Opinion
Docket No. 5468.
1947-02-28
HORTON & CONVERSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frank Mergenthaler, Esq., and Russell S. Bock, C.P.A., for the petitioner. R. E. Maiden, Jr., Esq., for the respondent.
Held, that petitioner did not sustain the burden of proving that the declared value excess profits tax deductions were not in consequence of an increase in gross income in petitioner's base period (section 711(b)(1)(K)(ii), Internal Revenue Code). Frank Mergenthaler, Esq., and Russell S. Bock, C.P.A., for the petitioner. R. E. Maiden, Jr., Esq., for the respondent.
The respondent determined a deficiency of $230.92 in the petitioner's income tax for the year 1941 and deficiencies of $1,165.36 and $1,723.16 in its excess profits taxes for the years 1941 and 1942, respectively. He also determined an overassessment of $271.76 in the petitioner's income tax for the year 1942.
The sole issue is whether or not, in computing its base period income for the determination of its excess profits credit for the years 1941 and 1942, the petitioner is entitled to eliminate as abnormal deductions, under section 711(b)(1)(J), declared value excess profits taxes for the years 1937 and 1939 in the amounts of $212.05 and $1,090.52, respectively.
FINDINGS OF FACT.
The facts were stipulated. They are as follows:
The petitioner, Horton & Converse, is a corporation, organized and existing under the laws of the State of California, with its principal office in Los Angeles, California. The returns for the years 1941 and 1942 were filed with the collector of internal revenue for the sixth collection district of California. The petitioner computed its excess profits credits for both taxable years 1941 and 1942 under section 713 of the Internal Revenue Code.
In the petitioner's income tax returns for the base period years and certain prior years, deductions for declared value excess profits tax and capital stock tax were claimed and allowed as follows:
+------------------------------+ ¦ ¦Declared value ¦ ¦ +----+---------------+---------¦ ¦Year¦excess profits ¦Capital ¦ +----+---------------+---------¦ ¦ ¦tax ¦stock tax¦ +----+---------------+---------¦ ¦1933¦ ¦$582 ¦ +----+---------------+---------¦ ¦1934¦ ¦359 ¦ +----+---------------+---------¦ ¦1935¦ ¦483 ¦ +----+---------------+---------¦ ¦1936¦ ¦309 ¦ +----+---------------+---------¦ ¦1937¦$212.05 ¦325 ¦ +----+---------------+---------¦ ¦1938¦ ¦693 ¦ +----+---------------+---------¦ ¦1939¦1,090.52 ¦800 ¦ +------------------------------+
The deductions for declared value excess profits tax were shown as separate items in the petitioner's returns for all years in which such deductions occurred. In computing its excess profits credit in its excess profits tax returns for 1941 and 1942, the petitioner eliminated, under the provisions of section 711(b)(1)(J) of the Internal Revenue Code, deductions for declared value excess profits tax as follows: In 1937, the total deduction of $212.05 was eliminated; in 1939, $1,024.26 out of a total deduction of $1,090.52 was eliminated.
The declared value excess profits tax paid for 1937 and 1939 was computed as follows:
+-----------------------------------------------------------------------------+ ¦ ¦1937 ¦1939 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Adjusted declared value ¦$309,171.03¦$518,576.42¦ +-----------------------------------------------------+-----------+-----------¦ ¦10% of above ¦30,917.10 ¦51,857.64 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Net income for declared value excess profits tax ¦34,451.20 ¦70,032.94 ¦ ¦purposes ¦ ¦ ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Taxable at 6% ¦3,534.10 ¦18,175.30 ¦ +-----------------------------------------------------+-----------+-----------¦ ¦Tax ¦212.05 ¦1,090.52 ¦ +-----------------------------------------------------------------------------+
The declared value or adjusted declared value shown in the petitioner's capital stock tax returns for each of the years affecting the computation of declared value excess profits tax for the base period years was as follows:
+------------------------------------+ ¦Year ended June 30, 1936¦$300,000.00¦ +------------------------+-----------¦ ¦1937 ¦309,171.03 ¦ +------------------------+-----------¦ ¦1938 ¦500,000.00 ¦ +------------------------+-----------¦ ¦1939 ¦518,576.42 ¦ +------------------------------------+
The amount shown in the return for the year ended June 30, 1936, was the value of capital stock declared in that return. The amount of $309,171.03 shown in the return for the year ended June 30, 1937, was the adjusted declared value, based upon the value declared in the 1936 return with adjustment as provided by section 105(f) of the Revenue Act of 1935, as amended by the Revenue Act of 1936. The amount of $500,000 shown in the return for the year ended June 30, 1938, was the value declared in that return. The amount of $518,576.42 shown in the return for the year ended June 30, 1939, was the adjusted declared value, based upon the $500,000 value declared in 1938, with adjustment as provided by section 1202(b)(1) of the Internal Revenue Code as originally enacted. Under the law in effect in 1939, the petitioner had the privilege of declaring a new value if it chose to do so in its return for that year, such value to be in excess of the adjusted declared value otherwise computed. The petitioner did not declare a new value in its return.
