Court Opinion

ID: 4472950
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:35:00.880709+00
Date Added: 2024-06-11T14:53:48.005953
License: Public Domain

OPINION. OppeR, Judge-. The present difficulty does not arise because of any question that some part of petitioner’s income was “abnormal” within the meaning of section 721. It was abnormal in size,2 and that suffices. Geyer, Cornell & Newell, Inc., 6 T. C. 96. The reason given for attributing it to other years, which is also necessary, Harris Hardwood Co., 8 T. C. 874, 882, namely, the duration of the bond liability for a period of more than 12 months, is related to a class of income which may itself be abnormal,3 but we take it that that would merely fortify petitioner’s position, not as a ground of abnormality, but as a ground of attribution 4 — which is also necessary, Regulations 109, sec. 30.721-3, as amended by T. D. 5045, 1941-1 C. B. 69, 86, on the theory that “other years” must always be involved when a contract lasts more than one, and that Congress so recognized. The problems at hand are, to the contrary, practical, not theoretical. It is quite evident that, to some extent at least, this extraordinary income was, in fact, the result of increased demand, improved business, higher prices, or some combination of all three. Not only do the figures5 make this clear, but these conditions were a direct consequence of the very aspect of the economy which motivated the excess profits tax — the existence of the European war and the domestic armament program. See Eitel-McCullough, Inc., 9 T. C. 1132, 1148. If all of the abnormal income could be thus characterized, its abnormality would not suffice to justify special relief. Precisely such increases over the base period were the objective and the rationale of the tax. * * * It is seen from this history and from the provisions of the act that the profits of a taxpayer for the base period years were to be regarded as normal in most cases and the tax was to be applied, generally, to the excess of the profits of the tax year over the prior normal profits. Congress anticipated that business for many taxpayers would improve because of external changes and it intended the tax to apply in those cases. * * * [Soabar Co., 7 T. C. 89, 96.] On the other hand, even the respondent’s regulations do not eliminate all abnormal income, but limit the exclusion for this cause Ho the extent that any items of abnormal income in the taxable year are the result of high prices, * * * increased demand * * * or decreased competition * * *.” (Emphasis added.) Regulations 109, sec. 30.721-3. We take this to authorize relief when to some extent, even if not wholly, the abnormality is due to other causes, see W. B. Knight Machinery Co., 6 T. C. 519, 531, at least when the basis for allocation to other years consists, as it does here, of the circumstance that we are dealing with a contract requiring several years for its performance; although to be sure that may be merely another way of saying that improved business does not account for all of the increased income. We are hence not persuaded that either extreme of the views advanced can be approved here. We need not, on the one hand, agree that the income was due entirely to improved business, Geyer, Cornell & Newell, Inc., supra, nor, on the other, that it is attributable entirely to the chronological span of the service. See Ramsey Accessories Manufacturing Corporation, 10 T. C. 482. When all is said, there consequently remains to be ascertained what constitutes the source of the income, and, if necessary, to what extent it seems to be the one or the other. And merely because some work remains to be done under a contract, an equal division among all the years of its performance is not necessarily called for. The justification advanced for the present annual allocation, that the earning of the income coincides with the passage of time, certainly does not dispose of the probability that the procurement of the business in the first instance, was the most potent factor in the earning of the commissions. Since that occurred in the tax year in issue, it seems necessary to place upon that year the greatest emphasis. Without information as to the applicable data, the customary “earned premium” or “handling charge,” the respective costs, the experience of petitioner and its competitors in the trade, the views of other qualified brokers, the impact of generally improved conditions on petitioner’s line of business, and other bases for allocation, we have somewhat arbitrarily, see Cohan v. Commissioner (C. C. A., 2d Cir.), 39 Fed. (2d) 540, apportioned one-third of the “net abnormal income” to improved business and have divided the remaining two-thirds equally between procurement and servicing. See Ramsey Accessories Manfacturing Corporation, supra. In our findings we have accordingly spread only the latter one-third over the five years of the life of the contract and the services rendered thereunder,6 allocating to each year one-fifteenth of the total. We have not, however, attempted to compute or to require of petitioner, any figures for the “direct costs” covered by the statute.7 It seems to be agreed that no such items appear on petitioner’s books, which would be their most likely soürce, and the finding made at respondent’s request so implies. If, in spite of this, it is claimed that such costs were incurred, the burden of going forward with evidence of their existence, if not of their amount, seems to us to have shifted to respondent. See Soabar Co., supra, 94. Other figures for the computation of “net” abnormal income having now been agreed to, all of the necessary material is available for the recomputation. Reviewed by the Court. Decision will be entered under Bule 50.   SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. (a) Definitions. — Eor the purposes of this section— (1) Abnormal income. The term “abnormal income” means income of any class in-cludible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of sucli class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years, or, if the taxpayer was not in existence for four previous taxable years, the taxable years during which the taxpayer was in existence    SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. (a) Definitions. — For the purposes of this section— [[Image here]] (2) Separate classes of income. — Each of the following subparagraphs shall be held to describe a separate class of income : «***•«« (B) Income constituting an amount payable under a contract the performance of which required more than 12 months ; *******    “Items' of net abnormal income are to be attributed to other years in the light of the events in which such items had their origin, and only in such amounts as are reasonable in the light of such events.”    Accepting the five-year duration of the bonds, advanced by petitioner as the source of abnormality, the 1940 bonds written were more than five times the average of the prior years shown, the premiums more than seven times the average, and petitioner's commission approximately ten times the average of the four base period years.    As our findings show, some services were apparently rendered in each of the five years, 1940-1944, inclusive.    SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. (a) Definitions. — For the purposes of this section— ******* (3) Net abnormal income.. — -The term “net abnormal income” means the amount of the abnormal income less, under regulations prescribed by the Commissioner with the approval of the Secretary. (A) 125 per centum of the average amount of the gross income of the same class detirmined under paragraph (1), and (B) an amount which bears the same ratio to the amount of any direct costs or expenses, deductible in determining the normal-tax net income of the taxable year, through the expenditure of which such abnormal income was in whole or in part derived as the excess of the amount of such abnormal income over 125 per centum of such average amount bears to the amount of such abnormal income.