*2076 Four separate companies had net losses in 1921; three of them had net losses in the first two months of 1922 and one had a net income in that period. The four became affiliated on March 1, 1922, and remained affiliated throughout the remainder of that year and the calendar year 1923. Held that the first two months of 1922 do not constitute a taxable year and that the 1921 net losses should be applied to 1922 and 1923 income, in accordance with the decisions in Alabama By-Products Corporation,18 B.T.A. 919">18 B.T.A. 919, and Swift & Co. v. United States,69 Ct.Cls. 171; 38 Fed.(2d) 365.
*725 This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1922 and 1923 in the respective amounts of $16,462.29 and $11,462.02. Petitioner alleges that the respondent erred in computing consolidated net income in that he disallowed as deductions the net losses sustained in 1921 by companies which became affiliated with the petitioner in 1922.
In addition to the written stipulation*2077 of facts filed, counsel for the parties stipulated at the hearing that the tax due from the affiliated group may be assessed against and collected from the petitioner in this proceeding.
FINDINGS OF FACT.
The petitioner, General Box Corporation, was organized under the laws of the State of Delaware in March, 1922, and has its principal office at 500 North Dearborn Street, Chicago, Ill.
As of March 1, 1922, petitioner exchanged certain shares of its stock for all of the stock of fifteen smaller companies among which were:
Detroit Wire Bound Box Company
Four-One Box Company of Houston
Sheboygan Cigar Box Lumber & Manufacturing Company
Pioneer Box Company
On or about April 25, 1922, the General Box Company was organized and the petitioner exchanged all the stock of fourteen of said fifteen companies for all of the stock of the General Box Company.
Consolidated corporation income tax returns for the period March 1, 1922, to December 31, 1922, and for the year 1923 were filed by the petitioner; the General Box Company; and the subsidiary corporations with which they were affiliated.
*726 The consolidated return for the period March 1, 1922, to December 31, 1922, included*2078 the net income of the following corporations, among others, and the amounts listed represent the income earned by these corporations during the fractional part of the year 1922 in which they were affiliated with the petitioner:
| Detroit Wire Bound Box Company, net income | $32,393.17 |
| Four-One Box Company of Houston, net loss | 2,232.82 |
| Sheboygan Cigar Box Lumber & Manufacturing Company, net income | 3,997.61 |
| Pioneer Box Company, net income | 33,922.71 |
The Detroit Wire Bound Box Company sustained an operating statutory net loss of $8,190.55 during the calendar year 1921; earned a net income of $5,659.68 during the fractional period of 1922 before affiliation with the petitioner; and during the calendar year 1923 earned a net income of $41,329.04.
The Four-One Box Company of Houston sustained an operating statutory net loss of $8,126.29 during the calendar year 1921; sustained an operating statutory net loss of $5,802.80 during the fractional period of 1922 prior to affiliation with the petitioner; and earned a net income of $903.53 during the calendar year 1923.
The Sheboygan Cigar Box Lumber & Manufacturing Company sustained an operating statutory net loss of*2079 $31,121.11 during the calendar year 1921; sustained an operating statutory net loss of $4,701.63 during the fractional period of 1922 prior to affiliation with the petitioner; and earned a net income of $738.68 for the calendar year 1923.
The Pioneer Box Company sustained an operating statutory net loss of $176,023.70 during the calendar year 1921; sustained an operating statutory net loss of $6,196.39 during the fractional period of 1922 prior to affiliation with the petitioner; and earned a net income of $899.90 during the calendar year 1923.
Neither the Detroit Wire Bound Box Company, the Four-One Box Company of Houston, the Sheboygan Cigar Box Lumber & Manufacturing Company, nor the Pioneer Box Company received any amounts as dividends or interest free from taxation during the calendar year 1921, and/or the fractional period in 1922, prior to affiliation with the petitioner, which would reduce the statutory net losses indicated in the preceding paragraphs.
Neither the Detroit Wire Bound Box Company, the Four-One Box Company of Houston, the Sheboygan Cigar Box Lumber & Manufacturing Company, nor the Pioneer Box Company was a member of an affiliated group during the calendar*2080 year 1921, and/or the fractional period in 1922 prior to the affiliation with the petitioner.
*727 Each of said four corporations, and each corporation of the affiliated group which was in existence during 1921, filed separate income tax returns for the calendar year 1921 and the period January 1, 1922, to February 28, 1922.
No part of the net losses sustained by the Detroit Wire Bound Box Company, the Four-One Box Company of Houston, the Sheboygan Cigar Box Lumber & Manufacturing Company, nor the Pioneer Box Company, for the calendar year 1921 or for the fractional part of the year 1922 prior to affiliation with the petitioner has been allowed in computing the consolidated net income for the taxable period beginning March 1, 1922, and ending December 31, 1922, or for the calendar year 1923; and no part of the net losses sustained by the Detroit Wire Bound Box Company, Four-One Box Company of Houston, Sheboygan Cigar Box Lumber & Manufacturing Company, and Pioneer Box Company during the calendar year 1921 has been deducted in arriving at the net losses or net income shown for the fractional period of 1922 prior to affiliation.
