Jefferson Amusement Co. v. Comm'r F Internal Revenue
| Decision Date | 09 April 1952 |
| Docket Number | Docket No. 27267. |
| Citation | 18 T.C. 44 |
| Parties | JEFFERSON AMUSEMENT COMPANY, PETITIONER, v. COMMISSIONER F INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
Petitioner seeks general relief under the provisions of section 722 of the Code from excess profits taxes for the years 1942, 1943, 1944, and 1945. Since incorporation it has been engaged in the business of operating a chain of motion picture theatres in the State of Texas. Held:
1. During the years 1936 and 1937, petitioner established additional theatres which constituted a change in the character of its business, section 722(b)(4), and relief therefor has been determined.
2. During 1938, petitioner remodeled and increased the seating capacity of a theatre. Petitioner failed to meet the requirements of sections 722(a) and 722(b)(4) and relief has been denied.
3. During the base period years petitioner entered into additional contracts, increasing the number of theatres to which petitioner rendered management or film booking services. Petitioner failed to establish: (1) that this was a ‘difference in capacity,‘ section 722(b)(4), and (2) what its earnings, if any, were from these contracts.
4. During 1941, petitioner began operating two new theatres. Petitioner was committed in 1939 to this course of action which constituted a change in the character of the business, section 722(b)(4), and the amount of relief has been determined.
5. The sale of popcorn and candy was commenced in petitioner's theatres on January 1, 1936. This constitutes a difference in products furnished, section 722(b)(4). Petitioner established that it was entitled to relief, and the amount has been determined.
6. Petitioner failed to establish that there was a change in management during the base period which was substantial, section 722(b)(4), and also failed to establish that a higher level of earnings resulted therefrom. Relief denied petitioner, Toledo Stove & Range Co., 16 T.C. 1125.
7. Petitioner is entitled to relief under section 722 because of a ‘difference in the ratio of non-borrowed capital to total capital,‘ section 722(b)(4).
8. It has been stipulated what petitioner's average base period net income was after giving effect to section 711(b)(1)(J) adjustments. Held, that the granting of relief under section 722 does not deprive petitioner of these section 711(b)(1)(J) adjustments to which it is entitled under the Code provisions. Milton H. West, Esq., and Lamar Cecil, Esq., for the petitioner.
Irene F. Scott, Esq., for the respondent.
This proceeding involves petitioner's excess profits tax liability for the calendar years 1942, 1943, 1944, and 1945. The Commissioner determined that petitioner's excess profits tax liability was as follows:
+----------------------------+
¦Calendar year ¦Liability ¦
+----------------+-----------¦
¦1942 ¦$95,651.16 ¦
+----------------+-----------¦
¦1943 ¦519,629.75 ¦
+----------------+-----------¦
¦1944 ¦426,270.82 ¦
+----------------+-----------¦
¦1945 ¦322,943.93 ¦
+----------------------------+
Petitioner agrees with this determination except for its allegation in the petition that respondent erred in his notice of disallowance in denying its applications for relief under section 722 and its related claim for refund of excess profits taxes. Petitioner states in the petition that it seeks refund of excess profits taxes in the following amounts:
+-------------------+
¦Year ¦Amount ¦
+------+------------¦
¦1942 ¦$85,596.30 ¦
+------+------------¦
¦1943 ¦139,597.73 ¦
+------+------------¦
¦1944 ¦60,363.94 ¦
+------+------------¦
¦1945 ¦59,483.76 ¦
+------+------------¦
¦Total ¦$345,041.73 ¦
+-------------------+
Petitioner in its brief states that the refunds which it now claims are approximately:
+-------------------+
¦Year ¦Amount ¦
+------+------------¦
¦1942 ¦$44,386.00 ¦
+------+------------¦
¦1943 ¦17,603.00 ¦
+------+------------¦
¦1944 ¦19,535.00 ¦
+------+------------¦
¦1945 ¦19,535.00 ¦
+------+------------¦
¦Total ¦$101,059.00 ¦
+-------------------+
Also in issue is the reconstruction of petitioner's average base period net income for the years 1940 and 1941 for the purpose of computing petitioner's unused excess profits credit carry-over to the year 1942.
