Opinion
Docket No. 12938.
1948-04-30
HOUSTON TEXTILE CO. (A DISSOLVED CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Whitfield H. Marshall, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent.
Petitioner is a Texas corporation which was dissolved October 31, 1945, and under the applicable statutes has a taxable year of less than 12 months, to wit, August 1 to October 31, 1945. It elected to have its excess profits tax for the period in question computed under section 711(a1(3)(B) of the Internal Revenue Code and its right to do so is not in dispute. Under such computation its adjusted excess profits net income was $81,764.17. Petitioner's actual net income for the three-month period involved was $52,362.60. In his determination of a deficiency in petitioner's income tax for the short period involved, the Commissioner, acting under section 29.47-1, Supplement to Regulations 111, has allowed petitioner a credit of $29,928.95 as adjusted excess profits net income. Petitioner contests this action of the Commissioner and contends that the regulation is invalid and that it is entitled to a credit of $81,764.17 as its adjusted excess profits net income, a sum which very considerably exceeds its entire net income for the period in question. Held, the Treasury regulation which the Commissioner has applied is valid. Whitfield H. Marshall, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent.
OPINION.
BLACK, Judge:
The Commissioner has determined a deficiency in petitioner's income tax for the taxable year August 1 to October 31, 1945, in the sum of $6,005.76. The petitioner assigns the following errors in contest of this determination:
1. The Commissioner erred in his method of computation of the credit to be allowed petitioner under Section 26(e) of the Internal Revenue Code.
2. The Commissioner erred in refusing to allow petitioner in the determination of its normal tax net income and surtax net income a credit of an amount equal to its adjusted excess-profits net income (as defined in Section 710(b)) under the provisions of Section 26(e).
3. The Commissioner erred in limiting the credit to be allowed petitioner under Section 26(e) to an amount of which its excess profits tax computed under Section 711(a)(3)(B) was 95 per cent.
The facts are not in dispute and have been stipulated. We summarize them as follows:
The petitioner is a corporation, organized under the laws of the State of Texas, with principal office at Houston, Texas, which completely liquidated on October 31, 1945, and legally dissolved on February 16, 1946, its existence for the purpose of winding up its affairs, including this proceeding, being continued for three years thereafter under article 1389, Vernon's Texas Civil Statutes.
The petitioner duly filed its corporation income and declared value excess profits tax return and its corporation excess profits tax return for its final taxable year, August 1 to October 31, 1945, with the collector of internal revenue for the first district of Texas at Austin, Texas.
The petitioner for its final taxable year, August 1 to October 31, 1945, was a corporation subject to the tax imposed by subchapter E of chapter 2 of the Internal Revenue Code. The normal tax net income of petitioner for this taxable year, as defined in section 13(a)(2), before deduction of the credit provided in section 26(e) (relating to income subject to the tax imposed by subchapter E of chapter 2), was $52,362.60.
Respondent in his computation of petitioner's income tax for its taxable year August 1 to October 31, 1945, deducted $29,928.95 as the amount of the credit to which petitioner was entitled under section 26(e), such sum being the amount of which petitioner's excess profits tax computed under section 711(a)(3)(B) is 95 per cent as provided in Supplement to Regulations 111, section 29.47-1.
The excess profits tax net income of petitioner for the short taxable year involved placed on an annual basis as provided in section 711(a)(3)(A) amounted to $207,742.92. The excess profits credit for petitioner, computed by the method based on income under section 713, amounted to $51,287.46, which exceeded that computed by the method based on invested capital under section 714. The annualized excess profits tax net income of $207,742.92, less the specific exemption of $10,000 and the excess profits tax credit of $51,287.46 results in an adjusted excess profits tax net income of $146,455.46 on such basis. The tax thereon computed as provided in the last sentence of section 711(a)(3)(A) would be $35,069.06.
Petitioner duly filed application for the benefits of section 711(a)(3)(B) and this application was allowed by the respondent. For the 12-month period ended October 31, 1945, the excess profits tax net income of petitioner amounted to $143,051.63, which, less the $10,000 specific exemption and the $51,287.46 excess profits tax credit results in an adjusted excess profits net income for such 12 months of $81,746.17. The tax thereon computed as provided in section 711(a)(3)(B) amounted to $28,432.50.
