Hilles & Jones Co. v. Commissioner , 12 B.T.A. 1189 ( 1928 )

HILLES & JONES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hilles & Jones Co. v. Commissioner

Docket No. 12651.

United States Board of Tax Appeals

12 B.T.A. 1189; 1928 BTA LEXIS 3387;

July 6, 1928, Promulgated

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The petitioner, having failed to adduce sufficient evidence to bring it within section 327(d) of the Revenue Act of 1918, may not have its taxes computed under section 328 of that Act.

Andrew S. Wilson, C.P.A., for the petitioner.

L. A. Luce, Esq., for respondent.

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MORRIS

This proceeding is for the redetermination of a deficiency in income and profits taxes of $27,160.15 for the fiscal year ended June 30, 1919.

The sole question for determination is whether the respondent correctly held that there were no abnormal conditions affecting either capital or income, and therefore, that petitioner was not entitled to have its taxes computed under the provisions of section 328 of the Revenue Act of 1918.

FINDINGS OF FACT.

The petitioner was incorporated in 1889 under the laws of the State of Delaware for the purpose of engaging in the manufacture and sale of machinery and machine tools, in which business it engaged until August, 1922, when it was consolidated with four other corporations engaged in the same or a similar business.

During the taxable year under consideration the petitioner's plant worked overtime, some employees worked the entire night and a large portion as late as 9.30 p.m.

The petitioner always closed its books as of June 30 of each year. In computing depreciation on machinery and tools it used what may be termed the inventory method, that is, the depreciable assets were listed at the end of each year and the officers of the company agreed upon a percentage by which those assets should be reduced in a given period, and the amount of the deduction agreed upon was not credited to a reserve for depreciation account, as it the common practice, but deducted directly from the asset account. In 1919 the revenue agent in making an audit of its books of account readjusted the cost values from 1909 up to the taxable year and these accounts were increased to agree with the report of said agent. At that time a depreciation reserve account was set up in the books of account.

The petitioner manufactured some of the machinery which it used in its own plant, the cost of which, representing material and labor expended, was recorded in the books of account. Some small tools, such as taps, large drills, and augers, used in its own plant, were manufactured by the petitioner and were charged directly to expense. In order to properly reflect the value of its capital assets, and to record assets that had not been capitalized, the petitioner made several adjusting journal entries in its books of account in 1919 increasing buildings, and machinery and equipment account.

Petitioner manufactured and sold patented articles during the taxable year to the extent of $430,418.

The invested capital as finally determined by the respondent for the fiscal year ended June 30, 1919, was $1,198,575.74, net income $952,082.14, and the excess-profits tax $488,246.31. The excess-profits tax computed at the rates prevailing for that part of the fiscal year falling in the calendar year 1918 was $331,689.94, and the amount computed at the rates prevailing for that portion of the fiscal year falling within the calendar year 1919 was $156,556.37.

The petitioner applied to the respondent for assessment of its excess-profits tax under the provisions of section 328 of the Revenue Act of 1918, and its application was denied on the ground that net income and/or invested capital were not affected by abnormal conditions which would warrant the determination of its tax liability under the provisions of section 328.

OPINION.

MORRIS: The evidence adduced by the petitioner in support of its contention that there were abnormal conditions affecting its invested capital and income for the fiscal year ended June 30, 1919, and that it is, therefore, entitled to the relief provided for under the provisions of section 328 of the Revenue Act of 1918, is clearly insufficient and we must, therefore, sustain the findings of the respondent in denying the petitioner the relief sought.

Judgment will be entered for the respondent.