7 T.C. 1350 (1946), 9045, Arrow-Hart & Hegeman Elec. Co. v. C. I. R.
|Citation:||7 T.C. 1350|
|Opinion Judge:||HARLAN, Judge:|
|Party Name:||THE ARROW-HART & HEGEMAN ELECTRIC COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.|
|Attorney:||W. C. Magathan, Esq., Philip Bardes, Esq., and J. Marvin Haynes, Esq., for the petitioner. Arnold R. Cutler, Esq., and James T. Haslam, Esq., for the respondent.|
|Judge Panel:||MURDOCK, J., dissenting: DISNEY, HARRON, and OPPER, JJ., agree with this dissent. TURNER, J., dissenting:|
|Case Date:||December 19, 1946|
|Court:||United States Tax Court|
1. On March 15, 1940, petitioner received from its Canadian subsidiary a dividend, the entire amount of which constituted ‘ net abnormal income.‘ Subsidiary's earnings and profits accumulated during period January 1 to March 15, 1940, were $10,350.94. Held, the amount of the dividend in excess of $10,350.94 represented net abnormal income attributable to prior taxable years excludible from gross income for excess profits tax purposes under the provisions of section 721(c), I.R.C.
2. The amount of the chapter 1 tax deductible in computing petitioner's excess profits net income for 1940, under section 711(a)(1)(A), as added to the Internal Revenue Code by the Second Revenue Act of 1940, may not be reduced by that part of such tax chargeable to net abnormal income attributable under section 721 to prior taxable years.
3. Special assessment of school tax levied against petitioner's property held not to be of a class abnormal for petitioner within the meaning of subparagraph (j)(i) of section 711(b)(1), I.R.C.
4. Certain deductions taken by petitioner during base period years for property taxes, ‘ Salaries Paid in Excess of Employment Period,‘ and interest held to be abnormal in amount within the meaning of subparagraph (J)(ii) of section 711(b)(1), I.R.C., and amounts of such deductions are to be disallowed in computing petitioner's excess profits tax credit for the taxable years determined.
The respondent determined deficiencies in income tax, declared value excess profits tax, and excess profits tax, as follows:
Year Tax Deficiency
1940 Excess profits tax $30,923.24
1941 Income tax 2,092.74
1941 Declared value excess profits tax 2,237.55
1941 Excess profits tax 27,124.93
In an amended petition filed at the trial, petitioner alleged an overpayment of excess profits tax in the amount of $7,032,14 for the calendar year 1940 as shown on claim for refund filed with the collector of internal revenue for the district of Connecticut on March 25, 1944. Also, in the amended petition petitioner alleges further overpayment of excess profits tax and interest for the calendar year 1940 and overpayments of income, declared value excess profits, and excess profits taxes and interest for the calendar year 1941 aggregating $67,265.31, being payments in whole or in part of the deficiencies stated in the deficiency notice, and that these payments were made to the collector of internal revenue for the district of Connecticut on September 28, 1945, after the mailing of the notice of deficiency and the filing of the original petition on August 30, 1945. The questions presented for our determination are:
(1) Is any portion of dividends on stocks of a foreign subsidiary corporation, constituting net abnormal income under section 721 of the Internal Revenue Code, received by the petitioner in the taxable year 1940, allocable to the taxable year 1940 for purposes of determining the excess profits tax net income? (2) Should that part of the chapter 1 tax which is chargeable to the abnormal income attributable to prior years be allowed as a deduction in computing the excess profits net income for the year 1940?
(3) Is the city of Hartford special assessment of school tax for the year 1937 abnormal as to class, for which adjustment may be made in the computation of excess profits tax credit? (4) In computing the excess profits tax credit for the year 1940, should income for the base period years 1937 and 1938 be adjusted for property taxes paid in those years? (5) In computing the excess profits tax credit for the years 1940 and 1941, should income for the base period year 1937 be adjusted for amounts paid as pensions, sickness pay, severance allowance, and payments to widows? (6) In computing the excess profits tax credit for the years 1940 and 1941, should the income for the base period years 1937, 1938, and 1939 be adjusted for interest paid in those years on a note issued July 1, 1937?
