Crow-Burlingame Co. v. Comm'r of Internal Revenue
| Decision Date | 29 November 1950 |
| Docket Number | Docket No. 19549. |
| Citation | 15 T.C. 738 |
| Parties | CROW-BURLINGAME COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. On December 11, 1943, petitioner's directors passed a resolution approving the establishment of an employees' pension plan and trust and appropriated irrevocably $30,000 thereto. On December 15, 1943, a tentative trust agreement was executed. The plan and trust were to meet with the approval of the governmental units having jurisdiction over them. Petitioner's employees were notified of this action. On February 29, 1944, petitioner deposited its check for $30,000 as its first payment to the trust in accordance with the resolution and agreement. On December 11, 1944, petitioner's directors appropriated $30,000 as a contribution to the trust, subject to the conditions of the 1943 appropriations, and payment of this $30,000 was made on February 23, 1945. Ultimate compliance with all of the provisions of section 23(p) and 165(a) was made within the grace period. Petitioner, on the accrual basis, deducted on its return for the year 1943, $30,000 as an accrued contribution to an employees' trust fund and deducted $27,015 for the year 1944. Held, respondent erred in determining that for the taxable years ended December 31, 1943, and December 31, 1944, petitioner's contributions were not deductible under sections 23(p) and 165(a) of the Internal Revenue Code. 555, Incorporated, 15 T.C. 671, followed.
2. In 1938 and 1939, petitioner deducted certain amounts in connection with moving its warehouse. The moving of its warehouse was a consequence of a change in the manner of operation, size and condition of petitioner's business. Held, respondent did not err in failing to disallow these deductions in computing petitioner's excess profits credit.
3. In 1938 and 1939, petitioner suffered bad debt losses as a result of the repeal of an Arkansas statute. These deductions taken and allowed in 1938 and 1939, were of a class abnormal for petitioner and not a consequence of the limiting factors of section 711(b)(1)(K). Held, respondent erred in failing to disallow these deductions in computing petitioner's excess profits credit for 1938 and 1939.
4. In 1939, petitioner suffered losses as a result of embezzlement and advances to a store manager. Petitioner has not proved that these losses were allowed as deductions. Held, petitioner not having proved that such deductions have been claimed and allowed has not established its right to have them disallowed in the computation of its excess profits tax credit.
5. In 1932, petitioner and two other automotive supply companies organized a corporation (O.C.Y.) for the purpose of consolidated buying which would reduce petitioner's cost of purchases. Prior to 1938, petitioner valued its inventory without taking into account the distributions received from OCY Co. In 1938, petitioner valued its closing inventory in a manner which endeavored to reflect 50 per cent of the total discount to be received by OCY Co. The remaining 50 per cent was reflected in the 1939 closing inventory. Held, even if these ‘deductions‘ were of the type contemplated by section 711(b)(1)(J) they were, nevertheless, a consequence of a change in the manner of operation of petitioner's business and respondent did not err in failing to disallow them in computing petitioner's excess profits credit for 1938 and 1939. E. Chas. Eichenbaum, Esq., for the petitioner.
John W. Alexander, Esq., for the respondent.
This proceeding involves deficiencies in declared value excess profits tax and excess profits tax, as follows:
+----------------------------------------+
¦ ¦Declared value ¦ ¦
+------+----------------+----------------¦
¦ ¦excess profits ¦Excess profits ¦
+------+----------------+----------------¦
¦Year ¦tax ¦tax ¦
+------+----------------+----------------¦
¦ ¦ ¦ ¦
+------+----------------+----------------¦
¦1943 ¦$486.36 ¦$25,701.97 ¦
+------+----------------+----------------¦
¦1944 ¦ ¦23,097.82 ¦
+------+----------------+----------------¦
¦1945 ¦1,816.98 ¦20,395.98 ¦
+----------------------------------------+
The deficiencies result from numerous adjustments to petitioner's net income for each year; however, only one adjustment for each year is in controversy. For the year 1943, this was explained by respondent in a statement attached to the deficiency notice, as follows:
(c) It has been determined that the net income disclosed by your return for the taxable year should be increased $30,000.00 by the denial of the deduction claimed thereon as a contribution to an employee pension plan.
