Woolford Realty Co v. Rose, 582

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

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.

Page 320

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]

Page 323

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.

Page 324

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

Page 325

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-

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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

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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...