National Casket Co. v. Commissioner

NATIONAL CASKET COMPANY, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

National Casket Co. v. Commissioner

Docket No. 50320.

United States Board of Tax Appeals

29 B.T.A. 139; 1933 BTA LEXIS 992;

October 20, 1933, Promulgated

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1. The petitioner is a member of a group of affiliated corporations which for many years have filed consolidated returns upon the basis of a fiscal year ended June 30. It owned all of the capital stock of one of the affiliates, which was liquidated and dissolved in 1928, and sustained a loss thereby. The liquidated corporation operated at a profit for the fiscal year ended June 30, 1925, but at a loss in the succeeding years. Held, that the loss sustained by the petitioner in 1928 should be decreased by the losses of the liquidated corporation during the period of affiliation.

2. Under an amendment to the Corporation Excise Tax Law of Massachusetts (ch. 258, Laws of Massachusetts, 1927), effective January 1, 1928, the corporation excise tax for the Massachusetts tax year ended June 30, 1928, accrued and became a legal obligation on June 30, 1928, and the corporation excise tax for the Massachusetts tax year ended June 30, 1927, accrued and became a liability on January 1, 1928, and both such taxes are deductible in a Federal income tax return for the fiscal year ended June 30, 1928, where the taxpayer keeps its books of account and makes its income tax returns on the accrual basis.

James L. Dohr, Esq., for the petitioner.

Philip M. Clark, Esq., and Prew Savoy, Esq., for the respondent.

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SMITH

This is a proceeding for the redetermination of a deficiency in income tax for the fiscal year ended June 30, 1928, of $14,601.65. The petitioner alleges that the respondent erred in disallowing as deductions from gross income: (a) A loss sustained by the petitioner in an amount not less than $105,355.07 upon the dissolution and liquidation of the petitioner's wholly owned subsidiary, Hornthal & Co.; (2) the amount of $4,861.96 for ordinary and necessary expenses paid or incurred during the year, consisting principally of contributions; and (3) excise taxes accrued within the taxable year in amounts of $6,088.94, $7,143.06 and $124.10.

FINDINGS OF FACT.

The petitioner is the parent corporation of a group of companies engaged in the business of manufacturing caskets and funeral supplies. The entire group of companies has a fiscal year ended June 30, and for many years prior to and including June 30, 1928, filed consolidated returns. The petitioner and its affiliates kept their books of account on the accrual basis and filed returns upon that basis.

As of July 1, 1924, the petitioner purchased all of the capital stock of Hornthal & Co., an Illinois corporation, at a price of $163,515.29. The net income of Hornthal & Co. was included in the consolidated returns filed for the years named below, such net income being finally determined by the respondent as follows:

Year ended	Amount
June 30, 1925 (gain)	$43,091.97
June 30, 1926 (loss)	10,993.44
June 30, 1927 (loss)	78,087.51
June 30, 1928 (loss)	11,278.42

The petitioner decided to dissolve Hornthal & Co. and take over its assets as of April 30, 1928. At that time Hornthal & Co. was indebted to the petitioner in the amount of $485,551.26. It had assets of a value of $543,711.48. The net assets were applied against the indebtedness owed by Hornthal & Co. to the petitioner and the balance of $58,160.22 was applied against the National Casket Co.'s investment in the stock of Hornthal & Co. of $163,515.29. The loss sustained by the National Casket Co. from the liquidation, without taking into account the losses of Hornthal & Co., was $105,355.07, none of which has been allowed by the respondent in the computation of the deficiency.

The petitioner incurred liability for Massachusetts corporation excise taxes as follows:

Massachusetts tax	Deducted in Federal	Amount of
period	return for year ended	tax
June 30, 1926	June 30, 1928	$6,301.05
June 30, 1927	June 30, 1929	6,088.94
June 30, 1928	June 30, 1930	7,143.06
June 30, 1928	June 30, 1931	124.10

The amount of Massachusetts excise tax accruing in the fiscal year ended June 30, 1928, was $6,088.94, representing a liability for the Massachusetts tax year ended June 30, 1927, and $7,143.06 and $124.10 for the Massachusetts tax year ended June 30, 1928.

OPINION.

