Parks-Chambers, Inc. v. Commissioner

PARKS-CHAMBERS, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Parks-Chambers, Inc. v. Commissioner Docket No. 101802. United States Board of Tax Appeals 46 B.T.A. 144; 1942 BTA LEXIS 901; January 23, 1942, Promulgated *901 1. Where a corporation had no accounting period which ended on last day of month, it had no fiscal year within meaning of section 48(b) of the Revenue Acts of 1934 and 1936, and is required by terms of section 41 of same revenue acts to compute its income on the basis of a calendar year. Held, Commissioner was authorized to reject returns filed by petitioner covering periods beginning January 26, 1935, and ending January 25, 1936, and beginning January 26, 1936, and ending January 26, 1937, and to compute petitioner's income for 1935 and 1936 upon a calendar year basis. Swift & Co. v. United States, 38 Fed.(2d) 365, followed. 2. In determining petitioner's tax liability for the calendar year 1936, the Commissioner prorated and allocated to the year 1936 340/365 of each and every income or deduction factor which affects petitioner's taxable income, and which occurred during the period from January 26, 1936, through January 26, 1937, except that he did not thus prorate and allocate to the calendar year 1936 any part of a dividend of $30,000 declared and paid by petitioner January 25, 1937. Held, that, since the dividend was paid in year 1937, petitioner*902 is entitled, under section 27(a), Revenue Act of 1936, to receive such dividends paid credit only on its income tax return of the calendar year 1937, and is not entitled to have 340/365 of such amount applied as a credit in computing its surtax on undistributed profits for the calendar year 1936. Edward R. Kane, Esq., for the petitioner. J. Marvin Kelley, Esq., for the respondent. BLACK *144 The Commissioner has determined deficiencies in petitioner's income tax as follows: [1935] $416.59 [1936] 5,081.08 Total 5,497.67 He also has determined a deficiency of $13.99 in petitioner's excess profits tax for the year 1935. The Commissioner explained his reason for the determination of the deficiencies in a statement accompanying the deficiency notice as follows: Your income has been adjusted to a calendar year basis since the forms filed for the irregular periods of January 25, 1935 to January 25, 1936 and January 25, 1936 to January 26, 1937, the dates on which your books were closed, were not fiscal year returns under Sections 41 and 48(b) of the Revenue Acts of 1934 and 1936. The dividend paid credit of $30,000.00 claimed*903 for the irregular period of January 25, 1936 to January 26, 1937 is not allowable for the period of the calendar year 1936 since these dividends were paid subsequent thereto. *145 To these determinations of the Commissioner the petitioner assigns error as follows: (a) The Commissioner has determined said taxes upon the basis of the calendar year 1935 and the calendar year 1936, whereas said taxes should be determined upon the basis of the fiscal year ending January 31, 1936, and the fiscal year ending January 31, 1937. (b) The Commissioner has denied to the petitioner any dividends paid credit for the petitioner's first taxable period under the Revenue Act of 1936, whereas the petitioner is entitled to a dividends paid credit of $30,000.00 for said taxable period. (c) If Petitioner is required to use the period ending December 31, 1935, then the Commissioner has erroneously included in Petitioner's taxable income for such period the sum of $1,787.51 upon which Petitioner has already paid income tax. (d) If Petitioner is required to use the calendar year 1936, then the Commissioner erred by failing to prorate and allocate to the calendar year 1936 340/365 of the*904 $30,000 dividend paid by Petitioner on January 25, 1937. FINDINGS OF FACT. The petitioner is a corporation with principal office at Atlanta, Georgia. It filed its returns for the periods here involved in the district of Georgia. Facts are stipulated as follows: 1. Petitioner is engaged in the business of selling at retail men's clothing and furnishings, and sporting goods and equipment. Pursuant to a general practice of the retail merchants in Petitioner's community, Petitioner does not include in its bills sent to its credit customers at the end of each month the purchases made by such customers during the last several days of the month, such purchases being included in the subsequent month's bill. Because of the foregoing practice, Petitioner closed its books of account on the following dates since Petitioner was organized as a corporation in 1927, namely: January 27, 1928 January 26, 1929 January 25, 1930 January 27, 1931 January 28, 1932 January 27, 1933 January 25, 1934 January 25, 1935 January 25, 1936 January 26, 1937 January 22, 1938 2. For each tax year since Petitioner was organized in 1927, Petitioner has made its income tax returns*905 upon the basis of a taxable year ending in January. In these returns Petitioner always used the same accounting periods which Petitioner used in keeping and closing Petitioner's books of account as described above. Such accounting periods ended on the dates shown in paragraph 1 above, and each such accounting period began where the last previous accounting period ended, so that there was never any lap or gap between such accounting periods. 