Similar adjustments in the amounts of $27,015 and $27,530 were made for the taxable years 1944 and 1945, respectively. By appropriate assignments of error petitioner contests these adjustments. Petitioner also assigns error, as follows:
(b) Respondent erred in failing to increase the amount of excess profits net income of the petitioner for its taxable years ended December 31, 1938 and December 31, 1939 by reason of abnormal deductions taken by the petitioner on its returns for those years. The amount of the excess profits net income for those years is used in determining the amount of the excess profits credit to which the petitioner is entitled and, in accordance with the provisions of Section 711(b)(1)(J) of the Internal Revenue Code, is to be adjusted for any deductions which are abnormal to the taxpayer.
The abnormal deductions which petitioner claims should be disallowed in computing its excess profits credit are as follows:
+----------------------------------------------------------+
¦(1) Wages covering moving (1938) ¦$913.00 ¦
+------------------------------------------------+---------¦
¦General moving expenses (1938) ¦706.05 ¦
+------------------------------------------------+---------¦
¦Additional rent on old location (1938) ¦1,891.42 ¦
+------------------------------------------------+---------¦
¦Additional taxes (1938) ¦1,543.25 ¦
+------------------------------------------------+---------¦
¦(2) Testing machinery loss (1938) ¦2,027.35 ¦
+------------------------------------------------+---------¦
¦(1939) ¦2,800.34 ¦
+------------------------------------------------+---------¦
¦(3) Embezzlement loss (1939) ¦1,537.66 ¦
+------------------------------------------------+---------¦
¦(4) Advance to store manager (1939) ¦653.66 ¦
+------------------------------------------------+---------¦
¦(5) Change in method of pricing inventory (1938)¦10,853.64¦
+------------------------------------------------+---------¦
¦(1939) ¦9,257.66 ¦
+----------------------------------------------------------+
In his brief respondent concedes that in the taxable year ended December 31, 1945, petitioner had in effect an employees' pension plan and trust meeting the requirements of section 23(p) and 165(a) of the Internal Revenue Code. Therefore, respondent's disallowance of the $27,530 payment to the pension trust in 1945 is no longer in issue.
We have left two issues for consideration: (1) The employees' pension plan deductions for 1943 and 1944, and (2) the claimed abnormal deductions.
Some of the facts were stipulated and are so found and the stipulation is incorporated herein by reference.
Petitioner is a corporation organized under the laws of Arkansas with its principal offices and place of business in Little Rock, Arkansas. Petitioner is now and was during the calendar years 1943, 1944, and 1945 engaged in the business of distribution of automotive supplies and equipment. For all taxable years herein petitioner kept its books and filed its income and excess profits tax returns on the calendar year and accrual basis of accounting. Its returns were filed with the collector of internal revenue for the district of Arkansas.
Employees' pension plan.— On December 31, 1943, petitioner's board of directors held a meeting and a portion of the minutes relating to that meeting is set out hereunder:
President Crow reported to the Board that the executives of the Company had been giving considerable thought to the establishment of a Trust Fund for the purpose of providing retirement and other benefits for the employees of Crow-Burlingame Company; the amount of the benefits to be based upon the length of service and compensation of the employee. He explained that the Company would profit from such an action in at least four ways:
1. The company's operation would be more efficient if it could retire those employees who had become old or were ill.
2. An employee is more efficient it (sic) he has assurance against dependency and want in his old age.
3. It would develop a feeling of greater loyalty on the part of the company's employees.
4. It would reduce employee turnover.
and he recommended that such a program be entered into and that an appropriation be made out of 1943 profits to start such a fund.
A motion was made, duly seconded and unanimously carried as follows:
1. That the recommendation be adopted.
2. That a trust should be created, to be known as ‘Crow-Burlingame Employee's Trust,‘ for the purpose of providing retirement and other benefits for employees of Crow-Burlingame Company.
3. That the Company's executive officers be instructed to draft an appropriate Trust Agreement with the Trustees who are hereby appointed, to wit: George G. Worthen, Kimbro V. Browne and William R. James.
4. That there be appropriated out of 1943 profits the sum of $30,000.00, or such portion thereof as should be needed, which sum should be transferred irrevocably to the Trustees, subject to approval by the proper regulatory...
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