SMITH: The first question presented is the amount of the deductible loss sustained by the petitioner upon the liquidation of Hornthal & Co. as of April 30, 1928. The petitioner claims that the loss sustained was $105,355.07. The respondent admits that this would be the amount of the deductible loss were it not for the fact that Hornthal & Co. sustained operating losses for the fiscal years ended June 30, 1926, 1927 and 1928, in the aggregate amount of $100,359.37, which operated to reduce the taxable net income of the affiliated group for the years in which sustained. The respondent contends therefore that the deductible loss of $105,355.07 should be reduced by the losses of Hornthal & Co. during the period of affiliation, and that the actual loss sustained from the liquidation of Hornthal & Co. was only $4,995.70. The petitioner contends that its actual loss upon the liquidation of Hornthal & Co. was not lessened by the fact that Hornthal & Co. had operating losses during the three fiscal years ended June 30, 1926, 1927 and 1928. It further contends that if the loss sustained is to be reduced in any amount it should not be reduced in an amount exceeding the operating loss of Hornthal & Co. for the fiscal year ended June 30, 1928, namely, $11,278.42; further, that in any event the loss of $105,355.07 should not be reduced by a greater amount than the net operating loss of Hornthal & Co. from the date of acquisition of the capital stock of that company, namely, July 1, 1924, to the date of liquidation in 1928, and that the net operating loss on such computation was only $57,267.40.

The question here presented has been before the Board and the courts a number of times. United Publishers Corp. v. Anderson, 42 Fed.(2d) 781; Burnet v. Riggs Natl. Bank, 57 Fed.(2d) 980; Burnet v. Aluminum Goods Mfg. Co.,287 U.S. 544; McLaughlin v. Pacific Lumber Co., 66 Fed.(2d) 895; Hernandez v. Ilfeld Co., 66 Fed.(2d) 236. The facts in Hernandez v. Ilfeld Co., supra, are substantially the same as those involved in this proceeding. The court there held that the loss on liquidation must be reduced by the net loss of the subsidiary during the period of affiliation; for otherwise the business unit would be obtaining a double deduction of a net operating loss. We reached the same conclusion in Summerfield Co.,29 B.T.A. 77. We are of the opinion, therefore, that the liquidating loss sustained by the petitioner upon the liquidation of Hornthal & Co. in the fiscal year ended June 30, 1928, claimed to be in the amount of $105,355.07, must be reduced by the operating losses of $57,267.40 of the subsidiary during the period of affiliation.

The second question presented by this proceeding is the right of the petitioner to deduct from gross income as ordinary and necessary expenses an amount of $4,861.96 which the respondent has disallowed in the computation of a deficiency. At the hearing it was stipulated by the parties that of this total $2,586.96 constituted ordinary and necessary expenses deductible from gross income and that $2,275 was properly disallowed by the respondent.

The third point in issue is the right of the petitioner to deduct from gross income accruals of the Massachusetts excise tax within the taxable year ended June 30, 1928, of $6,088.94, $7,143.06 and $124.10. The first named amount represents the excise tax based upon the petitioner's income for the fiscal year ended June 30, 1927. Both parties are agreed that the amounts of $7,143.06 and $124.10 are excise taxes which accrued on June 30, 1928, and are deductible from gross income. The only question is whether the item of $6,088.94 is also a legal deduction.

Under the Massachusetts Excise Tax Law, which was in force in 1927, the excise tax accrued for the fiscal year ended June 30, 1927, on April 1, 1928, although not payable until the following October. H. H. Brown Co.,8 B.T.A. 112. By an amendment effective January 1, 1928 (ch. 258, Laws of Massachusetts, 1927), the above statute was amended to provide that the excise tax payable accrued as of the end of the calendar or fiscal year of the corporation. It was by virtue of the amendment that the parties stipulated that the excise taxes due upon the petitioner's business for the fiscal year ended June 30, 1928, accrued on June 30, 1928. The respondent raises the question, however, as to the date of accrual of the excise tax paid by the petitioner for the fiscal year ended June 30, 1927.

In General Counsel Memorandum 8553, Cumulative Bulletin IX-2, p. 109, it was held that under the Massachusetts Corporation Excise Tax Law, as amended April 15, 1927, effective January 1, 1928, in the case of a corporation which filed a return for the calendar year 1928 and kept its books of account on the accrual basis, there might be deducted in computing net income of that year the amount of excise taxes which had accrued upon the business of the year 1927 and which under the old law accrued April 1, 1928, and also those which accrued as of December 31, 1928. The respondent was of the opinion that the only result of the amendment, so far as it affected the excise tax liability of a corporation for the calendar year 1927, which accrued on April 1, 1928, was to set back the date of accrual to January 1, 1928, the effective date of the act. Whether this be a correct conclusion is not material to the proceeding at bar. Clearly, under the old law, this petitioner's tax liability for the amount of $6,088.94 accrued on April 1, 1928. The respondent makes no contention that the petitioner was exempt from payment of the $6,088.94 in question and the evidence shows that this amount was paid in October 1928. It is immaterial to decide whether the correct date of accrual was January 1 or April 1, 1928. In either event the petitioner, keeping its books of account upon the accrual basis, was entitled to deduct the amount. This issue is determined in favor of the petitioner.

Judgment will be entered under Rule 50.