Lehigh Valley Coal Sales Co. v. Commissioner of Internal Revenue, Docket No. 19751.
| Citation | 15 BTA 1401 |
| Decision Date | 12 April 1929 |
| Docket Number | Docket No. 19751. |
| Parties | LEHIGH VALLEY COAL SALES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Charles B. McInnis, for the petitioner.
Stanley Suydam, Esq., and O. J. Tall, Esq., for the respondent.
This appeal is from the determination of the Commissioner rejecting the petitioner's claim in abatement. The taxes in controversy are income and profits taxes for the calendar year 1918 and are in the total amount of $50,866.92.
The petitioner asserts that the Commissioner erred:
(a) In reducing the petitioner's invested capital by the amount of $20,610.54, representing a portion of the petitioner's surplus included in a special account at December 31, 1917;
(b) In failing to take into consideration in computing the amount of tax due for 1918, an amount of $17,298.79 paid subsequent to the filing of the income and profits-tax return for the year 1918;
(c) In reducing the invested capital on account of a tentative tax, and thus reducing the amount of current earnings for the payment of dividends, paid in 1918;
(d) In reducing invested capital for the year 1918 by the amounts of $9,376.74 and $18,637.73 alleged to represent accrued state taxes and accrued taxes on real estate and personal property;
(e) In reducing invested capital by amounts alleged to represent accrued state and property taxes at December 31, 1917, and at the same time failing to allow as a deduction in computing 1918 taxable income the amount of state and property taxes accrued during the year 1918.
FINDINGS OF FACT.
The petitioner is a New Jersey corporation with its principal office at 90 West Street, New York City. Affiliated with the petitioner during 1918, was the Manitowoc Land and Fuel Co. of Manitowoc, Wis., a consolidated income-tax return being filed for the year 1918. The Commissioner proposed a deficiency assessment for that year of $50,866.92 and subsequently rejected a claim in abatement for that amount, thus giving rise to the questions here involved.
The petitioner and its subsidiary are engaged in the business of buying and selling coal. The business of the Lehigh Valley Coal Sales Co. is wholesale only, while its subsidiary sells both at wholesale and retail. The petitioner purchases coal from the operators or mine owners and sells it to wholesale coal dealers.
(a) During the year 1913, the legislature of the Commonwealth of Pennsylvania passed a law levying a tax on all coal mined in that State. All of the producing companies from which the petitioner purchased coal, with one exception, charged the petitioner with the amount of the tax. The exception was the Raub Coal Co. In February, 1916, the petitioner set up a reserve of $20,610.54 to cover any possible claim that the Raub Coal Co. might later assert for the amount of such tax. This amount was segregated from its surplus by the petitioner in filing its 1916 income-tax return, but was not deducted from its income for that year. Business relations under the Raub Coal Co. contract had been terminated by that company prior to December 31, 1917. No claim had ever been asserted against the petitioner for any part of the tax that the Raub Coal Co. might have been called upon to pay to the Commonwealth of Pennsylvania, and during the year 1918 this segregated part was retransferred by the petitioner to its general surplus account.
(b) The petitioner erroneously deducted from its income in its original tax return for 1918 an amount of $25,000 donated to the American Red Cross. Later, it discovered the error and on April 5, 1921, it voluntarily filed with the collector a recomputation of its tax liability, after restoring to its net income for 1918 the erroneous deduction, and at that time paid to the collector the sum of $17,298.79, representing the additional taxes disclosed by that recomputation. When the Commissioner rejected the petitioner's claim in abatement and computed its tax liability as set forth in the notice of his determination mailed February 2, 1924, he failed to take into consideration this additional payment, and until the time this petitioner appealed to this Board from the Commissioner's determination of the deficiency in accordance with his letter of July 6, 1926, he had refused to consider such payment. Subsequent to the filing of this appeal, the collector has credited this amount, together with three other payments, against the additional assessment of $50,966.92 which had been made on the basis of the Commissioner's letter of February 2, 1924.
(c) During the year 1918, the petitioner paid dividends in the total amount of $1,726,482.84. In the audit of the petitioner's income-tax return for that year, the Commissioner determined its net income available for such dividends by "the method outlined in Article 857, Regulations 45." The result of the computation was a "tentative tax" of over $1,500,000, thus reducing the amount of earnings available for the dividends at the times they were paid, and so decreasing in turn the petitioner's invested capital by an "adjusted average" for the year of more than $320,000.
(d) and (e) The Commissioner reduced the petitioner's consolidated invested capital for the year 1918 by the sum of two reserves; one captioned "Real Estate and Personal Property Taxes" in the amount of $18,637.73, and the other, "State Tax" in the amount of $9,376.74, "for the reason that an analysis of surplus for the taxable year 1917 indicates that these accounts have been treated as accrued expenses and as such are properly excluded from the computation of invested capital." In doing this the Commissioner deducted a greater amount than the amount of taxes accrued or accruable at December 31, 1917. A part of that amount was recovered in 1918, and a part in 1919. In 1918 the Commissioner failed to permit a reduction from gross income of all the taxes actually accrued in that year.
In regard to the first issue — (a), counsel for the respondent concedes "that the sum of $20,610.54 (erroneously quoted as $20,614.54), being a contingent liability in 1918, should not have been deducted from petitioner's invested capital for the calendar year 1918." Accordingly we find for the petitioner on this issue.
In regard to the second issue — (b), counsel for the respondent argues that it is neither proper nor necessary for this Board to take into consideration this voluntary payment by the petitioner of $17,298.79, and that the proper application of this credit is solely a matter for adjustment by the collector of internal revenue at New York. We do not agree with that contention.
We cite Peerless Woolen Mills, 13 B. T. A. 1119, not because it offers an exact precedent for the case at bar, but because the exhaustive discussion of its several issues, both direct and collateral, and the reasoning upon which that opinion was based, bear directly upon and illuminate such controversies as that now before us for determination. Briefly, the Board there held that an appeal once properly before it in connection with a deficiency determined and declared by the Commissioner, it was clearly within its province...
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