Wier Long Leaf Lumber Co.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Nov 28, 1947
9 T.C. 990 (U.S.T.C. 1947)
9 T.C. 990T.C.

Docket No. 6223.

1947-11-28

WIER LONG LEAF LUMBER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Thomas J. Reilly, Esq., J. A. Phillips, Esq., Milton H. West, Jr., Esq., and Harry R. Jones, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent.


1. Respondent's determination for 1942, eliminating depreciation deduction relating to mill equipment by reflecting adjustment in figure for salvage value of the assets, held not shown to have been erroneous.

2. On issue submitted, held depreciation deduction on automobile can not be disallowed merely by reason of the appreciated price received for asset.

3. A corporation which was in liquidation during 1943 and 1944 is not entitled during those years to the benefit of the unused excess profits credit carry-back provisions of section 710(c)(3)(A), I.R.C. Acampo Winery & Distilleries, Inc., 7 T.C. 629, distinguished. Thomas J. Reilly, Esq., J. A. Phillips, Esq., Milton H. West, Jr., Esq., and Harry R. Jones, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent.

Respondent determined deficiencies in declared value excess profits and excess profits taxes of petitioner for the calendar year 1942 in the respective amounts of $982.71 and $18,863.28. In an amended petition filed with the Court on April 11, 1945, petitioner claims the benefit of carry-backs to the taxable year in its unused excess profits credits for the calendar years 1943 and 1944, and alleges that it made an overpayment of its excess profits tax for 1942.

Three questions are presented:

(1) Is petitioner entitled to a deduction for depreciation of $9,768.71 on its mill property for 1942?

(2) Is petitioner entitled to a deduction for depreciation on certain automobiles which were sold during the taxable year?

(3) Is petitioner, in computing its excess profits tax for the year 1942, entitled to the benefit of unused excess profits tax credit carrybacks from the years 1943 and 1944?

FINDINGS OF FACT.

This matter was submitted to the Court on a stipulation of facts, which the Court hereby finds accordingly. The stipulated facts disclose the following:

Petitioner was incorporated in Texas in 1917, with its principal office in Houston, and it filed its income tax returns with the collector of internal revenue for the first district of Texas.

Its original capital stock of $400,000 was increased to $1,000,000 by a stock dividend in 1922.

During 1942 petitioner operated a sawmill at Wiergate, Texas, which operation was begun in 1918. At the beginning of operations it had acquired an extensive tract of standing timber and subsequently acquired a few relatively small adjacent tracts.

The useful life of the mill was controlled by the quantity of available standing timber upon which it could operate.

From the beginning of its operations petitioner had computed its depreciation upon the basis of the board feet of lumber produced. The depreciation rate was computed by estimating the available supply of timber and prorating the mill cost over this supply. From time to time, as outside tracts of timber were acquired, the estimate of uncut timber was increased and the depreciation rate of the mill and mill equipment was reduced accordingly.

Prior to 1936 the computation of depreciation was made without considering the mill as having any salvage value at the termination of its useful life. However, for the taxable year 1936 petitioner and respondent's examining agent agreed upon a salvage value of $15,000, and the rate of depreciation was modified accordingly. This modified rate, based upon an assumed salvage value of $15,000, has continued in each of petitioner's returns through and including the year 1941.

On January 1, 1942, petitioner's sawmill and mill equipment had a remaining depreciation cost of $24,768.71 and the estimated lumber remaining to be cut was 21,000,000 feet. Petitioner's estimate of its remaining lumber feet was low and petitioner in 1942 actually cut in excess of 28,000,000 feet of timber. Petitioner had been cutting approximately 35,000,000 feet of timber per annum. In its tax return for 1942 petitioner deducted the difference between the salvage value of $15,000 and the depreciated cost as of January 1, 1942, of $24,768.71, or $9,768.71, as a reasonable allowance for wear and tear of its sawmill and mill equipment in that year. Respondent determined that petitioner was entitled to no deduction in 1942 for depreciation of its sawmill and mill equipment.

The parties herein have stipulated that if the Court should hold that petitioner is entitled to any depreciation on its sawmill and mill equipment for the taxable year 1942, the amount thereof is $9,768.71.

