*598 Petitioner, a wholly owned subsidiary, kept its books on the basis of a fiscal year ended June 30, and filed its separate income tax return for the fiscal year 1930. The parent corporation kept its books and filed its returns on a calendar year basis. Petitioner and its parent corporation filed a consolidated return for the calendar year 1930. Held, the filing of a separate return by petitioner for its fiscal year 1930 did not preclude the filing of a consolidated return by the affiliated corporations for the calendar year 1930, under section 141 of the Revenue Act of 1928, and regulations promulgated thereunder; held, further, respondent properly determined a deficiency in tax against petitioner for the period July 1 to December 31, 1929.
*1076 This proceeding is for the redetermination of a deficiency in income tax of $11,797.30 for the period July 1 to December 31, 1929. The only matter in controversy is the correctness of the respondent's action in determining the petitioner's tax liability for the six-month period from July 1 to December 31, 1929, as*599 a separate taxable period instead of as a part of the twelve-month period beginning July 1, 1929, and ending June 30, 1930.
FINDINGS OF FACT.
The petitioner is an Illinois corporation organized in 1925. The Gulbransen Co. is an Illinois corporation organized in 1906. Each has its principal place of business in Chicago, Illinois. The Gulbransen Co. is engaged in the manufacture and sale of pianos and player pianos. Petitioner is engaged in the business of manufacturing and selling radio receivers and accessories.
On and after May 1, 1929, all of petitioner's capital stock was owned by the Gulbransen Co.
At all times material to this proceeding the books and records of the Gulbransen Co. were kept upon the basis of calendar years. From its organization up to and including June 30, 1930, petitioner's books and records were kept upon the basis of fiscal years ending June 30. On December 31, 1930, petitioner closed its books and records and thereafter maintained them on the basis of calendar years.
On September 10, 1929, petitioner duly filed with the collector its separate income tax return on form 1120-A for its fiscal year ended June 30, 1929, showing thereon a tax*600 of $2,386.59.
On March 15, 1930, the Gulbransen Co. duly filed with the collector its separate income tax return on form 1120 for its calendar year 1929, showing thereon a net loss and no tax liability.
On May 1, 1930, the Gulbransen Co. applied to the respondent through the collector of internal revenue at Chicago, Illinois, for permission to change its accounting period from the taxable year ending December 31, 1930, to the taxable year ending Juen 30, 1930. In its application it also requested permission to file a consolidated *1077 return at June 30, 1930, to include twelve months of the operations, July 1, 1929, to June 30, 1930, of its subsidiary, the petitioner, and six months of its own operations, January 1 to June 30, 1930. It further stated in the application that, if the respondent should refuse to permit it to file a consolidated return including the operations of itself and the petitioner as thus set out, then it desired to withdraw the application for a change in its accounting period.
On May 3, 1930, the Gulbransen Co. addressed a letter to the respondent advising him that it and the petitioner had filed separate returns for their taxable years ended*601 respectively on December 31, 1929, and June 30, 1929. The Gulbransen Co. also requested that the respondent give his permission for it either to file an amended consolidated return for the year ended December 31, 1929, or in the future to file its returns including therein the income and deductions of the petitioner as consolidated returns of both companies, the first of such returns to be filed as of June 30, 1930, the closing of the fiscal year of the petitioner. In reply to this letter the respondent on May 21, 1930, advised the Gulbransen Co. that since it (the parent company) had filed a separate return for 1929 it had exercised its privilege and under the provisions of article 10 of Regulations 75 an amended return on a consolidated basis was not acceptable for 1929. He further advised the company that since under the provisions of section 141 of the Revenue Act of 1928 and article 1 of Regulations 75 affiliated corporations had the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year in lieu of separate returns, his permission for the filing of a consolidated return for 1930 was not necessary. The respondent also called the attention*602 of the company to article 14 of Regulations 75, providing that where a subsidiary corporation has a different taxable year to that of the parent the income of the subsidiary must be adjusted to conform to the accounting period and taxable year of the parent. He also advised the corporation that if a consolidated return were filed by it for 1930 such return should be for the calendar year ending December 31, 1930, unless permission was granted by him to change such basis, as this represented the accounting period and taxable year of the Gulbransen Co. (the parent company).
