1956 U.S. Tax Ct. LEXIS 177">*177
Petitioner was incorporated in 1905. For many years prior to its base period (fiscal years ended October 31, 1937, to October 31, 1940, inclusive) it manufactured tires and tubes, belts, rollers, and miscellaneous products under separate divisions. In 1938, it set up a new textile division. During the remainder of its base period it had an over-all net loss from textile. Its old business income for the last 2 years of its base period was greatly in excess of its income for the first 2 years. Parties agree that setting up textile was a change in the character of petitioner's business under
26 T.C. 389">*390 OPINION.
These consolidated proceedings involve the total disallowance by respondent of petitioner's applications for relief under
Excess profits | ||
Docket No. | Taxable year ended October 31 | tax paid |
47294 | 1941 | $ 93,967.33 |
53682 | 1942 | 561,945.47 |
53682 | 1944 | 681,903.06 |
53682 | 1946 | 402,041.09 |
1956 U.S. Tax Ct. LEXIS 177">*179 Petitioner paid no excess profits taxes for the taxable years ended October 31, 1943, and October 31, 1945.
The only issue is whether petitioner is entitled to relief under
All the facts were stipulated. Only those facts which are deemed necessary to an understanding of the law question involved are summarized and set forth below.
Petitioner was incorporated under the laws of the State of Ohio on May 13, 1905, as "The Dayton Rubber Manufacturing Company." On April 1, 1947, the name was changed to "The Dayton Rubber Company." The principal plant, manufacturing facilities, and offices of petitioner are located at Dayton, Ohio.
Petitioner filed its income and excess profits tax returns with the then collector of internal revenue for the first district of Ohio at Cincinnati.
Petitioner keeps its books on the accrual basis1956 U.S. Tax Ct. LEXIS 177">*180 of accounting and reports its income for Federal income tax purposes on the basis of a fiscal year ending October 31.
26 T.C. 389">*391 Petitioner's "base period" as that term is defined in section 713 (b) (1) (A) of the 1939 Code, as amended, is the 4-year period beginning November 1, 1936, and ending on October 31, 1940.
For many years prior to its base period petitioner had manufactured tires and tubes, belts, rollers, and miscellaneous products under separate divisions. In 1938, petitioner set up a new division known as the textile division wherein it commenced the manufacture of a line of products for use by the textile industry. Respondent recognized the setting up of this new division as a "change in the character of the business" of petitioner as that term is used in
Petitioner's average base period net income computed under section 713 (f) of the 1939 Code, as amended, for the taxable years in question, is as follows:
Actual excess profits net income (all divisions) | ||||
Base period years ended | ||||
October 31 | Year ended October 31 | |||
1941 | 1942 | 1944 | 1946 | |
1937 | $ 519,230 | $ 677,180 | $ 677,180 | $ 677,180 |
1938 | 379,219 | 489,365 | 489,534 | 489,534 |
1939 | 894,106 | 1,093,497 | 1,093,497 | 1,093,497 |
1940 | 508,708 | 622,062 | 622,061 | 622,061 |
Total | $ 2,301,263 | $ 2,882,104 | $ 2,882,272 | $ 2,882,272 |
Arithmetic average | $ 575,316 | $ 720,526 | $ 720,568 | $ 720,568 |
Total 2d half b. p | 1,402,814 | 1,715,559 | 1,715,558 | 1,715,558 |
Total 1st half b. p | 898,449 | 1,166,545 | 1,166,714 | 1,166,714 |
Excess of 2d half | $ 504,365 | $ 549,014 | $ 548,844 | $ 548,844 |
One-half of excess | 252,182 | 274,507 | 274,422 | 274,442 |
Total 2d half b. p | 1,402,814 | 1,715,559 | 1,715,558 | 1,715,558 |
Total | $ 1,654,996 | $ 1,990,066 | $ 1,989,980 | $ 1,989,980 |
ABPNI (one-half) | 827,498 | 995,033 | 994,991 | 994,991 |
1956 U.S. Tax Ct. LEXIS 177">*182 Petitioner's actual excess profits net income for the base period, after eliminating the actual operations of the new textile division 26 T.C. 389">*392 during the base period, applicable to the taxable years in question, is as follows:
Actual excess profits net income (all divisions | ||||
except textile) | ||||
Base period years ended | ||||
October 31 | Year ended October 31 | |||
1941 | 1942 | 1944 | 1946 | |
1937 | $ 519,230 | $ 677,180 | $ 677,180 | $ 677,180 |
1938 | 390,805 | 500,951 | 501,120 | 501,120 |
1939 | 898,499 | 1,097,890 | 1,097,890 | 1,097,890 |
