*1190 1. Held that the Crocker First National Bank of San Francisco is the transferee of the assets of the First National Bank of San Francisco and that the Board has jurisdiction to determine its liability for the taxes of the latter company for the years 1924 and 1925.
2. Held that since the deficiency notice is not a notice to the other two petitioners, the Board does not have jurisdiction of the proceeding in so far as it relates to them.
3. Claimed deduction for loss on stocks denied for lack of evidence to establish worthlessness thereof.
4. The action of the respondent, in determining net income of an affiliated group of corporations, in applying the tax-exempt income of certain of the members to reduce the net loss of the group and, where such tax-exempt income was in excess of the net loss of the group, in refusing to allow any amount to be carried over as a net loss under the provisions of section 24, Revenue Act of 1921, and section 206, Act of 1924, approved.
*1079 This is a proceeding for the redetermination of income*1191 taxes for the years 1924 and 1925 in the amount of $22,066.85. The petition sets up the following allegations of error:
a. That said respondent erred in determining the consolidated net loss of First National Bank of San Francisco, First Federal Trust Company, Rogers Brown Transportation Company and East Waterway Dock & Warehouse Company under and in accordance with a consolidated return filed by said companies for the calendar year 1923, in that said respondent failed to determine said consolidated net loss in the sum of $476,483.31 consisting of losses sustained by the individual companies participating in such consolidated return as follows, to-wit: of said First National Bank of San Francisco a net loss in the sum of $466,447.94; of said Rogers Brown Transportation Company a net loss of $23,701.56; of said East Waterway Dock & Warehouse Company a net loss of $20,791.53; and of said First Federal Trust Company a net profit of $34,457.72.
b. That said respondent erred in refusing to allow the aforesaid consolidated net loss of $476,493.31 as an offset, credit or deduction from the net incomes of said First National Bank of San Francisco and Rogers Brown Transportation Company*1192 for the calendar year 1924, which said net incomes were $125,777.15 and $5,972.87, respectively, as provided for in Section 206 of the Revenue Act of 1924.
C. That said respondent erred in failing and refusing to carry over, in accordance with the provisions of Section 206 of the Revenue Act of 1924, the balance of said consolidated net loss sustained in the calendar year 1923, as aforesaid, after deducting therefrom the net income of said First National Bank of San Francisco and Rogers Brown Transportation Company for the calendar year 1924, viz., the sum of $344,733.29.d. That said respondent erred in not separately computing the net losses and net incomes of the several corporations participating and joining in the aforesaid consolidated return for the calendar year 1923 before consolidating such net income and net losses, respectively, for purposes of the consolidated return filed under and pursuant to the provisions of Section 240 of the Revenue Act of 1921.
e. That said respondent erred in determining the net losses of said corporations so filing said consolidated return for the year 1923 by applying incomes from tax exempt securities to reduce the net loss for tax*1193 purposes under Section 204 of the Revenue Act of 1921 and thus imposing a tax upon income not subject to tax under any of the Revenue Acts of the United States.
FINDINGS OF FACT.
The First National Bank of San Francisco was a national banking association, organized under the National Bank Act of the United States, and the Crocker National Bank of San Francisco was a similar national banking association. On January 1, 1926, the First National Bank of San Francisco and the Crocker National Bank of San Francisco were consolidated, in accordance with the provisions *1080 of law applicable to national banks. The Crocker First National Bank of San Francisco, one of the petitioners herein, has been since that time and is now the successor of said banks.
The First Federal Trust Company and the East Waterway Dock & Warehouse Company are corporations created and existing by virtue of the laws of the State of California, and the State of Washington, respectively.
The Rogers Brown Transportation Company was, up to December 15, 1927, a corporation created and existing under the laws of the State of California, but on that date was dissolved and its corporate existence terminated.
