Miami Valley Coated Paper Co. v. Comm'r of Internal Revenue
| Citation | 28 T.C. 492 |
| Decision Date | 28 May 1957 |
| Docket Number | Docket No. 30181. |
| Parties | THE MIAMI VALLEY COATED PAPER CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Scott P. Crampton, Esq., for the petitioner.
Lyman G. Friedman, Esq., for the respondent.
1. There having been no waiver of regulatory requirements by the Commissioner and no administrative action having been taken on a claim under section 722(b) (4) first made on August 8, 1952, whereas the notice of disallowance of claims under section 722 had been issued June 9, 1950, this Court has no jurisdiction to consider the subsection (b)(4) claim.
2. Petitioner has not shown that it is entitled to relief under section 722(b)(1) or (b)(2).
3. Petitioner has not shown error in the Commissioner's disallowance of certain claimed deductions.
This case involves refunds of excess profits tax claimed by petitioner in applications for relief under section 722 of the Internal Revenue Code of 1939 and deficiencies in excess profits tax arising from so-called standard issues for the years 1944, 1945, and 1946.
The Commissioner disallowed the claims for refund and determined deficiencies in excess profits tax as follows:
+----------------------------------+
¦Year ended April 30 ¦Deficiency ¦
+---------------------+------------¦
¦1944 ¦$19,499.48 ¦
+---------------------+------------¦
¦1945 ¦3,817.10 ¦
+---------------------+------------¦
¦1946 ¦4,776.26 ¦
+----------------------------------+
The petitioner claims relief under section 722(b)(1), (2), and (4); The Commissioner contends that this Court has no jurisdiction of the (b)(4) claim and that petitioner has not qualified for relief under the other subsections.
The standard issues involve the propriety of the Commissioner's disallowance of certain claimed deductions.
Some of the facts are stipulated and are so found; and the stipulation of facts together with the pertinent exhibits, is included herein by this reference.
Petitioner is a corporation incorporated under the laws of the State of Ohio in 1925. It keeps its books and files its Federal income and excess profits tax returns on an accrual basis of accounting for fiscal years ending April 30. For all periods material hereto the returns of petitioner and its claims for refund on Treasury Department Form 843 were filed with the collector of internal revenue for the first district of Ohio at Cincinnati, Ohio.
Petitioner is engaged in the business of converting and selling coated book and specialty grade papers, with its principal place of business at Franklin, Ohio; It is known as a paper converter for business census purposes and is a member of the book paper manufacturers industry. Petitioner began the business of coating paper in 1926; It purchased uncoated base paper from manufacturers and applied coating on its own machines. At that time the large paper manufacturers prepared their coated paper by a two-step process— first, the manufacture of raw paper and, second, the actual coating of the paper. The coating process consists of the application of a very fine layer of clay or other coating material to the paper in such a way as to give it a glossy surface. With regard to coated paper the petitioner's work consisted only of the function of coating paper, or the second step in the process. Prior to 1934 petitioner had two principal classes of products generally known as ‘standard paper’ and ‘specialty paper.’ Specialty papers are papers made for specific purposes, for example, hectograph paper and tag paper. Standard grade papers are papers that are generally sold in large volume, such as are sold to commercial printers for general printing purposes. Standard papers include book papers and are of two types, coated and uncoated. Petitioner produced and sold only coated book papers. Petitioner's records did not segregate actual dollar sales of specialty paper and standard paper;
Competition in the coated paper industry was keen. About 1934 a process for coating paper at the same time raw paper was being made completely eliminated the secondary coating operation, so that petitioner was no longer able to compete profitably with the large integrated producers of standard grades of coated paper. This led petitioner to seek specialized markets for its output and resulted in financial difficulties which culminated in petitioner's being forced into receivership in September 1936. At that time the plant had been reduced to inoperation, cars of material were on the siding, cash funds were almost nonexistent, and virtually all receivables had been assigned. The receiver immediately made arrangements to borrow money and subsequently borrowed $50,000 to provide working capital;
All during its existence petitioner has conducted its manufacturing operations in practically the same manner.
