author: ARuNdell

text:
    Appeal of PAUL STARRETT.
    Docket No. 6567.
    Decided July 27, 1926.
    Value of certain securities received as compensation for services determined.

      J. S. Y. Ivins, Esq., for the petitioner.

      Geo. G. Witter, Esq., for the Commissioner.
    Before Sternhagen and ARundell.
    The Commissioner has determined a deficiency in income taxes for the year 1919 in the amount of $81,526.54. So much of the deficiency as is in dispute arises from the inclusion in income by the Commissioner of certain bonds of the Bowman Hotel Corporation at a valuation of 97y2 per cent of their face value.
    FINDINGS OF FACT.
    In the year 1919 the petitioner was president of the George A. Fuller Co. of New York. In addition to a fixed salary, he had a contract with the George A. Fuller Co. that he should receive a certain proportion of the profits of that company. Under the terms of the contract, where the company received its profits in cash, his share was to be paid to him in cash, and where the company received its profits in securities, he was to receive a ratable proportion of such securities. The petitioner received during May, 1919, as a part of his compensation under his profit-sharing contract with the George A. Fuller Co., 84 bonds of the Bowman Hotel Corporation, which bonds were of the par value of $1,000 each and'carried interest at the rate of 6 per cent. These bonds were part of a total issue of $1,500,000 secured by a lien upon a leasehold estate "in the property known as the Hotel Commodore at Forty-second Street and Lexington Avenue, New York City. These bonds, being only on the leasehold, were, in effect, junior to two mortgages on the property in a total amount of $5,000,000, held by the Metropolitan Life Insurance Co. of New York, and to the annual charges for ground and building rentals. The fair market value of the bonds of the Bowman Hotel Corporation at the time of their receipt by petitioner was 50 per cent of their par value, making a total fair market value for the 84 bonds received by him of $42,000.
   OPINION.

ARuNdell

: For the reasons set forth in the Appeal of Walter T. Smith, this day decided, cmte, 397, we are satisfied that the value of the bonds of the Bowman Hotel Corporation, when received by petitioner in May, 1919, was not to exceed 50 per cent of the face value of the securities.

Order of redetermination will be entered on 15 days'1 notice, under Rule 50.


source: Caselaw Access Project

author: Aetjndell:

license: Public Domain

text:
    Appeal of JAMES BAIRD.
    Docket No. 9393.
    Decided July 27, 1926.
    Value of certain securities received as compensation,for services determined.

      J. S. Y. Ivins, Esq., for the petitioner.

      Geo. G. Witter, Esq., for the Commissioner.
    Before Sternhagen and Arundell.
    The Commissioner has determined a deficiency in income taxes for the year 1919 in the amount of $11,885.61. The question involved is the valuation of certain bonds received by the petitioner as additional compensation for services rendered.

      FINDINGS OF FACT.
    During the year 1919 petitioner was vice president of the George A. Fuller Go. of New York. In addition to a fixed salary he had a contract with the George A. Fuller Co. that he should receive a certain proportion of the profits of that company. Under the terms of the contract, where the company received its profits in cash, his share was to be paid to him in cash, and where the company received its profits in securities, he was to receive a ratable proportion of such securities. The George A. Fuller Co. received during its fiscal year ended April 30, 1919, as part of its profits, certain bonds of the .Bowman Hotel Corporation and certain notes of the Central Building Co.
    The petitioner received during June, 1919, as part of his compensation under his profit-sharing contract with the. George A. Fuller Co., 42 bonds of the Bowman Hotel Corporation, which bonds were of the par value of $1,000. These bonds were secured by a lien upon a leasehold estate in the property known as the Hotel Commodore, at Forty-second Street and Lexington Avenue, New York City. The security of said bonds, being secured only by the leasehold, was, in effect, junior to two mortgages in a total amount of '$5,000,000, held by the Metropolitan Life Insurance Co. of New York, and to the annual charges for ground and building rentals. The fair market value of the bonds of the Bowman Hotel Corporation at the time of their receipt by petitioner was 50 per cent of their par value, making a total fair market value for the 42 bonds received by him of $21,000.
    The petitioner also received, as additional compensation during the year 1919, 68 notes of the Central Building Co. of the face amount of $1,000 each. These notes were reported by the petitioner in his income-tax return as having a fair market value of 75 per cent of their face value. The value of the notes at the time of their receipt as reported by the petitioner in his income-tax returns was accepted by the Commissioner and the tax fixed on that valuation.
   OPINION.

