Union Bus Terminal, Inc. v. Commissioner

Union Bus Terminal, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Union Bus Terminal, Inc. v. Commissioner Docket No. 15967 United States Tax Court 12 T.C. 197; 1949 U.S. Tax Ct. LEXIS 274; February 16, 1949, Promulgated *274 Decision will be entered under Rule 50. Held, petitioner corporation did not dissolve during the taxable year and hence is not required to place its excess profits net income for such year on an annual basis as required by section 711 (a) (3) of the Internal Revenue Code. United States v. Kingman, 170 Fed. (2d) 408. Robert A. Littleton, Esq., for the petitioner. James L. Backstrom, Esq., for the respondent. Hill, Judge. HILL *197 The respondent determined a deficiency in petitioner's excess profits tax for the taxable year 1943 in the amount of $ 6,316.12. Respondent also determined that petitioner's income tax liability*275 for the same period disclosed an overassessment of $ 1,702.15. Certain adjustments made by respondent are not in issue. The only issue before us is whether petitioner's excess profits net income for its fiscal year 1943 should be placed on the basis of a taxable year of less than twelve months in accordance with the provisions of section 711 (a) (3) of the Internal Revenue Code, or whether such income should be computed on the basis of petitioner's full fiscal year. The tax returns for the year involved were filed with the collector of internal revenue for the district of Louisiana. *198 FINDINGS OF FACT. The petitioner was incorporated in 1940 under the laws of Louisiana, with a paid-in capital of $ 1,000. W. H. Johnson, petitioner's president, owned 98 of the 100 shares of stock outstanding. Two shares were issued to R. F. Hemperly and James M. Smith to qualify them for petitioner's board of directors. Smith was also petitioner's secretary and treasurer as well as its bookkeeper. From the date of petitioner's incorporation until July 31, 1943, it operated the Union Bus Terminal for the use of five certified carriers of passengers that used Shreveport, Louisiana, as a *276 terminal. The service for those bus companies included furnishing facilities and selling tickets to people using the various lines. The terminal building used by petitioner was leased from Tri-State Transit Co., a corporation, which was also controlled by W. H. Johnson. Petitioner's rental was based upon a percentage of the tickets it sold. On August 1, 1943, petitioner transferred the lease to the bus terminal and all of its furniture and fixtures to W. H. Johnson and R. F. Hemperly for a total consideration of approximately $ 800. This was the book value of the furniture and fixtures. No value was placed upon the privilege of operating the bus terminal or upon the lease of the terminal building. After July 31, 1943, Johnson and Hemperly, operating as a partnership, conducted the business formerly carried on by petitioner. The earnings of the petitioner before the payment of income taxes for the periods specified were as follows: Fiscal year ended Apr. 30, 1941 $ 5,728.94 [1942] 13,001.33 [1943] 30,887.82 Period May 1 to July 31, 1943 11,633.68 Petitioner's assets owned after the transfer of the bus terminal lease and business and the furniture and fixtures to the above*277 mentioned persons consisted of an excess profits postwar refund bond and an account receivable against W. H. Johnson in the amount of $ 32,000. That account represented cash withdrawals from the petitioner made by Johnson prior to July 31, 1943. Petitioner did not carry on or conduct any kind of business after July 31, 1943, and it had no income after that date. Petitioner never paid any dividends during its existence. Petitioner paid a corporation franchise tax to the State of Louisiana for its fiscal years ended April 30, 1943, 1944, 1945, and 1946. *199 Subsequent to April 1944 petitioner paid its Louisiana state franchise tax with funds furnished by W. H. Johnson. His account receivable on the books of petitioner was credited with such amounts. On January 7, 1946, petitioner's then sole stockholder, W. H. Johnson, adopted a plan of dissolution of petitioner. Petitioner was declared formally dissolved by the Louisiana Secretary of State on July 9, 1946. At this time all of its remaining assets were distributed to W. H. Johnson in consideration of the surrender and cancellation of the outstanding stock of petitioner. In a statement attached to his notice of deficiency respondent*278 stated as follows: Upon the basis of the evidence of record it is held that your fiscal taxable year covers the