1928 BTA LEXIS 3266">*3266 1. The petitioner held not entitled to special assessment under section 328 of the Revenue Act of 1918 for the fiscal years ended July 31, 1918, and July 31, 1919.
2. The collection of a deficiency for the fiscal year ended July 31, 1918, assessed in September, 1923, held not barred by any statute of limitation. Held, further, that the assessment and collection of a further deficiency for the fiscal year ended July 31, 1918, is barred.
13 B.T.A. 338">*339 This is a proceeding for the redetermination of deficiencies in income and profits tax for the fiscal years ended July 31, 1918, and July 31, 1919, in the respective amounts of $34,600.26 and $42,209.40. Several of the assignments of error made in the petition were waived at the hearing. Those not waived are: That the petitioner is entitled to special assessment under the provisions of section 328 of the Revenue Act of 1918 for the fiscal years involved, and that the assessment and collection of deficiencies for the fiscal year ended July 31, 1918, are1928 BTA LEXIS 3266">*3267 barred by statutes of limitation.
FINDINGS OF FACT.
The petitioner is a Texas corporation with its principal office in Houston. It is engaged in the rice-milling business and is the second largest company in the country engaged in such business. The rice is grown by rice growers who are not connected with the mill. Samples of the rice grown are assembled at a given point and the buyers for the mill appear at these given points and buy the rice from the samples for spot cash. The rice thus bought is transported to mills and milled and the crop is sold within the season in which it is raised. In so far as the mills are able to sell the rice milled within the normal period no inventory of rice is carried over from one season to another.
The rice is harvested in August or September, and the purchases by the mill usually begin in October. Purchases from producers continue until the beginning of the next calendar year. The milled rice is sold during the spring months.
The net income of petitioner for the calendar years 1911, 1912, and 1913, as shown by its income-tax returns for those years, was as follows:
| 1911 | $56,054.71 |
| 1912 | 116,499.31 |
| 1913 | 1,287.30 |
1928 BTA LEXIS 3266">*3268 The small amount of net income for the year 1913 was occasioned by a bad break in the market for rice from about October, 1912, to about February, 1913. Petitioner had heavy stocks of rice on hand at the time and they were sold at practically no profit to the petitioner. 13 B.T.A. 338">*340 The conditions obtaining in 1913 affected all rice mills and were not peculiar to petitioner.
Petitioner's net income, as shown by its income and profits-tax return, was, for the year ended July 31, 1918, $522,217.74, and for the year ended July 31, 1919, $545,641.57. Its average invested capital for the earlier year as shown by its return was $1,711,638.81 and for the later year, $1,883,976.69.
At the beginning of the petitioner's fiscal year ended July 31, 1918, petitioner had no borrowed capital. On October 20, 1917, it borrowed $100,000 for a period of six months and during October, November, and December it borrowed additional amounts, so that the amount of borrowed capital at December 31, 1917, was $1,437,418.75. Further borrowings were made in February and March. The greatest amount borrowed on any date was $2,037,418.75. Two hundred thousand dollars of this amount was paid off on1928 BTA LEXIS 3266">*3269 February 28, 1918, but the same amount was again borrowed on March 11. Repayments began on March 18, 1918, and the total amount borrowed was rapidly reduced until on June 30 only $40,000 of the amount borrowed was owed and this indebtedness was paid off on July 1, 1918. The average daily borrowing was $800,000. The petitioner again began borrowing money on October 15, 1918, for the financing of its operations with respect to the marketing of the crop raised in 1918. The greatest amount borrowed during the fiscal year ended July 31, 1919, was $800,000. Repayments of borrowings made began on April 15, 1919, and on July 12, 1919, the last repayment was made. The average amount borrowed for the year was slightly less than $400,000. The petitioner had no borrowed capital either at the beginning or end of the fiscal years under review. The borrowings were made upon short-term notes without security, running from one day up to six months. The situation with regard to borrowed capital for the fiscal years ended July 31, 1918, and July 31, 1919, was not peculiar to those years. The petitioner regularly borrows money for short periods to finance the purchase of rice during the period1928 BTA LEXIS 3266">*3270 October to June. Owing to the high prices obtaining for rice during the taxable years the borrowings of those years were in excess of the amounts borrowed in most years.
