J. Landis Shoe Co. v. Commissioner

J. LANDIS SHOE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. Landis Shoe Co. v. Commissioner

Docket No. 7992.

United States Board of Tax Appeals 11 B.T.A. 42 ; 1928 BTA LEXIS 3883 ; March 16, 1928 , Promulgated *3883 1. Where petitioner, a corporation, operated upon the basis of a fiscal year ending September 30, and it consolidated with another corporation as of December 31, 1919, the taxable period prior to consolidation for which the petitioner should file a return is the period from October 1, 1919, to December 31, 1919.

2. The consolidation not having altered the corporate entity of the petitioner, the proceeds from the sale of stock of petitioner on hand at the time of inventory, December 8, 1919, which were paid to the former stockholders of the petitioner under an agreement with the other corporation, constituted income to the petitioner before it could have been distributed.

3. Where it is not shown what part of the proceeds of the sales of goods on hand at the time of inventory accrued prior to December 31, 1919, the deficiency asserted by the respondent for the taxable period ending December 31, 1919, is approved.

4. The calculation of net income for the taxable period ending December 31, 1919, by applying to the year's sales of this period the percentage of gross profit to gross sales for the prior taxable period held to be improper.

Ben Jenkins, Esq., *3884 for the petitioner.

James O'Callaghan, Esq., for the respondent.

SIEFKIN *42 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the three-months' period ended December 31, 1919, in the amount of $18,918.53.

The errors alleged are:

1. That the respondent erroneously determined that $82,800.16, the profits earned by the petitioner from October 1, 1918, to December 8, 1918, was the petitioner's taxable net income for the fiscal year ended September 30, 1919.

2. That the respondent erroneously determined that $65,013, the proportionate share of the profits from the sale of shoes, due the stockholders of the petitioner under an agreement made with another corporation with which they exchanged stock, was the petitioner's taxable net income for the three months' period ended December 31, 1919.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Pennsylvania on May 23, 1918, for the purpose of engaging in the manufacture and sale of shoes. Its principal office is at Palmyra, Pa. On October 1, 1918, it acquired the business theretofore *43 conducted as a partnership *3885 under the same name and started operation on the basis of a fiscal year ended September 30.

On December 8, 1919, it was agreed between the G. R. Kinney Co., a corporation, and the stockholders of the petitioner that the Kinney Company would exchange its capital stock for stock of the J. Landis Shoe Co. There was also an oral agreement that any profit which might be realized from the sale of finished goods on hand should be prorated and their proper share allocated to the stockholders of the petitioner.

On March 15, 1920, the petitioner filed an income-tax return purporting to be for the fiscal year ended September 30, 1919, and reporting a net income of $81,103.49, and taxes were paid upon that basis. Subsequently it was called to the attention of the petitioner that the return as filed covered the period from October 1, 1918, to December 8, 1919, a period of one year, two months and eight days. Thereafter, in May, 1920, amended returns were filed, one for the fiscal year ended September 30, 1919, in which the taxable net income was shown to be $81,103.49, the same amount as had been shown in the original return. At the same time an attempt was made to file a return for the *3886 three-months' period between October 1, 1919, and December 31, 1919, the date upon which the stockholders transferred their stock for stock in the other corporation, such return showing a net income of one-fourth of the income shown by the return filed at the same time for the full twelve months ended September 30, 1919.

The petitioner did not close its books on September 30, 1919. On or about July 1, 1920, the former stockholders of the petitioner were advised by the G. R. Kinney Co. that their share of the net profits for the season was $65,013, and each of the stockholders received his proportionate part of such profits in shares of stock of the G. R. Kinney Co. As a result of this, amended returns were filed by the petitioner apportioning a total income of $146,116.49 to the fiscal year ended September 30, 1919, and the succeeding three-months' period on the basis of elapsed time, and additional taxes paid on that basis. This method of determining taxable net income for the respective periods was held to be incorrect by the respondent, and the amended returns so filed were rejected. For the fiscal year ended September 30, 1919, the respondent accepted the income reported *3887 on the amended return filed in May, 1920, added thereto certain organization expenses in the amount of $1,696.67, and determined that the taxable net income for that fiscal year is $82,800.16. For the three-months' period October 1, 1919, to December 31, 1919, the respondent determined that the amount of $65,013 received by the former stockholders of the petitioner in 1921, represented the income of the petitioner, and that it is upon that amount that the *44 petitioner's tax liability for the three months' period in question should be calculated.

On January 1, 1920, the petitioner consolidated with the G. R. Kinney Co. but still continued as a corporate entity. The $65,013 is the proportionate share of the income derived from sale of merchandise on hand on December 8, 1919, from that date to June 28, 1920.