On July 8, 1930, the respondent advised the collector of internal revenue at Chicago that the application made May 1, 1930, by the Gulbransen Co. for permission to change its accounting period from December 31 to June 30 was denied because it was conditioned upon the company being permitted to file a consolidated return for itself and the petitioner in which would be included the income of the company for the period January 1, 1930, to June 30, 1930, and of the petitioner for the fiscal year ended June 30, 1930. He informed *1078 the collector that there was no authority for accepting a consolidated return*603 filed on that basis. A copy of the respondent's letter to the collector was furnished the Gulbransen Co. by the collector on July 12, 1930.
On September 15, 1930, petitioner duly filed with the collector its separate income tax return on form 1120-A for its fiscal year ended June 30, 1930, showing thereon a tax of $9,739.95.
On October 30, 1930, the petitioner made application to the respondent through the collector of internal revenue at Chicago for permission to change its accounting period from the taxable year ended June 30 to the taxable year ended December 31, stating that this change was desired in order to make its accounting period conform to that of the Gulbransen Co., of which it was a wholly owned subsidiary and with which it desired to file a consolidated return.
On October 30, 1930, the Gulbransen Co. addressed a letter to the respondent in which reference was made to the application of the petitioner for permission to change its accounting period from June 30 to December 31. In this letter the Gulbransen Co. requested permission to file a consolidated return for itself and the petitioner for the calendar year ending December 31, 1930, stating that such return*604 would only include the operations of the petitioner for the period July 1 to December 31, 1930. In reply to this letter of the Gulbransen Co. the respondent, on November 8, 1930, advised the company that section 141(a) of the Revenue Act of 1928 granted affiliated corporations the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year in lieu of separate returns, and that specific permission for the filing of a consolidated return by it and the petitioner was not required. He further advised the company as follows:
Under article 10 of Regulations 75, the privilege of making a consolidated return is exercised at the time of filing the return of the parent corporation.
In regard to the proper preparation of a consolidated return for the calendar year 1930, since Wells-Gardner and Company closes its books on the basis of a fiscal year ending June 30, article 14 of Regulations 75 provides that the taxable year of the parent corporation shall be considered as the taxable year of the affiliated group which makes a consolidated return, and the consolidated net income must be computed on the basis of that taxable year.
Article 13(a) of*605 Regulations 75 provides that except for changes in an affiliated group by way of additions of new companies becoming affiliated or of elimination of old companies ceasing to be affiliated, a consolidated return must include the income of the parent and of each subsidiary for the entire taxable year. Accordingly, the income of Wells-Gardner and Company, for the period January 1 to June 30, 1930, should be included in the consolidated return to be filed for the calendar year 1930 and its return for the fiscal year ending June 30, 1930 should be amended so as to cover the period from July 1 to December 31, 1929, only.
*1079 On November 15, 1930, the respondent advised the collector of internal revenue at Chicago as follows with respect to the application of the petitioner for permission to change its accounting period:
Permission is hereby granted Wells-Gardner & Company to change the basis of computing its income and filing income tax returns from the fiscal year ending June 30 to the calendar year, effective as of December 31, 1930, provided the proper adjustments are made in its books of account and returns of income. To effect the change, the corporation will be required*606 to close its books on Dec. 31, 1930 and to file a return on or before March 15, 1931, covering the period July 1 to December 31, 1930. This return should be accompanied with a statement to the effect that the books of the corporation have been adjusted to conform to the calendar year. Returns for subsequent years must be made on the basis of the full calendar year and will be due on or before March 15 of each year. The attention of the corporation should be directed to the fact that in determining the tax on the return covering the period July 1 to Dec. 31, 1930, the net income must be placed on an annual basis and the tax computed in accordance with section 47(c) of the Revenue Act of 1928.
The enclosed copy of this letter should be forwarded to the corporation with instructions to attach it, or a copy thereof, to the return for the period July 1 to December 31, 1930, as authority for the change herein granted.
