Woolford Realty Co v. Rose

• Decision Date: 16 May 1932
• Docket Number: No. 582,582
• Citation: 286 U.S. 319,76 L.Ed. 1128,52 S.Ct. 568
• Parties: WOOLFORD REALTY CO., Inc., v. ROSE, Collector of Internal Revenue
• Court: U.S. Supreme Court

286 U.S. 319

52 S.Ct. 568

76 L.Ed. 1128

WOOLFORD REALTY CO., Inc.,

v ROSE, Collector of Internal Revenue.

No. 582.

Argued April 19, 1932.

Decided May 16, 1932.

Mr. William A. Sutherland, of Atlanta, Ga. (Messrs. Elbert P. Tuttle and Joseph B. Brennan, both of Atlanta, Ga., on the brief), for petitioner.

[Argument of Counsel from pages 320-322 intentionally omitted] The Attorney General and Mr. Whitney North Seymour, of Washington, D. C. (Messrs. Thomas D. Thacher, Sol. Gen., of Washington, D. C., G. A. Youngquist, Asst. Atty. Gen., Sewall Key, John H. McEvers, and Wilbur H. Friedman, all of Washington, D. C., on the brief), for respondent.

Messrs. Frederick L. Pearce, George M. Morris, Louis Titus, and Henry M. Ward, all of Washington, D. C., amici curiae.

Mr. Justice CARDOZO delivered the opinion of the Court.

Petitioner and Piedmont Savings Company are separate corporations organized in Georgia. They became affiliated in 1927 when the petitioner became the owner of 96 per cent. of the Piedmont stock. In March, 1928, the two corporations filed a consolidated income tax return for 1927 under section 240 of the Revenue Act of 1926. Revenue Act of 1926, c. 27, 44 Stat. 9, 46 (26 USCA § 993). During 1927, the petitioner had a net taxable income of $36,587.62, and Piedmont had suffered during the same year a net loss of $453.80. Before its affiliation with the petitioner, it had suffered other and greater losses. Its net loss in 1925 was $43,478.25, and in 1926 $410.82, a total for the two years of $43,889.07. In the assessment of the tax for 1927, the Commissioner deducted from the petitioner's net income for that year the loss of $453.80 suffered by its affiliated corporation in the course of the same year. The consolidated net taxable income as thus adjusted was $36,133.82, on which a tax of $5,026.22 was assessed and paid. On the other hand, the Commissioner refused to deduct the Piedmont losses suffered in 1925 and 1926 before the year of affiliation. The deductions, if allowed, would have wiped out the tax. A refund having been refused, the petitioner brought this suit against the collector to recover the moneys paid. The District Court sustained a demurrer to the petition, 44 F.(2d) 856, and the Court of Appeals affirmed, 53 F.(2d) 821. The case is here on certiorari, 284 U. S. 615, 52 S. Ct. 209, 76 L. Ed. —.

Section 240(a) of the Revenue Act of 1926 provides that 'corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this chapter, in which case the taxes thereunder shall be computed and determined upon the basis of such return.'

Section 240(b) provides that 'in any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agree- ment, then on the basis of the net income properly assignable to each. * * *' (26 USCA § 993(a, b).

The general principal underlying the income tax statutes, ever since the adoption of the Sixteenth Amendment, has been the computation of gains and losses on the basis of an annual accounting for the transactions of the year. Burnet v. Sanford & Brooks Co., 282 U. S. 359, 363, 51 S. Ct. 150, 75 L. Ed. 383. A taxpayer who seeks an allowance for losses suffered in an earlier year must be able to point to a specific provision of the statute permitting the deduction, and must bring himself within its terms. Unless he can do this, the operations of the current year must be the measure of his burden.

The only section of the Revenue Act that made allowance in 1927 for the losses of earlier years was section 206(b), 26 USCA § 937(b), upon which this controversy hinges. Its provisions are as follows:

'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.'

Under that section of the statute, the losses suffered by the Piedmont Company in 1925 might have been deducted from its net income in 1926, and might thereafter, if not extinguished, have been deducted to the extent of the excess from its net income in 1927, the year in which its shares were acquired by the petitioner. But the Piedmont Company did not have any net income in 1927. Its operations for that year resulted in a loss. There was therefore nothing from which earlier losses could be deducted, for the net income without any such deductions was still a minus quantity. The tax for the year was nothing, and the losses of other years could not serve to make it less. The petitioner would have us hold that the minus quantities for all the years should be added together, and the total turned over by the company suffering the loss as an allowance to be made to the company realizing the gain. In that view of the statute, a net loss for a taxable year becomes, for the purpose of determining the burdens of affiliated corporations, though not for any other, the equivalent of a net income, and deductions which the statute has said shall be made only from net income may, none the less, by some process of legerdemain, be subtracted from the loss.

There are two fundamental objections to this method of computation. In the first place, an interpretation of net income, by which it is also a net loss, involves the reading of the words of the statute in a strained and unnatural sense. The metamorphosis is too great to be viewed without a shock. Certainly the average man suffering a net loss from the operations of his business would learn with surprise that, within the meaning of the Congress, the amount of his net loss was also the amount of his net income. 'The popular or received import of words furnishes the general rule for the interpretation of public laws.' Maillard v. Lawrence, 16 How. 251, 261, 14 L. Ed. 925; Old Colony R. R. v. Commissioner, 284 U. S. 552, 560, 52 S. Ct. 211, 76 L. Ed. 484. In the second place, the statute has given notice to the taxpayer that the aggregate of minus quantities is not to be turned over as a credit to an affiliated company, but is to be used in another way. If the loss for the first year is more than the income for the second, the excess is to be carried over to a third year, and deducted from the net income, if any, returnable for that year, at which time the process of carrying over is to end. Cf. Report of Senate Committee in charge of the Revenue Act of 1924, Senate Report No. 398, 68th Congress, 1st Session, p. 20. Obviously, the direction to apply the excess against the income of a later year is inconsistent with a purpose to allow it to an affiliated company as an immediate deduction from income of the current year. Adherence to the one practice excludes adherence to the other. Cf. Treasury Regulations 69 promulgated under the Act of 1926, arts. 634, 635, 1622. The fact is not to be ignored that each of two or more corporations joining (under section 240) in a consolidated return is none the less a taxpayer. Commissioner v. Ginsburg Co. (C. C. A.) 54 F.(2d) 238, 239. By the express terms of the statute, section 240(b), the tax when computed is to be assessed, in the absence of agreement to the contrary, upon the respective affiliated corporations 'on the basis of the net income properly assignable to each.' 'The term 'taxpayer' includes any person * * * subject to a tax imposed by this Act.' Revenue Act of 1921, § 2(9...