Kamin Chevrolet Co. v. Commissioner

Kamin Chevrolet Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Kamin Chevrolet Co. v. Commissioner Docket No. 371 United States Tax Court 3 T.C. 1076; 1944 U.S. Tax Ct. LEXIS 91; July 10, 1944, Promulgated *91 Decision will be entered under Rule 50. The petitioner filed an excess profits tax return for the calendar year 1940. On June 24, 1940, all of the stockholders of the petitioner entered into an agreement consenting to the dissolution and winding up of its affairs and on the same date the board of directors adopted a like resolution. Pursuant to such resolution the petitioner, on June 29, 1940, distributed all of its assets to its stockholders, subject to its liabilities, but did not surrender its charter. After June 30, 1940, the corporation was an empty shell without capital, income, or expenses. The respondent treated the return filed as one made for the period January 1 to June 30, 1940; determined the excess profits net income for the twelve-month period as provided by section 711 (a) (3) of the Internal Revenue Code; reduced the excess profits credit as provided by section 713 (a) (1) (C); and determined the excess profits tax liability accordingly. Held, that the respondent did not err in treating the excess profits tax return filed as one covering only the period January 1 to June 30, 1940, but that he did err in reducing the excess profits credit by the application*92 of section 713 (a) (1) (C). Harry W. Kamin, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent. Smith, Judge. SMITH *1076 This is a proceeding for the redetermination of a deficiency in excess profits tax for 1940 in the amount of $ 633.69. The petitioner alleges as follows: (a) The Commissioner erred in interpreting the return filed as a return for a fractional part of the year 1940 and placing the same on an annual basis. *1077 (b) The Commissioner erred in deducting for excess profits tax credit an amount of $ 754.10 representing 6 percent of the net capital reduction. FINDINGS OF FACT. The petitioner is a Pennsylvania corporation, incorporated on October 18, 1935, with its principal office in Pittsburgh. It filed required tax returns for the calendar year 1940 with the collector of internal revenue at Pittsburgh. Its corporate income, declared value excess profits, and defense tax return (Form 1120) showed net income of $ 7,671.12. In the return it is stated: "ASSETS AND LIABILITIES SOLD TO STOCKHOLDERS JUNE 30, 1940, CORPORATION INACTIVE." Its corporation excess profits tax return (Form 1121) for the calendar year 1940 showed excess profits*93 net income of $ 6,459.66. No excess profits tax liability was disclosed thereby. In the determination of the deficiency the respondent treated the excess profits tax return as one covering the period January 1 to June 30, 1940, and found the correct excess profits net income for that period to be $ 6,487.41. The petitioner does not question the correctness of the determination of the amount of the excess profits net income for such period. The respondent placed the net income on an annual basis in accordance with the provisions of section 711 (a) (3) of the Internal Revenue Code and found that the excess profits net income for the 12-month period ended June 30, 1940, was in the amount of $ 13,046.11. The petitioner does not question the correctness of this excess profits net income, provided the return filed should be considered as a return for the period January 1 to June 30, 1940. The respondent also found that on June 30, 1940, the petitioner, as a result of the distribution of its assets, effected a net capital reduction of $ 12,568.13, which was arrived at by multiplying its total capital of $ 25,000 by 184, the number of days the petitioner was out of business during the*94 year 1940, by dividing by 366, the number of days in the calendar year. By the application of section 713 (a) (1) (C) of the code the respondent effected a reduction in petitioner's excess profits credit of $ 754.10, or 6 percent of the petitioner's net capital reduction. On June 24, 1940, all the stockholders of record of the petitioner entered into an agreement consenting to the dissolution and winding up of the affairs of the petitioner. A special meeting of stockholders of petitioner was held on that date and it was duly resolved as follows: (1) That the petitioner be dissolved and the affairs of the company wound up, and (2) that the petitioner sell, transfer, assign, and deliver to the shareholders all the assets of the petitioner, subject to all of its debts. On June 26, 1940, a special meeting of the board of directors *1078 of petitioner was held, at which the foregoing resolutions were adopted and the proper officers of petitioner were authorized to make a complete liquidation of the assets of petitioner in accordance with the aforesaid resolution. The assets of the petitioner were transferred in accordance with the resolution on June 29, 1940, resulting in a complete*95 liquidation of the assets and business of the petitioner. The officers of petitioner did not proceed with the dissolution of the company and the corporate charter of petitioner was not surrendered, but instead its corporate charter continued in existence during and subsequent to the calendar year 1940. OPINION. The first question presented is whether the respondent correctly