## Facts

- Woods Investment Company, a Delaware corporation, was the common parent of an affiliated group that filed consolidated federal income tax returns from 1966 through 1978.
- Woods owned four wholly owned subsidiaries, including United Transports, Inc. and Auto Warehousers, Inc., which operated a transportation division.
- For taxable income on the consolidated returns, the subsidiaries used accelerated depreciation on business property.
- On December 13, 1978, Woods sold all of its stock in the four subsidiaries.
- To compute gain on the stock sale, Woods determined its basis in the subsidiary stock under Treas. Reg. § 1.1502-32 (investment adjustment), which adjusts a parent’s stock basis by the subsidiary’s earnings and profits (E&P).
- In computing subsidiary E&P for the basis adjustment, Woods applied I.R.C. § 312(k) and used straight-line depreciation for E&P purposes, even though accelerated depreciation had been used for taxable income.
- The Commissioner determined a 1978 income tax deficiency of $3,211,019, asserting Woods had to reduce stock basis by the excess of accelerated over straight-line depreciation to avoid an impermissible “double deduction.”

## Issues

1. Whether, in applying Treas. Reg. § 1.1502-32 to adjust stock basis, a consolidated group must compute subsidiary E&P using I.R.C. § 312(k)’s straight-line depreciation rule.
2. Whether the Commissioner may require an additional stock-basis reduction for the excess of accelerated over straight-line depreciation to prevent a claimed “double deduction” under consolidated return principles and Ilfeld.

## Decision

- The Tax Court sustained Woods’s basis adjustments and rejected the Commissioner’s additional basis reduction.
- The court held Woods properly computed subsidiary E&P under § 312(k) and properly applied Treas. Reg. § 1.1502-32 as written.
- The court declined to apply an extra anti-double-deduction adjustment where the statute and the applicable regulation directly governed the computation.
- The deficiency was disallowed to the extent it depended on the Commissioner’s stock-basis adjustment.

## Legal Principles

- For consolidated return stock-basis adjustments under Treas. Reg. § 1.1502-32, subsidiary E&P is computed under the Internal Revenue Code’s E&P rules, including § 312(k)’s straight-line depreciation requirement.
- A generalized anti-double-deduction doctrine (including Ilfeld) does not override results compelled by an on-point statute and an on-point consolidated return regulation.
- The Commissioner cannot impose a stock-basis adjustment not found in the governing consolidated return regulations to neutralize the effects of § 312(k).

## Conclusion

The Tax Court held that Woods correctly increased its subsidiary stock basis by using § 312(k) straight-line depreciation in computing E&P for Treas. Reg. § 1.1502-32 purposes, and it refused to require an additional reduction intended to prevent a purported double deduction.


Woods Inv. Co. v. Comm’r, 85 T.C. 274 (1985)