Winter & Co. 
v.
Comm'r of Internal Revenue

Tax Court of the United States.Jul 19, 1949
13 T.C. 108 (U.S.T.C. 1949)

Docket No. 15204.

1949-07-19

WINTER & COMPANY, INC. (INDIANA), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

David Sher, Esq., and B. E. Brandes, Esq., for the petitioner. John J. Madden, Esq., for the respondent.


Petitioner claims error in the determination of deficiencies in income and excess profits taxes for its fiscal year 1942 and claims, under authority of section 710(c)(3)(A) of the code, the right to carry back to that year an unused excess profits credit for each of its fiscal years 1943 and 1944. It also claims a net operating loss for 1944 which it claims the right to carry back to 1942. The result of such carry-backs, if allowed, would be overpayments of income and excess profits taxes for 1942. Petitioner's excess profits credit was computed on its average base period net income. Petitioner's business was the assembling of pianos from parts supplied by its parent. It operated on the basis of a fiscal year ending January 31. On or prior to April 30, 1942, petitioner ceased all operations, and dismantled and shipped its plant equipment, inventories, and all other tangible assets to its parent. Its intangible assets consisted of credits on the parent's books and represented accounts receivable which the latter had at all times held and collected. On the parent's books also was credited the value of the above described tangible assets. Petitioner had no earnings and no business expense subsequent to April 30, 1942. Held:

(1) The period from February 1 to April 30, 1942, inclusive, was a tax year of less than twelve months within the meaning of section 711(a((3)(A) and, accordingly, the excess profits net income of such ‘short year‘ should be annualized for the application thereto of the excess profits credit for the fiscal year ended January 31, 1942.

(2) Within the meaning of section 710(c)(3)(A) the period May 1, 1942, to January 31, 1943, inclusive, and the fiscal year 1944 are not includible in petitioner's cycle of tax years for the carry-back of unused excess profits credit.

(3) Since petitioner carried on no business or other operation and had no earnings or business expense in the fiscal year 1944, it sustained no operating loss in that year and, hence, there is no such loss to carry back. David Sher, Esq., and B. E. Brandes, Esq., for the petitioner. John J. Madden, Esq., for the respondent.

Respondent determined a deficiency in petitioner's income tax for the fiscal year ended January 31, 1942, in the amount of $209.13 and a deficiency in its excess profits tax for the same year in the amount of $449.75. Petitioner filed a claim for refund of excess profits tax for that year in the net amount of $10,481.73. The claim for refund was based upon the claimed right of carry-back of unused excess profits credit from the fiscal years ended January 31, 1943 and 1944, respectively, and of a net operating loss carry-back for the fiscal year 1944.

The questions presented are: (1) Did petitioner have an unused excess profits credit for its fiscal year 1943? (2) Did petitioner have an unused excess profits credit for its fiscal year 1944, and, if so, is it entitled to carry such credit back to its fiscal year 1942? (3) Did petitioner have a net operating loss for its fiscal year 1944, and, if so, is it entitled to carry such loss back to its fiscal year 1942?

Some of the facts are stipulated and are so found.

FINDINGS OF FACT.

Petitioner is a corporation, organized under the laws of the State of Indiana on August 4, 1937. It was formed by its then sole stockholder, Sears, Roebuck & Co. (sometimes hereinafter referred to as Sears). It was created by Sears at the suggestion of William G. Heller, president of petitioner corporation and also of Winter & Co. of New York (hereinafter sometimes referred to as the New York Company or parent), whose stock was also wholly owned by Sears. It is on the accrual and fiscal year basis. Its fiscal year ends on January 31.

Petitioner's tax return for the year involved was filed with the collector of internal revenue for the first collection district of Illinois, at Chicago.

The New York company has been engaged in the business of manufacturing Winter pianos and piano parts for sale in the United States, as well as for export, for more than forty years.

Petitioner's business was the assembling and finishing of pianos from cases, backs, and certain other parts shipped to it by the New York company. Petitioner was organized and its physical plant located at La Porte, Indiana, for the purpose of enlarging production of Winter pianos, saving freight charges, and facilitating quicker delivery of pianos to midwest and western customers of the New York company. The building and premises of the La Porte plant were occupied under a five-year lease which expired in August 1942 and has never been renewed. The pianos assembled and finished by petitioner were sold and distributed by the New York company to its customers.

