*2090 One corporation owned all of the stock of another corporation during the first six months of the taxable year. At the end of that time the two corporations were consolidated or merged into one. Held, there was no affiliation during the last six months of the year, and one consolidated return for the entire year was not proper. A net loss of one of the companies for the preceding year may be deducted only from its net income for the first six months of the taxable year here in question.
*648 Docket No. 28131 is a proceeding under section 280 of the Revenue Act of 1926 in which the Commissioner has proposed for assessment against the petitioner $61.90 as its liability as transferee of the assets of the Blue Buckle Cotton Mills, Inc., for the period beginning January 1, 1922, and ending January 21, 1922.
In the proceeding at Docket No. 28132 the Commissioner notified the petitioner of deficiencies as follows:
| Period January 1 to January 21, 1922 | $1,069.24 |
| Period January 22 to June 30, 1922 | 14,852.43 |
| Period July 1 to December 31, 1922 | 39,601.80 |
| 1923 | 39,601.80 |
| Total | 69,503.69 |
*2091 The petitioner assigns as error the action of the Commissioner (1) in computing separate tax liabilities for the three periods in 1922 instead of computing liability for the full year on the basis of the consolidated return filed for that year by the petitioner and the Blue Buckle Cotton Mills, Inc.; (2) in failing to credit the consolidation for the year 1922 with a statutory net loss of the Blue Buckle Cotton Mills, Inc. for the year 1921; and (3) in asserting transferee liability under section 280. The cases were consolidated.
FINDINGS OF FACT.
The Blue Buckle Cotton Mills, Inc. was incorporated under the laws of Virginia on or about January 1, 1920. Its capital stock of the par value of $2,000,000 was divided into 5,000 shares of preferred, without voting privileges, and 15,000 shares of common. Except as hereinafter stated, the common stock was held as follows:
| Shares | |
| Jobbers Overall Co | 14,450 |
| A. C. Barrow | 10 |
| H. C. Barrow | 10 |
| H. P. Holt | 10 |
| W. H. Miller | 10 |
| R. H. Pritchett | 10 |
| Alex Long | 250 |
| L. D. Pitts | 250 |
| 15,000 |
*649 Long was president and Pitts was treasurer of the Blue Buckle Cotton Mills, Inc. In the latter part of 1920*2092 this company had received large orders from the Jobbers Overall Company for denims, and to fill these orders it had contracted for raw cotton for delivery to it ratably during the first five months of 1921 from the following in the amounts shown:
| Bales | |
| George H. McFadden & Bros | 2,712 |
| Rogerson & Co | 1,000 |
| A. L. Wolf & Co | 333 |
| Warwick, Aiken & Co | 1,000 |
| A. C. Walker | 2,400 |
In the latter part of December, 1920, the Jobbers Overall Company notified the Blue Buckle Cotton Mills, Inc. that it could not take any more goods. The creditors of the Jobbers Overall Company met on December 24, 1920, decided the company could not carry out its contracts, and appointed a creditors' committee. Long, as president of the Blue Buckle Cotton Mills, Inc., on December 28, 1920, wrote a letter to each of the five firms from which his company had ordered raw cotton. One of those letters, typical of all, was as follows:
NEW YORK, N.Y., December 28, 1920.
Messrs. T. G. HARDIE & COMPANY,
Charlotte, N.C.
GENTLEMEN: - This will confirm our telephone conversation of last night, in which you were fully advised as to the present credit situation of the Blue Buckle Cotton*2093 Mills. A Committee of Creditors has been appointed and full details are going forward to you from them under separate cover.
Under the circumstances, it might be well for Messrs. Warwick, Aiken & Company to close out the 1,000 bales of cotton purchased by the mills through you from them for January to May delivery, and in that way fix any loss or claim which they may have against the mills.
Yours truly,
BLUE BUCKLE COTTON MILLS,
By , President.
On December 28, 1920, the creditors' committee of the Blue Buckle Cotton Mills, Inc. sent a letter to each creditor of the company stating what it had done, what it proposed to do, giving a statement of the present condition of the company, and asking that all claims be sent to it promptly.
