Court Opinion

ID: 4596283
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:16:47.6462+00
Date Added: 2024-06-11T07:51:35.342703
License: Public Domain

THE AMERICAN FORK & HOE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American Fork & Hoe Co. v. CommissionerDocket No. 60681.United States Board of Tax Appeals33 B.T.A. 1139; 1936 BTA LEXIS 773; February 20, 1936, Promulgated *773  1.  The petitioner, an Ohio corporation, owned, through two New York corporation, except qualifying shares.  Held, that petitioner is not entitled to include the New York corporation in its consolidated return, following Commissioner v. Manus-Muller & Co., 79 Fed.(2d) 19; certiorari denied, 296 U.S. 657">296 U.S. 657. 2.  A taxpayer on the accrual basis can not be charged with income if there exists good reason for believing that the income can not be collected.  John H. Watson, Jr., Esq., John T. Scott, Esq., and Robert W. Wheeler, Esq., for the petitioner.  Arthur Carnduff, Esq., and Curtis Risley, Esq., for the respondent.  VAN FOSSAN *1139  This proceeding involves a deficiency of $14,433.07 for the fiscal year ended June 30, 1929.  The original and amended petitions set forth allegations of error in paragraphs (a) to (m), inclusive.  The parties have filed written stipulations which dispose of the allegations in paragraphs (a) to (f), inclusive, and (1) and (m).  Effect will be given to these stipulations in the recomputation under Rule *1140  50.  Our findings of fact are based on a written stipulation*774  of the parties and oral testimony.  The three issues remaining for determination are: (1) Whether net losses sustained by Cronk & Carrier Manufacturing Co. for the fiscal years ended June 30, 1928 and 1929, should be included in the consolidated return of the petitioner and its subsidiaries for the fiscal year ended June 30, 1929.  (2) Whether petitioner should accrue as income certain uncollected rents of $41,392.89 from the Private Investment Co. (hereinafter called the Investment Co.), or in the alternative, whether petitioner is entitled to deduct interest, ground rent, and taxes amounting to $26,267.89, or as a further alternative, whether petitioner is entitled to deduct $40,000 as a partial bad debt due to its transactions with the Investment Co.  (3) Whether the petitioner is entitled to deduct $60,000 or any portion thereof from its gross income for the fiscal year ended June 30, 1929, which amount represents a portion of a bad debt due from the W. F. Tubbs Co. to the petitioner.  FINDINGS OF FACT.  ISSUE I.  The Cronk & Carrier Manufacturing Co. is a corporation organized and existing under and by virtue of the laws of the State of New York.  During the fiscal*775  years ended June 30, 1928, and June 30, 1929, its capital stock outstanding consisted of 750 shares of common stock and 215 shares of preferred stock.  All of this capital stock, except 15 shares of common stock issued to qualify officers and directors, was owned by the Welland Vale Manufacturing Co.  During the fiscal years ended June 30, 1928, and June 30, 1929, the Cronk & Carrier Manufacturing Co. sustained net losses of $5,293.42 and $16,180.10, respectively.  The Welland Vale Manufacturing Co. is a corporation organized and existing under and by virtue of the laws of the Province of Ontario, Canada.  During the fiscal years ended June 30, 1928, and June 30, 1929, its capital stock outstanding consisted of 3,300 shares.  All of this capital stock, except eight shares issued to qualify directors, was owned by the General Land & Industrial Co., Ltd.  During the fiscal years ended June 30, 1928, and June 30, 1929, the Welland Vale Manufacturing Co. earned net income of $68,295.79 and $74,412.95, respectively.  The General Land & Industrial Co., Ltd., is a corporation organized and existing under and by virtue of the laws of the Province of Ontario, Canada.  During the fiscal*776  years ended June 30, 1928, *1141  and June 30, 1929, its capital stock outstanding consisted of 8,515 shares.  All of this capital stock, except six shares issued to qualify directors, was owned by the petitioner, the American Fork & Hoe Co.  During the fiscal years ended June 30, 1928, and June 30, 1929, the General Land & Industrial Co., Ltd., earned net income of $50,635.31 and $8,559.82, respectively.  The petitioner, an Ohio corporation, filed its consolidated income tax return for the fiscal year ended June 30, 1929, with the collector of internal revenue at Cleveland, Ohio.  In computing its consolidated income reported to the United States for the fiscal year ended June 30, 1929, petitioner did not include the income of the General Land & Industrial Co., Ltd., or the income of the Welland Vale Manufacturing Co., nor did it deduct the losses of Cronk & Carrier Manufacturing Co.  