Aetjndell:

For the reasons set forth in the Appeal of Walter T. Smith, this day decided, ante, 897, we are satisfied that the value of the bonds of the Bowman Hotel Corporation, when received by the petitioner in June, 1919, was not to exceed 50 per cent of their par value. No evidence was offered as to the value of the notes of the Central Building Co. and the finding of the Commissioner is consequently approved.

Order of redetermination will be entered on 15 days' notice, under Rule 50.


author: ARttndell:

text:
    Appeal of O’NEIL CONSTRUCTION CO.
    Docket No. 1701.
    Decided July 27, 1926.
    Credit balances in the accounts of the officers of the corporation which were allowed to remain in the business were borrowed capital.

      W. E. Bail’d, G. P. A., for the petitioner.

      Briggs G. Simpich, Esq., for the Commissioner.
    Before Sternhagen and Aiíundell.
    This is an appeal from the determination by the' Commissioner of a deficiency in income and profits taxes for the calendar years 1919 and 1920 in the aggregate amount of $450.63. The controversy arises over the refusal of the Commissioner to allow as invested capital certain credits given to officers as salaries and otherwise,' which were allowed by the officers to remain and be used in the business Avithout payment of interest.
    FINDINGS OF FACT.
    The petitioner was incorporated in and under the laws of Kansas on December 29, 1911, with a paid-up capital stock of $1,000, and AAÚth an authorized capital of $5,000. Joseph O’Neil held 96 shares of stock and the remaining shares of stock Avere held as foIIoavs : By his father, P. J. O’Neil, one share; by his brother, E. P. O’Neil, one share; by two other relatives, one share each.
    On January 2, 1914, in order to provide additional money to continue the business, the following amendment to the by-laws was adopted:
    Officers of the company may let their salaries accumulate to their account, in excess of the amounts they withdraw, to be used in the business and no interest shall be paid thereon. Money shall not be drawn on such accounts which may accumulate, in preference to any other indebtedness of this business.
    In addition to the money Avhich accumulated to the account of the officers, Joseph O’Neil and P. J. O’Neil, under the provision of the by-latv adopted on January 2,' 1914, these officers’ accounts were increased by the money due them for expenses and also by certain cash deposits which they made.
    .In the business of the corporation there was a total accumulation ( to the account of the officers, under the provision of this by-law and otherwise, at the beginning of the year 1919, amounting to $12,293.38, and at the beginning of the year 1920 a like accumulation amounting to $17,396.81.
   OPINION.

ARttndell:

Was the money which had accumulated at the beginning of each taxable year invested capital or was it borrowed capital? The petitioner contends that under article 813, Regulations 45, the money was paid-in capital. This article holds that it is largely a question of fact in each particular case. It reads in part as follows :

* * * amounts left in the business representing salaries of officers in excess of their actual withdrawals, * * * will be considered paid-in surplus or borrowed capital according to the facts of the particular case. The'general principle is that if interest is paid or is to be paid on any such amount. *r if the stockholder’s or officer’s right to repayment of such amount ranks with or before that of the general creditors, the amount so left with the corporation must be considered as borrowed capital and be so treated in computing invested capi tal.

The money which might accumulate ivas to be used by the corporation in the business, without interest, but that does not mean that these officers put their salaries and other money into the business without any hope of recovery except as each would receive a return as a stockholder. The by-law adopted on January 2, 1914, recognised these balances of the officers as obligations of the corporation. Under its terms the salaries might accumulate to their account. So much of the accumulation as was made up by money due for expenses and by cash deposits made by the officers was in no way affected by the by-law, and, as to this money, we see no reason why the officers could not withdraw their portion at their pleasure. Joseph O’Neil testified that he hoped to get the money back at some time, thus explicitly denying any intention to donate his money to the corporation. Under the wording of the by-law, the officers were not to receive their un-drawn salary balances in preference to any other creditors, but they were entitled to receive them just as any other creditor of the corporation would be entitled to receive payment for amounts due him.