On December 24, 1942, petitioner sold the mill, mill equipment, one automobile, and two tractors for a lump cash consideration of $75,000. By reason of war conditions existing throughout 1942, the price for which the mill and mill equipment could be sold was far in excess of the estimated salvage value of $15,000. On the same date and as a part of the same transaction petitioner sold to the same purchaser for a cash consideration of $100,000 the mill site and various lands which were in the vicinity of the mill and upon which there was some standing timber.

In 1942 petitioner sold three automobiles which had cost $2,854.85 and had a depreciation reserve of $1,148.39 accumulated to January 1, 1942. Petitioner, in its tax return for 1942, deducted $1,047.53 as a reasonable allowance for depreciation of these automobiles. Respondent has allowed for depreciation of these automobiles. Respondent has allowed as a deduction the sum of $592.94, his adjustment being explained as follows: ‘The depreciation has been reduced so that the net book value is equal to the sale price and no gain or loss results.‘ The depreciation rate taken by petitioner was 40 per cent per annum.

A tabulation showing the type of car, date purchased, cost, depreciation, claimed and allowed for prior years at the rate of 40 per cent per annum, remaining balance on January 1, 1942, depreciation claimed for 1942, and sales price follows:

+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Depreciation ¦ ¦ ¦ ¦ +-----------+---------+--------+---------------+---------+------------+-------¦ ¦ ¦Date ¦ ¦Allowed ¦Remaining¦Depreciation¦Sale ¦ +-----------+---------+--------+---------------+---------+------------+-------¦ ¦Type ¦purchased¦Cost ¦_ ¦balance ¦claimed, ¦price ¦ +-----------+---------+--------+---------------+---------+------------+-------¦ ¦ ¦ ¦ ¦1940 ¦1941 ¦1-1-42 ¦1942 ¦ ¦ +-----------+---------+--------+-------+-------+---------+------------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+---------+--------+-------+-------+---------+------------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+---------+--------+-------+-------+---------+------------+-------¦ ¦(1) ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Chevrolet ¦3/23/40 ¦$876.00 ¦$269.60¦$350.40¦$256.00 ¦$256.00 ¦$455.00¦ ¦coach ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+---------+--------+-------+-------+---------+------------+-------¦ ¦(2) ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Chevrolet ¦2/26/41 ¦995.00 ¦0 ¦331.60 ¦663.40 ¦398.00 ¦275.00 ¦ ¦sedan ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+---------+--------+-------+-------+---------+------------+-------¦ ¦(3) ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Chevrolet ¦6/10/41 ¦983.85 ¦0 ¦196.79 ¦787.06 ¦393.53 ¦(1) ¦ ¦sedan ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+---------+--------+-------+-------+---------+------------+-------¦ ¦Total ¦------- ¦2,854.85¦269.60 ¦878.79 ¦1,706.46 ¦1,047.53 ¦-------¦ +-----------------------------------------------------------------------------+

It has been agreed by the parties that if the allowable depreciation in 1942 upon the automobiles above mentioned was not controlled by the price received for the automobiles upon the sale thereof, then the amount of depreciation claimed by petitioner in its tax return is proper and should be allowed.

Petitioner, in determining the net long term gain on the sale in 1942 of its mill and mill equipment, two tractors, and the automobiles, offset against the sale prices a salvage value of $15,000 on the mill and mill equipment, a depreciated cost of $6,001.42 on the two tractors, and the depreciated cost of $658.93 on the three automobiles, a total of $21,660.35. No controversy exists as to the depreciated cost of $6,001.42 on the two tractors. Respondent has increased the salvage value of the mill and mill equipment and the depreciated balance on the automobiles by the depreciation disallowed for 1942 in the respective amounts of $9,768.71 and $454.29, a total of $10,223.30.

