Denman Tire & Rubber Co. v. Comm'r of Internal Revenue, Docket No. 19041.

• Decision Date: 28 April 1950
• Docket Number: Docket No. 19041.
• Citation: 14 T.C. 706
• Parties: DENMAN TIRE & RUBBER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

14 T.C. 706

DENMAN TIRE & RUBBER COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 19041.

Tax Court of the United States.

Promulgated April 28, 1950.

1. Petitioner was reorganized to take over as of October 1, 1937, pursuant to a revised plan of reorganization, the assets and some of the liabilities of its predecessor corporation. Among the liabilities was an obligation of $144,572.49 owing to the United States Government for manufacturers' excise taxes incurred by petitioner's predecessor. Petitioner executed a promissory note in payment of this indebtedness and executed a mortgage to secure the payment of the note. As of May 23, 1941, this obligation was reduced to $125,500. In November, 1941, this liability was settled for $50,000. On or about November 31, 1941, petitioner purchased for $1,250 its bonds in the face amount of $2,500, with accrued interest of $320.83. Petitioner did not file with its original return its consent under section 113(b)(3) to the adjustment of the basis of its property by the $76,892.23 of surplus credit represented by the cancellation by these items of indebtedness; however, petitioner filed its consent with an amended return filed April 21, 1944. Held, the $75,500 representing income from the cancellation of petitioner's debt to the United States Government and the $1,570.83 representing income from the purchase of its bonds at a discount are includible in petitioner's gross income for the calendar year 1941.

2. Upon the evidence, held, petitioner is entitled to additional depreciation of $50.24 for the calendar year 1942 and $962.01 for the calendar year 1943.

3. Petitioner suffered losses on defalcations in 1939 which were allowed as bad debt losses. Petitioner also charged off in 1938 and 1939 bad debt losses from accounts receivable taken over from its predecessor. These deductions were of classes abnormal to petitioner and not a consequence of the limiting factors of section 711(b)(1)(K). Held, the deductions for bad debt losses which were of classes abnormal to petitioner and the losses from defalcations are disallowed in computing petitioner's excess profits credit for the years 1941, 1942, and 1943.

4. Petitioner deducted certain amounts for advertising, professional services, factoring commissions, repairs, and bad debt losses (exclusive of the bad debt deductions of paragraph 3 above) during the base period years. Held, petitioner's bad debt deductions in 1938 were amount abnormalities to the extent stipulated as defined in section 711(b)(1)(J)(ii) and should be disallowed; held, further, that petitioner's stipulated amount abnormalities in 1939 for advertising, professional services, factoring commissions, and repairs should not be disallowed. Petitioner has not proved that these amount abnormalities were not a consequence of the limiting factors of section 711(b)(1)(K), and this failure of proof, coupled with the reasonable inference that these deductions were a consequence of some of such factors, precludes the disallowance of these deductions in computing petitioner's excess profits credit for the calendar years 1941, 1942, and 1943.

5. Upon the evidence, held, in making the growth formula computation the loss of $1,560.70 for the year 1937 must be taken into account as reducing the income for the first half of the base period. I. W. Sharp, Esq., for the petitioner.

John A. Newton, Esq., for the respondent.

BLACK, Judge:

This proceeding involves deficiencies in excess profits tax for the calendar years 1942 and 1943 in the respective amounts of $39,959.89 and $186,944.91. The deficiencies are due to numerous adjustments to petitioner's net income. Many of these adjustments are not contested by petitioner.

Respondent's adjustments which result in the major portion of the deficiency were explained in a statement attached to the deficiency notice as follows:

1942 (c) In your return for the year 1941, you reported a net loss of $4,990.87. You contend that said net loss should be increased by $75,500.00, for purposes of a carry-over net loss, by excluding that amount from gross income reported in the return. It is held that the amount of $75,500.00 constituted gross income within the meaning of Section 22(a) of the Internal Revenue Code, and, further, that the net loss for 1941, available as a carry-over loss to 1942, is $4,534.04. The net operating loss deduction of $4,373.59 claimed on Item 27 of your 1942 return has, therefore, been increased in the amount of $160.45.

1943 In your Excess Profits Tax Return for the year 1943, in the determination of your excess profits credit based on income, you claimed abnormal deductions in the aggregate amount of $69,464.72 in computing base period net income of $129,768.39 for the year 1939. Abnormal deductions in the amount of $749.84 have been disallowed within the provisions of Section 711(b)(1)(J) of the Internal Revenue Code. The base period income claimed for 1939 has, therefore, been decreased by $68,714.88 for purposes of the excess profits credit.

