Graves Bros. Co. v. Comm'r of Internal Revenue
| Decision Date | 18 March 1952 |
| Docket Number | 29446.,Docket Nos. 28809 |
| Citation | 17 T.C. 1499 |
| Parties | GRAVES BROTHERS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. DEBENTURE NOTES— INTEREST.— Debenture notes issued to stockholders to cover open accounts representing unpaid dividends, salaries, and advances held to represent bona fide indebtedness and the interest thereon is deductible.
2. PROPERTY USED IN TRADE OR BUSINESS— SALES TO STOCKHOLDERS.— Property acquired for use in trade or business does not lose that character merely because not actively so used in year of sale, and loss is deductible under Code section 117(j). Code section 24(b)(2) does not authorize the tacking on of stock owned by a collateral relative in determining percentage of stock owned by stockholder to whom corporation sold assets.
EXCESS PROFITS TAX— EQUITY INVESTED CAPITAL— IMPAIRMENT OF CAPITAL BY DIVIDENDS— INSTALLMENT SALES.— In 1925 the petitioner's accumulated earnings and profits, including unrealized profit from the sale of a plant and timber in 1924, were more than the amount of a dividend paid in 1925. In 1927 amended returns were filed for prior years and the 1924 sale was reported as an installment sale. Accumulated earnings and profits in 1925 were thereby reduced to an amount less than the amount of the dividend paid in that year. Held, that the 1925 dividend, to the extent that it exceeded earnings and profits computed by treating the 1924 sale as an installment sale, reduced equity invested capital in the years 1941 to 1945.
4. EXCESS PROFITS TAX— RELIEF UNDER CODE SECTION 721.— Where the petitioner had income from citrus groves planted after 1933 and also had income from other groves in the same vicinity which had been planted earlier, held, that the income from the post-1933 groves cannot be considered separate from income from other groves for the purpose of determining whether there was abnormal income. Marshall O. Mitchell, Esq., James P. Hill, Esq., F. B. Colley, Esq., and William R. Frazier, Esq., for the petitioner.
Newman A. Townsend, Jr., Esq., for the respondent.
The respondent determined deficiencies in taxes for fiscal years ended June 30, 1943, 1944, and 1945, as follows:
+---------------------------------------------------------+
¦ ¦Year ¦Deficiency ¦
+---------------------------------+---------+-------------¦
¦ ¦( 6/30/43¦$36,501.90 ¦
+---------------------------------+---------+-------------¦
¦Income tax ¦( 6/30/44¦21,205.90 ¦
+---------------------------------+---------+-------------¦
¦ ¦( 6/30/43¦9,197.56 ¦
+---------------------------------+---------+-------------¦
¦Declared value excess-profits tax¦( 6/30/44¦6,396.82 ¦
+---------------------------------+---------+-------------¦
¦ ¦( 6/30/45¦2,929.15 ¦
+---------------------------------+---------+-------------¦
¦Excess profits tax ¦( 6/30/44¦6,101.35 ¦
+---------------------------------+---------+-------------¦
¦ ¦( 6/30/45¦1 75,232.85¦
+---------------------------------+---------+-------------¦
¦ ¦ ¦ ¦
+---------------------------------------------------------+
At the hearing, counsel for the parties announced agreement as to issues concerning the rate of depreciation applicable to citrus groves, the loss sustained by the petitioner in the fiscal year 1943, and the gain realized in the fiscal year 1945 on the sale of property used in trade or business, and the income from advance oil royalties for the fiscal year 1945.
The issues presented for decision are: (1) Whether deductions are allowable for the fiscal years 1941 to 1945, inclusive, for interest paid on debenture notes; (2) whether losses sustained on sales in the fiscal year 1944 are deductible because of the stock ownership by the vendees in the petitioner and also whether the losses, if allowable, are allowable in full or subject to capital loss treatment; (3) whether a dividend paid in 1925 impaired capital so as to reduce the petitioner's equity invested capital for the fiscal years 1944 and 1945; and (4) whether the petitioner had net abnormal income which entitled it to relief under Code section 721 for the fiscal years 1944 and 1945. The basis for excess profits tax relief is the petitioner's claim that it had abnormal income resulting from the development of tangible property within the meaning of section 721(a)(2)(C).