The petitioner was granted special assessment under the provisions of section 210 of the Revenue Act of 1917 with respect to its tax liability for the fiscal year ended July 31, 1917.
The excess-profits tax determined for the fiscal year ended July 31, 1918, is 46.92 per cent of the net income, and for the succeeding fiscal year 20.38 per cent of the net income.
The petitioner filed its income and profits-tax return for the fiscal year ended July 31, 1918, on or about June 14, 1919, and the tax 13 B.T.A. 338">*341 shown to be due thereby was duly assessed and paid. On the September, 1923, Special List No. 3, an additional tax of $31,502.21 was assessed against the petitioner for the fiscal year ending July 31, 1918. On or about October 13, 1923, the petitioner filed a claim in abatement, which claim was duly rejected in full and an additional deficiency determined as shown by deficiency notice of October 14, 1925, in the amount of $3,098.05. On January 24, 1924, the petitioner filed with the Commissioner the following1928 BTA LEXIS 3266">*3271 "Income and Profits Tax Waiver":
JANUARY 24, 1924.
(Date)
IT:CR:C
FLH
Parent.
INCOME AND PROFITS TAX WAIVER
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Standard Rice Company, of Houston, Texas, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Standard Rice Co. for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned.
STANDARD RICE CO. INC.
Taxpayer.
[Corporate1928 BTA LEXIS 3266">*3272 seal].
By F. A. FARDA, Secy.
D. H. BLAIR,Commissioner. LDL.
This consent was executed by both the petitioner and the Commissioner and bore the corporate seal of the petitioner. The petitioner filed its petition in this proceeding on December 11, 1925.
OPINION.
SMITH: Considering first the question of the bar of the statute of limitations as it relates to the determination of the Commissioner of a deficiency in income and profits tax for the fiscal year ended July 31, 1918, it is to be noted that the petitioner's tax return for the fiscal year ended July 31, 1918, was filed on June 14, 1919. The Commissioner had five years from the date of the return within which to make an assessment and collection of a deficiency in tax. Section 250(d), Revenue Act of 1921. The Commissioner made an assessment 13 B.T.A. 338">*342 of a deficiency within such five-year period, the assessment being made on the September, 1923, list. Under the provisions of section 278 of the Revenue Act of 1924, the Commissioner had six years within which to collect such assessment, the collection of the assessment not being barred by the five-year period of limitation of the 1921 Act until after1928 BTA LEXIS 3266">*3273 the effective date of the Revenue Act of 1924. The effective date of that Act is June 2, 1924, and the five-year period of limitation for collection would not have expired under the 1921 Act until June 15, 1924. The facts in this case are identical with those which obtained in , and the decision in that case is controlling here so far as the deficiency covered by the assessment made in September, 1923, is concerned.
The petitioner filed a consent for the determination of its tax liability for the year 1918 on January 24, 1924. The determination of a further deficiency for the fiscal year ended July 31, 1918, was made by the Commissioner within the period of extension covered by the consent, the deficiency notice having been sent to the petitioner on October 14, 1925. An appeal having been taken within 60 days from the date of such notice of deficiency, the only question which it is necessary for us to determine is whether the deficiency notice was sent within the period of extension of the consent filed on January 24, 1924. The five-year period allowed by the statute for the determination of a deficiency for the fiscal year ended1928 BTA LEXIS 3266">*3274 January 31, 1918, expired on June 14, 1924, that date being five years after the filing of the return. The consent filed gave an additional period of one year within which to make a determination of the deficiency, or until June 14, 1925. The determination of the deficiency not covered by the assessment made in September, 1923, was made on October 14, 1925, or more than one year after the expiration of the period of limitations allowed by statute. It appears therefore that the determination of the further deficiency of $3,098.05 for the fiscal year ended July 31, 1918, is barred by the statute of limitations.
