Court Opinion

ID: 6842669
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:22:50.89088+00
Date Added: 2024-06-11T08:48:39.066346
License: Public Domain

CHASE, Circuit Judge
(after stating the facts as above).
Briefly stated, the issue of law which forms the basis of this appeal is whether these corporations were affiliated for taxation purposes not only in 1918, as all agree, but also whether their predecessors, owned by the same stockholders during the pre-war period from the time the Massachusetts corporation was organized in 1912, are to be treated as one for the purpose of computing the deductible pre-war credit. It is true that the petitioner -and the Massachusetts corporation were so related through stock ownership after the Massachusetts corporation was organized that, had that same situation prevailed in 1918, they would have been affiliat*147ed corporations. But the petitioner insists that Congress intended affiliation with its attendant business unity to be confined to the taxable year 1918; while the respondent has taken the position that the law requires getting the basis for comparing 1918 net income with pre-war net income by looking through form to the same business unit for each period in the same way where the facts are the same or substantially so.
Section 330 of the Revenue Act of 1918, above quoted, providing that, “in the case of the reorganization, consolidation, or change of ownership after January 1, 1911, of a trade or business now carried on by a corporation * * * the net income and invested capital of such predecessor trade or business * * * shall be deemed to have been the net income and invested capital of such corporation,” applies to the business unit if the formation of the petitioner and of the Massachusetts corporation in 1912 by the stockholders of the petitioner and Rubin, and the conduct of the business thereafter as the expanded business of the petitioner, can be justly called a “reorganization, consolidation, or change of ownership” of the entire business, or if the taking over of the assets of the Massachusetts corporation by the Delaware corporation and its affiliation with the petitioner can justly be called such a reorganization, consolidation, or change of ownership. Surely if we look to the reorganization and consolidation which actually took place by virtue of these changes, although they were not all made at the same time, there can be no doubt that they bring the petitioner squarely within section 330. The actual facts cannot be ignored, although these changes were taken step by step. What happened, stripped of nonessential details, is that certain men bought the wholesale shoe business of an individual in 1912; formed a corporation which took over that business; decided to enlarge the business to manufacture as well as sell shoes; took in Rubin; bought a shoe factory; formed another corporation to take over that factory and make shoes; later formed the Delaware corporation to take over the business and assets of the first shoe-manufacturing corporation; and so we find them in 1918 doing the expanded business of 1912 through the instrumentality of the petitioner corporation and the Delaware corporation. The latter is apparent because the ownership of stock by these same men in these last corporations is the very thing which makes those corporations admittedly affiliated in 1918.
It may be noted that this method of treatment has the support of Treasury Department Regulations 45, § 802. While it is said that this particular tax was of such short duration, being applicable only in 1918, that the Treasury Department’s interpretation of the law should be given little weight, as it was in force an insufficient time to have acquired the implied approval of Congress, we may agree with the petitioner as to the point of time and that no regulation can alter or amend the law, Morrill v. Jones, 106 U. S. 466, 1 S. Ct. 423, 27 L. Ed. 267, and still find some virtue in the fact that the regulation was authorized by the law, and its soundness is by no means entirely dependent upon the time it remained in force. It could hardly have been expected to attain an operative age greater than that of the law to which it applied. This regulation follows:
‘ “The consolidated net incomes of afiiliated corporations for the prewar period shall be the average consolidated net income for the prewar years of such of the several corporations included in the consolidation for the taxable year as were affiliated during the prewar period, plus the aggregate of the average net income for each of the corporations not affiliated during the prewar period which were in existence during all of the prewar period or during at least one full year within the prewar period. The net income of a subsidiary corporation organized during the prewar period by an existing corporation shall also be included.”
While sections 320 and 330 of the Revenue Act of 1918, above quoted, embrace the case now presented, the regulation supplied the elements of detail thought inadvisable to put into the general law which covered the subject broadly. The regulation is perfectly consistent with the law and carries out the evident intent of Congress to reach for special taxation purposes net income attributable solely to abnormal war profits. This is done by taking from 1918 net income what the business earned normally during the three years before war Conditions prevailed, regardless of the form of ownership, but with due regard for the fact of substantial identity of ownership extending throughout the business as a whole during the pre-war period. In carrying out this purpose, net income and invested capital are linked together and the amount of the war profits credit made dependent upon both, section 311 (a) (2), Act of 1918, whether either covers all or a part only of the pre-war period, disregarding only fractions of years in which *148no part of the business was in existence the entire year.
By deducting from 1918 net income “the average consolidated net income” received by the predecessors of the 1918 affiliated corporations during the pre-war years rather than deducting the consolidated average net income of each for the pre-war years, the Commissioner has recognized and given practical application to the fact that the petitioner’s business was in existence during the entire pre-war period, although at first it had not, of course, attained the size to which it grew. In 1912, as expanded and enlarged to include the manufacture of shoes as well as the sale of them at wholesale, the ownership of the expanded business, being substantially the same as before, gave it the character of business oneness, W. S. Bogle & Co. v. Commissioner (C. C. A.) 26 F.(2d) 771, 772, and a pre-war affiliated status.
We have been referred to section 320(a), Act of 1918, which provides how net income shall be “ascertained and returned” for the calendar years 1911, 1912, 1913, and “for the taxable year.” It is thought to have been overlooked when the Commissioner’s action in computing the war profits tax was approved by the Board and to be at variance with the action taken. Yet the amount of net income for all.these years is not in dispute, and we can see no reason for thinking this section was overlooked or that it is applicable to anything but the method of arriving at the net income of the component parts of the business unit. It does not afford a basis for computing average net income'for the pre-war period even of such component parts. That is treated in section 320(b). And, being confined to the separate net income of such parts for the years in question, it stops far short of providing a method for getting at the average net income for the pre-war period of a business conducted in 1918 by affiliated'corporations who.succeeded to pre-war affiliated business.
Although the petitioner does not quite claim that treating the business as affiliated during the pre-war period is contrary to the due process clause of the Constitution, it does insist that the constitutionality of such a construction is so doubtful that affiliation should be confined to 1918 to avoid any uncertainty in that regard. When the law as we have applied it is tested, as it should be, to see that the tax is not imposed in such an arbitrary or capricious manner as to amount to confiscation, Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 24, 36 S. Ct. 236, 60 L. Ed. 493, L. R. A. 1917D, 414, Ann. Cas. 1917B, 713, it would seem that there has been no violation of the Fifth Amendment. All in the same class are treated alike, and the class is determined on the reasonable basis of business affiliation in fact during the pre-war years. Compare Billings v. United States, 232 U. S. 261, 283, 34 S. Ct. 421, 58 L. Ed. 596.
Judgment affirmed.