Ken-Rad Tube & Lamp Corp. v. Commissioner

Ken-Rad Tube & Lamp Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ken-Rad Transmitting Tube Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent Ken-Rad Tube & Lamp Corp. v. Commissioner Docket Nos. 11746, 11747 United States Tax Court 10 T.C. 1217; 1948 U.S. Tax Ct. LEXIS 146; June 28, 1948, Promulgated *146 Decisions will be entered under Rule 50. Corporation A owned all outstanding stock of corporation B, which it had organized in October 1941 to engage in the manufacture for profit of transmitting tubes for defense purposes. On June 30, 1943, corporation B transferred, in exchange for its stock, all of its assets to corporation A and was dissolved. The transaction was treated as a nontaxable transfer under section 112 (b) (6), I. R. C. Corporation A on January 2, 1945, sold the assets involved at a profit. In its returns for 1942 and for the period ended June 30, 1943, corporation B claimed amortization on its emergency facilities on the basis of a 60-month period under section 124, I. R. C. The emergency period was proclaimed at an end on September 29, 1945. On December 28, 1945, corporation B elected to take amortization on the shorter period and claimed additional amortization for 1942 and the period ended June 30, 1943, in the aggregate amount of $ 30,721.56 under section 124 (d) (1), I. R. C.Held, since section 124 (d) (4), I. R. C., to determine benefit, if any, to which taxpayer making an election under subsection (d) (1) is entitled, requires computation of *147 taxes for all years within which the elected amortization period falls, i. e., 1942 to 1945, inclusive, and since corporation B is unable, under the circumstances, to make such computation, it is not entitled to the additional amortization deductions claimed. James E. Fahey, Esq., for the petitioners. Clarence E. Price, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *1217 The Commissioner determined deficiencies against the Ken-Rad Transmitting Tube Corporation in income tax of $ 383.38 for the year 1942, and in excess profits taxes of $ 8,998.77 for the year 1942 and*148 $ 2,349.17 for the period January 1 to June 30, 1943. He also determined liability for the same deficiencies against the Ken-Rad Tube & *1218 Lamp Corporation as transferee of Ken-Rad Transmitting Tube Corporation. The only question to be determined is whether petitioner Ken-Rad Transmitting Tube Corporation is entitled to an amortization allowance in each taxable year based on the so-called "shortened period" as prescribed in section 124 (d) (1) of the Internal Revenue Code. Other errors assigned by petitioners were either conceded by respondent or petitioners or adjustment thereof was stipulated. Adjustments will be made accordingly upon recomputation under Rule 50. FINDINGS OF FACT. The following facts were stipulated: Ken-Rad Transmitting Tube Corporation, hereinafter referred to as petitioner, was organized under the laws of Kentucky on October 31, 1941. Its principal office and place of business were located at Owensboro, Kentucky. Its income and excess profits tax returns for the taxable year ended December 31, 1942, and for the taxable period January 1 to June 30, 1943, inclusive, were made to the collector for the district of Kentucky. Its outstanding capital stock*149 of 1,000 shares of common stock of the par value of $ 100 per share was owned entirely by Ken-Rad Tube & Lamp Corporation, a Kentucky corporation, with its principal office at Owensboro, Kentucky. Shortly after petitioner was organized, it made applications to the United States War Department for the issuance to it of certificates of necessity to be issued pursuant to section 124 of the Internal Revenue Code, such certificates to cover land, buildings, equipment and other facilities. Pursuant to such applications, certificates of necessity were issued to petitioner on the dates as follows: Number Date WD-N-6075 Mar. 11, 1942 WD-N-15594 May 29, 1943 WD-N-22564 [sic] Sept. 6, 1943 Petitioner, in its tax return for 1942 and for the taxable period ended June 30, 1943, duly elected to amortize the cost of the assets acquired by it pursuant to the foregoing certificates of necessity based upon a term of 60 months commencing with the month after the acquisition of such facilities. In such tax returns, amounts which represented amortization of such facilities upon a period of 60 months were deducted. Exhibit 4, a schedule which sets forth correctly a description of the properties*150 acquired by petitioner pursuant to the above referred to necessity certificates, the month in which such properties were acquired, the cost thereof, which, in the aggregate, was $ 380,001.34, the *1219 amortization deduction with respect to such properties which petitioner claimed in its income and excess profits