J. L. Goodman Furniture Co. v. Comm'r of Internal Revenue
| Citation | 11 T.C. 530 |
| Decision Date | 30 September 1948 |
| Docket Number | Docket No. 13552. |
| Parties | THE J. L. GOODMAN FURNITURE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. SECTION 102— IMPROPER ACCUMULATION OF CORPORATE SURPLUS.— The taxpayer has shown reasonable business needs for its accumulated earnings. It was not formed or availed of in 1942 or 1943 for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its earnings or profits to accumulate instead of being divided or distributed.
2. EXCESS PROFITS TAX— EQUITY INVESTED CAPITAL— ACCUMULATED EARNINGS AND PROFITS— UNCOLLECTED GROSS PROFITS ON INSTALLMENT SALES— SECTIONS 718(a)(4), 736(a).— The petitioner is not entitled to include in its equity invested capital as accumulated earnings and profits as of the beginning of 1942, within the meaning of section 718(a)(4), its uncollected profits at the beginning of the year resulting from installment sales made in previous years, even though it elected under section 736(a) to have its income for 1942 computed on an accrual basis for excess profits tax purposes. Kimbrell's Home Furnishings, Inc., 7 T.C. 339, followed. Henry Kutash, Esq., for the petitioner.
H. M. Kohn, Esq., for the respondent.
The Commissioner determined deficiencies as follows:
+-------------------------------+
¦Year¦Income tax¦Excess profits ¦
+----+----------+---------------¦
¦ ¦ ¦tax ¦
+----+----------+---------------¦
¦1942¦$9,119.24 ¦$2,470.98 ¦
+----+----------+---------------¦
¦1943¦8,921.21 ¦2,811.91 ¦
+-------------------------------+
The issues for decision are (1) whether the Commissioner erred in holding the petitioner subject to surtax under section 102 for improperly accumulating surplus, and (2) whether he erred in computing the petitioner's excess profits credit for 1942 by excluding from equity invested capital an amount representing uncollected gross profits on installment sales made in previous years.
The petitioner, a corporation, filed its returns for 1942 and 1943 with the collector of internal revenue for the eighteenth district of Ohio.
The outstanding stock of the petitioner was held during 1942 and 1943 as follows:
+----------------------------------------------------------------------+
¦Julius E. Goodman ¦1,505¦
+----------------------------------------------------------------+-----¦
¦Esther Goodman (widow of founder) ¦550 ¦
+----------------------------------------------------------------+-----¦
¦Janet Altman (granddaughter of founder) ¦430 ¦
+----------------------------------------------------------------+-----¦
¦Jacob H. Altman (former husband of deceased daughter of founder)¦215 ¦
+----------------------------------------------------------------+-----¦
¦Louis A. Krost (not related) ¦300 ¦
+----------------------------------------------------------------------+
The business, retail furniture, of the petitioner was started in 1886 by the father of Julius E. Goodman. The corporation was formed in 1911. Its principal store, at all times material hereto, was located in the shopping center of the section of Cleveland once known as Newburg and now called South Cleveland. It is about six miles from the center of the main business section of Cleveland. That location was a good one original, but Julius E. Goodman, the president, treasurer, and operating head of the petitioner began to realize, at least as long ago as 1935, that changes in residential sections were taking place, as a result of which the South Cleveland district was becoming less desirable and other districts were becoming more desirable as a site for a store selling the type of furniture sold by the petitioner. Goodman decided in 1935 that branch stores should be opened in one or two of the newer residential districts of Cleveland in order to meet the existing keen competition and to preserve and expand the business. He investigated possible locations for such stores.
He decided in 1937 and 1938 to delay the contemplated expansion, due to the business recession in those years. He further postponed this expansion in 1939, and during the war years because of the threat of war and the existence of war. He was of the opinion during 1942 and 1943 that the war would seriously curtail and jeopardize the business. Actually, the experience of the petitioner during the war years was better than he expected.
He also anticipated in 1942 and 1943 that there would be an unprecedented boom in the furniture business after the war, for which the petitioner would need additional inventory and working capital.
The petitioner purchased a lot in 1947 for the erection of a new store in one of the residential districts which Goodman had had in mind in 1942 and 1943.
About 90 per cent of the petitioner's business was done on the installment basis. It keeps its books on an accrual basis, but reports its profits from installment sales on the installment sales method. The petitioner is unable to determine the amount of its profits from installment sales for any year until about six weeks after the close of that year.
The petitioner has consistently declared substantial annual dividends. Dividends were declared in December on the basis of profits for the first 11 months. It paid a dividend of $36,000 in each of the years 1942 and 1943 and has paid a dividend in a like amount in five other years since 1927. Its dividends for the remaining years since 1927, including loss years, have ranged from about $6,000 in 1933 to $45,000 in 1941.
The taxable net income of the petitioner for 1942 was $127,098.88 and for 1943 was $130,112.96. It received an unusually large amount of cash payments during those years reducing its accounts receivable, due in part to the publication of a Government regulation in August 1941 restricting credit, and in part to the large wartime earnings of its customers.
The petitioner estimated that its Federal taxes would be $51,588.91 for 1942 and $53,992.68 for 1943.
Its balance sheets for the beginning and end of the years 1942 and 1943, as shown on its returns for those years, were as follows:
FN* A $25,000 reserve was closed out in 1943 and surplus increased accordingly.
The balance sheets in accordance with the books kept on an accrual basis show much larger accounts receivable, including those relating to installment sales, and somewhat larger surpluses. The accounts receivable for the dates shown in the above table were shown on the books at $275,651.63, $167,363.93, and $119,279.91.
The petitioner filed its income tax returns for 1942 and 1943 on the installment basis pursuant to section 44. It elected on its return for 1942 to compute its income for excess profits tax purposes, including income on installment sales, on an accrual basis pursuant to section 736(a), and it attached as a part of its return a statement of the adjustment of the income from installment sales for 1940 and 1941 for excess profits tax purposes to conform to such election. It did not know prior to the end of 1942 whether or not it would be permitted to compute its excess profits tax under that section. It learned in March 1943 that it did qualify under that section by a narrow margin, with a resulting tax saving for 1942 of $17,170.13.
The petitioner was not a mere holding or investment company.
The gains and profits of the petitioner for 1942 and 1943 were not permitted to accumulate beyond the reasonable needs of the business.
The...
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