On December 19, 1942, the stockholders of petitioner met and voted in favor of the liquidation and dissolution of petitioner, and the following resolution was adopted at that meeting:

RESOLVED THAT, pursuant to written consent of stockholders to the liquidation and dissolution of this corporation, the Directors and Officers of this corporation be and hereby they are authorized and directed (1) to proceed promptly and in due order to take all necessary and appropriate action to accomplish dissolution of Wier Long Leaf Lumber Company; (2) to distribute in liquidation of the company and cancellation and redemption of all of its capital stock the net assets of the corporation remaining after making and/or providing for payment of its debts and liabilities; and (3) to make a liquidation distribution immediately (whether before or after dissolution has been actually accomplished) of so much cash as available after setting aside, for payment of the Company's federal tax liability and other (if any) known liabilities and contingent and presently unknown liabilities— if any— (a) the sum of $450,000 cash and (b) all bills and accounts receivable, and (c) all other assets of the company except cash.

At a meeting of petitioner's directors on the same day, a similar resolution was adopted, and a resolution was also adopted that the company sell to Buck Williams certain land owned by it, together with sawmill and other improvements located thereon, excepting new unused shipping lumber, railroad steel, store merchandise and equipment, unused mill supplies, horses and mules, etc. The corporation has not as yet filed a certificate of dissolution.

From 1942 through 1945 petitioner has made distributions in liquidation as follows:

+---+ ¦¦¦¦¦ +---+

Amount per Date share Total 1942--------------- 12/22/42 $103.00 $1,030,000.00 1942--------------- 4/26/43 27.00 270,000.00 1944--------------- ------------ ------------ --------------- 1945--------------- ( 8/ 2/45 .213292 2,132.92 (12/27/45 7.50 75,000.00

Petitioner's excess profits credit, computed on the income basis and prior to any adjustment as a result of its capital reduction in 1942, is $382,334.60.

For 1942 respondent reduced petitioner's excess profits credit by $1,479.45 as a result of the $1,030,000 distribution in liquidation to the capital stockholders nine days before the close of the taxable year.

If petitioner is entitled to carry back an unused excess profits credit from the year 1943, such carry-back will total $322,334.60. Petitioner's adjusted excess profits net income for its calendar year 1941, exclusive of any specific exemption, is $302,077.30. If petitioner is entitled to carry back to 1941 the excess profits credit of $322,334.60 for 1943, it will have remaining $20,257.30 of the 1943 carry-back to apply as a credit against its 1942 excess profits tax liability.

For the calendar year 1944, petitioner had no excess profits net income. If petitioner is entitled to carry back an unused excess profits credit for the calendar year 1944, such carry-back will total $322,334.60 and will constitute an unused excess profits credit carry-back to petitioner 's calendar year 1942.

For the calendar year 1942 petitioner has paid to the collector of internal revenue at Austin, Texas, $191,045.97 as income tax; $9,097.25 as declared value excess profits tax; and $312,308.33 as excess profits tax; payment thereof having been made as follows:

+------------------------------------+ ¦Mar. 11, 1943 . . . . . ¦$129,250.00¦ +------------------------+-----------¦ ¦June 7, 1943 . . . . . ¦127,733.85 ¦ +------------------------+-----------¦ ¦Sept. 13, 1943 . . . . .¦127,733.85 ¦ +------------------------+-----------¦ ¦Dec. 13, 1943 . . . . . ¦127,733.85 ¦ +------------------------------------+

Petitioner's balance sheet as of December 31, 1942, is as follows:

+-------+ ¦ASSETS ¦ +-------¦ ¦ ¦ ¦ ¦ ¦ +-------+

Cash: On hand $1,781.67 In banks 756,244.38 758,026.05

Accounts receivable: Lumber $118,770.57

Less: Reserve for discounts $1,965.60 Reserve for freight on sales 9,725.00 11,690.60 107,079.97 Miscellaneous accounts 13,678.31 Creditors debit balances 6,339.66 127,097.94

Other assets: Mill supplies 16,705.30 Prepaid insurance premiums 524.35 Prepaid rail lease rental 116.99 Insurance deposit 3,100.00 20,446.64 Total 905,570.63

LIABILITIES

Accounts payable: For purchases, expenses, etc 14,584.84 Unclaimed wages 116.36 14,701.20

Accrued: Social security taxes $7,713.04 Federal income and excess profits taxes 516,639.17 Payroll 187.73 $524,539.94 $539,241.14

