ABC Brewing Corporation v. Commissioner of Int. Rev.

Decision Date22 June 1955
Docket NumberNo. 14412.,14412.
Citation224 F.2d 483
PartiesA B C BREWING CORPORATION (formerly Aztec Brewing Co.), a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Ninth Circuit

Todd W. Johnson and Edward D. Robertson, Los Angeles, Cal., for petitioner.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Caroly R. Just and David O. Walter, Sp. Assts. to Atty. Gen., for respondent.

Before STEPHENS and CHAMBERS, Circuit Judges, and YANKWICH, District Judge.

YANKWICH, District Judge.

The facts involved in this petition to review a decision of the Tax Court of the United States, as they may be gathered from the stipulated facts and facts found by the Tax Court, 20 T.C. 515, which cannot be successfully disputed, are these:

A B C Brewing Corporation, formerly known as the Aztec Brewing Company, the petitioner (to be referred to hereafter as "taxpayer") is a California corporation with its principal place of business located at San Diego, California. Its return for the taxable years involved, filed with the Collector of Internal Revenue for the Sixth District of California, were prepared on an accrual basis for a fiscal year ending October 31. Taxpayer was organized under the laws of California in 1932 under the name of Aztec Brewing Company, which name was changed to A B C Brewing Corporation on September 21, 1946.

Taxpayer 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 and partial liquidation of $750,000.00 book value of assets. Taxpayer has not actively engaged in the brewery business since March 31, 1944. Petitioner's balance sheets showed the following assets and liabilities on March 31, 1944:

Total assets — $1,540,321.67; Total liabilities, — $1,540,321.67. The items which went to make up these items are not important. However, it is well to note that the corporation listed as cash on hand $11,476.72, and cash deposited in the Bank of America, $554,791.02, or a total of $566,267.74. The inventory cost of finished stock and containers, beer in storage, raw material and supplies totaled $363,411.05. The plant and equipment were listed, after deducting reserve for depreciation, at $386,460.42. As of October 31, 1944, the assets had been reduced to: Cash $107,158.61, United States Treasury obligations, $143,172.23, or a total of $250,330.84. The liabilities as of October 31, 1944, consisted chiefly of accrued taxes, accrued expenses, unrealized profit on excess profits tax bonds, and earned surplus, which, after various deductions, reduced the liabilities to $250,330.84. The details do not concern us in this review. The balance sheets as of October 31, for the years 1945 and 1946 were:

                  Assets               1945         1946
                  Cash             $ 1,498.11    $15,299.58
                  U.S. Treasury
                    Obligations     13,172.23     10,000.00
                                  ___________   ___________
                  Total Assets      14,670.32     25,299.58

The increase in the net worth over the period October 31, 1945, to October 31, 1946, was $13,733.44. Additional details will be given during the course of the discussion to follow.

Petitioner's returns for the years 1945 and 1946 showed the following items of gross income and deductions:

                               Fiscal Year Ended October 31
                  Gross Income             1945           1946
                  Interest on U.S
                    Obligations          $  582.00
                  Recoveries on bad
                    debts                   256.00       $150.00
                  Refund on Calif
                    franchise tax                         204.12
                                          ________       _______
                        Total income        838.00        354.12
                  Capital stock tax          62.50
                  California franchise
                    tax                  12,621.34         21.25
                  Collection fee on
                    debt recoveries          30.00
                                         _________        ______
                  Total deductions       12,713.84         21.25
                                       ____________     ________
                  Net income
                    or (loss)          $(11,875.84)      $332.87

Taxpayer maintained a bank account throughout 1944, 1945 and 1946, during which years its president and auditor performed certain services on its behalf, such as preparation and filing of federal and state tax returns, petitions to the Tax Court, applications for relief under Section 722, 26 U.S.C.A. § 722, and taking care of other matters relating to the winding up of the taxpayer's affairs. Some collections were made in 1944 and 1945 of small amounts on accounts which taxpayer had previously charged off, and certain small expenses were incurred.

On January 4, 1946, taxpayer's auditor received a letter from its attorney, which, among other things, stated:

"It is also believed advisable to file a corporation excess profits tax return for the year ended October 31, 1945, even though no tax is due for that year in order to show a basis for claiming the benefits of an unused excess profits credit carry-back. That return has been prepared and is enclosed herewith in triplicate."