*1194 For the calendar year 1923 the First National Bank of San Francisco, the First Federal Trust Company, the East Waterway Dock & Warehouse Company, and the Rogers Brown Transportation Company filed a consolidated return showing a net loss of $346,244.53. The separate items of income and loss of the four companies as reported were as follows:
| First National Bank of San Francisco (loss) | $336,209.16 |
| First Federal Trust Company (income) | 34,457.72 |
| East Waterway Dock & Warehouse Comapny (loss) | 20,791.56 |
| Rogers Brown Transportation Company (loss) | 23,701.53 |
| Total (loss) | 346,244.53 |
This loss of $346,244.53 was adjusted by the respondent on the basis of the revenue agent's reports to $147,903.06.
The First National Bank had tax-exempt income consisting of interest on obligations of the United States in that year in the amount of $95,275.88, and the First Federal Trust Company in the amount of $249,315.54, making a total tax-exempt income of $344,591.42. These two companies had dividends deductible in the amount of $11,845.50, of which amount $8,100 was received by the First National Bank.
For the years 1924 and 1925 consolidated returns were filed, which included*1195 the First National Bank of San Francisco, the East Waterway Dock & Warehouse Company and the Rogers Brown Transportation Company. The First Federal Trust Company filed individual returns for the years 1924 and 1925. The respondent ruled that all four companies were affiliated for the years 1923, 1924 and 1925, and computed their income-tax liability for the years 1924 and 1925 on a consolidated basis.
The following table shows the amount of net income reported and net income as corrected by the respondent for the year 1924:
| Assessment on consolidated return filed by First | |
| National Bank of San Francisco | None. |
| Assessment on separate return filed by First | |
| Federal Trust Company | $5,406.66 |
| Company | Net income | Allocation | Net | Correct |
| reported | of tax | income | tax | |
| assessed | corrected | liability | ||
| First National Bank of | ||||
| San Francisco | $120,031.41 | None. | $125,777.15 | $13,095.29 |
| East Waterway Dock and | ||||
| Warehouse Co | (-29,239.74) | None. | (29,239.74) | None. |
| Rogers Brown | ||||
| Transportation Co | 5,972.87 | None. | 5,972.87 | 621.86 |
| Consolidated statutory | ||||
| net loss | (-242,868.65) | (*) | ||
| Consolidated net loss | ||||
| shown on return | (-146,104.11) | |||
| First Federal Trust Co. | ||||
| affiliated but not | ||||
| included in consolidated | ||||
| return filed | 43,253.28 | $5,406.66 | 43,253.28 | 4,503.30 |
| (-102,850.83) | 5,406.66 | 145,763.56 | 18,220.45 |
| Deficiency | Over-assessment |
| $13,095.29 | |
| None. | |
| 621.86 | |
| $903.36 | |
| 13,717.15 | 903.36 |
*1081 For the year 1925 the respondent determined a deficiency in the amount of $8,971.56, which was assessed against the First National Bank of San Francisco, inasmuch as the other companies in the consolidation showed losses in that year. In the deficiency letter for 1924 and 1925 the respondent refused to allow the claimed net loss for the year 1923 to be applied against income of the taxable year 1924, upon the ground that the nontaxable income for 1923 was in excess of the operating loss for that year.
In a letter from the deputy commissioner to the Crocker First National Bank the following statement appears:
The provisions of Article 636 of Regulations 65 relative to consolidated net income of affiliated corporations require that the consolidated net taxable income shall be the combined net income of the several corporations consolidated, which consists of the aggregate*1197 net income less the aggregate net loss of the affiliated companies.
Since the nontaxable income of the affiliated companies for the year 1923 is in excess of the consolidated operating net loss, there is no statutory net loss as contemplated within the provisions of Section 204 of the Revenue Act of 1921, as shown by the following statement:
| Nontaxable income for the year 1923: | ||
| Nontaxable interest | $344,591.42 | |
| Dividends from domestic corporations | 11,845.50 | |
| Total | $356,436.92 | |
| Net operating loss | $176,518.01 | |
| Less adjustment for fire insurance reserve | 28,614.95 | |
| 147,903.06 | ||
| Excess income | $208,533.86 |
In arriving at the loss of $147,903.06 for 1923 the revenue agents, in a report dated December 7, 1926, disallowed an amount of $400,000. This claimed loss arose from the following transaction: Rogers Brown & Company, a Seattle concern, was heavily indebted to the *1082 First National Bank of San Francisco at the time of its failure in 1920. For moneys advanced to Rogers Brown & Company the bank held as collateral security all of the capital stock of the East Waterway Dock & Warehouse Company and the Rogers Brown Transportation Company. *1198 On June 10, 1921, the pledge of the said stocks was foreclosed and, in default of other means, the bank bought in the stock on foreclosure sale at an average price of $1,250,000.
