Source: http://www.chanrobles.com/usa/us_supremecourt/288/152/case.php
Timestamp: 2018-07-21 13:42:27
Document Index: 283730198

Matched Legal Cases: ['§ 1331', '§ 1331', '§ 240', 'Art. 631', 'Art. 633', 'Art. 633', '§ 240', '§ 141', '§ 141']

The question presented is whether the petitioner, Atlantic City Electric Company, was affiliated with the American Gas & Electric Company so that the federal taxes for 1917, 1918, and 1919 should be determined upon the basis of consolidated returns under § 1331 of the Revenue chanroblesvirtualawlibrary
With respect to control of stock, as creating the affiliation which affords a basis for a consolidated return, § 1331 of the Revenue Act of 1921 is to the same effect as § 240 of the Revenue Act of 1918. The requirement of control, in the absence of legal title or beneficial ownership, is not satisfied by acquiescence or by business considerations chanroblesvirtualawlibrary
without binding force. There must be a control that is legally enforceable. Handy & Harman v. Burnet, 284 U. S. 136, 284 U. S. 140-141. And it must be control of "substantially all the stock." In Handy & Harman v. Burnet, supra, legally enforceable control of somewhat more than 75 percent of the stock was held to be insufficient. The question, then, is whether, in the instant case, the entire voting stock, preferred and common, should be considered in determining whether there was affiliation, or the common stock alone.
The purpose of the Congress was to secure substantial equality among stockholders who ultimately bear the burden of taxation, and to prevent evasion through the manipulation of intercompany transactions. Handy & Harman v. Burnet, supra. See also Burnet v. Aluminum Goods Mfg. Co., 287 U. S. 544. The requirement of consolidated returns was
Treasury Regulations No. 45, Art. 631. [Footnote 1] chanroblesvirtualawlibrary
In establishing ownership or control of substantially all the stock as the criterion of a business unit, the statute made no distinction between preferred and common stock. It referred simply to "stock," and we perceive no ground upon which stock with voting right can be treated as excepted. The Treasury Regulations under the Revenue Act of 1918 regarded the statutory requirement as relating to the "outstanding voting capital stock (not including stock in the treasury) at the beginning of and during the taxable year." Regulations No. 45, Art. 633. The same construction was given by the Department to the corresponding provision of the Revenue Act of 1921. Regulations No. 62, Art. 633. The Congress, in the Revenue Act of 1924, embodied this construction in the statute itself. [Footnote 2] Section 240(c)(1), 43 Stat. 288. See also Revenue Act of 1926, § 240(c)(d), 44 Stat. 46; Revenue Act of 1928, § 141(d), 45 Stat. 831; Revenue Act of 1932, § 141(d), 47 Stat. 213. Compare Schlafly v. United States, 4 F.2d 195, 200; Ice Service Co. v. Commissioner, 30 F.2d 230, 231; United States v. Cleveland, P. & E. R. Co., 42 F.2d 413; Commissioner v. City Button Works, 49 F.2d 705.
Nor are we able to conclude that, in the instant case, the preferred stock with voting right should be excluded because it was redeemable at any time and had a limited interest in dividends. Compare Commissioner v. Shillito chanroblesvirtualawlibrary
Realty Co., 39 F.2d 830; United States v. Cleveland, P. & E. R. Co., 42 F.2d 413. Despite redeemability and the limitation of dividends, the owners of the preferred stock were not in the position of creditors, but were stockholders with a proprietary interest in the corporate undertaking and with a corresponding relation, through the voting right, to the direction of that undertaking. The voting right remained unimpaired until actual redemption. The statute is not concerned with a failure to exercise existing rights, but with what is deemed to be a more certain and adequate test of a unitary enterprise. According to this test, petitioner failed to show affiliation. Burnet v. Howes Brothers Hide Co., 284 U.S. 583, 584.
"Affiliated Corporations. -- The provision of the statute requiring affiliated corporations to file consolidated returns is based upon the principle of levying the tax according to the true net income and invested capital of a single business enterprise, even though the business is operated through more than one corporation. Where one corporation owns the capital stock of another corporation or other corporations, or where the stock of two or more corporations is owned by the same interests, a situation results which is closely analogous to that of a business maintaining one or more branch establishments. In the latter case, because of the direct ownership of the property, the invested capital and net income of the branch form a part of the invested capital and net income of the entire organization. Where such branches or units of a business are owned and controlled through the medium of separate corporations, it is necessary to require a consolidated return in order that the invested capital and net income of the entire group may be accurately determined. Otherwise opportunity would be afforded for the evasion of taxation by the shifting of income through price-fixing, charges for services, and other means by which income could be arbitrarily assigned to one or another unit of the group. In other cases, without a consolidated return, excessive taxation might be imposed as a result of purely artificial conditions existing between corporations within a controlled group."
With respect to this provision, the report of the Committee on Ways and Means of the House of Representatives said: "The requirement that the stock held must be voting' stock merely embodies in the law the present rule of the Treasury Department." House Rep. No. 179, 68th Cong., 1st Sess., p. 24.