Frank Shepard Co. v. Comm'r of Internal Revenue

Citation9 T.C. 913
Decision Date06 November 1947
Docket NumberDocket No. 8904.
PartiesTHE FRANK SHEPARD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Since its incorporation in 1900 petitioner has been continuously engaged in the business of compiling and publishing legal citations. Early in 1938, due to the sense of social responsibility to do something towards providing for the superannuation of its older employees, it pensioned 2 of its employees, who were no longer able to work. Later in 1938 it purchased annuity policies, to commence at age 65, for a number of other employees. In 1939 it continued to pay pensions to the 2 employees pensioned in the previous year and purchased additional annuity policies for others. The amounts so expended for premiums and pensions were allowed as deductions from gross income in the respective years. Prior to 1938 petitioner had never made any such expenditures. Held, under section 711(b)(1)(J), I.R.C., that the deductions for both premiums and pensions constituted a single class of deductions separate and distinct from all other classes of deductions; that such deductions for 1938 were abnormal; that such deductions for 1939 were normal because a definite course of conduct had been entered upon in the prior year 1938; and that such abnormality under subparagraph (J)(i) and excess under subparagraph (J)(ii) should be disallowed for the purpose of determining petitioner's excess profits credit; held, further, petitioner has established that the abnormality and excess of the deductions disallowed under subparagraph (J) were not the consequence of any of the factors mentioned in section 711(b)(1)(K)(ii), I.R.C. Norris Darrell, Esq., and Alexander J. Bruen, Esq., for the petitioner.

Martin M. Lore, Esq., for the respondent.

The respondent, for the calendar year 1942, determined a deficiency in declared value excess profits tax of $823.25; a deficiency in excess profits tax of $22,331.69; and an overassessment in income tax of $4,852.30. Petitioner contests the entire deficiency in excess profits tax, but makes no contest as to the remainder of the determination.

Petitioner, in its excess profits tax return, schedule B, line 24(c), claimed as abnormal deductions under section 711(b)(1)(J)(ii) and (K) of the Internal Revenue Code for the taxable years in the base period ended December 31, 1938 and 1939, the amounts of $52,344.46 and $1,011.89, respectively. In a statement attached to the return it explained these amounts as follows:

Deduction for Premiums on Deferred Annuities Purchased for Employees

+----------------+
                ¦1940¦$22,800.73 ¦
                +----+-----------¦
                ¦1939¦17,369.53  ¦
                +----+-----------¦
                ¦1938¦52,344.46  ¦
                +----+-----------¦
                ¦1937¦None       ¦
                +----+-----------¦
                ¦1936¦None       ¦
                +----+-----------¦
                ¦1935¦None       ¦
                +----+-----------¦
                ¦1934¦None       ¦
                +----+-----------¦
                ¦1933¦None       ¦
                +----+-----------¦
                ¦1932¦None       ¦
                +----------------+
                

Adjustment of Base Period Net Income Under Section 711(b)(1)(J) of the Internal Revenue Code

+-----------------------------------------------------------------+
                ¦Year 1938                                             ¦          ¦
                +------------------------------------------------------+----------¦
                ¦Excess of Deduction over 125% of the Average for 1934 ¦          ¦
                +------------------------------------------------------+----------¦
                ¦1935, 1936, 1937                                      ¦$52,344.46¦
                +------------------------------------------------------+----------¦
                ¦Excess of Deduction over Year 1942                    ¦$52,344.46¦
                +------------------------------------------------------+----------¦
                ¦Year 1939                                             ¦          ¦
                +------------------------------------------------------+----------¦
                ¦Excess of Deduction over 125% of the Average for 1935,¦          ¦
                +------------------------------------------------------+----------¦
                ¦936, 1937, 1938                                       ¦$1,011.89 ¦
                +------------------------------------------------------+----------¦
                ¦Excess of Deduction over Year 1942                    ¦17,369.53 ¦
                +-----------------------------------------------------------------+
                

The amounts of the adjustments in the above deductions have no relation to the prices and gross sales of the taxpayer nor are they a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in the base period. Furthermore, they have no relation to nor are they a consequence of any change in the type, manner of operation, size or condition of the business engaged in by the taxpayer.

As will appear in our findings, the amounts shown in the above statement attached to the return as deductions for premiums in 1938 and 1939 of $52,344.46 and $17,369.53, respectively, included deductions for pensions of $1,529 and $2,132, respectively, so that the correct figures to be considered for these years will appear as follows:

+------------------------------------------------+
                ¦                          ¦1938      ¦1939      ¦
                +--------------------------+----------+----------¦
                ¦(a) Deduction for premiums¦$50,815.46¦$15,237.53¦
                +--------------------------+----------+----------¦
                ¦(b) Deduction for pensions¦1,529.00  ¦2,132.00  ¦
                +--------------------------+----------+----------¦
                ¦Total                     ¦$52,344.46¦$17,369.53¦
                +------------------------------------------------+
                

As will also appear in our findings, petitioner, in the taxable year 1942, paid nothing for premiums, but did pay $1,493 for pensions.

