Wolter Construction Co. v. Commissioner of Internal Revenue

Wolter Construction Company (plaintiff) was organized in 1968, with its ownership shared by Brent F. Peacher and Theodore T. Finneseth. River Hills Golf Club, Inc. (River Hills) was organized in 1968, with its ownership shared between Peacher, Finneseth, and Luella Peacher. In 1969 and 1970, River Hills made two additional issuances of stock to Wolter Construction in exchange for the cancellation of numerous liabilities. By March 1970, Wolter Construction owned 80 percent of River Hills’ common stock. Wolter Construction and River Hills filed consolidated income tax returns for 1970 and 1971. These consolidated returns included deductions of the net operating losses reported by River Hills on its separate income tax returns for the 1968, 1969, and abbreviated 1970 tax years. The Internal Revenue Service audited the returns and determined that the carryover and deduction of River Hills’ net operating losses on the 1970 and 1971 consolidated tax returns were limited to River Hills’ income. Because River Hills did not have income in 1970 and 1971, it was determined that no deduction could occur. The commissioner of internal revenue (the commissioner) (defendant) agreed that River Hills’ earlier losses could only be deducted from River Hills’ income on the 1970 and 1971 tax returns. The United States Tax Court upheld the commissioner’s determination. Wolter Construction appealed the decision.