Green River Distilling Co. v. Commissioner of Internal Revenue, Docket No. 10604
| Decision Date | 08 May 1929 |
| Docket Number | 10610.,Docket No. 10604 |
| Citation | 16 BTA 395 |
| Parties | GREEN RIVER DISTILLING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. E. LA MONTAGNE'S SONS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Mark J. Ryan, Esq., and Wayne Johnson, Esq., for the petitioners.
John D. Foley, Esq., for the respondent.
These proceedings, involving a deficiency of $339,167.97 in income and profits taxes for the period from July 1, 1917, to February 28, 1918, inclusive, in the case of the Green River Distilling Co., and deficiencies of $39,923.91 and $82,419.23 in income and profits taxes for the calendar years 1918 and 1919, respectively, against E. La Montagne's Sons, Inc., were consolidated for hearing and decision. The issues involved in the proceeding instituted by the Green River Distilling Co. are:
1. Whether the respondent may determine a deficiency for a period of eight months.
2. Whether in determining the deficiency for the eight-month period error was committed in (a) reducing invested capital to eight-twelfths of the average invested capital for that period; and (b) refusing to allow a greater excess-profits and war-profits credit than eight-twelfths of the amount allowable for a full year.
3. Whether the respondent, in computing invested capital for 1913 for war-profits-credit purposes, erred in reducing the amount thereof as the result of the computation of a tentative tax to determine the amount of current earnings available for the payment of dividends.
The only issue common to both proceedings is whether invested capital may be reduced by the amount of taxes assessed for prior years.
All other assignments of error were either abandoned or disposed of at the hearing by agreements.
The respondent, by amendments to his answers, alleges error in allowing as a deduction from the gross income of each petitioner, certain amounts for obsolescence of good will, by reason of which increased deficiencies are claimed. The cases were submitted on the pleadings.
At the hearing counsel for the parties reached an agreement as to the proper specific exemption to be allowed in computing the excess-profits tax of the Distilling Company, and counsel for the respondent admitted that the net income of E. La Montagne's Sons, Inc., for the years 1918 and 1919 should be adjusted by allowing as deductions for ordinary and necessary business expenses, the items totaling $1,843.04 and $143.99, respectively.
FINDINGS OF FACT.
The Green River Distilling Co. was incorporated in 1903 under the laws of Kentucky and, until the enactment of Federal prohibition legislation, was engaged in the manufacture and sale of a brand of whiskey known as "Green River." Prior to July 1, 1917, it kept its books on the basis of a fiscal year ended June 30.
E. La Montagne's Sons, Inc., a New York corporation organized in 1907, prior to the passage of Federal prohibition statutes, was engaged in the business of importing, buying and selling wines, brandies and distilled spirits.
On February 28, 1918, the Copperfield Co., Inc., acquired all of the capital stock of the Distilling Company, and thereafter the two corporations were treated by the respondent as affiliated. For the period from July 1, 1917, to February 28, 1918, inclusive, the respondent computed the Distilling Company's net income as a nonaffiliated corporation and for the remainder of the calendar year 1918 he treated its taxable status as that of a member of an affiliated group.
In connection with his determination of the deficiency against the Distilling Company, the respondent reduced its invested capital to eight-twelfths of the amount of invested capital for the eight-month period. He also reduced the excess-profits and war-profits credits to eight-twelfths of the amounts allowable for a full year.
In determining the invested capital of the Distilling Company for the year 1913 for war-profits-credit purposes, the respondent reduced the amount of current earnings available for the payment of dividends by a so-called tentative tax.
The respondent, in his computation of the invested capital of the petitioners for the taxable periods in controversy, reduced the amounts thereof for each corporation by the amount of income and profits taxes assessed against it for prior years. The amount by which the invested capital of the Distilling Company was reduced was $10,462.94, representing taxes for fiscal years ended in 1916 and 1917.