OPINION.
*2081 ARUNDELL: The four companies referred to in the findings of fact, before and after becoming affiliated, computed net income upon the basis of the calendar year. The calendar year was the taxable year of each. Sec. 212(b), Revenue Act of 1921. Unquestionably, were it not for affiliation each would be entitled to offset its net loss for 1921 against the net income for 1922, and to deduct the excess of such loss, over the net income for 1922, in computing net income for 1923, sec. 204(b), Revenue Act of 1921; though the respondent takes the position that the amount allowable as a deduction in computing net income for 1923 could not exceed the net income for that year before the deduction, a position contrary to the prior decision of this Board. ; ; ; and . But well within the taxable year 1922, the four companies became affiliated, and, because of that, the petitioner and the respondent are unable to agree as to how the net loss provisions of section 204(b) *2082 should be applied, in respect of the net losses for 1921. They agree that these net losses are to be deducted from the net income of the "succeeding taxable year" and the excess thereof deducted in computing the net income of the "next succeeding taxable year," but they disagree as to what are the "succeeding taxable year" and the "next succeeding taxable year," in relation to 1921, within the meaning of section 204(b). The petitioner contends that they are the calendar years 1922 and 1923, *728 respectively, while the respondent says that they are the two-month period January 1 to February 28, 1922, and the ten-month period March 1 to December 31, 1922, respectively.
In the alternative, the respondent says that the two-month period January 1 to February 28, 1922, and the ten-month period March 1 to December 31, 1922, and the taxable year 1923 are neither the "succeeding taxable year" nor the "next succeeding taxable year," because the two periods are less than twelve full calendar months and the year 1923 is "not contiguous to 1921." If the respondent be wrong in his first defense and right in the alternative, the four companies will be deprived of all benefit of the net*2083 loss provisions of the Revenue Act of 1921, because that act does not govern after 1923 and the Revenue Act of 1924 takes no cognizance of 1921 net losses. ; ; and .
The following tabulation shows the net income or net loss, before any deduction for net losses of any prior period or year, of each of the four companies for the years and periods above stated.
| 1922 | |||||
| Company | 1921 | 2 months | 10 months | Total | 1923 |
| Detroit Wire Bound Box Co. | 1 $8,190.55 | $5,659.68 | $32,393.17 | $38,052.85 | $41,329.04 |
| Four-One Box Co. of Houston | 1 8,126.29 | 1 5,802.80 | 1 8,035.62 | 903.53 | |
| Sheboygan Cigar Box Lumber & Manufacturing Co | 1 31,121.11 | 1 4,701.63 | 3,997.61 | 1 704.02 | 738.68 |
| Pioneer Box Co | 1 176,023.70 | 1 6,196.39 | 33,922.71 | 27,726.32 | 899.90 |
The consolidated return provisions of the statute permit or require the filing of a consolidated return only for the period of affiliation. Sec. 240, Revenue Act of 1921. *2084 This requires that a separate return be filed for the period from the beginning of the taxable year to the date of affiliation, by a taxpayer which becomes affiliated with another during the taxable year. ; ; ; ; ; and ; . It has been held that a return covering the portion of the taxable year prior to affiliation may be made the basis of a separate assessment of taxes for the period which it covers. . Conceivably, the filing of such a return may begin the tolling of the statute of limitations for the assessment of taxes for the period which it covers, though we do not have that question before us and do not *729 presume to decide it, but simply point this out in the interest of a clear understanding*2085 of the problem involved in the issue presented to us. Thus, it appears that when the status of a taxpayer has been changed from a separate to an affiliated company, during a taxable year, the portion of such taxable year prior to affiliation has been recognized as a taxable period.
A taxable period of less than twelve calendar months is not a taxable year within the meaning of sections 200(1) and 204(b) of the Revenue Act of 1921. ; ; ; While all of the cited cases dealt with a situation in which the taxable periods were occasioned by changes in accounting periods, the same reasoning which led to our conclusions there must inevitably lead to a like conclusion as to all taxable periods, except in the situations recognized in that line of cases, such as ; ; *2086 ; ; ; ; ; ; and , in which the first or last accounting period was less than twelve calendar months, due to the fact that the first full annual accounting period began at a date later than that of organization, or dissolution took place before the end of the annual accounting period. In this last line of cases, the income for the short accounting periods has been recognized as income for the taxable years for the purpose of applying the net loss provisions of section 204(b). When a taxpayer, however, is required to make two returns covering portions of one regular accounting period, because of the statutory provisions requiring it to join with its affiliated companies in a consolidated return covering the period of affiliation, the situation is within the rule that the two taxable periods are not taxable*2087 years within the meaning of section 204(b).