Section 327 of the Revenue Act of 1918 provides in part:
That in the following cases the tax shall be determined as provided in section 328:
* * *
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax as determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative1928 BTA LEXIS 3266">*3275 corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is higher merely because the corporation earned within the taxable year a higher rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross 13 B.T.A. 338">*343 income for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
The petitioner bases its claim to assessment under the provisions of section 328 upon the grounds (1) that it was granted special assessment under section 210 of the Revenue Act of 1917 in determining its excess-profits-tax liability for the fiscal year ended July 31, 1917; (2) that its profits for the prewar year 1913 were abnormally low; and (3) that it had an abnormality of invested capital for the fiscal years ended July 31, 1918, and July 31, 1919, by reason of the fact that it borrowed large amounts of money during those years for the financing of its operations.
1928 BTA LEXIS 3266">*3276 We regard it as wholly immaterial that the petitioner was granted special assessment under the provisions of section 210 of the Revenue Act of 1917 in the determination of its tax liability for the fiscal year ended July 31, 1917. The facts with respect to the petitioner's income and invested capital for that year are not before us. We can not determine whether the facts obtaining for that year warranted the granting of special assessment, nor whether the rate determined for that year was proper. The Board has held in numerous cases that the granting of special assessment in one year does not of itself warrant the granting of special assessment for a succeeding year. ; ; .
The record of this action shows that the net income of the petitioner for the calendar year 1913 was much less than the net income for the two prior years. There was a break in the prices of rice in the latter part of 1912 and this fact, it is alleged, operated to reduce the profits of the petitioner for the year 1913. This company is not the only1928 BTA LEXIS 3266">*3277 one that was adversely affected by such a break in prices. The evidence indicates that all companies engaged in a similar business were likewise adversely affected by the drop in prices. The evidence does not show that the earnings of this petitioner for the prewar year 1913 were abnormally low. We can not determine that the situation of this petitioner in 1913 was different from that of other companies engaged in the rice-milling industry.
The petitioner places chief reliance in its claim for special assessment for the fiscal years ended in 1918 and 1919 upon the fact that during those years it borrowed large amounts of money in financing its operations. The petitioner's average invested capital for the year ended July 31, 1918, was $1,711,638.81, and for the fiscal year ended July 31, 1919, $1,883,976.69. Petitioner had no bonded indebtedness. It had no need for large amounts of capital except for a period of about six months during each of its fiscal 13 B.T.A. 338">*344 years. The average amount borrowed for the fiscal year ended July 31, 1918, was approximately $800,000, and the average amount borrowed during the succeeding year was slightly less than $400,000. The credit of1928 BTA LEXIS 3266">*3278 the petitioner was good and it was able to borrow all the money that it needed at the prevailing rates for money upon its own notes, without security. The record does not show whether this company borrowed greater amounts during the taxable years than its competitors. We can not determine from the record whether the borrowings were abnormally large. In , the petitioner claimed that it was entitled to special assessment under the provisions of section 328 of the Revenue Act of 1918. Its argument was based primarily upon the amount of borrowed money used. It appears that during the year its invested capital was $2,656,613.61 and its average borrowed capital $2,189,025.25. In our opinion we stated:
In many businesses this would not be regarded as unusual or abnormal and in the absence of any evidence that it is abnormal in the wholesale dry goods business, there is nothing on which we may base an opinion as to normality or abnormality.
The same observation may be made here. We can not determine from the evidence that the borrowing of money on short-term notes was any hardship to the petitioner. It apparently deliberately1928 BTA LEXIS 3266">*3279 followed this method of financing its operations. Rather than have a large amount of idle capital on its hands during a portion of each of the taxable years, the petitioner preferred to borrow money as it needed it on short-time notes during the year. Upon the record we sustain the Commissioner's determination that the petitioner is not entitled to have its tax liability for the fiscal years involved determined under the provisions of section 328 of the taxing act.
Reviewed by the Board.
Judgment will be entered under Rule 50.