SOUTH TEXAS LUMBER CO. v. COMMISSIONER

Docket No. 10050.

7 T.C. 669 (1946)

SOUTH TEXAS LUMBER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

United States Tax Court.

Promulgated August 30, 1946.


Attorney(s) appearing for the Case

J. Arthur Platt, Esq., for the petitioner.

P. Louis Bergeron, Esq., for the respondent.


Petitioner seeks a redetermination of a deficiency in excess profits tax for the year 1943 in the original amount of $6,797.34, which amount, however, has since been reduced by negotiations between the parties, leaving a net amount in controversy of $1,708.53.

The question involved is whether petitioner is entitled to include the anticipated and unreported profits from installment transactions outstanding on its books as at January 1, 1941, 1942, and 1943, as part of its surplus or "accumulated earnings and profits" in arriving at its equity invested capital within the meaning of section 718 (a) (4) of the Internal Revenue Code.

FINDINGS OF FACT.

This case was submitted on the following agreed statement of facts:

1. South Texas Lumber Company, hereinafter referred to as petitioner, is a corporation organized on September 17, 1902, under the laws of the State of Texas, with its principal place of business as a retail dealer in lumber and building materials located in Houston, within the First Collection District of Texas.

2. Petitioner keeps its books and files its income and excess profits tax returns on the calendar year and accrual basis.

3. During the course of its business life petitioner acquired title to certain real estate situated in the State of Texas. Beginning with the taxable year 1937, petitioner has made sales of portions of such real estate and, in accordance with section 44 (b) of the Internal Revenue Code, has elected to compute and report the profit thereon on the installment basis. In each of the transactions where petitioner made such real estate installment sales, deeds were given to purchasers, and the deferred payments were evidenced by promissory notes executed by the purchaser, payable to the order of petitioner as therein shown, and were secured by vendor's lien and mortgage lien against the land. Petitioner, being on the accrual basis of accounting, carried on its books as receivables all of the said installment obligations so received by it from such sales.

4. The books disclose the following with reference to such sales:

---------------------------------------------------------------------------------------------------
                      |            |             |            |           |  Reported  | Unreported
        Name          |    Cost    | Sales Price |   Profit   | Per cent  |   Profits  |  Profits
                      |            |             |            |           |  1937-1940 |  12-31-40
----------------------|------------|-------------|------------|-----------|------------|-----------
                      |            |             |            |           |            |
       1937           |            |             |            |           |            |
                      |            |             |            |           |            |
Melton -------------- | ---------- |   $1,500.00 |  $1,500.00 |   100.00  |    $877.31 |    $622.69
Crowley ------------- |  $1,891.69 |    3,750.00 |   1,858.31 |    49.555 |     600.19 |   1,258.12
Freitag ------------- |     806.87 |    2,552.40 |   1,745.53 |    68.39  |   1,186.84 |     558.69
Lacas --------------- |     610.50 |    1,931.20 |   1,320.70 |    68.39  |     898.08 |     422.62
Porter -------------- |     796.63 |    3,170.00 |   2,373.37 |    74.87  |   1,749.96 |     623.41
Arls ---------------- |     826.97 |    4,443.00 |   3,616.03 |    81.39  |   2,151.07 |   1,464.96
Towson -------------- |   2,149.64 |    8,250.00 |   6,100.36 |    73.94  |   3,882.00 |   2,218.36
Winn ---------------- |   1,019.18 |    3,224.00 |   2,204.82 |    68.39  |   1,119.05 |   1,085.77
Rosen --------------- |   3,561.88 |    4,000.00 |     438.12 |    10.95  |     151.35 |     286.77
                      |            |             |            |           |            |
       1938           |            |             |            |           |            |
                      |            |             |            |           |            |
Speed --------------- |     477.72 |    1,700.02 |   1,222.30 |    71.90  |     928.95 |     293.35
Modglin ------------- |   3,034.80 |    7,679.76 |   4,644.96 |    60.48  |   2,495.67 |   2,149.29
                      |            |             |            |           |            |
       1941           |            |             |            |           |            |
                      |            |             |            |           |            |
Jones --------------- |   3,907.80 |    5,000.00 |   1,092.20 |    21.84  | ---------- | ----------
                      | __________ | ___________ | __________ | _________ | __________ | __________
    Totals ---------- | $19,083.68 |  $47,200.38 | $28,116.70 | --------- | $16,040.47 | $10,984.03
---------------------------------------------------------------------------------------------------

5. At the time provided by law petitioner filed corporation income tax (Form 1120) and corporation excess profits tax (Form 1121) returns for the calendar years 1941, 1942 and 1943, disclosing net income and income taxes due thereon for the three years and excess profits tax for the calendar year 1943. In arriving at the net income for the said three years, petitioner reported the following realized profits on the installment sales previously referred to above:

---------------------------------------------------------------------
                                |     1941    |   1942    |  1943
--------------------------------|-------------|-----------|----------
1937 Sales -------------------- |   $3,043.49 | $2,136.34 | $2,396.87
1938 Sales -------------------- |      903.70 |  1,135.81 |    403.13
1941 Sales -------------------- |       21.84 |    196.56 |    190.98
                                | ___________ | _________ | _________
  Total ----------------------- |    3,969.03 |  3,468.71 |  2,990.98
---------------------------------------------------------------------

6. The balance sheets attached to and made a part of the income tax returns disclosed the following unreported income from installment sales classified as "Unrealized Profit Installment Sales":

--------------------------------------------------------------------
                      |  12-31-40 |  12-31-41 | 12-31-42  | 12-31-43
----------------------|-----------|-----------|-----------|---------
1937 ---------------- | $8,541.39 | $5,497.90 | $3,361.56 |  $964.69
1938 ---------------- |  2,442.64 |  1,538.94 |    403.13 | --------
1941 ---------------- | --------- |  1,070.36 |    873.80 |   682.82
                      | _________ | _________ | _________ | ________
  Total ------------- | 10,984.03 |  8,107.20 |  4,638.49 | 1,647.51
--------------------------------------------------------------------

7. In its corporation excess profits tax return, Form 1121, for the calendar year 1943, petitioner claimed the unreported income from installment sales, $4,638.49, as a part of surplus and undivided profits in arriving at its equity invested capital. It also claimed the unreported income from installment sales, $10,984.03, as at December 31, 1940, and $8,107.20 as at December 31, 1941, in arriving at its equity invested capital for the calendar years 1941 and 1942, respectively, for the purpose of its unused excess profits credit carry-over from the calendar years 1941 and 1942 to the calendar year 1943.

8. The capital stock, surplus and undivided profits and reserve for depletion, as disclosed by the balance sheets as at December 31, 1940, December 31, 1941, December 31, 1942, and December 31, 1943, attached and made a part of petitioner's corporation income tax returns, Form 1120, for said years, were as follows:

------------------------------------------------------------------------------
          Year Ended              |    Capital    |  Net Surplus | Reserve for
                                  |     Stock     |              |  Depletion
----------------------------------|---------------|--------------|------------
December 31, 1940 --------------- | $1,400,000.00 |  $313,152.09 | -----------
December 31, 1941 --------------- |  1,400,000.00 |   311,936.37 | -----------
December 31, 1942 --------------- |  1,400,000.00 |   307,344.13 |   $1,249.86
December 31, 1943 --------------- |  1,400,000.00 |   320,822.22 |    2,828.50
------------------------------------------------------------------------------

Included in the capital stock of $1,400,000.00 was the original stock issued, $50,000.00, and $1,350,000.00 stock dividends subsequently issued.

9. The tax in controversy in this case is the excess profits tax for the calendar year 1943. The Commissioner, as disclosed by the statutory notice of deficiency dated November 5, 1945, reduced petitioner's equity invested capital for the calendar years 1941, 1942 and 1943 by the amounts of unreported profits from installment sales previously referred to in paragraphs 6 and 7 above in the respective amounts of $10,984.03, $8,107.20 and $4,638.49.

OPINION.

HARLAN, Judge:

Since the hearing of this case and since the filing of petitioner's brief a case, undistinguishable on its relevant facts from the case at bar, has been decided by this Court. On July 11, 1946, this Court decided, in Kimbrell's Home Furnishings, Inc., 7 T.C. 339, that a corporation engaged in the sale of furniture at retail on the installment basis could not, in the computation of its equity invested capital, include unrealized profits as represented by unpaid installment notes received from the purchasers at the time of the sale. All of the questions raised by both the petitioner and the respondent herein are fully discussed in the decision in the Kimbrell's Home Furnishings, Inc., case.

Petitioner, in his reply brief, seeks to distinguish the Kimbrell case from the one at bar, due to the fact that in the former case the taxpayer computed its net income on the installment basis as provided by section 44 (a) and its excess profits net income on the accrual basis, whereas in the case at bar the taxpayer filed its income and excess profits tax returns on the accrual basis, but "elected to compute and report the profit" from its installment sales under section 44 (a).

The claimed distinction impresses us as being without substance. In both cases the taxpayers included anticipated and unreported profits from installment sales in equity invested capital as "accumulated earnings and profits."1 Approval of this treatment of anticipated and unreported profits from installment sales would be equivalent to an admission that a different rule applies in the computation of accumulated earnings and profits for excess profits purposes than in the computation of earnings and profits for income tax purposes. In Federal Union Insurance Co., 5 T.C. 374, we held to the contrary.

Judgment will be entered for the respondent.

FootNotes


1. SEC. 718 [I. R. C.]. EQUITY INVESTED CAPITAL.

(a) DEFINITION. — The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b) —

* * * * * * *

(4) EARNINGS AND PROFITS AT BEGINNING OF YEAR. — The accumulated earnings and profits as of the beginning of such taxable year; * * *


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