The following table shows the respective differences between the petitioner and the Commissioner in the computation of petitioner's excess profits tax and normal income tax and surtax:
+-----------------------------------------------------------------------------+ ¦ ¦Tax ¦¦ ¦ ¦ ¦liability ¦¦ ¦ +------------------------------------------------+------------+---------------¦ ¦ ¦as claimed ¦Tax liability ¦ ¦ ¦ ¦per ¦ +------------------------------------------------+------------+---------------¦ ¦ ¦by ¦deficiency ¦ ¦ ¦petitioner ¦notice ¦ +------------------------------------------------+------------+---------------¦ ¦Computation of excess profits (PX) ¦¦ ¦¦ ¦ +------------------------------------------------++-----------++--------------¦ ¦Excess profits net income, 12-month period ended¦¦$143,051.63¦¦$143,051.63 ¦ ¦10/31/45 ¦¦ ¦¦ ¦ +-----------------------------------------------------------------------------+
Less: Exemption $10,000.00 $10,000.00 Credit (based on income) 51,287.46 61,287.46 51,287.46 61,287.46 Adjusted excess profits net income 81,764.17 81,764.17 Tentative tax 95% 77,675.96 77,675.96 Tax applicable to period 8/1 to 10/31 28,432.50 28,432.50 /45, $52,362.60/$143,051.63 Less credit, sec.784 (10%) 2,843.25 2,843.25 Excess profits tax liability 25,589.25 25,589.25 Excess profits tax assessed 32,587.62 32,587.62 Overassessment 6,998.37 6,998.37
Computation of normal income tax and surtax Adjusted net income 52,362.60 52,362.60 Less income subject to excess profits tax 1 81,764.17 2 29,928.95 Income subject to normal income tax and surtax 0 22,433.65 Normal tax 3,762.39 Surtax 2,243.37 Total 0 6,005.76 Normal and surtax assessed 0 0 Deficiency 0 6,005.76
Both parties agree that this is a case of first impression and, so far as we have been able to find, it is.
The Commissioner states the issue in his brief as follows:
Having elected to compute the excess profits tax for its short taxable year under the provisions of section 711(a)(3)(B) of the Internal Revenue Code, is petitioner entitled to a credit of the amount of its adjusted excess profits net income so computed, in determining its normal and surtax for such short taxable year?
Section 711(a)(3)(A) and (B) is printed in the margin.
There is no dispute between the parties as to whether petitioner properly made its election to have its excess profits tax computed under section 711(a)(3)(B). Cf. Pepsi Cola Co., 5 T.C. 190; affd., 155 Fed.(2d) 921. The Commissioner has made determination of petitioner's excess profits tax in accordance therewith and has determined an overassessment of $6,998.37 in petitioner's excess profits tax for the period August 1 to October 31, 1945. That overassessment is not involved in this proceeding. Respondent has determined a deficiency of $6,005.76 in petitioner's income tax and petitioner contests all of that on the grounds heretofore stated in its assignment of error. The issue presented is a narrow one and is entirely one of law.
Income subject to excess profits tax.
SEC. 711. EXCESS PROFITS NET INCOME.(a) TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1939.— The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13(a)(2). * * *(3) TAXABLE YEAR LESS THAN TWELVE MONTHS.—(A) General Rule.— If the taxable year is a period of less than twelve months the excess profits net income for such taxable year (referred to in this paragraph as the ‘short taxable year‘) shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the short taxable year and dividing by the number of days in the short taxable year. The tax shall be such part of the tax computed on such annual basis as the number of days in the short taxable year is of the number of days in the twelve months ending with the close of the short taxable year.(B) Exception.— If the taxpayer establishes its adjusted excess profits net income for the period of twelve months beginning with the first day of the short taxable year, computed as if such twelve-month period were a taxable year, under the law applicable to the short taxable year, and using the credits applicable in determining the adjusted excess profits net income for such short taxable year, then the tax for the short taxable year shall be reduced to an amount which is such part of the tax computed on such adjusted excess profits net income so established as the excess profits net income for the short taxable year is of the excess Profits net income for such twelve-month period. The taxpayer (other than a taxpayer to which the next sentence applies) shall compute the tax and file its return without the application of this subparagraph. If, prior to one year from the date of the beginning of the short taxable year, the taxpayer has disposed of substantially all its assets, in lieu of the twelve-month period provided in the preceding provisions of this subparagraph, the twelve-month period ending with the close of the short taxable year shall be used. For the purpose of this subparagraph, the excess profits net income for the short taxable year shall not be placed on an annual basis as Provided in subparagraph (A), and the excess profits net income for the twelve-month period used shall in no case be considered less than the excess profits net income for the short taxable year. The benefits of the subparagraph shall not be allowed unless the taxpayer, at such time as regulations prescribed hereunder require, makes application therefor in accordance with such regulations, and such application, in case the return was filed without regard to this subparagraph, shall be considered a claim for credit or refund. The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary for the application of this subparagraph.
Petitioner contends that the credit to which it is entitled under section 26(e) of the code