Atlas Oil & Refining Corp. v. Commissioner

Atlas Oil and Refining Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent Atlas Oil & Refining Corp. v. Commissioner Docket Nos. 24764, 24765 United States Tax Court 17 T.C. 733; 1951 U.S. Tax Ct. LEXIS 47; October 31, 1951, Promulgated *47 Decision will be entered for the petitioner. Petitioner's books of account having been closed and balances carried forward at the end of each calendar year, held deficiencies determined on a fiscal year basis were incorrect, notwithstanding that petitioner reported its income for the years involved on the basis of a fiscal year ended November 30. Helvering v. Brooklyn City R. Co. (C. A. 2), 72 F. 2d 274, followed. Floyd F. Toomey, Esq., Vincent H. Maloney, Esq., John P. Lipscomb, Jr., Esq., and Waymon G. Peavy, C. P. A., for the petitioner. Conway N. Kitchen, Esq., for the respondent. Opper, Judge. OPPER *733 Respondent determined deficiencies against petitioner as follows: Declared Fiscal year ended -- Income tax value excess- Excess profits tax profits tax Nov. 30, 1942 $ 16,500.07 $ 1,563.92 1 $ 337,173.38 Nov. 30, 1943 1,017.78 56,084.96 288,706.19 The remaining questions are: 1. Should petitioner's tax liability be computed on a fiscal year basis? 2. If so, (a) was petitioner's acquisition of the assets and properties of Atlas Pipeline Corporation a transaction within the provisions of Internal Revenue Code, sections 112 (g) (1) (C) or 112 (b) (5), so that its bases for *48 these assets and properties were the same as that of its tranferor, and (b) did respondent err in treating as ordinary income gain realized during the fiscal year ended November 30, 1943, from the sale of certain pipeline equipment? It is agreed that several associated issues will be resolved by our disposition of these questions. Some of the facts are stipulated. FINDINGS OF FACT. The stipulated facts are hereby found. Petitioner is a Delaware corporation with its principal office located in the Atlas Building, Shreveport, Louisiana. It filed tax returns for the years in issue, employing the accrual basis of accounting and a fiscal year ended November 30th, with the collector for the district of Louisiana. Petitioner was conceived as the successor to the insolvent Atlas Pipeline Corporation, hereinafter referred to as Pipeline, also a Delaware*734 corporation, engaged in the refining and marketing of petroleum products. On September 20, 1939, Pipeline filed its petition with the District Court for the Western District of Louisiana, hereinafter referred to as District Court, for reorganization under chapter X of the National Bankruptcy Act, as amended, and a trustee of Pipeline was appointed. *49 By August 9, 1941, the trustee's plan of reorganization of Pipeline, evolved by a series of conferences and negotiations extending over more than a year, was approved by the requisite number of creditors and on that day the plan was affirmed by order of the District Court. Pursuant to the plan, petitioner was incorporated under the laws of Delaware on November 29, 1941. On December 2, 1941, the incorporators met for their first meeting and adopted by-laws for the regulation of corporate affairs. It was provided that stockholders' meetings should be held on the last Thursday of January of each year or if that be a legal holiday, then on the next succeeding business day. Section 4 of article VII of those by-laws adopted read as follows: Section 4. The fiscal year of the corporation shall begin on the first day of December of each calendar year and end on the thirtieth day of November of the following calendar year. At the first meeting of the board of directors of petitioner held December 3, 1941, the directors approved these by-laws and adopted a resolution that the firm of Barrow, Wade, Guthrie & Company be employed to audit the financial affairs of petitioner as promptly as practicable *50 after the close of each fiscal year. Effective as of December 31, 1941, petitioner acquired the assets and properties, with immaterial exceptions, of Pipeline in accordance with the District Court's order entered January 9, 1942. On February 16, 1942, the District Court entered an order decreeing the formal dissolution of Pipeline as of December 31, 1941. The effect of the acquisition by petitioner of the pipeline system of Pipeline was to make petitioner an interstate carrier and as such subject to the jurisdiction of the Interstate Commerce Commission, hereinafter referred to as the Commission. After receipt by the Commission of notice that petitioner had acquired the properties of Pipeline, and following correspondence relating to tariffs, the correct corporate name, and other general information, the Director of Statistics of the Commission wrote petitioner's treasurer in regard to preparation of annual accounts, in part, as follows: You are aware, of course, that the new corporation [petitioner] will be expected to keep its accounts in conformity with the