H. W. Clark Co. v. Commissioner

H. W. Clark Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent

H. W. Clark Co. v. Commissioner

Docket No. 110508

United States Tax Court

1 T.C. 891; 1943 U.S. Tax Ct. LEXIS 192;

April 9, 1943, Promulgated

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Decision will be entered for the respondent.

1. Where petitioner, a corporation, was in the process of reorganization under section 77B of the National Bankruptcy Act, and by order of the Federal court having jurisdiction was allowed to remain in possession of its property and to continue its business as a corporate principal, it was "carrying on or doing business" during that period within the meaning of section 601 of the Revenue Act of 1938 and, accordingly, was subject to excess profits taxes under section 602 of the same act. United States Shipyards, Inc. v. Hoey, 131 Fed. (2d) 525; National Motorship Corporation v. Hoey, 131 Fed. (2d) 863, followed.

2. Petitioner is bound by the value of its capital stock, even though erroneous, as declared in its original capital stock tax return which was not timely amended. Scaife Co. v. Commissioner, 314 U.S. 459">314 U.S. 459; Helvering v. Lerner Stores Corporation (Md.), 314 U.S. 463">314 U.S. 463.

Harry I. Hannah, Esq., for the petitioner.

David Altman, Esq., for the respondent.

Leech, Judge.

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LEECH

This proceeding involves deficiencies in petitioner's excess profits tax for the taxable calendar years 1938 and 1939 in the respective amounts of $ 1,097.15 and $ 1,212.51. The issues are (1) was the petitioner liable for excess profits taxes for the taxable calendar years and, if so, (2) in computing the amounts of such taxes, was the respondent correct in using the capital stock value declared in petitioner's original capital stock tax return for the first such year and that value, appropriately adjusted, for the latter taxable year.

FINDINGS OF FACT.

The petitioner is an Illinois corporation, with its principal office at Mattoon, Illinois. For many years, including those from 1931 to 1940, petitioner was engaged in the manufacture and sale of meter boxes and water works appliances.

On February 12, 1935, petitioner filed a voluntary petition for reorganization under section 77B of the National Bankruptcy Act, as amended, with the appropriate Federal District Court, which the same day approved the petition.

On February 23, 1935, petitioner filed its petition, alleging, inter alia, that it was then working upon and filling contracts for about $ 25,000 worth of goods, with assurance of other contracts, which would result in sizeable profits, and that the completion of the work on these contracts and the successful continuation of the business required the personal experienced supervision of Donald M. Clark, the then president of petitioner. This petition closed with the prayer that the court:

* * * continue the operation of said business under the direction and management of the said Donald M. Clark, and its present Board of Directors, until the further order of this Court, pending the determination of the petition herein under Sections 77A and 77B.

On the same day the court approved the petition and ordered that petitioner:

* * * continue the operation of its business under the management and direction of Donald M. Clark and its present Board of Directors, under the supervision of, and until the further order of this Court, and that reports of said business be rendered this Court at such times as may be directed; that no expenditures be made except in the usual course of business; that the corporation file herein its bond in the sum of $ 5,000.00 [sic] conditioned for the faithful accounting for all funds and performance of this order, with sureties to be approved by the court.

It is further ordered that all creditors, bondholders, stockholders and others be and they are hereby enjoined from taking or attempting to take any action or proceedings against said corporation, except by order of this Court, or until this cause be disposed of under and pursuant to said Sections 77A and 77B of the National Recovery Act.

The bond of the petitioner was given as ordered. Subsequently, petitioner filed with the court a modified plan of reorganization which, on June 25, 1935, was approved with additional modifications, and a decree in accordance therewith was entered on July 25, 1935, which decree was confirmed upon appeal by the United States Circuit Court of Appeals for the Seventh Circuit, reported at 79 Fed. (2d) 681. This confirmed decree provided, inter alia, as follows:

6th: That said Proposed Plan of Reorganization as amended should be approved upon the conditions hereinafter provided in this order and that the Debtor should continue in possession and operation of said property and business under and pursuant to the orders of this Court.

