BENEFICIAL LOAN SOCY. OF TRENTON v. COMMISSIONER

*1343 In these proceedings respondent has determined deficiencies as follows: Against Beneficial Loan Society of Trenton, for period February 1, 1929, to May 31, 1929, $192.51; against American Loan Company of Akron, for period May 31, 1927, to January 31, 1928, $86.09; against American Loan Society of Camden, for period June 1, 1927, to January 31, 1928 $84.67; against Beneficial Loan Society of Providence, for*1161 period February 1, 1929, to May 31, 1929, $192.50; against Personal Finance Company of Lebanon, for period July 1 to December 31, 1927, $135.01.

The proceedings have been consolidated for hearing and all involve one common issue, which will be stated in the opinion.

FINDINGS OF FACT.

Beneficial Loan Society of Trenton. - Petitioner, hereinafter referred to as Trenton, was incorporated February 16, 1915, under the laws of the State of New Jersey, and is engaged in the business of making industrial loans, $300 or less, as principal. Its accounting period ended January 31, but permission was granted to change to *1344 the calendar year basis of filing by the Commissioner on December 26, 1929. The Commissioner, in his letter granting the change from a fiscal year to a calendar year basis, said: "The attention of the taxpayer should be called to the fact that in determining the tax on the return for the period from February 1, 1929, to December 31, 1929, the net income must be placed on an annual basis and the tax computed in accordance with section 47(c) of the Revenue Act of 1928."

The deficiency notice shows that the Commissioner found Trenton's net income to*1162 be $15,042.62 for the period February 1, 1929, to May 31, 1929. Petitioner filed its income-tax return on Form 1120 for the calendar year 1929, but the return itself shows that it covers a period of four months, to with, February 1, 1929, to May 31, 1929, and the amount of net income shown on the return is $15,042.62, the same as shown by respondent in his deficiency notice.

Trenton computed the tax on $15,042.62 by multiplying said net income by twelve and dividing by eleven, deducting specific credit in the amount of $3,000 and multiplying by the rate of tax, and taking eleven-twelfths thereof, which was a calculation of the tax on the calendar year basis from February 1 to December 31, 1929, and a placing of the income on an annual basis, as provided in section 47(c) of the Revenue Act of 1928.

On June 1, 1929, petitioner became a member of the affiliated group of Beneficial Industrial Loan Corporation, and for the remainder of the year 1929 its income was reported on the consolidated return filed by the parent corporation, the Beneficial Industrial Corporation. The consolidated income is not involved in this proceeding.

In the deficiency notice, the respondent prorated*1163 the specific credit of $3,000 provided by the Revenue Act of 1928, and allowed four-twelfths thereof, or $1,000.

American Loan Company of Akron, Ohio. - Petitioner, hereinafter referred to as Akron, was incorporated under the laws of Delaware, April 11, 1923, and is engaged in the business of making industrial loans of $300 or less, as principal. It established and maintained its accounting period on a fiscal year basis ending January 31.

The deficiency notice shows that the respondent found petitioner's net income to be $6,247.48 for the period June 1, 1927, to January 31, 1928, which was the same as that shown by the petitioner's return. Petitioner filed its separate income-tax return on Form 1120-A for the fiscal year 1928, beginning February 1, 1927, and ending January 31, 1928, but the return itself shows that it covers a period of eight months from June 1, 1927, to January 31, 1928. Petitioner *1345 computed the tax on the net income of $6,247.48 in conformity with section 105 of the Revenue Act of 1928, and deducted the specific credit by taking eleven-twelfths of $2,000, plus one-twelfth of $3,000. Eleven months of the fiscal year were in 1927 and one month*1164 in 1928.

From February 1 to May 31, 1927, the taxpayer was affiliated with the American Loan Company, Wilmington, Delaware, and its income for that period was included with said company in a consolidated income-tax return of the Beneficial Loan Society, Wilmington, Delaware, for the fiscal year ended January 31, 1928. This consolidated income is not involved herein. In the deficiency notice, the respondent, in computing the tax at the 1927 rate, prorated the specific credit of $2,000 provided by the Act of 1926 and allowed eight-twelfths thereof, or $1,333.33. In computing the tax at the 1928 rates the specific credit of $3,000 under the 1928 Act was prorated and $2,000 allowed.