period May 1, 1943, to July 31, 1943. Since such taxable year is a period of less than twelve months, the excess profits tax is computed in accordance with the provisions of section 711 (a) (3) of the Internal Revenue Code. OPINION. The sole question before us is whether petitioner's excess profits net income should be computed on the basis of a short taxable year beginning May 1, 1943, and ending July 31, 1943, in accordance with section 711 (a) (3) (A) of the Internal Revenue Code, as respondent contends, or whether such income should be computed on the basis of petitioner's full fiscal year ending April 30, 1944, as petitioner contends. The question we have here was, we think, correctly decided by, the United States Court of Appeals for the Fifth Circuit in United States v. Kingman, 170 Fed. (2d) 408. The facts there were essentially parallel to the facts here. On the basis of the decision in that case and in conformance with our own conviction, we sustain petitioner's contention. In the Kingman case, as here, the taxpayer was*279 of small capital and its shares were closely held. Similar to the situation in the case before us, the corporation taxpayer in that case was not dissolved during the taxable year. In the instant proceeding the plan of dissolution was not adopted by petitioner's stockholder until January 7, 1946, and it was not formally dissolved until July 9, 1946. The taxpayer corporation there, as petitioner here, distributed before the end of its taxable year certain of its assets to its then sole stockholder, but it retained on its books during the taxable year assets in the form of "* * * claims to United States bonds and tax refunds." In the case before us petitioner retained assets in the form of an account receivable and an excess profits postwar refund bond. In both cases the taxpayer corporation did not conduct any business after the distribution *200 of certain assets to their respective sole stockholders, which date in the Kingman case was April 3, 1943, and in the instant case was August 1, 1943. See Kingman Distributing Co. v. United States, Fed. Supp. (May 13, 1948). In the Kingman case the respondent determined that the taxpayer's income should be computed*280 under section 711 (a) (3) for a short taxable year beginning January 1, 1943, and ending April 30, 1943, whereas in the present case the respondent determined that petitioner's income should be so computed for a taxable year beginning May 1, 1943, and ending July 31, 1943. In the Kingman case, supra, the court stated: It is too plain for discussion that a corporation's taxable year covers twelve months if it remains in existence, and that it does not under [the Commissioner's Regulations 111, sec. 29.52-1, and Regulations 112, sec. 35.711. (a) (4)] go out of existence unless it ceases business, dissolves and retains no valuable claims on which it may sue after dissolution. * * * Under both quoted regulations covering both kinds of taxes the taxable year of this corporation was not a short taxable year but one of twelve months, for the corporation continued in existence and did not dissolve, and retained valuable claims to United States bonds and tax refunds. Its returns were correctly made on a twelve months basis. The argument of appellant that as the income ceased after three months of the year the credits ought to be proportionately cut down is a reasonable one, and *281 might prevail if we were making the law. Congress and the Commissioner made the law and they have so made it that "annualization", under Section 711 (a) (3) which applies only to short taxable years, does not, under their definition of a short taxable year, apply here. To support his contention respondent cites three cases, Kamin Chevrolet Co., 3 T. C. 1076; Pepsi Cola Co. v. Commissioner, 155 Fed. (2d) 921; Economy Savings & Loan Co. v. Commissioner, 158 Fed. (2d) 472. The first two cases involve taxpayers who were liquidated and dissolved during the taxable year. In Kamin the corporation had completely liquidated during the year there involved, but did not in that year surrender its corporate charter; in Pepsi Cola Co. the taxpayer corporation had dissolved during the taxable year by means of a merger with another corporation. Economy Savings & Loan Co. is so remote to the situation here that it has no application. These cases, therefore, are not controlling. In view of the above, we hold that petitioner is entitled to compute its excess profits net income on a 12-month*282 basis. It follows that respondent erred in his determination. Decision will be entered under Rule 50.