ABC Brewing Corp. v. Comm'r of Internal Revenue
| Decision Date | 29 May 1953 |
| Docket Number | Docket Nos. 6701,11570. |
| Citation | 20 T.C. 515 |
| Parties | A B C BREWING CORP. (FORMERLY AZTEC BREWING COMPANY), A CALIFORNIA CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
20 T.C. 515
A B C BREWING CORP. (FORMERLY AZTEC BREWING COMPANY), A CALIFORNIA CORPORATION, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Docket Nos. 6701
11570.
Tax Court of the United States.
Promulgated May 29, 1953.
1. Carry-back of unused excess profits tax credits for 1945 and 1946 denied where petitioner distributed its operating assets and was de facto dissolved in 1944.
2. In the computation of average base period net income under the growth formula of section 713(f), respondent correctly applied the limitations imposed by subsection (f)(7), in addition to those imposed by subsection (f)(6), limiting the benefits from the application of the growth formula to the increase in base period earnings occurring prior to June 1, 1960.
3. In adjusting excess profits credit under section 713(g)(4), respondent correctly reduced distributable earnings and profits of 1944 by the excess profits tax liability for that year.
4. Petitioner's income was overstated in 1943 and understated in 1944 by reason of erroneous adjustments in those years of its bad debt reserve account.
5. Unused bad debt reserve transferred to income in 1944 held abnormal income excludible from excess profits tax net income under section 721(a)(1) of the Internal Revenue Code.
6. Petitioner held not entitled to relief under the provisions of section 722(b)(4), Internal Revenue Code.
[20 T.C. 515]
Donald C. McGovern, Esq., for the petitioner.
R. E. Maiden, Jr., Esq., and R. B. Sullivan, Esq., for the respondent.
These proceedings involve excess profits tax deficiencies for the fiscal years ended October 31, 1941, to October 31, 1944, in the respective amounts of $956.59, $29,513.66, $232,437.25, and $41,557.63.
Also involved is the question of whether and to what extent petitioner is entitled to relief from excess profits tax liability for those years under the provisions of section 722, Internal Revenue Code. Petitioner filed claims for relief under section 722 and for refunds of
[20 T.C. 516]
excess profits tax in the aggregate amount of $649,915.05. These claims were disallowed in toto.
The issue pertaining to the deficiencies are:
1. Whether petitioner is entitled to a carry-back of unused excess profits tax credits for 1945 and 1946.
2. Whether respondent has correctly computed petitioner's average base period net income under the provisions of section 713(f), Internal Revenue Code.
3. Whether, in adjusting petitioner's excess profits credit for 1944 under section 713(g)(4), the earnings and profits distributable to shareholders should be reduced by the estimated excess profits tax for that year.
4. Whether petitioner's income for 1943 was overstated and its 1944 income understated by reason of erroneous adjustments of its bad debt reserve account; and,
5. Whether a credit balance in petitioner's bad debt reserve account taken into income in 1944 was abnormal income attributable to prior years within the meaning of section 721(a)(1) or income attributable to the recovery of bad debts within the meaning of section 711(a)(1)(E) of the Internal Revenue Code.
Petitioner bases its claim for relief under section 722 solely upon section 722(b)(4). It contends that there were changes in the character of its business during the base period years both in its operations and the products manufactured. The claims for relief, as originally filed, were based on 722(b)(1), (2), (3), (4), and (5), but in this proceeding petitioner has abandoned all but its 722(b)(4) claims.
Other issues raised in the pleadings have been settled by stipulation and will be given effect under the Rule 50 recomputations.
The facts set out below are substantially those found by the commissioner, who took the evidence in the case, with the addition of certain conclusive facts not previously found. Other facts, some of which were stipulated and incorporated in the commissioner's findings by reference, will be stated when necessary in the discussion of the separate issues.
1. The stipulated facts are incorporated herein by this reference.
2. Petitioner is a California corporation with its principal place of business located in San Diego, California. Its returns for the taxable years involved were filed with the collector of internal revenue for the sixth district of California. The returns were prepared on an accrual basis for a fiscal year ending October 31.
3. Petitioner was organized under the laws of the State of California in 1932 under the name of Aztec Brewing Company. Its name
[20 T.C. 517]
was changed to A B C Brewing Corporation on September 21, 1946. Petitioner operated a brewery at San Diego California, from June 1933 to March 31, 1944. Its stockholders agreed to its dissolution on March 7, 1944, and on April 1, 1944, there was a distribution to the stockholders in partial liquidation of $750,000 book value of assets. Petitioner has not actively engaged in the brewery business since March 31, 1944.
4. Petitioner's balance sheets showed the following assets and liabilities at March 31, 1944, and at the close of the taxable years ended October 31, 1944, 1945, and 1946.