Issues as to the net operating carry-overs and unused excess profits credit adjustment will be determined automatically as the result of decisions on the issues above stated.
The petitioner is a corporation organized under the laws of the State of Florida, on February 2, 1915, and has its principal office at Wabasso, Florida. Its returns for the Taxable years were filed with the collector for the district of Florida, at Jacksonville.
The petitioner's books of account during the taxable years were kept on the accrual basis, with a fiscal year ending June 30.
The petitioner was originally organized by W. F. Graves and his brother, J. E. Graves. W. F. Graves died in June 1937, and J. E. Graves died in January 1949.
Under date of February 4, 1915, the petitioner issued, as fully paid and nonassessable, common stock in the amount of $350,000, represented by 3,500 shares of a par value of $100 each. There has been no change in the number of outstanding shares, nor the par value thereof, of the common stock of the petitioner since its original issue.
In the early days of its existence, the petitioner carried on an extensive saw mill and planing mill operation near Hosford, Florida. About the year 1919, timber tracts became scarce and difficult to obtain, and the petitioner sought other activities in which to engage. Shortly thereafter petitioner acquired a 32,225 acre tract in Indian River County, a short distance from Vero Beach, Florida. This land was purchased for the principal purpose of raising farm crops for market, and in addition, to engage in citrus horticulture, cattle raising and cutting of timber on said land, and the manufacture of same into lumber.
The petitioner ceased its timber operations about 1937 or 1938. It pastured cattle on its cut-over timber lands, but ceased all cattle operations prior to the fiscal year 1944.
In recent years the petitioner has been engaged primarily in the business of growing, harvesting, processing, and marketing of citrus fruits. In the taxable years the petitioner had approximately 500 acres of producing citrus groves.
Issue 1. Interest Deductions.
Prior to October 1, 1936, the petitioner credited to open accounts of its stockholders substantial amounts representing dividends on their stock. Some of those accounts were also credited with unpaid salaries and interest on the unpaid balances. From time to time, loans and advances were made to the petitioner which were reflected in the open accounts, and various withdrawals were made by the stockholders which were charged to those accounts.
When the audit of the petitioner's accounts was being made for the fiscal year ended June 30, 1935, the petitioner's president, W. F. Graves, instructed the accountants making the audit to cancel the credit accounts of certain of the stockholders. This was accomplished on the petitioner's journal by debits to the several stockholders and a credit to surplus in the amount of $738,304.88 which was the aggregate of the several accounts that were debited. The instructions so given by W. F. Graves had not been authorized by the stockholders and there was no record in the petitioner's minutes concerning any release of indebtedness. Two of the stockholders were minors in 1935.
On September 25, 1936, a meeting of the petitioner's stockholders was held at which all stockholders were represented either in person or by proxy. At that meeting, the June 30, 1935, cancelation of accounts was discussed and a resolution was adopted wherein the action of the president, in giving instructions for the cancelation and the action of the accountants in making the entries of that date, were ‘repudiated, rescinded and annulled‘ and the books of the company were ‘ordered to be corrected accordingly.‘ Journal entries were thereupon made, dated June 30, 1936, reversing those of June 30, 1935, by charging $738,304.88 to surplus and crediting to the various stockholders the several sums that had been charged to their accounts by the 1935 entry.
At the time of the stockholders' meeting of September 25, 1936, the balance that the petitioner owed to its stockholders on open account amounted to $706,260.71 which consisted of the following, in totals:
+-------------------------------------------------------------------+
¦Credits ¦ ¦$2,774,257.62¦
+---------------------------------------+-------------+-------------¦
¦Debits: ¦ ¦ ¦
+---------------------------------------+-------------+-------------¦
¦Withdrawals ¦$1,874,134.32¦ ¦
+---------------------------------------+-------------+-------------¦
¦Inter-account transfers and adjustments¦193,862.59 ¦2,067,996.91 ¦
+---------------------------------------+-------------+-------------¦
¦Balance ¦ ¦$706,260.71 ¦
+-------------------------------------------------------------------+
The indebtedness of the petitioner was referred to in a resolution by the stockholders, which recited that it was the desire of the stockholders to preserve the credit of the petitioner; that it was to the advantage of the stockholders that the credit of the petitioner be preserved even at the...
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