The respondent did not deem the General Land & Industrial Co., Ltd., the Welland Vale Manufacturing Co., or Cronk & Carrier Manufacturing Co. affiliated with petitioner in determining the deficiency herein.  The Cronk & Carrier Manufacturing Co. filed separate returns for the fiscal years ended*777  June 30, 1928, and June 30, 1929, with the collector of internal revenue at Syracuse, New York.  On January 9, 1934, and January 13, 1934, respectively, Cronk & Carrier Manufacturing Co. filed consents with the collectors at Syracuse, New York, and Cleveland, Ohio, regarding its inclusion in petitioner's consolidated return for the fiscal year ended June 30, 1929.  ISSUE II.  During April 1920 the petitioner subleased certain real estate in Cleveland, upon which the Union Building was situated.  At the same time petitioner purchased its lessor's right, title, and interest in the Union Building for $210,000 cash and assumed the payment of $275,000 in bonds which were secured by a mortgage on the leasehold and the building.  The term of petitioner's sublease was 92 years and 3 months from April 1, 1920.  The rentals thereunder were: To the underlying lessors:$12,000 per year, April 1, 1920, to June 30, 1923.  $18,000 per year for the next 20 years.  $20,000 per year for the remainder of the term of the lease.  To petitioner's lessor:$12,000 per year.  In addition, petitioner assumed the payment of taxes, assessments, and public charges, other than income taxes, *778  in respect of the Union Building property, which is sometimes hereinafter referred to as Parcel 1.  *1142  During April 1920 the petitioner subleased certain other real estate in Cleveland, sometimes hereinafter referred to as Parcel 2.  The term of petitioner's sublease on Parcel 2 was 98 years and 7 months from April 1, 1920.  The rental thereunder was: $7,000 per year for the first 5 years $8,500 per year for the next 5 years $10,000 per year for the next 5 years $11,000 per year from and after April 1, 1935.  In addition petitioner assumed the payment of taxes, assessments, and public charges, other than income and inheritance taxes, in respect of Parcel 2.  By mortgage or deed of trust dated December 1, 1922, petitioner mortgaged its leases on Parcel 1 and Parcel 2 to The Union Trust Co. of Cleveland, Ohio, as trustee, to secure an issue of $400,000 of 6 percent first mortgage leasehold gold bonds, maturing serially, $15,000 per year, from December 1, 1923, to December 1, 1936, both dates inclusive, and the balance ($190,000) on December 1, 1937, which bonds were thereafter sold for the sum of $388,000.  From the proceeds thereof petitioner paid the $275,000*779  of bonded indebtedness that it assumed when it purchased the office building situated on Parcel 1.  Under date of August 13, 1923, petitioner made a sublease of Parcels 1 and 2 to the Investment Co., whereunder the latter paid petitioner $200,000 cash for the Union Building and agreed to pay to a trustee named by petitioner, at least 15 days before they came due, all charges for interest on petitioner's $400,000 bond issue, ground rent on the underlying leases, the principal of the bond issue as it fell due, and all taxes, assessments, and other public charges levied against Parcels 1 and 2.  The Investment Co. further agreed to erect a building on Parcel 2 which would have a fair cost and value of not less than $100,000.  This sublease contained the usual provisions regarding maintenance, repairs, insurance, reconstruction or repairs in case of damage by fire, assignment, and repossession in case of default in payments required by the lease agreement.  In its income tax return for the fiscal year ended June 30, 1924, petitioner reported a profit from its leasing agreement of August 13, 1923, with the Investment Co. of $46,079.41.  Subsequent to its acquisition of Parcel 2 the*780  Investment Co. erected or caused to be built thereon a two-story and basement garage building, the cost of which was financed by a leasehold bond issue.  The balance sheets of the Investment Co. show that approximately $140,000 of these bonds were outstanding at December 31, 1928.  During 1926, 1927, and 1928 there was a serious deflation in real estate values in Cleveland.  Despite all its efforts the rentals and *1143  other receipts of the Investment Co. from its office building and the garage during 1928 were insufficient, after the payment of operating expenses, to meet the obligations under its lease agreement with petitioner.  On or about December 1, 1928, the Investment Co. did not pay the sum of $15,000 for payment of principal and $9,750 for payment of interest on the mortgage leasehold bonds of the petitioner, which the Investment Co. had agreed to pay to the trustee designated by petitioner pursuant to the sublease of August 13, 1923.  