It is Therefore Ordered, Adjudged and Decreed:

(1) That the Amended Proposed Plan of Reorganization of the Debtor heretofore presented and now on file in this Court be and the same is hereby approved as fair and equitable and complying with the provisions of Section 77B of the National Bankruptcy Act;

(2) That this Court retain jurisdiction of this cause and the operation of said business under said proposed plan for the period of five (5) years unless sooner terminated or extended upon hearing after due notice for the purpose of aiding, if necessary, the successful working of the plan of reorganization;

(3) That said Twenty Thousand Dollars ($ 20,000.00) working capital provided for in the second paragraph of Article 9 of said Proposed Plan shall be created in the manner therein provided, subject to the condition that there shall be no diversion of such fund by the purchase of fixed assets, capital stock or other means except upon application made to and allowed by the Court after due notice and hearing;

(4) That the costs of administration shall be paid in cash;

(5) That the present salaries of the corporate officers of said Debtor corporation shall not be increased except by order of court after due notice and hearing.

(6) That no dividends shall be declared or paid upon common stock without an order of this Court upon due notice and hearing.

(7) That upon the final confirmation of the Proposed Plan and in accordance with the terms thereof the Five Thousand Dollars ($ 5,000.00) in bonds held by Donald M. Clark and H. P. Clark, being the bonds purchased by them from the Leader Iron Works, together with Sixteen Thousand Two Hundred Dollars ($ 16,200.00) of bonds now held in the Treasury of the Debtor Corporation shall be cancelled in accordance with the terms of said plan.

(8) That the Debtor Corporation, pursuant to the terms of this Order proceed to effectuate and carry out the Proposed Plan of Reorganization and upon completion of the same make full and complete report to this Court.

That the Debtor Corporation continue in possession and operation of its property and business under and pursuant to the orders and directions of this Court.

(9) That the National Bank of Mattoon, Mattoon, Illinois, be and it is hereby ordered to act as Escrow Agent pursuant to the terms and conditions set forth in the Proposed Plan of Reorganization and this decree, and upon completion of its duties thereunder that it make report to this Court; * * *

In order to carry out the modified plan of reorganization, and the redemption of outstanding bonds of petitioner, the 77B proceeding was continued until September 14, 1940, when the Federal District Court, upon the filing of the financial report of the petitioner indicating, inter alia, the redemption of part of its matured indebtedness and the compliance with the approved plan of reorganization, approved that report in a final decree in which, after approving the foregoing acts of the petitioner and its report, ordered the following:

And it further appearing to the Court that the said H. W. Clark Company, a corporation, the petitioning debtor herein, has fully performed and complied with all the orders of this Court and the modified plan of reorganization as heretofore approved by this Court; and it appearing from the financial report herewith presented that said corporation is in a sound and solvent condition.

It Is Therefore Ordered, Adjudged and Decreed that the said H. W. Clark Company, a corporation, be and it is hereby discharged from the provisions of Section 77-B of the National Bankruptcy Act and from these proceedings and the jurisdiction of this Court, and all its property, rights and privileges are hereby restored to it.

From February 23, 1935, to September 4, 1940, annual reports containing balance sheets of the petitioner and condensed statements of its operating expenses were submitted to the court for approval and as funds were made available for redemption of bonds the petitioner so reported to the court, and it gave notice for bids and when the bids were received by the clerk of the court they were opened in the presence of the judge, who directed what bids to accept and what bonds to redeem. These bonds were then redeemed by petitioner and a report thereof made to the court.

In a petition on September 11, 1936, petitioner formally asked the District Court to reduce its working capital from $ 20,000 to $ 17,000 to facilitate bond redemption, which was approved after a hearing on September 28, 1936. On other petitions of the petitioner the District Court ordered repairs to a roof of a building owned by the petitioner, and increased the salaries of certain of its officers.