In 1922 the Comptroller of Currency of the United States directed the bank to write down the value of the stocks in the amount of $100,000 and, pursuant to such instruction, in April, 1922, said stocks were written down to the sum of $1,150,000. Thereafter and during the year 1923, the Comptroller of Currency made another investigation and appraisal and as a result thereof found that the value of said stocks as carried upon the books of the bank was far in excess of their present or prospective liquidating values, and on February 10, 1923, directed the bank to write down the stocks to $750,000 and charge off on its books the resulting loss. Accordingly, said stocks were written down to $750,000 and the resulting loss of $400,000 was charged off on the books of the bank during the calendar year 1923.
The deficiency of $621.86 on the return for 1924 assessed against the Rogers Brown Transportation Company was paid on August 25, 1928.
The deficiency notice which forms the basis for the petition in*1199 this proceeding was mailed May 22, 1928, and was addressed to "First National Bank of San Francisco, Crocker First National Bank of San Francisco (Successor), Post and Montgomery Streets, San Francisco, California," and provides in part as follows:
In accordance with Section 274 of the Revenue Act of 1926 you are advised that the determination of your tax liability for the years 1924 and 1925 discloses a deficiency of $22,066.85, as shown in the attached statement.
In the statement attached to the deficiency letter there was taken into account the net income and losses of the First National Bank of San Francisco, the East Waterway Dock and Warehouse Company, the Rogers Brown Transportation Company, and the First Federal Trust Company. The deficiency of $22,066.85 consists of items of $13,095.29 and $8,971.56, representing the deficiencies for 1924 and 1925, respectively, allocated to the First National Bank of San Francisco, the parent company. The deficiency letter was mailed to the Crocker First National Bank of San Francisco, but there is no evidence that it was mailed to any of the other companies.
In the above deficiency letter it is indicated that the respondent found*1200 no deficiencies in tax due from either the East Waterway Dock & Warehouse Company or the First Federal Trust Company for either of the years 1924 or 1925.
*1083 In the statement attached to the deficiency letter it is stated as to the year 1924, that the "deficiency of the Rogers Brown Transportation Company and overassessment of the First Federal Trust Company will be made the subject of separate communications to those two companies." In such statement attached to the deficiency letter the following also appears: "Inasmuch as the other companies in the consolidation show losses in the year 1925, the entire deficiency of $8,971.56, shown in Schedule 14 of the Statement, will be assessed against the First National Bank of San Francisco, the parent company."
At the hearing counsel for petitioners stated that any deficiency found by the Board was, by agreement among the petitioners, to be assessed against the Crocker First National Bank and any overpayment was to be made to that bank.
OPINION.
MCMAHON: The petitioners in this case are the First Federal Trust Company, the East Waterway Dock & Warehouse Company and the Crocker First National Bank of San Francisco, a successor*1201 to the First National Bank of San Francisco. The First National Bank, the First Federal Trust Company, the East Waterway Dock & Warehouse Company and the Rogers Brown Transportation Company filed a consolidated return for the year 1923. For the years 1924 and 1925 the First Federal Trust Company filed individual returns and the other three filed consolidated returns. The respondent, however, ruled that all four companies were affiliated for all three years and computed their income-tax liability on a consolidated basis. The petitioners have not questioned this action, and we must accept it as correct. The Rogers Brown Transportation Company was dissolved before the institution of this proceeding before the Board, and it is not a party petitioner. The amount of the deficiency determined against it for 1924 has been paid.
