Sunburst Ref. Co. v. Commissioner

SUNBURST REFINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sunburst Ref. Co. v. Commissioner Docket No. 43421. United States Board of Tax Appeals 23 B.T.A. 824; 1931 BTA LEXIS 1814; June 23, 1931, Promulgated *1814 1. NET LOSS - STATUTORY "TAXABLE YEAR." - Incident to the voluntary change in 1925 of the accounting period of petitioner from a fiscal year ending November 30 to a calendar year, made with the full approval of the Commissioner, a separate return was filed and accepted for the month of December, 1925. Pennsylvania Electric Steel Casting Co.,20 B.T.A. 602, and Corno Mills Co.,21 B.T.A. 712, followed, in holding that the one month of December, 1925, for which an income-tax return was made, was a taxable year in the contemplation of section 206(b) of the Revenue Act of 1926, and was the second succeeding taxable year following the fiscal year ending November 30, 1924, and exhausted petitioner's right to carry forward a statutory net loss for the fiscal year ending November 30, 1924. Consequently, petitioner's statutory net loss for the fiscal year ended November 30, 1924, can not be carried forward and used as a deduction in computing petitioner's net income for the calendar year 1926. 2. Value of certain shares of the capital stock of the petitioner delivered to the Stevenson Consolidated Oil Company for crude oil, determined. George*1815 E. Hurd, Esq., H. C. Hall, Esq., Homer G. Murphy, Esq., and William B. Finlay, C.P.A., for the petitioner. J. E. McFarland, Esq., for the respondent. BLACK *825 In this proceeding the petitioner seeks a redetermination of its income-tax liability for the calendar year 1926, for which year the respondent has determined a deficiency in the amount of $2,846.31. Petitioner alleges as error respondent's disallowance as a deduction, in determining petitioner's net income for the calendar year 1926, of $18,783.73 of petitioner's statutory net loss for the fiscal year ending November 30, 1924. Respondent by an amended answer filed at the hearing affirmatively alleged that the capital stock which the petitioner exchanged under the terms of a certain contract with the Stevenson Consolidated Oil Company, in payment for crude oil, was valueless and that he erred in treating it as worth par, or $1 per share, in his computations of the cost of goods sold, and that the deficiency should be increased accordingly. FINDINGS OF FACT. The petitioner is a Montana corporation with its principal place of business at Great Falls in that State. The petitioner duly*1816 filed its income-tax returns for the fiscal year ending November 30, 1924, and for the fiscal year ending November 30, 1925. For the fiscal year ending November 30, 1924, the petitioner showed in its return a net loss of $32,148.45, but in this proceeding asks only that $18,783.73 of such net loss be carried forward and used as a deduction in computing petitioner's net income for the calendar year 1926. For the fiscal year ending November 30, 1925, the petitioner had a statutory net loss of $28,589.25, and this amount has been *826 agreed to by stipulation between petitioner and respondent. With the permission and approval of the Commissioner, the petitioner then changed its accounting period to a calendar year basis and filed its return pursuant to law for the period December 1 to December 31, 1925, and for this period petitioner had a statutory net loss of $6,170.96. The petitioner thereafter duly filed its return for the calendar year 1926. For the calendar year 1926 the petitioner returned a net income of $152,086.84, after using as a deduction from gross income its statutory net losses for the calendar month of December, 1925, and for the fiscal year ending November 30, 1925, and*1817 $18,783.73 of its statutory net loss for the fiscal year ending November 30, 1924. Respondent has added to the net income returned by petitioner $18,783.73 as representing a net loss for 1924, which he alleges petitioner erroneously carried forward and used as a deduction in computing net income for 1926, and $300 donations which petitioner erroneously deducted. With these additions respondent arrived at a figure of $171,170.57, as representing petitioner's net income for the calendar year 1926, and it is upon that revised net income that the deficiency of $2,846.31 is based. From 1923 to 1925 petitioner was embarrassed by various financial difficulties. Its losses for the years 1923, 1924 and 1925 were $3,142.61; $20,874.89 and $42,235.17, respectively, and it was not until 1926 that it showed a profit. In 1924 liens were filed against petitioner's property in the amount of $158,800, and suit was started for the foreclosure of these liens, and the State of Montana during this period was prosecuting actions for the recovery of over $70,000 alleged to be due the State for taxes. The law under which this tax was created was later held to be unconstitutional. There was never*1818 an open market for the sale of petitioner's stock. However, during the period under consideration some 140,000 shares of its stock were sold by solicitation on subscription at par, $1 per share. Smaller amounts were sold by brokers at 50 cents a share and there were a few sales at as high as 80 cents a share made by brokers and from these prices the broker deducted a fee of 10 cents on each share as his commission for selling. In the latter part of 1925 the financial situation of the petitioner materially improved. The foreclosure suit brought against it by creditors had been settled by agreement, permission being granted to the corporation to pay the claims held against it on the installment basis. The claims held by the State of Montana against the corporation for unpaid taxes had been declared void by the courts, and entirely disposed of by the middle of 1925. In 1926 the corporation made a net profit of more than $150,000. This was the first year it had conducted its operations profitably. *827 From all the evidence we find that the stock of the