The income and profits-tax liability of the Distilling Company and E. La Montagne's Sons, Inc., for the fiscal year ended June 30, 1917, and the calendar year 1917, respectively, was before the Board in proceedings under Dockets Nos. 10293 and 10294. Pursuant to stipulations filed by the parties in each proceeding that collection of the alleged deficiencies was barred by the statute of limitations, orders of "no deficiency" were entered on March 7, 1928.
The respondent, in computing the net income of the petitioners for the taxable periods, allowed the Distilling Company a deduction of $752,868.76 for obsolesence of good will, and E. La Montagne's Sons, Inc., a similar deduction of $65,327.56 and $11,199.01 for the years 1918 and 1919, respectively.
We are confronted at the threshold of our consideration by the Distilling Company's objection that the deficiency is void in that it is a deficiency for a period less than one year, viz., for the eight-month period from July 1, 1917, to February 28, 1918. In order that petitioner's position may more clearly appear, it is well to recite the pertinent facts and the argument outlining its objection to respondent's determination.
Prior to July 1, 1917, the Distilling Company kept its books, and presumably returned its income, on the basis of a fiscal year ending June 30. On February 28, 1918, it became affiliated with the Copperfield Company through the purchase by the latter of all of its capital stock. The record is without evidence to show whether the Distilling Company, following its affiliation, changed its accounting period to conform with that of the Copperfield Company, or otherwise. Subsequent to the affiliation the respondent determined the tax liability of the Distilling Company by computing the latter's tax liability for the eight-month period ended February 28, 1918, as a single corporate taxpayer, and for the remainder of the calendar year 1918 as a member of an affiliated group. The deficiency notice from which the instant appeal is taken relates to petitioner's tax liability for the eight-month period prior to which it became affiliated. The Distilling Company claims that the Revenue Act of 1918 does not recognize a taxable period of less than twelve months, except in the case of a voluntary change of a taxpayer's accounting period, and accordingly the deficiency being asserted against it for taxes for the eight months immediately preceding its affiliation, is "null and void."
Petitioner relies in support of its position on the case of Bankers Trust Co. v. Bowers, 295 Fed. 89, the reasoning of which we held in Louis Hymel Planting & Manufacturing Co., 5 B. T. A. 910, and Premier Packing Co., 12 B. T. A. 637, to be applicable to the case of a corporation under the Revenue Act of 1918. In that case the court said:
In the view we take, it will be unnecessary to consider the Constitutional questions presented; this, for the reason that section 226, subdivision (c) provides solely for the placing of income on an annual basis and for computation of the tax thereon in the case of a return for a period of less than one year where the change is made voluntarily by the taxpayer or pursuant to an order of the Commissioner. The fundamental scheme of title 2 of the Revenue Act is for a tax upon the net income of the taxpayer during an accounting period of 12 successive months. This general accounting period seems to be a predetermined measure to be applied to a taxpayer as income, and is not affected by his death or change of status within the period. The tax is imposed upon the entire net income for such period, and the return of such income constitutes his return for the period of 12 full months, even though he may have lived only a portion thereof. The exception to this is where a voluntary change is made in the accounting period by the taxpayer, or where it becomes involuntary in so far as the taxpayer is concerned by the Commissioner's declaring the taxable period terminated under section 250(g) * * *.
* * * When during the year his status changes, and he becomes a taxpayer, or ceases to be one, is immaterial. If he received taxable income during any part of that year, and kept his books on a calendar year basis, a return is required of all such income derived from or received within the 12 months of such calendar year, and the return is for a period of 12 months.
As we understand the petitioner's reasoning, it is this: Section 230 of the Revenue Act of 1918 imposed a tax for each taxable year upon the net income of every corporation; section 200 defines the term taxable year as meaning the calendar year or the fiscal year ending during the calendar year, and covers a period of 12 months; the only exception to the requirement that the taxable period be a period of 12 months is found in section 226 and that exception is where a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from a fiscal year to a calendar year, or vice versa, a return being required under said circumstances for the short period. Petitioner would also probably concede, as pointed out in the Bankers Trust Co. decision, that...
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