treated the excess profits tax return filed by the petitioner for 1940 as a return for the 6-month period ended June 30 rather than one for the calendar year. The petitioner submits that since it was in existence for the entire calendar year 1940 it was required to file a return covering the entire calendar year and that the respondent was in error in treating the return filed as one for only a fractional part of the year. Section 48 of the Internal Revenue Code defines a taxable year as meaning: * * * the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Part. "Taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this chapter or under regulations prescribed by the Commissioner*96 with the approval of the Secretary, the period for which such return is made. Section 711 (a) of the code, added by section 201 of the Second Revenue Act of 1940, and paragraph (3) of that subdivision, as amended by section 213 of the Revenue Act of 1942, read in material part as follows: (a) Taxable Years Beginning After December 31, 1939. -- The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13 (a) (2), for such year except that the following adjustments shall be made: * * * * (3) Taxable year less than twelve months. -- (A) General Rule. -- If the taxable year is a period of less than twelve months the excess profits net income for such taxable year (referred to in this paragraph as the "short taxable year") shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the short taxable year and dividing by the number of days in the short taxable year. The tax shall be such part of the tax computed on such annual basis as the number of days in the short taxable year is of the number of days in the twelve months*97 ending with the close of the short taxable year. *1079 (B) Exception. -- If the taxpayer establishes its adjusted excess profits net income for the period of twelve months beginning with the first day of the short taxable year, computed as if such twelve-month period were a taxable year, under the law applicable to the short taxable year, and using the credits applicable in determining the adjusted excess profits net income for such short taxable year, then the tax for the short taxable year shall be reduced to an amount which is such part of the tax computed on such adjusted excess profits net income so established as the excess profits net income for the short taxable year is of the excess profits net income for such twelve-month period. The taxpayer (other than a taxpayer to which the next sentence applies) shall compute the tax and file its return without the application of this subparagraph. If, prior to one year from the date of the beginning of the short taxable year, the taxpayer has disposed of substantially all its assets, in lieu of the twelve-month period provided in the preceding provisions of this subparagraph, the twelve-month period ending with the close of*98 the short taxable year shall be used. For the purposes of this subparagraph, the excess profits net income for the short taxable year shall not be placed on an annual basis as provided in subparagraph (A), and the excess profits net income for the twelve-month period used shall in no case be considered less than the excess profits net income for the short taxable year. The benefits of this subparagraph shall not be allowed unless the taxpayer, at such time as regulations prescribed hereunder require, makes application therefor in accordance with such regulations, and such application, in case the return was filed without regard to this subparagraph, shall be considered a claim for credit or refund. The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary for the application of this subparagraph. Section 213 (b) of the Revenue Act of 1942 provides that the above amendments "shall be applicable to taxable years beginning after December 31, 1939." In support of his determination that the excess profits tax return filed by the petitioner for the calendar year 1940 is a return for the six-month period ended June 30 the respondent*99 cites section 35.711 (a)-4 of Regulations 112, in which it is stated: * * * A short taxable year is any taxable period of less than 12 months. If the period from the date of incorporation of a corporation to the end of its first accounting period, or the period from the beginning of its last accounting period to the date it ceases operations and is dissolved, retaining no assets, is a period of less than 12 months, such period is a short taxable year. * * * In G. C. M. 23064; C. B. 1942-1, p. 140, it is stated: In the instant case the facts show that the corporation was dissolved on June 30, 1940, and retained no assets whatever. Under such circumstances, this office cannot distinguish, in so far as present inquiry is concerned, between the case of a new corporation and one which has completely dissolved. This Office is of the opinion, therefore, that the excess profits tax return filed by the M Company covering the period January 1, 1940, to June 30, 1940, as of which date the taxpayer corporation ceased operations and dissolved, the corporation retaining no assets, is a return for a period of six months; and that under the provisions of section 711 (a)*100 3 of the Internal Revenue Code, supra, the excess profits net income should be placed on an annual basis. To hold otherwise would mean that against the