tax returns, being $ 40,610.77 for the year 1942 and $ 37,689.28 for the period ended June 30, 1943, and a correct computation of the amortization of such properties over a period commencing with the month after the acquisition thereof and ending with the month of September 1945, both months inclusive, is incorporated herein by reference. If the position of petitioner is sustained, it is entitled to additional deductions for amortization of defense facilities of $ 19,577.21 during the year 1942 and of $ 20,136.52 during the taxable period ended June 30, 1943. If the Commissioner's determination is sustained, it is not entitled to such additional deductions. On June 30, 1943, in exchange for its outstanding stock, petitioner transferred all of its assets to its parent corporation, Ken-Rad Tube & Lamp Corporation. This exchange was effected without tax liability on *151 either party pursuant to the provisions of section 112 (b) (6) of the Internal Revenue Code. Ken-Rad Tube & Lamp Corporation disposed of all assets which it received in the above transfer from petitioner, its wholly owned subsidiary, by sale for cash on January 2, 1945. The President of the United States, pursuant to the provisions of section 124 of the Internal Revenue Code, terminated the emergency period referred to in such section as of September 29, 1945. On December 28, 1945, petitioner forwarded to the Commissioner of Internal Revenue a letter reading as follows: Subject -- Statement of Election Dear Sir: Pursuant to the provisions of section 124 of the Internal Revenue Code, election is hereby made to use new amortization deductions based on a period beginning with the month following the month in which the emergency facilities were completed or acquired and ending September 30, 1945, in accordance with the President's proclamation. The emergency facilities, with respect to which this election is made, are all of the emergency facilities of this taxpayer. These facilities are included and detailed in the schedules made a part of the following certificates of necessity: Issued to Ken-Rad Transmitting Tube Corporation: Date No. 3/11/42 WD-N-6075 5/29/43 WD-N-15594 9/ 6/43 WD-N-22561 *152 This taxpayer was a wholly-owned subsidiary of Ken-Rad Tube and Lamp Corporation until June 30, 1943. At that date, it was liquidated and its assets were acquired by Ken-Rad Tube and Lamp Corporation in a nontaxable transaction under the provisions of Section 112 (b) (6) of the Internal Revenue Code. This election is being signed by the President and Treasurer of this taxpayer *1220 responsible for winding up its affairs and by Ken-Rad Tube and Lamp Corporation, the equitable owner of all the capital stock of this taxpayer. Yours very truly, Ken-Rad Transmitting Tube Corporation By: [Signed] Stanley Burlew Vice President [Signed] H. E. Baumgarten Treasurer Ken-Rad Tube and Lamp Corporation By: [Signed] W. F. Davis Vice President On September 10, 1946, petitioner filed claims for refund of taxes paid in the amount of $ 15,857.54 representing excess profits tax for 1942 and $ 14,864.02 representing excess profits tax for the taxable period ended June 30, 1943. It was therein stated that the refund of such taxes should be allowed for the reason that petitioner was entitled, under section 124 of the Internal Revenue Code, to have its tax for the taxable year ended *153 December 31, 1942, and the taxable period ended June 30, 1943, recomputed on the basis of the shorter amortization period ending with the month of September 1945. Ken-Rad Tube & Lamp Corporation concedes that it is the transferee of the assets of petitioner and, as such, is liable for the amount of any and all Federal income and excess profits taxes finally determined as due and payable by petitioner for the year 1942 and the taxable period ended June 30, 1943. The record discloses additional facts as follows: The petitioner was formed by its parent corporation for the purpose of manufacturing transmitting tubes at a profit. The war developed a great demand for such tubes. The venture turned out to be a very profitable one for the parent corporation, and the 1942 net income, as disclosed by petitioners' amended return for 1942, was $ 109,463.70. The net income for the period ended June 30, 1943, as disclosed by petitioner's second amended return for that period, was $ 664,305.47. The sale on January 2, 1945, by the parent corporation of all assets transferred to it by petitioner was made at a profit to the parent corporation. The petitioner was dissolved and its assets were transferred*154 to its parent corporation to eliminate confusion and unnecessary accounting and to attain greater accuracy in cost figures. OPINION. The respondent contends that the petitioner is not entitled to amortization of emergency facilities based upon the