The respondent, in the statement attached to the deficiency notice, disallowed the above claimed abnormal deductions and explained his adjustments as follows:

Explanation of Adjustments

(a) It is held that the provisions of section 711(b)(1)(J) and (K) of the Internal Revenue Code bar the allowance of your claim for abnormal deductions with respect to the cost of single premium insurance policies purchased for some of your employees during the years 1938 and 1939 in computing the excess profits net income for these two years for the purpose of determining your excess profits credit.

(b) For the same reason given in explanation of adjustment (a), supra, the abnormal deductions adjustments of $1,529.00 and $1,011.89 in the base period years 1938 and 1939 for pensions paid to former employees are eliminated.

Petitioner, by appropriate assignments of error, contests the above adjustments made by the respondent in such manner as to present for consideration the following issues:

(1) Is petitioner entitled under either subparagraph (J)(i) or (J)(ii) section 711(b)(1) of the Internal Revenue Code and section 711(b)(1)(K) to a disallowance of the deduction for premiums paid in 1938 in the amount of $50,815.46?

(2) Is petitioner entitled under subparagraph (J)(i) of section 711(b)(1) and section 711(b)(1)(K) to a disallowance of the deduction for premiums paid in 1939 in the amount of $15,237.53?

(3) Is petitioner entitled under section 711(b)(1)(J) and (K) to a disallowance of the deduction for pensions paid in 1938 to the extent of $36 ($1,529 paid in 1938 but limited under section 711(b)(1)(K)(iii) to the excess of that amount over the $1,493 paid in the taxable year 1942)?

(4) Is petitioner entitled under section 711(b)(1)(J) and (K) to a disallowance of the deduction for pensions paid in 1939 to the extent of $639 ($2,132 paid in 1939 but limited under section 711(b)(1)(K)(iii) to the excess of that amount over the $1,493 paid in the taxable year 1942)?

Petitioner also claimed an unused excess profits credit adjustment of $28,773.75 in its excess profits tax return. The respondent, in schedule 6 of the statement attached to the deficiency notice, disallowed this claim and explained his disallowance as follows:

It is held that you had no unused excess profits credit carry-over to the year 1942 from the years 1940 and 1941 under the provisions of section 710(c) of the Internal Revenue Code as amended. Accordingly, the unused excess profits credit adjustment in amount of $28,733.75 claimed therefor is eliminated.

Petitioner, by appropriate assignments of error, also contests this disallowance. The solution of this issue, however, depends upon our holding relative to the issues previously stated.

Some of the facts were stipulated and others were developed by oral testimony and by documentary evidence.

FINDINGS OF FACT.

The facts as stipulated are so found.

Petitioner, for all the years pertinent to this proceeding, was a corporation, organized under the laws of the State of New York.

For all the years pertinent to this proceeding petitioner kept its books and filed its tax returns on an accrual basis and for taxable periods of 12 months ended on December 31 of each year. Petitioner's income tax return and its excess profits tax return for the calendar year 1942, and its tax returns for the other years pertinent to this proceeding, were filed with the collector for the second district of New York.

Since its incorporation in 1900 petitioner has been continuously engaged in the business of compiling and publishing legal citations, commonly known as ‘shepard's Citations.‘ The income of petitioner is derived from the sale of bound volumes of citations and from new and renewal subscriptions to cumulative supplements.

During the years 1934 to 1943, inclusive, petitioner employed an average of 236 persons.

Prior to 1938 petitioner had never paid a pension to any employee or former employee and had never purchased for any employee any retirement annuity. Except for social security taxes paid for the first time in 1937 under the Federal Social Security Act, petitioner had never before 1938 provided benefits for any of its employees upon or after their retirement. Petitioner considered that its employees had been fully compensated by their current salaries, and until the enactment of social security legisl...

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6 cases
  • Telfair Stockton & Co. v. Comm'r of Internal Revenue, Docket No. 6164.
    • United States
    • U.S. Tax Court
    • November 19, 1953
    ...may result from an improvident contract, the deduction must be an expenditure which is not ordinary or usual for the petitioner. Frank Shepard Co., 9 T.C. 913. ‘Abnormal‘ is defined by Webster's New International Dictionary as meaning ‘Not conformed to rule or system; deviating from the typ......
  • Universal Optical Co. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • October 14, 1948
    ...in 1936 is not sufficient by itself to establish that the deduction for officers' compensation was due to such increase. See Frank Shepard Co., 9 T.C. 913, 926, and O. Hommel Co., 8 T.C. 383, 387. American Paper Specialty Mfg. Co., 9 T.C. 166, cited by respondent, is distinguishable on the ......
  • Quaker Oats Co. v. Comm'r of Internal Revenue, Docket No. 48679.
    • United States
    • U.S. Tax Court
    • June 11, 1957
    ...petitioner had commenced many years before 1938. In this respect, petitioner's situation does not differ from that in Frank Shepard Co., 9 T.C. 913. There the corporate taxpayer had never paid a pension to any employee prior to 1938. Early in 1938, the taxpayer retired 2 employees who had b......
  • Walter Motor Truck Co.  v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • March 28, 1951
    ...old age benefit tax, and other items. This Court held that there was no difference between these classifications of interest. Cf. Frank Shepard Co., 9 T.C. 913. In view of the above we hold that the payments of interest involved here were of the same class and that under section 711(b)(1)(K......
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