Toledo Stove & Range Co. v. Comm'r of Internal Revenue
| Decision Date | 21 May 1951 |
| Docket Number | 27161,27162.,Docket Nos. 4802 |
| Citation | 16 T.C. 1125 |
| Court | U.S. Tax Court |
| Parties | THE TOLEDO STOVE & RANGE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
OPINION TEXT STARTS HERE
Harley A. Watkins, Esq., and Richard H. Peters, Esq., for the petitioner.
William J. Stetter, Esq., for the respondent.
Petitioner, a manufacturer of gray iron castings, operated at a loss in each of the years 1936, 1937, 1938, and 1939. In the years from 1922 to 1939 it had net earnings in only five years. Held, that petitioner has not shown that its business was depressed in the base period so as to qualify for relief under section 722(b)(2) or (b)(3)(A), I.R.C.; and held further, that a change in general managers in 1935 which did not result in any significant change in basic management policies or earnings fails to establish petitioner's right to relief under section 722(b)(4).
In this proceeding petitioner challenges the Commissioner's total disallowance of its claim for refund of excess profits taxes for the calender years 1942, 1944, and 1945, filed under the provisions of section 722 of the Internal Revenue Code.
Petitioner is an Ohio corporation organized in 1904 for the purpose of manufacturing stoves and gray iron castings. Its office and principal place of business are in Toledo, Ohio.
Petitioner was in existence during the entire base period and is entitled to use an excess profits credit based on income under the provisions of section 713 of the Internal Revenue Code. For each of the years 1942, 1944, and 1945 the excess profits credit used in the determination of petitioner's excess profits tax liability, without the application of section 722, was computed on the invested capital method under section 714 of the Internal Revenue Code, since that method of computation resulted in a lesser excess profits tax. Petitioner's excess profits credits computed under the invested capital method were $8,563.63, $8,352, and $8,405.35 for the years 1942, 1944, and 1945 respectively.
Petitioner's excess profits net income showed a loss for each of the years 1936 through 1939, as computed under section 711(b) without the application of section 722, as follows:
+-----------------+
¦1936¦$(7,246.71) ¦
+----+------------¦
¦1937¦(4,952.19) ¦
+----+------------¦
¦1938¦(8,032.65) ¦
+----+------------¦
¦1939¦(995.58) ¦
+-----------------+
Petitioner's excess profits tax liability for the years 1942, 1944, and 1945, respectively, as determined by the respondent, without the application of section 722, is $27,478.69, $9,759.39, and $11,651.19. The petitioner claimed the benefits of section 710(a)(5) of the Internal Revenue Code.
Since 192 petitioner has been controlled by George G. Metzger, his three sons, and two sons-in-law, who in the year became shareholders and directors of the company and who have continued as such to the present time. Until his death in 1926 George G. Metzger was president of petitioner. He was succeeded by his son, George F. Metzger, who served as president until his resignation in 1936.
Thereafter, Herbert P. Whitney, one of the sons-in-law, became president. Whitney is still serving in that capacity. Another son-in-law, Earle Peters, became a director and secretary of the petitioner in 1912 and since 1926 Peters has also served as petitioner's treasurer. Petitioner's present directors have served continuously for the past 25 years.
Since the early 1920's petitioner's principal activity has been the production and sale of rough gray iron castings manufactured in its gray iron foundry. This foundry is a ‘jobbing‘ foundry, manufacturing small quantities of many types of castings by predominantly manual labor processes. Petitioner's largest single cost item is labor. Petitioner's percentage of labor cost to net sales over the years 1922 through 1938 varied from a high of 62.6 in 1929 to a low of 50.4 in 1923. It averaged 57.2 in the period 1922-39, 56.9 in the period 1922-35, and 59.1 in the period 1936-39.
The petitioner's labor cost in 1939 was 57.8 per cent of net sales. This was substantially in excess of the industry-wide labor cost which was 35 per cent of net sales for the same year. This high labor cost was one of the reasons petitioner failed to obtain more business because it was necessarily reflected in its bids for jobs.
The following table shows the petitioner's earnings before Federal taxes for the years 1922 through 1935:
FN* Amounts in parentheses indicate loss.
The following table shows indexes of compiled net profit (or loss) before Federal income taxes less tax-exempt income for all corporations and for five representative competitors of petitioner, for the years 1922 through 1939:
The following table shows indexes of petitioner's sales of gray iron castings, aggregate net sales of five representative competitors of petitioner, and aggregate net sales of four principal customers of petitioner, for the years 1922 through 1939:
George F. Metzger, in addition to being petitioner's president from 1926 until his resignation in 1936, was petitioner's general manager from March 10, 1924, until January 1935. George's managerial practices interfered to some extent with the most economical operation of petitioner's business. A. E. Bacon succeeded him as general manager in January 1935. Bacon delegated more authority to subordinates than the previous manager and rearranged the physical layout of petitioner's plant, including the relocation of sand storage bins which reduced the walking space between the bins and the working area and the replacement of one shipping dock with three docks. Several old customers lost during the previous management were also regained after the change in general managers.
After Bacon took over petitioner's management, labor costs were slightly reduced, such cost being 67.7 per cent of the cost of sales in the period 1922 to 1935 and 67.4 per cent in the period of 1936 to 1939.
The following indexes based on the year 1936, one year after the managerial change took place, show that petitioner failed to maintain its relative position in the gray iron casting industry during the base period:
+----------------------------------------------------------------------------------------+
¦[Basis for all indexes-1936 is 100] ¦
+----------------------------------------------------------------------------------------¦
¦ ¦Grey Iron ¦ ¦ ¦ ¦ ¦ ¦
+---------------+--------------+-----+------------+------------+------------+------------¦
¦ ¦Founders ¦ ¦ ¦ ¦ ¦ ¦
+---------------+--------------+-----+------------+------------+------------+------------¦
¦ ¦Society sales ¦O.P.A¦Sales ¦Petitioner's¦Petitioner's¦Petitioner's¦
+---------------+--------------+-----+------------+------------+------------+------------¦
¦ ¦of grey ¦index¦of ¦index ¦index ¦net sales ¦
+---------------+--------------+-----+------------+------------+------------+------------¦
¦ ¦iron castings ¦of ¦petitioner's¦based on ¦based on ¦of grey ¦
+---------------+--------------+-----+------------+------------+------------+------------¦
¦ ¦composite ¦sales¦five ¦material ¦pig iron ¦iron ¦
+---------------+--------------+-----+------------+------------+------------+------------¦
¦Year ¦index ¦of ¦competitors ¦melted ¦purchased ¦castings ¦
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