South Texas Lumber Co. v. Commissioner of Internal Rev.

Decision Date03 July 1947
Docket NumberNo. 11896.,11896.
PartiesSOUTH TEXAS LUMBER CO. v. COMMISSIONER OF INTERNAL REVENUE.
CourtU.S. Court of Appeals — Fifth Circuit

J. Arthur Platt, of Houston, Tex., for petitioner.

Charles C. MacLean, Jr., of New York City, for petitioner in amicus curiae.

Carlton Fox and Helen R. Carloss, Sp. Assts. to the Atty. Gen., Sewall Key, Acting Asst. Atty. Gen., J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Charles E. Lowery, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before SIBLEY, HOLMES, and WALLER, Circuit Judges.

WALLER, Circuit Judge.

The Taxpayer, a corporation under the laws of Texas, which keeps its books and files its income and excess profits tax returns on the calendar year and on the accrual basis, made sales of certain real estate and elected to compute and report the profit from such sales on the installment basis as provided by Sec. 44(b) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, § 44. The question presented is whether or not in computing the income and excess profits tax of the corporation for the year 1943 the corporation may, for excess profits credit, include as "equity-invested capital" uncollected profits which had been accumulated on its books on January 1, 1941, from such installment sales on the theory that such profits, although uncollected, represent "accumulated earnings and profits as of the beginning of the taxable year" under Sec. 718(a) (4) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 718(a) (4), which provides that equity-invested capital shall include "the accumulated earnings and profits as of the beginning of such taxable year; * * *"

In making the sales of the real estate on the installment plan, a deed was executed and delivered to the purchaser, with a vendor's lien retained to secure payment of the promissory notes, for the balance, which notes the purchaser had executed to the corporation. Being on the accrual basis of accounting, the corporation carried on its books as receivables all of these installment obligations, but for income tax purposes it showed as unreported income under the classification of "Unrealized Profit Installment Sales" such part of the proceeds from the installment sales that remained uncollected, and in its excess profits tax return for the year 1943 it claimed the unreported income, or that part not yet collected from the installment sales, as a part of its surplus and undivided profits in computing its equity-invested capital.

In redetermining the Taxpayer's excess profits tax for the calendar year 1943 the Commissioner reduced its equity-invested capital for the calendar years of 1941, 1942, and 1943, by the full amount of the sums so carried as unreported income or profits from those installment sales for the said three years.

The term "accumulated profits" is not defined in the excess profits tax provisions of the statutes, but Sec. 728 provides that "the terms used in this subchapter shall have the same meaning as when used in chapter 1." The Commissioner contends:

(1) That whether uncollected profits on installment sales at the beginning of the taxable year are includible in the equity-invested capital depends on whether such profits are "recognized in computing net income" as provided in Sec. 115(l) of Chapter 1 as added by Sec. 501(a) of the Second Revenue Act of 1940, 26 U.S.C.A. Int.Rev. Code, § 115(l), and that since the Taxpayer did not report in its income tax return the uncollected profits under the installment sales in computing its net income, such profits, therefore, were not "recognized in computing net income" and, therefore, are not includible in the term "equity-invested capital" for excess profits tax purposes.

(2) That Congress, in enacting Sec. 115 (l), intended to approve an administrative definition of "earnings and profits" in determining the source of dividend distribution under 115(a) and that such long-standing definition should be applied in computing "earnings and profits" in determining equity-invested capital under Sec. 718 (a) (4).

(3) That Sec. 115(l) makes "recognition" in computing net income the test, and that income that is returned under the installment sales statute (44(a) and (b)) is so "recognized", but that the uncollected profits on these installment sales which are merely shown in the income tax return as "Unrealized Profit Installment Sales" are not included in the income tax return and hence they are not "recognized" so...

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6 cases
  • Latham Park Manor, Inc. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • November 9, 1977
    ...and they are not to be overruled except for weighty reasons. Commissioner v. South Texas Co., 333 U.S. 496, 501 (1948), revg. 162 F.2d 866 (5th Cir. 1947), revg. 7 T.C. 669 (1946); see also Fawcus Machine Co. v. United States, 282 U.S. 375, 378 (1931). The Court's task is not to sit as a co......
  • Tilford v. Comm'r of Internal Revenue , Docket No. 1334-77.
    • United States
    • U.S. Tax Court
    • October 20, 1980
    ...such, they should not be overruled except for weighty reasons. Commissioner v. South Texas Lumber Co., 333 U.S. 496 (1948), revg. 162 F.2d 866 (5th Cir. 1947), revg. 7 T.C. 669 (1946). Ordinarily, regulations must be sustained unless they are unreasonable and plainly inconsistent with the r......
  • Commissioner of Internal Revenue v. South Texas Lumber Co
    • United States
    • U.S. Supreme Court
    • March 29, 1948
    ...7 T.C. 669, relying on its opinion in Kimbrell's Home Furnishings, Inc., v. Commissioner, 7 T.C. 339.5 The Circuit Court of Appeals, 5 Cir., 162 F.2d 866, with one justice dissenting, reversed on the authority of its decision in Commissioner v. Shenandoah Co., 5 Cir., 138 F.2d 792. The Gove......
  • Frederick Smith Enter. Co. v. Commissioner of Int. Rev.
    • United States
    • U.S. Court of Appeals — Sixth Circuit
    • April 12, 1948
    ...on Kimbrell's Home Furnishings v. Com'r, 4 Cir., 159 F.2d 608; Com'r v. Shenandoah Co., 5 Cir., 138 F.2d 792, and South Texas Lumber Co. v. Com'r, 5 Cir., 162 F. 2d 866. The Tax Court held that the personal holding company sections necessarily require that comparable concepts of income tax ......
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