Continental Baking Corp. v. Commissioner

CONTINENTAL BAKING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Continental Baking Corp. v. Commissioner Docket No. 61603. United States Board of Tax Appeals 30 B.T.A. 354; 1934 BTA LEXIS 1340; April 11, 1934, Promulgated *1340 In July 1925 a domestic corporation keeping its accounts on the accrual basis filed a capital stock tax return in which it claimed exemption from the tax as not being engaged in business. In 1929 the respondent denied the claimed exemption, and in that year the tax was paid. In its income tax return for 1929 a deduction was taken for the amount of the tax paid. Held, the tax accrued in 1925 and was not a proper deduction from income in 1929. Raymond F. Garrity, Esq., for the petitioner. E. L. Corbin, Esq., for the respondent. MARQUETTE *354 A deficiency in income tax has been asserted by the respondent herein for the calendar year 1929 in the amount of $5,393.08. The petitioner assigns as error (a) the failure of the respondent to allow as a deduction from gross income capital stock tax paid during the year 1929 by the Bakeries Service Corporation in the amount of $49,028, and (b) the failure to allow as a deduction from gross income depreciation on patents sustained during the year 1929 by the Bakeries Service Corporation in the amount of $56,960.05. The parties have stipulated the amount of the deduction properly to be allowed under*1341 (b), leaving only the question under the first assignment of error for decision. A stipulation of facts was filed, from which we make the following findings of fact. FINDINGS OF FACT. The Continental Baking Corporation is a corporation organized and existing under the laws of the State of Maryland, with its principal place of business in New York City. In 1919 the Bakeries Service Corporation was a subsidiary of the petitioner, Continental Baking Corporation, and returned its income for the year 1929 on Form 1122, in the consolidated income tax return, Form 1120, filed by the petitioner for the calendar year 1929. The Continental Baking Corporation and the Bakeries Service Corporation kept their books of account on the accrual basis, and the same were so kept in the calendar years 1925 to 1929, inclusive. During the calendar year 1929 the Bakeries Service Corporation, owners of certain letters patent, sustained depreciation thereon in the amount of $43,439.84, and it is entitled to this amount as a deduction in its income tax return for the year 1929. The Continental Baking Corporation filed its capital stock tax return, Form 707, as required by law, in July 1925, *1342 with the collector *355 of internal revenue at Chicago, Illinois, which covered the taxable period ended June 30, 1926. No capital stock tax was shown to be due on the return. The petitioner claimed exemption from capital stock tax on the return on the alleged grounds that during the period covered by the return it was a holding company, not actively engaged in the transaction of business, and was exempt from the capital stock tax. On July 12, 1928, petitioner received from the respondent its first communication relative to its capital stock tax return for the year ended June 30, 1926. On December 13, 1928, respondent advised petitioner that it was not exempt and proposed a capital stock tax of $60,765 for the year ended June 30, 1926. On December 26, 1928, the capital stock tax was assessed against the petitioner. Demand was made for this tax on January 16, 1929, by the collector of internal revenue, and on January 25, 1929, a claim for abatement was filed. On May 20, 1929, the respondent advised the petitioner that it was liable for the capital stock tax for the year ended June 30, 1926, but allowed the abatement claim in the amount of $11,737. The balance of $49,028*1343 was disallowed and was paid by the Bakeries Service Corporation on June 11, 1929. No capital stock tax was accrued on the books of account of the petitioner or the Bakeries Service Corporation during either the calendar year 1925 or the calendar year 1926, and no reserve for this tax was set up on its books in any manner. No deduction was claimed or allowed in the income tax returns for either of the years 1925 or 1926. The Continental Baking Corporation claimed in its capital stock tax return and in the claim for abatement filed by it that it was not "doing business" and therefore was not subject to the capital stock tax. In 1929, when the tax of $49,028 was paid to the collector of internal revenue, it charged the tax as an expense on its books for the year 1929, and it took this item of $49,028 as a deduction on its return for that year. The respondent has disallowed the claimed deduction. In addition to the payment of the capital stock tax in the amount of $49,028 on June 11, 1929, the Bakeries Service Corporation paid $2,091.86 representing interest on the tax accrued from January 25, 1929, the date of the filing of the abatement claim mentioned above, to the date*1344 of the payment of the tax on June 11, 1929. In its income tax return for 1929 the Bakeries Service Corporation deducted from its gross income the interest thus paid. The respondent in his final determination allowed this deduction. OPINION. MARQUETTE: The issue to be decided is whether the capital stock tax of the Bakeries Service Corporation accrued in 1925 or in 1929, *356 in which latter year the respondent determined it was not exempt from such tax. If it was a proper accrual for 1929 the petitioner prevails; otherwise, it is not entitled to deduct the amount of the tax in its income tax return for that year. ; affd., . The applicable provisions of the Revenue Act of 1924 and of the respondent's regulations are set forth in the margin. 1 *1345 The petitioner maintains that inasmuch as the capital stock tax return filed claimed the corporation was exempt as one not "engaged in business" and by the regulations "the determination of liability rests with the Commissioner", this decision of liability by the Commissioner was a "fact" necessary to fix the liability, and no tax could be said to have accrued until such decision was made. There appears to be no dispute between the parties as to the law of the case. They both cite and rely upon practically the same decisions, but differ in their application. The question is narrowed then to this: Was the determination of liability by the respondent such an event or fact as would postpone the accrual of the liability until such determination was made? We are constrained to answer this question in the negative. At June 30, 1925, all the facts existed and were known upon which the liability to the tax was to be predicated; it was then ascertainable as a matter of law whether the corporation was "carrying on or doing business" within the intent and meaning of the statute, and we do not think the incidence of the tax or its accrual could be postponed by the filing of a return in which*1346 exemption from the tax was claimed. Since the accounts were kept on the accrual basis, the liability became fixed at July 1, 1925, if the corporation was not exempt, and it having been so determined by the respondent, the liability to the tax accrued in 1925 and not in 1929. ; ; ; ; affd., ; Columbian*357 ; ; The respondent therefore correctly denied as a deduction in the year 1929 the amount of the capital stock tax which accrued in 1925. The parties have stipulated that the Bakeries Service Corporation is entitled to a deduction in the amount of $43,439.84 from its 1929 income for depreciation on certain letters patent, and an allowance will be made therefor upon recomputation. Judgment will be entered under Rule 50. Footnotes 1. SEC. 700. (a) * * * (1) Every domestic corporation shall pay annually a special excise tax with respect to carrying on or doing business, equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. * * * (2) * * * (b) The taxes imposed by this section shall not apply in any year to any corporation which was not engaged in business (or, in the case of a foreign corporation, not engaged in business in the United States) during the preceding year ending June 30 * * *. [Regulations 64.] ART. 31. Corporation claiming exemption.↩ - * * * Organizations claiming exemption should fill out Form 707 but instead of computing the tax should enter in the space provided for the computation the notation "Exemption claimed." The determination of liability rests with the Commissioner of Internal Revenue and without complete information it is impossible to make a decision. Therefore in all such cases the return so filled out must be filed with the collector, together with a comprehensive statement of the reasons for claiming exemption * * *.