*61 Decision will be entered under Rule 50.
Where the record shows that the cost of abandoned tools was charged to cost of sales and that no deduction was claimed for losses in petitioner's tax return, such costs may not be disallowed under section 711 (b) (1) (E), I. R. C.
*602 The respondent determined a deficiency of $ 638 in the petitioner's income tax liability for the year 1940 and deficiencies of $ 14,355.48 and $ 30,910.23 in its excess profits tax liability for the year 1940 and 1941, respectively. It is stipulated that*62 the petitioner is entitled to an excess profits credit carry-back of $ 75,650.54 from the year 1942 to the year 1941, subject to any adjustments which result from the determination of the effect of section 711 (b) (1) (E) of the Internal Revenue Code on the computation of the petitioner's base period net income.
Certain questions were settled by concession or otherwise, leaving in controversy the following issues:
(1) In determining the petitioner's base period income for excess profits purposes, is it entitled to adjust that income by taking into account the abandonment of certain production tools, as provided by section 711 (b) (1) (E)?
(2) Is the petitioner entitled to deduct in the year of payment, additional capital stock taxes due to a change in rate made effective on June 25, 1940, and September 20, 1941, as to the capital stock years beginning July 1, 1939, and July 1, 1940, respectively?
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of Connecticut, and has its principal office in Hartford, Connecticut. Its income *603 and excess profits tax returns for the taxable years 1940 and 1941, computed on the accrual basis, were filed with the collector*63 of internal revenue for the district of Connecticut. It is engaged in the business of manufacturing counting, computing, and measuring devices. To enable it to effect such manufacture, the petitioner designs and builds the tools, machines, and dies, hereinafter called "tools," required in the fabrication of its various products.
The petitioner had its own catalogue lines and also manufactured articles sold by others. Charges for tools made for the petitioner's regular or standard lines were capitalized. When the petitioner made special purpose tools for a customer's particular requirements, its general policy was to collect the cost of such tools from the customer. When the tools were made for one customer and charged to it, the customer owned the beneficial interest in the tools, the petitioner would retain them in its custody, and would use them exclusively on orders from that customer.
Under a contract dated December 27, 1933, with the Wayne Pump Co., hereinafter called Wayne, the petitioner fabricated tools and machinery for the manufacture of a gasoline pump computer for Wayne. A computer is the mechanism included in a gasoline pump that computes and indicates the price*64 per gallon, the number of gallons delivered, and the computed cost of the purchase at the established price. The original set of computer tools, made in 1933 or shortly thereafter, was paid for by Wayne, which owned the patents on the computer and prorated such cost among its licensees. Wayne and its licensees manufactured approximately 90 per cent of the gasoline dispensing pumps in 1936 and 1937.
In the latter part of 1935 and in 1936 the petitioner, through its managing officers, undertook the improvement of the current computer, then widely in use, by installing larger wheels and hence more legible figures. The development was known as the "1937 computer," and the petitioner and Wayne believed that it would render obsolete all computers then in operation. The petitioner discussed the proposed computer with all of its customers, of whom Wayne was the largest. The petitioner manufactured all computers used by Wayne. Wayne approved the 1937 computer and the petitioner's other customers showed much interest therein. Wayne was to pay a substantial part of the cost of the necessary tools. In order to manufacture the 1937 computer, the petitioner proceeded to fabricate a complete*65 set of tools at a cost of $ 105,393.99. The petitioner expected to recover its costs by including them in the cost of its product through orders from the customers and thus the cost would be reflected in the sale price to the consumers.
The petitioner manufactured and assembled a few 1937 computers and presented them to its customers, the pump manufacturing companies, *604 for their inspection. The prospective customers, including Wayne, refused to buy the 1937 computers, and the petitioner was unable to make any sales.
