UNITED STATES TRUST COMPANY v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 12941.

• Decision Date: 16 October 1928
• Docket Number: Docket No. 12941.
• Parties: UNITED STATES TRUST COMPANY OF NEW YORK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

13 B.T.A. 1074 (1928)

UNITED STATES TRUST COMPANY OF NEW YORK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12941.

Board of Tax Appeals.

Promulgated October 16, 1928.

George L. Shearer, Esq., for the petitioner.

Maxwell E. McDowell, Esq., for the respondent.

The petitioner seeks a redetermination of a deficiency of $30,424.78 in income and profits taxes for 1921. It urges that the Commissioner committed error in (1) disallowing as a deduction from gross income the amount of $82,565 representing New York State franchise tax accrued during the last six months of 1920 and paid in 1921; (2) reducing earned surplus by $82,565 on account of such New York State franchise tax; and (3) refusing to include in invested capital of the petitioner $89,523.89 representing an overpayment of Spanish war taxes in the amount of $52,014.23, plus interest on such amount to March 1, 1913, of $37,509.66. The petitioner further alleged error with respect to the determination of inadmissible assets in computing invested capital, but such allegation of error has been abandoned.

FINDINGS OF FACT.

The petitioner is a New York corporation with its principal place of business located at No. 45 Wall Street, New York City.

The petitioner at all times herein mentioned has kept its books on the accrual basis. The New York franchise tax to which the petitioner was subject was an annual tax, payable prior to September 1 of each year and was based upon the average capital, surplus and undivided profits of the company for the year ending on the preceding June 30.

The petitioner filed a return for the year 1920, and deducted in its return for that year an amount of $82,565 appearing on its books and representing accrued New York franchise tax for the period from July 1, 1920, to December 31, 1920, which was payable prior to September 1, 1921, and paid in August, 1921. Prior to the time that the petitioner prepared its returns for 1921, the return for 1920 was audited. The Commissioner refused to allow the deduction of the said amount of $82,565 accrued franchise taxes on the basis that such tax was deductible only in the year of payment. In preparing its return for the year 1921 the petitioner deducted the said amount of $82,565 so disallowed in the year 1920 as a deduction for 1921.

Thereafter the petitioner's return for 1921 was audited and this deduction of the said amount of $82.565 New York franchise tax was disallowed for the year 1921 on the basis that it was a proper deduction in the year of accrual, to wit, 1920, and not a deduction in 1921 when paid. At the time such audit of the 1921 return was made, claim for refund of the 1920 tax was outlawed by the period of limitation fixed by statute.

The petitioner has never received the benefit of a deduction from its income for the said amount of $82,565 franchise tax, although the same was duly paid by petitioner to the State of New York.

The invested capital of the petitioner for 1921 was adjusted by respondent by reducing the petitioner's surplus as of January 1, 1921, by this amount of $82,565, on the ground that this tax was a properly entered reserve for taxes on the books of the petitioner as of that date. After the said amount of $82,565 New York franchise tax was disallowed as a deduction in the 1920 return, the petitioner in preparing its 1921 return had restored that amount to its invested capital for 1921.

The petitioner paid the following Spanish War taxes, which were known as special bankers' taxes, on the following dates:

                    July 25, 1898 _________________________________________ $23,562.60
                    July 3, 1899 __________________________________________  24,244.00
                    July 2, 1900 __________________________________________  24,000.00
                    July 3, 1910 __________________________________________  24,000.00
                                                                             _________
                          Total ___________________________________________  95,806.60
                

Prior to January 1, 1914, the petitioner filed a claim for refund of said taxes upon the ground that only part of its capital was employed in banking. The Supreme Court of the United States on May 29, 1922, in the test case of the Fidelity Deposit Co. of Maryland against the United States, held that the Act of 1898 which imposed these war taxes placed a tax only upon such capital as was actually employed in the banking business and that the capital used in other branches of the company was not subject to the tax. Under this decision the taxpayer was successful in its claims and the Treasury Department reduced the tax and allowed a refund of $52,014.23, with interest in the amount of $81,609.36, a total of $133,623.59. This refund was received by the taxpayer on February 27, 1926. Neither during the taxable year 1921 nor prior thereto has any entry appeared on the petitioner's book of this claim as a company asset. No part of such amount was included by the Commissioner in the computation of petitioner's invested capital.

OPINION.

PHILLIPS:

This proceeding was submitted on a stipulation of the facts which have been adopted as our findings of fact. The stipulation was supplemented by testimony which established that the New York State franchise tax on trust companies accrues rateably over the year, although not payable until after its close.

It appears that petitioner was subject to the New York franchise tax on trust companies, which is an annual tax imposed for the year beginning on July 1 and ending on June 30. Under the decisions of the courts of that State, this tax accrues...