Arcade Department Store, Inc. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 6298.
| Decision Date | 14 February 1930 |
| Docket Number | Docket No. 6298. |
| Citation | 18 BTA 1172 |
| Parties | ARCADE DEPARTMENT STORE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Harold B. Gilbert, Esq., for the petitioner.
Arthur H. Murray, Esq., for the respondent.
The respondent has asserted deficiencies in income and profits taxes for the period July 1, 1918, to December 31, 1918, and for the year 1919, in the respective amounts of $3,847.82 and $1,117.77. For its causes of action the petitioner alleges:
(1) That its opening inventory at date of incorporation was undervalued in the amount of $10,500, and that respondent is in error in refusing to allow any adjustment of such inventory value for income and excess profits purposes;
(2) That the respondent has erroneously disallowed as deductions from its gross income for the taxable period and year involved reasonable amounts on account of depreciation of capital assets;
(3) The erroneous disallowance of $780.15 as a deduction from gross income for 1919 on account of debts alleged to have been worthless and to have been charged off in that year;
(4) That the respondent erroneously allocated to the taxable period ended December 31, 1918, certain salary payments that were an expense to its business in 1919;
(5) That state personal property taxes for the years 1918 and 1919, paid in the years 1919 and 1920, are proper accruals on its books for the year in which such taxes were levied; and
(6) That the statute of limitations had run against a collection of the deficiencies asserted when the respondent's deficiency letter was issued.
FINDINGS OF FACT.
The petitioner, in the taxable period and year involved, was a Washington corporation, with its principal place of business in Toppenish, where it conducted a department store. It was organized August 17, 1918, as the successor of Hinman & Dobrin, a partnership, theretofore engaged in the dry goods and ladies' furnishing business, and E. J. Tweed, who was engaged in the grocery business as an individual. The capital stock at date of organization was $50,000.
Upon its incorporation, the petitioner took over merchandise stocks, store fixtures and receivables, and assumed the payables of the two predecessor concerns. No inventories of merchandise stocks and fixtures acquired at date of incorporation were made at that time. In arriving at the value of merchandise acquired for stock, the inventories of the predecessor concerns as of January 1, 1918, were used as a basis, additions and sales during the time intervening before August 17 were considered, and estimated values of the merchandise taken into the assets of the petitioner were made in the respective amounts of $69,325.96 and $4,500. The fixtures, receivables, and payables of the predecessors were transferred to the accounts of the petitioner at book value at date of the incorporation.
Some time before the close of the first taxable period here involved, the prior owners of the merchandise stocks acquired from the partnership and the individual business decided that such stocks had been taken into the accounts of the petitioner at figures substantially below actual value at August 17, 1918. To correct this alleged undervaluation, the accounts of the members of the partnership, and of the individual, were credited with the respective amounts of $10,000 and $500; but no additional stock was issued, nor were any cash payments ever made on account of such entries.
At December 31, 1918, the petitioner made a closing inventory, on some basis not clearly disclosed by the record, which showed merchandise on hand at that date of the value of $74,512.40. In its income and profits-tax return for such period it reported a closing inventory of $64,012.40. This write-down represents the alleged undervaluation of merchandise acquired at date of incorporation and subsequently credited to the prior owners thereof, and reduced the gross profits of the business for the period as shown by the books in the same amount. Upon audit of such return the respondent restored this inventory write-off and correspondingly increased the gross profits of the business.
At date of incorporation the petitioner took into its asset accounts furniture and fixtures acquired from prior owners at a book value of $6,814.28. Such assets consisted of a mixed body of fitments and equipment made up of counters, shelving, scales, and other furniture and fixtures commonly used in the dry goods and grocery business. There is nothing in the record that discloses the original cost, the accrued depreciation, or the remaining useful life of such property at date of its acquisition by the petitioner.
Subsequent to August 17, 1918, and prior to January 1, 1919, the petitioner acquired a Burroughs posting machine and a Lamson cash carrier, at respective costs of $500 and $2,400. The useful life of such equipment is 10 years. During the same period it acquired a desk, a typewriter, a showcase, and a new clothing cabinet at respective costs of $85, $60, $50, and $182.50. The useful life of these articles at date of acquisition was six years. In the same period it acquired a new Dodge delivery truck at a cost of $1,250. The useful life of such truck, when purchased, was four years.
In its income and profits-tax return for the period and years here involved the petitioner deducted from its gross income the respective amounts of $445.47 and $1,484.55 on account of depreciation of physical assets used in its business. Upon audit, the Commissioner disallowed such deductions.
At December 31, 1919, the petitioner charged off $2,584.03, alleged to represent bad debts or losses sustained during the taxable year, and in its income and profits-tax return deducted such amount from its gross income for such year. Upon audit the respondent disallowed $780.15 of this amount.
Upon audit of the petitioner's income and profits-tax returns for the period ended December 31, 1918, and the year 1919, the respondent reduced the deduction from gross income on account of salaries for the year 1919 in the amount of $3,000, and allowed the amount so deducted as deduction from gross income for the period ended December 31, 1918, on account of salaries for that period.
In the years 1919 and 1920 the petitioner paid state and local personal property taxes for the years 1918 and 1919 in the respective amounts of $360.72 and $1,295.60, accrued such payments on its books for the period ended December 31, 1918, and the year 1919, in its income and profits-tax returns, and deducted the amounts so paid from its gross income for the respective period and year.
The petitioner filed its income and excess-profits-tax returns for the taxable period ended December 31, 1918, and for the year 1919 on May 1, 1919, and March 13, 1920, respectively. On April 11, 1924, consent was entered into in writing by the officers of the petitioner and the respondent which extended the period of time within which the Commissioner of Internal Revenue might determine, assess and collect any tax from petitioner for the year 1918 until one year after the expiration of the statutory period of limitation then running against the same, or until May 1, 1925.
On or about June 17, 1925, the respondent mailed the deficiency notice which is the basis of this proceeding. On August 15, 1925, the petitioner filed a petition with this Board asking that the deficiency so asserted be redetermined. On September 8, 1925, the respondent filed his answer to such petition.
On December 1, 1925, the following waiver was executed in writing between officers of the petitioner and the respondent:
In pursuance of the provisions of existing Internal Revenue Laws Arcade Department Store, Inc., a taxpayer of Yakima, Washington, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the years 1918 and 1919, under existing revenue acts, or under prior revenue acts.
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
The Revenue Act of 1924, including section 278 (e), became effective on June 2, 1924.
No assessment of the deficiencies in controversy was made prior to June 2, 1924, but such deficiencies were assessed on September 26, 1926, after the enactment of the Revenue Act of 1926.
The issues involved in this proceeding are fully set forth in our preliminary statement and need not be repeated here. They will be discussed and decided in the order...
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