Court Opinion

ID: 4627948
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:20.107018+00
Date Added: 2024-06-11T07:57:08.031822
License: Public Domain

LITTLE ROCK TENT & AWNING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Little Rock Tent & Awning Co. v. CommissionerDocket No. 13866.United States Board of Tax Appeals23 B.T.A. 1205; 1931 BTA LEXIS 1755; July 17, 1931, Promulgated *1755  Special assessment denied.  Raymond Jones, Esq., and Harvey D. Jacobs, Esq., for the petitioner.  W. Frank Gibbs, Esq., for the respondent.  BLACK *1205  The respondent determined deficiencies in income and profits taxes as follows: 1918, $2,949.53; 1919, $7,590.25; and 1920, $3,285.41, making a total for the three years of $13,825.19.  Petitioner has taken an appeal for all three years but alleges errors for 1918 and 1919 only.  As to those two years petitioner alleges that the respondent erred in not granting it special assessment under sections 327 and 328 of the Revenue Act of 1918 and alleges as grounds therefore that it used such a large amount of borrowed money in its business in said years as to cause abnormalities in both income and invested capital and that its officers' salaries were abnormally low, considering the services performed and the volume of business done.  By motion granted by the Board, hearing in the first instance has been limited to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice.  FINDINGS OF FACT.  The petitioner is an Arkansas corporation with its principal office and*1756  place of business in Little Rock, Ark.  Its business was that of a dealer and jobber in rubber and canvas goods, including retailing and manufacturing.  Petitioner's net income and statutory invested capital were, respectively, as follows: YearInvested capitalNet income1918$168,334.74$77,456.661919192,713.9655,308.84*1206  For the year 1918 petitioner's gross sales were $774,054.15 and for 1919 its gross sales were $748,999.45.  Petitioner's bills payable account for borrowed money at the end of each month of the calendar year 1918 were as follows: January$19,167.06February40,000.00March70,000.00April115,000.00May109,333.65June117,333.65July$122,833.65August75,333.65September15,333.65October12,000.00November9,000.00December4,000.00At the end of each month of the calendar year 1919 petitioner's bills payable account for borrowed money showed: JanuaryNone.February$15,000.00March1,763.66April2,420.46May7,420.46June38,156.80July$93,156.80August92,500.00September117,478.82October62,478.82November72,478.82December106,004.86*1757  All of the books and records of the petitioner and of the Union Trust Company, the bank where it did business, which reflected the loans made to petitioner during 1918 and 1919 had been destroyed prior to the hearing because it was believed they were of no further value or use.  The only evidence available was oral testimony and certain memoranda previously taken from the books.  The Trust Company during those years had a limit of $100,000 for a borrowing customer and which loan limit it would not exceed in any event.  The petitioner was a borrower to this limit at times during the taxable years 1918 and 1919 and in order to obtain additional funds for the petitioner, J. D. Simpson and V. L. Jackson, officers of petitioner, borrowed from the bank on their personal notes and turned the proceeds over to the credit of petitioner and petitioner paid the interest thereon.  The amounts of these loans made by the bank to Simpson and Jackson for the account of petitioner were not shown.  OPINION.  BLACK: No evidence was introduced relative to the inadequacy of the salaries paid petitioner's officers.  That ground alleged by petitioner as reason for special assessment was not pressed*1758  at the hearing.  This leaves for consideration the single question of the right of the petitioner to a special assessment under sections 327 and 328, Revenue Act of 1918, for the years 1918 and 1919 because of alleged abnormalities in income and invested capital resulting from the use of borrowed money in its business.  Section 326(b), Revenue Act of 1918, provides: "As used in this title the term 'invested capital' does not include borrowed capital." *1207  We have held in a number of cases that the use of borrowed capital is not in and of itself evidence of abnormality of invested capital or income unless the fact that it creates an abnormal condition is clearly shown by the evidence.  The rule was stated by the Board in , as follows: * * * It does not appear from any proof in the record that it was not customary and normal for concerns engaged in business similar to that of petitioner to borrow considerable sums of money to finance their operation.  What is abnormal can be determined only by reference to what is normal.  On this principle we have consistently held that the use of borrowed capital is not in itself evidence*1759  of an abnormality, but that the claimed abnormality must be established clearly by the proof.  ; ; ; . In the instant case there is no evidence that there was anything abnormal or unusual in the use of borrowed capital to the amount indicated in our findings of fact.  On the authority of the above cited cases we hold that petitioner is not entitled to special assessment under sections 327 and 328 of the Revenue Act of 1918.  Petitioner in his motion filed herein January 14, 1930, stated, "The only issues involved in the appeal are those whether the petitioner is entitled to special assessment under the provisions of sections 327 and 328 of the 1918 Revenue Act for the years 1918 and 1919, and if so, then the amount of tax due under said sections." We have examined the pleadings and find that the above statement made by petitioner in its said motion is correct.  Therefore, having held that petitioner is not entitled to special assessment, and there being no other issues*1760  for us to decide, Decision will be entered for respondent.