William Leonard Crum

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau
of Economic Research
Volume Title: Fiscal-Year Reporting for Corporate Income Tax
Volume Author/Editor: William Leonard Crum
Volume Publisher: NBER
Volume ISBN: 0-87014-417-0
Volume URL: http://www.nber.org/books/crum56-1
Publication Date: 1956
Chapter Title: Introduction And Summary
Chapter Author: William Leonard Crum
Chapter URL: http://www.nber.org/chapters/c5457
Chapter pages in book: (p. 305 - 310)FISCAL-YEAR REPORTING CORPORATE INCOME TAX 305
INTRODUCTION AND SUMMARY
I
N RECENT years the practice of filing corporate income-tax returns for an
accounting year other than the calendar year has been steadily and rapidly
extended. This development of so-called "fiscal-year" returns is of high im-
portance to various specialists and groups of specialists who are concerned with
the preparation and filing of returns, or with interpretation of statistics com-
piled from the returns.
To members of the accounting profession, this development means an im-
portant reduction in the peak load of auditing, which has long occurred in the
interval between the end of the calendar year and the March 15 filing date
applicable to most corporations. Corporate officers, in turn, find their burdens
considerably reduced, since they can collaborate with auditors under circum-
stances less marked than formerly by pressure and urgency. In fact, much of
the expanded use of fiscal-year reporting can be credited to efforts of the ac-
counting profession to bring about these changes in the time distribution of
the auditing load.
To Treasury officials responsible for having funds available for day-to-day
outlays of the government, the spreading of the corporate reporting year to
periods other than the calendar year means a considerable smoothing out of the
monthly flow of revenue from the corporate income tax. Until recent years, tax
receipts of this sort came mainly in the months of March, June, September, and
December. In view of the large share of the corporate income tax in total rev-
enues and of the fact that receipts from the other major source—the individual
income tax—were predominantly in the same months, the Treasury's short-
term financing problem of meeting needs for expenditures in the intervening
months was somewhat aggravated. The provisions under the Mills amendment
of the Internal Revenue Code for acceleration of the payment of the corporate
income tax would greatly intensify the uneven monthly flow of revenue from
this source if nearly all corporate income were reported on a calendar-year
basis. With the expanding use of fiscal-year returns, however, and particularly
insofar as the tax liability of such returns is fairly evenly spread over the various
months of the year, the monthly flow of revenue from the corporate income
tax will during the peak effect of the Mills amendment be less uneven than if
all reporting were for the calendar year. Under the 1954 revision of the Internal
Revenue Code, corporate tax payments will soon again be distributed in quar-
terly installments, in the second half of the year in which the income is earned
and in the first half of the following year. Treasury receipts of revenue will con-
tinue to come chiefly in the quarterly months, creating temporary large cash
balances in the Treasury, with corresponding effects on the general economy
which may in fact be more significant than the short-term Treasury financing
problems mentioned above. These effects will be somewhat restrained by the
increasing practice of filing fiscal-year returns, to the extent that fiscaj. years
do not end in the four quarterly months.
To those experts of the Treasury and the Bureau of the Budget concerned
with forecasting the federal revenue, the task of predicting the corporate in-
come subject to tax, and estimating from that figure the amount of tax liability,
is notably aggravated by the presence-and the currently increasing impor-306 AMERICAN STATISTICAL ASSOCIATION JOURNAL, JUNE 1956
tance—of fiscal-year returns. These experts normally must provide, well in
advance of the annual Budget Message, an estimate of revenue receipts for the
fiscal years ending in the following June and in June of the next succeeding
year. This means a forecast of the corporate income-tax liability covering a
period reaching ahead at least a year and a half. And for a like period they must
also forecast—among various other elements—the flow of dividends from cor-
porations to individuals, which has a highly important effect upon the expected
individual income-tax liability. Basic to both these forecasts is a prediction of
corporate net income during the pertinent reporting years. This prediction,
in its essence and ignoring many complexities, requires a study of the correla-
tion of corporate profits with various economic factors such as commodity
prices, industrial production, and other measures of business activity or con-
dition. For these factors, dependable figures are in general much more nearly
up to date than are any adequately comprehensive figures on corporate profits;
and yet, even for these factors, some projection of figures into the unknown
future is necessary before deriving the estimate of corporate profits. If all
corporate income were reported on a calendar-year basis, this task of predicting
corporate profits by such correlation methods would be sufficiently difficult and
uncertain. When, however, a substantial fraction of corporate income is re-
ported for years not ending in December, the task becomes much more compli-
cated because of the possible need for studying the relevant economic factors
for the various periods pertinent to various reporting years of corporations.