The first reply to these letters was a letter from George M. McFadden & Bros. Agency, dated January 6, 1921, in which that firm *650 stated that it had received the letter of December 28, 1920, had sold the cotton on December 31, 1920, and made claim for $220,325.60 representing the difference between the contract price of the cotton to the Blue Buckle Cotton Mills, Inc. and the amount received from the sale on December 31, 1920. *2094 On January 12, 1921, the Blue Buckle Cotton Mills, Inc. replied that it had received the above claim, which would have to be approved by its attorney before being allowed, but it seemed to be too large because it covered not only loss, but anticipated profits. None of the other four firms had sold cotton in 1920 to establish the amount of its loss, but each made a claim during the early part of 1921. All five firms signed a creditors' agreement dated January 19, 1921, under which the amounts of all claims of creditors were to be determined by the creditors' committee. The claims of the five firms were first accrued on the books of the Blue Buckle Cotton Mills, Inc. in 1921. These books were kept on an accrual basis. The McFadden claim was allowed and accrued in full. Against the total of these claims there was credited the amount of a dividend received on the claim of the Blue Buckle Cotton Mills, Inc. against the Jobbers Overall Company, Inc.
The directors of the Blue Buckle Cotton Mills, Inc. approved the creditors' agreement on February 8, 1921. On February 15, 1921, the stockholders of the Blue Buckle Cotton Mills, Inc. elected the members of the creditors' committee*2095 directors and put them in entire charge of operations. The mill had been closed, but it started to operate on February 14, 1921. On its return for the year 1921 it claimed a net loss of $543,310.93 after deducting loss on cotton claims of $468,356.82.
It would have been proper for the five firms from which the Blue Buckle Cotton Mills, Inc. had ordered cotton to have had cotton on hand to fill the orders or to have acquired contracts in 1920 for delivery of cotton in 1921 with which to fill the orders. There was an established daily market both for cotton and for such contracts for future delivery of cotton.
The petitioner, the Industrial Cotton Mills Company, Inc., was incorporated under the laws of Virginia in November, 1921, to take over all claims against the Blue Buckle Cotton Mills, Inc., in exchange for its stock and also to exchange its stock for the stock of the Blue Buckle Cotton Mills, Inc. Its stock was issued to the holders of such claims and to the old stockholders of the Blue Buckle Cotton Mills, Inc. It became the owner of all of the stock of the Blue Buckle Cotton Mills, Inc., as hereinafter set forth.
The Blue Buckle Cotton Mills, Inc. made certain claims*2096 against the Jobbers Overall Company, Inc. There was a creditors' committee formed for the later company, but the company went into *651 bankruptcy. The creditors' committee of the Blue Buckle Cotton Mills, Inc. compromised its claim against the Jobbers Overall Company, Inc. with the creditors' committee of that company, and on December 28, 1921, the compromise agreement was approved by the referee in bankruptcy. The agreement provided, inter alia:
The Creditors' Committee of Jobbers Overall Company, Inc., shall cause to to sold and transferred to the nominee of the Creditors' Committee of Blue Buckle Cotton Mills, Inc., for the consideration of One Dollar (1.00), fourteen thousand four hundred and fifty (14,450) shares of the common stock of Blue Buckle Cotton Mills, Inc., of the par value of One Million Four Hundred Forty-five Thousand Dollars ($1,445,000), heretofore owned by Jobbers Overall Company, Inc.
(The Creditors' Committee of Jobbers Overall Company, Inc., agrees to use its best efforts to obtain a similar sale and transfer of fifty (50) additional shares of said common stock now owned by A. C. Barrow, H. C. Barrow, H. P. Holt, W. H. Miller and R. H. Pritchett, *2097 but makes no promise in respect thereto.)
The stock ledger of the Blue Buckle Cotton Mills, Inc. shows the following transfers as of February 9, 1922, to the Industrial Cotton Mills Company, Inc., and does not show any transfers to any creditors' committee.
| Transferred by - | Shares |
| L. D. Pitts | 250 |
| Alex Long | 243 |
| Jobbers Overall Co | 14,450 |
| A. C. Barrow | 10 |
| H. C. Barrow | 10 |
| R. H. Pritchett | 10 |
| W. H. Miller | 10 |
| H. P. Holt | 10 |
In connection with the agreement of the creditors' committee, Long and Pitts had agreed to transfer their Blue Buckle Cotton Mills, Inc. stock to the Industrial Cotton Mills Company, Inc. Long endorsed his certificates for transfer on December 21, 1921, and Pitts endorsed his certificate on or about the same date. The creditors' committee of the Blue Buckle Cotton Mills, Inc. held the certificates for all of the stock from some time in 1921 until February 9, 1922, but without formal transfer on the stock ledger.