The petitioner assigns errors as follows:

The determination of taxes set forth in said notice of deficiency is based upon the following errors:

(a) The inclusion as taxable income, in computing the taxable net income of Petitioner for the calendar year 1941, of a surplus credit of $75,500 arising out of the settlement during that year of an excise tax obligation of Petitioner to the United States of America in the amount of $125,500, for $50,000, with a resultant reduction of $75,500 in the net operating loss carryover from the calendar year 1941 to the calendar year 1942.

(b) The inclusion as taxable income, in computing the taxable net income of Petitioner for the calendar year 1941, of a surplus credit of $1,570.83 arising out of the purchase during that year, pursuant to direct negotiations with the holder, for $1,250, of bonds of Petitioner in the face amount of $2,500 on which interest had accrued to the date of purchase in the amount of $320.83, with a resultant reduction of $1,570.83 in the operating loss carryover from the calendar year 1941 to the calendar year 1942.

(c) The disallowance as a deduction in computing taxable net income for the calendar year 1942 of depreciation in the amount of $50.24 on furniture and fixtures acquired by Petitioner during that year.

(d) The disallowance as deductions in computing taxable net income for the calendar year 1943 of depreciation in the amount of $907.22 on molds and cores acquired during that year, depreciation in the amount of $47.77 on furniture and fixtures acquired during that year and depreciation in the amount of $7.02 on machinery and equipment acquired during that year.

(e) The failure to disallow in computing Petitioner's excess profits tax credit based on income, with reference to the calendar years 1941, 1942 and 1943, the following ‘class abnormalities‘:

(1) Bad debt losses on defalcations in the amount of $30,540.13 in the year 1939.

(2) Bad debt losses on accounts receivable taken over from Petitioner's predecessor corporation in the amount of $8,851.72 in the year 1938, and in the amount of $10,590.45 in the year 1939.

(f) Failure to disallow in computing Petitioner's excess profits tax credit based on income for the calendar years 1941, 1942 and 1943, the following ‘amount abnormalities‘:

+------------------------------------------------------------------------+
                ¦                 ¦Taxable   ¦          ¦          ¦          ¦          ¦
                +-----------------+----------+---------------------+---------------------¦
                ¦                 ¦Year 1941 ¦Taxable Year 1942    ¦Taxable Year 1943    ¦
                +-----------------+----------+---------------------+---------------------¦
                ¦                 ¦Re 1939   ¦Re 1938   ¦Re 1939   ¦Re 1938   ¦Re 1939   ¦
                +-----------------+----------+----------+----------+----------+----------¦
                ¦Bad debts        ¦          ¦$12,575.26¦          ¦$23,641.62¦          ¦
                +-----------------+----------+----------+----------+----------+----------¦
                ¦Advertising      ¦$16,171.11¦          ¦$16,171.11¦          ¦$16,171.11¦
                +-----------------+----------+----------+----------+----------+----------¦
                ¦Professional serv¦0         ¦          ¦1,504.38  ¦          ¦2,521.12  ¦
                +-----------------+----------+----------+----------+----------+----------¦
                ¦Factoring comms  ¦0         ¦          ¦8,880.05  ¦          ¦8,880.05  ¦
                +-----------------+----------+----------+----------+----------+----------¦
                ¦Repairs          ¦12,570.78 ¦          ¦14,362.73 ¦          ¦12.02     ¦
                +-----------------+----------+----------+----------+----------+----------¦
                ¦Total            ¦28,741.89 ¦12,575.26 ¦40,918.27 ¦23,641.62 ¦27,584.30 ¦
                +------------------------------------------------------------------------+
                

(g) Failure to take into account the loss of $1,560.70 for the year 1937 as reducing the income of the first half of the base period, in making the growth formula computation in Exhibit A (page 12) of Respondent's ninety-day notice (Exhibit A to this Petition).

FINDINGS OF FACT IN GENERAL.

Most of the facts were stipulated are are so found. The stipulation of facts is incorporated herein by reference.

Petitioner is a corporation, incorporated on June 28, 1937, under the laws of the State of Delaware. During the years here involved petitioner's principal business and accounting offices were located at Warren, Ohio. Petitioner's books have been kept and its tax returns have been prepared and filed on the accrual basis. Petitioner filed its returns for the calendar years 1941, 1942, and 1943 with the collector of internal revenue for the eighteenth collection district of Ohio, at Cleveland.

Petitioner was organized to take over as of October 1, 1937, the assets and business of an Illinois corporation of the same name, subject to certain of its liabilities, pursuant to a revised plan of reorganization under section 77-B of the Bankruptcy Act of the United States, confirmed by...