Valve v. Comm'r of Internal Revenue, Docket No. 31164.
| Decision Date | 29 August 1952 |
| Docket Number | Docket No. 31164. |
| Citation | 18 T.C. 931 |
| Parties | SUPERIOR VALVE AND FITTINGS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
EXCESS PROFITS TAX— SECTION 722(b)(4) RELIEF— CONSTRUCTIVE EARNINGS.—Petitioner was organized and commenced business in 1938 and its business did not reach, by the end of 1939, the earning level it would have reached had it commenced business two years earlier. Held, relief should be granted. Amount of constructive average base period net income determined. Sidney B. Gambill, Esq., for the petitioner.
A. W. Dickinson, Esq., for the respondent.
The respondent has denied the petitioner's claims for refund asserted in applications for relief from excess profits tax for the calendar years 1941 to 1945, inclusive. He has also determined deficiencies in excess profits tax for the years 1943 and 1944 in the respective amounts of $11,512.71 and $9,160.61, the payment of which was deferred under Code section 710(a)(5).
The petition alleges error in the disallowance of claims for relief, in which relief was claimed under the provisions of Code section 722, subsections (a) and (b)(4). The specific questions for decision are whether the petitioner is entitled to the use of the push-back rule of section 722(b)(4) and, if so, what is the amount of its constructive average base period net income.
The petitioner is a corporation organized under the laws of Pennsylvania on April 18, 1938. Its principal office is in Pittsburgh, Pennsylvania. It commenced business on April 18, 1938.
The petitioner's Federal income tax returns for all periods here involved were filed with the collector of internal revenue at Pittsburgh, Pennsylvania. It kept its books and filed its returns on the accrual method of accounting and on the calendar year basis. The petitioner filed timely applications for relief under section 722 of the Internal Revenue Code for the years 1941 to 1945, inclusive.
The petitioner was organized by John S. Forbes, who became its president and general manager. Prior to the organization of the petitioner, Forbes had been treasurer of Kerotest Manufacturing Company (hereinafter called Kerotest) and was responsible for its sales in connection with commercial refrigeration and air conditioning. During the time that Forbes was with Kerotest, he had developed and patented a so called diaphragm packless valve for use in commercial refrigeration equipment, which valve was thereafter used by Kerotest.
In September 1937, Forbes applied for a patent on an improved diaphragm packless valve. A patent was granted to Forbes on January 24, 1939. This patent relates particularly to a valve designed to be used where fluids at high pressure are to be controlled and particularly fluids which are difficult to confine, such as refrigerant gases and light hydrocarbon gases.
The principal advantage of the packless valve over the packed valve previously in use was that the packless valve could be dismantled and repaired without closing the flow of the refrigerant and without having leakage into the space occupied by the refrigeration unit. Prior to the organization of the petitioner, Kerotest was the only company that manufactured a packless valve. The valve invented by Forbes and on which he obtained a patent was competitive with the valve manufactured by Kerotest but sufficiently different so as not to result in infringement.
Upon incorporation of the petitioner, $60,000 was paid in in cash for preferred stock. Forbes turned in to the petitioner his interest in his application for a patent in exchange for 2,400 shares of common stock with a par value of $1 per share. There was no change in the capitalization of the petitioner during the base period years. The petitioner did not manufacture its valves but purchased parts from various suppliers and assembled them into complete units for sale.
The petitioner added other items to its packless valves, which included valve parts, check valves, compressor valves, manifolds, filters, and tools.
Forbes was a leader in the refrigeration valve industry and in 1939 he was president of the Refrigeration Equipment Manufacturers Association, which was the leading trade association of the refrigeration industry.
When the petitioner commenced business, it had no backlog of orders. Its principal difficulty in the beginning was making inroads on the established companies and selling to refrigeration manufacturers who were purchasing from other suppliers. The petitioner's first orders were small as customers were unwilling to switch completely from established suppliers until the petitioner's new valve was tested and proven. The petitioner was at a disadvantage in making its purchases of parts inasmuch as in the beginning its purchases were comparatively small. The petitioner's first quarters were in a basement with floor space approximately 100 feet by 175 feet. In the spring of 1940 it moved its plant to larger premises.
During the period that Forbes was with Kerotest, he had acquired many acquaintances in the commercial refrigeration field. Among these were persons connected with Commonwealth Brass Corporation, which was the petitioner's largest supplier. Commonwealth extended to the petitioner substantial amounts of credit in order to help the petitioner get started in business. The petitioner's purchases from Commonwealth in 1938 amounted to $40,065.20, of which it owed $26,198.56 at the end of the years. In 1939, the petitioner's purchases from Commonwealth amounted to $109,344.49, of which it owed $56,210.70 at the end of the year.
The petitioner's business was subject to seasonal fluctuations. The commercial refrigeration business picks up about the first of March each year and a seasonal upswing continues on through the summer months. It then tapers off in the fall months of the year. Sales of commercial refrigerators and commercial refrigerator equipment during the taxable years lagged approximately one month behind the seasonal cycle of the petitioner's sales. The petitioner's sales and sales of commercial refrigerators and commercial refrigerator equipment by quarters, with adjustment for a one month lag, and the ratio of the petitioner's sales to the combined refrigerator sales for 1938 and 1939 were as follows:
The commercial refrigerating equipment sales for the years 1938 and 1939 of 16 companies, including such items as water coolers, ice cream cabinets, bottle beverage coolers, milk coolers and cooling cabinets, commercial evaporators, and condensing units and condensers were as follows:
The monthly average of sales of durable goods stores in the United States for the years 1936 to 1939, inclusive, were as follows, in millions of dollars:
+-------------------+
¦1936¦1937¦1938¦1939¦
+----+----+----+----¦
¦ ¦ ¦ ¦ ¦
+----+----+----+----¦
¦816 ¦907 ¦734 ¦865 ¦
+-------------------+
The indices of industrial production of all manufacturers in the United States, adjusted for seasonal variations, for the years 1935 to 1939, inclusive, on the basis of the average for those years being 100 per cent, are as follows:
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