shortened period under section 124 (d) (1) of the Internal Revenue *1221 Code1 for the reason that such facilities were not owned by either petitioner or its parent corporation as of September 29, 1945, the date of the termination of the emergency period as proclaimed by the President of the United States. *155 It is contended by petitioners that there is nothing in the law or regulations to indicate that the amount of amortization which the statute allows under proper election during the year the facility is held by the taxpayer is to be affected by the disposal of the property or facility in a subsequent year. They further contend that Mimeograph No. 5957, 2 promulgated December 12, 1945, C. B. 1945, pp. 181, 184, is not a proper interpretation of section 124 (d). *156 The facts are not in dispute. They are in brief as follows: The petitioner was organized by Ken-Rad Tube & Lamp Corporation, which received and held all issued and outstanding stock of petitioner. Substantially all of petitioner's assets were covered by certificates of necessity. It engaged in the manufacture of transmitting tubes, for which the war created a great demand, until June 30, 1943, when it transferred all of its assets to its parent corporation. Although there is no direct evidence on the point, the reasons given for the transfer indicate that the parent corporation continued the manufacture of transmitting tubes until January 2, 1945, when it sold all the assets transferred to it by petitioner at a profit. In petitioner's brief it is stated that such sale was made to the General Electric Co. In its returns for the periods involved, petitioner elected to amortize the cost of its emergency facilities on the basis of a 60-month period and on such basis deducted amortization of $ 40,610.77 for the year 1942 and $ 37,689.28 for the period ended June 30, 1943. On December 28, 1945, *1222 after the President had declared termination of the emergency period as of *157 September 29, 1945, and after the sale of the emergency facilities by the parent transferee, the petitioner, in a letter addressed to the Commissioner, elected to use new amortization deductions for the year 1942 and the period ended June 30, 1943, based on the shortened period ended with the month of September 1945, in which the President's proclamation was made, in lieu of the end of the 60-month period. It claims additional amortization deductions of $ 19,577.21 and $ 20,136.52, or a total of $ 39,713.73, for 1942 and the period ended June 30, 1943. In our opinion, the statute itself precludes a decision in petitioner's favor. Section 124 (d) (4) provides that, when the election provided in paragraph (1), (2), or (3), as the case may be, has been made, then: * * * under regulations prescribed by the Commissioner with the approval of the Secretary, the taxes for all taxable years, beginning with the taxable year in which the amortization period began, shall be computed in accordance with an amortization deduction computed in accordance with the method provided in subsection (2), but using (in lieu of the sixty-month period provided in such subsection) the amortization period specified*158 in paragraph (1), (2), or (3), as the case may be. Section 124 (d) (4) provides for the method to be used to give retroactive effect taxwise to a change in the computation of a deduction for amortization of emergency facilities in accordance with paragraph (1), (2), or (3), as elected by the taxpayer. The petitioner made its election under paragraph (1), i. e., to use, in the computation of amortization, the shorter period ended September 30, 1945, in lieu of the 60-month period it had used in computing its deductions for amortization for the taxable year 1942 and the taxable period January 1 to June 30, 1943. To determine the benefit, if any, to which the person making an election under paragraph (1), (2), or (3), is entitled, section 124 (d) (4) provides the method to be used. Clearly, it requires more than the computation of the amortization deduction with respect to each month of a 60-month period within the taxable year as provided in subsection (a). It requires that "the taxes for all taxable years, beginning with the taxable year in which the amortization period began" shall be computed with an amortization deduction based upon the newly elected amortization period ended*159 September 30, 1945, in lieu of the previously elected period of 60 months. In other words, it requires the recomputation of the taxes for all the taxable years in which the newly elected amortization period falls, i. e., recomputation of the taxes for the years 1942 to 1945, inclusive. Thus it requires the adjustment retroactively of the amortization deduction for the entire amortization period. *1223 This the petitioner has failed to do and can not