This difficulty is likely to be intensified whenever substantial and fairly rapid
cyclical changes occur in any of the economic factors. It is also intensified by
the fact that the selected fiscal year tends to end in a particular month for most
corporations in one line of industry, and in another month for those in some
other industry, and by the fact that cyclical and other business changes have
widely different impacts upon different lines of industry. Moreover, so long as
the present tendency toward increased fiscal-year reporting continues, the use
of compilations from corporate tax returns of preceding years as background for
estimating figures in the near-term future is somewhat obstructed by the lack
of stability in the relation of fiscal-year figures for various terminal months to
figures for the calendar year.
To many other specialists—for example, those engaged in financial analysis,
in describing and interpreting variations in national income, or in appraising
general economic conditions—whether within or outside of government, the
steady shift toward fiscal-year reporting may be highly important. Since 1916
the United States Treasury has published annually Statistics of Income, which
shows a wide variety of highly useful tables compiled from income-tax returns.
We are here interested in such tabulations from corporate tax returns. Apart
from those derived from the balance sheets which accompany most corporate
tax returns, these tabulations include aggregates of income-account items for
the corporate system as a whole, and for various groups within the system—
classified chiefly according to line of industry and size of enterprise. As long as
the fiscal-year returns were a very minor fraction of the total, analysts could
assume that the tabulated aggregates were approximately pertinent to a
calendar year—a year centered at July 1. Now that fiscal-year returns have
become a much larger fraction of the total, this assumption may no longer beREPORTING CORPORATE INCOME TAX 307
valid. The Statistics of Income aggregates, published for the corporate system
as a whole for a specified year, pertain to a range of twelve-month periods with
their terminal dates varying from July 31 of that year to June 30 of the follow-
ing year, and cover also various accounting periods—so-called part years—of
less than twelve months. Although the bulk of such an aggregate still pertains
to a year ending December 31, the aggregate as a whole pertains to an "average"
year centered somewhat later than July 1. For certain lines of industry, the
aggregates may pertain to an average year centered notably later (or earlier)
than for the entire system. And for some lines of industry, even the bulk of the
returns may belong to a year ending in a single month other than December.
In these instances, the assumption that the average year centers at July 1 is
no longer even approximately valid, and we need to examine the question
whether it is sufficiently valid even for the system as a whole. Analysts should
take due notice of any impairment in its validity in any study which requires
assigning a date to the figures for corporate profits or other income-account
items (such as a comparison of any Statistics of Income aggregate with factors
reflecting general or specific economic fluctuations or conditions). An additional
difficulty appears whenever comparisons among records of quarterly figures are
needed. Corporations which file fiscal-year tax returns are likely to use the same
fiscal years for published corporate statements, and, unless the fiscal year ends
on one of the quarterly months of the calendar year, the resulting quarterly
figures are not readily comparable with other quarterly records.
In view of the importance of the recent expansion in fiscal-year reporting to
the specialists mentioned above, and perhaps others, I have undertaken an
analysis of most of the special tabulations of fiscal-year returns which have been
compiled by the Bureau of Internal Revenue and published in successive annual
issues of Statistics of Income during a period of over two decades ending in 1950.'
I report in the following sections the major results of this analysis, along with
my admittedly limited commentaries upon certain implications of the more
important findings. Part I is concerned with fiscal-year reporting in the cor-
porate system as a whole, without regard to differences according to size or to
line of industry; Part II, with differences among lines of industry; and Part III,
with differences according to size.