3. For eight tax years prior to the two tax years here involved, Respondent, through his Revenue Agents, examined Petitioner's returns. During such eight years Respondent never objected to the use by Petitioner of the accounting periods as set forth in paragraph 1 above, and never suggested to Petitioner that Petitioner's use of the accounting periods described in paragraph 1 above *146 might be improper. In any of such eight previous years, Petitioner could have changed to the calendar year basis with only a nominal, if any, resulting additional tax. 4. For the two tax years here involved, Respondent for the first time proposes to require Petitioner to use a calendar year basis. No change was made in Petitioner's method of accounting*906 in the two tax years here involved, and Petitioner's books and accounts were kept and closed for such two tax years in exactly the same manner as for the eight previous tax years. 5. Respondent, through his Revenue Agents, knew when he accepted Petitioner's eight prior returns on the basis of the accounting periods described in paragraphs 1 and 2 above that Petitioner closed its books on the dates referred to in paragraph 1 above. No new facts with respect to Petitioner's method of keeping and closing its books came to Respondent's knowledge in connection with or with respect to the two tax years here involved. 6. In his deficiency notice covering the calendar year 1935, Respondent proposes to include in Petitioner's taxable income the sum of $1,787.51, consisting of 25/365ths of Petitioner's net income for Petitioner's accounting period beginning January 26, 1934, and ending January 25, 1935, inclusive. Petitioner has paid and Respondent has accepted and retained income tax upon Petitioner's full taxable income for the period beginning January 26, 1934, and ending January 25, 1935, inclusive, which income included the $1,787.51 referred to above. 7. In his deficiency*907 notice covering the calendar year 1936, Respondent determined that Petitioner's net income for the calendar year 1936 is $29,778.32, which figure Respondent arrived at by adding together (1) 25/365ths of Petitioner's net income for the period beginning January 26, 1935, and ending January 25, 1936, inclusive, and (2) 340/365ths of Petitioner's net income for the period beginning January 26, 1936, and ending January 26, 1937, inclusive. In so doing, Respondent pro-rated and allocated to the calendar year 1936 340/365ths of each and every income or deduction factor which affects Petitioner's taxable income and which occurred during the period from January 26, 1936, through January 26, 1937, inclusive, except that Respondent did not thus pro-rate and allocate to the calendar year 1936 any part of the dividend paid by Petitioner in January of 1937. 8. On January 25, 1937, the following resolution was passed and adopted by Petitioner's Board of Directors: RESOLVED That a dividend of 15% be and the same is hereby declared to be paid to shareholders of record on this the 25th day of January 1937. Said dividend payable immediately from the surplus of the corporation. The dividend*908 of 15% referred to in the foregoing resolution amounted a total of $30,000.00 on Petitioner's 2000 shares of stock outstanding on January 25, 1937, on which date all of such 2000 shares was owned by Parks-Chambers Investment Company, a separate corporation. 9. On January 25, 1937, an entry was made in Petitioner's journal crediting Parks-Chambers Investment Company with $30,000.00 and charging surplus with $30,000.00. Such journal entry included an expanatory note as follows: 15% dividend declared. On January 25, 1937, and immediately prior to the crediting of the $30,000.00 dividend referred to above, Parks-Chambers Investment Company was indebted to Petitioner in the sum of approximately $40,000.00, representing loans and advances made by Petitioner to Parks-Chambers Investment Company. Petitioner carried on its books only one account between itself and Parks-Chambers Investment Company. When the dividend of $30,000.00 was credited by Petitioner to Parks-Chambers Investment Company on January 25, 1937, *147 there was no restriction on the right of Parks-Chambers Investment Company to collect, use or apply such $30,000.00 in any way and at any time it saw fit. On*909 January 30, 1937, Petitioner drew and delivered to Parks-Chambers Investment Company Petitioner's check for $30,000.00. Parks-Chambers Investment Company deposited said check in its bank account, and said check was paid through the clearing house, all on January 30, 1937. Parks-Chambers Investment Company makes its Federal income tax returns upon the basis of a fiscal year ending January 31st. In its Federal income tax return for its fiscal year ending January 31, 1937, Parks-Chambers Investment Company included in its gross income the dividend of $30,000.00 from Petitioner referred to above. OPINION. BLACK: The respondent concedes error as alleged in petitioner's assignment "(c)", and adjustment for the item there involved will be made under Rule 50. The remaining issues are: (1) Whether the petitioner is entitled to use a fiscal year ending on January 31 for computing net income for each taxable year, or, if not (2) whether all or any part of a $30,000 dividend declared and paid by it on January 25, 1937, may be credited as "dividends paid" in determining petitioner's surtax on undistributed profits for the calendar year 1936. The first question is determined by certain*910 identical provisions in the Revenue Acts of 1934 and 1936 printed in the margin. 