1939 BTA LEXIS 1068 | B.T.A. | 1939
Lead Opinion
The deficiency in this proceeding results from respondent’s determination that the petitioner corporation’s income tax liability for 1933 should be computed, assessed, and collected on the basis of the consolidated income of petitioner and an affiliated corporation. Bespondent has made this determination by application to the year 1933 of article 11 (a) of Begulations 78.
Since the issue in this proceeding arises out of application of an administrative regulation, it is pertinent to comment first upon the recognized limitations upon the application of the administrative regulations. We refer to a decision of the Supreme Court in Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129, in which the Court stated as follows:
The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law, for no such power can be delegated by Congress, but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity. Lynch v. Tilden Produce Co., 265 U. S. 315, 320-322, 44 S. Ct. 488, 68 L. Ed. 1034; Miller v. United States, 294 U. S. 435, 439, 440, 55 S. Ct. 440, 79 L. Ed. 977, and cases cited. And not only must a regulation, in order to be valid, be consistent with the statute, but it must be reasonable. International R. Co. v. Davidson, 257 U. S. 506, 514, 42 S. Ct. 179, 66 L. Ed. 341.
The matter of requiring or allowing consolidated returns has long been in controversy, as clearly appears in reports of the Committee on Ways and Means and the Committee on Finance. Since the Revenue Act of 1918, there have been various provisions enacted by Congress relating to the method by which affiliated corporations should or could report income. In the 1918 Act, section 240 (a), Congress enacted a mandatory provision requiring affiliated corporations to make a consolidated return of net income. In the Revenue Act of 1921, section 240 (a) was amended so as to permit affiliated corporations to make either separate returns or, within their election, a consolidated return. But it was prescribed in the statute that if a return was made on either of such bases all returns thereafter should be made upon the same basis unless permission to change the basis was granted by the Commissioner. The consolidated returns provision in the revenue act remained the same in this particular respect until the Revenue Act of 1928, when it was considerably revised, and section 141 of that act extended to affiliated groups of corporations the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year. Under the 1928 Act, a special provision was adopted, section 142, which required keeping the basis of income tax return the same for the year 1928 as had been adopted by the taxpayer for the year 1927. In the Revenue Act of 1932, section 141 remained unchanged, excepting for insertion of a parenthetical clause.
Congress gave to an affiliated group of corporations the privilege of making a consolidated return for a taxable year in lieu of separate
Taxation of corporation income was affected by sections 215 (a), (f); 216 (a); 218 (e) of the National Industrial Recovery Act, as
It is not material to the decision of the question before us to explore the comparative advantages or disadvantages to groups of affiliated corporations, after amendment of the 1932 Act, to make consolidated returns instead of separate returns. The fact is that there was a new revenue act for the year 1933 affecting taxation of corporations. The petitioner corporation in this proceeding considered it preferable to make income tax returns on the basis of a separate return for the year 1933. Where there are two methods of making income tax return available to corporations which involve a choice between two possibly different tax liabilities, it is reasonable that corporations should consider the practical aspects of the election to make separate returns or consolidated returns. Certainly, since the 1928 Act, Congress has allowed affiliated corporations freedom to entertain such considerations. From the comparison made above of the Revenue
Under the circumstances reviewed above, and upon our opinion that Congress intended that a new election as to the method of making corporation income tax returns should be given, from time to time, as the revenue act is changed, we must conclude that the Commissioner’s application of article 11 (a) of Regulations 78 to the taxable year 1933 was not reasonable and was not consistent with the new revenue act for 1933. The application of article 11 (a) to the year 1933 does not carry out any intent of Congress that we are able to discover but, in fact, contravenes the apparent intent of Congress that there should be a new election when the law is changed.
Petitioner has paid the full amount of the tax reported on its separate return. However, the parties have stipulated that certain adjustments should be made. Consequently, there must be recomputation of the tax under Bule 50.
Beviewed by the Board.
Decision, will be entered wnder Bule 50.
Art. 11. Consolidated Returns for Subsequent Years.
(a) Consolidated Returns Required for Subsequent Years.
If a consolidated return is made under these regulations for the taxable year 1932 or any taxable year thereafter, a consolidated return must be made for each subsequent taxable year during which the affiliated group remains in existence unless (1) a corporation (other than a corporation created or organized, directly or indirectly, by a member of the affiliated group) has become a member of the group during such subsequent taxable year, or (2) one or more provisions of these regulations, which have previously been consented to, have been amended, or (3) the Commissioner, prior to the time of making the return, upon application made by the common parent corporation and for good cause shown, grants permission to change.
SEC. 141. CONSOLIDATED RETURNS OP CORPORATIONS.
(a) Privilege to Pile 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 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) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. In the ease of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.
(b) Regulations.- — The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability.
(c) Computation and Payment of Tax. — In any case in which a consolidated return is made the tax shall be determined, computed, assessed, collected and adjusted in accordance with the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the date on which such return is made; except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of % of 1 per centum.
[See. 218 (e), National Industrial Recovery Act.] Effective as of January 1, 1933, section 141 (c) of the Revenue Act of 1932 is amended by striking out “except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of three-fourths of 1 per centum” and inserting in lieu thereof the following: “except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of three-fourths of 1 percentum and except that for the taxable years 1934 and 1935 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of 1 per centum.”