In 1941, a corporate taxpayer sustained a loss arising out of
the liquidation of a wholly owned subsidiary whose stock was
worthless. Under federal tax laws applicable in 1941, the loss was
a long-term capital loss, but it could not enter into the
computation of net operating loss, because the taxpayer had no
long-term capital gains. Under a 1942 amendment, such a capital
loss could enter into the computation of net operating loss, and
the taxpayer used the 1941 capital loss in claiming a net operating
loss deduction in its return for 1942.
Held: the taxpayer's net operating loss deduction in
1942 was properly disallowed. Pp.
338 U. S.
443-450.
(a) A net operating loss must be computed solely on the basis of
the statutes in effect during the year in which the loss was
sustained. Pp.
338 U. S.
446-449.
(b) The provision of § 101 of the 1942 Revenue Act that the
amendments enacted therein "shall be applicable only with respect
to taxable years beginning after December 31, 1941" cannot be read
to mean "shall be applicable only in computing tax liability for
taxable years beginning after December 31, 1941." P.
338 U. S.
449.
(c) The fact that the 1924, 1926, 1928, and 1932 Revenue Acts,
which permitted the carry-over of net loss from an earlier year,
expressly provided that such net loss should be computed under the
law in effect during the earlier period, and that the present Code
contains no such provision, does not require a result different
from that here reached. Pp.
338 U. S.
449-450.
(d)
Commissioner v. Moore, Inc., 151 F.2d 527,
disapproved. Pp.
338 U. S.
444-445, n. 4.
170 F.2d 1001 affirmed.
The Commissioner's determination of a deficiency in petitioner's
income and excess profits tax for 1942 was sustained by the Tax
Court. 9 T.C. 314. The Court of Appeals affirmed. 170 F.2d 1001.
This Court granted certiorari. 337 U.S. 923.
Affirmed, p.
450.
Page 338 U. S. 443
MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.
An asserted conflict between the decision below and that of the
Court of Appeals for the Fifth Circuit in
Commissioner v.
Moore, Inc., 151 F.2d 527, made this an appropriate case for
our review on writ of certiorari. [
Footnote 1] A recital of the facts must precede definition
of the issue.
Petitioner is a Michigan corporation engaged in the manufacture
of motor vehicles. On February 1, 1941, Reo Sales Corp., a wholly
owned subsidiary, was dissolved and all of its assets, subject to
all its liabilities, were transferred to petitioner. At the date of
dissolution, Reo Sales was indebted to petitioner in an amount
greater than the value of its net assets. Consequently, its stock,
which had an adjusted basis in petitioner's hands of $1,551,902.79,
was worthless. This loss was a long-term capital loss under the law
applicable in 1941. [
Footnote
2] It was so claimed by petitioner and allowed by the
Commissioner.
Petitioner realized no gains from the sale or exchange of
capital assets in 1941. Its gross income amounted to $2,573,259.89,
while allowable deductions under Chapter 1 of the Internal Revenue
Code, exclusive of the capital loss on Reo Sales stock, amounted to
$2,215,727.08. With the Reo Sales stock loss included, petitioner's
allowable deductions exceeded its gross income by $1,
194,369.98.
Page 338 U. S. 444
Under the tax laws applicable in 1941, petitioner's capital loss
on Reo Sales stock could not have been utilized as a net operating
loss to be carried over to subsequent years. Section 122(a) of the
Code defines "net operating loss" as
"the excess of the deductions allowed by this chapter over the
gross income, with the exceptions and limitations provided in
subsection (d). [
Footnote
3]"
The exceptions outlined in § 122(d) included the following,
which is pertinent here:
"(4) Long-term capital gains and long-term capital losses shall
be taken into account without regard to the provisions of section
117(b). As so computed, the amount deductible on account of
long-term capital losses shall not exceed the amount includible on
account of the long-term capital gains, and the amount deductible
on account of short-term capital losses shall not exceed the amount
includible on account of the short-term capital gains. . . .