A copy of the foregoing letter was furnished the petitioner by the collector on November 19, 1930.
On February 4, 1931, the Gulbransen Co. advised the respondent by letter that in filing its return for the year 1930 it would include the taxable income of the petitioner, *607 its wholly owned subsidiary.
On March 14, 1931, petitioner and the Gulbransen Co. filed a tentative consolidated return for the calendar year 1930. Pursuant to extension of time granted, petitioner and the Gulbransen Co. duly filed on May 15, 1931, a consolidated return for the calendar year 1930, including therein the incomes and deductions of the Gulbransen Co. and petitioner for said calendar year and showing thereon a large net loss.
On March 13, 1931, the petitioner executed for the calendar year 1930 form 1122, designated "Authorization and Consent of Subsidiary Corporation Included in a Consolidated Income Tax Return and Return of Information", which accompanied the tentative consolidated return filed by the petitioner and the Gulbransen Co. In the form 1122 the Gulbransen Co. was named as the parent corporation. This form also contained the following provisions:
The above-named subsidiary corporation hereby authorizes the above-named parent corporation (or in the event of its failure, the Commissioner or the Collector) to make a consolidated return on its behalf for the taxable year for which this form is filed, and for each taxable year thereafter that a consolidated*608 return must be made under the provisions of Article 11(a) of Regulations 75.
The above-named subsidiary corporation, in consideration of the privilege of joining in the making of a consolidated return with the above-named parent corporation, hereby consents to and agrees to be bound by the provisions of Regulations 75 prescribed prior to the making of this return. This consent is applicable *1080 to the taxable year for which this form is filed and to each taxable year thereafter that a consolidated return must be made under the provisions of Article 11(a) of Regulations 75.
At or before the time required by law, petitioner and the Gulbransen Co. filed a consolidated return for the calendar year 1931, including therein the incomes and deductions of the Gulbransen Co. and petitioner. Said return showed a large net loss.
For the period July 1 to December 31, 1929, the petitioner had a substantial net income in excess of all credits. For the period January 1 to June 30, 1930, it had a substantial net loss. For the period July 1 to December 31, 1930, it had a substantial net income in excess of all credits. The Gulbransen Co. had a loss for the calendar year 1930. *609 Its loss for the last six months of the year was in excess of the petitioner's net income for such six months.
The deficiency here involved was determined by the respondent for the six-month period ended December 31, 1929. In determining the deficiency the respondent gave the petitioner credit for the amount of tax shown on the petitioner's return for the entire fiscal year ended June 30, 1930, and paid for such fiscal year.
OPINION.
HILL: The question for determination here is whether the petitioner and its parent corporation were authorized to make a consolidated return for the calendar year 1930, which was the taxable year of the parent corporation, notwithstanding that the petitioner had previously made and filed a separate return for the fiscal year ended June 30, 1930. Such authority, if it existed, must be found in the provisions of section 141 of the Revenue Act of 1928 1 and the regulations prescribed by the Commissioner thereunder.
*610 Section 141 confers upon an affiliated group of corporations the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year, upon condition that all corporations of such affiliated group consent to all the regulations under subsection (b) prescribed prior to the making of such return. It is provided further in that section that the making of a consolidated return shall be considered as such consent. Subsection (b) of section 141 gives the Commissioner authority, with the approval of the Secretary, the prescribe such regulations as he may deem necessary *1081 to determine, compute, assess, collect, and adjust the tax liability of an affiliated group of corporations and of each corporation of the group in such manner as to reflect clearly the income and prevent avoidance of tax liability.
Pursuant to that authority the Commissioner, with the approval of the Secretary, prescribed in Regulations 75 for the carrying into effect of the provisions of section 141. Article 10 of these regulations requires that the privilege of making a consolidated return for any taxable year of an affiliated group must be exercised at the time of filing*611 the return of the parent corporation for such year. Article 14 provides that the taxable year of the parent corporation shall be the taxable year of the affiliated group which makes a consolidated return, and that the consolidated net income must be computed on the basis of the taxable year of the parent corporation.