During the period above described, petitioner paid its state franchise taxes and maintained its corporate charter in good standing. Petitioner continued throughout this time to accept orders and to make and carry out contracts for the manufacture and sale of its products. The directors and stockholders held regular and special meetings, the proceedings at which were recorded in its minute books. Contracts and leases were executed in petitioner's name by its officers, to which its corporate seal was attached.

Petitioner timely filed its capital stock tax return for the year ended June 30, 1936, declaring a value of such stock therein of $ 109,060, and paid the tax thereon of $ 109. Similarly, petitioner filed its return for the year ended June 30, 1937, declaring therein an adjusted declared value for its capital stock of $ 129,585.17, and paid the tax thereon of $ 129. It made no claim for exemption from capital stock tax in filing either of these returns.

Upon being advised on June 10, 1938, by an internal revenue agent that, owing to its operation under the provisions of section 77B of the Bankruptcy Act, it was not liable for capital stock tax or excess profits taxes, petitioner filed a claim for refund for the capital stock tax paid for the years ended June 30, 1936 and 1937. It based this claim on the ground that it was "Not liable for Capital Stock Tax, as the corporation is operating under section 77B of the Bankruptcy Act of 1898 as Amended."

On July 29, 1938, this claim for refund was allowed and made, the notice of adjustment of the same reading as follows:

Inasmuch as your corporation during all of the two years under consideration was in the process of reorganization under Section 77-B of the Federal Bankruptcy Act, it is therefore not subject to capital stock tax under the provisions of section 105 of the Revenue Act of 1935.

On July 28, 1938, the petitioner filed its Federal capital stock tax return for the year ended June 30, 1938, with the collector of internal revenue for the eighth district of Illinois. Item 9 of that return reads as follows:

Declared Value of Entire Capital Stock	$ 10,906.00
(The value declared must be definite and unqualified. A value
must be declared in every case regardless of whether exemption
is claimed. See instructions 1 and 2.)

Item 16 of said return was filled out by petitioner as follows:

State amounts of outstanding capital stock and surplus as of date of the close of income-tax taxable year reported in item 5 above. (If nonstock organization, so indicate and attach statement of net worth.)

	Number	Par (Stated)
	of Shares	Value Per Share
Capital stock: Preferred	None	None
Common	10906	10.00

In the return for the year ended June 30, 1939, petitioner did not fill out item 9, relating to a declaration of value, or item 10, part B, relating to "Elective Declared Value of Capital Stock." Instead, petitioner filled out part A of item 10, entitled "Adjusted Value of Capital Stock." The figure inserted in said part A by petitioner was $ 118,769.71, arrived at by a computation shown in schedule I of said return as follows:

Declared value established by the return for the taxable year
ended June 30, 1938	$ 109,060.00
Additions: C. Net income	9,709.71
Adjusted value	118,769.71

The return showed a computation of capital stock tax in the amount of $ 118. No computation of tax was shown on the preceding year's return, but in the space provided for the computation there was typed in by petitioner the following legend: "Operating under Section 77B of the Bankruptcy Act of 1898 as Amended."

Petitioner filed timely corporation income and excess profits tax returns for the taxable calendar years 1938 and 1939 with the collector of internal revenue for the eighth district of Illinois, at Springfield, Illinois. On each of these returns, in the space provided for the excess profits tax computation, petitioner inserted no figures, but typed in the following legend: "Operating under Section 77B of the Bankruptcy Act of 1898 as amended."

Respondent used the capital stock value of $ 10,906 declared in petitioner's original timely return for the taxable year 1938 as a basis for computing the contested deficiency in excess profits taxes for that taxable year and, based upon that declared value, he used $ 20,615.71 as the adjusted value of the stock for the taxable year 1939 in determining the contested deficiency for that year.

OPINION.

The contested deficiencies are proposed under the legislative authority of section 602 of the Revenue Act of 1938. That section provides, so far as pertinent here:

(a) If any corporation is taxable under section 601 with respect to any year ending June 30, there is hereby imposed upon its net income for the income-tax taxable year ending after the close of such year, an excess-profits tax * * *.