1 In applying identical provisions to those set out in the margin, relating to the use of a fiscal year in filing income tax returns, the courts and this Board have*911 strictly construed the statutory language and rejected the fiscal year basis for computing net income in cases where the accounting period involved did not end upon the last day of some calendar month. Thus in Swift & Co. v. United States, 38 Fed.(2d) 365, the taxpayer's annual accounting period, for determining profits for dividends and other business purposes, ended in October of each year. The period was composed of twelve smaller accounting groups of four or five weeks, each ending upon a Saturday and not on the last day of a month except by accident. The Government contended in that case that, since the period in dispute *148 correctly reflected the taxpayer's true income and otherwise met the substantial conditions of a fiscal year, its date of ending was unimportant. The court denied the contention so made, and in its decision, among other things, said: The contention on behalf of the defendant is that the words "ending on the last day of any month" are not to be taken literally, but may be construed to refer to a day which is not the last day of a month but somewhere near it * * *. We are unable to agree that this statute may be so construed. *912 It is not ambiguous, but positive and direct, and if not held to mean just what it says, by the words "the last day", it may mean any day between the middle of the month and the last day, or at least any day at all near the last day, and thus practically lose all meaning or significance so that it might just as well have never been enacted. * * * Typical holdings of the Board in harmony with the above decision are Clara A. McKee, Administratrix,11 B.T.A. 1381; Dewitt C. Dunn,15 B.T.A. 1042; and J. W. Vaughan,19 B.T.A. 478. In Clara A. McKee, Administratrix, supra, the question was whether a 12-month period, within which the entire business affairs of an estate were administered, could be treated as a fiscal year for computing the net income of that period. The period began April 17, 1921, at the death of the decedent and ended with the administratrix's final report on April 17, 1922. Substantially all of the estate income was collected in the first half of this period, while most of the taxes admittedly deductible from income were paid in the last half of the period. In these circumstances, the petitioner*913 contended that equity justified use of the fiscal year basis for computing the net income for the whole period. Otherwise, the estate would not get the full benefit of the deductions to which it was entitled. Basing its decision squarely upon the wording of the statute, the Board denied the contention of the petitioner in that case and, in such connection said: * * * The taxing statute specifically requires that net income shall be computed upon the basis of a twelve-month period "ending on the last day of any month other than December" or on the basis of the calendar year. A twelve-month period ending April 17th is not a "fiscal year" as defined in the statute and is not an accounting period which the respondent has authority under the statute to accept as a basis for an income tax return. Obviously these decisions are in point and decisive of the issue involved in petitioner's assignment of error (a). Since neither of the periods which petitioner claims as taxable years ends upon the last day of any month, it follows that neither may be treated as a fiscal year for computing net income, and the contentions of the petitioner on this point are not sustained. We next take*914 up for decision petitioner's assignments of error (b) and (d). Manifestly petitioner's assignment of error (b) fails when *149 we hold that it is not entitled to use a fiscal year basis, as the commissioner has determined. However, petitioner contends in assignment of error (d): If Petitioner is required to use the calendar year 1936, then the Commissioner erred by failing to prorate and allocate to the calendar year 1936 340/365 of the $30,000 dividend paid by Petitioner on January 25, 1937. The applicable statute and regulations are printed in the margin. 2 *915 The substance of petitioner's contentions in support of its assignment of error (d) is set out in its brief as follows: In determining Petitioner's tax liability for the calendar year 1936, Respondent allocated to 1936 340/365ths of every factor which enters into the computation of Petitioner's tax liability and which occurred during the fiscal year ending January 26, 1937, with the sole and single exception of the $30,000 dividend paid by Petitioner on January 25, 1937. Since no justification can possibly be found for Respondent's inconsistent treatment of the $30,000 dividend, Respondent should be required to allocate to 1936 in like manner 340/365ths of the $30,000 dividend, and Petitioner accordingly should be allowed a dividends paid credit for 1936 of 340/365ths of the $30,000 dividend. Petitioner concedes that the method by which the Commissioner has arrived at petitioner's net income for the calendar year 1936 appears to be fair and reasonable, with the exception of the dividends paid credit, and is authorized by A.R.R. 3092II-2 C.B. 190. The substance of A.R.R. 3092, referred to in petitioner's brief, is as follows: It is the opinion of the Committee, since appellant*916 closes its books on December 20 of each year, that taxable net income for the calendar year 