Commission's rules, and I believe that you have in your possession copies of the classifications and orders which apply with *51 respect to accounting matters and are prepared to observe the necessary procedure. *735 These orders applying to accounting matters were contained in a brochure issued by the Commission entitled "Uniform System of Accounts for Pipe Lines," hereinafter referred to as the Uniform System. It divided the accounts to be maintained by a carrier into the following categories: Balance sheet accounts, carrier-property accounts, surplus accounts, income accounts, operating-revenue accounts, operating-expense accounts, and clearing accounts. The general instructions contained therein provided that "Balances shall be struck for each account at the close of each calendar year and balances thus determined in each account at the close of each year shall be carried forward to the corresponding account for the succeeding year." The Uniform System directed that all income and expense of the carrier be reflected in income primary accounts numbered 401 through 422. At the end of each calendar year the balance of these income primary accounts was to be closed to surplus primary account 301 denominated "Income Balance." The purpose of the surplus accounts was described as "* * * designed to show the changes *52 in surplus during each calendar year as affected by the operations and the business transactions during that period, by any disposition of surplus made solely at the option of the carrier, by adjustment of matters not properly attributable to the period, and by miscellaneous gains or losses not provided for elsewhere; and also to show the unappropriated surplus of the carrier at the date of the balance sheet." The opening entry was made in petitioner's books of account on January 23, 1942, in income primary account 401 denominated "Operating Revenues." It recorded the result of Pipeline's operations for the period January 1 to January 22, 1942, during which time it was operated by a receiver. Petitioner's books of accounts were closed as of December 31, 1942, and 1943, and income and expense balances were transferred to the surplus accounts. For each of these periods an annual report was filed on appropriate form with the Commission. During the periods in issue petitioner maintained two types of inventories, one for oil and petroleum products sold, and the other for operating construction, maintenance and supplies. Inventories of crude oil and petroleum products were taken daily by *53 gauge at the refinery. The operating construction, maintenance, and supplies inventory was kept on a "perpetual" basis, taken monthly or at indeterminate periods. Although during a 12-month period inventories on all these properties would be taken, physically counted, and compared with the records and adjustments made on the petitioner's books of account, such action was never taken at any one particular time of the year. *736 Pursuant to the resolution adopted by the petitioner's board of directors at their first meeting held on December 3, 1942, the accounting firm of Barrow, Wade, Guthrie & Company made an audit of petitioner's books of account on the basis of a fiscal year ended November 30, 1942, and November 30, 1943. Said firm submitted to petitioner's board of directors audit reports covering each fiscal period. Petitioner's two subsidiaries, Atlas Oil Corporation and Sparco Gasoline Company, Inc., both of which reported income and kept accounts on the basis of a fiscal year ended November 30, were included in the annual report for the year ended November 30, 1942, and Atlas Oil Corporation was included in the annual report for the year ended November 30, 1943, Sparco Gasoline *54 Company, Inc., having been dissolved in the meantime. Atlas Oil Corporation was the wholesale selling agent for petitioner's refinery products and Sparco Gasoline Company, Inc., acted as the retail outlet in Shreveport. They were not subject to regulation by the Commission. Because of the seeming conflict between petitioner's by-laws adopted December 2, 1941, prescribing a fiscal year ending November 30, and the Commission's directive to strike balances on each account at the close of each calendar year, some consideration was given to keeping a double set of books. Petitioner's secretary-treasurer, responsible for keeping the accounts, rejected this idea because of the specific directive contained in the Commission's Uniform System of Accounts that balances be struck each calendar year. The audit reports prepared by Barrow, Wade, Guthrie & Company were not a part of the accounting record of petitioner. Petitioner's books of account for the periods here in question were kept with the purpose of honestly recording all operations of petitioner. No attempt was made to conceal any transaction. By letters dated January 7, 1943, from the Office of the Commissioner of Internal Revenue to the *55 collector in New Orleans, the