do, since it disposed of all its assets as of June 30, 1943, and was dissolved. As stated in New Colonial Ice Co. v. Helvering, 292 U.S. 435: * * * Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed. * * * a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms. Not being able to bring itself within the terms of the statute, it is not entitled to its benefit. There are additional reasons for the disallowance of the deductions claimed. The purpose behind the enactment of section 124 was to permit those who *160 invested in emergency facilities "to amortize the cost thereof over a shorter period than would be permitted under the depreciation provisions of the Internal Revenue Code." Committee on Ways and Means Report No. 2894 3 (C. B. 1940-2, pp. 496, 507-8). It is apparent that the primary purpose for the enactment of section 124 was to permit the recovery, by way of amortization, of investments in emergency facilities, by those who would suffer an economic loss at the end of the emergency period because the use of such facilities would end with the termination of the emergency period. The same principle is applicable to allowances for depreciation. In Edith Henry Barbour, 44 B. T. A. 1117, 1121 (reversed on another point), we stated as follows: * * * While ownership may not be a prerequisite to the right to a depreciation deduction, see Helvering v. Lazarus & Co., 308 U.S. 252, it is conversely true that not even ownership necessarily entitles the owner to deduct depreciation. The test is whether the claimant to depreciation is in such a position as to suffer an economic loss as a result of the decrease in value of the*161 property due to the depreciation. Weiss v. Wiener, 279 U.S. 333; Atlantic Coast Line Railroad Co., 31 B. T. A. 730; affd. (C. C. A., 4th Cir.), 81 Fed. (2d) 309; certiorari denied, 298 U.S. 656. * * * *162 Section 124 (a) makes the basis for amortization the same as the basis would be for the computation of gain. The adjusted basis for determining gain is cost, with exceptions not here applicable. Sec. 113 (a) and (b). Thus the adjusted basis of petitioner at the time of the transfer of its emergency facilities to its parent corporation was cost to it, less the amortization allowances on the basis of a 60-month period. The transfer was treated as a transfer in liquidation under section 112 (b) (6) of the Internal Revenue Code, and accordingly, *1224 the basis to the parent corporation was the same as it was in the hands of petitioner, the transferor. Section 113 (a) (15) of the Internal Revenue Code. It is reasonable to assume that the parent corporation, in its returns, claimed and was allowed amortization on the basis of a 60-month period from June 30, 1943, up to the time of the sale on January 2, 1945. Mimeograph 5957, C. B. 1945, pp. 181, 187. 4 All inferences support this assumption and there is no evidence to the contrary. Since the sale occurred prior to September 29, 1945, the date of the termination of the emergency period as proclaimed by the President's proclamation, *163 it is also reasonable to assume, there being no evidence to the contrary, that, in the computation of its gain realized on the sale of the emergency facilities involved, the parent corporation did not reduce its basis by a greater amortization allowance than that based upon a 60-month period. The parent corporation having realized a gain on the sale, it is obvious that it recovered any unamortized portion of its basis from the purchaser of the facilities. Thus the entire adjusted basis of the emergency facilities involved was recovered. Under the statutes, the cost bases of petitioner and its transferee are the same. By a nontaxable transfer no new cost basis is established for the transferee. Under the circumstances here, there is but one investment, the adjusted basis of which petitioners are entitled to amortize under section 124. *164 To allow the additional amortization under the circumstances herein would not be the mere granting of the relief contemplated by section 124, as argued by petitioners. Although petitioner on brief argues much about the equities of the case, it is not shown that they will sustain an economic loss unless additional amortization is allowed to petitioner. On the contrary, to allow the additional amortization would result in substance and effect in the realization by the parent corporation, petitioner's transferee, of additional gain to the extent of the reduction in taxes resulting from the deduction of the additional amortization claimed. Section 124 was not intended to be utilized for such purpose. To disallow the claimed additional amortization under the circumstances herein does not result in discrimination between a taxpayer who transferred emergency facilities immediately prior to September 29, 1945, and one