General Retail Corp. v. Commissioner ( 1957 )

General Retail Corporation (Delaware), Petitioner, v. Commissioner of Internal Revenue, Respondent

General Retail Corp. v. Commissioner

Docket No. 55272

United States Tax Court

29 T.C. 632; 1957 U.S. Tax Ct. LEXIS 3;

December 31, 1957, Filed

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">*3 Decision will be entered for the respondent.

Corporation organized after 1945 but which acquired all its assets from parent corporation in business since 1925, held, to have commenced business prior to 1945 for excess profits tax purposes under section 430 (e), I. R. C. 1939, Excess Profits Tax Act of 1950, so as to be barred from preferential tax rate as a new corporation.

J. W. Allen, Esq., and William Waller, Esq., for the petitioner.

Jack D. Yarbrough, Esq., for the respondent.

Opper, Judge.

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OPPER

">*632 Respondent determined a deficiency of $ 18,504.93 in petitioner's income (excess profits) tax for its taxable year ended October 31, 1951. The only issue is whether petitioner is entitled to compute its excess">*4 profits tax as a new corporation under section 430 (e) (1), I. R. C. 1939.

FINDINGS OF FACT.

Certain facts are stipulated and are hereby found.

Petitioner, chartered under the laws of the State of Delaware on September 30, 1948, maintained its principal office at Nashville, Tennessee. Petitioner maintained its books and records on an accrual basis for fiscal years ended October 31. It filed corporate income tax returns for the fiscal years ended October 31, 1950 and 1951, with the collector of internal revenue for the district of Tennessee.

The incorporators elected the following directors of petitioner on September 30, 1948, to hold office for 1 year:

W. Maxey JarmanW. M. BlackieJ. R. McCollumF. M. WeisigerB. P. WeisigerE. L. BritainW. GivanE. C. JonesK. LawrenceP. C. Runyon

G. O. Petway

">*633 The directors on October 11, 1948, elected the following officers of petitioner to serve for 1 year:

William Blackie, president

J. R. McCollum, executive vice president

F. M. Weisiger, vice president

E. L. Britain, vice president

W. Givan, secretary

E. D. Woods, treasurer

The individuals elected as directors and officers of petitioner also held the following positions ">*5 with General Shoe Corporation, hereafter referred to as General, during the period September 30 through December 31, 1948:

W. Maxey Jarman, chairman

W. M. Blackie, vice president

E. D. Woods, assistant comptroller

J. R. McCollum, employee

F. M. Weisiger, employee

B. P. Weisiger, employee

E. L. Britain, employee

W. Givan, employee

E. C. Jones, employee

K. Lawrence, employee

P. C. Runyon, employee

G. O. Petway, employee

Petitioner's authorized capital stock consisted of 1,000,000 shares, par value $ 1. The board of directors had discretionary authority to issue capital stock in such amounts and for such considerations as it determined. On October 21, 1948, the directors issued stock certificate No. 1 for 1,000 shares in the name of Sarah A. Jarman, wife of W. Maxey Jarman.

On November 1, 1948, the stock certificate issued in the name of Sarah Jarman was transferred to General. General issued its check for $ 1,000 in payment for the stock. The stock certificate endorsed on November 1, 1948, over her signature discloses an irrevocable transfer for value received.

The stock certificate issued in the name of Sarah Jarman for 1,000 shares and a stock certificate for 10 shares, par">*6 value $ 100, issued to General under date of February 6, 1950, represented the only shares issued by petitioner. The stock certificate issued in the name of General replaced the certificate issued in the name of Sarah Jarman. General then owned all of the outstanding stock of petitioner. At that time individuals owning directly or indirectly 50 per cent or more in value of the outstanding stock or outstanding voting stock of General indirectly owned all outstanding stock of petitioner.

During November 1948, petitioner acquired from General several retail stores in Ohio. This acquisition consisted of assets acquired ">*634 for their book value on the books of General, and for which General extended credit to petitioner on open account. The assets consisted of the following:

Inventories	$ 205,612.46
Leasehold improvements	138,813.51
Total	344,425.97

The leasehold improvements had an adjusted basis for determining gain upon sale or exchange on December 1, 1950, of $ 51,916.99. It is stipulated that furniture and fixtures were also acquired, but no monetary value is assigned thereto.

The assets held by petitioner on December 1, 1950, consisted of the following: ">*7

Cash	$ 50,063.32
Inventories	329,677.84
Leasehold improvements	264,741.99
Total	644,483.15

The adjusted basis for determining gain upon sale or exchange of leasehold improvements on December 1, 1950, was $ 264,741.99.

Petitioner acquired a substantial part (all) of its assets from General during November 1948.

When General transferred the assets to petitioner, it owned all of the outstanding capital stock of petitioner. General commenced business in 1925 and has continuously engaged in business since that time.

Petitioner computed its excess profits tax for the fiscal year ended October 31, 1951, as a new corporation pursuant to section 430 (e) (1), I. R. C. 1939. Respondent determined that petitioner was not entitled to compute its excess profits tax for that fiscal year as a new corporation.

Petitioner is not a new corporation and did not commence business after July 1, 1945, within the meaning of section 430 (e), I. R. C. 1939, and is not entitled to compute its excess profits tax pursuant to the alternative method prescribed in section 430 (e) (1), I. R. C. 1939, relating to new corporations.

OPINION.