+-------------------------------------------------------+
¦Assets ¦Mar. 31, 1944 ¦
+------------------------------+------------------------¦
¦Current assets: ¦¦ ¦ ¦
+-----------------------------++-----------+------------¦
¦Cash on hand ¦¦$11,476.72 ¦ ¦
+-----------------------------++-----------+------------¦
¦Bank of America ¦¦554,791.02 ¦ ¦
+-----------------------------++-----------+------------¦
¦ ¦¦ ¦$566,267.74 ¦
+-----------------------------++-----------+------------¦
¦Accounts receivable—Customers¦¦ ¦171,136.19 ¦
+-----------------------------++-----------+------------¦
¦Inventories at cost: ¦¦ ¦ ¦
+-----------------------------++-----------+------------¦
¦Finished stock and containers¦¦$124,712.63¦ ¦
+-----------------------------++-----------+------------¦
¦Beer in storage ¦¦55,471.65 ¦ ¦
+-----------------------------++-----------+------------¦
¦Raw materials ¦¦115,162.53 ¦ ¦
+-----------------------------++-----------+------------¦
¦Supplies ¦¦68,064.24 ¦ ¦
+-----------------------------++-----------+------------¦
¦ ¦¦ ¦363,411.05 ¦
+-----------------------------++-----------+------------¦
¦Total current assets ¦¦ ¦1,100,814.98¦
+-----------------------------++-----------+------------¦
¦Property plant and equipment:¦¦ ¦ ¦
+-----------------------------++-----------+------------¦
¦Plant and equipment ¦¦$927,876.15¦ ¦
+-----------------------------++-----------+------------¦
¦Less reserve for depreciation¦¦541,415.73 ¦ ¦
+-----------------------------++-----------+------------¦
¦ ¦¦ ¦386,460.42 ¦
+-----------------------------++-----------+------------¦
¦Land ¦¦ ¦8,501.29 ¦
+-----------------------------++-----------+------------¦
¦Other assets: ¦¦ ¦ ¦
+-----------------------------++-----------+------------¦
¦Cash deposits ¦¦$5,120.00 ¦ ¦
+-----------------------------++-----------+------------¦
¦Sundry debtors ¦¦978.02 ¦ ¦
+-----------------------------++-----------+------------¦
¦Investments (per Contra) ¦¦1,696.32 ¦ ¦
+-----------------------------++-----------+------------¦
¦ ¦¦ ¦7,794.34 ¦
+-----------------------------++-----------+------------¦
¦Deferred expenses: ¦¦ ¦ ¦
+-----------------------------++-----------+------------¦
¦Taxes ¦¦25,619.94 ¦ ¦
+-----------------------------++-----------+------------¦
¦Insurance ¦¦8,016.80 ¦ ¦
+-----------------------------++-----------+------------¦
¦General expense ¦¦97.12 ¦ ¦
+-----------------------------++-----------+------------¦
¦ ¦¦ ¦33,733.86 ¦
+-----------------------------++-----------+------------¦
¦Intangible assets: ¦¦ ¦ ¦
+-----------------------------++-----------+------------¦
¦Organization expense ¦¦662.95 ¦ ¦
+-----------------------------++-----------+------------¦
¦Trade marks ¦¦2,353.83 ¦ ¦
+-----------------------------++-----------+------------¦
¦ ¦¦ ¦3,016.78 ¦
+-----------------------------++-----------+------------¦
¦Total assets ¦¦ ¦1,540,321.67¦
+-------------------------------------------------------+
Liabilities
Current liabilities
Notes payable to vendors $18,937.14
Accounts payable 29,730.50
48,667.64
Accrued liabilities
Salaries and wages 7,617.43
Social security and unemployment taxes 14,108.41
Other taxes 357,453.77
$379,179.61
Total current liabilities 427,847.25
Other liabilities
Credit balances in former customers' $240.85
accounts
Unrealized profit on excess profit tax 1,696.32
bonds (per Contra)
$1,937.17
Capital stock 100,000.00
Surplus $584,591.42
Current year profits $425,945.83
$1,010,537.25
Total capital 1,110,537.25
Total liabilities $1,540,321.67
Oct. 31
Assets 1944 1945 1946
Cash $107,158.61 $1,498.11 $15,299.58
U.S. Treasury obligations 143,172.23 13,172.23 10,000.00
Total assets 250,330.84 14,670.34 25,299.58
Liabilities
Accrued taxes 13,050.36 72.13
Accrued expenses 25.35 21.25
Unrealized profit on excess profits tax bonds 3,172.23 3,172.23
Capital stock 100,000.00 100,000.00 100,000.00
Earned surplus 884,108.25 661,472.76 675,206.20
Subtotal 984,108.25 761,472.76 775,206.20
Less: Liquidation account 750,000.00 750,000.00 750,000.00
Net worth 234,108.25 11,472.76 25,206.20
Total liabilities $250,330.84 $14,670.34 $25,299.58
[20 T.C. 518]
5. The increase in net worth over the period October 31, 1945, to October 31, 1946, of $13,733.44, as shown above, was derived as follows:
+------------------------------------------------+
¦Recoveries on bad debts ¦$150.00 ¦
+-------------------------------------+----------¦
¦Refund of California franchise tax ¦204.12 ¦
+-------------------------------------+----------¦
¦Postwar refunds of excess profits tax¦13,472.70 ¦
+-------------------------------------+----------¦
¦Total additions ¦13,826.82 ¦
+-------------------------------------+----------¦
¦California franchise tax ¦21.25 ¦
+-------------------------------------+----------¦
¦Federal income tax ¦72.13 ¦
+-------------------------------------+----------¦
¦Total
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