Reserves: For contingent liabilities 3,500.00 For employees defense bond purchases 75.00 For additional compensation 40.00 3,615.00 542,856.14

NET WORTH Net at Dec. 31, 1942 362,714.49 Total 905,570.63

Petitioner's balance sheet as December 31, 1943, is as follows:

+-------------------------------------------------+ ¦ASSETS ¦ +-------------------------------------------------¦ ¦Cash ¦¦$110,696.34¦ +------------------------------------++-----------¦ ¦Accounts receivable ¦¦6.32 ¦ +------------------------------------++-----------¦ ¦Postwar refund of excess profits tax¦¦31,230.83 ¦ +------------------------------------++-----------¦ ¦ ¦¦141,933.49 ¦ +------------------------------------++-----------¦ ¦ ¦¦ ¦ +-------------------------------------------------+

LIABILITIES Account payable 1,250.00 Unclaimed wages 76.80 Federal income tax payable 1,974.80 Accrued payroll taxes 195.97 Reserves: For contingent liabilities $3,500.00 For storing records 1,102.54 For employees defense bond purchases 18.75 4,621.29 8,118.86

NET WORTH Net at Dec. 31, 1943 133,814.63 Total 141,933.49

Petitioner's income and declared value excess profits tax return for the year 1943 discloses the following items of income and deductions and the net income reported:

+-----------------------------------------------------------------------+ ¦GROSS INCOME ¦ +-----------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Net gain from sale of capital assets ¦ ¦$28,007.60¦ +---------------------------------------------------+--------+----------¦ ¦Other Income: ¦ ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Interest on freight claims ¦$2.35 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Recovery on freight claims charged off ¦10.95 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refund on merchandise returned ¦23.53 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refund on rail bond premium ¦129.64 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refund interest on leased rail rental ¦107.57 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Old outstanding check written off ¦8.47 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refunds on insurance ¦256.62 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refunds on freight charges ¦107.40 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refunds on oil and grease drums ¦363.00 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Refunds-miscellaneous ¦312.78 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Sale of timber, wood, and trims ¦257.81 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Discount on merchandise accounts ¦4.33 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Credit balance in prepaid insurance account written¦ ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦off ¦40.88 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Excess of estimated freight charges on lumber over ¦ ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦actual charges paid ¦516.86 ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Company's portion of accumulated insurance reserve ¦ ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦on books of U.S. Epperson Underwriters Co ¦4,248.92¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Insurance refund, per contract with T.H. Mastin & ¦ ¦ ¦ +---------------------------------------------------+--------+----------¦ ¦Co., on workmen's compensation insurance policy ¦2,753.93¦ ¦ +---------------------------------------------------+--------+----------¦ ¦ ¦ ¦9,144.98 ¦ +---------------------------------------------------+--------+----------¦ ¦ ¦ ¦37,152.58 ¦ +---------------------------------------------------+--------+----------¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------+

DEDUCTIONS Other deductions: Salaries and wages: Officers' $8,800.00 Office 4,295.00 Mill manager 3,825.00 Mill 5,983.80 Legal-retainer 1,333.33 General: Office rent (including lights) 1,669.21 Miscellaneous mill expense 388.07 Telephone and telegraph 302.93 Unclassified 220.15 Workmen's compensation and public liability—office and mill 182.61 Insurance and bonds 139.46 Rail lease rental 116.99 Gasoline 52.50 P.O. box rent 16.00 Linen service 34.25 Stationery and supplies 4.10 Group insurance $208.89 Discounts and allowances 168.90 Taxes Social security $351.23 Capital stock 93.75 Ad valorem 25.51 Franchise 20.00 Cosmetics 14.41 Accountants' service 1,250.00 $29,496.09 Net income 7,656.49 On the return the kind of business was stated to be “(IN LIQUIDATION).”