On or about December 1, 1928, the petitioner opened an account in its general ledger under the title "Union Building Bond and Interest Account." Petitioner charged into this account, as of the date of payment, all sums paid by it*781  in respect of obligations for which it was originally liable but payment of which had been assumed by the Investment Co. and which the latter failed to pay when due.  Petitioner credited this account with all sums received by it, as of the date said sums were received, from the Investment Co. or J. B. Kiefer, receiver thereof appointed by the Court of Common Pleas of Cuyahoga County, Ohio.  The "Union Building Bond and Interest Account" shows the amount of bond retirements, bond interest, ground rent, and taxes paid by the petitioner from December 1, 1928, to August 1, 1931, which payments were defaulted by the Investment Co., and the cash received from the Investment Co. in partial settlement of its obligations.  The totals for the several periods listed were as follows: Amounts paid by AmericanCash received from PrivateFork and Hoe Co. Investment Co.Dec. 1, 1928-June 30, 1929$70,392.89$29,000.00July, 1, 1929-June 30, 193089,845.5555,892.89July 1, 1930-June 30, 193182,377.3447,982.19July 1, 1931-Aug. 1, 193118,563.985,000.00Totals$261,179.76$137,875.08The petitioner served notices of forfeiture of said sublease to the*782  Investment Co. on June 8, 1929, and July 27, 1931, and finally obtained possession of Parcels 1 and 2 on or about August 27, 1931.  Thereafter petitioner entered suit to quiet title, securing a decree with respect thereto on or about March 29, 1932.  On November 30, 1931, an entry was recorded as of September 1, 1931, on petitioner's books of account, as follows: Dr. Miscellaneous properties$403,304.68Union BuildingUnion Prospect GarageCr. Long Term LiabilitiesFirst Mortgage 6% Leasehold Bonds$280,000.00Union Building Bond and Interest Account123,304.68*1144  The $280,000 of bonds represented the remaining outstanding bonds of the original $400,000 issue.  The $123,304.68 item represented the difference between the amounts paid by petitioner, $261,179.76, and the cash received from the Investment Co., $137,875.08.  The book assets of the Investment Co. at December 31, 1928, amounted to $731,449.81.  Leaseholds and buildings constituted $678,712.24 thereof, and an account receivable from the Union Prospect Garage Co., $37,447.03 thereof.  Liabilities of the Investment Co. at that date totaled $856,519.99, exclusive of capital stock, $172,400, *783  and reserves, $41,302.03.  The petitioner kept its books and filed its return for the fiscal year ended June 30, 1929, on the accrual basis.  ISSUE III.  On February 20, 1925, the petitioner loaned $50,000 to the W. F. Tubbs Co., Norway, Maine, under a contract which recited the urgent need of the Tubbs Co. for financial assistance and the petitioner's willingness to lend the funds under certain conditions.  The loan was for five years, evidenced by a promissory note bearing 6 percent interest and secured by a first mortgage on all the property and assets of the Tubbs Co.  The stockholders of the Tubbs Co. were to place their stock in trust and the trustee was to vote three fifths of the stock as directed by the petitioner and to name three of the five directors as designated by the petitioner.  At any time during the five-year period petitioner could buy all the capital stock for $30,000.  The Tubbs Co. was engaged principally in the manufacture and sale of snowshoes and skis.  The petitioner was interested in developing a sporting goods department and elected to enter this field by making a loan to the Tubbs Co. and taking an option to purchase all its capital stock.  During*784  the first two years the results were not satisfactory.  Believing that the business would have to be enlarged materially in order to accomplish the desired results the petitioner commenced a program of expansion in the latter part of 1927 which continued through 1928.  The financing of this program had to be borne by the petitioner as the stockholders of the Tubbs Co. were unable to furnish the capital.  In connection therewith the petitioner loaned additional sums to the Tubbs Co. to the extent that on June 30, 1929, these loans aggregated $186,000.  Late in 1928 and during 1929 it became apparent that this expansion program was a failure, the Tubbs Co. showing net losses for the *1145  calendar years 1928 and 1929 of $26,613.51 and $28,124.92, respectively.  The balance sheet of the Tubbs Co. as at June 30, 1929, shows assets and liabilities, as follows: ASSETSFixed AssetsReal estate$ 20,138.48Machinery and equipment44,935.71Truck401.25Office equipment1,863.0567,338.49Less reserve for depreciation36,192.6931,145.80$31,145.80Quick AssetsCash2,318.82Accounts receivable3,524.25Imprest fund (p. cash)35.00Postage (p. p. fund)19.195,897.265,897.26InventoryInventories84,783.43Penobscot Snowshoe Co10,000.00$131,826.49$131,826.49LIABILITIESCapital AccountsCommon stock$60,000.00Profit and loss53,174.08 (def.)Surplus61,294.20"54,468.28"54,468.28 (def.)Quick LiabilitiesNotes payable186,000.00Loss and gain account294.77$131,826.49$131,826.49*785  The assets shown in the above balance sheet were not worth more than the values placed upon them in said balance sheet.  