The consolidated return in this case was made in strict accordance with the provisions of section 141, supra, and of the regulations prescribed thereunder. The consolidated return was made voluntarily and in the exercise of a privilege granted by section 141 after the corporations involved affirmatively consented to the provisions of said regulations in addition to the consent imposed by statute upon the filing of a consolidated return.
Petitioner contends, however, that the consolidated return was made without authority of law, for the assigned reason that petitioner had previously made a separate return for the fiscal year ended June 30, 1930, covering the first six months of the taxable year for which the consolidated return was made. This contention is based on the argument that the petitioner by making the separate return had elected not to join in a*612 consolidated return for the calendar year 1930 and that the election was irrevocable and binding upon petitioner, its parent corporation and the respondent, notwithstanding the subsequent making and filing of the consolidated return. We find that neither the provisions of section 141 of the Revenue Act of 1928 nor the regulations thereunder support this argument.
The petitioner has cited and relies upon a number of cases based upon the provisions of previous revenue acts relating to the filing of separate and consolidated returns by affiliated corporations.
There is clearly a difference between the provisions of section 141(a) of the Revenue Act of 1928 and section 240(a) of the Revenue Act of 1921. Under section 141(a) of the 1928 Act an affiliated group of corporations has the privilege of filing a consolidated return for the taxable year 1929 or any subsequent taxable year, and such privilege is not lost or forfeited by postponing the election to file such return to any taxable year subsequent to the taxable year 1929.
Under section 240(a) of the Revenue Act of 1921 an affiliated group of corporations was permitted to file either a consolidated return or *1082 *613 separate returns for any taxable year beginning on or after January 1, 1922, but the kind of return (consolidated or separate) filed for the first taxable year beginning on or after January 1, 1922, was required to be the basis for returns for subsequent taxable years by such corporations unless and until such basis was changed by permission of the Commissioner.
Under the 1928 Act the election applies only to consolidated returns and may be exercised as to any taxable year subsequent to the taxable year 1928, but when the privilege to file a consolidated return is once exercised, the basis can not be changed without permission of the Commissioner, whereas under the 1921 Act the privilege of election applied to separate as well as consolidated returns and could be exercised only for the first taxable year beginning on or after January 1, 1922.
Section 240(a) of the Revenue Act of 1924 and section 240(a) of the Revenue Act of 1926 are identical with section 240(a) of the Revenue Act of 1921, except in [*] to the first taxable years to which the later acts apply. Under the Acts of 1921, 1924, and 1926 the filing of a separate return constituted an election to continue to file*614 return for subsequent taxable years until permission to change to a consolidated return basis was granted by the Commissioner. Also under those acts the filing of a consolidated return for the first taxable year constituted an election to continue to file such return for subsequent taxable years until permission to change to the basis of separate returns was granted by the Commissioner.
Under the 1928 Act the filing of a separate return does not constitute an election to continue to file such return until permission to change is granted by the Commissioner, but the filing of a consolidated return under that act does constitute an election to continue to file consolidated returns on such basis until permission to change is granted by the Commissioner. Therefore, the filing by the petitioner of a separate return for the fiscal year ended June 30, 1930, constituted no legal hindrance or impediment to the making of a consolidated return by petitioner and its parent corporation for the calendar year 1930, whcih was the taxable year of the parent corporation.
Section 141 of the Revenue Act of 1928 is new law that prospectively supersedes and annuls those provisions of section 240*615 of the Revenue Acts of 1921, 1924, and 1926 constituting the filing of a separate return an election to continue to make returns on that basis. Hence, the cases cited and relied on by petitioner in support of its contention that the filing of its separate return for the fiscal year ending June 30, 1930, foreclosed it from joining in the consolidated return for the calendar year 1930 have no pertinency in the instant case.
*1083 The petitioner, exercising its legal right to join in a consolidated return for the calendar year 1930, included therein its income and losses during the period from January 1 to June 30, 1930, its losses substantially exceeding its income for that period. Its net loss was deducted from its substantial net income for the last half of the calendar year 1930. Petitioner in its separate return for its fiscal year 1930 also deducted its net losses sustained during the period from January 1 to June 30, 1930, from its income for the period July 1 to December 31, 1929. Petitioner, therefore, had a double deduction of the loss sustained in the period January 1 to June 30, 1930, and in each return the loss was absorbed.
