*1 590 com- appellants What our Government.7 these
tions or concerning opinions8 were their municated beliefs in national and world measures and trends domestic affairs. criminal cannot be im- our sanctions
Under decisions communication. posed for such judgments are
Reversed. INTERSTATE TRANSIT LINES v. COMMISSIONER
OF INTERNAL REVENUE.
Argued April 19,
June
No. 552.
1943. Decided
1943.
7
Jonge
Oregon,
353;
See De
299
Lowry,
U. S.
Herndon v.
301
U. S. 242.
8
Stromberg
California,
359;
See
Alabama,
U. S.
Thornhill v.
Mr. with whom Mann Nelson Mr. petitioner. on for was brief, Monarch, J. with whom Solicitor General
Mr. Louis Clark, Jr., Attorney O. Fahy, Assistant General Samuel on for Key brief, respondent. Mr. were and Sewall opinion Reed delivered of the Court. Mr. Justice treatment This case involves a claim the to single subsidiary itself and a taxable person. a as granted because in writ of certiorari was of uncertainties Moline Prop- this area of federal tax law. important See Commissioner, ante, Petitioner, n. 1. Inter- p. erties v. sought Transit Lines, $28,100.66 to deduct as ordi- nary year and for necessary business 1936. (a), represented 23 Act of 1936.1 sum § Revenue subsidiary, Stages California, credit to its Union Pacific to be petitioner to contract which liable pursuant for The claimed operating subsidiary. deficits of the all deficiency deduction determined. was disallowed and Appeals The Board Tax the Commissioner sustained Appeals and the Circuit has affirmed Board. Court Commissioner, 44 T. A. 957; Interstate Transit Lines v. B. 2d
130 F. 136.
1 49 Stat. 1648: from
“Sec. 23. Deductions Income. Gross computing “In income as deductions: net there shall be allowed Expenses. paid “(a) ordinary necessary expenses —All during year carrying in trade or any incurred the taxable on busi- ness . . .” operated Nebraska an inter-
Petitioner, corporation, transportation line between Illinois and Cali- state bus Wyoming, did an Missouri and fornia, and the states en route. Because of its most of barred, under foreign incorporation, petitioner was interpretation of Cali- California Railroad Commission’s obtaining public fornia from certificate of conven- law, To ience to do intrastate California. avoid organized Stages situation, petitioner Cali- wholly-owned fornia as its to do Stages Stages with was unable do. contracted operate petitioner’s solely was to benefit and under direction; profits paid all were to be petitioner’s peti- any it was reimburse tioner and *3 In own business, Stages deficit. addition to its intrastate carry was on all interstate in petitioner’s of business California, agreement providing the as each party’s that line, the the crossed other became its lessee. buses lessor per was to oper- The lessee five cents mile in custody. ated the bus the lessee’s All this resulted change and expense no no added in in formerly the business respects in accounting except done other than for the addi- gross enterprise tion of the to the revenues of the proceeds of intrastate business. kept Petitioner Stages’ accounts, managed its and paid finances pay- bills and Each petitioner roll. month apportioned between the companies the revenues expenses two on the basis of mileage. passenger and traffic On the books of each a “clearing account” with the other showed the absorption by petitioner Stages’ of annual deficit or profit. It is the 1936 deficit of Stages, entered on of books both on December 31 of that year, petitioner which now deduct seeks to as its business expense. years Some after change in 1936, by reason of a California law or its inter- pretation, petitioner became able to conduct Consequently Stages in California. was dis- peti- transferred solved and its assets and franchises In tax re- 1933, tioner. 1932 and consolidated income pursuant petitioner turns were filed § 1932,47 Revenue Act of Stat. 169,213. expense an a busi- phrased payment
Whether
as the
of
agent or as a case
for
an
principal by
ness conducted
corpo-
equity
reality require
separate
where
under con-
ignored
incurring
be
or as the
rate identities
argument
necessary expense, petitioner’s
of
tract
Stages’ oper-
depends
the contention that
its success
on
business. With-
ating
petitioner’s
deficit is an
argument must fall. And
keystone
out this
the entire
argument
light
now familiar
we examine
legisla-
a matter of
income tax deduction is
rule
showing
clearly
grace and that
the burden of
tive
right to
deduction
New
taxpayer.
the claimed
is on
Helvering,
435, 440; Deputy
292 U.
Ice Co.
S.
Colonial
Pont,
du
308 U. S.
493. The decision of
two
is that
met.
courts below
burden
not been
has
not the
of a mere branch or division
case
under a
sake
solely
business conducted
convenience’
did an interstate bus
corporate form. Petitioner
separate
On
foreign
to California.
corporation
and was
year
hand,
tax
the other
peti
both
and intrastate.
For
interstate
question
*4
was,
engage
tioner to
intrastate business
illegal. Thus,
the
findings,
the businesses of
two
the
on
Copper
v.
companies were distinct. Cf. Edwards
Chile
Texas-Empire Pipe Line Co.
