The opinion
DIAMOND SHOE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Diamond Shoe Co. v. Commissioner
Docket No. 3453.
United States Board of Tax Appeals
15 B.T.A. 826 ; 1929 BTA LEXIS 2790 ;
March 12, 1929 , Promulgated
*2790 Evidence held insufficient to warrant modification of respondent's method of computing average prewar income.
Myron A. Finke, Esq., and Joseph J. Klein, Esq., for the petitioner.
James L. Backstrom, Esq., for the respondent.
TRAMMELL
*826 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $32,028.64, of which amount the respondent proposes to assess $24,175.27 against the petitioner and $7,853.37 against a subsidiary corporation. Errors alleged are (1) that the respondent used a wrong amount as the 1913 income of the subsidiary, (2) that he erroneously calculated the average prewar income of the consolidated companies, and (3) that he denied the petitioner's application for special assessment. As to the first alleged error, the parties have stipulated the facts and such stipulation is contained in our findings. The petitioner has withdrawn its contention as to the third alleged error.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal office in New York City. It was organized in February, 1912, and was a continuation of an individual *2791 wholesale shoe business conducted by D. Davidowitz, selling but not manufacturing shoes.
In July, 1912, the stockholders of the petitioner and one Rubin, a practical shoe manufacturer, purchased a shoe factory in Brockton, Mass., from a trustee in bankruptcy. The business theretofore carried on by the factory had been conducted under the name of the Ideal Shoe Co. The stockholders of the petitioner and Rubin formed a Massachusetts corporation called Diamond Shoe Co. and turned the factory over to it. Later, the Diamond Shoe Co., a Delaware corporation, succeeded to the assets and business of the Massachusetts corporation.
The stockholdings in the two corporations during that part of the prewar period in which the corporations existed were as follows: New York company Massachusetts company
D. Davidowitz 1,750 300
J. P. Davidowitz 50 50
E. Davidowitz 5 50
Max L. Friedman 150 50
Henry Rubin 50
2,000 500
*827 The petitioner filed a consolidated income and profits-tax return for 1918, combining with its income that of Diamond Shoe, Co., the Delaware corporation.
The prewar income of the petitioner, including that of the predecessor *2792 individual, and of the Massachusetts corporation, was as follows: Petitioner Massachusetts corporation
1911 $26,549.76 ( 1 )
1912 22,683.78 $3,610.81
1913 32,528.79 41,268.43
In computing the average prewar income of the affiliated corporations, the respondent took $26,549.76 for 1911, $26,294.59 for 1912, and $68,250.58 for 1913, making a total of $121,094.93. He then divided this sum by 3 to obtain the average net income for the prewar period. The deficiency asserted is attributable in part, at least, to such computation.
OPINION.
TRAMMELL: We have set forth in our findings above the method used by the respondent in computing the average prewar income of the affiliated corporations. The parties have stipulated that the respondent's result is wrong in that the income of the Massachusetts corporation for the year 1913 was $41,268.43 instead of $35,721.79 as used by him.
It is contended that the Commissioner was in error in computing the average prewar income as he did. The petitioner argues for a method that arrives at the average prewar income of each corporation separately. The following table *2793 shows the difference: Commissioner's determination
Income of - 1911 1912 1913 Total
Diamond Shoe Co. (New York) 26,549.76 $22,683.78 $32,351.95
Diamond Shoe Co. (Mass.) 3,610.81 35,721.79
Total 26,549.76 26,294.59 68,073.74
Plus Federal tax paid during
year 176.84
Total 26,549.76 26,294.59 68,250.58 $121,094.93
Average net income for prewar
period ($121,904.93 divided
by 3) 40,364.98
Petitioner's determination
Income of - 1911 1912 1913 Total
Diamond Shoe Co. (New York) $26,549.76 $22,683.78 $32,351.95
Plus Federal tax paid during
year 176.84
Total 26,549.76 22,683.78 32,528.79 $81,762.33
Average prewar income of the
Diamond Shoe Co. (New York) 27,254.11
1913
Average prewar income of the
Diamond Shoe Co. (Mass.) 41,268.43
Summary
Average prewar income of
Diamond Shoe Co. (New York) 27,254.11
Average prewar income of
Diamond Shoe Co. (Mass.) 41,268.43
Total average prewar income of
both companies 68,522.54
*828 Section 320(b) of the Revenue Act of 1918 provides:
The average net income *2794 for the prewar period shall be determined by dividing the number of years within that period during the whole of which the corporation was in existence into the sum of the net income for such years, even though there may have been no net income for one or more of such years.
Section 310 of the same Act provides:
That as used in this title the term "prewar period" means the calendar years 1911, 1912, and 1913, or, if a corporation was not in existence during the whole of such period, then as many of such years during the whole of which the corporation was in existence.
Section 330 of the same Act provides:
That in the case of the reorganization, consolidation, or change of ownership, after January 1, 1911, of a trade or business now carried on by a corporation, the corporation shall for the purposes of this title be deemed to have been in existence prior to that date, and the net income and invested capital of such predecessor trade or business for all or any part of the prewar period prior to the organization of the corporation now carrying on such trade or business shall be deemed to have been the net income and invested capital of such corporation.
If such predecessor *2795 trade or business was carried on by a partnership or individual the net income for the prewar period shall, under regulations prescribed by the Commissioner with the approval of the Secretary, be ascertained and returned as nearly as may be upon the same basis and in the same manner as provided for corporations in Title II, including a reasonable deduction for salary or compensation to each partner or the individual for personal services actually rendered.
Under the provisions of section 330, both the corporations are deemed to have been in existence during the prewar years if the businesses to which they succeeded were carried on during those years. The Diamond Shoe Co. of Massachusetts took over the assets and business of a shoe factory in Brockton, Mass., which theretofore had been conducted under the name of the Ideal Shoe Co. This *829 occurred in 1912, but there is no evidence as to how long the business of the Ideal Shoe Co. had been operated. If it had been operated during the prewar years then under the statute, the Diamond Shoe Co. is deemed to have been in business during those years. There is no evidence as to this fact, nor as to the prewar income, if any, *2796 during the period prior to July, 1912.
It may well be that the business to which the Massachusetts corporation succeeded was in existence, but had no net income other than as stated or used by the respondent.
In view of this fact, we can not find that the respondent was in error as to the amount of the deficiency.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Not in existence Aug. to Dec. 31. ↩