Woolford Realty Co. v. Rose

• Decision Date: 13 November 1931
• Docket Number: No. 6101.,6101.
• Citation: 53 F.2d 821
• Parties: WOOLFORD REALTY CO., Inc., v. ROSE, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Fifth Circuit

53 F.2d 821 (1931)

WOOLFORD REALTY CO., Inc., v. ROSE, Collector of Internal Revenue.

No. 6101.

Circuit Court of Appeals, Fifth Circuit.

November 13, 1931.

W. A. Sutherland, of Atlanta, Ga., for appellant.

C. P. Goree, Asst. U. S. Atty., of Atlanta, Ga., and Wright Matthews, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., for appellee.

Before BRYAN, HUTCHESON, and WALKER, Circuit Judges.

HUTCHESON, Circuit Judge.

In 1925 the Piedmont Savings Company sustained a statutory net loss of $43,478.25; in 1926 it sustained a further statutory net loss of $410.82; it was in those years unaffiliated. In 1927, appellant and the Piedmont Savings Company having become affiliated, a consolidated return for that year was filed. This return disclosed a combined net income for that year of $37,128.83 made up of appellant's net taxable income of $37,582.63 and a loss of Piedmont, $453.80. The Commissioner, because Piedmont had no net income in 1927, refused to allow appellant to deduct from the combined net income the statutory net losses of Piedmont incurred in 1925 and 1926, and carried over, because of having had no net income in 1926, into the third and second year respectively. The District Judge, taking the same view, denied the claim that because of this disallowance there was an overpayment.

This appeal presents the single question whether statutory net losses, accruing to a corporation when unaffiliated, may be used by it in a subsequent year when affiliated with another, in computing, not simply its own net income, but the net income of the other member of the affiliated group. Or, putting it another way, whether the words "net income" used in section 206(b), Revenue Act 1926 (26 USCA § 937(b) may mean "minus net income" or loss, so as to permit a statutory net loss to be availed of by the affiliated group, not merely to the extent of reducing the amount of the net income of the corporation entitled to it on which the affiliated group must pay taxes, but of producing a loss or minus quantity which the affiliated group may use as a deduction from the net income of the other member.

Respondent insists that the whole structure of the taxing system, with its emphasis upon gains and losses incurred in the taxable year by the taxpayer, "a person subject to a tax imposed by the Act," makes it plain that both losses and gains must, in order to be taken account of in a return, be the losses and gain of the persons subject to the tax, and, except in the single case of section 206 the amortization in prosperous years by the taxpayer incurring it of his statutory net loss, they must be the losses and gains of the taxable year. He declares that the purpose of the taxing statutes as to each person subject to the tax is as to each taxable year to ascertain, set down, and fix what taxable income has accrued to him in that year; that nowhere in the statutes is there any warrant for the view that losses incurred in one year and carried over by statute as net losses by one taxpayer may be purchased and dealt in, or in any manner acquired by another taxpayer, and used by him as deductions against his own net income. He contends that the taxing statutes use the term "net income" in its real, its natural sense, of a plus, not a minus, quantity, meaning "that portion of the receipts of a business which remains after making the deductions allowable by law from its gross income"; that it is just as unthinkable to say that net income means either net loss or minus net income as to say that plus and minus are the same.

Appellant on its part insists that to permit respondent's contention to prevail would be to permit a literal construction of the words "net income" in section 206(b) to defeat the clear purpose and intent of that section; that the deduction may be used as one of the factors in ascertaining whether the taxpayer made a loss or gain for the year, and how much; that the result of this literal construction would be, as to this particular deduction, to deprive an affiliated corporation entitled under section 240 (26 USCA § 993) to make a consolidated return, of the full benefit of the deductions to which each member of the group is entitled, contrary to the clear intent of section 240 and the regulations and practices under it. Appellant cites generally, in support of its position, the proposition first advanced by the Board of Tax Appeals in Alabama By-Products Corporation v. Com'r, 18 B. T. A. 919, and repeated in later decisions of the Board, that "the statutory net loss is by the plain language of the statute put in the same category as any other deduction allowed by statute in determining an operating gain or loss of one corporation in an affiliated group for the taxable year." It declares, as the Board did in Pittsburgh Gasoline Co. v. Com'r, 21 B. T. A. 302, that in determining the net income of a corporate taxpayer the deduction of the net loss of a prior year allowed by section 206 is to be treated the same as the deduction allowed by section 234 (26 USCA § 986), whether this deduction produces a net loss, or, as the Board calls it, a minus net income. Appellant cites in support of its position the opinions of the Board of Tax Appeals in Alabama By-Products Corporation v. Com'r, 18 B. T. A. 919; Ginsburg Co. v. Com'r, 19 B. T. A. 81; Buckie Printers' Ink Co. v. Com'r, 19 B. T. A. 943; Pittsburgh Gasoline Co. v. Com'r, 21 B. T. A. 297; General Box Corporation v. Com'r, 22 B. T. A. 725; Arrow Coal & Ice Co. v. Com'r, 22 B. T. A. 1341; Tolerton & Warfield Co. v. Com'r, 23 B. T. A. 892; Hawley Investment Co. v. Com'r, 23 B. T. A. 953; and National Slag Co. v. Com'r (C. C. A.) 47 F.(2d) 846.

On the face of it, a ruling which permits a corporation, with a consistent record of gains, to affiliate with one having a large accumulation of statutory net losses for the purpose and with the result of using these losses in the year of affiliation as deductions from its income in that year, appears generally inappropriate to the federal scheme of income taxation, designed as it is, with the sole exception of the statutory net loss provision, to make each person subject to the tax pay taxes on his income for the year in which it accrues. The District Judge was impressed with this general inappropriateness; it impresses us. The particular inappropriateness of the contention that, in using the words in section 206(b), "shall be used as a deduction in computing net income," Congress intended to emphasize, not as the object of computation the ascertainment of the net income of the taxpayer for the purpose of determining the tax he should pay, but merely the fact that a computation was to be had for the purpose of finding out whether the taxpayer made a loss or a gain, and the setting down of this figure, whether a plus or a minus one, also impresses us.

It seems to us that to give this effect to the words would be to do violence, not only to the words themselves, but to the general purpose of the section, which was to give to a taxpayer which had sustained it the purely personal right Busch v. Com'r (C. C. A.) 50 F.(2d) 800 to amortize out of earnings in the second and third years following losses of the first year, not to give to this statutory net loss a substantive character as an asset which could be traded in through the device of affiliation, and thus, acquired by another taxpayer, used by him as a deduction against his own income.

Were it not for the fact urged upon us by appellant with such earnestness that the Board of Tax Appeals and the Circuit Court of Appeals for the Third Circuit have by construction found that the words in question do have the meaning which appellant contends for, we should take the simple view which Alice took before her encounter with the master logomachist, that words mean what they say, and not the opposite, and simply say, without more ado, that the words "net income" mean net income; they do not, they cannot, mean minus net income or loss. That, when Congress in section 206(b) declared that the statutory net loss "shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year," it used...