Chartier Real Estate Co. v. Comm'r of Internal Revenue, Docket Nos. 838-66
| Decision Date | 29 May 1969 |
| Docket Number | 2116-67.,Docket Nos. 838-66 |
| Citation | 52 T.C. 346 |
| Parties | CHARTIER REAL ESTATE COMPANY, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Lester H. Salter and James R. McGowan, for the petitioner.
Joel Gerber, for the respondent.
1. T corporation, for its taxable year ending June 30, 1962, had capital gain income of $83,787.64 and ordinary income of $1,115.57. It had an unused net operating loss of $11,458.21 from the next 2 taxable years which could be carried back to the taxable year ending June 30, 1962. Held, in computing tax under the ‘alternative’ method provided in sec. 1201(a), I.R.C. 1954, no part of the net operating loss may be applied against the capital gain. Walter M. Weil, 23 T.C. 424,affirmed229 F.2d 593 (C.A. 6) followed.
2. Held, that part of the net operating loss not absorbed in the ‘alternative’ tax computation for the year ending June 30, 1962, may be carried forward to the year ending June 30, 1965, under sec. 172(b)(2), I.R.C. 1954, notwithstanding that it was taken into account in making a tenative tax computation under the ‘regular’ method for the year ending June 30, 1962.
The Commissioner determined deficiencies in petitioner's Federal income taxes in the following amounts:
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¦ ¦Year ending ¦Amount ¦
+------------------+-------------+--------¦
¦ ¦ ¦ ¦
+------------------+-------------+--------¦
¦Docket No. 838-66 ¦June 30, 1962¦$270.04 ¦
+------------------+-------------+--------¦
¦Docket No. 2116-67¦June 30, 1965¦6,812.22¦
+-----------------------------------------+
In its petition in docket No. 838-66, petitioner seeks a refund of $2,948.96 in respect of an alleged overpayment. Certain matters previously in controversy are no longer in dispute, leaving for our determination the question of the proper relationship between a net operation loss carryback deduction and the ‘alternative’ tax computation provided in section 1201(a), I.R.C. 1954. We must decide whether the carryback may be taken into account in determining the amount of that component of the tax that is to be computed under section 1201(a)(2). If we decide that it may not be so taken into account, we must decide whether any amount of the net operating loss remains to be carried forward to another taxable year under section 172(b)(2).
All the facts have been stipulated by the parties, and their stipulation together with attached exhibits is incorporated herein by this reference.
Petitioner is a Rhode Island corporation with its principal office in Newport, R.I. It filed its corporate Federal income tax returns for its taxable years ended June 30, 1962, and June 30, 1965, with the district director of internal revenue in Providence, R.I.
Petitioner was incorporated on June 26, 1947, and during the years in question engaged in the business of renting real estate. It also occasionally sold some of its rental properties during the years in question. Petitioner keeps its books and records and files its Federal income tax returns on the basis of a fiscal year ending June 30.
The table below sets forth petitioner's taxable income before any deduction for net operating losses (as agreed to by the parties) and petitioner's net operating losses:
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¦ ¦Taxable income ¦ ¦
+------------------------+----------------------+--------------------¦
¦ ¦before net operating ¦ ¦
+------------------------+----------------------+--------------------¦
¦Year ending June 30— ¦loss ¦Net operating loss ¦
+------------------------+----------------------+--------------------¦
¦ ¦ ¦ ¦
+------------------------+----------------------+--------------------¦
¦1960 ¦$11,396.56 ¦ ¦
+------------------------+----------------------+--------------------¦
¦1961 ¦ ¦$13,764.98 ¦
+------------------------+----------------------+--------------------¦
¦1962 ¦84,903.21 ¦ ¦
+------------------------+----------------------+--------------------¦
¦1963 ¦ ¦17,492.02 ¦
+------------------------+----------------------+--------------------¦
¦1964 ¦ ¦5,362.75 ¦
+------------------------+----------------------+--------------------¦
¦1965 ¦56,137.54 ¦ ¦
+------------------------+----------------------+--------------------¦
¦1966 ¦ ¦5,181.18 ¦
+--------------------------------------------------------------------+
The net operating loss for the year ending June 30, 1961, was carried back (and used in full) to the years ending June 30, 1958, and June 30, 1959. Of the net operating loss for the year ending June 30, 1963, $11,396.56 was carried back to the year ending June 30, 1960, leaving $6,095.46.
In its Federal income tax return for the year ending June 30, 1962, petitioner reported taxable income of $83,964.70, of which $83,787.64 represented long-term capital gain. In computing its tax liability, petitioner used both the ‘regular’ and ‘alternative’ methods of computation. The ‘regular’ method is prescribed in section 11, I.R.C. 1954, and the ‘alternative’ method is prescribed in section 1201(a). The ‘regular’ method produced the following result:
+------------------------------------------------------------+
¦Normal tax: 30% X $83,964.70 = ¦$25,189.41¦
+-------------------------------------------------+----------¦
¦Surtax: 22% X $58,964.70 ($83,964.70 - $25,000) =¦12,972.23 ¦
+-------------------------------------------------+----------¦
¦Total ¦38,161.64 ¦
+------------------------------------------------------------+
The computation under the ‘alternative’ method was as follows:
+-------------------------------+
¦Taxable income ¦$83,964.70¦
+--------------------+----------¦
¦Less: Capital gain ¦83,787.64 ¦
+--------------------+----------¦
¦ ¦ ¦
+--------------------+----------¦
¦ ¦ ¦
+--------------------+----------¦
¦ ¦177.06 ¦
+--------------------+----------¦
¦30% of $177.06 = ¦53.12 ¦
+--------------------+----------¦
¦25% of $83,787.64 = ¦20,946.91 ¦
+--------------------+----------¦
¦ ¦ ¦
+--------------------+----------¦
¦Total ¦21,000.03 ¦
+-------------------------------+
Since the ‘alternative’ computation was more favorable, it was the one that petitioner used to determine its tax liability.
At some time before the close of petitioner's taxable year ending June 30, 1963, the parties agreed to an increase in petitioner's taxable income for the year ending June 30, 1962, in the amount of $938.51 and to the allowance of an investment credit of $270.04 unclaimed on the petitioner's return for that year. The two methods of computing tax liability new produced the following results (prior to allowance of any investment credit):
On September 11, 1964, petitioner filed two claims for refund with the district director of internal revenue at Providence, R.I., with respect to its taxable year ending June 30, 1962. Petitioner's claim was that it should be allowed to apply its aggregate unused net operating losses of $11,458.21 ($5,362.75 from the year ending June 30, 1964, and the remaining $6,095.46 from the year ending June 30, 1963) not only against its ordinary income of $1,115.57 for the year ending June 30, 1962, but also against its long-term capital gain of $83,787.64 in computing the ‘alternative’ tax.
On November 30, 1965, the Commissioner issued a notice of deficiency in petitioner's income tax for the year ending June 30, 1962. The notice of deficiency increased petitioner's taxable income by $938.51, as previously agreed to, but disallowed the investment credit. The petitioner now agrees that this disallowance was correct. The Commissioner took into account the net operating loss in determining petitioner's ‘taxable income’ (it was reduced from $84,903.21 to $73,445.00), but he did not apply any part of the loss against petitioner's capital gain in computing the ‘alternative’ tax. The tax computed by the ‘regular’ method with respect to these revised figures would have been as follows:
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