1940 | 500,402 | 613,756 | 613,755 | 613,755 |
Total | $ 2,308,936 | $ 2,889,777 | $ 2,889,945 | $ 2,889,945 |
Arithmetic average | 577,234 | 722,444 | 722,486 | 722,486 |
Petitioner's actual excess profits net income of its new textile division for all years from its inception to October 31, 1946, inclusive, compared with its actual excess profits net income of its other divisions, is as follows:
Actual excess profits net income | ||
Fiscal year ended October 31 | Textile division | Other divisions |
1938 | ($ 11,586) | $ 500,951 |
1939 | (4,393) | 1,097,890 |
1940 | 8,306 | 613,756 |
Total for 3 years in base period | ($ 7,673) | $ 2,212,597 |
1941 | 162,758 | 883,848 |
1942 | 383,417 | 1,411,890 |
1943 | 154,223 | 1,361,214 |
1944 | 268,568 | 1,851,441 |
1945 | 180,512 | (303,122) |
1946 | 60,919 | 3,799,654 |
Total for the 6 excess profits tax | ||
taxable years | $ 1,210,397 | $ 9,004,925 |
1956 U.S. Tax Ct. LEXIS 177">*183 Petitioner contends that it is entitled to a constructive average base period net income under
1 | 2 | 3 | |
Actual excess | |||
Fiscal year ended October 31 | profits net | Section 722 | Total of |
income after | average for | columns 1 | |
eliminating | textile division | and 2 | |
textile division | |||
1937 | $ 677,180 | $ 179,136 | $ 856,316 |
1938 | 500,951 | 179,136 | 680,087 |
1939 | 1,097,890 | 179,136 | 1,277,026 |
1940 | 613,756 | 179,136 | 792,892 |
$ 2,889,777 | $ 716,544 | $ 3,606,321 |
Total 2d half (column 3) | $ 2,069,918 |
Total 1st half (column 3) | 1,536,403 |
Excess of 2d half over 1st half | 533,515 |
One-half of excess | 266,757 |
Add: Total of 2d half | 2,069,918 |
Total | $ 2,336,675 |
CABPNI (one-half) | $ 1,168,337 |
The respondent contends that in determining whether petitioner is entitled to any relief under
Year ended October 31 | ||||
Base period | ||||
1941 | 1942 | 1944 | 1946 | |
1 | $ 577,234 | $ 722,444 | $ 722,486 | $ 722,486 |
2 | 100,316 | 179,136 | 179,136 | 179,136 |
3 | $ 677,550 | $ 901,580 | $ 901,622 | $ 901,622 |
4 | 827,498 | 995,033 | 994,991 | 994,991 |
Petitioner has never applied for
1956 U.S. Tax Ct. LEXIS 177">*185 The only question in this case is one of law, and the principles involved therein are the same as were litigated and decided in favor of the Government in
The basic reason behind the above decisions is found in the specific language of
1956 U.S. Tax Ct. LEXIS 177">*187 We have set out the computations relied upon by the parties in support of their respective contentions for a constructive average base period net income based upon the stipulated facts. For the purposes of this discussion we need only refer as an example to the taxable year ended October 31, 1942, as the principles involved in the other years are the same. For the year 1942, petitioner contends it is entitled to a constructive average base period net income of $ 1,168,337 whereas respondent contends that the constructive average base period net income for that year is only $ 901,580 and, since this is less than the actual average base period net income of $ 995,033 computed under section 713 (f), without the benefit of
There are two objections to petitioner's computation. Petitioner has assumed that when the parties stipulated that "the constructive average base period net income under the provisions of
A supplemental opinion was rendered since the parties could not agree under Rule 50. See
The arguments made by Acme in the proceedings under Rule 50 were substantially the same as petitioner is making here. In holding contrary to such arguments, we said:
Despite counsel's astute argument to the contrary, we think petitioner's proposed computation would afford a combined relief under both
In the instant case petitioner made no claims for
Petitioner also makes the point that
We hold that petitioner is not entitled to any relief under
Reviewed by the Special Division.
1. Actual arithmetic average base period net income of all divisions, except textile.↩
2. Stipulated constructive average base period net income of new textile division.↩
3. Tentative constructive average base period net income of entire business.↩
4. Actual average base period net income of entire business computed under section 713 (f) without the benefit of
5.
(a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayer generally occurring or existing after December 31, 1939, except * * *↩