Wishnick-Tumpeer v. Helvering

• Decision Date: 12 March 1934
• Docket Number: No. 6015.,6015.
• Citation: 77 F.2d 774
• Parties: WISHNICK-TUMPEER, Inc., v. HELVERING.
• Court: U.S. Court of Appeals — District of Columbia Circuit

77 F.2d 774 (1934)

WISHNICK-TUMPEER, Inc., v. HELVERING.

No. 6015.

United States Court of Appeals for the District of Columbia.

Argued February 7, 1934.

Decided March 12, 1934.

On Rehearing June 10, 1935.

Joseph R. Little, of Washington, D. C., for petitioner.

Sewall Key, Walter L. Barlow, S. Dee Hanson, E. Barrett Prettyman, Shelby S. Faulkner, and Roy N. McMillan, all of Washington, D. C., for respondent.

Before MARTIN, Chief Justice, and ROBB, VAN ORSDEL, HITZ, and GRONER, Associate Justices.

GRONER, Associate Justice.

Petitioner, whom we shall call Tumpeer, was an Illinois corporation, and, prior to November 1, 1928, and thereafter, owned in excess of 95 per cent. of the stock of Pioneer Asphalt Company, also an Illinois corporation, whom we shall call Pioneer. Both Tumpeer and Pioneer filed separate returns for the taxable year 1928 on the basis of their regular accounting periods, which were, as to Tumpeer, the calendar year, and, as to Pioneer, the fiscal year ending October 31. Tumpeer on May 28, 1929, asked for and was granted permission by the Commissioner to change its taxable year from the calendar year to a fiscal year ending June 30, with a provision in such permit that in order to effect the change Tumpeer would be required to file a return on or before September 15, 1929, covering the period January 1, 1929, to June 30, 1929. Tumpeer, with the consent of Pioneer, duly filed a consolidated return for the period ending June 30, 1929. This return included its net income for the period January 1 to June 30, 1929, the net income of another affiliate whom we need not notice, and the net income of Pioneer for the eight months' period November 1, 1928, to June 30, 1929. In computing the income of Pioneer, there was deducted a net loss admittedly sustained by that company for the fiscal year ending 1927, no portion of which had been used to offset its income for the taxable year ended October 31, 1928. Tumpeer deducted this net loss from the income of Pioneer for the period November 1, 1928, to June 30, 1929. The Commissioner held that this was not permissible and apportioned the income for the eight months' period between the two months November and December, 1928, and the six months, January to July, 1929, and allowed the 1927 net loss against the income allocated to November and December, but denied the right to offset the remainder against the income for the period January to July, 1929. The effect of this was to reduce the allowable deduction in computing the consolidated taxable net income for the year ended June 30, 1929. The Commissioner accomplished this result by treating the period November and December, 1928, as a separate taxable year.

The single question, therefore, we have to determine is whether his action in this respect was correct. The answer to this involves an examination of the provisions of the income-tax laws as to accounting periods, particularly with reference to those allowing net losses to be spread over a three-year period, and, more particularly, with reference to the Revenue Act of 1928 so far as it relates to the right of affiliated corporations to file a consolidated return. The act in specific terms (section 141 (a), 45 Stat. 831, 26 USCA § 2141 (a) extends the privilege upon the condition that all the corporations for which the return is made "consent to all the regulations under subsection (b) prescribed prior to the making of such return." Subsection (b), 45 Stat. 831, 26 USCA § 2141 (b), reads as follows:

"The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an 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 determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability."

The Commissioner, acting under the authority of the statute, promulgated certain rules in relation to the subject, known as Regulations 75. One of such rules (art. 14) entitled, "Accounting Period of an Affiliated Group," reads as follows:

"The taxable year of the parent corporation shall be considered as the taxable year of an affiliated group which makes a consolidated return, and the consolidated net income must be computed on the basis of the taxable year of the parent corporation."

Another (art. 13 (g) reads:

"If a corporation, during its taxable year, becomes a member of an affiliated group, its income for the portion of such taxable year not included in the consolidated return of such group must be included in a separate return."

And still another (art. 41 (d) reads:

"Any period of less than 12 months for which either a separate return or a consolidated return is filed * * *, shall be considered as a taxable year."

We have, therefore, here a case in which corporations, though affiliated, had consistently filed separate returns. In the case of the parent corporation, the basis of its accounting period was the calendar year, and in the case of its affiliate the fiscal year ending October 31. After the passage of the 1928 law, Tumpeer (the parent company) asked for and received permission to change its accounting period for 1929 from the calendar year to the fiscal year ending June 30. It had filed a separate return for the calendar year January 1 to December 31, 1928. Its return-period, therefore, for the taxable year 1929 was January 1 to June 30, and this period, giving effect to the regulation of the Commissioner quoted above, likewise determined the taxable year of its affiliates. It was therefore ruled by the Commissioner that the act and the regulations required that Pioneer must file, or be treated as having filed, a separate return for the period between the end of its former separate return-period and the commencement of the taxable year of its parent, i. e., November and December, 1928.

The position of Tumpeer is that the term "taxable year" as used in section 117 of the Revenue Act of 1928, 26 USCA § 2117, does not mean a fraction of a year, as the Commissioner contends, but does mean a full twelve months' period, and that since a corporation retains its separate entity as a taxpayer irrespective of affiliation, the latter state cannot, under any regulation of the Commissioner, deprive it of the right to deduct for two succeeding years its own net loss from its own net gain.

Section 117 (b), 45 Stat. 825, 26 USCA § 2117 (b), provides:

"If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called `second year'), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called `third year'); the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary."

This position of Tumpeer is the crux of the case.

The net loss-extension provision was first inserted in the Revenue Act of 1918, and has continued practically unchanged, except that in 1921 the right to make the deduction was extended from the next succeeding year to the next two succeeding years, and it was not until the Revenue Act of 1924 that the term "taxable year" was defined, but in that act and in succeeding acts, including the act of 1928, "taxable year" was defined to include, in the case of a return made for a fractional part of a year, the period for which such return was made (section 48 (a), 45 Stat. 807, 26 US CA § 2048 (a).

Tumpeer insists, however, that the legislative history and the reports of the committees of Congress indicate that the congressional intent in thus defining the term was to broaden rather than to narrow the rights of taxpayers; that the provision was inserted as a measure of relief for taxpayers required by uncontrollable circumstances to make a return for a period of less than a full year; and that it was never intended to limit the period of the loss carry-over under two years of twelve months each. In short, it is argued that Congress, first of all, extended the loss deduction period two years, and then, to make it apply in the case of a taxpayer commencing operation within the year, or discontinuing or dissolving, defined the term "taxable year" as the period for which a return was made — though less than twelve months — to include within its provisions taxpayers thus circumstanced. And so it is insisted here it never was intended to limit the carry-over period, or deny its benefits to a taxpayer voluntarily but as the result of affiliation changing its accounting period. So it is said that since each taxpayer remains such in his own right, the accounting practice of each corporation at the commencement of affiliation should be followed, though it involves separate returns for different periods of the year, and that each such corporation in such circumstances is entitled to its own deductions for its accounting period, because otherwise the mere fact of affiliation would deprive it of the rights granted by the net-loss provisions of the statute.

The argument is plausible, and the question is not without difficulty, for it is undeniable that Pioneer, had it continued to file a separate return, would have been entitled to deduct the losses of 1927 in its return for its fiscal year November 1, 1928, to November 1, 1929, and it is equally undeniable that, if the Commissioner's position is correct, the making of a consolidated return has lost it this right, for the Commissioner's ruling is to take away from it...