[
Footnote 4]
Page 338 U. S. 445
Since petitioner realized no long-term capital gains in 1941,
its long-term capital loss on the Reo Sales stock could not enter
into the computation of net operating loss."
In the Revenue Act of 1942, § 23(g) of the Code, which defines
capital losses, was amended by adding subsection (4). [
Footnote 5] This amendment had the
practical effect of making losses such as that suffered by
petitioner in the dissolution of Reo Sales Corp. ordinary, rather
than capital, losses. Under 1942 law, therefore, the exception set
out in § 122(d)(4) is inapplicable, and a loss of this kind may
enter into the computation of net operating loss.
It is petitioner's contention, reflected in its 1942 income tax
returns, that, although its loss in the liquidation of Reo Sales
Corp. was incurred in 1941, determination of the amount of net
operating loss was postponed until 1942, when it sought to carry
over and deduct such net operating loss, and that the 1942 statutes
therefore govern that determination. Since, under the 1942
statutes, its loss on Reo Sales stock was an ordinary loss, it
claims the right to include that loss in the computation of net
operating loss for carry-over and deduction from gross income in
1942. While § 101 of the Revenue Act of 1942 provides that,
"Except as otherwise expressly provided, the amendments made by
this title shall be applicable only with respect to taxable years
beginning after December 31, 1941,"
petitioner contends that this simply means
Page 338 U. S. 446
that such amendments shall be applicable only
in computing
tax liability for tax years after December 31, 1941.
The issue is therefore whether, in the computation of net
operating loss, the governing statutes are those in effect during
the year when the transaction occurred (1941), or whether the
statutes in effect during the year when the net operating loss
deduction is taken (1942) are controlling. The Commissioner's
disallowance of petitioner's net operating loss deduction in 1942
was upheld by the Tax Court, 9 T.C. 314, and the Court of Appeals
affirmed, 170 F.2d 1001.
We think that a net operating loss must be computed on the basis
of the tax laws applicable to the year in which the loss was
suffered. What petitioner seeks here is not the kind of relief
which the statute was designed to grant. [
Footnote 6] It asks that the carry-over section be used
as a vehicle by which it may take advantage of changes in the tax
laws in years after the taxable event has occurred. We find nothing
in the language or legislative history of the statutes to justify
such an interpretation.
The scheme of the statute is this: Section 23(s) of the Code
permits as a deduction from gross income "the net operating loss
deduction computed under section 122." The amount of that deduction
is determined in three separate steps. First, the net operating
loss is determined. Section 122(a) [
Footnote 7] provides the definition and method of
computation of net operating loss, specifically providing that the
exceptions and limitations of § 122(d) are applicable in its
computation. Second, net operating loss having been determined, the
amount and extent to
Page 338 U. S. 447
which it may be utilized as a carry-over is set out in §
122(b)(2), [
Footnote 8] and as
a carry-back in § 122(b)(1). Finally, the amount which may actually
be deducted from gross income under § 23(s) is computed under the
terms of § 122(c). [
Footnote 9]
That section provides for the aggregation of permissible
carry-overs and carry-backs and the application of certain
adjustments thereto.
The starting point is thus the determination of net operating
loss under § 122(a). We may point briefly to several circumstances
which, we think, require a holding that net operating loss must be
computed solely with reference to the statutes in effect during the
year when the loss occurred.
First, under petitioner's theory, the net operating loss
sustained in any given year would not be a fixed amount, but would
vary from year to year depending upon changes in the tax laws. But
§ 122(a) defines net operating loss as "the excess of the
deductions allowed by this chapter over the gross income." Clearly,
determination of the amount of gross income and of allowable
deductions for any given year must depend upon the tax statutes
in
Page 338 U. S. 448
effect during that year. If, as petitioner contends, 1942 law
governs although the loss occurred in 1941, it is difficult to see
why the whole of its 1941 operations, and not merely the Reo Sales
liquidation, should not be recomputed on the basis of the income
and deduction provisions applicable in 1942. Petitioner does not
suggest such a recomputation, in spite of the fact that the terms
in which net operating loss is defined -- "gross income" and
"deductions allowed by this chapter" -- are equally applicable in
the computation of income taxes generally. And even if a
distinction could be drawn, so far as applicable law is concerned,
between computation of net operating loss and computation of
ordinary tax liability, we should think it strained and anomalous
to read § 122(a) as defining net operating loss in this case as
"the excess of the deductions allowed for 1942 incomes over the
gross income earned in 1941 but computed according to 1942
law."
