Source: https://law.justia.com/cases/federal/appellate-courts/F2/210/901/393214/
Timestamp: 2020-01-18 12:43:11
Document Index: 699972447

Matched Legal Cases: ['§ 718', '§ 718', '§ 112', '§ 112', '§ 714', '§ 201', '§ 201', '§ 714', '§ 112', '§ 112']

Charles Leich & Co. v. United States, 210 F.2d 901 (7th Cir. 1954) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Seventh Circuit › 1954 › Charles Leich & Co. v. United States
Charles Leich & Co. v. United States, 210 F.2d 901 (7th Cir. 1954)
US Court of Appeals for the Seventh Circuit - 210 F.2d 901 (7th Cir. 1954) February 26, 1954
The questions presented for determination are: (1) whether for the purpose of computing taxpayer's invested capital under § 718, Internal Revenue Code, 26 U.S.C.A. § 718, for excess profits tax purposes for the fiscal year ended April 30, 1942, taxpayer's invested capital should be reduced by the fair market value (as taxpayer contends) or by the cost (as the government contends) of property taxpayer exchanged in prior years for shares of its own stock which it thereafter retired; (2) whether taxpayer's exchange of common stock of H. A. Woods, Inc. and Gillis Drug Company on January 11, 1932, for stock of Woods-Gillis Corporation was accomplished pursuant to a plan of reorganization as defined in § 112(i) (1) of the Revenue Act of 1932,1 and that the exchange then made came within the scope of § 112(b) (3) of that Act,2 so that there would be no recognizable loss to plaintiff on the transaction; and (3) whether the Commissioner correctly allocated taxpayer's basis on the H. A. Woods, Inc. and Gillis Drug Company common stock as between the Woods-Gillis preferred and common stock received on the January 11, 1932, exchange.
12,511 shares common stock ..... $127,900.00 2,221 shares of series A 7% preferred at par, less discount ..................... 203,174.00 ___________ $331,074.00
Redemption of 194 shares of its old 6% preferred, then outstanding ............. $ 20,176.00 Acquisition of Cline-Vick retail drug stores operated in Illinois .................. 183,781.61 Acquisition of Wilhelm Drug Co. retail drug store at Carbondale, Illinois, for cash ..................... 12,836.19 Liquidation of purchase money obligations upon stock of H. A. Woods, Inc. ......... 83,535.45 ___________ Total .......................... $300,327.25
Cash, including expenses of acquisition ............... $103,294.11 482 shares of plaintiff's 7% Series A preferred stock ..... 48,200.00 3,583 shares of plaintiff's common stock ................. 32,287.50 ___________ Total .......................... $183,781.61
Cash, a series of notes and legal fees in connection with acquisition ..................... $ 97,538.85 704 shares of plaintiff's 7% Series B preferred stock, par value $100 each ................. 70,400.00 ___________ $167,938.85
154 shares 8% preferred, $100 par ................... $ 15,400.00 2,500 shares $7 preferred, no par ................... 223,600.00 5,000 shares common, no par ... 1,000.00 ___________ Stock ................... $240,000.00 Surplus ................. 17,501.33 ___________ Total ......................... $257,501.33
The excess profits tax is a tax which was imposed by Congress in addition to the regular income tax on corporations. It applies "to all corporate profits and gains over and above what Congress deemed to be a fair and normal return for the corporate business taxed." Commissioner of Internal Revenue v. South Texas Co., 333 U.S. 496, 497, 68 S. Ct. 695, 697, 92 L. Ed. 831. Two methods are provided to determine what would be normal profits. The first permits a deduction of an amount equal to the corporation's average net income during the base period from 1936 to 1939. The second (used by taxpayer) permits a deduction equal to 8% of the taxpayer's invested capital for the taxable year. § 714, Internal Revenue Code, as added by § 201, Second Revenue Act of 1940, 54 Stat. 974, and amended by § 201, Revenue Act of 1941, 55 Stat. 687, 26 U.S.C.A. § 714. As was stated in the South Texas case, Congress intended to impose the excess profits tax on all annual net income in excess of 8% of a corporation's working capital, including its accumulated profits.
Sec. 718(b) (1) does not state the amount by which the distribution of property representing equity invested capital shall be considered to reduce equity invested capital when such property has appreciated or depreciated in value by the time of the distribution. Taxpayer contends that the property goes out of equity invested capital at its fair market value at the time of distribution. The government contends, and the district court so held, that it goes out at its cost basis — the same amount at which it was included in equity invested capital.
The words of the statute are thus open to construction. "If the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer." United States v. Merriam, 263 U.S. 179, 188, 44 S. Ct. 69, 71, 68 L. Ed. 240. And, as was stated by this court in Durkee Famous Foods, Inc., v. Harrison, 136 F.2d 303, 307, "Another rule often overlooked in construing a revenue statute is that in a doubtful situation the taxpayer is entitled to the benefit of the doubt." See also: United States v. Updike, 281 U.S. 489, 496, 50 S. Ct. 367, 74 L. Ed. 984.
26 U.S.C.A.Int.Rev.Acts, p. 513, Act of 1932, § 112(i) (1)
26 U.S.C.A.Int.Rev.Acts, p. 511, Act of 1932, § 112(b) (3)