Summary of main results. The percentage of the total number of corporate
income-tax returns filed on a fiscal-year basis increased from about 12 in 1928
to about 34 in 1950. The annual figures (from Table 1, in Part I) are as follows:
1928 12.4 1940 19.7
1929 12.0 1941 20.6
1930 12.8 1042 218
1931 12.9 1943 22.6
1932 13.2 1944 23.6
1933 12.1 1945 24.8
1934 14.3 1946 26.9
1935 15.0 1947 30.3
1936 15.9 1948 32.6
1937 17.3 1949 33.9
1938 17.9 33.7
1939 18.7
1In Appendix A I give as full a list as I could compile of references to suchspecialtabulations and the relevant
textual comments in &agisUcs of Income. Further footnote references to &&istica of Incom will be indicated as fol-
lows: S. oil., followed by the year and the page number or numbers. For those years (1934-1950) for which corporate
trsjnPart2ofSi.referonceewillbetopart2.308 AMERICAN STATISTICAL ASSOCIATION JOURNAL, JUNE 1956
The evidence based upon number of returns is not entirely satisfactory, because,
as is brought out in Part III, fiscal-year reporting tends in general to be more
common among small than among large corporations. Figures yielding per-
centages in terms of total assets are available only for the years 1946—1949, but
an estimate can be made for 1934. For these years the percentages of total
assets of all corporations filing balance sheets that were reported on fiscal-year
returns were (Table 3) as follows:
1934 (estimated) 8.9
1946 11.3
1947 12.2
1948 12.9
1949 13.2
These total-assets percentages are not only much smaller than the number-of-
returns percentages, but they also show a less striking rate of increase in recent
years.
The distribution among the various accounting periods has changed notably
between 1928 and 1950. The different accounting periods include: the calendar
year; 11 fiscal-year periods, ending at the end of each of the five months pre-
ceding and six months following December; and various part years. The per-
centages of the total number of returns tabulated in tics of Income for
1928 and for 1950 in these 13 accounting periods were (Table 4) as follows:
1928 1950 1928 1950
Part-year 7.50 6.18 January 1.47 2.87
July 0.84 2.28 February 0.87 2.46
August 0.82 2.52 March 1.18 4.12
September 0.89 3.62 April 1.08 2.74
October 0.83 2.84 May 1.16
November 0.82 2.20 June 2.40 5.54
December 80.14 60.07
The 1928—1950 decline in the calendar-year percentage reflects the general in-
crease in fiscal-year reporting noted above. For each of the 11 fiscal-year pe-
riods, a notable increase appeared between 1928 and 1950. In both years, June
was the most common fiscal-year period; March stood next in 1950, whereas
January was the second most common period in 1928. The 1928—1950 changes
in comparative size among the 11 fiscal-year percentages are in considerable
degree due to diversities in fiscal-year reporting among lines of industry, which
are examined in Part II.
As number of returns is not for most purposes a satisfactory basis on which
to measure the importance of fiscal-year reporting, the distribution among ac-
counting periods is examined also in terms of total assets (Table 6). The basic
figures required are unfortunately available only for the years 1946—1949; and,
as total assets for part-year returns are not shown separately, the percentage
for "December" combines the calendar-year and part-year returns. The per-
centages of total assets tabulated for 1946 and 1949 from all returns accom-
panied by balance sheets ified for each of the eleven fiscal-year periods, and for
the combination of calendar-year and part-year periods, are:FISCAL-YEAR REPORTING CORPORATE INCOME TAX 309
1946 1949 1946 1949
July 0.74 0.88 January 1.45 1.56
August 0.84 1.03 February 0.56 0.64
September 1.05 1.38 March 0.79 1.09
October 1.29 1.46 April 0.74 0.86
November 1.20 1.20 May 0.68 0.78
December 88.66 86.81 June 2.01 2.31
For fiscal-year periods ending in every month except November, the percentage
rose from 1946 to 1949. The June period in each year is the most important, in
terms of total assets, and that for January is second most important.
Net income is a far less satisfactory measure of importance, for general pur-
poses, than total assets. But for purposes relating to the flow of revenue from
corporate taxes, the net-income measure, particularly of corporations showing
net income rather than deficit, may have high significance. Moreover, the basic
figures are available over a longer period than those for total assets. The per-
centages of the combined net income of net-income and deficit corporations
reported on returns filed for the various accounting periods as tabulated in
1928 and 1950 are:
1928 1950 1928 1950
Part-year —1.63 1.00 January 1.41 3.11
July 0.33 1.14 February 0.93 1.13
August 0.97 1.49 March 0.41 1.91
September 0.60 2.10 April 0.69 1.28
October 0.94 2.36 May 0.54 1.39
November 1.51 2.02 June 2.21 3.73
December 91.07 77.35
The part-year figure for 1928 is negative because in that year part-year returns
showed a deficit, while all returns showed net income.