*616 The petitioner and its parent corporation, in exercising their legal privilege to file a consolidated return for the calendar year 1930, pursued a course which safely assured the avoidance of any tax liability for either corporation for such taxable year. This course involved, however, a double deduction of the loss sustained by petitioner during the period January 1 to June 30, 1930. The law does not contemplate nor countenance the avoidance of tax liability through such device. As bearing upon the question of the double deduction of losses, the following citations are pertinent: ; ; ; . In the last case the court said: "Double credits equally with double taxation are to be avoided where possible in construing laws passed by Congress."
It is obvious that petitioner is not entitled to deduct its loss incurred in the period January 1 to June 30, 1930, from both its income for its fiscal year 1930 and its income for the calendar year 1930. Petitioner's tax liability*617 for its fiscal year ending June 30, 1930, was determined by its separate return for that taxable year. But subsequent to the determination of that tax liability petitioner joined with its parent corporation, the Gulbransen Co., in exercising the privilege granted by statute to make a consolidated return for the calendar year 1930. Under this consolidated return petitioner's tax liability for the entire calendar year 1930 was determined, and upon that basis it was found that petitioner had no tax liability for such year.
Exercise of the privilege of filing a consolidated return imposed upon the petitioner and its parent corporation acceptance of the following conditions: (1) That they consent to all the regulations prescribed prior thereto under subsection (b) of section 141 of the Revenue Act of 1928; (2) that the consolidated return be made at the time of filing the return of the Gulbransen Co., the parent corporation; (3) that the consolidated return be made for the taxable year of the parent corporation, which was the calendar year 1930; and (4) that the consolidated net income be computed on the basis of the taxable year of the parent corporation.
*1084 Under no*618 other conditions and on no less than all of the conditions named is a consolidated return authorized under the statute and the regulations, which have the force of a statute.
No question as to the validity of the regulations referred to has been raised.
In , the Supreme Court, referring to consolidated returns under the above act and Regulations 75, prescribed under section 141(b) thereof, said:
The making of the consolidated return constituted acceptance by petitioner and its subsidiaries of the Regulations that had been prescribed. No question of validity is raised.
The same position was taken on that question in , and in the same case at .
The petitioner not only consented to filing a consolidated return for the parent's taxable year 1930, but consented to all the regulations prescribed prior thereto. Such consent can not be withdrawn or revoked after the consolidated return is filed. Art. 12(b). Regulations 75.
If petitioner's contention herein should be upheld it would avoid a portion of its tax liability by reason of the fact*619 that it has twice deducted from its income the loss sustained in the six-month period from January 1 to June 30, 1930 - once from the income for the period July 1, 1929, to June 30, 1930, and again for the period January 1, to December 31, 1930.
In order to reflect properly the income of petitioner and determine its correct tax liability for the overlapping periods of the fiscal year 1930 and the calendar year 1930, it was necessary that there be an adjustment of the return of one of those taxable years.
The Commissioner accepted the consolidated return, as he was compelled to do under section 141 of the Revenue Act of 1928 and articles 10 and 14 of Regulations 75, and determined the tax liability thereon for the calendar year 1930. This operation reflected properly the income and tax liability covered by the period of such return, but disturbed the tax liability of petitioner as previously determined on the basis of its separate return for the fiscal year ending June 30, 1930. Hence, it became necessary, in order to reflect properly the taxable income of petitioner for the eighteen-month period from July 1, 1929, to December 31, 1930, to adjust the separate return for the*620 fiscal year 1930 by limiting it to the period July 1 to December 31, 1929.
It was the duty of the Commissioner to make such adjustment. His action is, therefore, approved.
Reviewed by the Board.
Judgment will be entered for the respondent.
Footnotes
1. SEC. 141. CONSOLIDATED RETURNS OF CORPORATIONS - 1929 AND SUBSEQUENT TAXABLE YEARS.
(a) Privilege to file consolidated returns.↩ - An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year, in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. * * *