Lancaster Cotton Mills v. South Carolina Tax Com'n

• Decision Date: 22 September 1925
• Docket Number: 11835.
• Parties: LANCASTER COTTON MILLS v. SOUTH CAROLINA TAX COMMISSION ET AL.,
• Court: South Carolina Supreme Court

129 S.E. 429

132 S.C. 466

LANCASTER COTTON MILLS v. SOUTH CAROLINA TAX COMMISSION ET AL.,

No. 11835.

Supreme Court of South Carolina

September 22, 1925

Controversy without action under the original jurisdiction of the Supreme Court between the Lancaster Cotton Mills, petitioner, and the South Carolina Tax Commission and individual members thereof respondents. Decree for petitioner.

Grier Park & McDonald, of Greenwood, for petitioner.

J Fraser Lyon, of Columbia, for respondents.

PURDY A. A. J.

This is a controversy submitted without action. The petition of the Lancaster Cotton Mills, made in behalf of itself and Ft. Mill Manufacturing Company and Lancaster Light & Power Company, all of which are affiliated, shows:

That the returns made under the requirement of acts of Congress under the regulations of the Treasury Department were made by it in its behalf and in behalf of the other companies mentioned and are consolidated returns. That, since the year 1917, income tax returns have been made by it to the Treasury Department of the federal government on a fiscal year basis; this fiscal year commencing on the 1st of July and ending on the 30th day of June of each year, and that it continuously made such returns, up to and including the fiscal year 1923-24, alleging that it has a right to make such returns under the acts of Congress. That such returns were made by the petitioner and its two affiliated corporations, in accordance with the requirements of the acts of Congress, and regulations pursuant thereto, for its fiscal year commencing on July 1, 1920, and ending on June 30, 1921, which return was accepted by the officials of the Treasury Department of the federal government, subject alone to corrections of errors and mistakes, if any. That by such return, commencing July 1, 1920, and ending June 30, 1921, no tax accrued or was owing the federal government, and it was not required to pay any income tax to the Treasury Department of the federal government for the fiscal year 1920-21. That on April 29, 1922, the petitioner for itself and its affiliated corporations named, filed with the South Carolina tax commission an affidavit showing that for the fiscal year 1920-21, it paid no income tax to the federal government, and that no income tax had accrued to the federal government for the fiscal year 1920-21. That it continued to make returns for itself and its affiliated corporations for the next succeeding fiscal years, commencing July 1, 1921, up to and including the fiscal year commencing July 1, 1921, and ending June 30, 1922, and up to and including its fiscal year commencing July 1, 1923, and ending June 30, 1924, which returns have been received and accepted by the Treasury Department of the Federal government, subject alone to the correction of errors and mistakes, if any, and that, for like periods, for itself and for its affiliated corporations, it likewise filed with the South Carolina tax commission a duplicate of the returns which it had filed with the federal government for its fiscal years last named. That by its return to the Treasury Department of the federal government for its fiscal year beginning July 1, 1920, and ending June 30, 1921, it showed a loss of $201,979.39, which, under the acts of Congress and regulations of the Treasury Department had been actually sustained, and that by its return for the fiscal year beginning July 1, 1921, and ending June 30, 1922, filed with the Treasury Department of the federal government, and also a duplicate of the same with the South Carolina tax commission, it showed an income of $264,002.60, against which was credited that part of the loss for the fiscal year commencing July 1, 1920, and ending July 30, 1921, which, according to the provisions of the acts of Congress and the regulations of the Treasury Department in regulation thereof, was fixed as accruing in the first 6 months of the year 1921, to wit, $100,989.69, leaving the net taxable income for the fiscal year beginning July 1, 1921, and ending June 30, 1922, of $163,012.91 upon which a tax was paid to the Treasury Department of the federal government of $18,338.91, and a tax of one-third of this amount was paid to the South Carolina tax commission.

The petitioner further sets forth the income tax paid to the federal government and the income tax paid to the state of South Carolina, respectively, for the next two succeeding fiscal years ending June 30, 1924, and further alleges:

That the South Carolina tax commission refused to accept or recognize the income tax returns made by the petitioner to the Treasury Department of the federal government for the fiscal year 1920-21, but had an audit made of petitioner's books and changed the inventories from a cost to a market basis, and set up inventories from the books of the petitioner as of date December 31, 1920, to the middle of the fiscal year, and from such changed inventories determined that for the last 6 months of petitioner's fiscal year 1920-21, to wit, from January 1, 1921, to June 30, 1921, there had been made and earned a taxable income of $201,500.50, on which it demanded the sum of $6,007.18 income tax for this 6 months' period. "That for the purpose of making income tax returns the inventories of petitioner were made and set up by it at the end of each fiscal year from year to year, and its annual net income or losses are determined by reference to these inventories which have been used as a basis of making income tax returns to the Treasury Department of the federal government uniformly since 1917, up to and including the fiscal year 1923-24. That petitioner from June 30, 1920, to December 31, 1920, both inclusive, as appears from its books, sustained a loss of approximately $250,000; and from January 1, 1921, to June 30, 1921, both inclusive, earned a profit, as appears from its books, of approximately $50,000. That for the fiscal year 1920-21 it sustained and incurred a net loss of $200,000.

"(13) That an additional tax and interest was assessed by the South Carolina tax commission against petitioner and its two affiliated corporations for the fiscal year 1921-22 of $9,607.25 because the South Carolina tax commission disallowed the credit on account of losses sustained during its fiscal year 1920-21 against its income for its fiscal year 1921-22, which credit was allowed by the federal government as a loss for the first 6 months of 1921, pursuant to the terms and provisions of the act of Congress and regulations of the Treasury Department in that behalf.

(14) Petitioner contends that the issues are:

(a) Whether, in arriving at net income of a corporation whose returns are made on a fiscal year basis the provisions of the acts of Congress known as the 1921 Income Tax Law and regulations of the Treasury Department in pursuance thereof are binding on the South Carolina tax commission in the determination of what portion of total income or loss for the fiscal year commencing July 1, 1920, and ending June 30, 1921, should be charged as income or loss for that portion of the fiscal year falling in the calendar year 1921.

(b) Whether the South Carolina tax

commission is required to credit against the income for the fiscal year 1921-22 that loss which the Treasury Department of the federal government allowed as a loss as accruing from January 1, 1921, to June 30, 1921, which the Treasury Department of the federal government arrived at and allowed pursuant to the provisions of the acts of Congress, known as the 1921 Income Tax Laws and the regulations of the Treasury Department in reference thereto."

"Contentions of the Tax Commission.

The South Carolina tax commission contends that the proper method for calculating the tax for the first 6 months of the year 1921 is to commence the calculation with January 1, 1921, and ending it with June 30, 1921, disregarding whatever may have transpired during the calendar year 1920, even though such later period is embraced in petitioner's fiscal year of 1920-21

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