Petitioner claims to be entitled to the preferential ">*8 tax treatment accorded "a new corporation" under section 430 (e), I. R. C. 1939, as added by the Excess Profits Tax Act ^{29 T.C. 632">*635 facts are not in dispute. Petitioner acquired all of its assets from its parent, General, and while petitioner concededly commenced business after July 1, 1945, General had been operating since 1925. Petitioner says that its stock was owned by General and not by General's stockholders, and respondent insists that the rule of attribution requires that petitioner's stock be considered as being held by General's stockholders.}

">*9 What the issue really comes down to is whether the formula of section 503 can and must be imported into section 430 (e). The statute says in effect that corporations can qualify under section 430 (e) as having "commenced business" only if they would likewise so qualify as described in section 445. 1957 U.S. Tax Ct. LEXIS 3">*10 Section 445 expressly requires for its application the use of the principle of section 503. 29 T.C. 632">*636 see, therefore, how a corporation can have the benefits of not having commenced business before July 1, 1945, under section 445 without applying section 503; and if not a corporation which commenced business after 1945 under section 445, it does not qualify for the benefits of section 430 (e), where section 445 (g) applies as it does here.

In order to clarify what we think is the consequently inevitable effect of the interconnected statutory provisions, we set forth below a paraphrased version of the interplay of the three sections and their application to petitioner's situation:

In the case of * * * [petitioner if it] commenced business [as limited below] after July 1, 1945, and * * * [its] fifth taxable year ends after June 30, 1950, the amount * * * [of excess profits tax] shall be 1957 U.S. Tax Ct. LEXIS 3">*11 which [General] * * * was in existence, and * * * [petitioner] shall be [then] considered to have commenced business [in 1925,] 1957 U.S. Tax Ct. LEXIS 3">*12 We think it inevitably follows that respondent is correct that petitioner cannot qualify as having commenced business after July 1, 1945; that section 430 (e) is accordingly inapplicable, and that, as a consequence, the deficiency was correctly determined. With such a clear statutory command, the legislative history is not available even were it more persuasive than is the present case. John H. Watson, Jr., 27 B. T. A. 463, 465.

Decision will be entered for the respondent.

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Footnotes

• 1. SEC. 430. IMPOSITION OF TAX.

  (e) New Corporations. --

  (1) Alternative amount. -- In the case of a taxpayer which commenced business after July 1, 1945, and whose fifth taxable year ends after June 30, 1950, the amount referred to in subsection (a) (3) shall be --

  * * * *

  (B) If the taxable year is the third taxable year of the taxpayer, an amount equal to 8 per centum of the excess profits net income for the taxable year, except that if the excess profits net income exceeds $ 300,000, the amount shall be the sum of $ 24,000 plus the amount determined under subparagraph (E) of this paragraph.

  * * * *

  (2) First five taxable years. -- For the purpose of this subsection --

  (A) The taxable year in which the taxpayer commenced business and the first, second, third, and fourth succeeding taxable years shall be considered its first, second, third, fourth, and fifth taxable years, respectively.

  (B) The taxpayer shall be considered to have been in existence and to have had taxable years for any period during which it or any corporation described in any clause of this subparagraph was in existence, and the taxpayer shall be considered to have commenced business on the earliest date on which it or any such corporation commenced business:

  (i) Any corporation which during or prior to the taxable year was a party with the taxpayer to a transaction described in section 445 (g) (2) (A), (B), or (C), determined as if the date "July 1, 1945" were substituted for the date "December 1, 1950" in section 445 (g) (2) (C).↩

• 2. SEC. 445. AVERAGE BASE PERIOD NET INCOME -- NEW CORPORATION.

  (a) New Corporation. -- A taxpayer which commenced business after the first day of its base period shall, except as provided in subsection (g), be considered a new corporation for the purposes of this section, and its average base period net income determined under this section shall be the amount computed under subsection (b).

  * * * *

  (g) Ineligible Corporations. --

  (1) If a taxpayer, on or after December 1, 1950, and prior to the end of its third taxable year, acquires any properties in any of the transactions described in paragraph (2), it shall not, for the taxable year in which such acquisition occurs or for succeeding taxable years, be entitled to the benefits of this section except under the circumstances and subject to the limitations provided in section 462 (g).

  (2) The transactions to which paragraph (1) applies are as follows:

  * * * *

  (B) The acquisition by the taxpayer of a substantial part of its assets from another corporation, or of a substantial part of the properties of another corporation, if 50 per centum or more in value of the outstanding stock or outstanding voting stock of the taxpayer is directly or indirectly owned, at the time of such acquisition, by individuals owning directly or indirectly 50 per centum or more in value of the outstanding stock, or outstanding voting stock of the transferor;

  * * * *

  (3) For the purposes of this subsection, the provisions of section 503 shall be applicable in the determination of ownership of stock.↩

• 3. SEC. 503. STOCK OWNERSHIP.

  (a) Constructive Ownership. -- For the purpose of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 501 (a) (2), section 502 (e), or section 502 (f) --

  (1) Stock not owned by individual. -- Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries.↩

• 4. Sec. 430 (e) (1)↩.

• 5. As stipulated.↩

• 6. Sec. 430 (e) (2) (B)↩.

• 7. Sec. 430 (e) (2) (B) (i)↩.

• 8. Sec. 445 (g) (2) (B).↩

• 9. Sec. 503 (a) (1), made applicable by sec. 445 (g) (3).↩