Steuben County Wine Co. v. Commissioner

STEUBEN COUNTY WINE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Steuben County Wine Co. v. Commissioner Docket No. 11035. United States Board of Tax Appeals 14 B.T.A. 746; 1928 BTA LEXIS 2914; December 17, 1928, Promulgated *2914 The disallowance of deductions for obsolescence of good will due to prohibition legislation and the reduction of invested capital by inadmissible assets create no such abnormality as to entitle petitioner to special assessment. Russel Wheel & Foundry Co.,3 B.T.A. 1168, followed. D. H. James, Esq., for the petitioner. J. L. Backstrom, Esq., for the respondent. SIEFKIN *746 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1919 in the amount of $58,633.95. The petition alleges error on the part of the respondent in: (1) Denying petitioner's application for assessment of its profits tax under the provisions of section 328 of the Revenue Act of 1918, based upon his finding that no exceptional hardship exists evidenced by gross disproportion between the tax computed without benefit of section 328 and the tax computed by reference to the representative corporations specified in section 328, and (2) In reducing petitioner's surplus at the beginning of the year 1919, in the amount of $66,740.40, the same being the prorated amount of the 1918 income and excess-profits*2915 taxes payable in 1919 upon the income of the petitioner for the year 1918. FINDINGS OF FACT. The petitioner is an Illinois corporation with principal office at Chicago. The business was started in Jackson, Mich., in 1869 and in 1874 or 1875 a branch was opened in Chicago. Petitioner, prior to the advent of prohibition, was engaged in the business of selling wine and all kinds of liquors. It was necessary to keep the liquor for a period of four years in order to mature it, necessitating a large investment. The bulk of petitioner's business was in Chicago, although some business was done throughout the country. The greatest volume of petitioner's business was done since March 1, 1913, due to the fact that there was a great demand for Old Taylor Whiskey which petitioner sold. Petitioner ceased doing business in the latter part of June, 1919, due to the adoption of national prohibition. In 1907 and 1908 the average annual sales made by petitioner were $445,000. From 1909 to 1913 the average was $689,000. The average from 1914 to 1919 was $1,202,000. In 1918 the sales amounted to $1,894,699.74, and for the part of the year 1919 in which petitioner *747 was doing*2916 business the sales amounted to $1,072,314.78. At the beginning of the year 1919 the books of petitioner showed invested capital of $982,037.66. This the respondent reduced to $696,665.20, by eliminating inadmissible assets in the amount of $216,952.23. In 1918 petitioner had good will written on its books at a figure of $225,000. Some of this was written off in 1918. In 1919, $125,000 was written off for obsolescence of good will, due to prohibition legislation. The respondent disallowed the deduction claimed by the petitioner and the petitioner's tax for 1918 was thereby increased. OPINION. SIEFKIN: The petitioner contends that it comes within the provisions of section 327(d) of the Revenue Act of 1918 and that it is entitled to special assessment. Section 327(d) of the Revenue Act of 1918 provides: That in the following cases the tax shall be determined as provided in section 328: * * * (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional*2917 hardship evidence by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. The respondent disallowed petitioner's claim for deductions for obsolescence of good will due to prohibition legislation. We have held heretofore that the revenue acts preclude the allowance of deductions for obsolescence of good will. ; see also *2918 . The respondent reduced petitioner's invested capital for the year 1919 by $216,952.23, representing inadmissible assets. In , and , we held that no abnormality justifying special assessment exists merely by reason of statutory exclusion. Since the respondent's action in reducing invested capital and in disallowing a deduction for obsolescence of good will due to prohibition legislation was in accordance with the provisions of the statute, we must hold that there is no abnormality entitling petitioner to special assessment. *748 The petitioner also assigns as error the action of the respondent in reducing the invested capital of the petitioner at the beginning of the year 1919 by the amount of $66,740.40, the pro rata amount of the 1918 income and excess-profits taxes of petitioner payable in 1919. This action of the respondent must be upheld. See . Judgment will be entered for the respondent.