The profit and loss statement of the petitioner for the period December 18, 1918, to December 8, 1919, as reflected by the books is as follows: Income:

Gross sales $1,194,552.38 Less: Returns 77,198.38 Net sales 1,117,354.00 Interest 3,478.02 Interest on employees' accounts 2,478.41 Bad debts recovered 577.12 Interest on accounts receivable 186.39 Credit balances written off 198.85 Adjustment of salesmen's accounts 2,649.33 Miscellaneous income 1,413.09 Increase in inventory 99,937.51 Increase in wages prepaid 478.77 Increase in new samples 257.00 Decrease in accounts payable 3,268.07 Total income $1,232,276.56 Expenses:

Salaries $55,938.52 Wages 213,420.70 Commission 46,885.57 Raw materials 622,248.68 Expense 100,560.76 Bills and freight prepaid Dec. 18, 1918 45,595.77 Discounts 27,369.10 Lasts and patterns (old) 7,230.97 Dies (old) 5,013.04 Interest credited to stockholders 4,623.82 Bad debts 2,435.89 Collection fees 756.76 Allowances 1,184.11 Depreciation 3,559.21 Total expenses 1,136,822.90 Net profit for period 95,453.66 *3888 The petitioner was upon an accrual basis, and in taking inventories it was necessary to keep strict account of old season and new season goods. The two seasons are spring and summer and fall and winter.

*45 The sales of new season goods prior to December 31, 1919, aggregated $21,504.23. The sales were between November 20, 1919, and December 29, 1919.

An inventory was taken on December 8, 1919.

OPINION.

SIEFKIN: The only real question properly before us relates to the taxable net income of the petitioner between October 1, 1919, and December 31, 1919. The petitioner has alleged error with respect to the fiscal year ended September 30, 1919, but it is clear that this Board has no jurisdiction of that period since the respondent determined an overassessment. It is also clear that beginning January 1, 1920, the petitioner corporation became affiliated with the G. R. Kinney Co., and from that time on consolidated returns were necessary under the Revenue Act of 1918. If it had not been for the affiliation, the petitioner would have had to continue filing its return on a fiscal year basis with a fiscal year ending September 30. As it was, the affiliation cut that *3889 period short and created a new taxable period being the period October 1, 1919, to December 31, 1919.

Because the petitioner did not close its books on December 31, 1919, or take an inventory at that date or on September 30, 1919, and because the petitioner's only inventory at or about that time occurred December 9, 1919, the petitioner claims that the period to be considered should be from December 9, 1919, to December 31, 1919. There are several reasons why such a period can not be taken. One reason is that the petitioner had already established, with the consent of the respondent, a fiscal year ending on September 30, and the mere failure to take an inventory at that time or close its books would not justify the creation of a new accounting period. Another reason is that the Revenue Acts have never recognized a fiscal year which ends other than on the last day of the month. Another reason is that to take the period December 9th as the beginning of a taxable period would be to separate the period of October 1, 1919, to December 31, 1919, into two taxable periods instead of one. It is clear that the taxable period to be considered is the three-months' period ended December 31, 1919.

*3890 The principal question with respect to that period is whether the respondent erred in including in income for that period the sum of $65,013, which amount exactly corresponds to the market value of additional shares of stock in the G. R. Kinney Co. issued to former stockholders of the petitioner corporation some time in the latter part of June or the early part of July, 1920. The reason for the receipt of such stock is found in an agreement entered into between such stockholders and the G. R. Kinney Co. on December 9, 1919, at which time the stockholders of the petitioner exchanged their shares of *46 stock in the G. R. Kinney Co., which company at the same time orally agreed to issue its stock to such stockholders in a further amount at a future date, based upon the profit realized from the sale of finished goods in inventory on December 9, 1919. The respondent has not filed a brief and has given us no reason why he included that sum in income of the petitioner for the taxable period. On the other hand, the petitioner has not shown that the entire profit on which the distribution to the stockholders was based did not accrue to the petitioner before December 31, 1919. *3891 Petitioner argues as though the profits never did accrue to it. That this is unsound is plain when it is remembered that the petitioner corporation still continued its corporate entity and presumably still exists, and that before a profit on the sale of its inventory could be distributed either to the then stockholders or the former stockholders, it must have accrued to the petitioner itself. We are, therefore, led to conclude that in the absence of a showing as to what portion of the profits accrued before December 31, 1919, and after that date, we must affirm the respondent's determination, since the burden of proof is on the petitioner to show that the Commissioner has erred.

The petitioner further contends that its net income for the taxable period should be computed by taking the same percentage of the new season's sales occurring during that period, as the gross profit for the preceding fiscal year bore to the gross sales for that fiscal year. This, the petitioner feels, is necessary because it has not a record of the expenses during that period or an inventory at the end of the period, or even at the beginning of the period. We can not assume that the percentage of profit *3892 will continue the same from year to year, or would be the same for the three-months' period as it was for a period of one year. We, therefore, must also approve the respondent's action as to this point.

Judgment will be entered for the respondent.