Petitioner's income and declared value excess profits tax return for the year 1944 discloses the following items of income and deductions and the net loss reported:

+------------------------------------------------------------+ ¦GROSS INCOME ¦ +------------------------------------------------------------¦ ¦ ¦¦ ¦ ¦ +------------------------------------------++-------+--------¦ ¦Interest ¦¦ ¦$408.27 ¦ +------------------------------------------++-------+--------¦ ¦Other Income: ¦¦ ¦ ¦ +-------------------------------------------+-------+--------¦ ¦Company's portion of accumulated insurance:¦ ¦ ¦ +-------------------------------------------+-------+--------¦ ¦Reserve on U.S. Epperson Underwriters ¦ ¦ ¦ +-------------------------------------------+-------+--------¦ ¦Co ¦¦$316.51¦ ¦ +------------------------------------------++-------+--------¦ ¦Refund on guaranty fund ¦¦462.50 ¦ ¦ +------------------------------------------++-------+--------¦ ¦Sale of miscellaneous equipment ¦¦213.50 ¦ ¦ +------------------------------------------++-------+--------¦ ¦ ¦¦ ¦992.51 ¦ +------------------------------------------++-------+--------¦ ¦ ¦¦ ¦1,400.78¦ +------------------------------------------++-------+--------¦ ¦ ¦¦ ¦ ¦ +------------------------------------------------------------+

DEDUCTIONS Wages and salaries 650.00 Taxes 57.18 Other deductions: Light and rent $613.56 Telephone 18.98 Linen service 9.75 P.O. box rental 8.00 Accounting service 175.00 Repair and supplies 15.82 Insurance and bond 129.01 Storing records 267.84 1,237.96 Total deductions 1,945.14 (544.36) On the return, the kind of business was stated to be “(IN LIQUIDATION).”

Petitioner had no excess profits in 1943 and 1944.

OPINION.

HARLAN, Judge:

Prior to the change in the 1942 Act with reference to the treatment of capital gains by corporations, it made no difference to a corporation whether the current depreciation up to the date of the sale or other disposition of an asset was allowed or disallowed. If allowed, it reduced the basis and if disallowed the basis would be increased. The profit in either event would be the same and taxable as ordinary income. The 1942 Act provides for two classes of income for corporations, ordinary income and capital gain. Because of the lower rate of tax on capital gains the treatment to be accorded the current year's depreciation becomes important and accounts for the resistence to respondent's determination in this proceeding that petitioner is not entitled to any depreciation on its sawmill and mill equipment for the year 1942.

Car (3) was used at Petitioner's logging camp, and was included as part of the consideration in the sale or $75,000.00 of the mill and mill equipment, as referred to in paragraph 8 of this stipulation.

Sec. 150, Revenue Act of 1942, amending sec. 117, I.R.C.
We are not able to conclude that petitioner has met its burden of proof and demonstrated that respondent's determination with respect to the depreciation deductions claimed on its mill was erroneous. Potter Farms, Inc., 6 B.T.A. 110.

While it is true that depreciation is not to be adjusted for appreciation in value, that problem generally is concerned with basis. Here we are called upon to resolve the question of what is a reasonable allowance for depreciation in 1942. The burden of showing that the property was not fully depreciated at the beginning of the present tax year, assuming a correct figure for salvage value, has not been met. Indeed, no evidence of the amount which should properly be attributed to anticipated salvage of the mill property under the circumstances then known to exist appears in the record. It thus fails to be apparent that petitioner is entitled to any depreciation whatever and on this issue the respondent's determination must be sustained.

It is true that Thomas Goggan & Brother, 45 B.T.A. 218, deals with the question as one of depreciation, but, as we have previously stated, the question was not material prior to the 1942 Revenue Act.

As to the issue of depreciation on the automobiles, a different situation exists. The parties have by their stipulation narrowed the scope of controversy. They present for consideration only the question whether the price received from the sale of the depreciated automobiles precludes any depreciation allowance. Granting that depreciation deductions computed in the first instance upon an assumed salvage value must be adjusted from time to time upon ascertainment of inaccuracies in that assumed value, just as adjustments are required for changes in estimates of anticipated life, see Washburn Wire Co. v. Commissioner, supra, that is not the question submitted.

