to join in consolidated returns with these companies as the common parent for the years 1950, 1951 and 1952, inasmuch as more than 80 percent of its gross income (computed without regard to capital gains and losses) during each of those years was deemed derived from regulated public utility sources as described in § 448(c). Consequently, during each of the years 1950, 1951 and 1952 North American and its four regulated public utility subsidiaries, electing to compute their respective excess profits tax credits pursuant to § 448, joined in filing consolidated returns. During these same years the non-utility corporations in the North American chain filed separate returns, for they were not includible in the utilities group computing excess profits tax credits under § 448.

For the year 1952, with which we are directly concerned, the consolidated income of North American and its utility corporations joining in the consolidated return was $17,504,972.96. North American itself, however, after elimination in the consolidated return of over $11,000,000 of intercompany dividends received from Union Electric, had a loss of $820,413.77, which was absorbed by income from the subsidiary corporations included in the consolidated return.

During 1953 and 1954, inasmuch as North American had no income from regulated public utility sources, it was precluded under § 448(e) from participating in consolidated returns with its utility corporations electing the special credit afforded by § 448. Thus, during 1953 and 1954, the utility companies that had joined in consolidated returns with North American from 1950-1952, each filed separate returns in which each elected to use the § 448 excess profits tax credit.

During 1953 North American joined in a consolidated return with entirely different subsidiaries — North American Light and Power Company, 60 Broadway Building Corporation, and Hevi-Duty Electric Company.⁴ Each of these corporations had filed separate returns during the years 1950-1952, and none of them were regulated public utility corporations eligible to elect the § 448 excess profits tax credit. For 1953 this group had a consolidated net loss of $373,721.83. To this figure North American itself had contributed a loss of $890,939.07.

During 1954 North American and the same subsidiaries filed a consolidated return. For the tax year 1954 the consolidated net loss was $681,967.58, to which figure North American had contributed a loss of $1,080,176.54.

Plaintiff contends that it is entitled to carry back the consolidated net operating losses, to the extent attributable to North American, of the group of miscellaneous corporations for 1953 and 1954 to be deducted from the consolidated net income of the North American utilities group in 1952. It is defendant's position that because the only link between the 1952 group and the group joining in consolidated returns in 1953 and 1954 is the presence of North American, the common parent — i. e. none of the subsidiaries joining with North American in the 1952 consolidated return were included or includible in the consolidated returns in which North American joined for the loss years 1953 and 1954 — North American's losses can be carried back to offset 1952 income only to the extent that North American contributed income to the 1952 group. Inasmuch as North American suffered losses in 1952, defendant contends that none of North American's 1953 and 1954 losses may be carried back to 1952.

Basically the issue in the case is whether North American had one affiliated group which remained continuously in operation during the years 1952, 1953 and 1954, within the meaning of the applicable provisions of the Code and regulations which confer and define the privilege of filing consolidated returns, or whether the 1952 group of utility corporations electing to compute their excess profits credits pursuant to § 448 is separate and distinct from the group of miscellaneous corporations with which North American joined in consolidated returns during 1953 and 1954. If the North American group of 1952 is deemed to have continued in existence as the same group in 1953 and 1954 solely by virtue of the...