The deficiency notice referred to in our findings of fact is sufficient to give us jurisdiction as to the Crocker First National Bank of San Francisco.
The deficiency notice, which is the basis for the petition in this proceeding, is not addressed to the First Federal Trust Company and the East Waterway Dock & Warehouse Company, and does not assert any deficiencies*1202 in tax or other liability against them. On the contrary in such deficiency notice it is indicated that the respondent found that those companies had net losses and it is stated that the overassessment of the First Federal Trust Company for the year 1924 would be made the subject of a separate communication. In this situation we must hold that the proceeding, in so far as it *1084 relates to the First Federal Trust Company and the East Waterway Dock & Warehouse Company, should be dismissed for lack of jurisdiction.
This holding is not contrary to that in , and that in . In those cases it did not clearly appear that the respondent was asserting in the deficiency letters only deficiencies against the parent corporations, to the exclusion of the subsidiaries, whereas in the instant proceeding it clearly appears that the deficiency letter purports to assert only deficiencies against the Crocker First National Bank, and does not purport to assert deficiencies against the other companies.
Those cases are also distinguishable in that*1203 they involved affiliated companies, whereas in the instant proceeding the Crocker First National Bank of San Francisco, which received the deficiency notice, was not affiliated with the First Federal Trust Company and the East Waterway Dock & Warehouse Company in the years 1924 and 1925. The Crocker First National Bank of San Francisco did not come into existence until January 1, 1926.
We now turn to the determination of the liability of the Crocker First National Bank of San Francisco. It is necessary in this regard to determine the tax liability of the First National Bank of San Francisco for the years 1924 and 1925, and incidentally to refer to the other companies affiliated with that company.
In this case the respondent, in determining the tax liabilities of the four companies for 1923, found that although there was an operating loss there was no net loss to be carried forward against income for the following years under the provisions of section 204 of the Revenue Act of 1921 and section 206 of the Revenue Act of 1924, due to the fact that two of the corporations in the consolidated group had tax-exempt income in an amount in excess of the operating loss of the group.
*1204 The petitioner contends that this action of the respondent was erroneous, for the reason that in determining the operating loss the respondent disallowed a deduction of an amount of $400,000 representing the decline in value of stocks held by the First National Bank; that tax-exempt income may not be used to offset operating losses; and that in any event the tax-exempt income of one member of an affiliated group may not offset and wipe out the net loss of another member so as to prevent its net loss from being carried forward and deducted from its income for a succeeding year. We will take up these contentions in the order in which they have just been stated.
The first contention of the petitioner is without merit. The only evidence of the worthlessness of the stocks in question is that the *1085 Comptroller of Currency directed the bank to write down the value of the stocks and that, pursuant to such instructions, they were written down on the books. We have repeatedly held that this is not sufficient evidence to establish the worthlessness or partial worthlessness of stocks. *1205 , and . Furthermore, mere decline in the value of stock is not allowable as a deductible loss. .
The second contention of the petitioner is that the net loss of a taxpayer can not be offset by tax-exempt income, since this in effect results in indirectly levying a tax on such income. Section 204(a) of the Revenue Act of 1921 provides as follows:
That as used in this section the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as*1206 is not permitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, * * *
Section 206(f) of the Revenue Act of 1924 provides as follows:
If for the taxable year 1923 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1921, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.
It will thus be seen that, by the plain terms of the act, tax-exempt income is to be added to the gross income in determining a net loss. ; ; ; and . The petitioner contends that this section is discriminatory and imposes a greater tax on those taxpayers who have tax-exempt income than on those who do not.
We do not agree with this contention. *1207 Congress has the power, in granting taxpayers the privilege of reducing the net income of one year by a net loss of another, to provide how such net loss shall be determined. The respondent did not err in holding that the tax-exempt income should be included in gross income in determining whether a net loss was sustained. .
