Source: https://supreme.justia.com/cases/federal/us/287/544/case.html
Timestamp: 2017-07-24 08:45:22
Document Index: 397326224

Matched Legal Cases: ['§ 1331', '§ 12', '§ 206', 'Art. 147', '§ 1331', '§ 206']

Burnet v. Aluminum Goods Manufacturing Co. (full text) :: 287 U.S. 544 (1933) :: Justia US Supreme Court Center Log In
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Burnet v. Aluminum Goods Manufacturing Co. 287 U.S. 544 (1933)
U.S. Supreme CourtBurnet v. Aluminum Goods Manufacturing Co., 287 U.S. 544 (1933)Burnet v. Aluminum Goods Manufacturing Co.No.192Argued December 13, 14, 1932Decided January 9, 1933287 U.S. 544CERTIORARI TO THE CIRCUIT COURT OF APPEALS
3. A manufacturing corporation bought all the shares of another corporation and used it as its subsidiary for selling the goods manufactured. The subsidiary, after netting losses in several years preceding 1917, was liquidated in that year, and, in the year next following, dissolved. Held that the two corporations did not cease to be "affiliated" during the year 1917 (Rev. Act 1921, § 1331; Treas.Reg. 41, Arts. 77 and 78), and that, in making up their consolidated return of excess profits for that year, the loss of the Page 287 U. S. 545 parent company's investment in the stock of the subsidiary, and the loss of moneys advanced by the one to the other for the business and not repaid were properly deducted from gross income after subtracting from their sum the subsidiary's operating loss in that year (Rev. Acts, 1916, § 12; 1917, § 206; Treas.Reg. 33, 1918 ed., Art. 147.) P. 287 U. S. 548 et seq.
In 1914, respondent, a New Jersey manufacturing corporation, purchased all the capital stock of the Aluminum Sales & Manufacturing Company, a New York corporation. From that time until its liquidation, carried on in 1917, the sales company was principally engaged in selling goods manufactured by respondent. In February, 1918, it was dissolved. The operation of the sales company reflected net losses during the years 1914, 1915, and 1916, as well as in the year 1917. At a result of the operating losses and the liquidation of the sales company, Page 287 U. S. 546 respondent suffered the loss of certain sums advanced to the sales company, and of the total investment in its stock.
Title 2 of the Revenue Act of 1917, 40 Stat. 300, 302, imposed a war excess profits tax in addition to the normal tax upon the income of corporations. The statute made no provision for consolidated returns by affiliated corporations, but Articles 77 and 78 of Treasury Regulations 41, adopted pursuant to the Act, did authorize the Commissioner to require affiliated corporations, including those, the stock of one of which was owned by another, to file a consolidated return of net income and invested capital. And § 1331 of the Revenue Act of 1921, 42 Stat. 227, 319, Page 287 U. S. 547 provided that, for the purpose of determining excess profits taxes, the Revenue Act of 1917
It is not denied that the two corporations became affiliated when respondent acquired all the capital stock of the sales company. But, on the basis of the finding of the Board of Tax Appeals that the sales company was chiefly engaged during 1917 in closing up its business preparatory to formal dissolution, which took place in February, 1918, that all its assets and liabilities were disposed of by the end of 1917, and that it did not do any business after that date, petitioner argues that the affiliation of the two companies was terminated by the liquidation. Page 287 U. S. 548
In the present case, even though the affiliation continued, it does not follow, as a matter of law, that the loss was not rightly deducted in the consolidated return. Section 12, Revenue Act of 1916, 39 Stat. 756, 767, governs the computation of the excess profits tax under § 206, Revenue Act of 1917, 40 Stat. 300, 305. That section and the regulation under it (see Article 147, Treasury Regulations 33, 1918 ed.) direct that taxable net income of a corporate taxpayer shall be ascertained by deducting, from gross income losses sustained within the year. It is conceded that the loss of respondent's advances to the sales company and the investment in its stock was sustained in 1917, was deductible, therefore, if at all, in that year, and might properly have been deducted by respondent in a separate return, if a separate return had been permissible. But the government insists that the loss cannot be deducted in the mandatory consolidated return for 1917 because it occurred as the result of "inter-company" transactions. Page 287 U. S. 549
These provisions plainly do not lay down any rigid rule of accounting to be applied to consolidated returns which would exclude from the computation of taxable income the results of every inter-company transaction, regardless Page 287 U. S. 550 of its effect upon the capital or the net gains or losses of the business of the affiliated corporations. Instead, they merely disclose the purpose underlying regulations and statute to prevent, through the exercise of a common power of control, any inter-company manipulation which would distort invested capital or the true income of the unitary business carried on by the affiliated corporations. Hence, no method of accounting, in calculating taxable income upon the consolidated return, can be upheld which would withhold from the taxpayer all benefit of deduction for losses actually sustained and deductible under the sections governing the computation of taxable income, and which, at the same time, would not further in some way the very purpose for which consolidated returns are required.
Such, we think, is the effect of the method adopted by the Commissioner. The sales company suffered losses during the years 1914, 1915, and 1916 which could not be deducted in its separate returns for those years because they were net losses, and which could not be deducted from the profits of the parent company because there was no consolidated return in those years. While it may be assumed that those losses affected the value of the stock owned by the parent company, the loss of its investment in the stock of the sales company and in advances to it could not be deducted by the parent company in its separate return for those years because the loss had not then been sustained with such finality as to permit its deduction under the applicable statute and regulations. So far as the loss from operation of the sales company in earlier years contributed to respondent's capital loss in 1917, deduction of the latter in the consolidated return involved no double deduction of losses of the business of the two companies during the period of their affiliation. As respondent's total loss in 1917 was reduced, before deduction in the consolidated return, by the amount of the Page 287 U. S. 551 operating loss of the sales company for that year, there was no duplication of any losses accrued or sustained in that year.