Petitioner contends that it is entitled to relief under the provisions of section 722 of the Code, and to use a constructive average base period net income as follows:
+-------------------+
¦Year ¦Amount ¦
+------+------------¦
¦1940 ¦$275,129.95 ¦
+------+------------¦
¦1941 ¦297,500.14 ¦
+------+------------¦
¦1942 ¦296,421.44 ¦
+------+------------¦
¦1943 ¦297,300.43 ¦
+------+------------¦
¦1944 ¦296,131.48 ¦
+------+------------¦
¦1945 ¦296,584.57 ¦
+-------------------+
The assignments of error in the petition raise the question as to whether petitioner is entitled to relief from excess profits tax under the provisions of section 722(b)(4) of the Code by reason of: certain changes in the operation of the business, a change in management of the business, a difference in products furnished, a difference in the capacity for operation, a difference in the ratio of nonborrowed capital to total capital, and a commitment.
In computing petitioner's excess profits net income for years in the base period an adjustment was made and agreed to by respondent under the provisions of section 711(b)(1)(J) for certain abnormal deductions incurred during 1937. Since we determine that petitioner is entitled to relief because of section 722(b)(4) factors, a secondary issue that arises is whether the relief granted to petitioner under section 722 interferes with the relief which is automatically granted to petitioner because it incurred during the base period certain abnormal deductions which satisfy the provisions of section 711(b)(1)(J) of the Code.
Petitioner is a corporation organized under the laws of the State of Texas on March 1, 1923, and has its principal office at Beaumont, Texas. On December 31, 1939, 50 per cent of the capital stock of petitioner was owned by Paramount Pictures, Inc., 25 per cent was owned by Sol Gordon, and the remaining 25 per cent was owned by members of Sol Gordon's family. Paramount Pictures, Inc., acquired its stock interest in petitioner corporation prior to the year 1936.
Petitioner owns 50 per cent of the stock of East Texas Theatres, Inc., which corporation operates a number of wholly owned and partially owned theatres under the management of petitioner. From the date of its formation in 1927 and throughout the base period, the business of East Texas Theatres, Inc., was actively managed and controlled by petitioner. Petitioner also owns 50 per cent of the stock of Sullivan & Moore Theatres, Inc., and 25 per cent of the stock of each of the corporations known as Cole Theatres, Inc., Yoakum Theatres, Inc., and Eagle Lake Theatres, Inc. In addition thereto, petitioner operated during the excess profits tax years four theatres which were owned jointly with certain individuals.
Petitioner commenced business in 1923, with two theatres in Beaumont, and it so expanded by the addition of theatres that at the beginning of 1936, it had 14 theatres in operation. In addition petitioner managed and booked films for certain theatres owned by corporations of which it is a stockholder and for other theatres in which it had no ownership interest. Petitioner received fees for such management and booking services which fees represented a percentage of the gross receipts of the theatres for which such services were performed.
The names, locations, and seating capacity of each of petitioner's 14 theatres during the base period years were as follows:
+-----------------------------------------------------------------+
¦ ¦ ¦Seating capacity—end of year ¦ ¦ ¦
+---------+-----------+-----------------------------+------+------¦
¦Name ¦Location ¦ ¦ ¦ ¦ ¦ ¦
+---------+-----------+---------+---------+---------+------+------¦
¦ ¦ ¦1935 ¦1936 ¦1937 ¦1938 ¦1939 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Jefferson¦Beaumont ¦1,878 ¦1,878 ¦1,878 ¦1,878 ¦1,878 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Liberty ¦Do. ¦856 ¦856 ¦856 ¦856 ¦856 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Tivoli ¦Do. ¦534 ¦534 ¦534 ¦534 ¦534 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Peoples ¦Do. ¦690 ¦690 ¦690 ¦655 ¦655 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Rio ¦Do. ¦641 ¦612 ¦612 ¦612 ¦612 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Gem ¦Do. ¦481 ¦476 ¦476 ¦476 ¦476 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Strand ¦Port Arthur¦1,079 ¦1,046 ¦1,046 ¦1,046 ¦1,046 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Pearce ¦Do. ¦544 ¦544 ¦541 ¦627 ¦627 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Peoples ¦Do. ¦956 ¦878 ¦939 ¦939 ¦939 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Majestic ¦Do. ¦462 ¦458 ¦419 ¦455 ¦455 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Texas ¦Do. ¦476 ¦476 ¦496 ¦476 ¦476 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Strand ¦Orange ¦861 ¦854 ¦790 ¦790 ¦790 ¦
+---------+-----------+---------+---------+---------+------+------¦
¦Gem ¦Do. ¦348 ¦350 ¦346 ¦346 ¦346 ¦...To continue reading
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