American Loan Company of Camden. - Petitioner, hereinafter referred to as Camden, was incorporated February 3, 1927, under the laws of Delaware and is engaged in the business of making industrial loans of $300 or less as principal. It established its accounting period on a fiscal year basis ending January 31.

The deficiency notice shows that the respondent found petitioner's net income to be $8,470.85 for the period from June 1, 1927, to January 31, 1928, which was the same as that returned*1165 by the petitioner. Petitioner filed its separate income-tax return on Form 1120-A for the fiscal year 1928, beginning February 3, 1927, and ended January 31, 1928, but the return itself shows that it covers a period of eight months only, viz., from June 1, 1927, to January 31, 1928.

Petitioner computed the tax on the income of $8,470.85 in accordance with section 105, Revenue Act of 1928, and deducted the full specific credit in the following manner, viz., eleven-twelfths of $2,000 and one-twelfth of $3,000, as eleven months of the fiscal year were in 1927 and one month was in 1928. From February 1, 1927, to May 31, 1927, the petitioner was affiliated with the American Loan Company, Wilmington, Delaware, and its income for that period was included with said company in a consolidated income-tax return of the Beneficial Loan Society, Wilmington, Delaware, for the fiscal year ended January 31, 1928. This consolidated income is not involved herein. In the deficiency notice the respondent, in computing the tax at the 1927 rate, prorated the specific credit of $2,000 provided by the Act of 1926 and allowed eight-twelfths thereof, or $1,333.33, and in computing the tax at the 1928*1166 rates the specific credit of $3,000 under the 1928 Act was prorated and $2,000 allowed. On March 7, 1930, petitioner and respondent executed a written waiver of the statute of limitations, extending the period for assessment of the taxes for *1346 1927 and 1928 until December 31, 1930. The waiver is in the usual form, but has written in typewriting at the top the following: "Parent Company: Beneficial Loan Society of Delaware, Wilmington, Delaware." The notice of deficiency was dated April 23, 1930, and this appeal was taken June 16, 1930.

Beneficial Loan Society of Providence. - Petitioner, hereinafter referred to as Providence, was incorporated November 10, 1923, under the laws of Delaware, for the purpose of engaging in the industrial loan business in amounts of $300 or less, as principal. Its accounting period was a fiscal year ending January 31, but permission was granted to change to a calendar year basis by the respondent on December 26, 1929. The respondent, in his letter granting the change from a fiscal year to a calendar year basis, said; "The attention of the taxpayer should be called to the fact that in determining the tax on the period from February 1, 1929 to*1167 December 31, 1929, the net income must be placed on an annual basis, and the tax computed in accordance with section 47(c) of the Revenue Act of 1928."

The deficiency notice shows that the respondent found petitioner's net income to be $7,050.95 for the period February 1 to May 31, 1929. Petitioner filed its separate income-tax return for the period from February 1 to May 31, 1929, on Form 1120.

Petitioner computed the tax on the net income for said four months, to wit, $7,050.95, by multiplying said net income by twelve and dividing by eleven and deducting the specific credit of $3,000 and then multiplying by the rate of the tax, and taking eleven-twelfths thereof, which was a calculation of the tax on the calendar year basis from February 1 to December 31, 1929, and placing the income on an annual basis, as provided by section 47(c) of the Revenue Act of 1928. On June 1, 1929, petitioner became a member of an affiliated group headed by the Beneficial Industrial Loan Corporation, and for the remainder of the calendar year its income was included and reported on the consolidated return filed by the parent corporation, the Beneficial Industrial Loan Corporation. The consolidated*1168 income is not involved in this proceeding.

In the deficiency notice, the respondent prorated the specific credit of $3,000 allowed by the Revenue Act of 1928 and allowed fourtwelfths thereof, or $1,000.