The inventories used by petitioner in its piano assembling operations were furnished and charged to petitioner by the New York company. The sales accounts of pianos assembled by petitioner were collected by the New York company and credited to petitioner. The New York company advanced to petitioner from such collections the moneys required by the latter in the operation of its business.

The books of account of petitioner were kept in the office of the New York company in New York by the same accountants that kept the books of the New York company.

Retwin Corporation was organized under the laws of the State of New York on January 30, 1942, with an authorized and issued capital stock of 2,000 shares of $100 par value preferred, and 1,000 shares of common without par value. William G. Heller was also president of this company.

On January 31, 1942, Sears, the New York company, and Retwin Corporation entered into an agreement whereby Sears sold the stock of petitioner to the New York company and sold the stock of the latter to Retwin Corporation. Pursuant to the agreement and effective prior to the indicated sales of stock, dividends were declared and credited to Sears by petitioner and the New York company of all their surplus and earnings, so that on January 31, 1942, these companies had no surplus and earnings.

The stock of petitioner was sold by Sears to the New York company for $10,000 cash. Also, the New York company assumed under the agreement above mentioned the indebtedness of petitioner to Sears. As a result of the indicated transaction the New York company from and after January 31, 1942, owned all of the capital stock of petitioner and from and after that date Sears owed nothing to and had no claim against petitioner.

The War Production Board on February 19, 1942, issued Limitation Order L-37, which restricted the manufacture of pianos to 50 per cent of the 1940 production. After February 19, 1942, and prior to May 1, 1942, petitioner assembled and finished as many pianos as it had complete parts for, and prior to May 1, 1942, it shipped and delivered to the New York company its remaining inventory, together with all its plant equipment. The value of the inventory returned was credited to petitioner. The plant equipment was fully depreciated and no credit was given petitioner therefor. From and after the last named date petitioner has had no plant, no plant equipment, and no inventory. Since that date petitioner has had no employees; it has not manufactured any pianos or engaged in any other operation or business; and it has incurred no expense.

At the time petitioner disposed of its inventory and plant equipment and ceased operations on or before May 1, 1942, it was intended that petitioner should resume operations at an undetermined future time after the governmental restrictions against the manufacture of pianos had been removed and if and when the requisite supply of materials should become available, and also if and when it should be deemed that competitive and economic conditions warranted resumption. Petitioner's corporate charter has been kept alive and no resolution has been adopted or proposed for its dissolution.

On May 29, 1942, the War Production Board issued Limitation Order L-37-A, which prohibited the further manufacture of pianos. This order was revoked May 10, 1945.

Petitioner abandoned the use of the building and premises used in its Indiana plant prior to May 1, 1942, and abandoned their possession when its lease thereof expired in August 1942.

For each of the years 1943 and 1944 petitioner filed an annual report with the Secretary of State of Indiana and paid its corporation franchise tax of $1. All the state and local personal property and real property taxes due from petitioner have been paid to date. Since April 30, 1942, petitioner has owned no tangible property. Petitioner also filed for the years 1943, 1944 and 1945 returns of capital stock tax. Such returns showed a ‘Declared Value of Entire Capital Stock‘ of $999 and no capital stock tax due.

In 1945, shortly after the prohibition placed upon production of pianos was removed, petitioner made inquiry of the Reconstruction Finance Corporation as to whether there were any available plants in Indiana suitable for woodworking. That corporation sent petitioner a catalog giving pictures and details of plants throughout the country, but none of the plants listed was suitable for petitioner's purposes. No further action has been taken by petitioner in respect of a plant or site for the resumption of operations.

The New York company produced 11,302 pianos in 1946 and 10,291 in 1947. In 1941 it manufactured 15,500 pianos, while in its fiscal year 1941 petitioner produced 3,500 pianos.