Fiscal-year reporting varies greatly among lines of industry. Statistics of In-
come classifies returns according to eight broad divisions, excluding a category
of returns which cannot be classified, and breaks down most of the divisions
into more detailed groups and subgroups. We summarize here, from Part II, the
chief figures for the broad divisions in 1949. The first column in the table below
indicates the percentage of each division's total number of returns accompanied
by balance sheets that was on a fiscal-year basis. The second column gives the
percentage of each division's total assets reported on fiscal-year returns.
In Terms In Terms In Terms In Terms of Total of Total of Number Assets of Number
Agriculture 44.8 87.9 Public utilities 22.2 1.8
Mining 31.8 15.4 Trade 41.4 48.3
Construction 36.6 33.9 Finance 18.3 4.2
Manufacturing 40.2 23.3 Services 37.9 40.5
The variation among the divisions is marked for the number-of-returns per-
centages, and very striking for the total-assets percentages. On both bases, the
lowest percentages are for Public utilities and Finance; and for both of these
the total-assets percentages are so much lower than the number-of-returns per-
centages that we may conclude that nearly all of the larger corporations in
these two divisions file calendar-year returns.310 AMERICAN STATISTICAL ASSOCIATION JOURNAL, JUNE 1956
Detailed evidence that fiBcal-year reporting is in general more common
among small than among large corporations is presented in Part III. It may be
summarized (from Table 15) in the following figures showing average total
assets (in thousands of dollars) per return in 1949 for the entire corporate sys-
tem and for each industrial division.
Fiscal-Year Non-Fiscal-Year All Returns Returns Year Returns
All divisions combined 984) 359 1,830
Agriculture 284 240 319
Mining 1,144 555 1,419
Construction 198 183 207
Manufacturing 1,122 650 1,440
Public utilities 3,184 284 4,018
Trade 229 250 210
Finance 1,930 375 2,516
Services 152 162 145
For every division except Trade and Services, the average of total assets is
lower for fiscal-year than for other returns. The smaller average size of corpora-
tions filing on a fiscal-year basis is especially striking for Public utilities and
Finance; this is in accord with our finding above that nearly all large com-
panies in these lines file calendar-year returns.
PART I. THE CORPORATE SYSTEM AS A WHOLE
1. Fiscal-year tabulations available. The earliest special tabulations from
fiscal-year returns of corporations in Statistics of Income are in the volume for
1926, which includes also fiscal-year tabulations for 1925. A largely similar set
of tables appears in the 1927 issue. These fiscal-year tables for 1925—1927, how-
ever, cover only returns which met at least one of the four following tests: net
income of $2,000 or over, net deficit of $500,000 or over, gross sales or other
items of $5,000,000 or over, and deduction because of net loss for prior year.
Hence, a large number of fiscal-year returns showing very small net income or
showing small or moderately large deficit were excluded. Evidence for later
years (see Part III) indicates that the excluded cases in 1925—1927 were prob-
ably numerous and important in the aggregate. Moreover, as some possibility
exists that small corporations may frequently be in industries with peculiar
patterns of fiscal-year reporting as respects distribution over the months from
July to June, these exclusions are quite likely to distort the over-all pattern for
all fiscal-year returns. And, of course, the total number of fiscal-year returns,
as well as the aggregate for any particular accounting item, is seriously under-
stated because of the exclusions. For these reasons, I have included no analyses
of the 1925—1927 fiscal-year tabulations in any section of this report. That
some useful inferences might be drawn from such analyses is not denied, but
I am convinced that most analytical results for those years would not be com-
parable with those for later years.
Beginning with 1928, the special tabulations from fiscal-year returns did aim
to cover all active fiscal-year returns, provided such returns "were received by
the Statistical Section [of the Bureau of Internal Revenue] prior to termination
of the tabulation of Statistics of Income data." This proviso, which is stated in
the text accompanying the tables for many years after 1927, presumably means

Fiscal-Year Reporting for Corporate Income Tax

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