During the receivership the business continued to be managed by the man who had been president of petitioner and had been in the paper business for years; There were no important changes in personnel or equipment during the base period years though the receiver did dispense with some advertising, salesmen, and other promotional activities. Continuing effort was made to turn the business more largely to specialty coated paper for particular purposes of customers because it was felt that the future of the business lay in that direction. The receiver did a commendable job of running the business; and by May 1941, when petitioner was affected by increased business activity created by the war situation, its sales had increased to $1,200,000 or about double a normal year's operation. On November 1, 1942, the receivership was terminated and the properties of petitioner were turned back to its original owners in a little better condition than when taken over.
Petitioner's net sales for its fiscal years were for the years shown respectively as follows:
+-----------------------------------------+
¦Fiscal year ¦ ¦
+-------------+---------------------------¦
¦ ¦Net sales for fiscal year ¦
+-------------+---------------------------¦
¦ ¦ended April 30 ¦
+-------------+---------------------------¦
¦ ¦ ¦
+-------------+---------------------------¦
¦1927 ¦$719,978 ¦
+-------------+---------------------------¦
¦1928 ¦697,930 ¦
+-------------+---------------------------¦
¦1929 ¦976,444 ¦
+-------------+---------------------------¦
¦1930 ¦956,506 ¦
+-------------+---------------------------¦
¦1931 ¦661,199 ¦
+-------------+---------------------------¦
¦1932 ¦501,935 ¦
+-------------+---------------------------¦
¦1933 ¦425,976 ¦
+-------------+---------------------------¦
¦1934 ¦614,021 ¦
+-------------+---------------------------¦
¦1935 ¦538,756 ¦
+-------------+---------------------------¦
¦1936 ¦653,101 ¦
+-------------+---------------------------¦
¦1937 ¦654,734 ¦
+-------------+---------------------------¦
¦1938 ¦503,206 ¦
+-------------+---------------------------¦
¦1939 ¦529,176 ¦
+-------------+---------------------------¦
¦1940 ¦614,898 ¦
+-------------+---------------------------¦
¦1941 ¦606,201 ¦
+-----------------------------------------+
Petitioner's earnings as reported on its Federal income tax returns for the years ended April 30, 1928 through 1940, are as follows:
+--------------------------------+
¦Fiscal year ended ¦Net income ¦
+-------------------+------------¦
¦April 30 ¦(or loss) ¦
+-------------------+------------¦
¦ ¦ ¦
+-------------------+------------¦
¦1928 ¦($39,533.13)¦
+-------------------+------------¦
¦1929 ¦(39,903.25) ¦
+-------------------+------------¦
¦1930 ¦20,519.80 ¦
+-------------------+------------¦
¦1931 ¦9,411.26 ¦
+-------------------+------------¦
¦1932 ¦(24,949.36) ¦
+-------------------+------------¦
¦1933 ¦(28,366.60) ¦
+-------------------+------------¦
¦1934 ¦(11,398.65) ¦
+-------------------+------------¦
¦1935 ¦(34,725.32) ¦
+-------------------+------------¦
¦1936 ¦(29,242.34) ¦
+-------------------+------------¦
¦1937 ¦3,155.85 ¦
+-------------------+------------¦
¦1938 ¦(10,412.78) ¦
+-------------------+------------¦
¦1939 ¦(10,680.36) ¦
+-------------------+------------¦
¦1940 ¦(9,079.38) ¦
+--------------------------------+
During the fiscal years here involved petitioner was entitled to use the excess profits credit based on income pursuant to section 713. Petitioner's excess profits tax credit based on its actual ‘average base period net income,’ determined without regard to section 722, was less in each of the fiscal years involved than its excess profits tax credit based on invested capital. The Commissioner determined that petitioner was entitled to an excess profits tax credit based on invested capital for the fiscal years and in the respective amounts as follows:
+-----------------------------------------------------+
¦Fiscal year ended in— ¦Excess profits tax credit ¦
+-------------------------+---------------------------¦
¦1941 ¦$18,422.79 ¦
+-------------------------+---------------------------¦
¦1942 ¦1 18,332.20 ¦
+-------------------------+---------------------------¦
¦1943...To continue reading
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