It must be taken as settled that mere appreciation in value due to extraneous causes has no influence on the depreciation allowance, one way or the other. Even Realty Co., 1 B.T.A. 355; Seton Falls Realty Co., 6 B.T.A. 883; Max Eichenberg, 16 B.T.A. 1368. The sole fact therefore in any specific situation that a given price is received for articles not fully depreciated throws no light on the effect upon the depreciation allowance. Thomas Goggan & Bro., 45 B.T.A. 218. If a higher price was available for the automobiles because of a miscalculation as to their useful life, a different result would follow from an enhanced sale price due to appreciated values. As the question is posed by the parties, it must be answered in the negative. The depreciation deduction can not be disallowed merely by reason of the price received for the article without consideration of other factors. On this issue, as the parties have submitted it under the stipulation, the determination must consequently be in favor of the petitioners.

Excess Profits Credit Carry-Back Issue.

The basis consideration in determining petitioner's right to an excess profits tax credit carry-back under the provisions of section 710(c((3)(A) of the Internal Revenue Code depends upon whether the word ‘corporation‘ as used in the excess profits tax provisions of the code includes liquidating corporations within the purview of the tax credit carry-back section.

SEC. 710. IMPOSITION OF TAX.(c) UNUSED EXCESS PROFITS CREDIT ADJUSTMENT.—(3) AMOUNT OF UNUSED EXCESS PROFITS CREDIT CARRY-BACK AND CARRY-OVER.—(A) UNUSED EXCESS PROFITS CREDIT CARRY-BACK.— If for any taxable year beginning after December 31, 1941, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such unused excess profits credit over the adjusted excess profits net income for the second preceding taxable year computed for such taxable year (i) by determing the unused excess profits credit adjustment without regard to such unused excess profits credit, and (ii) without the deduction of the specific exemption provided in subsection (b)(1).

Since liquidation of some sort is the destined fate of almost all corporations and is therefore a normal corporate function, it could be soundly argued that, under a general revenue law pertaining to all ‘taxpayers,‘ liquidating corporations would be included with active corporations unless specifically exempted. Cf. Will T. Caswell, 36 B.T.A. 816; Taylor Oil & Gas Co. v. Commissioner, 47 Fed.(2d) 108; certiorari denied, 283 U.S. 862.

Such was also the recent decision of this Court in Acampo Winery & Distilleries, Inc., 7 T.C. 629. The question discussed and decided in that case was whether or not a liquidating corporation could deduct, under the provisions of section 23(s) and section 122(b)(1) of the code, a loss suffered during the two years of liquidation, 1944 and 1945, from the corporation's net taxable income during 1943, its last year of active operation. The Court therein said (p. 640): ‘The words of the statute are general in their application and something would have to be read into them which is not there to limit them so that they would not apply in this case.‘

SEC. 23. DEDUCTIONS FROM GROSS INCOMEIn computing net income there shall be allowed as deductions:(s) NET OPERATING LOSS DEDUCTION.— For any taxable year beginning after December 31, 1939, the net operating loss deduction computed under section 122.

SEC. 122. NET OPERATING LOSS DEDUCTION.(b) AMOUNT OF CARRY-BACK AND CARRY-OVER.—(1) NET OPERATING LOSS CARRY-BACK.— If for any taxable year beginning after December 31, 1941, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-back for each of the two preceding taxable years, except that the carry-back in the case of the first preceding taxable year shall be the excess, if any, of the amount of such net operating loss over the net income for the second preceding taxable year computed (A) with the exceptions, additions, and limitations provided in subsection (d), (1), (2), (4), and (6), and (B) by determining the net operating loss deduction for such second preceding taxable year without regard to such net operating loss.

It is our opinion, however, that the above statement does not apply without qualification to the excess profits tax provisions of the Internal Revenue Code. True, those provisions are general in the sense that they have universal application throughout the United States, but they are special in the sense that they were passed to cover a limited period of time, the war years, and had special objectives in addition to the raising of revenue, i. e., the control of wartime inflation and the facilitation of the return to a peacetime economy.

See sec. 780, I.R.C., providing for post-war refund of excess profits tax.

The loss carry-back provision of section 122 of the code was intended to cover not only all taxpayers within its jurisdiction, but it was to last an indefinite period of time during which it was reasonably to be anticipated that large numbers of corporate taxpayers would liquidate. The failure of Congress to exclude such liquidating corporations from the privilege of loss carry-backs did not conflict with any of the purposes of the peacetime revenue law and in fact carried out those purposes by promoting industrial stability, and by removing peacetime peaks and valleys from taxpayer's revenue.

