Court Opinion

ID: 4499282
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:23.19701+00
Date Added: 2024-06-11T08:00:24.694011
License: Public Domain

*1219OPINION.
Trammell:
The petitioner contends that the income should not be reduced by a tentative tax in determining the amount available for distribution from the earnings for the expired portion of the taxable year.
We considered this question in the Appeal of L. S. Ayers & Co., 1 B. T. A. 1135. There we held that the respondent’s action in reducing the invested capital of a corporation in determining the extent to which a dividend is paid from current earnings of a year by a tentative tax theoretically set aside out of such earnings prorated over the year was erroneous.
Since our decision in the Ayers appeal, the Supreme Court in the case of United States v. Anderson, 269 U. S. 422, has held that the munitions tax for 1916 accrued and was deductible in that year by a corporation which reported on the accrual basis.
In reaching that decision the court said:
Only a word need tie said with reference to the contention that the tax upon munitions manufactured and sold in 1916 did not accrue until 1917. In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a-tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting *1220period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee’s books. In the economic and bookkeeping sense with which the statute and Treasury decision were concerned, the taxes had accrued.
Subsequent to the decision of the Supreme Court in the above case, we have affirmed the decision in the Appeal of L. S. Ayers & Co. as not being in conflict therewith. Appeals of Washington Motel Co., 4 B. T. A. 441; Amalgamated Sugar Co., 4 B. T. A. 568.
In attempting to show that its depreciable assets had a fair market value on March 1, 1913, equal to the cost price at which they were carried on the books without any allowance for depreciation, the petitioner introduced evidence showing the sales made by each plant and its inventories from 1912 to 1921. The only witness offered by the petitioner testified entirely from the books. He stated that he was not employed by the petitioner on March 1, 1913, that he had no personal knowledge as to the fair market value of the petitioner’s assets on that date, and that he did not know how long the assets had been in use prior to that date. The books show that on October 31, 1912, the depreciable assets were carried at $18,127.56. Against this a reserve for depreciation, amounting to $9,745.42, had been set up leaving a book value of $8,382.14 on October 31, 1912.
Ten thousand six hundred and fourteen dollars and eighty-three cents was eliminated from the invested capital by the respondent and restored to the reserve for depreciation account; $9,745.42 of that amount represented depreciation written off prior to March 1, 1913, but restored to the books on October 31, 1918. Wo are unable to find from the evidence that the depreciation written off prior to March 1, 1913, was not sustained prior to that date, nor can we find from the evidence that the fair market value of the assets on that date was greater than their undepreciated value as shown by the books. There is no evidence that the reduction of invested capital on account of depreciation sustained subsequent to March 1,1913, was erroneous. The adjustment made by the respondent is, therefore, sustained. Nor is there any competent evidence that the action of the respondent with respect to the deduction on account of depreciation in determining taxable income was erroneous.
No error is shown to have been committed by the respondent in reducing invested capital by the amount of a disallowed claim for abatement. If there was a liability for unpaid taxes for prior years, earned surplus should be reduced by such amount. In the absence of evidence showing error in this respect, we affirm the respondent’s determination.
The action of the respondent in reducing invested capital on account of income and profits taxes for the prior years is in accordance with section 1207 of the Revenue Act of 1926.
*1221During the hearing the respondent asked and was granted leave to amend his answer to the petition by setting up an averment that the petitioner’s invested capital for the year in question should be further reduced by an amount of $1,558.2?, representing the difference between the value of petitioner’s assets as shown by its books and that allowed by the respondent in determining surplus at October 31, 1916. The testimony is not sufficient to sustain the respondent’s affirmative allegations. Therefore, the invested capital for the year ended October 31, 1920, should not be further reduced by $1,558.2?.
Judgment will be entered after 15 days' notice, under Bule 50.