*1086 The petitioner contends further that in any event the tax-exempt income of one member of an affiliated group may not offset and wipe out the net loss of another member so as to prevent its net loss from being carried forward and deducted from its income for a succeeding year. The consolidated return for the year 1923 showed a net operating loss of $346,344.53, adjusted by the respondent to $147,903.06, all the companies affiliated having net operating losses except the First Federal Trust Company. The tax-exempt income of the First National Bank of San Francisco and the First Federal Trust Company for that year exceeded the amount of the consolidated net loss as adjusted by the respondent. However, it is claimed by the petitioner that the net operating loss of the First National Bank of*1208 San Francisco exceeded its own tax-exempt income; that it is entitled to deduct such excess from its net income in the succeeding year; and that such excess should not be offset by the tax-exempt income of the First Federal Trust Company. This claim is based upon the assumption that the respondent erred in disallowing the deduction of $400,000 representing alleged shrinkage in value of stock, which disallowance we have hereinabove approved. There is no evidence from which we can determine whether or not the net operating loss of the First National Bank of San Francisco for the year 1923 as adjusted by the Commissioner was in excess of its own tax-exempt income for that year. It only appears from the record that the disallowance of the deduction of $400,000 resulted in the reduction of the consolidated net operating loss from $346,344.53 to $147,903.06. Assuming that the net loss of the First National Bank of San Francisco was in excess of its own tax-exempt income, nevertheless we are of the opinion that the contention of the petitioner can not be sustained.
The petitioner cites our decision in *1209 , in which we held that a corporation does not lose its indentity as a "taxpayer" when it becomes a member of an affiliated group. It contends that, since the net loss provision refers to a "taxpayer," the net income or net loss of each member should be computed separately, and that if one member has a net loss it should be carried forward against its income for the succeeding year or years and should not be eliminated by reason of the fact that another member had income in an amount in excess of such loss.
Upon this point the court in , decided by the Court of Claims, states as follows:
* * * The consolidated group, as such, is not a taxpayer but a tax computing unit, and the corporations which are members of the affiliated group for the year, or became members during the year, lose their separate identity while so affiliated only for the purpose of computation of the tax upon one income and one invested capital which is composed of the income and invested capital of such corporations combined, but, when it comes to the assessment *1087 and collection*1210 of the tax so computed, it is assessed against and collected from the several corporations constituting the affiliated group, in proportion to the net income properly assignable to each, unless there is an agreement among them as to a different apportionment. * * *
* * *
* * * In the enactment of section 240, Congress was simply laying down the principle that where a group of companies constituted a single business unit, the net income, determined in accordance with the general principles of law should be combined, losses being offset against gains, and the rate of tax should be determined by the relation between such combined net income and the invested capital of the group as a whole, each corporation being at all times separately recognized and individually liable for its proportion of the tax according to the net income properly assignable to it.
* * *
It might be argued that the position we have taken herein as to the separateness of each member of the affiliated group as a taxpayer is not consistent when we refuse to give to one member of the affiliated group, who sustained a net loss in 1919, the benefit of this net loss as a deduction from 1918 income when*1211 the affiliated group in 1919, when combined, had a consolidated net income. The answer to this is that in such a case, for the purpose of computation, section 240 is a limitation of section 204 and that, in the computation under section 240, losses of one company must be offset against the income of the other companies before it can be determined whether there is a net loss of any company in 1919 which may be applied against its income for 1918. Obviously, if this were not done, the net loss which had been used to offset the income of the other companies in the consolidated group would be allowed again to reduce the income of the company which sustained the loss when applying it to the income of the prior year, and we think Congress did not intend a double deduction of this character. [Italics supplied.]
In that case there was a consolidated gross loss in 1919 of $10,000 which was reduced to $8,000 by the net income of $2,000 of one of the members of the group. The court held that, since the net losses of the members sustaining such net losses may be said to have contributed to the extinguishment of the net income of one of the members, the consolidated net loss should*1212 be apportioned in the ratio of losses suffered. Thus far the facts in that case are similar to the facts in this proceeding. The only difference between that case and the instant proceeding is that in that case none of the members had any tax-exempt income to take into account in computing the consolidated net loss deductible in a suceeding year, whereas in the instant proceeding the net operating loss was offset by tax-exempt income of two of the members. This difference is immaterial. . See computation in that proceeding at page 998 as approved at page 1000. In every case the net loss to be carried forward must be "an actual and true loss."