It was not, however, reasonably to be anticipated in 1942, when section 710(c)(3)(A) of the code was enacted, that during the feverish activity of a short war period many corporations would liquidate. Furthermore, to permit the carry-back of excess profits tax credits by liquidating corporations so as to refund excess profits taxes already collected would seriously militate against the stability of war revenue and the anti-inflationary and reconversion purposes of the excess profits tax law itself.

Therefore, it is our opinion that any court, in deciding the question of the allowance of the excess profits tax carry-back credit to liquidating corporations, is justified in inquiring whether or not the terms ‘taxpayer‘ and ‘corporation‘ used in the excess profits tax law provisions included liquidating corporations for the purpose of the carry-back credit. Such inquiry is not for the purpose of reading something into the act ‘which is not there,‘ but to define the terms ‘taxpayer‘ and ‘corporation‘ as used in the statute.

Section 710(c)(2)(A) became a part of the 1942 Act as a Senate amendment. It occasioned no debate and practically no relevant explanation either on the Senate floor or when the Conference Committee Report was before the House. However, the Senate committee which presented the amendment said in its report, Senate Report No. 1631, 1942-2 C.B. 504, 546-547:

* * * Many corporations will suffer substantially in periods of declining profits, especially at the close of a war economy in which their deductible expenses have been held down to a bare minimum by priorities, rationing, labor shortage, and other factors beyond the control of the taxpayer. For example, a corporation during the war years makes substantial profits which would be considerably reduced if it could make the expenditures possible in a free economy for maintenance, repair, and other deductible expenses. Upon the termination of the war, the materials and labor will once more be available, but the costs and expenses which would otherwise be taken against the wartime profits will fall into the years of lesser profits or of no profits, thereby resulting in small or no tax benefit for the taxpayer.

To afford relief to these hardship cases, where maintenance and upkeep expenses, must, because of wartime restrictions be deferred to peacetime years, your committee has provided a 2-year carry-back of operating losses and of unused excess-profits credit.

From the above it is certainly obvious that the excess profits tax credit carry-back was intended by Congress to benefit only corporations which had been in active production throughout the war period and which had projected their activities to ‘peacetime years.‘ The amendment was surely not adopted to permit a corporation during wartime years to cease all productive activity and obtain a substantial profit at the expense of the Federal revenue for doing nothing. Such an interpretation would permit a needless and unreasonable diversion of wartime revenue, would promote inflation, and would not assist reconversion to peacetime economy.

That the petitioner itself evidently realized the unreasonableness of a statutory interpretation which would produce such indefensible results is shown by its failure to make any claim for an excess profits credit carry-back until after the Commissioner had determined a deficiency in its declared value excess profits tax and excess profits tax for 1942. Petitioner then, on October 10, 1944, filed its petition herein, claiming the benefit of the excess profits tax credit carry-back provision. On March 11, 1944, petitioner filed its 1943 income tax return, Form 1120, and reported a declared value excess profits tax and income tax of $1,974.80. Subsequently it paid this amount and made no claim for any overpayment in its 1942 tax. Furthermore, it never set up such a claim on its books.

Petitioner justifies its present contention almost wholly on Acampo Winery & Distilleries, Inc., supra. While the opinion in that case refers only to loss carry-backs and does not discuss excess profits tax credit carry-backs, the whole question was before the Court for decision. However, the respondent therein did not present any separate argument against excess profits tax credit carry-backs and both counsel agreed that the two issues should be joined for consideration and decision. Therefore the issue before the Court in the case at bar was neither argued nor decided in the Acampo case except to the extent that the argument against the application of loss carry-backs would also apply to excess profits tax credit carry-backs. The Acampo case is therefore to be distinguished from the case at bar.