Section 601 reads, in part:

(a) For each year ending June 30, beginning with the year ending June 30, 1938, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year, an excise tax of $ 1 for each $ 1,000 of the adjusted declared value of its capital stock.

* * * *

(d) Every corporation liable for tax under this section shall make a return under oath within one month after the close of the year with respect to which such tax is imposed to the collector * * *. The Commissioner may extend the time for making the returns and paying the taxes imposed by this section, under such rules and regulations as he may prescribe with the approval of the Secretary, but no such extension shall be for more than sixty days.

* * * *

(f) (2) For each declaration year the adjusted declared value shall be the value, as declared by the corporation in its return for such declaration year (which declaration of value cannot be amended), as of the close of its last income-tax taxable year ending with or prior to the close of such declaration year (or as of the date of organization in the case of a corporation having no income-tax taxable year ending with or prior to the close of such declaration year).

The first issue is whether petitioner is subject to any liability for excess profits taxes for the taxable years. The answer to this question turns on whether the petitioner was "carrying on or doing business" during such years, as is provided by section 601 (a), supra.

The petitioner contends that it was not exercising its corporate privileges in its corporate capacity, as a principal, during that period because of its reorganization then being effected under section 77B of the National Bankruptcy Act under the jurisdiction of a District Court. It relies upon United States v. Whitridge, 231 U.S. 144">231 U.S. 144; Reinecke v. Gardner, 277 U.S. 239">277 U.S. 239, and other similar cases, holding that corporations, while being operated by trustees or receivers appointed as agents of a court, are not "carrying on or doing business" within the meaning of section 601 (a), supra.

Respondent, of course, concedes the authority of those cases as applied to their facts. His position is, however, that the facts here are effectively distinguishable from those in the cited cases. He argues that the petitioner, as a debtor in possession, continued the "carrying on" of its corporate business as a principal in its own right throughout the taxable years and that the conditions imposed by the orders of the court having jurisdiction of the 77B proceeding were merely restrictions and limitations thereon which fell short of ousting the corporation from the status of "carrying on" its business within the meaning of the statute. The authority cited as supporting this position is United States Shipyards, Inc. v. Hoey, 131 Fed. (2d) 525, and National Motorship Corporation v. Hoey, 131 Fed. (2d) 863. In the first mentioned case the Second Circuit Court of Appeals, on facts substantially identical with those existing here, decided that the United States Shipyards, Inc., during the taxable years, was "carrying on or doing business" and was thus liable for capital stock tax under section 105 (a) of the Revenue Act of 1935, as amended. That provision is the same for present purposes as section 601 (a) of the Revenue Act of 1938, supra.

Petitioner contends that those cases were wrongly decided and that, in any event, the present facts are distinguishable in that the debtor here was not left in possession, as such, during the reorganization, as the court found was so in the cited cases, but that Donald M. Clark and the board of directors were here, in effect, made trustees by the order of the bankruptcy court. We think, however, that the opinion of the Second Circuit in United States Shipyards, Inc. v. Hoey, supra, upon the authority of which National Motorship Corporation v. Hoey, supra, was decided, is sound. Moreover, in our opinion, the wording of the order of the bankruptcy court here, to which petitioner points as supporting its attempted distinction, is not significant. Petitioner, throughout the taxable years here, was being reorganized under section 77B of the National Bankruptcy Act, as amended, as was true in the cited cases. The order of the bankruptcy court here directed "That the Debtor Corporation continue in possession and operation of its property and business under and pursuant to the orders and directions of this Court." Nobody was designated as trustee therein. The court order upon the petition asking for the continuation of the operation of petitioner's business under the management of Donald M. Clark and petitioner's then board of directors directed that the corporation, not Clark and those members of the board of directors, file its bonds for the faithful performance of the order of the court. The bond of the corporation was filed. And the corporation, as such, continued to conduct its business as principal and in its own right, as was intended by section 77B, subject to the restrictions imposed by the Federal court. See United States Shipyards, Inc. v. Hoey, supra.

