Mid-West Box Co. v. Commissioner

MID-WEST BOX CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Mid-West Box Co. v. Commissioner Docket No. 11066. United States Board of Tax Appeals 11 B.T.A. 1223; 1928 BTA LEXIS 3651; May 9, 1928, Promulgated *3651 1. Reduction of invested capital on account of prior-year taxes, prorated, approved. Section 1207, Revenue Act of 1926. 2. Reduction of current earnings by a tentative tax in determining the amount available for dividends held to be erroneous. 3. Action of Commissioner in excluding from invested capital certain intangibles approved. 4. Rule for application of profits-tax credit in computing the 4 per cent additional income tax under the Revenue Act of 1917 laid down in F. J. Thompson, Inc.,1 B.T.A. 535, and Yokohama Ki-Ito Kwaisha, Ltd.,5 B.T.A. 1248, followed. 5. Respondent's application of credit for profits taxes in determining income tax for year ended June 30, 1919, approved. 6. Petitioner failed to establish that it is entitled to assessment under section 210 of the Revenue Act of 1917. Herman A. Fischer, Jr., Esq., for the petitioner. A. Calder Mackay, Esq., for the respondent. LITTLETON *1223 Proceeding for the redetermination of income and profits taxes for the fiscal years and in the amounts as follows: Fiscal year ended - Overassessment Deficiency June 30, 1917 $468.41 June 30, 1918 1,834.38 June 30, 1919 $14,904.34 June 30, 1920 7,464.52 *3652 The overassessments for the years 1917 and 1918 result from the partial rejection of abatement claims. The errors alleged are the reduction of invested capital on account of prior years' taxes, reduction of invested capital by reducing current *1224 earnings by a tentative tax in determining the amount available for dividends, the exclusion from invested capital of the alleged cost of intangibles, the method of application of profits-tax credit in computing the 4 per cent additional income tax under the Revenue Act of 1917, the method of application of credit for profits taxes in determining the amount of income tax for the year ended June 30, 1919, and the denial of a petition for assessment under section 210 of the Revenue Act of 1917. FINDINGS OF FACT. 1. The petitioner is an Indiana corporation with its principal office at Chicago, Ill. 2. The respondent computed petitioner's taxes for the fiscal year ended June 30, 1917, as follows: Excess-profits tax $81,573.61 6/12 account fiscal year 40,786.81 Net income $199,818.80 Deduct excess-profits tax 40,786.81 Taxable at 2% 159,031.99 3,180.64 Taxable at 4% 79,516.00 3,180.64 Excess-profits tax as above 40,786.81 Total tax 47,148.09 *3653 3. The respondent, in determining petitioner's invested capital for the fiscal year ended June 30, 1918, reduced the amount thereof on account of income tax for the preceding fiscal year, prorated from the due dates. The excess-profits tax for said year was computed on the basis of invested capital as so reduced. 4. The respondent, in determining petitioner's invested capital for the fiscal year ended June 30, 1918, under both the Revenue Act of 1917 and the Revenue Act of 1918, reduced the amounts thereof by $26,108.47, representing the total income and profits taxes as determined by respondent for the preceding fiscal year, prorated from the due dates. Having so reduced petitioner's invested capital, the respondent in determining the deficiency computed petitioner's excess-profits tax at the rate provided in the Revenue Act of 1917 and also at the rates provided in the Revenue Act of 1918, and took the sum of six-twelfths of said sums as the adjusted tax on which the deficiency is based. 5. The respondent, in determining petitioner's invested capital for the fiscal year ended June 30, 1919, reduced the amount thereof by $3,620.48, which sum represented income and profits*3654 taxes for the preceding fiscal year, as determined by the respondent, prorated from *1225 the respective due dates. Having so reduced petitioner's invested capital, the respondent in determining the deficiency, computed the excess-profits tax by allowing an excess-profits credit derived from the invested capital as so reduced. 6. The respondent, in determining petitioner's invested capital for the fiscal year ended June 30, 1919, reduced the amount thereof by an amount representing the difference between the income and profits taxes for the fiscal year ended June 39, 1917, as determined by him and the amount of $43,261.81, paid on account of such taxes in the year 1918. The respondent used such decreased amount of invested capital in computing petitioner's excess-profits taxes for the year ended June 30, 1919. 