The Tubbs Co. had no liabilities as of June 30, 1929, except those shown on said balance sheet.  The petitioner never exercised the option to purchase the capital stock of the Tubbs Co. for $30,000.  On or about August 20, 1929, the petitioner purchased all of the capital stock of the Tubbs Co. for $5,000.  *1146  After the acquisition of the said stock by the petitioner, the Tubbs Co. continued to operated and do business as a separate corporate entity, and the petitioner made certain additional loans to it.  On May 28, 1931, the total indebtedness of the Tubbs Co. to the petitioner was $209,687.04.  On May 28, 1931, the petitioner was the sole creditor and stockholder of the Tubbs Co. and on that date purchased all of the property and assets, except cash, of the Tubbs Co.  On May 28, 1931, the assets of the Tubbs Co. stood on its books at $142,042.54, against which a reserve for depreciation was set up in the amount of $45,979.31.  These assets of the Tubbs Co. were not worth more than the depreciated value at which they were carried on the books of*786  the Tubbs Co.The purchase of the property and assets of the Tubbs Co. was reflected on petitioner's books of account by the following entries: Sundry assets$142,042.54Notes receivable$96,062.63Reserve for depreciation45,979.91To record purchase of all of the assets and property of the W. F. Tubbs Co.Reserve for contingencies113,624.41Notes receivable113,624.41To charge off the balance of the notes of the W. F.Tubbs Co.Reserve for contingencies5,000.00Capital stock investment5,000.00To charge off the investment in the capital stock ofThe W. F. Tubbs Co.After May 28, 1931, the petitioner continued to operate the W. F. Tubbs Co. as a branch of the American Fork & Hoe Co.  In computing petitioner's net income for the fiscal year ended June 30, 1929, the Commissioner allowed no deduction for any part of the debt then due the petitioner from the Tubbs Co.The petitioner paid its Federal income tax for the fiscal year ended June 30, 1929, in the amounts and on the days set forth, as follows: September 16, 1929$22,200.00October 16, 19292,129.40December 16, 192924,329.40March 31, 193024,329.40June 16, 193020,274.50Total paid$93,262.70*787  OPINION.  VAN FOSSAN: In this opinion we will discuss the contested issues in the order hereinabove set forth.  *1147  ISSUE I.  The petitioner contends that under section 141(a), (d), and (e) of the Revenue Act of 1928, 1 it is entitled to include the Cronk & Carrier Manufacturing Co. in its consolidated income tax return for the fiscal year ended June 30, 1929.  *788  The petitioner bases its contention upon the statutory definition of an "affiliated group" which is "one or more chains of corporations connected through stock ownership with a common parent corporation." The chain here begins with the petitioner as the parent owning all the stock except qualifying shares of the General Land & Industrial Co., Ltd., which in turn owned all the stock except qualifying shares of the Welland Vale Manufacturing Co., which in turn owned all the stock except qualifying shares of Cronk & Carrier Manufacturing Co., which completes the chain.  All of these corporations, according to petitioner, were members of the affiliated group, and while the two intervening corporations were foreign, that fact does not exclude the Cronk & Carrier Manufacturing Co. from the consolidated return under section 141(e), *1148  because the latter company is in fact a domestic corporation, organized and existing under the laws of the State of New York.  In its brief the petitioner asserts that the only possible argument against including the Cronk & Carrier Manufacturing Co. in the consolidated return is the provision of section 238 of the Revenue Act of 1928 which provides*789  that "a foreign corporation shall not be deemed to be affiliated with any other corporation within the meaning of sections 141 or 142." Petitioner, in its principal brief, relied on our decision in , where it was held that foreign corporations may be included in the affiliated group, but are precluded from joining in a consolidated return made for the domestic corporations within the group.  In that case a foreign corporation owned all of the stock of two domestic corporations.  The Board held the three corporations constituted an affiliated group and allowed the two domestic corporations to file a consolidated return. Since the hearing in this case, however, the Board's decision in the cited case was reversed by the Circuit Court of Appeals for the Second Circuit (), that court holding that the prohibition in section 238, supra, could not be ignored and that the express provisions of that section must prevail.  