collector was notified that taxpayers Atlas Oil Corporation and Sparco Gasoline Company, Incorporated [sic], both subsidiaries of petitioner, were granted permission to change the basis of filing their respective Federal tax returns from the taxable year ended December 31 to a new taxable year ending November 30, effective as of November 30, 1942. By letter dated April 10, 1943, from C. A. Donnelly, acting collector with offices in New Orleans, Louisiana, petitioner and its two subsidiaries were granted an extension of time to May 1, 1943, within which to file their respective corporate income and excess profits tax returns for the fiscal period ended November 30, 1942. Petitioner filed income and declared value excess-profits tax returns thereafter on April 27, 1943, and a consolidated excess profits tax return in which *737 latter return were joined its subsidiaries, Atlas Oil Corporation and Sparco Gasoline Company, Inc. For the year ended November 30, 1943, petitioner filed an income and declared value excess-profits tax return and excess profits tax return. All of these returns were filed with the collector of internal revenue for Louisiana. These returns *56 were prepared by Waymon Peavy of the accounting firm of Barrow, Wade, Guthrie & Company. Peavy did not examine or use petitioner's books of account in preparing these returns but used the information contained in the audit work papers of petitioner's annual audits. These returns were executed by officials of petitioner. Petitioner filed no income or excess profits tax returns or consolidated excess profits tax return for the period ended November 30, 1941, had no income on November 29 and 30, 1941, and conducted no operations on those two days. Petitioner filed its Federal tax returns for a fiscal year ended November 30, 1944, and November 30, 1945. For the year 1946 petitioner and its subsidiary, Atlas Oil Corporation, filed Federal income tax returns on a calendar year basis. Attached to their respective 1946 returns were the following letters: March 14, 1947. Mr. William M. Lucas, Chief, Income Tax Division, Treasury Department, 423 Canal Street, New Orleans 16, Louisiana. Reference: IT: WML: EM. Dear Mr. Lucas: This will acknowledge receipt of your letter of March 11, 1947 which is in reply to our request for an extension of time for filing the income tax returns, From [sic] 1120, *57 for the Calendar year of 1946. There were two requests that covered this corporation and its wholly owned subsidiary, Atlas Oil Corporation. In reply to your question in the above mentioned letter regarding returns filed by us on a fiscal year basis for the prior years of 1942 to 1945 inclusive, advise that this corporation, as your records will show, is an outgrowth of a reorganization of Atlas Pipeline Corporation consummated as of December 31, 1941. An audit b [sic] Internal Revenue agents covering the years 1942 and 1943 and conferences on the involved questions between your Mr. William E. Logan, Revenue Agent in Charge and our representatives established the fact that dur [sic] to our operations being under regulations of the Interstate Commerce Commission with books kept on a Calendar year basis and other technical points, the income tax returns should also be filed on a like basis. Therefore, it is the understanding of this writer that shortly after representatives of your department and our own agree on all points of issue we are to file amended returns for the prior years. Due to the time running short you will please find enclosed herewith tentative returns of both companies *58 for the calendar year of 1946. Hoping you will find everything in order, I am Very truly yours J. L. Polk, Treasurer, Atlas Oil and Refining Corporation and Atlas Oil Corporation. JLP: mm Encls. *738 The reply was as follows: March 31, 1947. In reply refer to: IT: LH Atlas Oil and Refining Corporation and Subsidiary, Atlas Oil Corporation, P. O. Box 1607, Shreveport, La. Gentlemen: Receipt is acknowledged of your letter of March 14, 1947, requesting for the reasons therein given, an extension of time within which to file your corporation income tax returns for the calendar year 1946. You are hereby granted an extension of time to April 15, 1947, within which to complete your returns for the taxable year above mentioned provided a tentative return is filed with this office on or before and payment made at that time of at least one-fourth of the total estimated tax shown thereon to be due. Any deficiency in tax on the installments past due when your completed return is filed will bear interest at the rate of one-half of one percent a month from the original due date. By a "tentative return" is meant a return on the appropriate income tax form, showing only the name and address of the taxpayer and the estimated *59 amount, if any, of the tax due. The items and schedules shown on the form need not be filled in. If such tentative return is not filed on or before the date