Petitioner's balance sheets for the years 1942 to 1943, inclusive, show the following:

+---------------------------------------------------------------------------+ ¦ ¦1/31/42 ¦1/31/43 ¦1/31/44 ¦1/31/45 ¦ +--------------------------------------------+---------+---------+----------¦ ¦ASSETS ¦ ¦ ¦ ¦ +--------------------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------+----------+---------+---------+----------¦ ¦Cash ¦$10,348.58¦$709.18 ¦$463.08 ¦ ¦ +---------------------------------+----------+---------+---------+----------¦ ¦Notes and accounts receivable (a)¦$72,683.51¦15,783.62¦24,202.49¦$24,246.50¦ +---------------------------------+----------+---------+---------+----------¦ ¦Inventories ¦64,861.88 ¦ ¦ ¦ ¦ +----------------------------------------------------------------+----------¦ ¦Equipment (2,919.33) less reserve for ¦ ¦ +----------------------------------------------------------------+----------¦ ¦depreciation (2,506.87) (b) ¦412.46 ¦ ¦ ¦ ¦ +---------------------------------+----------+---------+---------+----------¦ ¦Deferred charges ¦1,059.02 ¦ ¦ ¦ ¦ +---------------------------------+----------+---------+---------+----------¦ ¦Total ¦149,365.45¦16,492.80¦24,665.57¦24,246.50 ¦ +---------------------------------+----------+---------+---------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------------------------+

LIABILITIES AND CAPITAL Accounts payable (c) 138,888.37 Accrued liabilities 477.08 1,800.00 Capital stock 10,000.00 10,000.00 10,000.00 10,000.00 Earned surplus None 4,692.80 14,655.57 14,246.50 Total 149,365.45 16,492.80 24,665.57 24,246.50

INCOME AND PROFITS OR (LOSS) Total income 149,068.71 13,646.03 (Int.) 1.41 None Total deduction 78,035.23 6,527.87 381.49 (74.00) Net income (loss) 71,033.48 7,118.16 (380.08) (74.00)

(a) Notes and accounts receivable 1/31/43 1/31/44 1/31/45 Winter (New York) $15,195.16 $13,827.73 $13,871.74 McGill Mfg. Co. (landlord, La Porte, Indiana) 565.00 Other 23.46 Net claim for refund of income and excess 10,374.76 10,374.76 profits taxes Total 15,783.62 24,202.49 24,246.50

+-----------------------------------------------------------------------------+ ¦(b) Depreciation-Assets of $2,919.33 were fully depreciated during the fiscal¦ ¦year ended 1/31/43. Most of this equipment was junked. ¦ +-----------------------------------------------------------------------------¦ ¦(c) 1/31/42 accounts payable ¦$138,888.37 ¦ +----------------------------------------------------------+------------------¦ ¦(1) Trade (paid off during July 1942) ¦5,723.73 ¦ +----------------------------------------------------------+------------------¦ ¦(2) Winter (N.Y.) (loan payable) ¦138,164.64 ¦ +----------------------------------------------------------+------------------¦ ¦Total ¦138,888.37 ¦ +-----------------------------------------------------------------------------+

The intercompany transactions between petitioner and the New York company were reflected in their respective books of account by offsetting credits and debits. Petitioner's balance sheet for the fiscal year ended January 31, 1942, as shown above, included an item of accounts payable in the amount of $138,888.37. The accounts marking up this item were payable to the New York company and consisted almost wholly of the account payable to Sears for dividends declared by petitioner as of January 31, 1942. This account was assigned by Sears to the New York company on that date. These accounts payable, after certain adjustments, were paid by the transfer on March 31, 1942, to the New York company by petitioner of accounts receivable in the amount of $136,590.24.

Petitioner's balance sheet for its fiscal year ended January 31, 1943, shows notes and accounts receivable in the amount of $15,783.62. Of that amount, $15,195.16 was due from the New York company and represented the balance of moneys credited by that company from collections of petitioner's receivables after paying therefrom various items for and on behalf of petitioner. Also, in the balance sheet the liability item of $1,800 represents an accrual for Federal income taxes.

Petitioner's balance sheets for its fiscal years 1944 and 1945 show notes and accounts receivable of $24,202.49 and $24,246.50, respectively. Of each of these amounts $10,481.73 represents the amount claimed by petitioner as a refund of income and excess profits taxes for its fiscal year 1942, the year here involved. Petitioner credited the amount of the claimed refund to earned surplus. Its earned surplus as shown in its balance sheets for the fiscal years 1944 and 1945 were $14,665.37 and $14,246.50, respectively. Petitioner had no earnings and no surplus earned subsequent to April 30, 1942. Petitioner had net income of $7,118.16 which it earned after January 31, 1942, and prior to May 1, 1942.