petitioner had a fair market value for the calendar month December, 1925, of $1 per share and for the year 1926 of*1819 $1 per share. OPINION. BLACK: In the case of , and , the Board had before it claims for net loss deductions in all respects similar to the situation in the instant case. In those cases we held adversely to the contention which petitioner is now making. In , we said: The petitioner takes the position that the term "taxable year" means a 12-month period, and contends that its right to deduct a loss from the net income for the two succeeding taxable years, as provided in section 206 of the Revenue Act of 1926, can not be restricted to a period of 16 months. It is to be borne in mind that the petitioner filed returns for the fiscal years ending August 31, 1923, and August 31, 1924, and that in 1924 it voluntarily, but subject to and with the approval of the Commissioner, changed its accounting period from a fiscal to a calendar year basis, and filed a return for the period September 1, 1924, to December 31, 1924. In section 200(a) of the Revenue Act of 1926, it is provided: The term "taxable*1820 year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232. The term "fiscal year" means an accounting period of twelve months ending on the last day of any month other than December. The term "taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made. * * * An identical provision is contained in section 200(a) of the Revenue Act of 1924. Under prior revenue acts, the term "taxable year" was defined as meaning a 12-month period but, beginning with the Revenue Act of 1924, Congress has seen fit to define a taxable year differently and to provide that the term "taxable year" includes, in the case of a return made for a fractional part of a year, the period for which such return is made. See . In *1821 , the court said: Having due regard to the various statutes in which the term is used by Congress, I think the words "taxable year", when fairly interpreted, mean taxable period, whether for twelve months or less. Any doubt or ambiguity regarding the meaning of "taxable year" has been removed in section 200 of the Revenue Acts of 1924 and 1926. * * * It is my conclusion, therefore, that the term "taxable year" includes a period of less than twelve months when a taxpayer voluntarily, but subject to, and with the approval of, the Commissioner, changes its accounting period from a fiscal to a calendar year basis * * *. *828 The loss sustained by the petitioner for the fiscal year ending August 31, 1923, having been allowed as a deduction in computing the petitioner's net income for the fiscal year ending August 31, 1924, and in computing the petitioner's net income for the four-month period ending December 31, 1924, which period constitutes a "taxable year" within the meaning of the statute, we are of the opinion that the petitioner has had the benefit of the provisions of section 206. Accordingly, *1822 the respondent's action in disallowing the balance of the loss as a deduction in 1925 is sustained. Upon the authority of the above cited cases, we hold that the $18,783.73 of petitioner's statutory net loss for the fiscal year ended November 30, 1924, involved in this proceeding, may not be used as a deduction in computing petitioner's net income for the calendar year 1926. The remaining issue involves the value of certain shares of the petitioner's capital stock which it delivered to the Stevenson Consolidated Oil Company in payment for crude oil. The respondent in his determination of the deficiency herein treated this stock in the same manner as the taxpayer had treated it in his original tax returns, to wit, at par or $1 per share. At the hearing, on account of the fact that the value of this stock was at issue in the Stevenson Consolidated Oil Company case, , and the petitioner therein was contending for a value of 25 cents per share in determining its own net income, the respondent amended his answer in this proceeding and alleged that the stock when paid out by petitioner in the purchase of crude oil had no value and asked that the deficiency*1823 be increased accordingly. In our findings of fact we have found that the stock of petitioner had a fair market value of $1 per share in 1926 and $1 per share for the calendar month of December, 1925. We have made no findings of the fair market value of this stock for the fiscal year ending November 30, 1924, and none for the fiscal year ending November 30, 30, 1925, because under our holding herein the amount of the statutory net loss of petitioner for the fiscal year ending November 30, 1924, is immaterial, for none of it can be carried forward and used as a deduction in computing petitioner's net income for the taxable year 1926. Petitioner's statutory net loss for the fiscal year ending November 30, 1925, was stipulated at the hearing to be $28,589.25. Therefore, a finding as to the fair market value of this stock for its fiscal year ending November 30, 1925, would not affect the statutory net loss already stipulated by the parties. Now, as to petitioner's statutory net loss for the calendar month of December, 1925, inasmuch as the figure of $1 per share of the stock of the petitioner was used in figuring the cost of goods sold in arriving at the statutory net loss of $6,170.96, *1824 and that figure has not been changed by our findings of fact, the statutory net loss for the taxable period, the calendar month of December, 1925, remains $6,170.96. *829 There being no change in computing the cost of goods sold by petitioner for the taxable year 1926, and there being no change in the statutory net loss of petitioner for the fiscal year ending November 30, 1925 (stipulated at the hearing), and no change in the statutory net loss for the taxable period, calendar month of December, 1925, both of which have already been allowed by respondent in computing petitioner's deficiency for 1926, respondent's motion to increase the deficiency is denied. Decision will be entered under Rule 50.