prescribed above, then this extension is of no effect. A copy of this letter must be attached to the tentative and completed returns as authority for the extension of time herein granted. Very truly yours, Joseph D. Nuna [sic], Jr., Commissioner. By C. A. Donnolly, Collector. *Note: Tentative return already complied with. No amended Federal income or excess profits tax returns have been filed by petitioner or its subsidiaries for years prior to 1946. Petitioner maintained an annual accounting period of a calendar year throughout the period in issue. OPINION. The simple conclusion would ordinarily be inescapable that under section 41, Internal Revenue Code, 1*61 petitioner was required to file its tax returns on the basis upon which its books of account were actually maintained. Helvering v. Brooklyn City R. Co. (C. A. 2), 72 F. 2d 274; Great West Printing Co. v. Commissioner (C. A. 8), 60 F. 2d 749; Estate of Cyrus H. K. Curtis, 36 B. T. A. 899; *739 James H. Silcox, 12 B. T. A. 748. The present situation is complicated by the fact that petitioner *60 actually filed its returns for the periods in controversy on the basis of a fiscal year ending November 30, and presumably on that theory respondent has determined these deficiencies accordingly. He urges that petitioner adopted the fiscal year system in the first return filed by it after its creation, thus making a valid election to employ a fiscal year and, also, that in fact, its books were kept not on a calendar but on a fiscal year basis. The first statement must yield to the circumstances that under respondent's own rulings petitioner's fiscal year return, although actually its first, was too late to create any implied request for or acceptance of a fiscal year return method. Regulations 111, sections 29.41-4 and 29.52-1; O. D. 404, 2 C. B. 67 (1920); O. D. 1120, 5 C. B. 233 (1931); I. T. 3466, 1941-1 C. B. 238. Under these rulings, by the time that return was filed, a report for the prior year was due either on a calendar or a fiscal year basis as the facts might warrant; if a fiscal year, the return should have been filed for the few days between petitioner's incorporation and December 1 of the following fiscal year; if a calendar year, the return should have been filed for the period through December 31 of its year of incorporation. In neither event, as respondent himself has ruled, did it commence its reporting sufficiently early to constitute it an adoption of the fiscal year system. See O. D. 404, supra; I. T. 3466, supra. It seems to be beyond contradiction that petitioner's books were actually closed at the end of the calendar year and at no other time. Respondent seeks to disregard this because *62 of its manifest origin in Interstate Commerce regulations. See Kansas City Southern Railway Co. v. Commissioner (C. A. 8), 52 F. 2d 372, certiorari denied 284 U.S. 676. But while it may be quite true that the Interstate Commerce Commission "has no power to direct how our revenue laws * * * shall be interpreted or * * * to govern the taxing authorities," the fact that books are kept in accordance with its regulations cannot eliminate the significance of the books themselves, particularly in such a proceeding as this one where the ultimate solution must rest upon the manner in which the books were actually maintained. If anything, it is the audit reports assembled annually for the apparent purpose of producing the figures upon which the tax returns could be based that must be cast aside in any examination of the petitioner's actual system of accounting. These reports were not a part of its books and are not adequate for us to conclude that it was either on a fiscal year basis or that, as respondent insists, it maintained a double set of accounts. Based upon the books of account themselves and the date as of which they were customarily closed out and the balances transferred, *740 petitioner's *63 accounting period was manifestly brought to a close only once each year and that was on December 31st. We couple this with the rule that "the taxpayer had no election; section 226 (a) 2 * * * refers only to a change in bookkeeping, not to a change in the period of the return which must always conform with the books," Helvering v. Brooklyn City R. Co., supra; and with the fact that respondent expressly disavows any suggestion of estoppel. Under those circumstances and in the absence of any showing that a different system of accounting has ever been requested by petitioner or permitted by respondent, no other conclusion is possible but that the deficiencies were incorrectly determined on a fiscal year basis. Helvering v. Brooklyn City R. Co., supra;San Francisco Hotel Co., 19 B. T. A. 383; James H. Silcox, supra. Decision will be entered for the petitioner. Footnotes 1. Docket No. 24765 only.↩ 1. SEC. 41. GENERAL RULE. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. * * * 2. Revenue Act of 1921, corresponding to section 46, Internal Revenue Code↩.