7. The respondent in his determination under the Revenue Act of 1917 of petitioner's invested capital for the fiscal year ended June 30, 1918, reduced the amount thereof by $5,469.63, which sum he designated as "net surplus adjustment." The respondent arrived at the amount of that adjustment by (a) computing the portion of two dividends of $4,500 each which were*3655 paid out of surplus, (b) adjusting such portion by excluding a part thereof corresponding to the fractions of that fiscal year which had expired when they were paid, and (c) taking the sum of said adjusted amounts. In computing the portions of said two dividends which were paid out of surplus the respondent reduced the amount of current earnings available for use in the payment of dividends on the dates when said dividends were paid, by a tentative tax representing an accrual of income and profits taxes for the then current year. In determining the excess-profits tax for the fiscal year ended June 30, 1918, respondent used as a basis the invested capital as so reduced. 8. The respondent, in determining petitioner's invested capital for the fiscal year ended June 30, 1919, excluded from petitioner's invested capital the sum of $75,000 under the heading of "Good Will (disallowed)." Said sum of $75,000 included an asset which was obtained from the K. I. Herman Co. in the preceding fiscal year. On December 31, 1917, petitioner acquired the intangible property of the going business theretofore conducted by K. I. Herman Co., an Illinois corporation, and, as a part of the contract*3656 for the acquisition of said business, petitioner undertook to pay, and prior to the beginning of the fiscal year 1919 did pay, a definite sum for the intangible assets of said company, including leases, purchase contracts, sales contracts and good will. In consideration of the payment of the definite sum above referred to, the directors of K. I. Herman Co., on May 3, 1925, ordered its officers to execute and deliver to the petitioner, and said officers did thereupon execute and deliver to the petitioner, *1226 a bill of sale which included all of that company's property "of every kind and nature whatsoever, and of whatsoever the same may consist and wherever the same may be situated." The amount paid to the K. I. Herman Co. was paid specifically as a separate item and specifically for the property referred to, which property the petitioner actually enjoyed from and after January 1, 1918. Simultaneously with the purchase of the intangibles, petitioner also purchased from the K. I. Herman Co. all of its tangible assets, including its plants, inventories, etc., and assuming its debts. The petitioner gave therefor its own stock to the par value of $87,500, which stock then*3657 had an actual value of $182,186.88, which latter sum also represented the excess of the value of the tangibles over the amount of indebtedness assumed by the petitioner. 9. The respondent, in determining petitioner's income tax for the fiscal year ended June 30, 1919, first computed the amounts of its excess-profits and war-profits taxes at 1918 rates and stated their total amount as $21,098.61. He next computed the excess-profits tax at 1919 rates and found the amount thereof to be $8,467.41. He then took six-twelfths of the amount computed at 1918 rates ($21,098.61) and six-twelfths of that computed at 1919 rates ($8,467.41), added them and found the sum to be $14,783.01. For the purpose of ascertaining the income tax at 1918 rates and also at 1919 rates, the respondent deducted from the net income the average war-profits and excess-profits taxes in the amount of $14,783.01, and also the $2,000 specific exemption, and applied to the difference the 12 per cent income-tax rate (applicable to 1918) and the 10 per cent rate (applicable to 1919), and computed as the adjusted income tax the sum of six-twelfths of the amounts so arrived at, at the 12 per cent and 10 per cent rates. *3658 10. In February, 1923, the petitioner filed with the respondent a petition for assessment of its excess-profits tax for the fiscal year ended June 30, 1917, pursuant to the provisions of section 210 of the Revenue Act of 1917. The petition was denied by the respondent. OPINION. LITTLETON: Although the petitioner states that the taxes in controversy are taxes for the years ended June 30 of each of the years 1917, 1918, 1919, and 1920, there are no allegations of error as to the year ended June 30, 1920. Hence we can find no error in the respondent's determination of deficiency for that year. The error alleged as to the fiscal year ended June 30, 1917, is that the respondent, in computing the amount subject to the 4 per cent tax under the Revenue Act of 1917, credited the amount of the *1227 excess-profits tax against the income for the entire year, instead of crediting it to the income for that portion of petitioner's fiscal year which fell within the calendar year 1917. This question has on a number of occasions been decided adversely to petitioner's contention. *3659 ; . The action of respondent is approved. As to the reduction of invested capital for the fiscal years ended in 1918 and 1919 on account of taxes for prior years, the respondent's method of computation must be approved in view of