Campbell-Fairbanks Expositions v. United States

• Decision Date: 03 December 1943
• Docket Number: No. 2148.,2148.
• Citation: 53 F. Supp. 331
• Parties: CAMPBELL-FAIRBANKS EXPOSITIONS, Inc., v. UNITED STATES.
• Court: U.S. District Court — District of Massachusetts

53 F. Supp. 331

CAMPBELL-FAIRBANKS EXPOSITIONS, Inc., v. UNITED STATES.

No. 2148.

District Court, D. Massachusetts.

December 3, 1943.

Sullivan & Worcester, Geoffrey A. Sawyer, and Foster E. Allison, all of Boston, Mass., for plaintiff.

Edmund J. Brandon, U. S. Atty., and George F. Garrity, Asst. U. S. Atty., both of Boston, Mass., Samuel O. Clark, Jr., Asst. Atty. Gen. and Andrew D Sharpe and Leon F. Cooper, Sp. Assts. to the Atty. Gen., for defendant.

FORD, District Judge.

This is an action brought by the plaintiff corporation to recover surtaxes on undistributed profits for the period from January 1, 1936, to April 30, 1936, imposed by Section 14 of the Revenue Act of 1936, c. 690, 49 Stat. 1648. The applicable sections of the act are set out in the margin.¹

The facts are as follows:

The plaintiff, Campbell-Fairbanks Expositions, Inc., is a Massachusetts corporation engaged in the business of promoting, holding, and supervising fairs and expositions. Up to and including the year 1935, the plaintiff kept its books of account and filed its income tax returns on a calendar year basis. On April 6, 1936, the plaintiff applied to the Commissioner of Internal Revenue for permission to change its accounting period from a calendar year basis to a fiscal year basis ending April 30. In anticipation of permission to make the change, plaintiff did in fact close its books on April 30, 1936. On May 4, 1936, the plaintiff was advised by the Commissioner that permission to make the requested change had been granted, but that it would be necessary for plaintiff to file an income and excess profits tax return on or before July 15, 1936, for the four months' period ending April 30, 1936. On May 26, 1936, plaintiff declared a dividend of $25 per share on its outstanding capital stock, payable on May 27, 1936; on May 27, 1936, this dividend totaling $27,500 was paid in cash to stockholders. On June 15, 1936, plaintiff filed its income and excess profits tax return for the four months' period beginning January 1, 1936, and ending April 30, 1936. The amount of income and excess profits tax reported as due in this return was computed by the plaintiff under the provisions of the Revenue Act of 1934, there being no surtax on undistributed profits included therein. Taxes were reported as due in the amount of $10,375.43. On June 22, the Revenue Act of 1936, by its terms retroactive to January 1, 1936, became law.

On or about July 6, 1936, the Collector of Internal Revenue advised the plaintiff that a recomputation of plaintiff's tax liability in accordance with the terms of the Revenue Act of 1936 disclosed a tax liability in the amount of $20,759.75 in which sum was included a surtax on undistributed profits. Plaintiff paid this additional balance. On or about July 21, 1936, plaintiff filed a request with the Collector of Internal Revenue for permission to revert to its former calendar year basis for accounting and filing of tax returns and that it be permitted to file its return for the year 1936 on a calendar year basis. On July 7, 1937, the Collector denied this request. On June 14, 1939, plaintiff filed a claim for refund contending (1) either the Revenue Act of 1936 did not apply to the period beginning January 1 and ending April 30, 1936, or Section 14 of that act did not apply, and (2) that a retroactive application of Section 14 of the 1936 Act violated the "due process" clause of the Fifth Amendment to the Constitution of the United States. It was denied by the Commissioner of Internal Revenue November 14, 1940. After certain adjustments not involved in the present action, plaintiff now sues to recover an overpayment of $9,844.02, and the first question involved is whether the Revenue Act of 1936 or that of 1934 is applicable to the plaintiff's situation.

In support of its contention that the Revenue Act of 1936 is not applicable, the plaintiff argues that the four months' period ending April 30, 1936, occasioned by the change in its accounting period was not a taxable year within the meaning of the relevant provisions of the Revenue Act of 1936. A brief summary of the legislation and decisions leading up to the 1936 Act will show that plaintiff's theory cannot be sustained.