1917 should be computed by adding that part of the income for each of the years ended December 20, 1917, and December 20, 1918, which falls in the calendar year 1917. Such income for the calendar year 1917 will be obtained by dividing taxable net income for the year ended December 20, 1917, by 12 and multiplying such one-twelfth by 11 20/31, to which should be added 11/365 of the taxable net income for the year ended December 20, 1918, * * * It *150 is clear from the deficiency notice, and is further made plain in the stipulation of facts herein, that in applying the proration method described above, the Commissioner prorated to the calendar year 1936 340/365 of each and every factor which enters into the computation of petitioner's tax liability and which occurred during petitioner's so-called fiscal year ending January 26, 1937, with the sole and single exception of the $30,000 dividend paid by petitioner on January 25, 1937. The Commissioner justifies his failure to prorate the $30,000 dividends paid credit in the same manner as he prorated all other items of income and deductions*917 in his brief as follows: The petitioner, no doubt, will contend that the respondent should allocate the dividends of $30,000.00 paid on January 30, 1937, over the calendar year 1936. There is no law authorizing the Commissioner or the taxpayer to allocate a dividends paid credit. If the payment of the dividend meets the requirement of the state it is allowable in full. If it does not meet such requirements it is totally unallowable. It will be noted that in the foregoing quotation from the Commissioner's brief he speaks of the dividend in question as having been paid on January 30, 1937. If that were the date of the payment of the dividend there would be no argument at all but that the Commissioner should be sustained. If January 30, 1937, were the date of the payment of the dividend, then even under petitioner's theory there would be no warrant for prorating any part of the $30,000 dividends paid credit to 1936. However, petitioner contends that the date of the payment of the dividend was January 25, 1937. Under the facts which have been stipulated in the record, we think petitioner must be sustained in this contention. See *918 Atlantic Land Co.,43 B.T.A. 74, and Valley Lumber Co. of Lodi,43 B.T.A. 423. Treating the date of the payment of the dividend as January 25, 1937, as we think we must, is petitioner entitled to have the $30,000 dividends paid credit prorated in the same manner as the Commissioner has prorated other items of income and ordinary deductions? We think not. We do not think that the language of the statute or the applicable Treasury regulations printed in the margin will permit of such treatment. The petitioner's situation is perhaps unfortunate in this respect, since it accumulated the surplus involved in these dividends in prior years and could and obviously would have distributed them during the taxable year had it realized its exact status as a taxpayer upon an irregular accounting period basis. This error, however, was not one for which the Commissioner was responsible. He in any event was required by law to compute the net income upon the basis of the calendar year. Since the authority for these credits is section 27(a), supra, which limits the allowance to dividends paid during *151 the taxable year, it follows that the petitioner's*919 claim under this issue must be denied. Petitioner will, of course, be entitled to receive dividends paid credit for this $30,000 dividend paid in its income tax return for the calendar year 1937. What effect that will have on its taxable income for 1937 we do not know, for we do not have that year before us. But, as already stated, we find no warrant in the law or regulations for allowing any part of this credit in computing petitioner's taxable income for the calendar year 1936. Decision will be entered under Rule 50. Footnotes 1. SEC. 41. GENERAL RULE. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed; or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. SEC. 48. DEFINITIONS. * * * (b) FISCAL YEAR. - "Fiscal year" means an accounting period of twelve months ending on the last day of any month other than December. * * * ↩ 2. Sec. 27(a), Revenue Act of 1936: "(a) DIVIDENDS PAID CREDIT IN GENERAL. - For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year." Article 27(a)-1(b) and (c) of Regulations 94 provides in part: (b) When dividends are considered paid. - A dividend will be considered as paid when it is received by the shareholder. A dividends paid credit can not be allowed unless the shareholder receives the dividend during the taxable year for which the credit is claimed. * * * If a corporation, instead of paying the dividend directly to the shareholder, credits the account of the shareholder on the books of the corporation with the amount of the dividend, the credit for a dividend paid will not be allowed unless it be shown to the satisfaction of the Commissioner that such crediting constituted payment of the dividend to the shareholder within the taxable year. * * * (c) Methods of accounting.↩ - The determination of whether a dividend has been paid to the shareholder by the corporation during its taxable year is in no way dependent upon the method of accounting regularly employed by the corporation in keeping its books or upon the method of accounting upon the basis of which the net income of the corporation is computed. See section 43.