In Warren Steam Pump Co. the same question involved herein was considered, the petitioner therein contending that the provisions of section 206(a) of the Revenue Act of 1926 were unconstitutional and *1088 also citing , as controlling. The Board, upon authority of *1213 , and , held such provisions constitutional and stated:
We see no reason why Congress in granting this particular boon may not limit it so that the loss to be carried forward is an actual and true loss, and not an artificial one which arises from the exclusion of certain nontaxable income. [Italics supplied.]
The status of affiliated corporations as a "tax-computing unit" is more clearly defined by the court in , as follows:
* * * Because the income on which the tax shall be paid in the taxable year, though made up of the results of the business of each affiliate, is not the income of each individual taxpayer, but the income of the unit for that year, the Commissioner was right in allowing against the aggregate gross income of the business for that year the aggregate deductions applicable to that year. This treatment gives full effect to the purpose of the statute to allow affiliates to transact their business as freely as though they were one corporation acting through departments, *1214 with the assurance to the Government and the taxpayer alike that the taxes payable as the result of the business done by the taxable unit in that year will, without reference to the bookkeeping of the individual corporations, be paid upon the whole business done by the unit, taking into consideration all of the earnings and all of the deductions of the branches of the business, not separately but in the aggregate, just as though in that year there was no separate corporate structure, but one corporation maintaining many departments.
The above case was affirmed by the Supreme Court in , in which the Supreme Court also cites , with approval.
The Board, in the case of , determined the method to be used in the treatment of nontaxable income of the wife in the determination of the "net loss" of the husband to be deducted in the succeeding year as follows:
* * * In other words, the two [husband and wife] are treated as a unit for the purpose of determining taxable net income and we think a different course should not be pursued*1215 when we come to arrive at a "net loss" as applicable to the year for which the joint return was filed. To determine the "net loss" of an individual for 1921, it is necessary to take into consideration not only the items of gross income specified in the statute, but also nontaxable income received by such individual. And the same method would obviously apply where a "net loss" is being determined on the basis of a joint return for one year which would be allowable as a deduction in computing net income on a joint return for the subsequent year. * * * Certainly, when it is considered that an election to file joint or separate returns gives to a husband and wife the privilege of adopting the method for a given year which is most advantageous to them, they should not be allowed to use such joint return for the purpose of fixing taxable net income, which may be advantageous to them, and then be allowed to disregard the joint return when it would be less *1089 advantageous to determine the "net loss" on the basis of such joint return. We find no statutory provision that would require such a result. On the contrary, we are of the opinion that when these petitioners elected to*1216 file joint returns they thereby elected to have all determinations of income and losses (for tax purposes) determined on the basis of these joint returns.
If affiliated companies avail themselves of the privilege of filing a consolidated return, such group becomes a tax-computing unit and the members lose their separate identity for the purpose of the computation of the tax. Since such group becomes a tax-computing unit upon filing a consolidated return, it seems to follow that they remain such tax-computing unit so long as consolidated returns are filed, whether the incomes involved are taxable or tax exempt. Cf.
Therefore, since there was no actual and true consolidated net loss in the year 1923, the net loss of a member of the affiliated group for the year 1923, offset by tax-exempt income of its own or other members of the group, can not be carried forward and deducted from its net income in the succeeding year.
Reviewed by the Board.
The proceeding will be dismissed as to the petitioners, First Federal Trust Company and East Waterway Dock & Warehouse Company. Judgment will*1217 be entered for the respondent as to the Crocker First National Bank of San Francisco.
VAN FOSSAN dissents.
BLACK, dissenting: The petitioner in this case makes the following contention: "That the tax exempt income of one member of an affiliated group may not offset and wipe out the net loss of another member so as to prevent its net loss from being carried forward and deducted from its income for a succeeding year." I think this contention of petitioner is correct, and that it is error for the Board to hold the contrary.