For petitioner's fiscal year ended January 31, 1942, it paid Federal excess profits tax of $14,865.20 and income tax of $17,162.17. For its fiscal year ended January 31, 1944, petitioner claims a net operating loss in the amount of $724.96.

There were included in the computation of the claimed net operating loss the following items which were deducted in petitioner's income and declared value excess profits tax return for its fiscal year ended January 31, 1944:

+-----------------------------+ ¦Interest ¦$0.19 ¦ +----------------------+------¦ ¦Personal property tax ¦330.30¦ +----------------------+------¦ ¦Legal expenses ¦51.00 ¦ +----------------------+------¦ ¦Total ¦381.49¦ +-----------------------------+

Petitioner's excess profits credit, based on its average base period net income, was $26,370.48.

For its fiscal year ended January 31, 1943, petitioner claims an unused excess profits credit in the amount of $19,252.32. For its fiscal year ended January 31, 1944, it claims an unused excess profits credit of $26,370.48. Petitioner carried back the above mentioned excess profits credits to its fiscal year ended January 31, 1942, and also carried back the above mentioned claimed net operating loss to the same year. On the basis of that action, it filed on April 14, 1945, a claim for refund of income and excess profits tax for its fiscal year 1942 in the total amount of $10,481.73.

In a statement attached to the notice of deficiency respondent stated as follows with respect to the claim for refund:

It is held that you are not entitled under the provisions of Sections 710 and 23 of the Internal Revenue Code to carry back alleged unused excess profits credits or alleged net operating losses for any period subsequent to May 1, 1942 at which date you ceased operations.

Respondent, in determining the deficiencies, treated the period February 1 to May 1, 1942, as a taxable year of less than twelve months and annualized petitioner's excess profits net income therefor. Such annualization eliminated any unused excess profits credit for the fiscal year 1943.

Respondent made an adjustment with respect to petitioner's allowable capital stock deduction for the year ended January 31, 1942, and determined a deficiency in petitioner's income tax in the amount of $209.13 and a deficiency in its excess profits tax in the amount of $449.75. The stated adjustment is not in issue. The claim of overpayments of income and excess profits taxes based on the claimed right of carry-back of unused excess profits credits for petitioner's fiscal years 1943 and 1944 and of a net operating loss in 1944 are in issue.

OPINION.

HILL, Judge:

The questions for determination as stated at the beginning of this report will be taken up in the order stated. The first question is, Did petitioner have an unused excess profits credit for its fiscal year ended January 31, 1943?

If it had such credit it is entitled under section 710(c)(3)(A) of the Internal Revenue Code to carry it back to its tax year 1942. Petitioner contends that it had such credit in the amount of $19,252.32.

SEC. 710. IMPOSITION OF TAX.(c) 0unused 0excess 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 determining 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).

Respondent contends that, because petitioner had disposed of its assets and ceased all operations before May 1, 1942, and earned no income after that date, its tax year is not its fiscal year ended January 31, 1943, but is the short period from February 1 to April 30, 1942, inclusive. Respondent further contends that, because, as he claims the tax year was a period less than twelve months, the excess profits net income for the short period should be annualized and the excess profits credit of $26,370.48 applied to the annualized income. Petitioner opposes annualization. If petitioner's contention should be sustained it will have a carry-back to its tax year ended January 31, 1942, of $19,252.32. If respondent's contention should be sustained, there will be no unused excess profits credit for petitioner's fiscal year 1943 and hence no such credit to carry back to its fiscal year 1942.

The statutory provision relied on by respondent in support of his contention for annualization is section 711(a)(3)(A) of the code.

SEC. 711. EXCESS PROFITS NET INCOME.(a) TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1939.—(3) TAXABLE YEARS LESS THAN TWELVE MONTHS.—(A) General Rule.— If the taxable year is a period of less than twelve months the excess profits net income for such taxable year (referred to in this paragraph as the ‘short taxable year‘) shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the short taxable year and dividing by the number of days in the short taxable year. The tax shall be such part of the tax computed on such annual basis as the number of days in the short taxable year is of the number of days in the twelve months ending with the close of the short taxable year.