The Supreme Court on January 6, 1936, denied certiorari, *790 . This decision by the Circuit Court of Appeals of the Second Circuit disposes of the arguments advanced by petitioner and, therefore, on this issue, the respondent must be affirmed. ISSUE II.  During the period December 1, 1928, to June 30, 1929, the petitioner paid $70,392.89 of obligations assumed by the Investment Co. under its sublease dated August 13, 1923.  During this same period.  the Investment Co. paid petitioner $29,000 on account, leaving a balance due petitioner at June 30, 1929, of $41,392.89.  The petitioner contends that this balance should not be accrued as income because it was uncollectible, it being urged that the Investment Co. was insolvent and in all probability the account would never be collected.  The petitioner adduced evidence to show that there was a serious deflation in real estate values in Cleveland during 1926, 1927, and 1928, that every effort was made to operate the Union Building and the garage at a profit, but that despite every effort rentals and other income from the building and garage were insufficient to meet the obligations the Investment Co. had assumed.  The financial condition of the latter company was established*791  by a balance sheet as of December 31, 1928, which reveals book assets of over $731,000 and liabilities, exclusive of capital stock and reserves, of over *1149  $856,000.  The principal book asset was leaseholds and buildings in the sum of over $678,000, which undoubtedly represented values prior to the deflation of 1926, 1927, and 1928.  While an excess of liabilities over assets does not necessarily mean permanent insolvency, that fact, together with the known fact of receivership of the Investment Co., the $41,392.89 default in rental obligations during the taxable year, and the fixed yearly disbursements required under its sublease, discloses the serious financial situation that existed on June 30, 1929.  Considering the facts known on June 30, 1929, we are of the opinion that petitioner is justified in its contention that in all probability the $41,392.89 of rentals due would never be received.  A taxpayer on the accrual basis can not be charged with income if there exists good reason for believing that the income can not be collected.  *792 ; ; ; , and cases there cited.  Here, when the ground rent, taxes, interest, and bond retirement obligations fell due the Investment Co. was unable to pay these obligations, which fact, with the other known factors at June 30, 1929, convinced petitioner that the unpain balances thereof would never be collected.  Subsequent events proved the correctness of this belief.  The amount owed to petitioner steadily increased until August 1931, when the petitioner repossessed the leaseholds and buildings, at which time the Investment Co. was over $123,000 in arrears on its obligations under the lease agreement of August 13, 1923.  It is our opinion that in the instant state of facts petitioner's income should include only the cash actually received from the Investment Co. during the taxable year.  ISSUE III.  The final issue is whether petitioner is entitled to deduct a portioner of the $186,000 advanced to the W. F. Tubbs Co.  The petitioner*793  has fixed the amount of its claimed deduction, $54,468.28, by taking the excess of the liabilities of the Tubbs Co. over its assets as shown by the balance sheet of that company at June 30, 1929.  The right to deduct a portion of a debt is provided for by section 23(j) of the Revenue Act of 1928.2 The statutory requirements *1150  set forth therein are different from the statutory requirements for deducting the entire debt.  The statute says that when the Commissioner is satisfied that a debt is recoverable only in part, he may allow such debt to be charged off in part.  In deducting a portion of a debt the taxpayer is under no duty to make the charge-off, but must satisfy the Commissioner that he is entitled to the deduction claimed.  Failure of the Commissioner to allow the deduction gives the taxpayer a right to have the Commissioner's ruling reviewed to determine whether or not the deduction should have been allowed.  ; ; *794 , reversing ; . See also , affirming . It is to be observed that petitioner could designate three of the Tubbs Co's. five directors; that it had a first mortgage on all the property and assets of the Tubbs Co.; that it financed and promoted an expansion program for the Tubbs Co. which failed to produce the desired results; that it was the sole creditor of the Tubbs Co. on June 30, 1929; that the assets of the Tubbs Co. were not worth more than the values placed upon them in the balance sheet; that*795  the liabilities exceeded the assets of the Tubbs Co. by $54,468.28; that for the years 1928 and 1929 the Tubbs Co. had net losses of $26,613.51 and $28,124.92, respectively, and we have the testimony of petitioner's vice president that in his opinion the advances to the Tubbs Co. were 40 to 50 percent bad at June 30, 1929.  