Hawaiian Freight Forwarders, Ltd. v. Commissioner of Internal Revenue

This is a petition to review a decision of the Tax Court affirming a decision of the Commissioner of Internal Revenue that the petitioner, a Hawaii corporation, had a deficiency in its tax return for its 1943 and 1944 fiscal years. The Tax Court held that the taxpayer must report its 1943 and 1944 excess profits income under the invested capital method of 26 U.S.C. § 714 rather than the income method of § 713 because the taxpayer had not qualified itself for the latter treatment under the relevant portions of 26 U.S.C. § 740 by showing that it or a qualified “component corporation” was in existence during the base period of 1936-40.

The petitioner was organized on March 14, 1940, to acquire the business of a partnership engaged in the freight forwarding business. This business in partnership form had first been organized in 1937 with two active partners, Leffel and Ballentyne, and one inactive partner, Schnack. Their interests were in shares of 33/67 and 24/67 and 10/67, respectively. On March 8, 1940, six days before the corporation was organized, Schnack withdrew from the partnership, taking $8,000 for his capital interest and accumulated profit. Each of the remaining partners…