On or about June 30, 1922, the Blue Buckle Cotton Mills, Inc. and Industrial Cotton Mills Company, Inc. merged under the name of the Industrial Cotton Mills Company, Inc., in accordance with the laws of Virginia, and the*2098 Industrial Cotton Mills Company, Inc. from that date operated without other change the business which theretofore had been operated by the Blue Buckle Cotton Mills, Inc.
A return on Form 1120 was filed for the year 1922, on which there was a statement that it was a consolidated return. It reported the income from operations for the full year 1922. The total net income of $239,718.57 was exactly offset by a part of a claimed net loss of *652 the Blue Buckle Cotton Mills, Inc. for 1921 in the amount of $543,310.93. The Commissioner determined that the two companies should have filed separate returns for the period January 1 to January 21, 1922, a consolidated return for the period January 22 to June 30, and a separate return for the balance of the year.
OPINION.
MURDOCK: The respondent was allowed to amend his answer after the hearing to claim that a redetermination of the deficiencies should be made on the basis of an affiliation beginning February 9 and ending June 30, 1922. The proof on this point is not as clear as it might be, but it seems that at some time in 1921 the creditors' committee of the Blue Buckle Cotton Mills, Inc. acquired the right to have all of*2099 the stock of the Blue Buckle Cotton Mills, Inc. transferred to its nominee; this nominee was the Industrial Cotton Mills Company, Inc.; and the committee had all of the certificates in its hands endorsed for transfer. The actual transfer was not made until February 9, 1922. But ownership or control of stock does not depend upon the date of formal transfer of certificates. The Industrial Cotton Mills Company, Inc. owned or controlled all of the stock of the Blue Buckle Cotton Mills, Inc. on or before January 1, 1922, and until the merger. Thus, the two were affiliated during this period and a computation of tax liability based upon a consolidated return for this period would be proper. But this does not satisfy the petitioner, which contends that the filing of but one return, a consolidated return, covering the entire year 1922 was proper. It claims that the Industrial Cotton Mills Company, Inc., up to the time of the merger, was not an operating company and had no physical properties, but only owned certain indebtedness and the stock of the Blue Buckle Cotton Mills, Inc., so that all of the profits of the first six months of 1922 were profits of the Blue Buckle Cotton Mills, *2100 Inc., and the profits of the last six months of 1922 and all profits of 1923 were in fact due to operations of the Blue Buckle Cotton Mills, Inc., although the operations during these two latter periods were conducted under the name of Industrial Cotton Mills Company, Inc. The petitioner has not established facts of record to support this contention, but even if the facts had been proven we would not agree with its contention. Obviously the affiliation ceased with the merger. Thereafter, there was no longer one corporation which owned or controlled all of the stock of the other, nor was there ownership or control of the stock of two corporations by the same interests. For income tax purposes, at least, there was but one corporation after the merger and section 240 would have no application. Therefore, the tax liability for the last six months of the year *653 1922 should be computed on the basis of a separate return of the Industrial Cotton Mills Company, Inc., is overruled. *2101 ; , affirmed as to this point in ; . Cf. ; ; ; ; ; and .
The petitioner contends that the losses which the Blue Buckle Cotton Mills, Inc. sustained as a result of cancelling its contracts for raw cotton were properly deducted on its income tax return for 1921, and the net loss shown on that return may be deducted from the net income of the Blue Buckle Cotton Mills, Inc. for the year 1922, and the excess must be allowed as a deduction in computing the net income of the petitioner for the year 1923. The respondent contends that these losses were sustained in 1920, but makes an alternative contention in which he assumes, for the purpose of argument, that the Blue Buckle*2102 Cotton Mills, Inc. had a net loss as claimed in the year 1921 and maintains that that net loss can not be properly applied in accordance with section 204(b) of the Revenue Act of 1921 because no segregation has been made in the record of the net income of the Blue Buckle Cotton Mills, Inc. for any part or all of the year 1922, and, as a matter of fact, the Blue Buckle Cotton Mills, Inc. ceased to have any income after June 30, 1922.
