*3119 Borrowing funds for operating expenses, although in large amount compared with invested capital, does not, per se, entitle a corporation to special assessment.
*1065 This proceeding is for a redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $2,442.56. Petitioner alleges two errors, the substance of both being that the Commissioner erred in failing to find that abnormalties existed with referrence to petitioner's invested capital, entitling it to special assessment under section 328 of the Revenue Act of 1918, and refusing to grant such special assessment.
FINDINGS OF FACT.
Petitioner is a New York corporation with its principal office in Rochester. Its business is the manufacture of paper boxes. The capital stock of the corporation was $5,000, and with its surplus in 1920 its invested capital was $23,497.54. Its net income for 1920 was $27,429.91, and it paid a tax of $5,835.20, that is 21.27 per cent of its net income. No gains, profits, commissions or other income inured to petitioner*3120 for the taxable year on cost-plus-basis Government contracts.
Almost the whole amount of its invested capital was invested in machinery and other properties, which condition left it with no operating capital. By reason of having no operating capital, it was forced to pay current bills, for raw material, rents, labor and other items, by and through notes, bills payable and accounts payable.
Those evidences of indebtedness usually ran from 60 to 120 days. The notes given to the banks for borrowed money, as well as some of the bills payable for raw materials, had to be endorsed by the personal endorsement of two of its wealthy stockholders before they would be accepted.
Operating capital thus borrowed averaged during the taxable year about $30,000. There was no abnormal feature in petitioner's business operations during the taxable year, urged by petitioner, other than the large ratio of borrowed capital as compared with invested capital.
*1066 The deficiency notice is not in the record and there was no evidence in regard to the method of computation adopted by the Commissioner in arriving at the deficiency; but counsel for the respondent stated at the hearing that*3121 the tax liability had been computed under section 302 of the Revenue Act of 1918, and that as so computed the petitioner in effect had gotten a benefit equal to that which it would have gotten without applying that section with an invested capital of $71,000. That statement was in no wise controverted or challenged.
OPINION.
LOVE: In this case the only issue involved is whether or not there existed such abnormal conditions in the conduct of petitioner's business in 1920 as would justify a holding that it was entitled to have its taxes assessed under section 328 of the Revenue Act of 1918.
It may be conceded that petitioner's percentage of profit in the taxable year was very high, but that does not entitle it to special assessment. Section 327(d), Revenue Act of 1918. Its average borrowed capital was somewhat in excess of its invested capital, and if it be held that such an amount was unusual with corporation experiences, such abnormality alone and within itself would not entitle a corporation to special assessment. See *3122 ; ; .
In view of all the facts in this case we are convinced that in having its taxes computed under section 302 it obtained all the benefits to which it was legally entitled.
Judgment will be entered for the respondent.