In construing the definition of "taxable year" which appeared in Section 200 of the Revenue Acts of 1918 and 1921, 40 Stat. 1058, 42 Stat. 227, the Board of Tax Appeals and the federal courts were in conflict. "Taxable year" in the 1918 and 1921 Acts was defined as follows: "The term `taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term `fiscal year' means an accounting period of twelve months ending on the last day of any month other than December." The Board of Tax Appeals took the view that accounting periods of less than twelve months occasioned by voluntary actual changes in the taxpayer's accounting system were not taxable years for the purpose of carrying forward or deducting net losses within the meaning of the Revenue Acts of 1918 and 1921. Dorsey Drug Co. v. Commissioner, 7 B.T.A. 229; Leland Stave Co. v. Commissioner, 6 B.T.A. 882; Tacoma Grocery Co., 1 B.T. A. 1062. The federal courts, on the other hand, held that such periods were taxable years. Chess & Wymond Co. v. Lucas, D. C., 33 F.2d 793; Pennsylvania Chocolate Co. v. Lewellyn, D.C., 27 F.2d 762; and see Bankers' Trust Co. v. Bowers, 2 Cir., 295 F. 89, at pages 92, 93, 31 A.L.R. 922.

This conflict as to whether periods of less than twelve months resulting from actual changes in the taxpayer's accounting system are taxable years has been resolved since the redefinition of "taxable year" in Section 200(a) of the Revenue Act of 1924, 43 Stat. 254. That section is identical with Section 48(a) of the Act of 1936, set out in the margin. Under the new definition of "taxable year" which has prevailed since the Revenue Act of 1924, the Board of Tax Appeals has consistently held that periods of less than twelve months occasioned by voluntary, actual changes in the taxpayer's accounting system are necessarily separate and independent taxable years. Sunburst Refining Co. v. Commissioner, 23 B.T.A. 824; Corno Mills Co. v. Commissioner, 21 B.T.A. 712; Pennsylvania Electric Steel Casting Co. v. Commissioner, 20 B.T.A. 602.

The plaintiff, however, on the basis of Helvering v. Morgan's, Inc., 293 U.S. 121, 55 S.Ct. 60, 79 L.Ed. 232 and other decisions of the federal courts (Continental Oil Co. v. Helvering, 69 App.D.C. 236, 100 F. 2d 101; Commissioner v. General Machinery Corp., 6 Cir., 95 F.2d 759; Palomas Land & Cattle Co. v. Commissioner, 9 Cir., 91 F.2d 100; Joseph & Feiss Co. v. Commissioner, 6 Cir., 70 F.2d 804; Arnold Constable Corp. v. Commissioner, 2 Cir., 69 F.2d 788) contends that the four months' period ending April 30 was not necessarily a separate taxable year within the meaning of Section 48(a) of the Revenue Act of 1936. It is obvious, however, that these four months must be accounted for somehow. An acceptance of plaintiff's theory necessarily constitutes the four months' period ending April 30, 1936, as part of a taxable year of sixteen months beginning prior to December 31, 1935, and, therefore, under the terms of Section 1 of the Revenue Act of 1936, not covered by that act. But this contravenes a principle recognized in all revenue acts since the Sixteenth Amendment that taxes be assessed on the basis of annual accounting periods of twelve months. Helvering v. Morgan's, Inc., supra, 293 U.S. at page 126, 55 S.Ct. at page 62, 79 L.Ed. 232. It is true that treating periods of less than twelve months as taxable years contravenes that principle just as much as treating periods of more than twelve months does, but the former departure from the twelve months accounting principle has the sanction of Section 48(a) of the act whereas the latter does not.

Moreover, all the cases cited by the plaintiff, including the Morgan's Inc., case, as authority for treating the short period as other than a taxable year, are distinguishable from the case at bar in two respects. (1) They are all cases of merger or affiliation, and, more importantly, (2) in none of those cases did the taxpayer actually change its accounting period. It is true that the mergers necessitated the filing of consolidated returns for a fractional part of the year, but the filing of such returns is not equivalent to the creation of the fractional periods for which they are filed as separate taxable years; it is merely a division of the year into periods for the purpose of accurate computation and equitable apportionment of the taxes during a single taxable year. Helvering v. Morgan's Inc., supra, 293 U.S. at page 127, 55 S.Ct. at page 62, 79 L.Ed. 232; Continental Oil Co. v. Helvering, supra, 69 App.D.C. 236, 100 F.2d at page 107. In Helvering v. Morgan's, Inc., supra, the taxpayer did not change its accounting period despite the merger and the court was careful to point this out: "Here the taxpayers' taxable year, both before and after the year of affiliation, was the calendar year. * * * The filing of separate returns for fractional parts of the year did not involve any change of the taxpayer's accounting year, * * *." 293 U.S. at pages 127, 128, 55 S.Ct. at page 62, 79 L.Ed. 232. In the case at bar, however, the plaintiff did change its accounting period from a calendar to a fiscal year basis. When that is the case, the Board of Tax Appeals has held that the period of less than twelve months involved in such a change is a taxable year within the meaning of Section 48 and for the purposes of Section 14 of the Revenue Act of 1936. Prudential Tobacco Co., Inc., v. Commissioner, 1940, 42 B.T.A. 518. Dicta in the federal cases point to a similar result. In the last paragraph of the opinion in Helvering v. Morgan's Inc., supra, Mr. Justice Stone distinguishes that case from the case at...