KIMBRELL'S HOME FURNISH. v. Commissioner of Int. Rev.

• Decision Date: 03 February 1947
• Docket Number: No. 5551.,5551.
• Citation: 159 F.2d 608
• Parties: KIMBRELL'S HOME FURNISHINGS, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

159 F.2d 608 (1947)

KIMBRELL'S HOME FURNISHINGS, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 5551.

Circuit Court of Appeals, Fourth Circuit.

February 3, 1947.

Norman Block, of Greensboro, N. C. (Brooks, McLendon, Brim & Holderness, of Greensboro, N. C., on the brief), for petitioner.

Charles C. MacLean, Jr., of New York City (Root, Ballantine, Harlan, Bushby & Palmer, Arthur A. Ballantine and John E. F. Wood, all of New York City, on the brief), as amicus curiae.

Lee A. Jackson, Sp. Asst. to the Atty. Gen. (Sewall Key, Acting Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before PARKER, SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

Kimbrell's Home Furnishings, Inc., petitions for review of a decision of the Tax Court of the United States determining a deficiency in excess profits taxes of $329.38 for the fiscal year ended August 31, 1943. The corporation was organized under the law of North Carolina on September 13, 1940. It is engaged in the retail sale of home furnishings and makes a substantial part of its sales on the installment plan. It computes its net income for income tax purposes on the installment basis under Section 44(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 44 (a), which permits a person who regularly sells personal property on the installment plan to return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized, when payment is completed, bears to the total contract price.

With respect to its excess profits tax the taxpayer elected to avail itself of the option to compute its income from installment sales on the accrual basis in conformity with Section 736(a) of the Internal Revenue Code which was added by Section 222(d) of the Revenue Act of 1942, 26 U.S.C.A. Int.Rev.Code, § 736(a). This option was made available to installments sellers who, like the taxpayer, had extended a certain average volume of credit to installment purchasers in preceding years. In part the section reads as follows: "Sec. 736(a) Election to accrue income. In the case of any taxpayer computing income from installment sales under the method provided by section 44(a), if such taxpayer establishes, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, * * * it may elect, in its return for the taxable year, for the purposes of the tax imposed by this subchapter, to compute, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, its income from installment sales on the basis of the taxable period for which such income is accrued, in lieu of the basis provided by section 44(a). Except as hereinafter provided, such election shall be irrevocable when once made and shall apply also to all subsequent taxable years, and the income from installment sales for each taxable year before the first year with respect to which the election is made but beginning after December 31, 1939, shall be adjusted for the purposes of this subchapter to conform to such election. * * *"

Since the taxpayer was not in existence during the base period defined in Section 713, 26 U.S.C.A. Int.Rev.Code, § 713, its excess profits tax was necessarily computed on the invested capital method as provided by Section 712, 714, 715, 716, 717 and 718 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code §§ 712, 714-718(a) (4), which, in the case of the taxpayer, allowed a credit of 8 per cent of the invested capital which comprehends equity invested capital and borrowed invested capital. Equity invested capital includes, among other things, the accumulated earnings and profits as of the beginning of the taxable year. See Section 718(a) (4).

The taxpayer claimed the right to include in its invested capital for the year ended August 31, 1943, the sum of $18,394.04 which represented a reserve or accumulation of uncollected profits on installment obligations held by it at the beginning of the tax year, and derived from sales in the two preceding years. This sum was arrived at as the result of the adjustment required by the terms of Section 736(a) whereby the taxpayer's excess profits net income for the two preceding years were adjusted to an accrual basis. Thereby the excess profits net income for the year ending August 31, 1941, was increased and a deficiency of excess profits in the sum of $5,934.15, which is not contested, was determined. The Tax Court denied the claim of the taxpayer to include the amount of $18,394.04 as accumulated profits in computing its equity invested capital for the year ended August 31, 1943, and the decision on this point is the question presented in the petition for review now before us.

Since the excess profits tax must be computed by determining the excess profits net income and deducting therefrom the excess profits tax credit, it would seem logical that the method used in determining one should be consistent with the method used in determining the other. In both calculations profits must be taken into consideration — in the one, in order to find the gross amount on which the tax will be based, and in the other, in order to ascertain the amount of the accumulated profits that have entered into the capital on which the tax credit will be based. The Commissioner, however, rejected this view and issued Section 35.736(a)-2 of Regulations 112, which provides in part as follows: "If the taxpayer elects under the provisions of 736(a) and this section to compute its income from installment sales on a straight accrual basis, such election shall be irrevocable. * * * If the taxpayer uses the excess profits credits based on invested capital pursuant to Section 714, the determination of accumulated earnings and profits shall be made without regard to any adjustment resulting from election made under Section 736(a) and this section, except as such election is reflected in the amount of income tax or excess profits tax payable for the taxable years beginning after December 31, 1939."

The effect of this regulation is to exclude from the taxpayer's equity invested capital the amount of the accumulated profits, to wit, $18,394.04, which were ascertained by the adjustment made under the provisions of Section 736(a). This is so because the regulation provides that in determining the amount of accumulated earnings and profits to be included in equity invested capital under Section 714 no regard shall be given to the adjustment made under Section 736(a). The taxpayer contends that the regulation conflicts with the purpose and intent of Section 736(a) and is therefore invalid. This raises a question reviewable by this court as to the meaning of a statute of general applicability. See Bingham's Trust v. Commissioner, 325 U. S. 365, 370, 65 S.Ct. 1232, 89 L.Ed. 1670; Commissioner v. Wilcox, 327 U.S. 404, 410, 66 S.Ct. 546; C. I. R. v. Swent, 4 Cir., 155 F.2d 513.

It seems to us that the regulation deprives Section 736(a) of the Code of the full force and effect that Congress intended it to have. The legislative history shows that the statute was passed to give relief to taxpayers in the installment business who during the war were required by the Federal Reserve Board to increase the size of the down payment and shorten the pay period of their installment contracts. According to H.R. Report No.2333, 77th Cong., 2d Sess., accompanying the Revenue Act of 1942, this requirement caused a bunching of income in the taxable year without the deduction of the normal selling costs. To overcome this hardship, taxpayers who could establish that the average volume of credit extended in the years preceding the taxable year was more than 125 per cent of the credits extended in the taxable year, were given the option to report their excess profits tax income on the accrual basis. Since the statute was thus passed for a remedial purpose, it should be liberally construed in the taxpayer's favor. Bonwit, Teller & Co. v. United States, 283 U.S. 258, 51 S.Ct. 395, 75 L.Ed. 1018.

It is clear that the purpose of the...