Opinion
Docket Nos. 9247 16534.
1950-03-27
INDUSTRIAL LOAN SOCIETY, INC., (MD.), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Archie M. Dawson, Esq., and Paul Smith, Esq., for the petitioner. Francis X. Gallagher, Esq., for the respondent.
Net earnings of a business conducted during part of the base period prior to petitioner's existence by a wholly owned affiliate, and of which the affiliate has obtained the benefit in computing its own credit for base period income, held insufficient by itself to demonstrate petitioner's right to relief from excess profits tax under section 722(b)(4). Archie M. Dawson, Esq., and Paul Smith, Esq., for the petitioner. Francis X. Gallagher, Esq., for the respondent.
These consolidated proceedings involve the correctness of the determinations of respondent which disallowed petitioner's applications for excess profits tax relief for 1941, 1942, and 1943, filed under section 722 of the Internal Revenue Code.
The deficiencies determined in excess profits tax liability were as follows:
+--+ ¦¦¦¦ +--+
Docket No. Year Amount 9247 1941 $344.45 9247 1942 2,559.47
In Docket No. 16534 for 1943 no deficiency is involved, and petitioner claims an overpayment of $1,912.67, the amount of its excess profits tax payment.
The question presented is whether petitioner corporation, which was organized on July 1, 1939, and thereupon acquired the business and assets of a small loan office in Cumberland, Maryland, is entitled to use in the reconstruction of its constructive average base period net income under section 722 the actual income realized by such office during the base period years when it had been operated as a branch office of another corporation, also a wholly owned subsidiary of petitioner's parent.
All the facts are stipulated and are hereby found accordingly.
Petitioner is a Maryland corporation, with its principal office in Cumberland, Maryland. It filed its corporation excess profits tax returns for 1941, 1942, and 1943 with the collector of internal revenue for the district of Maryland, at Annapolis, Maryland.
Petitioner was incorporated on July 1, 1939, and commenced business on that date. On the same date it acquired the assets and business of a small loan office located in Cumberland, Maryland, which had formerly been owned and operated as a branch office by Industrial Loan Society, Inc., (Del.), hereinafter sometimes referred to as Delaware.
Delaware also owned and operated small loan offices at Erie, Harrisburg, and York, Pennsylvania, which it retained and continued to own and operate after July 1, 1939.
Delaware at all times here pertinent was a wholly owned subsidiary of American National Finance Corporation, a Delaware corporation. Petitioner, since its organization on July 1, 1939, has been a wholly owned subsidiary of American National Finance Corporation.
American National Finance Corporation, Delaware, and petitioner have at all times here pertinent filed separate income and excess profits tax returns.
Delaware and petitioner are licensed small loan companies, operating small loan offices. American National Finance Corporation is a holding company which holds the stock and obligations of a number of subsidiaries operating small loan companies.
Each of the four offices (Erie, Harrisburg, York, and Cumberland), which had been owned and operated by Delaware had, so long as it was so owned and operated, maintained its own earnings record for each of the years 1936 through 1939, inclusive. The earnings of the offices at Cumberland, Maryland, the assets and business of which were acquired by petitioner on July 1, 1939, for the period indicated were as follows:
+-----------------------------------+ ¦1936 ¦$13,726.60¦ +------------------------+----------¦ ¦1937 ¦15,405.34 ¦ +------------------------+----------¦ ¦1938 ¦14,597.46 ¦ +------------------------+----------¦ ¦1939 (Jan. 1 to June 30)¦6,163.75 ¦ +------------------------+----------¦ ¦1939 (July 1 to Dec. 31)¦5,559.40 ¦ +-----------------------------------+
The average annual income during this period was $13,863.14. These figures are not derived by any process of constructing or reconstructing the earnings of the Cumberland office, but are the actual earnings during each of the years above mentioned as taken from the books and records separately maintained for said office and shown in detail in the statements included in the applications for relief under section 722, hereinafter referred to.
Petitioner filed applications for relief under section 722 of the Internal Revenue Code on Form 991, claiming its benefits for 1941 and 9142, on September 15, 1943; and for 1943 petitioner filed its application for relief on July 30, 1945. Therein, petitioner, using a constructive average base period net income of $13,863.14 and a resulting excess profits credit of 95 per cent thereof, or $13,169.96, claimed that its excess profits liability for the period indicated was as follows:
+--------------+ ¦1941¦$738.48 ¦ +----+---------¦ ¦1942¦2,248.12 ¦ +----+---------¦ ¦1943¦None ¦ +--------------+
Respondent disallowed these applications for relief under section 722, and determined petitioner's base period net income under the provisions of section 713(d)(2) and section 713(f) of the Internal Revenue Code as $6,759.68 for the years 1941 and 1942, which resulted in an excess profits tax credit of $6,421.70 for each of the years 1941 and 1942, and similarly determined petitioner's average base period net income as $6,759.69 for 1943, which resulted in an excess profits tax credit of $6,421.71 for 1943. From these figures respondent determined petitioner's excess profits tax liability as follows:
+---------------+ ¦1941¦$3,100.38 ¦ +----+----------¦ ¦1942¦8,340.47 ¦ +----+----------¦ ¦1943¦1,912.67 ¦ +---------------+
The earnings of the office at Cumberland hereinabove set out were included by Delaware in its base period income for the years 1936, 1937, 1938, and January 1 to June 30, 1939, for the purpose of computing its excess profits credit based on income for the taxable years in question, and such computation has been allowed by respondent.