The losses here in question arise from breach of contract. In , the Supreme Court of the United States, dealing with a similar question, sustained the decision of this Board and refused to allow the company which breached its contract to deduct the loss in the earlier year. The Court there remarked that the income tax law is generally concerned with realized losses except "in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized." It pointed out that the statute provides no definite legal test for determining the year in which losses occasioned by the taxpayer's breach*2103 of contract are to be deducted, but the general requirement that they are to be deducted in the year in which sustained calls for a practical, not a legal, test. It then stated:
The Board of Tax Appeals has held, in a series of well-reasoned opinions, that a loss occasioned by the taxpayer's breach of contract is not deductible in the year of the breach, except under the special circumstances where, within the tax year, there is a definite admission of liability, negotiations for settlement are begun, and a reasonable estimate of the amount of the loss is accrued on the books.
*654 In the present case in the year 1920, the Blue Buckle Cotton Mills, Inc. was ready to admit that it would be liable in some undetermined amount on account of these contracts. It was not in position to determine this amount. The other parties to the contracts had made no claim, no negotiations for settlement had been begun, and no reasonable estimate of the amount of the loss was accrued on the books. Under these circumstances it is our opinion that all of the losses should be deducted in the year 1921 in determining the net loss for that year which is to be carried forward into later years. *2104 The parties stated that they were not in disagreement as to the amounts of these losses.
This brings us to the respondent's alternative contention. The net loss of the year 1921 was a loss of the Blue Buckle Cotton Mills, Inc. and under section 204 that net loss may be deducted from the net income of the same taxpayer for 1922. But under the decisions of this Board and of the courts it is not proper to deduct that loss from the net income of any other taxpayer for 1922 or 1923, even though some other taxpayer may have been affiliated with the Blue Buckle Cotton Mills, Inc. for all or a part of the year 1922, or even though some other taxpayer may have absorbed the Blue Buckle Cotton Mills, Inc. in the year 1922. ; ; ; ; ; . It would be proper to deduct the net loss of the Blue Buckle Cotton Mills, Inc. for 1921 from its net income for the first six months of 1922 which was*2105 in fact its only income for the entire year. But there should be eliminated in computing such net income all income and deductions of the affiliated group which relate to the Industrial Cotton Mills Company, Inc.
Under Regulations 62, articles 632 and 636 relating to income tax and war-profits and excess-profits tax under the Revenue Act of 1921, affiliated corporations filing a consolidated return were required to use Form 1120 and to file with that form statements of gross income and deductions and the several schedules required "in columnar form to the end that the details of the items of gross income and deductions for each corporation included in the consolidation may be readily audited." The petitioner placed in evidence a copy of the Form 1120 which was filed as a consolidated return of the Industrial Cotton Mills Company, Inc. and the Blue Buckle Cotton Mills, Inc. for the calendar year 1922. This form does not comply with the above regulations. It is not possible to tell from the return which corporation filed it, but such schedules as there are indicate that the income was the income of the Industrial Cotton Mills Company, Inc.*655 We can not determine from*2106 this return nor from any other fact in the record before us the amount of the net income of the Blue Buckle Cotton Mills, Inc. for the period January 1, 1922, to June 30, 1922, or for the calendar year 1922. So far as we know the Industrial Cotton Mills Company, Inc. may have had income for the first six months of 1922, or if it did not have income, some of the deductions taken on the consolidated return may have been its deductions relating to this period, and further than this there is no way of separating the operations of the first six months from the operations of the last six months. Perhaps the parties can agree upon this question of net income in their computations under Rule 50, but if not, the establishment of these facts was a part of the petitioner's case and it must suffer the consequences.
Reviewed by the Board.
Judgment of no liability may be entered in Docket No. 28131. Judgment will be entered under Rule 50 in Docket No. 28132.