The solution of the first question depends on whether the period beginning February 1, 1942, and ending April 30, 1942, was petitioner's tax year instead of the fiscal year beginning February 1, 1942, and ending January 31, 1943.

It is our conception that the obvious purpose of the provisions for the carry-over and carry-back of unused excess profits credit from a current tax year is to establish a maximum cycle of five years over which to level off the income for excess profits tax purposes as between the more profitable and the less profitable operations of the respective years composing the cycle. The effectuation of the provisions for tax relief purposes and the prevention of its abuse for tax avoidance beyond the relief intended require of necessity that the period of tax years over which the carry-over or carry-back can be made shall embrace only a period of business operations or of operations to effect a conversion or liquidation thereof.

If and when, within such authorized maximum cycle, a corporation destroys its potentiality for the production of income by disposing of its capital, inventories, and assets, and ceases operations, goes out of business, and, consequently, ceases to produce income, its cycle for the carry-over and carry-back of unused excess profits credit thereupon terminates. In respect of the excess profits credit, the period following cessation of operations under such circumstances is not a tax period and it therefore ceases to be a constituent part of the cycle within which a carry-over and carry-back of an unused excess profits credit is provided.

This case presents a unique factual situation. Petitioner was a corporate entity, but in practical effect was operated as a department of its parent, the New York company. Petitioner assembled pianos from constituent parts supplied were charged to it on the parent's books. The pianos assembled by petitioner were sold as its parent's pianos to the latter's customers. The sales accounts were held and collected by the parent and credited on its books to petitioner. From the proceeds of the collections the parent advanced to petitioner such amounts as were required by the latter to carry on its operations and charged petitioner therewith. The parent retained in its custody the balance thereof. Petitioner's books of account were kept by the parent at the offices of the latter in New York. The same persons kept and audited the books of the parent and of petitioner. Except for cash advanced by the parent to petitioner to carry on the latter's operations, no moneys were transmitted from the parent to petitioner or vice versa. The intercompany accounts were settled by bookkeeping entries of offsetting credits and debits.

When it was determined, on or about February 19, 1942, that petitioner should cease operations, such pianos as petitioner had complete parts for in inventory were assembled, sold, and distributed to the parent company's customers and its remaining inventories and plant equipment were shipped to the parent in New York and credited on the latter's books to petitioner. There remained in petitioner's possession no other tangible property. Petitioner's intangible property consisted of credit entries on the parent's books.

The foregoing statement as to intangible property does not include petitioner's claim for refund. Whether such claim has substance as property is the ultimate issue for determination.

It is obvious that a distribution of petitioner's intangible property to its parent was available at any time to the parent, and at the latter's behest, by mere book entries, and that without formal distribution the parent used the funds represented by the book credits above mentioned.

It is apparent that the course of petitioner's action and function as a corporate entity was and is entirely dictated and controlled by its parent to subserve the latter's convenience and economic interests and that petitioner, notwithstanding its recognition as a corporate entity, can not independently formulate or execute for itself any functional program.

Petitioner was not dissolved and its charter has been kept alive, but since April 30, 1942, it has been a mere empty corporate shell, not for any present or current purpose, but for a contingent future purpose of petitioner's parent. Since April 30, 1942, petitioner has not been a functioning corporation. As of that date petitioner was stripped of its plant, equipment, and financial structure. It was reduced to a state of complete inertia and its charter was folded up and laid away. Whether or not petitioner will ever be recapitalized, refinanced, reinventoried, reequipped and again put in operation depends entirely upon the decision of its parent. That decision has not been made. Many years have now elapsed since petitioner was laid to rest and no action has been taken to reanimate it.

Since April 30, 1942, petitioner has had no operations, no earnings, no income, and no expense except its franchise tax. In short, no period from and after April 30, 1942, has been a tax year or part of a tax year of petitioner within the meaning of the applicable statutory provisions respecting the carry-over or carry-back of unused excess profits credit.