Neither Delaware nor American National Finance Corporation has filed any application for relief under section 722 of the Internal revenue Code, Form 991, for any of the taxable years here involved.
In rejecting the claim for refund under section 722 for 1941 and 1942, respondent stated:
It has been determined that you have not established that the tax computed under subchapter E of Chapter 2 of the Internal Revenue Code, without the benefit of section 722 of the Code, results in an excessive and discriminatory tax within the provisions of section 722(a) and (b) of the Code, and that you have not established what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purpose of an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits tax taxable years ended December 31, 1941 and December 31, 1942.
Accordingly, the claims for refund contained in Forms 991, Application for Relief under Section 722 of the Internal Revenue Code, are disallowed.
The claim for 1943 was rejected without explanation.
OPINION.
OPPER, Judge:
Petitioner's application for section 722 relief seems to us to require disallowance for two reasons, or perhaps two aspects of the same one. The essence of both is that the prior corporate owner of the business which petitioner acquired, and the activity of which it seeks to use as the measure of its reconstructed base period earnings, is and always has been under complete common ownership and control with petitioner.
Although petitioner itself was not in business for more than the last six months of the base period, respondent has not computed its tax liability with regard only to the actual figures of that limited experience. It is stipulated that he has employed the provisions of section 713(d)(2), which amount to an application of an invested capital theory on a species of annualized basis; and of section 713(f), which is the so-called ‘growth formula.‘ While these adjustments are expressly authorized by the statute and are clearly applicable by their terms to petitioner's situation, it insists that their inadequacy permits it to resort to the more flexible provisions of section 722.
There can be no question that petitioner, its transferor, and their common parent are separate juristic persons, and for tax purposes would ordinarily be treated as such. See National Carbide Corporation v. Commissioner, 336 U.S. 422. But we are here asked to apply a section of the law which speaks essentially in terms of what is ‘fair and just.‘
In a suit for refund of taxes, equitable principles may require unitary treatment of a trust and its beneficiary— ordinarily at least as separate as a corporation and its wholly owned subsidiary.
SEC. 722 (I.R.C.) GENERAL RELIEF— CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) GENERAL RULE.— In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. * * *(b) TAXPAYERS USING AVERAGE EARNINGS METHOD.— The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because—(4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. * * *
Stone v. White, 301 U.S. 532, 537.
Cf. secs. 161, 162, I.R.C., with sec. 45, I.R.C.
The terms of section 722, which also makes provision for the recovery of taxes already paid, show that it was not more intended to be a vehicle of inequity than the action for money had and received involved in the Stone case. We can not assume that the doctrine of corporate individuality should result in making it one. See United States Paper Exports Association v. Bowers (C.C.A., 2d Cir.), 80 Fed.(2d) 82; Crocker v. Malley, 249 U.S. 223. ‘* * * the fact that the petitioners and their beneficiary must be regarded as distinct legal entities for purposes of the assessment and collection of taxes does not deprive the court of its equity powers or alter the equitable principles which govern the type of action which petitioners have chosen for the assertion of their claim.‘ Stone v. White, supra.
In that case ‘The question for decision * * * (was) whether the petitioners, testamentary trustees, who have paid a tax on the income of the trust estate, which should have been paid by the beneficiary, are entitled to recover the tax, although the government's claim against the beneficiary has been barred by the statute of limitations.‘ The Court concluded that: ‘Equitable conceptions of justice compels the conclusion that the retention of the tax money would not result in any unjust enrichment of the government. All agree that a tax on the income should be paid, and that if the trustees are permitted to recover no one will pay it. It is in the public interest that no one should be permitted to avoid his just share of the tax burden except by positive command of law, which is lacking here.‘
We do not suggest that this is an equitable proceeding or that there has been conferred upon the Tax Court by section 722 any equitable jurisdiction. But in the light of consideration analogous to those appealing to equity and the good conscience of the chancellor, we are required here to apply a statute using the words ‘fair and just,‘ and dealing with the concept of an ‘inadequate standard of normal earnings,‘ where the test of adequacy or inadequacy must be employed in determining whether the tax would otherwise ‘be excessive and discriminatory.‘ When petitioner seeks to use for its constructive average base period income under section 722 the same experience which its corporate brother has already used up under section 713, its attempt to obtain the duplicate benefits for its parent does not seem to us distinguishable from the conduct which Stone v. White forbids.
