7 T.C. 354 (1946), 5783, City Auto Stamping Co. v. C. I. R.

Docket Nº:5783.
Citation:7 T.C. 354
Opinion Judge:DISNEY, Judge:
Party Name:THE CITY AUTO STAMPING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:LeRoy Eastman, Esq., and L. T. Konopak, C.P.A., for the petitioner. Lawrence R. Bloomenthal, Esq., for the respondent.
Case Date:July 11, 1946
Court:United States Tax Court

Page 354

7 T.C. 354 (1946)

THE CITY AUTO STAMPING COMPANY, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

No. 5783.

United States Tax Court.

July 11, 1946

The petitioner, a manufacturing corporation, in 1933 paid approximately $300,000 on judgments in suits brought by the Superintendent of Banks alleging unlawful preference in withdrawals of deposits. In 1937 it paid approximately $70,000 in settlement of a suit brought against it involving a dispute over a contract as to patent rights, also in settlement of a suit brought by stockholders, alleging mismanagement in connection with the patent rights and the litigation growing therefrom. In computing excess profits taxes for 1941 the Commissioner denied restoration of deduction of $70,000 taken by the petitioner in 1937. Held, that Regulations 109, section 30.711(b)-2, is not valid basis for the Commissioner's determination that the deductions in 1937 were normal; and that they were abnormal for the petitioner; held, further, that the petitioner has shown, under section 711(b)(1)(K)(ii), that the abnormality was not a consequence of a change at any time in the type, manner of operation, size or condition of the business engaged in by the petitioner.

LeRoy Eastman, Esq., and L. T. Konopak, C.P.A., for the petitioner.

Lawrence R. Bloomenthal, Esq., for the respondent.

This case involves income tax for the calendar years 1940 and 1941 and excess profits tax for 1941. A deficiency of $12,165.81 in excess profits tax was determined for 1941, and overassessment of income tax was determined of $288 for 1940 and $2,490.62 for 1941. The petition prays for a refund of $40,951.37 for the year 1941. The general issue presented is whether the petitioner, in computing excess profits tax, was entitled to have certain deductions of expense incurred in connection with litigation in 1937 disallowed as abnormalities. From evidence adduced, admission, and stipulations (which stipulations we adopt, setting forth here only parts considered necessary), we make the following findings of fact.

FINDINGS OF FACT.

1. The petitioner is an Ohio corporation, incorporated February 23, 1929, with its principal office at Toledo, Ohio. The return for the calendar year 1941 relating to the income and excess profits tax liability of this corporation was filed with the collector of internal revenue for the tenth district of Ohio. Petitioner was in existence during the years 1936 to 1939, inclusive.

2. The notice of deficiency from which the appeal herein is taken was mailed to the petitioner on June 5, 1944. Claim for refund of $40,951.37 was filed on June 15, 1944, by petitioner with the collector for the tenth district of Ohio.

Page 355

3. The articles of incorporation of the petitioner corporation state its main purpose as follows: ‘ To carry on a general stamping business, including the manufacturing, buying, selling and otherwise dealing in metal stampings of all kinds, forms and combinations, and the doing of all things necessary, incident and convenient thereto.‘

4. The principal business of the City Auto Stamping Co. consists of the manufacture of stampings and stamping assemblies, as well as truck cab roofs and backs, automobile doors, grills, hoods, fenders and other parts for automobiles, trucks, farm tractors and refrigerators. Petitioner also manufactures dies for the production of the aforesaid assemblies and other items such as power saw parts, metal table legs, and other articles adapted to manufacture by the facilities of petitioner. Petitioner operates exclusively as a contract shop, making products according to the specifications of its customers.

5. In connection with the settlement of a suit brought by the Dole Valve Co. involving the cancellation of a patent license contract, petitioner made payments in the year 1937 totaling $48,023.99. The suit was filed by Dole Valve Co. against petitioner in the United States District Court for the Northern District of Ohio, to recover judgment for $100,000, with 6 per cent interest from May 17, 1934, on $50,000 and from May 17, 1935, on $50,000, as payments allegedly agreed upon as consideration for the sale of certain patent rights (held by Dole Valve Co. under license from one Morrison, and involving inventions of ventilating windows for automobiles), under which agreement, consented to by Morrison, petitioner had agreed to pay $300,000, $50,000 in cash and $50,000 yearly, and of which it paid the first $50,000. The Dole Valve Co. alleged breach of contract. Petitioner filed a general denial and further defended on the ground that Morrison was a necessary party plaintiff; that it entered into the contract because of reliance upon false representations knowingly made, and demanded repayment of the $50,000 already paid; that it had notified the plaintiff of its refusal to be bound by the contract and had surrendered and formally offered in writing to surrender all rights under such contract; that if the agreement had been legally made it had been repudiated by the plaintiff; and that the petitioner had been caused losses in the total amount of $84,249.45. Petitioner also claimed return of the $50,000 paid, making the total sum claimed $134,249.45, and interest.

6. After execution of the agreement with Dole Valve Co., and about the latter part of 1933, and pursuant to the patents involved in the contract, the petitioner began manufacture of wing ventilators for several companies for assembly into bodies of several well known makes of automobiles. Such production was continued until February 1935. Production was discontinued as the result of investigation as to the patent applications involved in the contract. On February 9,

Page 356

1935, petitioner, in writing, notified Dole Valve Co. that the contract was void, that it refused to be bound by it and surrendered all rights thereunder, and that it demanded restoration of all moneys paid.

7. On November 8, 1937, the litigation with Dole Valve Co. was dismissed, after settlement. The contract was rescinded, and the patent rights involved in the agreement were reassigned. The petitioner paid Dole Valve Co. $25,000 and paid attorneys' fees of $23,023.99.

8. In 1937 petitioner made payments of attorney and counsel fees and expenses aggregating...

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