As above indicated, the purpose of the statutory provision for the carry-over and carry-back of an unused excess profits credit is to level the burden of excess-profits taxes over a period of not exceeding five consecutive tax years of a going concern. If a corporation to which the provision for such credit is applicable should discontinue its operating functions after the lapse of a month, a year, or two years, within such applicable period, we think it inconceivable that Congress intended that the excess profits credit was to apply not only to the operating years, but also to each of the remaining nonoperating years of the maximum authorized cycle. For if there is no production there can be no excess profits income, potential or actual, and, hence, no occasion for the authorization of an excess profits credit. It follows that if, under the situation stated, no excess profits credit to carry back.

In the above expression of our views we are not unmindful of the following court decisions: United States v. Kingman, 170 Fed.(2d) 408; Union Bus Terminal, Inc., 12 T.C. 197; Allegheny Broadcasting Corporation, 12 T.C. 522; Mesaba-Cliffs Mining Co. v. Commissioner, 174 Fed.(2d) 857; Wier Long Leaf Lumber Co. v. Commissioner, 173 Fed.(2d) 549.

An examination of the listed cases discloses that the decision in each deals with a regularly operating corporation whose unused excess profits credit was sought to be carried over, as in the Mesaba case, or a corporation whose functioning as such had continued pending liquidation in the year from which it was sought to carry back unused excess profits credit. The Mesaba case is obviously not a precedent for the decision here.

The Kingman case is distinguishable on its facts from the instant case. In that case, as here, there was involved the question of a short taxable year and the annualization of excess profits income against which to apply the excess profits credit. On April 3 of its calendar tax year 1943 the Kingman corporation, pursuant to a plan of liquidation, distributed to its sole stockholder all of its physical operating assets. Thereafter it engaged in no activities or operations other than as hereinafter stated. The corporation retained its claims against the Government for refund of income and excess profits taxes, including its proposed claim under section 722 and its right to post-war refund of excess profits taxes. The latter item consisted of nonnegotiable bonds evidencing its right to the postwar refund of excess profits taxes. Application was filed with the collector of internal revenue on September 10, 1943, for refund of excess profits tax for the year 1942 under the provisions of section 722. That claim was pending during the remainder of the calendar year 1943. The corporation's 1942 excess profits tax return, after adjustments, showed that it was entitled to a postwar refund credit of $2,586.08. Its return for the year 1943, after adjustments, showed that it was entitled to a postwar refund credit of $1,305.95. The original returns prior to adjustment showed a postwar refund credit of $2,269.90 for 1942 and $598.42 for the year 1943. Under the law as it then stood the taxpayer would be entitled to receive the correct amount of its postwar refund credit only after termination of the war. On or about April 30, 1945, the Kingman corporation received income by way of interest on overassessments of tax for 1942 and on or about January 29, 1946, it received income in the amount of $98.94 as interest on overassessment of income tax for the year 1943. It also received from the United States in years subsequent to 1943 the postwar refunds hereinabove referred to. The Kingman corporation retained its corporate existence throughout the years mentioned for the purpose of prosecuting the claims above enumerated.

A deficiency in excess profits tax was determined against the corporation on the theory and contention that the period January 1 to and including April 3, 1943, was a taxable year of less than 12 months, on the basis of which the Commissioner annualized the corporation's income for the purpose of applying thereto the excess profits credits for the calendar year 1943.

In the instant case petitioner received no income after April 30, 1942, and had no claim for refund under section 722 and had no bonds evidencing its right to a postwar refund of excess profits taxes. In the instant case the corporate existence was not retained for any of the purposes for which the corporate existence was retained in the Kingman case or for any current purpose.

In the instant case the claim for refund filed April 14, 1945, is based on petitioner's claim of right to carry back unused excess profits credits and a net operating loss from a period in which it had no operation or income.

On the facts in the Kingman case as above summarized, both the Federal District Court and the U.S. Court of Appeals for the Fifth Circuit held that the action of the Commissioner in determining a short taxable year and in annualizing the income thereof was error. By reason of the distinction in the facts between the Kingman case and the instant case, the decision in the former is not a precedent for a decision in the latter.

The Wier case involved the question of whether the taxpayer there was entitled to carry back to the year 1942 an unused excess profits credit for each of the years 1943 and 1944. The Wier corporation began liquidation in 1942 and continued in liquidation throughout 1943 and 1944. It retained its corporate existence beyond the period of those years.