Furthermore, the language of § 122(b) negatives the contention
that net operating loss for any given year is not a fixed amount,
but varies depending upon the law in effect during the year when
the deduction is taken. Section 122(b)(2), for example, states
that, "if, for any taxable year the taxpayer has a net operating
loss,
such net operating loss" [
Footnote 10] shall be a carry-over for the two
succeeding years. Under petitioner's interpretation, "such net
operating loss" "for any taxable year" may be different amounts at
different times. And, as in this case, what was no net operating
loss at all for the year when the event occurred becomes a loss for
that year through subsequent changes in the statutes. Similarly, in
some cases in which the taxpayer had net income for the year under
controlling law, subsequent changes in the law might produce a net
operating loss for that year if
Page 338 U. S. 449
petitioner's construction of the statute prevailed. We find no
warrant for the view that Congress intended that a statute designed
to equalize tax burdens should be used to produce net losses where
none had previously existed. [
Footnote 11]
We also agree with the court below that the words of § 101 of
the Revenue Act of 1942, which states that the amendments enacted
therein "shall be applicable only with respect to taxable years
beginning after December 31, 1941," cannot be read to mean "shall
be applicable only in computing tax liability for taxable years
beginning after December 31, 1941." To apply § 23(g)(4) to
establish a net operating loss is clearly to apply the 1942
amendment "with respect to" 1941, contrary to the statute.
Petitioner finds comfort in the fact that the 1924, 1926, 1928,
and 1932 Revenue Acts, which permitted the carry-over of net loss
from an earlier year, expressly provided that such net loss should
be computed under the law in effect during the earlier period,
while the present Code contains no such provision. Two observations
may be made: first, that, in reviving carry-overs in 1939 after a
seven year lapse, Congress patterned the new statute generally on
the prior practice without any suggestion of change in this
particular, and second, that, while such express provisions were
appropriate in Revenue Acts prior to the Code, when the law of a
prior year was of no effect when superseded by a new Act unless
specifically made applicable, the present Code has continuous
application, and incorporation of previous statutes is
unnecessary.
Page 338 U. S. 450
Instead, the old provisions remain in effect for prior years,
and general provisions, such as § 101 of the 1942 Act, give
amendments prospective application only, unless otherwise
specifically provided.
The result is that net operating loss must be computed solely on
the basis of the statutes in effect during the taxable year when
the loss was incurred. Only if such a loss exists under those
statutes will a taxpayer have anything that may be carried over or
back. § 122(a) and (d). The amount of net operating loss which may
be utilized as a carry-over or carry-back and the extent to which
it may be used as an offset to net income in another year depend
upon the law of the year in which the "carry" is effective, §
122(b), while the net operating loss deduction which may be taken
in any one year depends upon the law in effect during that year. §§
23(s) and 122(c).
With respect to petitioner's other contentions, [
Footnote 12] it is sufficient to say that
they ignore the trichotomy plainly established with respect to §
122: determination of net operating loss; determination of the
amount and extent of carry-over and carry-back, and determination
of net operating loss deduction. The decision of the Court of
Appeals is
Affirmed.
MR. JUSTICE DOUGLAS took no part in the consideration or
decision of this case.
[
Footnote 1]
337 U.S. 923.
[
Footnote 2]
Section 23(g) of the Internal Revenue Code, 26 U.S.C. (1940 ed.)
§ 23(g).
[
Footnote 3]
Section 122(a) was amended by § 105(e)(3) of the Revenue Act of
1942 to read ". . . with the exceptions,
additions, and
limitations provided in subsection (d)." (Italics added.)