The second ground for disallowing the claim has to do with legislative intent as evidence by the statutory design and the interplay of related sections such as those in Supplement A. The latter provisions are admittedly inapplicable. Otherwise, resort to section 722 would have been unnecessary, and probably unavailable. See George J. Meyer Malt & Grain Corporation, 11 T.C. 383. But it seems evident that the relief Supplement A furnishes to certain related or successor businesses if they qualify under its terms is identical with what is being proposed here, namely, to employ the base period experience of a predecessor. See A. C. Burton & Co., 14 T.C. 290. The purpose to limit these benefits so as to avoid duplications seems equally clear. See, e.g., section, 742. While the actual experience of a predecessor might in ordinary circumstances be adequate evidence upon which to base a finding of a taxpayer's constructive base period net income, the situation is otherwise here, in view of the relationship between petitioner and the owner of the business during the base period and the undoubted duplication which would otherwise result. It is hard to believe that in the more flexible provisions of section 722(e)(2), addressed as it is moreover to attempts at redressing inequitably harsh results,
there should have been incorporated a purpose contrary to that of the other comparable sections.
‘8. GENERAL RELIEF PROVISIONS‘Section 213 of the bill amends the relief provisions of existing law, section 722, broadening its application to cases which do not fall within the specific provisions of existing law, thereby removing certain inequities and alleviating hardships for which relief cannot be obtained at the present time.‘The need for this legislation was recognized when the excess-profits tax was enacted in 1940, and in the excess-profits-tax amendments of 1941, as pointed out in the committee reports on those acts. (H. Rept. No. 146, S. Rept. No. 75, on H.R. 3531, 77th Cong., 1st sess.)‘It was there stated that equitable considerations demand that every reasonable precaution should be taken to prevent unfair application of the excess-profits tax in abnormal cases; * * * Such experience demonstrates that abnormal and unusual cases arise, diverse in character and unforeseeable, for which special legislation is necessary if the purpose of the law is to be carried out.‘ (Ways and Means Committee Report, No. 2333, 77th Cong., 2d sess., p. 21.)
We are not now confronted with a case where the corporate affiliate has refrained from availing itself of its portion of the net income credit based upon the same earnings or where it offers to relinquish it. Cf. Excess Profits Tax Council Ruling, E.P.C. 20, 1947-2 C.B. 135. Still less do we have a case where the petitioner represents a wholly separate interest and has had no benefit from such a credit. We are not required to pass upon such situations, and express no opinion as to their proper disposition.
It may even be that had petitioner attempted to prove otherwise what a new business of the same kind and in the same locality would have earned during the ‘pushback‘ period, such evidence would have raised a different question. But all that the present record shows is the actual earnings of the related predecessor. We are unable to find that such figures, based as they are upon the necessary duplication of excess profits credits, could possibly represent a ‘fair and just amount,‘ constituting also the simultaneous constructive base period income of this petitioner.
Petitioner, having contested the deficiencies and claimed the overpayment only by resort to section 722 relief,
Decision will be entered for the respondent.
Reviewed by the Special Division.
‘NEED FOR THE LEGISLATION
DISNEY, J., dissenting:
Because section 722(a) requires the applicant for relief to reconstruct average base period net income in a ‘fair and just amount,‘ the majority deny petitioner relief for the reason that it measured such amount by the experience of its coaffiliate from which it purchased its business during the base period, and because the coaffiliate had been allowed excess profits tax credit based upon such experience. The majority view is that such experience was improperly ‘used‘ by petitioner, having already once been used, and that the petitioner obtains for its parent ‘duplicate‘ benefits. I can not agree that petitioner ‘used‘ such experience a second time. It merely pointed to it as a good example of a comparative, as it could have pointed to any other similar corporation, under a well established technique of proving a base period norm of earnings by comparison with those of a comparative business. The majority seems to consider petitioner as claiming, as a matter of right, the use of the experience of its coaffiliate, but since the petitioner is not, and does not claim to be, an ‘acquiring corporation‘ under Supplement A, section 740, it is clear that the coaffiliate is cited only as a comparative.
Moreover, under sections 141 and 730 of the Internal Revenue Code, a consolidated excess profits credit is provided in case of consolidation of return by corporations like petitioner, its coaffiliate from whom it purchased, and the common parent corporation. No such consolidated return having been filed in this matter, petitioner must for purpose 494 of such credit be regarded as a separate juristic entity. Though paying lip service to that principle, the majority, in my view, violate its essentials and in effect compel the petitioner to be treated as if one a consolidated return basis. The petitioner, filing separate return and having none of the benefits of consolidated basis, and having a right to point to its coaffiliate, as a comparative, in my view is not duplicating the benefits of the coaffiliate, and I find nothing ‘fair and just‘ in denying relief. I therefore dissent.