Subsequent to June 30, 1929, the evidence shows that petitioner acquired in August 1929, all the Tubbs Co's. capital stock for $5,000, which was designated the "nuisance value" of the stock; that additional loans were made to the Tubbs Co. to the extent that on May 28, 1931, the Tubbs Co. owed petitioner $209,687.04; that on that date petitioner purchased all the property and assets of the Tubbs Co., except cash; that the assets so purchased were not worth more than the depreciated values appearing on the Tubbs Co's. books; that the petitioner's books reflect the charge-off in May 1931 of $113,624.41, being the balance of the notes of the Tubbs Co. after crediting the amount owed with the depreciated value of the assets acquired; and that after May 28, 1931, the petitioner continued to operate the Tubbs Co. as a branch of the American Fork & Hoe Co.  From the*796  foregoing summary of facts, we are of the opinion that the Commissioner should have been satisfied that only a portion of the $186,000 loaned by petitioner was recoverable, and that his failure to allow the deduction constituted error.  It was apparent at June 30, 1929, that petitioner would never recover all the sums advanced to the Tubbs Co.  The yardstick used to measure the portion *1151  of the aggregate loans that was worthless, is the difference between the assets and liabilities.  The petitioner was the sole creditor of the Tubbs Co. and the assets were worth no more than the values carried on the Tubbs Co.'s books.  The petitioner's only opportunity to recoup its loans over and above the assets would be from the earnings of the Tubbs Co.  It appears, however, that despite petitioner's efforts to expand the business of the Tubbs Co. net losses resulted for 1928 and 1929 and the failure of the expansion program was conceded as early as 1928.  The events occurring subsequent to June 30, 1929, corroborate the contention of the petitioner that this portion of its advances to the Tubbs Co. was worthless at June 30, 1929.  *797  The present situation differs from that before us in , in that here only a partial charge-off is claimed.  Our observations in that case related to a claim of entire worthlessness of the advances in question.  On this issue, therefore, we sustain the contention of the petitioner.  Reviewed by the Board.  Decision will be entered under Rule 50.MURDOCK MURDOCK, concurring: My views on the question of whether an affiliated group may contain a foreign corporation, and whether the domestic corporations within the group may join in a consolidated return, under section 141 of the Revenue Act of 1928, were fully set forth in Manus-Muller & Co.,30 B.T.A. 1015">30 B.T.A. 1015. The Circuit Court of Appeals for the Second Circuit considered the question and reversed the decision of the Board, 79 Fed.(2d) 19. The court there properly pointed out at the conclusion of its opinion that doubts on the question must be resolved against the taxpayer.  The interpretation which I placed upon the provisions of the act, including section 238, was not entirely free from doubt.  The question is a complicated one*798  and probably has been settled for all practical purposes by the decision of the Appellate Court in Commissioner v. Manus-Muller & Co., supra.Footnotes1. SEC. 141.  CONSOLIDATED RETURNS OF CORPORATIONS - 1929 AND SUBSEQUENT TAXABLE YEARS.  (a) Privilege to file consolidated returns. - An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year, in lieu of separate returns.  The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent.  In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.  * * * (d) Definition of "affiliated group". - As used in this section an "affiliated group" means one or more chains of corporations connected through stock ownership with a common parent corporation if - (1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and (2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.  As used in this subsection the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.  (e) A consolidated return shall be made only for the domestic corporations within the affiliated group.  An insurance company subject to the tax imposed by section 201 or 204 shall not be included in the same consolidated return with a corporation subject to the tax imposed by section 13. ↩2. SEC. 23.  DEDUCTIONS FROM GROSS INCOME.  In computing net income there shall be allowed as deductions: * * * (j) Bad debts.↩ - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such a debt to be charged off in part.