As bearing upon the use by this Court of facts of general knowledge existing at the time of the passage of the excess profits tax credit carry-back law and also the use by this Court of the Senate committee reports above set out for the purpose of interpreting the words ‘taxpayer‘ and ‘corporation,‘ which words would ordinarily have an accepted meaning without interpretation, we may cite a recent decision of the United States Supreme Court, United States v. American Trucking Associations, 310 U.S. 534, wherein the Court said:

There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. When that meaning has led to absurd or futile results, however, this Court has looked beyond the words to the purpose of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one ‘plainly at variance with the policy of the legislation as a whole‘ this Court has followed that purpose, rather than the literal words. When aid to construction of the meaning of words, as used in the statute, is available, there certainly can be no ‘rule of law‘ which forbids its use, however clear the words may appear on ‘superficial examination.‘ * * * A few words of general connotation appearing in the text of statutes should not be given a wide meaning, contrary to a settled policy, ‘excepting as a different purpose is plainly shown.‘ (Italics supplied.)

See also tsoi Sim v. United States, 116 Fed.920; Church of the Holy Trinity v. United States, 143 U.S. 457; Ozawa v. United States, 260 U.S. 178; and United States v. Ogilvie Hardware Co., 330 U.S. 709.

It is therefore our decision that the petitioner herein is not entitled to the benefit of the excess profits tax credit carry-back during the years 1943 and 1944 when it was a liquidating corporation.

Reviewed by the Court.

Decision will be entered under Rule 50.

VAN FOSSAN and MURDOCK, JJ., dissent.

BLACK, J., dissenting: I dissent from the majority opinion wherein it disallows petitioner any depreciation on its mill properties for the year 1942. Petitioner in its brief states this issue as follows:

Did the respondent err in refusing petitioner the statutory allowance for wear and tear ‘depreciation‘ upon its mill properties operated throughout the year up to its sale in December, 1942, because, due to market conditions as a result of the war the price received on its sale exceeded its estimated salvage value, which value had been agreed upon by petitioner and respondent for all years from 1936 through 1941?

I think respondent did so err.

On January 1, 1942, petitioner's sawmill and mill equipment had a remaining depreciated value of $24,768.71, and the estimated lumber remaining to be cut was 21,000,000 feet. Petitioner's estimate of its remaining lumber feet was low, and petitioner in 1942 actually cut in excess of 28,000,000 feet of timber. Petitioner had been cutting approximately 35,000,000 feet of timber per annum. In its tax return for 1942 petitioner deducted the difference between the salvage value of $15,000 and the depreciated value as of January 1, 1942, of $24,768.71, being the sum of $9,768.71, as a reasonable allowance for wear and tear of its sawmill and mill equipment. Respondent determined that petitioner was entitled to no deduction in 1942 for depreciation of its sawmill and mill equipment.

Respondent's action in disallowing petitioner any depreciation on its mill properties in 1942, notwithstanding petitioner had cut in that year 28,000,000 feet of timber, seems to be based on the fact that due to the war petitioner's mill properties had greatly appreciated in value and were sold at the end of the year for a good profit over the salvage value of $15,000 which had been agreed upon in 1936 between petitioner and the Bureau of Internal Revenue. But the fact that this property had appreciated in value due to war conditions and could be sold at a profit does not, in my opinion, defeat petitioner's right to take depreciation due to the wear and tear of its mill properties in 1942. See Even Realty Co., 1 B.T.A 355; Max Eichenberg, 16 B.T.A. 1368. If petitioner was entitled to take any depreciation for the wear and tear of its mill properties in 1942, then the amount of that depreciation has been stipulated. It has been agreed and stipulated that, if the Court should hold that petitioner is entitled to any depreciation on its sawmill and mill equipment for the taxable year 1942, the amount thereof is the sum of $9,768.71.

Petitioner, of course, had to return the gain which resulted to it from the sale of its mill properties in December 1942 as capital gain and pay tax thereon. It has done this and for reasons I have already stated, I think petitioner has treated these transactions in the proper manner and is entitled to take the depreciation which it claims on its mill properties for 1942.

I do not dissent from the majority opinion on the other two issues, but concur therein.

LEECH and JOHNSON, JJ., concur in the dissent of Judge Black on the first issue, but also dissent from the decision of the majority on the third issue, since they believe Acampo Winery & Distilleries, Inc., 7 T.C. 629, is not effectively distinguishable.