MAY, STERN AND COMPANY v. Commissioner
| Decision Date | 26 May 1948 |
| Docket Number | Docket No. 9595. |
| Citation | 7 TCM (CCH) 309 |
| Parties | May, Stern and Company v. Commissioner. |
| Court | U.S. Tax Court |
Louis Caplan, Esq., 1124 Frick Bldg., Pittsburgh, Pa., for the petitioner. R. Bruce Jones, Esq., for the respondent.
Supplemental Memorandum Findings of Fact and Opinion
The respondent determined a deficiency in income tax for the fiscal year ended January 31, 1941, in the amount of $1,069.28. The pleadings do not raise any issue relating to the liability of the petitioner for income tax in the taxable year. Petitioner agrees that there is a deficiency in income tax in the above amount.
The respondent determined a deficiency in excess profits tax for the fiscal year ended January 31, 1941, in the amount of $89,774.93. Petitioner contests this determination.
Memorandum Findings of Fact and Opinion were entered in this proceeding on September 17, 1946 Dec. 15,393(M). No decision has been entered. Two issues were raised by the pleadings which relate to petitioner's liability for excess profits tax. The first issue presented was decided in petitioner's favor upon the authority of Mackin Corporation, 7 T. C. 648 Dec. 15,349; and The Hecht Co., 7 T. C. 643 Dec. 15,348. The decisions of this Court in the above cases have since been affirmed. See Commissioner v. Mackin, 164 Fed. (2d) 527 47-2 USTC ¶ 5916; Commissioner v. Hecht, 163 Fed. (2d) 194 47-2 USTC ¶ 5915. The second issue presented was decided adversely to petitioner's contention upon the authority of this Court's decision in Kimbrell's Home Furnishings, Inc., 7 T. C. 339 Dec. 15,267, which was subsequently reversed. See Kimbrell's Home Furnishings, Inc. v. Commissioner, 159 Fed. (2d) 608 47-1 USTC ¶ 5907. We granted petitioner's motion for reconsideration of the second issue because of the reversal of the above case; and have held reconsideration in abeyance pending decision of the Supreme Court in its review of South Texas Lumber Co. v. Commissioner, 162 Fed. (2d) 866 47-2 USTC ¶ 5912; certiorari granted November 24, 1947. Reconsideration has been given to the question presented under the second issue in the light of the recent decision of the Supreme Court in Commissioner v. South Texas Lumber Co., 333 U. S. 496; 68 S. Ct. 695 48-1 USTC ¶ 5922 (decided March 29, 1948).
The facts relating to the second issue are set forth again in this report, for convenience, and because there are a few additional facts to be found, according to a supplemental stipulation of facts which was filed after entry of the memorandum report.
The facts which have been stipulated are found to be facts. The stipulations are incorporated herein by this reference.
Petitioner, having its principal place of business in Pittsburgh, is engaged in the business of buying and selling home furnishings to the retail trade, and sells merchandise under installment sales contracts. It keeps its books of account and reports its income on the basis of a fiscal year ending January 31, and, in general, under the accrual method of accounting. However, it computes its income from the installment sales contracts on the installment basis for the Federal income tax purposes under section 44 (a) of the Internal Revenue Code.
The fiscal year which began February 1, 1940, and ended January 31, 1941, was petitioner's first taxable year under the Federal Excess Profits Tax Act of 1940, which was enacted by section 201 of the Second Revenue Act of 1940. In 1943, petitioner elected, under section 736 (a) of the Internal Revenue Code, to compute income from its installment sales on the accrual basis for the purposes of the excess profits tax. It filed amended corporation excess profits tax return for the fiscal year, February 1, 1940 to January 31, 1941, (Form 1121), in which it reported in its excess profits net income, income for that fiscal year from installment sales on the accrual basis in the net amount of $363,896.09. It filed, also, an amended corporation income tax return for the same fiscal year, in which it reported net income of $83,331.91, income from installment sales being reported under section 44 (a) for the income tax.
In the amended excess profits tax return for the fiscal year 1940-1941, petitioner computed its accumulated earnings and profits to be $3,919,768.94, as of February 1, 1940, invested capital, (net) $3,801,178.68; and excess profits credit (8 per cent of $3,801,178.68), $304,094.29.
The accumulated unrealized earnings and profits on installment sales at February 1, 1940, amounted to $1,294,745.79, and that sum was included in the total amount of accumulated earnings and profits, $3,919,768.94, in the computation of equity invested capital at the beginning of the year in the amended excess profits tax return. The above amount ($1,294,745.79) of unrealized earnings and profits constituted that portion of petitioner's accounts receivable for uncollected gross profits on installment sales made prior to February 1, 1940. That is to say, the above amount represented "unrealized gross profit" as of February 1, 1940, and was carried on the books of petitioner in a surplus reserve account pending collection of payments under outstanding installment sales contracts.
Respondent excluded from petitioner's equity invested capital as of February 1, 1940, the above amount of $1,297,745.79, and with other adjustments, determined that the invested capital was $2,588,723.39, in his audit of the amended excess profits tax return for the fiscal year 1940-1941. This determination resulted in reduction of the 8 per cent excess profits credit to $207,097.87, and deficiency in excess profits tax (after other adjustments) in the amount of $89,774.93.
On November 22, 1946, petitioner paid to the collector of internal revenue for the twenty-third district of Pennsylvania the sum of $50,000 on account of the deficiency asserted by the respondent in petitioner's excess profits tax for the taxable year ending January 31, 1941.
On February 26, 1947, petitioner agreed in writing to an assessment of the asserted deficiency in excess profits tax in the amount of $50,000 and said amount was assessed March, 1947, Account No. OOC Spl. #13.
OpinionThe only question is whether petitioner is entitled to include in equity invested capital as of February 1, 1940, that portion of its accounts receivable which represented installment sales which were made prior to February 1, 1940, upon which profits and earnings were not yet realized, in the total sum of $1,294,745.79. The question arises in connection with the computation of petitioner's first year of liability for excess profits tax under the Excess Profits Tax Act of 1940. The amount of the excess profits credit, computed upon invested capital, is affected by the determination of the question.
Respondent points out that none of the above sum of earnings and profits which were unrealized on February 1, 1940, had ever been included in income subject to either the Federal income or excess profits tax before and up to February 1, 1940; and from this he argues that a taxpayer reporting income on the installment basis under section 44 (a) of the Internal Revenue Code may not accrue such unrealized items of income for invested capital purposes prior to the time they are reported for income tax purposes, citing Federal Union Insurance Company, 5 T. C. 374 Dec. 14,634; and Jacob Bros. Company v. Commissioner, 50 Fed. (2d) 394 5 USTC ¶ 1480. Respondent relies upon section 29.115-3 of Regulations 111,...
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