The capital stock tax deducted in the petitioner's returns for the base period years was computed as follows:
1936— Tax accrued July 1, 1936, $1.00 per thousand on adjusted declared value of $309,171.03 shown in the capital stock tax return for the year ended June 30, 1937.
1937— Estimated tax accrued July 1, 1937, based upon estimate of $325,000 declared value to be used in capital stock tax return for the year ended June 30, 1938.
1938— Tax accrued July 1, 1938, $1.00 per thousand on declared value of $518,576.42 shown in the capital stock tax return for the year ended June 30, 1939 ($518), plus $175 tax for the year ended June 30, 1938 in excess of the estimated amount deducted in the 1937 return (tax $500, estimate $325.)
1939— Estimated tax accrued July 1, 1939, representing $1.00 per thousand on estimated value of $800,000 to be declared in the capital stock tax return for the year ended June 30, 1940.
The petitioner's gross income and its net income for declared value excess profits tax, and its gross sales and cost of sales, as shown in its returns for the base period years, were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦ ¦ ¦Net income ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦for ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦ ¦Total gross¦ ¦ ¦ ¦ ¦declared ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦value ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦Year¦income ¦Gross sales¦Cost of ¦Grossprofit¦Other ¦excess ¦ ¦ ¦ ¦ ¦sales ¦ ¦income ¦profits ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦tax ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦1936¦$299,695.08¦$806,005.83¦$518,309.88¦$287,695.95¦$11,999.13 ¦$22,927.03 ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦1937¦318,791.42 ¦887,117.03 ¦570,416.25 ¦316,700.78 ¦2,090.64 ¦34,451.20 ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦1938¦308,913.41 ¦890,638.99 ¦579,360.67 ¦311,278.32 ¦(2,364.91) ¦18,576.42 ¦ +----+-----------+-----------+-----------+-----------+-----------+------------¦ ¦1939¦366,682.07 ¦933,598.13 ¦564,768.03 ¦368,830.10 ¦(2,148.03) ¦70,032.94 ¦ +-----------------------------------------------------------------------------+
The following amounts were deducted as taxes in the petitioner's returns, exclusive of sales taxes for which it was reimbursed by its customers:
+---------------+ ¦1933¦$5,364.53 ¦ +----+----------¦ ¦1934¦7,282.71 ¦ +----+----------¦ ¦1935¦7,879.70 ¦ +----+----------¦ ¦1936¦8,192.64 ¦ +----+----------¦ ¦1937¦12,081.24 ¦ +----+----------¦ ¦1938¦16,757.61 ¦ +----+----------¦ ¦1939¦61,227.81 ¦ +----+----------¦ ¦1941¦26,795.77 ¦ +----+----------¦ ¦1942¦29,560.53 ¦ +---------------+
The total amount deducted each year included property taxes, franchise taxes, payroll taxes, and miscellaneous other taxes in minor amounts.
The claimed abnormality or excess in declared value excess profits tax is not a consequence of a change at any time in the type, manner of operation, size or condition of the business engaged in by the taxpayer unless a change in the value of the petitioner's business may be deemed by the Court as a matter of law to be a changed in type, manner of operation, size or condition of its business. The petitioner had not deduction for declared value excess profits tax in either of the taxable years 1941 or 1942.
