CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE FIRST CIRCUIT.
Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo
MR. JUSTICE STONE delivered the opinion of the Court.
This petition for certiorari, 292 U.S. 618, presents for determination the single question, whether the two separate periods in 1925, for which the taxpayer made separate income tax returns, constitute two "taxable years" within the meaning of § 206 of the Revenue Act of 1926, c. 27, 44 Stat. 9, 17, which permits the taxpayer suffering a net loss in any taxable year to deduct it from taxable gains in the two succeeding taxable years.
On June 1, 1925, respondent, Morgan's, Incorporated, acquired all the voting stock of respondent Haines Furniture Company. Later, and in due course, in compliance with § 240 (a) and Article 634 of Treasury Regulations 69, the Haines Company filed its separate income tax return for the first five months of 1925 preceding the affiliation,
and the two affiliated corporations filed a consolidated return for the last seven months of the year and for the calendar years 1926 and 1927. During the seven months' period of 1925, and in 1926 and 1927, Morgan's, Incorporated, reported net income. In the first five and the last seven months of 1925, and in 1926, the Haines Company suffered net losses. In 1927 it made a net profit. Its net loss in the first five months of 1925, before affiliation, was shown in its separate return for that period. Its net losses for the last seven months of 1925 and for the year 1926 were shown in the consolidated returns of the two corporations for those periods and were deducted from the net income of Morgan's, Incorporated, in the returns for each of these periods. In the consolidated return for 1927, the Haines Company brought forward its loss for the first five months of 1925 and deducted it from its net income for 1927, under the provisions of § 206 (b). The Commissioner disallowed this deduction, and determined a corresponding deficiency for the taxable year 1927. The order of the Board of Tax Appeals sustaining his action was set aside by the Court of Appeals for the first circuit. 68 F.2d 325. Like rulings have been made by the Courts of Appeals in other circuits. Arnold Constable Corporation v. Commissioner, 69 F.2d 788 (C. C. A. 2d); Crossett Western Co. v. Commissioner, 73 F.2d 307 (C. C. A. 3rd); Joseph & Feiss Co. v. Commissioner, 70 F.2d 804 (C. C. A. 6th). A different conclusion was reached in Wishnich-Tumpeer, Inc. v. Commissioner, App. D.C., Mar. 12, 1934, under the Revenue Act of 1928, applied in circumstances and under regulations not involved in the present case.
Section 206 (b) permits the taxpayer to carry forward a net loss sustained "for any taxable year" and to deduct it from "net income of the taxpayer for the succeeding taxable year." If the net loss to be deducted is in excess of the net income for that year, he is permitted to deduct the excess "from the net income of the next succeeding
taxable year," referred to in the section as the "third year." In all cases the deduction is to be made under regulations made by the Commissioner.
It is plain that under this section the Haines Company, had it not taken advantage of the statutory provision authorizing consolidated returns, would have been permitted to carry over its net loss of 1925 for the next two succeeding years, and as it made no profit in 1926 its entire net loss for 1925 could have been deducted from its profit in 1927. But the government contends that the taxpayer has forfeited that privilege by making a return for the first five months of 1925, as it was required to do in order to avail itself of the privilege of making consolidated returns after the date of affiliation. It is said that the two periods in 1925, for which separate returns were made, are two separate taxable years within the meaning of the tax act, so that the "third year" within which § 206 permits the deduction is, in this case, the year 1926. This construction is required, it is urged, by the definition of "taxable year" in § 200 (a), which reads:
"(a) The term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232. The term 'fiscal year' means an accounting period of twelve months ending on the last day of any month other than December. The term 'taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made. The first taxable year, to be called the taxable year 1925, shall be the calendar year 1925 or any fiscal year ending during the calendar year 1925." U. S. C. App., Title 26, § 931.
The provision that the term "taxable year" "includes" the period of less than twelve months for which a separate return is made, ...