The Court of Appeals for the Fifth Circuit held that at the end of 1943 the process of liquidation had reached a stage where there was no occasion to delay formal dissolution of the corporation and also held that at the end of 1943 the corporation was de facto dissolved. Accordingly that court held that the Wier corporation was entitled to carry back to 1942 an unused excess profits credit for 1943, but that it was not entitled to carry back such credit for the year 1944.

The Court of Appeals, in its decision in the Wier case, said:

We find ourselves in equal disagreement with the petitioner's broad position, that the facts and circumstances of, and the stage reached in, liquidation are without significance, and that the only relevant inquiry in a case of this kind is whether the corporation is a corporation still if only in name and form.

We find ourselves, however, in general agreement with the view of the Commissioner that the fact of liquidation and the particular circumstances and stages of it are relevant to the inquiry here, and that they may, indeed must, be inquired into.

We agree with him, too, that if it appears that 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 above quoted excerpt from the Wier case is authority for our holding on the facts in the instant case that, notwithstanding the petitioner here retained its legal existence, it was, for the purpose of excess profits taxes, de facto dissolved as of April 30, 1942, and that the period February 1 to April 30, 1942, inclusive, was a short taxable year. The quoted excerpt is also authority for our holding that there can be no carry-back to 1942 of the unused excess profits credit for the year 1944.

Because of the dissimilarity between the facts in the instant case and those of the Union Bus and Allegheny cases, neither of those cases rules the decision here.

The essence of the factual picture here is that the operation and functions of petitioner reduced it to a mere department of its parent, which on April 30, 1942, stored petitioner's charter to await its use if and when the parent should so decide to set up another activity, departmental or otherwise, under corporate form.

Petitioner's corporate charter was not intended to be and was not surrendered or canceled. But, notwithstanding its charter has been kept alive, all substance was drawn out of the corporate body as of or prior to April 30, 1942. Since that time, in a practical sense, petitioner has been as effectually dead as if it had been mummified.

Also, as a basis of its claimed right to carry back unused excess profits credits and a net operating loss to its fiscal year 1942, petitioner contends that it was compelled to cease operations because of War Production Board Limitation Orders L-37 and L-37-A, hereinabove described. By reason of such orders petitioner was unable to continue its operation of assembling pianos. It did not elect to convert to a permissible line of production. The gist of this contention is that, because petitioner did not voluntarily quit business, but was compelled to do so by the Government, it should be permitted, for excess profits tax purposes, to carry back and apply to its tax year 1942 an unused excess profits credit for each of the two succeeding fiscal years, 1943 and 1944. We see no merit in this contention.

Petitioner claims a net operating loss for its fiscal year 1944 and the right, under section 122(b)(1) of the Code, to carry back such loss to its tax year 1942.

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 (a)(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.

No evidence was offered to establish that the deductions which petitioner claims resulted in a net operating loss in its fiscal year 1944 represented expense connected with its business operations. Moreover, it affirmatively appears from the evidence, and is so found, that petitioner owned no tangible personal property subsequent to April 30, 1942. Therefore, it does not appear from the evidence that the deducted item of $330.30 for personal property taxes in 1944 represented taxes owed by petitioner.

We hold, therefore, that within the meaning of section 710(c)(3)(A) the period from May 1, 1942, to January 31, 1943, inclusive, and the period February 1, 1943, to January 31, 1944, inclusive, are not includible in petitioner's cycle of tax years for the carry-back of unused excess profits credit.

We hold, further, that within the meaning of section 711(a)(3)(A) the period February 1 to April 30, 1942, inclusive, is, for the purpose of this proceeding, a taxable year of less than twelve months, or a ‘short taxable year‘ and, accordingly, the excess profits net income for that taxable year should be annualized. Riteway Products, Inc., 12 T.C. 475; Kamin Chevrolet Co., 3 T.C. 1076.

We also hold that, in addition to the reason that there was a lack of evidence to establish the loss claimed as a net operating loss, since petitioner was not engaged in a business or other operation after April 30, 1942, it could not have had an operating loss for a tax year subsequent to that date. Accordingly, there can be no carry-back of a net operating loss from petitioner's fiscal tax year 1944 to its fiscal tax year 1942.

Reviewed by the Court.

Decision will be entered for respondent.

LEECH, J., dissents.