No dissolution certificate has ever been filed on taxpayer's behalf with the Secretary of State of California, as required by Section 5200 of the California Corporations Code.

Taxpayer filed corporation income tax and excess profits tax returns for the years 1943, 1944, 1945 and 1946 with the Collector of Internal Revenue for the Sixth District of California. On September 18, 1944, and April 20, 1946, the Collector of Internal Revenue mailed a notice of deficiency to the taxpayer advising it of a deficiency in excess profits taxes of $232,437.25 for the fiscal year 1943, and $41,557.63 for the fiscal year 1944. Timely petitions for redetermination of deficiencies under Section 275 of the Internal Revenue Code, 26 U.S.C.A. § 275, were filed with the Tax Court. On March 16, 1954, the Tax Court entered its decision finding deficiencies in excess profits taxes for the years 1943 and 1944 in the amounts of $217,423.07 and $36,738.21, respectively.

Before us is a petition to review the decision of the Tax Court, Internal Revenue Code, 1954, 26 U.S.C., § 7482, in which we are to determine the correctness of the finding of the Tax Court disallowing the taxpayer's claim for a carry-back of the alleged unused excess profits credit from the fiscal years 1945 and 1946 to the year 1944.

The problem involved arises under the provisions of Section 710(a) of the Internal Revenue Code of 1939 as added by Section 201, Second Revenue Act of 1940, c. 757, 54 Stat. 974, which imposes a 95 per centum tax on the "adjusted excess profits net income". 26 U.S.C., 1952 ed., § 710(a) (1) (A).

The term "adjusted excess profits net income" is defined to mean the excess-profits net income as defined in Section 711, from which is deducted a certain specific exemption, Section 710(b) (1), an excess profits credit under Section 712, Sec. 710(b) (2), and "the amount of the unused excess profits credit adjustment for the taxable year computed in accordance with subsection (c)". Sec. 710(b) (3).

The unused excess-profits credit adjustment for a taxable year consists of "the aggregate of the unused excess profits credit carry-overs and unused excess profits credit carry-backs to such taxable year". Sec. 710(c) (1), 26 U.S.C., § 710, 1952 ed.

Section 713 of the same Act made the excess-profits tax credit "95 per centum of the average base period net income". Sec. 713(a) (1) (A).

In the case before us, the Tax Court allowed carry-backs for the entire taxable year 1944, but disallowed the taxpayer's claim for a carry-back of alleged unused excess-profits credit from the fiscal years 1945 and 1946 to the year 1944. The authority for such carry-back is contained in Section 710(c) (3) (A), which, excluding certain exceptions which do not concern us here, reads:

"(A) Unused excess profits credit carry-back. If for any taxable year beginning after December 31, 1941, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-back for each of the two preceding taxable years." 26 U.S.C., 1952 ed., § 710 (c) (3) (A).

The object of the excess-profits tax and of the provisions allowing carry-backs for the years prior to 1945 when the excess-profits tax was repealed, has been stated very well by the Court of Claims in a unanimous decision:

"The purpose of the excess profits tax law was, of course, to absorb by taxation most of any abnormal profits which the stimulation of business by the war might bring to corporations. Excess profits were those in excess of the average profits of certain prewar years, and in excess of a specified return on invested capital. But, in order to prevent the undue hardship which might result from taking by taxation practically all abnormal profits while maintenance and upkeep expenses were having to be deferred because of shortages and wartime restrictions, leaving plants run down and no reserves to restore them, Congress in 1942 enacted section 710(c) (3) (A) of the Internal Revenue Code, 26 U.S.C.A., § 710(c) (3) (A), providing for the carry-back of any unused excess profits tax credit to cancel out excess profits taxes incurred for the two preceding years. This meant, as we understand it, that if a corporation having had excess profits in a given year, in a later year had less than normal profits, measured by the prewar standard formula, it could carry this deficiency in profits back to balance its excess profits for one or both of the two preceding years. When, in 1945, Congress repealed the excess profits tax law, it thought that it was fair to continue, for the year 1946, the averaging out process embodied in the carry-back provision, so it left that provision in effect for the year 1946." Aluminum Products Co. v. United States, 101 F.Supp. 373, 375, 121 Ct.Cl. 187.

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