Personal Finance Company of Lebanon. - Petitioner, hereinafter referred to as Lebanon, was incorporated under the laws of Delaware, October 6, 1926, for the purpose of engaging in the industrial loan business in amounts of $300 or less, as principal. Its accounting period was on the calendar year basis. The deficiency notice shows that the petitioner's net income for the period July 1, 1927, to December 31, 1927, was $6,513.98, the amount returned by petitioner. *1347 Petitioner filed its separate income-tax return for that period on Form 1120. It computed the tax on $6,513.98 by deducting the entire specific credit of $2,000, althought the income reported on the return covered only a period of six months of the calendar year 1927, and multiplying by the rate of tax, 13 1/2 per cent, as provided in sections 230 and 236, Act of 1926.

For the first six months of 1927, from January 1, 1927, to June 30, 1927, the petitioner was affiliated with the Collateral Bankers, *1169 Inc., New York, and its return for that period was included in and returned by the Collateral Bankers, Inc., in a consolidated return for the calendar year 1927. This consolidated income and return is not involved herein. In the deficiency notice the respondent prorated the specific credit and allowed $1,000, or one-half thereof for the period of six months from July 1 to December 31, 1927.

OPINION.

BLACK: As to all of the petitioners there is one issue which is common, and that is whether or not each petitioner is entitled to take as a deduction from a return reporting income for a fractional part of a year, the entire specific credit allowed to a corporation with net income less than $25,000 per annum, by the Revenue Acts of 1926 and 1928, or whether such specific credit should be prorated over the number of months for which income has been reported separately, as respondent has done in his determination of the deficiencies involved in these proceedings.

There is an issue of limitation as to petitioner, American Loan Company of Camden. We will discuss these issues in their order.

An examination of the findings of fact will show that some of the income-tax returns in*1170 question are governed by both the Revenue Acts of 1926 and 1928, because the fiscal year of the taxpayer began in 1927 and ended in 1928, and some of them are governed solely by the Revenue Act of 1928, but in so far as a decision on the first point is concerned, it is not believed that there is any substantial difference in the provisions of the two acts and that whatever is the correct rule to apply to one is the correct rule to apply to the other. Under both the 1926 and 1928 Acts, the Commissioner has promulgated regulations which require the subsidiary or subordinate corporation, member of an affiliated group, whose status is changed during the taxable year, to make a separate *1348 return for that part of the taxable year during which time it was outside of the affiliation. See art. 634, Regulations 69; art. 733, Regulations 74; art. 13, Regulations 75 (which govern the year 1929 and subsequent years). This requirement, that the subsidiary or subordinate corporation, whose status has been changed during the taxable year shall make a separate return for that part of the taxable year during which time it was outside of the affiliated group, has received the approval of*1171 the Board and the courts. , and cases there cited; , affirmed on this point, .

Petitioners in the instant case complied with the above stated regulations, and filed separate returns, in which they included that part of their net income earned during that part of their calendar year or fiscal year, as the case may be, while they were outside the affiliation. Their income for the period of affiliation was included in the consolidated return of a parent corporation. On these points there is no dispute between petitioners and the Commissioner, but as to the use of the specific credit deduction, there is a contest. Petitioners, as has already been stated, contend they are entitled to deduct the entire amount permitted by the statute for a whole taxable year of twelve months, whereas respondent contends that this credit should be prorated in proportion to the income for the number of months included in the return.

Respondent gives, as a justification for his contention, section 239(b) of the 1926 Act, and a corresponding provision in*1172 the 1928 Act, section 47(e). Section 239(b) of the 1926 Act reads: "* * * In the case of a return made for a fractional part of a year, except a return made under subdivision (a) of section 226, the credit provided in subdivision (b) of section 226 shall be reduced to an amount which bears the same ratio to the full credit therein provided as the number of months in the period for which the return is made bears to twelve months."

The Commissioner promulgated article 625 of Regulations 69 under the foregoing provision of the 1926 Act, and article 715 of Regulations 74 and 75 under section 47(e) of the 1928 Act. He followed out the provisions of these regulations in the determination of the deficiencies involved in these proceedings.

The method used by the Commissioner in the instant case recently received the approval of the United States Court of Claims in . We agree with the decision of the Court of Claims in that case.