who transferred such facilities immediately after that date, as argued by petitioner. In neither case would the taxpayer be entitled to recover more than its adjusted basis of its investment in such emergency facilities. Any return in excess thereof by subsequent sale would*165 be gain and taxable as such. *1225 The only case cited by petitioner as supporting its position is Union Bleachery v.United States, an unreported decision of the United States District Court for the Western District of South Carolina entered January 18, 1933. The taxpayer brought action to recover income and profits taxes of its transferor for the years 1916 to 1919, inclusive. The taxpayer, on July 1, 1922, acquired in exchange for its stock certain facilities for the production of war material, the cost of which was $ 76,468.57. Only five of such facilities, costing $ 12,128.66, were abandoned or sold during the postwar period and the remaining facilities were continued in full use and with respect to which no loss was sustained. Of the five facilities, three were abandoned and had no salvage value and two were sold at a price less than depreciated cost basis. It was held by the court, as admitted by defendant, that the taxpayer was entitled in 1918 to the additional allowance of amortization of the difference between salvage value or selling price and the cost of the facilities reduced by the depreciation theretofore allowed. Thus the taxpayer was permitted *166 to recover the cost of such facilities by way of depreciation or amortization only to the extent not recovered by the selling price. This case affords little aid to petitioner. It is our conclusion that under the circumstances herein the respondent did not err in disallowing the additional amortization claimed for the year 1942 and the period ended June 30, 1943. Decision will be entered under Rule 50. Footnotes 1. SEC. 124. AMORTIZATION DEDUCTION. * * * * (d) Termination of Amortization Period. -- (1) If the President has proclaimed the ending of the emergency period (as defined in subsection (e)), or if the Secretary of War or the Secretary of the Navy has, in accordance with regulations prescribed by the President, certified to the Commissioner that an emergency facility ceased, on the date specified in the certificate, to be necessary in the interest of national defense during the emergency period, and if the date of such proclamation or the date specified in such certificate occurs within sixty months from the beginning of the amortization period with respect to such emergency facility, then the taxpayer may elect (in accordance with paragraph (4) of this subsection) to terminate the amortization period with respect to such emergency facility as of the end of the month in which such proclamation was issued or in which occurred the date specified in such certificate, whichever is the earlier. In such case the amortization period with respect to such facility shall end with the end of such month in lieu of the end of the sixty-month period.↩ 2. The portion of Mimeograph 5957 referred to is as follows: "Facilities which were sold or abandoned prior to September 29, 1945, the date of termination of the emergency period, or prior to the date specified in a non-necessity certificate, as the case may be, are not subject to amortization over the shortened period provided in section 124 (d) of the Code because their use as emergency facilities was terminated by reason of such sale or abandonment. Under such circumstances, the adjusted basis for gain or loss at the date of sale or abandonment must be determined without reference to the shortened emergency period provided in section 124 (d)↩. If the facilities were not sold before September 29, 1945, they are subject to amortization over the shortened period even though subsequently sold either before or after the date of the notice of election." 3. The extension of existing facilities is a necessary and vital part of the national defense program. To obtain the needed facilities will require the investment of hundreds of millions of dollars. Your committee has been informed by the Advisory Commission to the Council of National Defense that substantial amounts of private capital will not be invested in the construction of such facilities unless corporations are assured, in view of the fact that such facilities will be of use chiefly only during the period of national emergency, that they will be permitted to amortize the cost thereof over a shorter period than would be permitted under the depreciation provisions of the Internal Revenue Code.↩ 4. Mim. 5957 provides, in part: "Generally, the [necessity] certificate issued to a transferor will be recognized in the hands of the transferee if the transfer was made in a nontaxable transaction under section 112 (b)↩ of the Code."