Due to the total absence of demand for such computers, the petitioner's officers, in 1937, scrapped as worthless the tools required specifically for the construction of the computers. The petitioner's board of directors ratified the action of its officers by the following resolution passed February 15, 1938:
The president reported that during the calendar year 1937 in an effort to meet the requirements of the oil pump industry for a gasoline computer of new design there had been expressed by the company an expenditure for tools for such a computer and in the production of parts there for the aggregate sum of $ 139,564.52 but that prior to the close of the year*66 the plan of producing computers upon such new design had been wholly abandoned. As said tools and computer parts were no value to the corporation, said expenditures had been charged to operations for the year ended December 31, 1937. After due consideration on motion of Mr. Robinson, seconded by Mr. Cook, it was unanimously voted that the action of the officers as reported by the president be approved and confirmed.
The figure $ 139,564.52 included the item of $ 105,393.99. The cost of designing and producing the tools was to be borne by Wayne and its licensee through additions to the selling price of the computer. The 1937 computer was not a catalogue or standard line article sold by the petitioner to the public. Wayne's refusal to buy the 1937 computer was due in part to the fact that in July 1937 that company elected a new president, who was not as favorably inclined toward the product as was his predecessor.
It was the petitioner's custom either to amortize the cost of tools so manufactured over a single order if it were large enough, or to spread the cost over subsequent sales if the petitioner considered that there was a good prospect for repeat orders.
On its books and*67 in its tax return for 1937, the petitioner included such costs of tools as a part of the cost of sales. It did not claim them as deductions for losses. The petitioner's auditors in their report designated the item as representing a loss by abandonment. In its report to the Securities and Exchange Commission, filed in 1938, the petitioner charged off as a deduction the cost of the tools so abandoned.
The petitioner's sales of computers to Wayne and its licensees in 1934 totaled $ 351,146; in 1935, $ 1,140,010; in 1936, $ 1,939,755; and in 1937, $ 3,047,889.
In 1938 the petitioner began to manufacture a yardage measure or "cut meter" intended to measure cloth in predetermined lengths. It was a catalogue article and was sold to the textile industry. The petitioner designed and made tools for its manufacture at a cost of about $ 11,000. The device proved unsatisfactory and in 1939 it became unsaleable. It was superseded by an entirely different device *605 developed by the petitioner. The petitioner stopped the sales thereof and scrapped the production tools in that year. The depreciated cost of the yard-measuring device at that time was $ 8,226.
In 1936 and 1937 the petitioner's*68 increased business required the demolition of buildings and equipment in order to make way for the expansion of its plant. The petitioner claimed that the loss of useful value of such buildings and equipment amounted to over $ 11,000 in 1936 and to over $ 12,000 in 1937, but at the hearing reduced such claims to $ 8,869.60 in 1936 and $ 10,487.94 in 1937. The respondent concedes that the petitioner is entitled to an appropriate adjustment under the provisions of section 711 (b) (1) (E).
The petitioner's income tax returns for the year 1940 and 1941 show deductions for capital stock taxes paid as follows:
| 1940 | -- Capital stock tax accrued July 1, 1940 for Federal fiscal | |
| year ended June 30, 1941 | $ 17,007.10 | |
| Capital stock tax year ended June 30, 1940 -- additional tax | ||
| paid in 1940 due to increase in rate from $ 1 to $ 1.10 per | ||
| $ 1,000 by change in rate in the Revenue Act of 1940 | ||
| approved June 25, 1940 | 1,500.00 | |
| Total | 18,507.10 | |
| 1941 | -- Capital stock tax accrued July 1, 1941 for Federal fiscal | |
| year ended June 30, 1942 | 26,372.50 | |
| Capital stock tax year ended June 30, 1941 -- additional tax | ||
| paid in 1941 due to increase in rate from $ 1.10 to $ 1.25 | ||
| per $ 1,000 by change in rate in the Revenue Act of 1941 | ||
| approved September 20, 1941 | 3,000.00 | |
| Total | $ 29,372.50 |
*69 The petitioner filed its capital stock tax returns and paid such taxes as follows:
| Tax period | Date | Amount | Rate of |
| paid | paid | tax | |
| 7/1/39 to 6/30/40 | 7/18/40 | $ 16,500 | $ 1.10 |
| 7/1/40 to 6/30/41 | 10/15/41 | 25,000 | 1.25 |
| 7/1/41 to 6/30/42 | 11/20/42 | 12,500 | 1.25 |
The respondent determined that the proper accruals of the petitioner's capital stock taxes were $ 25,000 and $ 12,500 for the years 1940 and 1941, respectively. In its returns the petitioner deducted $ 18,507.10 and $ 29,372.50 for those respective years. The respondent's determination produced a decrease of $ 6,492.90 in the petitioner's net income for 1940 and an increase of $ 16,872.50 in its net income for 1941. The petitioner's capital stock periods ended June 30, 1939, June 30, 1940, and June 30, 1941, were all declaration years. The *606 petitioner's capital stock tax return for the tax year ended June 30, 1940, was filed on July 18, 1940, and a similar return for the year ended June 30, 1941, was filed by it on October 15, 1941.