Co.,
452, 454, 456;
270 U. S.
Commissioner,
assuming
the deficit attributable to interstate business could expense petitioner be an petitioner’s business and conceivably the not deduct as a business cost of expense Stages’ showing intrastate business. There was no below sought as to the allocation the deductions as between Stages’ intrastate and interstate There is thus business. requiring no record of petitioner’s a further examination argument proof since the absence of affirmative contrary we deficiency must assume that the entire correctly by the was found Commissioner and that Stages’ deficit is attributable to intrastate business. It no answer is to this defect of proof petitioner obligated by contract to assume deficit. The Stages’ mere expense fact was incurred under contractual obligation does not of equivalent course make it the of a rightful deduction 23 (a). § under That subsection limits permitted deductions those “in paid carry- or incurred ing any on trade or business.” The origin and nature, legal sought form, and not of the to be de- ducted determines applicability words of 23§ (a). Deputy Pont, supra, v. du 494. was not of the taxpayer of operating costs carriage bus line in California. The of intra- passengers did not increase the tax- payer. profit carriage on their increased earned taxpayer’s profit any profitable but so would other ac- wholly tivity disconnected from the own busi- taxpayer’s As the pointed out, assumption ness. Circuit Court dependent upon corresponding of the deficit was not or benefit rendered to the petitioner Stages service petitioner’s with business. 130 F. connection 2d 139. conclusions, unnecessary
In view these to char- the payment petitioner capital acterize expendi- as a otherwise, ture or to decide whether if record were petitioner complete should be treated as a *5 Cf. purpose. Prop- for the Moline entity claimed taxable ante, Commissioner, p. 436. erties v.
-Affirmed. Mr. Justice Jackson, dissenting: Chicago operated system bus between taxpayer Angeles. pick passen- not up
and Los did the State gers elsewhere, as it because California, do In-order foreign permission to so. corporations denied operating the cost of help carry to obtain local traffic to buses, taxpayer organized wholly-owned interstate subsidiary. This contented and dominated authorities, granted carry and it was permission local arriving local It took over buses at the business. part thus California, performing them
line, operated through and bene- taxpayer’s agreements carriage of com- fiting to reduce the cost. It was a from local traffic arrangement, for the purpose mon-sense profitable. its business making subsidiary, by taxpayer made a contract with the
The subsidiary parent undertook service; which the entitled to the and assumed the company profits became agreed to reimburse taxpayer losses. This, too, deficit. was common-sense any operating arrangement. its pay wholly-owned To sub- for it come pointless, only would be would more
sidiary bankruptcy result its To it less back. would taxpayer agreed that the creditors. So injury of contractual be the measure deficits should operating obligation subsidiary. arrangement tax suggestion that is no
There actually not re- for that matter that did avoidance, or tax liability. thus increase its costs and taxpayer’s duce ruled, however, that the amount The Commissioner was not paid deficit expense. *6 to allow a
To the Commissioner all cases de- require might unscrupulous fixed be turned to by duction so through then, ends. It its controlled tax-evasion could as subsidiary, expenditures make not allowable properly them deficit expense, get part but allowed as by contract. Of course the not assumed Commissioner is any obliged this, allow or other when it is arrangement, to skullduggery. cover for tax Examination used as is to the Commissioner. But deduction has open items denied, legal theory been not for such reasons, upon but think is which I erroneous. taxpayer took positions: first,
The inconsistent entity corporate disregarded of the should be companies two taxed on basis; and the a consolidated sec- ond, the amount proper under deduction the con- implies tract, parties which course existence of two to Government, contract. The not to be outdone the mat- ter inconsistency, separate entity denied theory and contract, disregarded argues also to us “the contract good taxpayer Stages’ to make deficits pervaded is one the stockholder-corporation relation. to under Any contribution this contract must there- regarded fore be to as incident the taxpayer’s stockholder says status.” So Government the payment was not a which compensation services the contract provides that it was a was, “capital but contribution” which the contract says it was not.
I think there is no merit the taxpayer’s theory that disregard Commissioner must the corporate entity of the If a subsidiary. taxpayer itself creates uses a cor- he poration, cannot require Commissioner to it say isn’t there.
But on the other if hand, says Commissioner there entities, are two it would seem that they be would able to contract with each other, perform one to a service and the other price. to The service may be, and often is, if itself, not but perform one that why its I no reason up business, hired build see is deduction. proper cost is a business not determinable price may need be but be one, not a fixed its amount fixed, or but when contingencies; costs other of the de- use amount (barring evade) as is the device duction. is one of the Government’s plus” Cost “cost contracting. not an illicit method for own methods of a taxpayer employ. *7 the not itself urged taxpayer
But it is that could since law, it cannot be the pick up local under business legal in to have a subsid- taxpayer sense business business to have local iary so, do and disbursements although for foreign in to brought legally business, its are corporation I the suppose taxpayer benefit. do not its medicine, I or but would legally practice can itself law if its business or legal it needed service for suppose to to attention thought good supply it medical business a business ailing employees, the cost be injured or would agent doing what deduction, though even taxpayer The for itself. legally could not do up bill- newspaper put not be authorized to run may in are, who if for services of those but it contracted boards, its buses, suppose fill in its I do not order vacant to seats disallowed that reason. would be cost even Califor- company law, not violated has comply with it. this trouble to Indeed, nia. it went to in subsidiary to benefit used fact that hardly in- lacking can competence was areas where its own it is arrangement, particularly since insisted validate the existence. separate legal and tax had men them dummies, may utilize If create states function of law, within long they keep as so they them shall man- tell how laws not to revenue proper do has tax they that what but to see age business, eonseauences. in
Since decision of this case the Tax Court has held very case wholly-owned subsidiary similar that where a exclusively to the business of performs services essential the parent advances made corporation, parent subsidiary’s operating meet the deficit deductible as a are Co. expense. Texas & Pacific Ry. Commis sioner, 25, 1943. No. March I think is a cor this ayoids rect Judge rule. Harron there the force case only upon ground corporation parent here engage not itself in in the business done its behalf the subsidiary. good enough get That distinction is away the Tax Court I rule, from a bad but see no reason why such a deduction should be available case unnecessary subsidiary and be refused the case of one making needed comply state laws profitable with enterprise. would I reverse. Murpht
The Chief join Justice Me. Justice this dissent.
OKLAHOMA TAX COMMISSION UNITED STATES. *8 623, 624, Argued April
Nos. 9, 1943. 14, 1943. and 625. June Decided