Joseph & Feiss Co. v. Commissioner

*1424 This is a proceeding for the redetermination of a deficiency in income tax for the year 1927 in the amount of $8,707.98. The issue is whether or not the fractional parts of the year 1916, prior and subsequent to affiliation of the petitioner and its subsidiary on May 5, 1926, constitute "taxable years" within the purview of section 200(a) of the Revenue Act of 1926, for the purpose of applying a net loss against income in succeeding years as provided in section 206(b) of the same act.

FINDINGS OF FACT.

The facts were stipulated as follows:

*1152 The petitioner is a corporation organized under the laws of the State of Ohio, its principal office at Cleveland, Ohio.

*1425 The notice of deficiency, a true copy of which is attached to the petition, was mailed to the petitioner on October 11, 1929.

The taxes in controversy are income taxes for the calendar year 1927 in the amount of $8,707.98, which is the deficiency proposed by the said notice of deficiency.

In the notice of deficiency the Commissioner disallowed a deduction of $87,229.11, which deduction was taken by petitioner from the gross income reported by it for the year 1927 on account of a net loss in its operations for the calendar year 1925.

For the year 1925 the petitioner sustained and reported on its income tax return, which was duly filed, a net loss in the amount of $232,365.48.

The said income tax return for 1925 was a separate income tax return reporting only the net loss of the said The Joseph & Feiss Company for the calendar year 1925.

On May 5, 1926 the said The Joseph & Feiss Company purchased for cash and notes all of the capital stock of The Kibler Company, a corporation organized under the laws of the State of Ohio, and since*1153 the said May 5, 1926, and throughout the year 1927, continued to own and hold all of the said capital stock.

For the fiscal year ended January 31, 1926, The Kibler Company filed its separate income tax return.

On November 10, 1926 the Commissioner of Internal Revenue granted permission to The Kibler Company to change its accounting period and taxable year from the fiscal year ended January 31st to the calendar year ended December 31st.

For the calendar year 1926 an income tax return was filed on a consolidated basis, including therein the income of the said The Joseph & Feiss Company for the calendar year 1926 and the income of the said The Kibler Company for the period February 1st to December 31st, 1926. Said return was filed with the Collector of Internal revenue, 18th District of Ohio, on May 14, 1927.

For the said year 1926 the net income of The Joseph & Feiss Company was and was reported in the said consolidated return in the amount of $69,469.86, without deduction of the said 1925 net loss, and for the period February 1st to December 31st, 1926 the net income of the said The Kibler Company was and was reported in the said consolidated return in the amount of $1,816.53, *1154 without deduction of the 1925 net loss of the said The Joseph & Feiss Co. The said consolidated return, therefore, showed the consolidated income of the two companies in the amount of $71,286.39 without deduction of the said 1925 net loss. On this return a deduction was taken for the said 1925 net loss in the anount of $232,365.48, leaving a consolidated net loss of $161,079.09.

For the year 1927 the consolidated income tax return was filed by the said The Joseph & Feiss Company and the said The Kibler Company. For the said year the net income of the said The Joseph & Feiss Company was and was reported on the said consolidated return in the amount of $87,229.11, without deduction of any part of the said 1925 net loss and for the year 1927 the net loss of the said The Kibler Company was and was reported on said consolidated return in the amount of $22,725.54 without deduction of any part of the said 1925 net loss of the said The Josepy & Feiss Company.

On the return thus filed for the year 1927, a deduction was taken on account of the 1925 net loss out of the $161,079.09 not used as a deduction for the year 1926 in the amount of $87,229.11. This deduction of the said $87,229.11*1155 was disallowed by the Commissioner who thus computed the deficiency in controversy.

*1426 The terms "net income" or "net loss" as used in the foregoing stipulation mean the excess of the gross income over the deductions allowed by section 234 of the Revenue Act of 1926 or the excess of the deductions so allowed over the gross income as the case may be. The said The Joseph & Feiss Company and the said The Kibler Company were in the years 1925, 1926 and 1927 not in receipt of any dividends or of any interest received free from tax. All the gross income received by or accruing to the said respective companies was derived from the operation of a trade or business regularly carried on by them and no depletion was sustained and no deduction therefor was used in the above computations of net income.

OPINION.

GOODRICH: Petitioner contends that the calendar year 1926 is the "succeeding taxable year" and the calendar year 1927 is the "next succeeding taxable year" designated in section 206(a) of the Revenue Act of 1926, and that against the income derived by itself and its affiliate during those years should be applied, to the extent permitted under the decision in *1156 , its net loss sustained in 1925.

Upon facts presenting a situation similar to that here obtaining and raising this same issue under section 200(b) of the Revenue Act of 1924, the pertinent provisions of which are identical with those of the same section of the 1926 Act, we have heretofore decided adversely to petitioner's contention. .

Reviewed by the BOARD.

Judgment will be entered for the respondent.

VAN FOSSAN dissents.

TRAMMELL, dissenting: I dissent on the following grounds. First, upon the reasoning of the Circuit Court of Appeals in the case of United States v. Hoffman, 61 Fed.(2d) 294. Second, even under the Commissioner's regulations no short period return was required under the facts of this case. Third, section 200 defines "taxable year" as follows:

The term "taxable year" includes in the case of the return made for a fractional part of a year under the provisions of this title or under regualtions prescribed by the Commissioner with the approval of the Secretary, the period for which*1157 such return is made.

It is to be observed that the statute does not define the taxable year as being a period for which a return is required for a period less than a year, but "the period for which such return is made." The taxpayer did not make any return for a fractional part of a year; therefore, under the definition contained in the statute the fractional *1427 years for which, as contended by the respondent, returns should have been made are not fractional year returns. The only taxable years here are periods of twelve months. It is only when the returns are made for fractional parts of years, not when required to be made, that the statute provides that the term "taxable year" shall include a fractional part of a year.

SMITH and SEAWELL agree with this dissent.