WHITNEY MANUFACTURING COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 10912. Promulgated June 21, 1950. 1. South Carolina property taxes which became due and payable January 1 of each year held properly accruable on a month to month basis by an accrual basis taxpayer. 2. Unused excess profits credits carry-back from 1943 and 1944 Percy W. Phillips, Esq., for the petitioner. Deficiencies have been determined in petitioner's income and excess profits taxes for 1942 in the respective amounts of $10,185.57 and $162,947.19. The questions for our determination are (1) whether the respondent erred in disallowing the deduction of South Carolina property taxes in the amount of $9,490 which accrued in January, 1942, but which petitioner accrued month by month and paid in its fiscal year ended March 31, 1942, and (2) whether petitioner is entitled in 1942 to a carry-back of unused excess profits credits from 1943 and 1944. Several other issues raised in the pleadings were waived by petitioner at the hearing and one issue, relating to the deduction of a small item of capital sales tax, was conceded by respondent. FINDINGS OF FACT. Petitioner is a South Carolina corporation. Its present address is Gaffney, South Carolina. During the years involved in this proceeding its principal office was located at Whitney, South Carolina. Its returns for 1942 were filed with the collector of internal revenue for the district of South Carolina. Petitioner kept its books and accounts and made its returns on an accrual basis. The returns were for a fiscal year ending March 31. For a number of years petitioner followed the accounting practice of accruing its state and property taxes on a month by month basis. It accrued on its books each year nine-twelfths of the taxes levied for the calendar year ending within its fiscal year and three-twelfths of the taxes for the succeeding calendar year. In this manner petitioner accrued and claimed deductions of $9,422.52 in its 1939 return, $10,245.09 in its 1940 return, and $13,673.29 in its 1941 return. In its 1942 return it claimed a deduction of $9,490 representing the taxes for the first nine months of its fiscal year 1942. The property was sold by petitioner in March, 1942, and the 1942 taxes were adjusted to the date of sale. Petitioner's portion of the 1942 taxes, amounting to $2,123.33, was allowed by respondent as a reduction of the sale price in computing petitioner's gain on the sale. In his determination of the deficiencies herein, the respondent required petitioner to accrue in January of each year the full amount of the taxes levied for that calendar year. He did not allow the deduction of any taxes, as such, in petitioner's taxable year ended March 31, 1942, but did make an adjustment in the sale price to account for petitioner's pro rata share of the taxes levied for the calendar year 1942. The respondent made similar adjustments to the petitioner's returns for the taxable years 1940 and 1941, allowing the deduction in 1940 of $12,997.29 of taxes levied for the calendar year 1940, and in 1941 $12,740 of taxes levied for that year. Since petitioner reported a substantial net loss for 1939 respondent made no audit of its return for that year. The petitioner did not contest the adjustments which respondent had made for 1940 and 1941. Petitioner was organized in 1889 with a capitalization of $600,000. Thereafter, until 1942, it engaged in the manufacture of cotton tex tiles at Whitney, South Carolina. For a number of years prior to 1940 it sustained operating losses. At the close of its fiscal year ended March 31, 1941, its balance sheet, as adjusted by the respondent, showed assets and liabilities as follows: In its taxable year ended March 31, 1942, due to wartime conditions, petitioner had earnings, before taxes, of approximately $306,000. On March 3, 1942, at the insistence of its creditors, petitioner sold all of its assets except a small company store which it had operated for some time as an adjunct of its textile business. The store fixtures, inventory, and other assets had a value of about $35,000. Over the past ten years the annual profits of the store had averaged about $6,300. Pe titioner continued to operate the store until some time in 1945 when it too was sold. After the sale of its textile manufacturing business petitioner reduced the par value of its capital stock from $100 to $5 a share. This reduction in capitalization, amounting to $570,000, was shown in petitioner's books as paid-in surplus which, when offset against the operating deficit, left a surplus of approximately $2,500. No steps were taken in 1942, or prior to 1945, to dissolve the corporation and no liquidating distributions of any kind were made to petitioner's stockholders. The proceeds from the sale of the assets in 1942 were all used to pay petitioner's creditors, including Cotwool Manufacturing Corporation and Deering, Milliken & Co. The stock of those corporations was all owned by members of the Milliken family. The majority of petitioner's stock was owned or controlled by Cotwool or the Milliken family. Deering, Milliken & Co. had acted as petitioner's selling agent, on a commission basis, for a number of years. From time to time it advanced money to petitioner to finance its operations and petitioner had been unable to repay these advances. In the operation of the store petitioner had a small gain in the first year, 1943, a small loss in the second year, and a larger loss of approximately $3,000 in the third year. The parties have stipulated that if petitioner is entitled in 1942 to any unused excess profits credits carry-back from 1943 and 1944, the amounts thereof are $47,052.60 from 1943 and $46,875.55 from 1944. OPINION. LEMIRE, Judge: The respondent's contentions with respect to the deduction of the South Carolina property taxes are that petitioner, being on an accrual basis, was required to accrue the full amount of taxes for each calendar year on January 1, when they accrued and became a lien upon the property under South Carolina law. Petitioner's method of accruing