Nat'l Screw & Mfg. Co. v. Comm'r of Internal Revenue
| Citation | 32 T.C. 490 |
| Decision Date | 29 May 1959 |
| Docket Number | Docket No. 33291. |
| Parties | THE NATIONAL SCREW AND MANUFACTURING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
M. E. Newcomer, Esq., H. V. E. Mitchell, Esq., and A. W. Geater, C.P.A., for the petitioner.
William O. Allen, Esq., for the respondent.
Under the facts, petitioner held to have qualified for relief under section 722(b)(4), I.R.C. 1939, because of change in management and its CABPNI determined to be $465,000 for the calendar year 1940 and $475,000 for the fiscal years ending November 30, 1941, to November 30, 1945, inclusive. FORRESTER, Judge:
By this proceeding petitioner challenges the Commissioner's disallowance of its claims under section 722, I.R.C. 1939, for relief from excess profits tax liabilities in the following amounts for the respective fiscal periods:
+---------------------------------------+
¦Period ¦Amount ¦
+--------------------------+------------¦
¦Calendar year 1940 ¦$17,910.27 ¦
+--------------------------+------------¦
¦Jan. 1, 1941-Nov. 30, 1941¦822,008.85 ¦
+--------------------------+------------¦
¦Dec. 1, 1941-Nov. 30, 1942¦466,631.28 ¦
+--------------------------+------------¦
¦Dec. 1, 1942-Nov. 30, 1943¦370,105.43 ¦
+--------------------------+------------¦
¦Dec. 1, 1943-Nov. 30, 1944¦1,187,868.97¦
+--------------------------+------------¦
¦Dec. 1, 1944-Nov. 30, 1945¦483,056.22 ¦
+---------------------------------------+
FINDINGS OF FACT.
Certain facts have been stipulated and are hereby so found.
Petitioner, a corporation organized under the laws of Ohio, maintained its principal office and place of business at Cleveland, Ohio. Prior to January 1, 1941, petitioner was on a calendar year basis. The taxable periods involved herein are calendar year 1940, the short fiscal period ended November 30, 1941, and fiscal years ended November 30, 1942 through 1945. Petitioner at all times kept its books and records and filed its tax returns on an accrual basis.
Petitioner filed with the then collector of internal revenue for the 18th district of Ohio, at Cleveland, its timely income and excess profits tax returns for 1940, the fiscal period ended November 30, 1941, and fiscal years 1942 through 1946.
Petitioner's timely applications under section 722(b)(4), I.R.C. 1939, claimed relief on the ground that petitioner during the base period had drastically changed its management and its manufacturing and marketing procedures and policies, that it commenced the manufacture and distribution of important new products and that such changes produced and resulted in a higher level of earnings not adequately or fully reflected in petitioner's actual base period net income.
Petitioner is entitled to compute its excess profits credit for each fiscal period involved by the ‘income credit’ method, using its excess profits net income during its base period, calendar years 1936 through 1939. Petitioner's excess profits net income (or deficit) for each base period year computed by the ‘income credit’ method, and without regard to section 722 or 713, is as follows:
+------------------------------------+
¦ ¦ ¦1941 and ¦
+----+------------+------------------¦
¦ ¦1940 ¦subsequent years ¦
+----+------------+------------------¦
¦1936¦$171,583.15 ¦$201,214.86 ¦
+----+------------+------------------¦
¦1937¦484,845.73 ¦632,921.26 ¦
+----+------------+------------------¦
¦1938¦(344,439.58)¦(344,439.58) ¦
+----+------------+------------------¦
¦1939¦(71,628.26) ¦(71,628.26) ¦
+------------------------------------+
Petitioner's average base period net income (general average) without regard to section 722 or 713, and its average base period net income computed by the 75 per cent or deficit rules under section 713, were stipulated to be as follows for each taxable period:
+--------------------------------+
¦ ¦General ¦ABPNI ¦
+------+----------+--------------¦
¦Year ¦average ¦under sec. 713¦
+------+----------+--------------¦
¦1940 ¦$60,090.26¦$146,200.16 ¦
+------+----------+--------------¦
¦1941 ¦104,517.07¦190,626.96 ¦
+------+----------+--------------¦
¦1942 ¦104,517.07¦238,283.70 ¦
+------+----------+--------------¦
¦1943 ¦104,517.07¦238,283.70 ¦
+------+----------+--------------¦
¦1944 ¦104,517.07¦238,283.70 ¦
+------+----------+--------------¦
¦1945 ¦104,517.07¦238,283.70 ¦
+--------------------------------+
In its applications for relief and supporting data for each fiscal period, petitioner claimed the following constructive average base period net income (CABPNI) under section 722:
+---------------------+
¦Year ¦CABPNI ¦
+------+--------------¦
¦1940 ¦$1,062,102.51 ¦
+------+--------------¦
¦1941 ¦1,190,354.15 ¦
+------+--------------¦
¦1942 ¦1,190,354.15 ¦
+------+--------------¦
¦1943 ¦1,190,354.15 ¦
+------+--------------¦
¦1944 ¦1,190,354.15 ¦
+------+--------------¦
¦1945 ¦1,190,354.15 ¦
+---------------------+
In its applications for relief and related refund claims for each fiscal period involved, petitioner claimed that its average base period net income was an inadequate standard of normal earnings, that its excess profits tax liability for each fiscal period without the benefit of section 722 was excessive and discriminatory, and that it was entitled to compute its excess profits tax liability for each fiscal period pursuant to section 722. It so computed its liability for each fiscal period as follows:
+-----------------------------------------+
¦Fiscal period ended ¦Claimed liability ¦
+---------------------+-------------------¦
¦ ¦under sec. 722 ¦
+---------------------+-------------------¦
¦Dec. 31, 1940 ¦ ¦
+---------------------+-------------------¦
¦Nov. 30, 1941 ¦$99,513.31 ¦
+---------------------+-------------------¦
¦Nov. 30, 1942 ¦1,364,406.01 ¦
+---------------------+-------------------¦
¦Nov. 30, 1943 ¦3,369,653.21 ¦
+---------------------+-------------------¦
¦Nov. 30, 1944 ¦601,274.91 ¦
+---------------------+-------------------¦
¦Nov. 30, 1945 ¦941,194.04 ¦
+-----------------------------------------+
Respondent determined petitioner's excess profits tax liability for the taxable periods involved, without the benefit of section 722, as follows:
+--------------------------------------+
¦Fiscal period ended ¦Excess profits ¦
+---------------------+----------------¦
¦ ¦tax liability ¦
+---------------------+----------------¦
¦Dec. 31, 1940 ¦$17,910.27 ¦
+---------------------+----------------¦
¦Nov. 30, 1941 ¦921,522.16 ¦
+---------------------+----------------¦
¦Nov. 30, 1942 ¦1,831,037.29 ¦
+---------------------+----------------¦
¦Nov. 30, 1943 ¦3,739,758.64 ¦
+---------------------+----------------¦
¦Nov. 30, 1944 ¦1,789,143.88 ¦
+---------------------+----------------¦
¦Nov. 30, 1945 ¦1,424,250.26 ¦
+--------------------------------------+
In his notice of deficiency and disallowance dated January 5, 1951, respondent determined the following excess profits credits on the invested capital basis:
+-------------------------------------+
¦Fiscal period ended ¦Credit ¦
+---------------------+---------------¦
¦Dec. 31, 1940 ¦$298,384.57 ¦
+---------------------+---------------¦
¦Nov. 30, 1941 ¦322,272.82 ¦
+---------------------+---------------¦
¦Nov. 30, 1942 ¦362,710.97 ¦
+---------------------+---------------¦
¦Nov. 30, 1943 ¦408,682.26 ¦
+---------------------+---------------¦
¦Nov. 30, 1944 ¦{1 484,005.36¦
+---------------------+---------------¦
¦ ¦{2 472,004.59¦
+---------------------+---------------¦
¦Nov. 30, 1945 ¦517,045.66 ¦
+-------------------------------------+
FN1 Under 1943 law.FN2 Under 1944 law.
Petitioner paid to the collector of internal revenue at Cleveland, Ohio, the excess profits tax liability determined by respondent for each fiscal period.
Petitioner's net sales, after renegotiation, and its excess profits net income after all agreed adjustments on final audit of its income and excess profits tax liability, but before any allowance under section 722, were as follows:
+-----------------------------------------------------------------------------+
¦Fiscal ¦Net sales ¦Excess ¦(Invested capital method) ¦
¦ ¦ ¦profits ¦ ¦
+-----------+----------+-------------+----------------------------------------¦
¦period ¦ ¦tax net ¦ ¦
¦ended ¦ ¦income ¦ ¦
+-----------+----------+-------------+----------------------------------------¦
¦Dec. 31, ¦$5,529,837¦$364,556.76 ¦ ¦
¦1940 ¦ ¦ ¦ ¦
+-----------+----------+-------------+----------------------------------------¦
¦Nov. 30, ¦9,932,316 ¦{1,905,502.56¦(11 months) ¦
¦1941 ¦ ¦ ¦ ¦
+-----------+----------+-------------+----------------------------------------¦
¦ ¦ ¦{2,682,360.58¦(Annual basis 365/334) ¦
+-----------+----------+-------------+----------------------------------------¦
¦Nov. 30, ¦14,531,612¦2,996,935.67 ¦(Same under both 1941 and 1942 Act) ¦
¦1942 ¦ ¦ ¦ ¦
+-----------+----------+-------------+----------------------------------------¦
¦Nov. 30, ¦22,344,957¦4,880,645.85 ¦ ¦
¦1943 ¦ ¦ ¦...To continue reading
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