159 F.2d 608 (4th Cir. 1947), 5551, Kimbrell's Home Furnishings v. C.I.R.

Docket Nº:5551.
Citation:159 F.2d 608
Case Date:February 03, 1947
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

Page 608

159 F.2d 608 (4th Cir. 1947)




No. 5551.

United States Court of Appeals, Fourth Circuit.

February 3, 1947

Page 609

Norman Block, of Greensboro, N.C. (Brooks, McLendon, Brim & Holderness, of Greensboro, N.C., on the brief), for petitioner.

Charles C. MacLean, Jr., of New York City (Root, Ballantine, Harlan, Bushby & Palmer, Arthur A. Ballantine and John E. F. Wood, all of New York City, on the brief), as amicus curiae.

Lee A. Jackson, Sp. Asst. to the Atty. Gen. (Sewall Key, Acting Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before PARKER, SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

Kimbrell's Home Furnishings, Inc., petitions for review of a decision of the Tax Court of the United States determining a deficiency in excess profits taxes of $329.38 for the fiscal year ended August 31, 1943. The corporation was organized under the law of North Carolina on September 13, 1940. It is engaged in the retail sale of home furnishings and makes a substantial part of its sales on the installment plan. It computes its net income for income tax purposes on the installment basis under Section 44(a) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 44(a), which permits a person who regularly sells personal property on the installment plan to return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized, when payment is completed, bears to the total contract price.

With respect to its excess profits tax the taxpayer elected to avail itself of the option to compute its income from installment sales on the accrual basis in conformity with Section 736(a) of the Internal Revenue Code which was added by Section 222(d) of the Revenue Act of 1942, 26 U.S.C.A.Int.Rev.Code, § 736(a). This option was made available to installments sellers who, like the taxpayer, had extended a certain average volume of credit to installment purchasers in preceding years. In part the section reads as follows: 'Sec. 736(a) Election to accrue income. In the case of any taxpayer computing income from installment sales under the method provided by section 44(a), if such taxpayer establishes, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, * * * it may elect, in its return for the taxable year, for the purposes of the tax imposed by this subchapter, to compute, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, its income from installment sales on the basis of the taxable period for which such income is accrued, in lieu of the basis provided by section 44(a). Except as hereinafter provided, such election shall be irrevocable when once made and shall apply also to all subsequent taxable years, and the income from installment sales for each taxable year before the first year with respect to which the election is made but beginning after December 31, 1939, shall be adjusted for the purposes of this subchapter to conform to such election. * * *'

Since the taxpayer was not in existence during the base period defined in Section 713, 26 U.S.C.A.Int.Rev.Code, § 713, its excess profits tax was necessarily computed on the invested capital method as provided by Sections 712, 714, 715, 716, 717 and 718 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, §§ 712, 714-718(a)(4), which, in the case of the taxpayer, allowed a credit of 8 per cent of the invested capital which comprehends equity invested capital and borrowed invested capital. Equity invested capital includes, among other things, the accumulated earnings and profits as of the beginning of the taxable year. See...

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