In , which was governed by the Revenue Act of 1918, we approved the action of the Commissioner in requiring*1173 the Green River Distilling Company to file its separate return for the fractional part of the year (8 months) during which time it was not affiliated with the Copperfield Company and to file a consolidated return with said Copperfield Company for the remainder of the year (4 months). The facts in that case show that in connection with his determination of the deficiency *1349 against the Distilling Company, the respondent reduced its invested capital to eight-twelfths of the amount of invested capital, for the 8-month period. He also reduced the excess-profits and war-profits credits to eight-twelfths of the amounts allowable for a full year. This action of the Commissioner, the taxpayer vigorously contested and contended the Commissioner had no right to prorate the amount of invested capital or of the excess-profits and war-profits credit over a period of eight months, but must allow them for the full 12-month period, notwithstanding that income of only eight months was included in the separate return. This contention there made was very similar to the one now made by petitioners in the instant case. Petitioner in the Green River Distilling Co. case relied upon some*1174 of the same authorities that the petitioners in the instant case urge in their brief, but we sustained the action of the Commissioner in his method of prorating the amount of invested capital and the excess profits credit and overruled the contentions of petitioner. We think the principles announced in Green River Distilling Co. are controlling here.

Undoubtedly the point raised by all the petitioners in the instant case would be governed by the same rule applied in , and , unless Beneficial Loan Society of Trenton and Beneficial Loan Society of Providence, which each on December 26, 1929, secured permission of the Commissioner to change their accounting period from a fiscal year period ending January 31, 1930, to a calendar year period beginning February 1, 1929, and ending December 31, 1929, be excepted and are entitled to take the specific credit deduction in accordance with section 47(a), (c), (e) of the Revenue Act of 1928, which reads:

(a) Returns for short period resulting from change of accounting period. - If a taxpayer, with the*1175 approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

* * *

(c) Income placed on annual basis. - If a separate return is made under subsection (a) on account of a change in the accounting period, the net income, computed on the basis of the period for which separate return is made, shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in the period for which the *1350 separate return is made. The tax shall be such part of the tax computed on such annual basis as the number*1176 of months in such period is of twelve months.

* * *

(e) Reduction of credits against net income. - In the case of a return made for a fractional part of a year, except a return made under subsection (a), on account of a change in the accounting period, the personal exemption and credit for dependents, and the specific credit for corporations, shall be reduced respectively to amounts which bear the same ratio to the full credits provided as the number of months in the period for which return is made bears to twelve months.

We think the provisions of section 47(a)(c)(e) of the Revenue Act of 1928 would govern in the cases of Trenton and Providence if they had not been in and out of affiliation during the taxable year. If they had not been in and out of affiliation during the taxable year, we think their proper procedure, under the permission which had been granted by the Commissioner, would have been to file returns covering the calendar period, February 1 to December 31, 1929, including all their income for such period and having it placed upon an annual basis, as provided in section 47(a)(c)(e) of the Revenue Act of 1928.

But Trenton and Providence, like the other petitioners*1177 in this proceeding, were in and out of affiliation during the taxable years. In the first four months of their calendar year (changed to such by permission of the Commissioner) beginning February 1, 1929, they were not affiliated and their income was reported separately. For the remainder of the calendar year their income was included in the consolidated returns of parent corporations. We, therefore, think the same rule which must be applied to the other petitioners in this proceeding must be applied to them and that rule, as we have already stated, we think was correctly decided by us in , and by the Court of Claims in That rule we follow in the instant case and approve the method used by the Commissioner in his determination of the deficiencies.

The remaining question relates to the statute of limitations raised by Camden, which executed and delivered to respondent a waiver of the statute of limitations dated March 7, 1930, extending the period for assessment of the taxes involved herein to December 31, 1930. The notice of deficiency was dated*1178 April 23, 1930, and the appeal was taken June 16, 1930. The written consent or waiver is in the usual form and no objection is made thereto, except it is pointed out that the name of the parent corporation of the affiliated group appears at the top of the printed form, but not in the caption or body of the consent in writing, and it is argued that because of this the waiver should be confined to the affiliated period for which consolidated *1351 return was filed, and not apply to the separate return filed by Camden. There is nothing to indicate that the waiver is so limited. The parent company is not a party to the agreement. Camden is the taxpayer and the only party to the agreement which waived the statute of limitations on 1927 and 1928 taxes until December 31, 1930. It follows that the waiver is valid.

Reviewed by the Board.

Decision will be entered for the respondent in all the respective dockets.