In his notice of deficiency, the Commissioner disallowed the items in controversy, with the following explanation:
Deductions taken on your 1936 and 1937 returns in the*70 respective amounts of $ 11,079.13 and $ 12,198.07, on account of discarded buildings, improvements and equipment, on your 1937 return in amount of $ 105,393.99, on account of discarded computer tools, and on your 1939 return in amount of $ 8,226.82, on account of discarded yardage measuring devices may not be disallowed under the provisions of Section 711 (b) (1) (E) of the Internal Revenue Code, since the deductions taken do not represent losses arising from loss of useful value, as contended by you.
The deduction for capital stock tax for the year 1940 is increased by $ 6,492.90 and for the year 1941, decreased by $ 16,872.50 under the provisions of section 43 of the Internal Revenue Code, since the capital stock tax returns filed by you for the years 1940 and 1941 reflect accruals giving rise to the changes indicated.
OPINION.
In the first issue we have the problem of determining whether or not the petitioner is entitled to adjust its base period net income by disallowing certain deductions under the provisions of section 711 (b) (1) (E). 1
*71 On brief, the respondent conceded that the petitioner was entitled to disallowance of the loss of useful value of buildings and equipment in an agreed amount, leaving in controversy the cost of tools required in the production of the 1937 computer and of the yardage-measuring or cut meter device, and the capital stock tax issue.
Petitioner charged the $ 105,393.99 item to cost of sales on its books and in its tax return. It did not claim the item as a "deduction for losses * * * arising from the demolition, abandonment, or loss of useful value of property." In this situation, the holding of this Court and the language used in Consolidated Motor Lines, Inc., 6 T. C. 1066, is squarely in point. In that case, where a factual similar situation *607 and an identical question under the same statutory provision was under consideration, we observed:
The question here is whether the amounts paid out by the petitioner, for which it was not compensated by insurance or otherwise, because of the injuries to cargo, persons, and property and to employees are, for purposes of computation of excess profits tax, to be disallowed as deductions for losses under section*72 711 (b) (1) (E) and 23 (f) of the Internal Revenue Code.
The petitioner relies upon that section and no other. It is there provided that adjustment shall be made, in arriving at excess profits net income in the base period years, by not allowing "Deductions under section 23 (f) for losses" arising from fires, storms, or other casualty, etc., not compensated for by insurance or otherwise. In other words, we are to review the deductions taken in the former year and those taken for losses from fire, etc., are to be eliminated. It is to be noted that we are to disallow not losses, but "Deductions under section 23 (f) for losses." But the facts before us are that the petitioner did not take, and was not allowed, the deductions here concerned "under section (f)," but took them for expenses, and that would be under section 23 (a) (1) (A). Now, in the computation of base period excess profits net income, the petitioner urges the disallowance of the same items as losses under section 23 (f) and the provisions of section 711 (b) (1) (E). Not only do we find illogic in the presentation now as loss of what both petitioner and the Commissioner (by allowance of deduction) regarded *73 in the base period years as expenses, but the statute appears to contain no ground for the view taken by the petitioner. We find no authority to change an expense under section 23 (a) (1) (A) into a loss under section 23 (f), in order to consider and disallow it in connection with the excess profits tax law. The statute on its face puts us in the position of examining returns, not amending them.