Upon the authority of that case we hold that petitioner was "carrying on or doing business" within the purview of section 601 (a), supra, throughout both taxable years and, therefore, was subject to capital stock and the concomitant excess profits taxes.

The second issue is whether respondent erred in computing the contested excess profits taxes by using the value of petitioner's capital stock as declared in its original timely capital stock tax return filed for the first taxable year and that value, appropriately adjusted, for the second year, thus disregarding the declaration of capital stock value contained in the so-called amended capital stock tax return filed on November 14, 1940, for the first taxable year, and the adjusted capital stock value of $ 118,769.71, appearing in the so-called amended capital stock tax return filed on the same day for the second taxable year.

The position of the petitioner is that its capital stock tax returns for the taxable years filed November 14, 1940, were its original returns for those years and were timely. It attempts to support this position upon the authority of a mere office ruling of the Bureau of Internal Revenue, S. T. 702, XII-2 C. B. 405, 406, in which appears, inter alia, the following:

While some corporations may not be subject to the capital stock tax, every domestic corporation will be required to file a capital stock tax return on Form 707, with the exception of insurance companies subject to income tax under sections 201 and 204 of the Revenue Act of 1932. (See article 42. Regulations 64.) If exemption is claimed, the information part of the return, namely, items 1 to 8, inclusive, should be completed in detail. Under item 9 no value need be declared, but a notation "exemption claimed" should be entered. The return as thus prepared and duly executed should be filed with the collector of internal revenue accompanied by Form 717 which should clearly set forth the fact upon which the claim for exemption is based.

When the return is received by the Bureau the claim for exemption will be considered and if sustained the corporation will not be required to file a capital stock tax return for subsequent taxable years, provided its status remains unchanged. [Emphasis supplied.]

Petitioner argues only (1) that under the emphasized portion of the first quoted paragraph its declaration of capital stock tax value in its original return was surplusage and thus without effect, and (2) that under the last quoted paragraph, since its claim for exemption from capital stock tax for the two preceding years had been sustained and its status throughout the taxable years remained unchanged, petitioner was under no duty to file a capital stock tax return for either of the taxable years and therefore the returns originally filed for the taxable years were surplusage and not binding.

Neither position is sound. Section 601 (d), supra, is unambiguous and mandatory. The return "shall" be filed "within one month after the close of the year with respect to which such tax is imposed," except that the Commissioner may extend such time, with the approval of the Secretary, for not more than 60 days. Equally clear is the legislative mandate in section 601 (f) (2), supra, that the value of capital stock upon which both the capital stock tax, under section 601 and the excess profits tax, under section 602, are computed, "shall be the value, as declared by the corporation in its return for such declaration year (which declaration of value cannot be amended) * * *"

Petitioner filed timely capital stock tax returns for both taxable years. In that for the first year it actually declared a value for its capital stock. That this value may have been erroneous is immaterial, since it was not corrected by a timely amended return. Haggar Co. v. Commissioner, 308 U.S. 389">308 U.S. 389. In the original return for the second taxable year petitioner, without more, merely declared its "adjusted value of capital stock" which it there computed by using as a declared value for the capital stock as established by the return for the prior year, a figure other than that declared in the return for that year. This return likewise was not timely amended. Assuming, therefore, that the cited office ruling would be entitled to weight in this Court under other conditions, it is of no value to petitioner. If it were construed as effecting either of the results for which petitioner contends, one or the other of the quoted legislative mandates would be nullified. And, of course, such action is beyond the power of the respondent.

Respondent is affirmed on the second issue also. Scaife Co. v. Commissioner, 314 U.S. 459">314 U.S. 459; Helvering v. Lerner Stores Corporation (Md.), 314 U.S. 463">314 U.S. 463. Cf. Haggar Co. v. Commissioner, supra.

Decision will be entered for the respondent.