Atlas Furniture Co. v. Commissioner , 26 T.C. 590 ( 1956 )

Atlas Furniture Company, Petitioner v. Commissioner of Internal Revenue, Respondent

Atlas Furniture Co. v. Commissioner

Docket No. 56770

United States Tax Court

26 T.C. 590; 1956 U.S. Tax Ct. LEXIS 152;

June 20, 1956, Filed

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Decision will be entered for the respondent.

Excess Profits Tax Under Subchapter D of the 1939 Code -- Sec. 456 (b), 1939 Code, Abnormal Income Attributable to Other Years. -- Petitioner's business is the manufacture of wood furniture. A fire at petitioner's plant in July 1951 damaged or destroyed goods in process of manufacture and finished goods, and for such losses petitioner recovered $ 31,403.38 insurance payments in September 1951. Petitioner excluded all of the above sum from excess profits income as abnormal income attributable to future years under section 456 (b), 1939 Code. Respondent denied the exclusion. Held, petitioner has failed to establish that it realized any income from the insurance proceeds in 1951 which could be allocated to a future year under section 456 (b) and therefore it is not entitled to any exclusion from excess profits net income for 1951 under section 456.

B. W. Flinn, C. P. A., for the petitioner.

Walter T. Hart, Esq., for the respondent.

Harron, Judge.

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HARRON

The Commissioner determined a deficiency in excess profits tax for the calendar year 1951 in the amount of $ 2,693.37. There is no deficiency in income tax. The question presented is whether, under the provisions of section 456 (b), 1939 Code, petitioner is entitled to exclude from excess profits net income for 1951 all or any part of $ 31,403.38, insurance proceeds recovered for loss of goods destroyed or damaged by fire, as abnormal income attributable to a future year. The Commissioner denied exclusion of the entire sum, $ 31,403.38.

FINDINGS OF FACT.

The petitioner is an Illinois corporation, organized in June 1932, having its place of business in Rockford, Illinois. It filed its income and excess profits tax return for 1951 with the collector of internal revenue for the first district of Illinois. It keeps its books and files its returns on an accrual method.

Petitioner is engaged in the business of manufacturing wood furniture such as chairs and tables. To make one piece of furniture requires from 60 to 90 days.

There was a fire at petitioner's factory on July 26, 1951, which caused, among other things, destruction of and damage to furniture in process of manufacture, completed furniture, and materials. Insurance adjustors determined that petitioner's net loss of materials, work in process, and furniture, after allowance for salvage value, was $ 31,403.38, under the 90 per cent co-insurance clauses of insurance policies, and petitioner received the above amount from insurance companies on September 1, 1951.

Petitioner resumed regular operations 45 days after the fire.

Petitioner did not have any class of abnormal income in previous years.

Petitioner, in 1951, used the $ 31,403.38 of insurance proceeds to purchase new materials.

Inventories are an income-determining factor in petitioner's business. It computes its cost of goods sold on the basis of inventory at the beginning and at the end of each year. The breakdown of petitioner's inventory at the beginning and at the end of 1951, as shown in its return for 1951, is as follows:

	Jan. 1, 1951	Dec. 31, 1951
Raw materials	$ 3,217.19	$ 2,436.34
Work in process	10,587.81	15,395.50
Finished products	5,504.45	8,496.86
Supplies	876.95	3,813.50
	$ 20,186.40	$ 30,142.20

Petitioner's gross sales, returns and allowances, net sales, cost of goods sold, and gross profit for 1950, 1951, and 1952, as shown by its income tax returns, are summarized as follows:

Year	Gross sales	Returns and	Net sales	Cost of goods	Gross profit
		allowances		sold
1950	$ 226,387.81	$ 4,088.00	$ 222,299.81	$ 168,930.89	$ 53,368.92
1951	234,869.03	4,035.07	230,833.96	181,624.67	49,209.29
1952	246,910.91	4,109.34	242,801.57	188,062.95	54,738.62

The aggregate inventories of materials on hand in various stages of processing at the beginning of 1950 and at the end of 1950, 1951, and 1952, as shown by the petitioner's income tax returns, are summarized as follows:

Period	Inventory
January 1, 1950	$ 16,781.09
December 31, 1950	20,186.40
December 31, 1951	30,142.21
December 31, 1952	30,775.69

In computing its excess profits tax for 1951, petitioner treated the insurance recovery of $ 31,403.38 as abnormal income attributable to a future year and excluded the entire sum from excess profits net income subject to excess profits tax. The Commissioner determined that no part of $ 31,403.38 constituted abnormal income attributable to a future year and denied the exclusion. The deficiency in excess profits tax for 1951 results from this determination.

OPINION.

The petitioner had a fire in the middle of 1951. Shortly thereafter, in 1951, it was paid insurance to cover its loss of materials and goods in the net amount of $ 31,403.38. Petitioner originally contended that it was entitled to exclude $ 31,403.38 from its excess profits net income under the provisions of section 456 (b), 1939 Code, as abnormal income. Petitioner has receded somewhat from its original position and now seeks to exclude only $ 13,808.40 which amount it computed in its brief, for the first time, as abnormal income allocable to 1952. Petitioner cites no authority for any of its contentions.

We think that the first question for consideration is whether petitioner realized any income in 1951 out of the insurance proceeds of $ 31,403.38. Petitioner had the burden of proving that income was realized.

We think the situation is not essentially different from what it would have been if petitioner had sold the destroyed property for $ 31,403.38. In that event the petitioner would have reported the latter amount as gross sales, and against that the cost of the property would have been offset in order to arrive at gross income from the sales. Then any other deductions pertaining to the goods would have been taken into account and a net amount would have been reflected in the return as net income. The situation is no different here where the disposition of the goods resulted from fire rather than from sale, and petitioner has made no attempt to show costs or other deductions which should be taken into account in determining what income was realized, if any, upon its receipt of $ 31,403.38.

This brings us to the provisions of section 456 (b), 1939 Code. It was incumbent upon the petitioner to show first what part, if any, of the $ 31,403.38 really represented income. Since the petitioner failed to do this, we do not reach the question of allocation of an amount, if any, which could be allocated to 1952, or any other year, under section 456 (b).

The petitioner's contentions must be denied.

Decision will be entered for the respondent.