the taxes month by month has been recognized as a sound accounting practice in a number of cases, including Citizens Hotel Co. v. Commissioner, 127 Fed. (2d) 229; Commissioner v. Schock, Gusmer & Co., 137 Fed. (2d) 750; Allen v. Atlanta Stove Works, Inc., 138 Fed. (2d) 452; New Orleans Cold Storage & Warehouse Co., Ltd., 40 B. T. A. 121; and Atlantic Coast Line Railroad Co., 4 T. C. 140. The argument made by respondent in his brief carries the implication that petitioner is estopped to protest the adjustment made for 1942 since it failed to protest the similar adjustments which respondent made for 1940 and 1941. There is no element of estoppel in the situation here and no merit in this argument. It does not appear, nor is it claimed, that petitioner ever made any misrepresentations to respondent or that in the final analysis it gained any benefit from the adjustments in prior years. Petitioner was, of course, not required to contest the adjustments of the prior years if it did not choose to do so. We think that respondent was in error in disallowing the taxes accrued in 1942 in the amount of $9,490. Respondent's disallowance of the unused excess profits credits carry-backs poses a more difficult question. His position on this issue is that the facts show a: complete liquidation and de facto dissolution of petitioner's manufacturing business prior to the fiscal years ended March 31, 1943, and March 31, 1944, and that consequently there is no basis in equity or in common sense for setting up theoretical excess profits tax credits for those years as if that business were still in existence and carrying those credits back to the taxable year. The respondent argues that section 710 (c) (3) (A), Internal Revenue Code, was not intended to apply to a business which had ceased to function. He relies principally upon Wier Long Leaf Lumber Co., 9 T. C. 990; affirmed in part and reversed in part, 173 Fed. (2d) 549. What the petitioner did in 1942 was to sell its principal assets and use the proceeds of the sale, for the most part, to pay its creditors. It made no liquidating distributions to its stockholders and took no steps to dissolve. To the contrary, it intended to continue and did continue its corporate existence and what remained of its business for several years. We held in the Wier Long Leaf Lumber Co. case, supra, that a corporation which pursuant to a resolution to liquidate and dissolve had sold its principal assets and made liquidating distributions in 1942 and was in the process of liquidation in 1943 and 1944, was not entitled in 1942 to the benefit of any unused excess profits credit carryback from 1943 and 1944 under the provisions of section 710 (c) (3) (A). That case was followed in Rite-Way Products, Inc., 12 T. C. 475. On appeal to the Court of Appeals for the Fifth Circuit we were reversed in Wier Long Leaf Lumber Co., supra, as to the year 1943, but affirmed as to 1944. The court held that the benefits of the carryback provisions of section 710 (c) are not to be denied a corporation merely because it was in the process of liquidation; that there must be a further inquiry into the "circumstances and stages" of the liquidation; and that when the corporation is "a corporation in name and semblance only, without corporate substance and serving no real corporate purpose, it must, though not formally dissolved, be treated as dissolved de facto." The rule as thus modified by the court was applied in Gorman Lumber Sales Co., 12 T. C. 1184, and Winter & Co. (Indiana), 13 T. C. 108. On the facts disclosed by the evidence here, it can not be said that petitioner in 1943 and 1944 was a corporation in name only and without corporate substance. It was in every sense a real corporation with a going business. Although its principal business, and the business for which it had been organized, the manufacture of cotton textiles, was discontinued in 1942, its corporate charter and all the rights and privileges of incorporation were retained. Petitioner took no steps to dissolve at the time of the sale of its manufacturing assets and, so far as the evidence shows, had no intention of dissolving. During all of the years 1943 and 1944 petitioner continued to operate the store as a going business under its original corporate charter. It made no liquidating distributions to the stockholders in any of the years under consideration. Thus, it must be found on the evidence that petitioner was not in the process of liquidating in 1943 and 1944. A case involving facts more closely resembling those in the instant case is Bowman v. Glenn, 84 Fed. Supp. 200. There a corporation which sold the major portion of its assets in October, 1944, but continued its corporate existence and took no steps toward dissolution until October, 1945, was permitted to carry back the unused excess profits credits originating in 1945 and 1946 to 1943 and 1944. There is no evidence here, nor does respondent contend that the petitioner delayed its liquidation and continued to operate its store during 1943 and 1944 for the purpose of gaining the advantage of the unused excess profits credit carry-back. On the facts in this case we think that petitioner is entitled in 1942 to a carry-back of its unused excess profits credits for 1943 and 1944 in the respective amounts of $47,052.60 and $46,875.55, as stipulated. Reviewed by the Court. Decision will be entered under Rule 50. LAWYERS TITLE COMPANY OF MISSOURI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 17304. Promulgated June 21, 1950. Where petitioner, a title insurance company acting as escrowee of funds advanced by mortgagees on a building contract, acquired title to property in the name of its nominee consisting of uncompleted buildings, after abandonment of construction by the building contractor, and completed and sold them, held, the loss sustained upon sale of the buildings is deductible as an ordinary loss upon the sale of property held by petitioner primarily for sale to customers in the ordinary course of its business within the meaning of section 117 (a) (1), I. R. C. |