An examination of the findings of fact will show that the respondent, in determining whether petitioner had a "net loss" for 1923 which it is entitled to carry forward and use as a deduction in 1924, does it on a consolidated basis, which I think is fundamentally wrong. In my judgment, on the authority of , recently decided by the Supreme Court, there is no such thing as a "consolidated net loss" under the 1924 and prior Acts. The proper way, in my judgment, is to determine the net income, or the net loss, as the case may be, of each constituent corporation. If one corporation*1218 has a net loss and such net loss is used *1090 to wipe out the taxable net income of an affiliate, then the amount of net loss which it may carry forward into the ensuing year is correspondingly reduced.
This rule is necessary to prevent the net loss being used for deduction purposes twice, a thing Congress evidently did not intend. . On that point I have no disagreement with the majority opinion, but where I do disagree is as to respondent's use of tax-exempt interest in the instant case, which belonged to petitioner's affiliate, the First Federal Trust Company.
I think I can better illustrate the point I am endeavoring to stress by the use of a concrete illustration. Take corporations "A" and "B," which are affiliated in 1923. Let us suppose corporation "A" has an operating loss of $50,000 in 1923 after the use of all items of ordinary income and deductions. Corporation "B" has a net income of $25,000 by the use of all items of ordinary income and deductions. I will admit that corporation "A," in determining what "net loss" it shall carry forward and use as a deduction from its 1924 income, will have*1219 to reduce its "net loss" by the amount that was used in wiping out the ordinary net income of its affiliate, "B." In such a case corporation "A" would be entitled to carry forward into 1924 a "net loss" of only $25,000, because $25,000 of its net loss had been used to wipe out that much taxable income of corporation "B." Suppose corporation "B" in addition to its ordinary net income of $25,000, has tax-exempt income of $25,000. According to the contention made by respondent, and approved by the majority opinion, this $25,000 tax-exempt income of "B" should also be used to reduce the statutory "net loss" of "A" and "A" would not be entitled to carry forward any statutory "net loss" into 1924. I say this is wrong. Corporation "A" should have its statutory "net loss" reduced only by its own tax-exempt interest and nontaxable dividends plus the amount of its net loss which is used to wipe out the net income of its affiliate corporation, "B."
In the instant case the First Federal Trust Company had a net income (ordinary income) for 1923 of $34,457.72, and to the extent that petitioner's net loss for 1923 was used to wipe out this $34,457.72, it should be reduced in carrying forward*1220 into 1924, under the doctrine of But the respondent's use of $249,315.54, tax-exempt interest (not tax-exempt interest belonging to petitioner, but tax-exempt interest belonging to the First Federal Trust Company) in reducing petitioner's "net loss" for 1923 was error, in my judgment.
The majority opinion cites, as authority for approving respondent's action in this respect, , but there is *1091 a substantial difference in the two situations. In the Samuel G. Adams case the husband combined all the income of himself and wife on one single joint return and there was only one taxpayer, to wit, Samuel G. Adams. But the situation is entirely different with affiliated corporations which file a consolidated return. Each corporation remains a separate taxpayer and its statutory net loss which it is entitled to carry forward to the next taxable year should be computed separately. The net loss of affiliated corporations may not be used as a consolidated net loss of the affiliated group. *1221 .
The majority opinion also cites as authority for its holding on this point, . Admittedly this case does hold that the nontaxable dividends received by one corporation, having no net loss for the taxable year, may be used to reduce the statutory net loss of an affiliated corporation, and in that respect would be a valid precedent for the majority opinion in the instant case. But in view of the recent decision of the Supreme Court in Woolford Realty Co. v. Rose, supra, I think our decision on the particular point herein discussed as decided in , was wrong and should not be followed.
TRAMMELL agrees with this dissent.
Footnotes
*. No explanation found in the record concerning this item, which was ignored by the Commissioner in recomputation of 1924 consolidated income. ↩