
    COMMISSIONER OF INTERNAL REVENUE v. BEN GINSBURG CO., Inc.
    No. 12.
    Circuit Court of Appeals, Second Circuit.
    Argued Oct. 14, 1931.
    Decided Nov. 2, 1931.
    G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and John H. McEvers, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., and Percy S. Crewe, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for petitioner.
    Lloyd Church, of New York City (A. W. Gregg, of Washington, D. C., of counsel), for respondent.
    William P. Smith, of Washington, D. C., amicus curias.
    Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
   MANTON, Circuit Judge.

The respondent and Mendelson & Suss-man Company, Inc., are New York corporations, both having offices in the city of New York. On January 2,1927, the respondent’s stockholders acquired all the capital stock of Mendelson & Sussman Company, Inc., in the proportions in which they -owned shares of stock' of the respondent, and thereby the corporations became affiliated for tbe taxable year 1927. In 1926, Mendelson & Suss-man Company, Inc., sustained a net loss of $48,340.18, and for the year 1927 a net loss of $57,407.79. Tbe net income of tbe respondent for 1927 was $101,934.11. Tbe two affiliated corporations filed consolidated income tax returns for tbe year 1927. They determined tbe net income of tbe two affiliated corporations for 1927 by deducting tbe 1926 and 1927 losses of tbe Mendelson & Sussman Company, Inc. Tbe Commissioner disallowed tbe deduction of tbe Mendelson & Sussman Company, Inc., 1926 loss, giving as bis reason that tbe companies were not affiliated in 1926, and therefore that tbe loss was not that of tbe respondent. This action by tbe Commissioner left tbe consolidated net income to tbe affiliated companies of $44,526.32. This forms the basis for tbe deficiency.

Tbe Board of Tax Appeals sustained tbe taxpayer’s contention, allowed the deduction, and found that there was no deficiency.

The question, therefore, presented to us, is whether tbe respondent is entitled to have $48,340.18, tbe net loss of tbe Mendel-son & Sussman Company, Inc., in 1926, used as a deduction in determining the net income of tbe affiliated group in 1927. Even though both corporations were affiliated in 1927, they each remained taxpayers, and their affiliation merely made them a tax computing unit. Swift & Co. v. United States (Ct. Cl.) 38 F.(2d) 365, 379; Sweets Co. v. Commissioner, 40 F.(2d) 436 (C. C. A. 2). Sections 234, 232, 206, of the Revenue Act of 1926 (26 USCA §§ 986, 984, 937) authorized tbe use of a net loss in tbe computation of net income of a taxpayer for tbe taxable year, but section 206 (a) does not authorize tbe use of such net loss in tbe computation of a net loss for that year. Since each corporation of tbe affiliated group is a taxpayer, tbe net loss of each must be computed separately, and a net loss may not be carried forward and added to a net loss of tbe taxpayer unless tbe taxpayer has a net income for a succeeding year. Therefore a net loss for a previous year, 1926, could not be availed of by tbe affiliated return, since Mendelson & Suss-man, Inc., bad no net income in 1927. Affiliated returns are authorized by section 240 (a) of tbe Revenue Act of 1926 (26 USCA § 993 (a) as “a consolidated return of net income,” under regulations prescribed by tbe Commissioner with tbe approval of tbe Secretary of tbe Treasury. Article 635 of Regulation 69, as promulgated, provides: “Subject to tbe provisions covering tbe determination of taxable net income of separate corporations, * * * the consolidated taxable net income shall be tbe combined net income of tbe several corporations consolidated.” By this regulation, tbe affiliated group, filing a consolidated return, becomes a tax computing unit. It is not a taxable unit. Section 206 (a) defines the term “net loss” as being tbe “excess of tbe deductions allowed by section * * “ 986 of this title over tbe gross income,” and section 206 (b), 26 USCA § 937 (b) provides that, if “any taxpayer has sustained • a net loss, tbe amount thereof shall be allowed as a deduction in computing tbe net income of tbe taxpayer for tbe succeeding taxable year (hereinafter in this section called ‘second year’).”

Tbe right of deduction of a net loss computed under section 206 is restricted to tbe computation of tbe net income of tbe taxpayer. But a corporation of tbe affiliated group remains a taxpayer, and tbe deduction must be confined to tbe computation of tbe net income of tbe corporate entity. In Swift & Co. v. United States, supra, tbe corporation, which was not a member of the affiliated group in 1918, sustained a net loss during tbe year 1919. Speaking of the right to take advantage of this loss in computing tbe 1918 taxes, the Court of Claims said: “Of course this net loss will not be used in tbe consolidated computation for 1918 for tbe reason that this corporation was not a member of tbe 1918 group.” And we said in Sweets Co. v. Commissioner, supra, that tbe statutory provisions for consolidated returns declared merely a method of computing tbe taxes of tbe corporation members of tbe group. It is section 240 (a) which authorized tbe net income of tbe affiliated group to be made up while computing tbe net incomes and losses of tbe several corporations and then consolidating tbe results of the several computations, thereby adding net income to net income and net loss to net loss and arriving at tbe taxable income by subtracting tbe composite net loss from tbe total net income. Section 206 (b) provides only that a net loss may be used in tbe computation of net income, but it may not be used in tbe computation of net loss. Under section 206 (b), the right to carry the deduction forward is limited to the third year (counting the taxable year as the first year), but the statute does not contemplate carrying forward the net loss and its addition to a net loss for the succeeding year and thus indefinitely until the combined net losses are offset by net income. The deduction is limited to the computation of net income. Burnet v. Moore Cotton Mills Co., 49 F. (2d) 59 (C. C. A. 4). It follows that, when the net income is reduced to zero, the function of the net loss provision ceases. In article 1622 of the Treasury Regulation 69, it is said: “It should be noticed, however, that a ‘net loss’ for a preceding year may not be considered in computing a ‘net loss’ for a succeeding year.” Since a net loss in the previous year may not be added to the net loss for a subsequent year, in the instant case, because of the lack of net income by Mendelson & Sussman Company in 1927, it cannot affect such taxpayer’s nét loss upon the computation of the consolidated net income. Woolford Realty Co. v. Rose (D. C.) 44 F.(2d) 856. The income tax law has defined net income and provides the formula for its computation, and has defined net loss and prescribed the formula for its computation; these formulas are exclusive. Botany Worsted Mills v. United States, 278 U. S. 282, 49 S. Ct. 129, 73 L. Ed. 379. The congressional intent is plain, and it is the duty of the courts to give effect thereto. United States v. Goldenberg, 168 U. S. 95, 18 S. Ct. 3, 42 L. Ed. 394.

We are referred to National Slag Co. v. Commissioner, 47 F.(2d) 846 (C. C. A. 3), which seems to be in conflict with these' views as well as with Sweets Co. v. Com’r, supra. We think the purpose of Congress was to provide affiliation of corporations based upon the theory that common stockholders of two or more corporations, whose holdings are substantially the same in each or a)l, bear the ultimate burden of tax equally and equitably, regardless of whether it rests primarily upon one or the other of the affiliated corporations. Commissioner v. Adolph Hirseh & Co., 30 F.(2d) 645 (C. C. A. 2). If the respondent were permitted to obtain credit for the losses sustained by Mendelson & Sussman Company at a time when the two companies were not affiliated, the common stockholders of the corporation would not bear the ultimate burden of tax equally or equitably.

Order reversed.  