[
Footnote 4]
Section 122(d)(4) was amended by § 150(e) of the Revenue Act of
1942, to read as follows:
"(4) Gains and losses from sales or exchanges of capital assets
shall be taken into account without regard to the provisions of
section 117(b). As so computed, the amount deductible on account of
such losses shall not exceed the amount includible on account of
such gains."
It was this amendment that was involved in
Commissioner v.
Moore, Inc., 151 F.2d 527. In 1941, Moore had a long-term
capital loss of $17,025 and short-term capital gains of $2,844.
Under § 122(d)(4) as it stood in 1941,
see text,
supra, long-term capital losses could not be deducted from
short-term capital gains in computing net operating losses, while,
under the 1942 amendment, the distinction between long and
short-term capital losses was withdrawn. Taxpayer therefore had no
net operating loss in 1941, but, under the 1942 statute, he would
have had such a loss to the extent of his short-term capital gain
of $2,844. The Court of Appeals for the Fifth Circuit approved such
an offset in the computation of net operating loss to be carried
over to 1942 and deducted in that year. That decision is obviously
inconsistent with the view we take of the statute, and must be
disapproved.
[
Footnote 5]
Subsection (4), which was added by § 123(a)(1) of the Revenue
Act of 1942, provides that, for the purpose of determining capital
losses, stock in a corporation affiliated with the taxpayer shall
not be deemed a capital asset. "Affiliation" is defined in terms
that clearly comprehend petitioner's ownership of Reo Sales
Corp.
[
Footnote 6]
See H.R.Rep. No.855, 76th Cong., 1st Sess. (1939);
S.Rep. No.1631, 77th Cong., 2d Sess. (1942).
[
Footnote 7]
"(a)
Definition of net operating loss. -- As used in
this section, the term 'net operating loss' means the excess of the
deductions allowed by this chapter over the gross income, with the
exceptions and limitations provided in subsection (d)."
See note 3
supra.
[
Footnote 8]
"(2)
Net operating loss carry-over. -- If for any
taxable year the taxpayer has a net operating loss, such net
operating loss shall be a net operating loss carry-over for each of
the two succeeding taxable years, except that the carry-over in the
case of the second succeeding taxable year shall be the excess, if
any, of the amount of such net operating loss over the net income
for the intervening taxable year . . ."
computed in such a way that the carry-over must be used to
offset certain nontaxable, as well as taxable, income. Section
122(b)(1) is similar in language and theory.
[
Footnote 9]
"(c)
Amount of net operating loss deduction. -- The
amount of the net operating loss deduction shall be the aggregate
of the net operating loss carry-overs and of the net operating loss
carry-backs to the taxable year reduced by the amount, if any, by
which the net income (computed with the exceptions and limitations
provided in subsection (d)(1), (2), (3), and (4)) exceeds, . . . in
the case of a corporation, the normal-tax net income (computed
without such deduction and without the credit provided in Section
26(e)). . . ."
[
Footnote 10]
Italics added.
[
Footnote 11]
In commenting upon a similar possibility in connection with the
net loss provisions of the Revenue Act of 1924, the House Committee
on Ways and Means stated:
"If capital losses were allowed as a deduction in computing the
net loss, it would result in the anomalous situation of a taxpayer
paying a tax in one year, but at the same time having a net loss
which he could carry over as a deduction in computing the tax for
the subsequent year."
H.R.Rep. No.179, 68th Cong., 1st Sess. (1924).
[
Footnote 12]
In commenting upon a similar possibility in connection with the
net loss provisions of the Revenue Act of 1924, the House Committee
on Ways and Means stated:
"If capital losses were allowed as a deduction in computing the
net loss, it would result in the anomalous situation of a
taxpayer's paying a tax in one year but at the same time having a
net loss which he could carry over as a deduction in computing the
tax for the subsequent year."
H.R.Rep. No.179, 68th Cong., 1st Sess. (1924).