section 1207 of the Revenue Act of 1926 (), but adjustment should be made in each of the years to reflect the changes effected by this decision. As to finding No. 7, the respondent erred in reducing invested capital for the fiscal year ended June 30, 1918, by subtracting from current earnings a tentative tax in determining the amount of such income available for dividends. See , and numerous later decisions. Included in the amount of $75,000 which the respondent excluded from invested capital for the fiscal year ended June 30, 1919, was an item alleged by the petitioner to have been acquired at a cost of $25,000. The respondent denies that the item cost the petitioner $25,000. As no proof was offered by the petitioner we can not say*3660 that the asset involved cost the petitioner anything. The petitioner claims that the transactions whereby it acquired the tangibles and intangibles of the K. I. Herman Co. were separate and distinct, and that therefore the intangibles, including good will, should go into invested capital at cost. From the allegations of fact admitted by the respondent, the petitioner's position in this respect appears to be correct. But, as we said above, the cost is not established. The failure of the petitioner to establish cost is fatal to its claim. The petitioner asks, as an alternative, that we make an allocation between the tangibles and intangibles along the lines of the . The rule laid down in that case is not applicable where, as here, the intangibles were acquired separately for a definite sum. As to finding of fact No. 9, the petitioner alleges that error was committed in that the respondent computed the income tax by allowing as a credit the average of the amounts of profits taxes, whereas the income tax should have been computed, (a) at 1918 rates using as a credit the profits tax ascertained at 1918 rates, (b) at 1919 rates*3661 using as a credit the profits tax ascertained at 1919 rates, and (c) taking the sum of one-half the amounts as computed. Section 205 *1228 (b) of the Revenue Act of 1918, upon which petitioner relies, refers only to the computation of the income tax and says nothing about the application of credits. The income tax on corporate income is imposed on net income for each year less the credits allowed by section 236, which, as far as the taxpayer is concerned, are: "The amount of taxes imposed by Title III [profits taxes] for the same taxable year;" and the $2,000 allowed domestic corporations. The words we have italicized obviously must be applied in the present case to the fiscal year, and not to the parts of the fiscal year falling within the calendar year. Section 236 makes no provision for splitting the credit for profits taxes and applying a part of it to a part of a fiscal year, and we can not say that it shall be done in that manner. It is shown by the respondent's computation that after determining profits taxes for "the same taxable year" (i.e., fiscal year ended June 30, 1919), he applied the amount thereof, plus the $2,000, as credits and then proceeded to*3662 compute the income tax as directed by section 205(b), namely by applying to one-half of the remainder the 1918 rate of 12 per cent, and to the remaining one-half, the 1919 rate of 10 per cent, and taking the sum of those figures as representing the income tax. We fail to see wherein the respondent erred. Cf. . In regard to the claim for assessment under section 210 of the Revenue Act of 1917, all that is admitted by the respondent is that a petition for such assessment was filed and that the petition was denied. We see nothing in the facts found which would justify a holding that respondent erred in denying the petition. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50. ARUNDELL ARUNDELL, dissenting: I am constrained to disagree with the majority opinion on that branch of the case dealing with the application of the profits-tax credit in computing the 4 per cent additional income tax under the Revenue Act of 1917. This question has been repeatedly before the courts and all have reached a conclusion contrary to the position of the Board. Semple & Co. v. Lewellyn, 1 Fed.(2d) 745,*3663 affirmed in United States v. Semple, 10 Fed.(2d) 1023; certiorari denied, 273 U.S. 698; Curtis & Co. v. United States,62 Ct.Cls. 115; 5 Am.Fed. Tax Rep. 6025; and Bowers v. Carl Schoen Silk Corporation, 16 Fed.(2d) 1014. Since the above court decisions were handed down the Commissioner has changed his former practice so as to conform to them and has made public announcement of the changes in Treasury Decision 3981, published in Cumulative Bulletin VI-I, p. 256. He no longer contends for the position he originally *1229 took in the instant case. In view of the unanimity of the decisions of the courts on this question, I feel that we should recede from the position we have heretofore taken on the question. LANSDON, SMITH, TRAMMELL, TRUSSELL, and MORRIS concur in the dissent.