In his notice of deficiency the Commissioner denied the petitioner's claims for adjustment for abnormal deductions of declared value excess profits taxes for the years 1937 and 1939 in the sums of $212.05 and $1,024.26, respectively.
OPINION.
VAN FOSSAN, Judge:
The question here presented is whether or not deductions of $212.05 and $1,090.52 for declared value excess profits taxes paid in the years 1937 and 1939, respectively, should be excluded as abnormal deductions in computing the petitioner's base period income for the purpose of determining its excess profits credit under the provisions of section 711(b)(1)(J).
SEC. 711. EXCESS PROFITS NET INCOME.(b) TAXABLE YEARS IN BASE PERIOD.—(1) GENERAL RULE AND ADJUSTMENTS.— The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 12(a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14(a) of the applicable revenue law. In either case the following adjustments shall be made (for additional adjustments in case of certain reorganizations, see section 742(e)):(J) ABNORMAL DEDUCTIONS.— Under regulations prescribed by the Commissioner, with the approval of the Secretary, for the determination, for the purposes of this subparagraph, of the classification of deductions—(i) Deductions of any class shall not be allowed if deductions of such class were abnormal for the taxpayer, and(ii) If the class of deductions was normal for the taxpayer, but the deductions of such class were in excess of 125 per centum of the average amount of deductions of such class for the four previous taxable years, they shall be disallowed in an amount equal to such excess. * * *
The petitioner contends that the deductions were in excess of 125 per cent of the deductions of the same class for the four previous taxable years and that they constituted a ‘class‘ separate from the other taxes, such as capital stock, property, franchise, payroll, and miscellaneous taxes, and were abnormal in character. It further asserts that the abnormality was not in consequence of an increase in its gross income in its base period or of a decrease in the amount of some other deduction in the base period or of a change at any time in the type, manner of operation, or condition of its business.
The respondent bases his action on the ground that the disallowance of the contested eliminations is prohibited by the provision of subsections (b)(1)(K)(ii) and (b)(1)(K)(iii).
(K) RULES FOR APPLICATION OF SUBPARAGRAPHS (H), (1), AND (J).—For the purposes of subparagraphs (H), and (J)—(ii) Deductions shall not be disallowed under such subparagraphs unless the taxpayer establishes that the abnormality or excess is not a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, and is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer.(iii) The amount of deductions of any class to be disallowed under such subparagraphs with respect to any taxable year shall not exceed the amount by which the deductions of such class for such taxable year exceed the deductions of such class for the taxable year for which the tax under this subchapter is being computed.
The method of computing excess profits credit is established by section 713 and need not be set forth here. The point at issue is the proper adjustment to normal tax net income as provided in section 711. The petitioner claims that subsection (b)(1)(J) provides the adjustments sought by it. The respondent contends (1) that a deduction for declared value excess profits tax does not, in and of itself, constitute a separate class of deduction for taxes (subsection (b)(1)(J)(ii), and (2) that the deductions for declared value excess profits taxes in 1937 and 1939 were the consequence of the decrease of another deduction (capital stock tax) in the base period (subsection (b)(1) (K)(ii)).
The respondent further argues that the petitioner has not sustained the burden of proving that the declared value excess profits tax deductions were not in consequence of an increase in gross income in the petitioner's base period. We give our attention to this proposition first. In William Leveen Corporation, 3 T.C. 593, we have discussed both the difficulty and the necessity of the petitioner's establishing this negative fact. See Consolidated Motor Lines, Inc., 6 T.C. 1066. In the case at bar the facts establish a steady increase in gross income. The petitioner has not demonstrated the required lack of relationship between this increase in gross income and the tax in controversy (subsection (b)(1)(K)(ii)). It has attempted to substitute argument for fact. Proof of fact is required by the statute. The proof being deficient and petitioner's argument being unconvincing, the respondent must be sustained.
The above holding is dispositive of the case and makes unnecessary the consideration of the other arguments advanced by either party.
Decision will be entered for the respondent.