U.S. Supreme Court MCLAUGHLIN v. PACIFIC LUMBER CO., 293 U.S. 351 (1934)

[Page 293 U.S. 351, 354]

returns as affiliated corporations. Their income taxes were paid on the latter basis. In each year respondent had a large net income and Thane & Co. lost heavily; the Pacific Lumber Company of Illinois lost in the first and had relatively small net income in each of the other years. [Footnote 1] Their separate returns for 1923 respectively showed net income of $1,379,494.78, net loss of $229,942.15, and net income of $8,809.83. The consolidated return reported net income of $1,158,362.46 on which respondent paid $144, 795.31 as the total income tax. Upon examination and audit in the Bureau, a greater deduction was made for depreciation than was claimed in the return, overpayment was found in the amount of $1,673.08, and that was refunded.

Insisting that the losses here in question were deductible, respondent filed a claim for refund of the balance, $143,122.23. The letter of the deputy commissioner notifying it that the claim would be rejected stated that, since Thane & Co. was affiliated with respondent and allowance was made, in computing consolidated not income, for all deductible losses sustained by the subsidiary during the several years, a further deduction reflect-

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1920 1921 1922 1923 []

Pacific Lumber Company of Maine, Respondent $2,262,959.39 $379,624.88 $1,266, 450.51 $1,379,494.78 A. F. Thane & Company * 443,821.95 * 548,166.82 * 344, 791.49 * 229,942.15 Pacific Lumber Company of Illinois * 23,052.35 18,314.97 31,198.03 8,809.83 ___ ___ ___ ___ Consolidated 1,796,085.09 * $150,226.97 $952,857.05 $1, 158,362.46 []

[Page 293 U.S. 351, 357]

& Co. had outstanding only $60,000 of capital stock, 90 per cent. of which was acquired by respondent for less than par. During the affiliated period its deductible losses amounted to more than three times its capital. While it is conceivable that, as suggested by respondent the losses do not necessarily indicate that thereby Thane & Co. became unable to pay its debts, the circumstances tend strongly to indicate that they did cause its breakdown resulting in respondent's 1923 losses here claimed. If these losses did not cause, or are not reflected in, those sustained by respondent in 1923 as the result of its investment in and advances to that company, it reasonably may be presumed that respondent would have shown that fact.

The trial court should have granted petitioner's motion for judgment in his favor.

Reversed. Footnotes 1