The above statement of the law and the consequent ruling in Consolidated Motor Lines, Inc., supra, fit the present case so neatly that they are dispositive of the present issue as to the $ 105,393.99 item. Moreover, in the present record there is so much confusion as to the obligations of Wayne in respect of the cost of tools as to make uncertain the real ownership of the tools and the petitioner's rights therein and to raise a serious question whether losses were sustained in fact.
As to the cut meter costs, we are met with a lack of evidence. The 1939 return is not in evidence and, albeit one witness testified that the item was deducted in the tax return, he did not establish just how it was treated or that the item was deducted as losses. The lack of familiarity*74 of the witness with the details affords no basis for determining with assurance the real facts. Petitioner has not proven that this item should be disallowed under section 711 (b) (1) (E). Consequently, we must affirm the Commissioner for failure of proof.
In the last issue, the petitioner challenges the adjustments made by the respondent relating to its capital stock taxes. The respondent justifies his action under the authority of G. C. M. 23251, C. B. 1942-2, p. 103, in which appeared the following rules:
* * * By the Revenue Act of 1939, however, taxpayers were given the option of declaring a new value for that year. A taxpayer which files its return on a *608 calendar year basis, for Federal income tax purposes, and declares a new value for capital stock tax purposes should accrue on July 1, 1939, a capital stock tax based on the new value and at the rate of $ 1.10 per $ 1,000 valuation, as set forth in the Revenue Act of 1940, since that Act was enacted prior to the close of the capital stock tax year 1939-1940. If the taxpayer did not declare a new value for the capital stock tax year 1939-1940, but adjusted the value from the capital stock*75 tax year 1938-1939, then the July 1, 1939, accrual should be based on the adjusted declared value as of December 31, 1939, and at a rate of $ 1 per $ 1,000 valuation.
The capital stock tax accrual on July 1, 1940, for the capital stock tax year 1940-1941, which was a declaration year, should be based on the declared value shown in the final capital stock tax return filed for that year at the rate in effect on the date of filing. If the return was filed after the enactment of the Revenue Act of 1941 on September 20, 1941, the rate prescribed by that Act, or $ 1.25 per $ 1,000 valuation, should be used. If no amended capital stock tax return was filed subsequent to enactment of the Revenue Act of 1941, then the capital stock tax accrual as at July 1, 1940, should be based on the declared value shown in the final capital stock tax return filed for the capital stock tax year 1940-1941, computed at the rate in effect at the time the return was filed, that is, at $ 1.10 per $ 1,000 valuation.
It is the basic principle of capital stock taxation that the tax liability accrues at the beginning of the capital stock period. See William C. Atwater & Co., 10 T.C. 218">10 T. C. 218,*76 and the cases there cited. The facts in the case at bar bring the determination of this issue well within the rule stated in G. C. M. 23251. We consider the rule reasonable in its requirements. By applying that rule, we find that the final capital stock tax returns for both years were filed after the enactment of the applicable sections of the Revenue Acts of 1940 and 1941, respectively, increasing the rate of tax. Therefore, the adjustments made by the respondent in the petitioner's deductions for the capital stock taxes are approved.
The petitioner cites and relies on the First National Bank in St. Louis, 1 T. C. 370. The facts in that case, however, are distinguishable from those before us and hence it is not applicable.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 711. EXCESS PROFITS NET INCOME.
* * * *
(b) Taxable Years in Base Period. --
(1) General Rule and Adjustments. -- The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustments shall be made (for additional adjustments in case of certain reorganizations, see section 742 (e)):
* * * *
(E) Casualty, Demolition, and Similar Losses. -- Deductions under section 23 (f) for losses arising from fires, storms, shipwreck, or other casualty, or from theft, or arising from the demolition, abandonment, or loss of useful value of property, not compensated for by insurance or otherwise, shall not be allowed. [Italics supplied.]
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