Petitioner is a corporation organized on December 31, 1928, under the laws of the State of Connecticut, pursuant to an agreement of consolidation or merger among the Arrow Electric Co., the Hart & Hegeman Manufacturing Co., the Arrow Manufacturing Co., and the H. & H. Electric Co. Its tax returns for the calendar years 1940 and 1941, the period here involved, were filed with the collector of internal revenue for the district of Connecticut. It kept its books and filed its returns on the accrual basis. Since incorporation, petitioner has been engaged in the manufacture and distribution of electrical products. Its principal office and factory have been located in Hartford, Connecticut. ISSUE NO. 1. FINDINGS OF FACT. Arrow-Hart & Hegeman (Canada), Ltd., (hereinafter called the Canadian subsidiary) is a corporation organized in 1932 under the laws of the Dominion of Canada. Since incorporation it has been a wholly owned subsidiary of the petitioner, and it is not a foreign personal holding company. At all times since incorporation both the petitioner and the Canadian subsidiary have kept their books and made their income and excess profits tax returns on the calendar year basis under the accrual method. Petitioner computed its excess profits net income for the calendar year 1940 under the income credit method. The canadian subsidiary is a manufacturer of electrical wiring devices and is located in Toronto, Canada. On March 15, 1940, the petitioner received a dividend from the Canadian subsidiary in the United States dollar amount of $191,551.92, Page 1353 which dividend was the first ever paid by the Canadian subsidiary. This dividend was the only dividend received by the petitioner from a foreign corporation in the calendar year 1940 and no dividends from a foreign corporation were received by the petitioner prior to the year 1940. The dividend was paid pursuant to a resolution of the board of directors of the Canadian subsidiary adopted on March 7, ,940, as follows:
VOTED: That a dividend out of earned surplus of $194,029.40 be paid March 15, 1940 to stockholders of record at the close of business March 8, 1940 in the following manner: $169,029.40 by means of a credit note or notes and $25,000 in cash.
Said dividend of $194,029.40 in Canadian funds amounted to $191,551.92 in United States funds, consisting of a credit for $169,029.40 plus $22,522.52 cash, the latter being the United States equivalent of 25,000 Canadian dollars converted at the official rate of exchange prevailing on March 15, 1940. Under the law of Canada in effect that the time said dividend was declared and paid, the transfer of cash, credits, or securities out of the Dominion of Canada was prohibited except upon the approval by the Dominion's Foreign Exchange Control Board. Under date of February 7, 1940, the foreign subsidiary filed an application with the Foreign Exchange Control Board for permission to transfer out of Canada a dividend of $194,029.40, out of its accumulated earnings at December 31, 1939. The board gave the required approval under date of February 14, 1940. Of the dividend paid on March 15, 1940, the board charged $153,618.98 to earnings accumulated at December 31, 1938, being the amount owed by petitioner to its subsidiary on that date, and the balance, $40,410.42, to current earnings for the calendar year 1939. The transfer of the credit of $169,029.40 in partial payment of said dividend was effected through the issuance by the Canadian subsidiary to the petitioner of the former's credit note dated March 15, 1940, crediting said amount against the balance of like amount in the inter-company account at December 31, 1939. The balance owing to the ,canadian subsidiary by the petitioner in said intercompany account at December 31, 1939, viz., $169,029.40, arose through current transfers of earnings by the Canadian subsidiary after organization to the petitioner without the formality of dividend declarations. The accumulated earnings of the Canadian subsidiary at December 31, 1938 and 1939, were as follows, as shown in reports of the company's independent auditors: December 31, 1938, $368,999.96, and December 31, 1939, $436,575.52. Page 1354 In the report of the company's independent auditors for the calendar year 1940 the earned surplus account of the Canadian subsidiary is stated thus:
Earned surplus as at January 1, 1940 $436,575.52
Dividend paid to Arrow-Hart & Hegeman Electric Co. of which $169,029.40 was applied against the intercompany account and $25,000.00 was paid in Canadian funds 194,029.40
Net Profit from Operations for year ended December 31, 1940 57,339.05
Earned Surplus as at December 31, 1940 $299,885.17
The earnings and profits of the Canadian subsidiary for the period January 1 to March 15, 1940, stated in Canadian dollars, were $11,489.54. The United States dollar amount of the earnings and profits of the Canadian subsidiary for the period January 1 to March 15, 1940, was $10,350.94, converted at the official rate of exchange prevailing on March 15, 1940. The earnings and...
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