six-months' income there would be allowed an excess profits credit based on an average base period net income involving 12 months. *1080 The entire contention of the petitioner in this case rests upon the tenuous ground that it did not surrender its charter at the time that it was completely liquidated on June 30, 1940. It claims that since under the laws of the Commonwealth of Pennsylvania it had a legal existence throughout the calendar year 1940, its return correctly covered the entire calendar year. It therefore argues that the respondent was in error in determining its excess profits net income for the year 1940 in accordance with the provisions of section 711 (a) (3) (A) of the Internal Revenue Code. It may be conceded that technically the petitioner had a legal existence for the entire calendar year 1940. Under the laws of the Commonwealth of Pennsylvania a corporation's charter is not canceled by a complete liquidation of the corporation. Some action must be taken either by the corporate officers or by the proper *101 state authorities for the cancellation of the charter before the corporate existence ceases. It does not follow from this that a corporation may not be dissolved for the purpose of the income and excess profits tax prior to the date that its charter is canceled. There may be a de facto dissolution even though there is no de jure dissolution. There can be no doubt that upon the stipulated facts there was a de facto dissolution of the petitioner corporation on June 30, 1940. Thereafter the corporation had no capital, no income, and no expenses. It was a mere empty shell. There appears to us to be no basis for the petitioner's contention. The excess profits tax credit is based on an average base period net income of 12 months. The scheme of the statute does not require a modification of the excess profits credit in the case of a return filed for a period of less than 12 months, but requires that the net income to which the excess profits credit is applicable shall be determined for a period of 12 months in the manner provided by the statute. We think it clear that it was the intention of Congress to apply the excess profits credit for a 12-month period against the net*102 income of a 12-month period. See General Aniline & Film Corporation, 3 T. C. 1070. Consequently, we think, the income of a corporation which has completely liquidated during a taxable year must be placed on an annual basis. In Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, it is stated: * * * The intention of the lawmaker controls in the construction of taxing acts as it does in the construction of other statutes, and that intention is to be ascertained, not by taking the word or clause in question from its setting and viewing it apart, but by considering it in connection with the context, the general purposes of the statute in which it is found, the occasion and circumstances of its use, and other appropriate tests for the ascertainment of the legislative will. * * * See also Helvering v. Weaver Co., 305 U.S. 293. *1081 We are of the opinion that the respondent did not err in treating the petitioner's excess profits tax return filed for the year 1940 as a return for the period January 1 to June 30, 1940. The petitioner makes no contention that section 711 (a) (3) (B) of*103 the code applies to it. The petitioner further alleges that the respondent erred in deducting from its excess profits tax credit the amount of $ 754.10 representing 6 percent of the net capital reduction effected on June 30, 1940. This deduction was made in accordance with the respondent's interpretation of section 713 of the code, which, so far as material, provides as follows: SEC. 713. EXCESS PROFITS CREDIT -- BASED ON INCOME. (a) Amount of Excess Profits Credit. -- The excess profits credit for any taxable year, computed under this section, shall be -- (1) Domestic corporations. -- In the case of a domestic corporation -- * * * * (C) Minus 6 per centum of the net capital reduction as defined in subsection (g). * * * * (g) Adjustments in Excess Profits Credit of Account of Capital Changes. -- For the purposes of this section -- * * * * (2) The net capital reduction for the taxable year shall be the excess, divided by the number of days in the taxable year, of the aggregate of the daily capital reduction for each day of the taxable year over the aggregate of the daily capital addition for each day of the taxable year. We think that this contention of the petitioner must*104 be sustained. The 12-month period with which we are dealing is not the calendar year 1940, but a 12-month period ended on June 30, 1940. The last sentence of section 711 (a) (3) (A) of the code provides: * * * The tax shall be such part of the tax computed on such annual basis as the number of days in the short taxable year is of the number of days in the twelve months ending with the close of the short taxable year. [Emphasis supplied.] The petitioner's short taxable year ended on June 30, 1940. There was no reduction in the petitioner's capital investment prior to June 30, 1940. The capital reduction came at the time the petitioner corporation was completely liquidated on that date -- not prior thereto. Therefore, there is no occasion for a reduction in the excess profits tax credit to which the petitioner is entitled. Decision will be entered under Rule 50.