Accordingly, we hold that the two-month period January 1 to February 28, 1922, and the ten-month period March 1 to December 31, 1922, are not taxable years within the meaning of section 204(b), and the net losses sustained for 1921 may not be offset against, or deducted in computing, the separate net incomes of those periods.
How, then, are the 1921 net losses to be disposed of, under section 204(b)? Are they to be availed of, for the first time, as an offset against the net income for 1923, under the theory announced in , that the year 1923 is the "succeeding taxable year," in relation to 1921, because there has been no intervening taxable year? If that rule is followed in this case, the effect *730 would be to negative, in part, the net loss provisions of the 1921 Act, for, because of reasons already pointed out, these net losses may not be availed of in any year later than 1923, and the purpose of the statute to spread the loss of one taxable year over the two succeeding taxable years, when such loss exceeds the net income of the first, will be defeated. *2088 Inequity would flow from the rule if applied to the situation here; and where a construction of a statute will occasion great inconvenience, or produce inequality or injustice, that view is to be rejected if another and more reasonable interpretation is present in the statute. The construction placed on the statute should avoid unjust consequences, unless the language clearly compels such a result. ; ; and .
It might be suggested that the unfair result which we seek to avoid here is inescapable under our decision in the Strain Bros. case; but that case is clearly distinguishable from the present one. In the case referred to, the short period intervening between the taxable years 1921 and 1922 and the taxable year 1924 was occasioned by a voluntary act of the taxpayer. When the taxpayer changed its annual accounting period, it brought its current one to a close and thereby terminated its taxable year, bringing itself within the provisions of section 226. The situation in which it found itself*2089 was the consequence of its own choosing, and the statute by clear language compelled it to stand the disadvantage of the tax. In the present case, however, there has been no change in the accounting periods of the four affiliated companies. Each of them continued, after becoming affiliated, to compute net income on the basis of the same accounting period as before affiliation. The accounting period of each was and is the calendar year, which is also the taxable year of the affiliated group. Section 226 has no application in a situation like this. As was stated by the Circuit Court of Appeals, in :
Reading section 226 as a whole, it is clear that the purpose was to present a single unified plan for computing tax liability of a taxpayer who voluntarily changed his accounting period. Subdivision (a) provides for making separate returns covering a period of less than 12 months in case of taxpayer who, with the consent of the Commissioner, changes his accounting period, and this is the only provision providing for a change of accounting period except section 250(g). *2090 Subdivision (b) merely provides that in all cases where separate returns are made for part of the taxable year, the return shall include the taxpayer's income during the period covered by the separate return and that the tax rate of the calendar year in which the period falls, is applicable. The use of the phrase "all cases" undoubtedly applies to cases where separate returns are required under subdivision (a).
*731 Had Congress intended to include within the provisions of section 226 a situation such as we are dealing with here, it might have done so in appropriate language; and one of the legal consequences of affiliation, then, would have been the termination of the taxable year of each member brought into the affiliated group. In that case, the rule announced in Strain Bros., Inc., supra, might well be held to apply. But Congress did not choose to do that, nor did it deem it necessary, elsewhere in the statute, to deal specifically with the situation. All of the provisions dealing with the making of consolidated returns by members of an affiliated group are contained in section 240, and there is nothing in that section which can in any way be construed*2091 as modifying the provisions of section 212(b), so as to terminate the taxable year of a corporate taxpayer upon the occasion of a change in status from a separate to an affiliated company, when such taxable year coincides with that of the affiliated group. Section 212(b) makes the taxpayer's annual accounting period its taxable year; and notwithstanding two returns may be required, in case of change in status from a separate to an affiliated company, for the accounting period in which the change is made, and both returns be made the bases for separate assessments of taxes for the periods which they cover, the taxpayer's taxable year is still its regularly established accounting period, so long as it conforms with the taxable year of the affiliated group, and the taxpayer is not only entitled but required to compute net income on the basis of that accounting period.
In view of the foregoing, we are of the opinion that in the case of the four affiliated companies referred to in the findings of fact, the "succeeding taxable year" and the "next succeeding taxable year," in relation to 1921, within the meaning of section 204(b) of the 1921 Act, are the calendar years 1922 and 1923, *2092 respectively; and, accordingly, that the net loss sustained by each for 1921 should be deducted from its net income for 1922, and any excess over the net income for 1922, determined in accordance with the principles laid down in ; , deducted in computing net income for 1923. Also, the year 1923 is the "succeeding taxable year," in relation to 1922, and the net losses sustained by the Four-One Box Company of Houston and the Sheboygan Cigar Box Lumber & Manufacturing Company for 1922, to the extent they have not been absorbed by offsetting against the net incomes of other affiliated companies for the same year, should be deducted from their net incomes for 1923.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Net losses. ↩