Textile Mill Supply Co. v. Commissioner , 8 B.T.A. 145 ( 1927 )

OPINION.

Phillips :

The first assignment of error was waived by petitioner at the hearing and is not here in issue.

In determining what earnings were available for payment of dividends, the Commissioner first computed a so-called tentative tax on the earnings of the year, reduced the earnings by such tentative tax and prorated the resulting figure over the year. We have heretofore had occasion to consider this question in the Appeal of L. S. Ayers & Co., 1 B. T. A. 1135, where we reached the conclusion that such a reduction of the earnings was not justified. The invested capital and the deficiency should be recomputed accordingly.

The petitioner claims the right to have its profits tax computed under the provisions of section 328 of the Revenue Act of 1918, contending that the Commissioner determined that it was entitled thereto in a prior year and that salaries paid were so small as to result in an abnormality of income. The first ground urged seems to us untenable. That the Commissioner may have permitted special relief in one year can not control other years when the question is raised before the Board. If, for example, the Commissioner erred with respect to such year, must such error be perpetuated indefinitely? Furthermore, we do not know on what basis the Commissioner based his determination as to the preceding year. The fact that net income and invested capital are similar in both years would be insufficient to establish that the situation with respect to the factors entering into their computation were the same in each year.

There is nothing from which we may determine whether the salaries paid to the officers were abnormally low, or otherwise. We know that the business earned a substantial net income during the taxable year, but this is not sufficient to enable us to say either that these officers should have commanded larger salaries or that any abnormality exists. The law in section 327 expressly provides that the relief claimed shall not apply to the case where the tax is high merely because the corporation earned a high rate of profit upon a normal invested capital

On the record before us we see no basis for the application of sections 327 and .328 of the Act.

Reviewed by the Board.

Decision will be entered on 15 days' notice, under Rule 50.