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Commissioner of Internal Revenue v. Allegheny Broadcasting Corp.

decided: February 10, 1950.

COMMISSIONER OF INTERNAL REVENUE
v.
ALLEGHENY BROADCASTING CORP.



Author: Maris

Before MARIS, GOODRICH and HASTIE, Circuit Judges.

MARIS, Circuit Judge.

The sole question for decision is whether the Tax Court erred in holding that the income received by KQV Broadcasting Company, respondent's assignor, between January 1, 1945 and February 28, 1945 was not required to be annualized for excess profits tax purposes by Section 711(a) (3) (A) of the Internal Revenue Code, 26 U.S.C.A. § 711(a) (3) (A). The facts are not in dispute and may be stated briefly.

In November, 1944 the respondent taxpayer, with permission of the Federal Communications Commission, acquired all the stock of KQV Broadcasting Company, a Pennsylvania corporation, which owned and operated radio station KQV in Pittsburgh, Pennsylvania. On December 19, 1944 KQV, anticipating that the Commission would accede to an additional request that the taxpayer had made to be permitted to acquire direct ownership of the radio station, and looking toward dissolution under Pennsylvania law, requested of the appropriate Pennsylvania departments the issuance of the clearance certificates required to be filed before dissolution could be accomplished under Pennsylvania law.

On February 28, 1945, pursuant to permission granted by the Commission on the previous day, the operating license and assets of KQV were transferred to the taxpayer which thereupon assumed the liabilities of KQV. Thereafter KQV ceased to do business.The last of the necessary clearance certificates was not issued until January 25, 1946, and on February 8, 1946, they were filed in the Pennsylvania Department of State by KQV together with its articles of dissolution. On the same day the Department issued to KQV a certificate of dissolution. Additional facts appear in the opinion filed by Judge Black for the Tax Court in banc, 12 T.C. 552. It is sufficient here merely to add that the Court found that "for adequate reasons KQV was not dissolved in 1945 when it ceased business." The Tax Court in banc, four judges dissenting, held that KQV was not required to file a return for a "short taxable year" consisting of the period January 1 to February 28, 1945 or to annualize for excess profits tax purposes the income received during that period. The Commissioner of Internal Revenue has brought the case here for review.

The Commissioner's contention is that Section 711(a) (3) (A) of the Internal Revenue Code requires the annualization of the two months income which KQV received during the time it was doing business in 1945. However, we agree with the view expressed by the Court of Appeals for the Fifth Circuit in United States v. Kingman, 1948, 170 F.2d 408, that under the circumstances of this case, which are essentially the same as those present in that case, such annualization is not required by the Internal Revenue Code or the regulations thereunder.

Section 711(a) (3) (A), as amended by section 213 of the Revenue Act of 1942, is as follows:

" § 711 Excess profits net income

(a) * * *

(3) Taxable year 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."

It will be seen that the application of this subsection depends upon whether "the taxable year is a period of less than twelve months." Subchapter E, Excess Profits Tax, of Chapter 2, Additional Income Taxes, of the Internal Revenue Code, in which Section 711 appears, contains no definition of this term. It does, however, contain in Section 728 a provision that "The terms used in this subchapter shall have the same meaning as when used in Chapter 1." Thus directed to Chapter 1 we find in Section 48 (a) of that chapter the following definition of the term "taxable year": "(a) Taxable year. 'Taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Part. 'Taxable year' means, in the case of a return made for a fractional part of a year under the provisions of this chapter or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made." 26 U.S.C.A. § 48.

It thus appears that the determination of the question whether the taxable year of a taxpayer is less than twelve months depends upon whether the taxpayer is required by the law or regulations to make a return for a fractional part of a year. Section 47 deals with "Returns for a period of less than twelve months." The only provision of that section which is relevant to our problem is subsection (g) which was added to Section 47 by Section 135(c) of the Revenue Act of 1942. That subsection is as follows: "(g) Returns where taxpayer not in existence for twelve months. In the case of a taxpayer not in existence during the whole of an annual accounting period ending on the last day of a month, or, if the taxpayer has no such annual accounting period or does not keep books, during the whole of a calendar year, the return shall be made for the fractional part of the year during which the taxpayer was in existence." 26 U.S.C.A. § 47.

It will be observed that this provision is applicable only to those taxpayers who were "not in existence during the whole of an annual accounting period * * * or * * * calendar year." Thus the test of the statute is whether the taxpayer was "in existence" during the entire year. The existence of a corporation, however, does not terminate until it is legally dissolved in accordance with the law of its creation.*fn1 For even if it has disposed of its property and ceased operations it may have until formal legal dissolution the capacity to contract, to acquire new property and to resume the exercise of its corporate franchises.*fn2 Accordingly the language of Section 47(g) plainly does not require a corporation to file a return for a fractional part of a year unless it was either initially incorporated or legally dissolved during the year.*fn3 That this language carries out the Congressional intent appears from the reports of the Congressional committees which proposed and approved it and which in identical language stated:*fn4 "In the case of a corporate taxpayer, the corporation is not in existence after it ...


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