The case is ruled by Appeal of Kelly-Buckley Co., 1 B. T. A. 1154. The facts here are even stronger than those in the Kelly-Buckley Co. appeal. The resolution there was that the personal accounts of the principal stockholders, Kelly and Buckley, “remaining in the business shall be deferred as to payment of general creditors.” Here we have a by-law which merely provides that “ Money shall not be drawn on such accounts which may accumulate, in preference to any other indebtedness of this business.” (Italics ours.) In the Kelly case, the stockholder’s or officer’s right to repayment ranks after that of general creditors, while in the present case the officer’s right is neither deferred nor preferred and therefore would at least rank with the right of general creditors to repayment.

We therefore hold, under the Kelly-Buckley appeal and the facts in this case, that the amounts in question were borrowed capital within the meaning of the law, and were properly excluded from invested capital by the Commissioner.

The deficiency is $1)50.63 for the years 1919 and 1930. Order will be entered accordingly.


author: Sternhagen:

text:
    Appeal of THE SHIPOWNERS & MERCHANTS TUGBOAT CO.
    Docket No. 3955.
    Decided July 27, 1926.
    1. In a general plan for tlie acquisition of tlie property of a corporation, a group of individuals first bought the stock. A new corporation was then organized with the same stockholders and acquired the property of the old corporation in exchange for its stock. Held, a case within section 331, Revenue Act of 1918, and such property included in new corporation’s invested capital at same figure as applied to old corporation.
    2. A corporation’s invested capital is not affected by a change of ownership of its stock.

      William M. Williams, Esq., and E. B. Quiggle, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Before Sternhagen, LaNSdon, and Aeundell.
    Proceedings to set aside a determination of deficiency of $25,744.49 income and profits tax for 1920, alleging that (1) section 331, Reve-rme Act of 1918, is not applicable, (2) no gain was derived from the sale of tugboat Hercules, and (3) deduction for amortization should be allowed although not heretofore claimed.
    FINDINGS OF FACT.
    In the year 1918 and prior thereto, Shipowners & Merchants Tugboat Co. (hereinafter referred to as the old company), was a corporation engaged in the business of owning and operating a fleet of tugboats in and around the Bay of San Francisco.
    During the early part of the year 1918, about March or April, one of the directors of the old company approached one Tynan, representing the Bethlehem Shipbuilding Co., with the view of selling the fleet of sixteen tugboats then owned by the company. Tynan then made up a syndicate or group of individuals, including Thomas Crowley and his associates, (said group being hereinafter referred to as the buyers), to purchase the tugboats, and the negotiations for such purchase were continued. The old company offered to sell the sixteen tugboats to tlie buyers for an aggregate of $1,020,000, made up of a certain price for each tugboat, together with some equipment for a further sum of $21,000. The tugboat Hercules was included in said offer at the price of $300,000.
    The parties first thought of selling and buying the tugs directly, but this was changed into an arrangement for the purchase of the stock of the old company.
    At the time of said negotiations the old company had outstanding 4,285 shares of stock. The stockholders were numerous and scattered. The majority of the stock was owned by persons residing in or near San Francisco, but some was owned by persons in the eastern part of the United States and some by persons residing in England.
    On May 15, 1918, a written agreement was entered into between’ W. J. Gray, J. D. and A. B. Spreckels Securities Co., F. S. Samuels, Arthur Page, W. H. Marston, C. Kandall, John W. Curry, stockholders of the old company, and all other stockholders of the old company who may execute the agreement, as first parties, Shipowners & Merchants Tugboat Company (the old company), second party, and Bobert J. McGahie, third party, representing the buyers. The agreement was prepared with many counterparts which were sent for execution to the various stockholders of the old company whose signatures were not affixed to the original copy. The agreement provided in its essential respects as follows :
    (1) That the old company should form a California corporation (hereinafter referred to as the Securities Company) which would (a) take over ail of the assets of the old company except the sixteen tugboats above mentioned, its office furniture, fixtures, telephone and office equipment, and all its rights to its office building and in or to the occupancy or use of the dock then used for its office and vessels, (b) assume all the liabilities of the old company arising prior to May 1, 1918, subject to certain limitations and exceptions not material to this case, and (c) issue to the old company in exchange for said assets such amount of the capital stock of the Securities Company as might be agreed upon between the two companies.
    (2) That the old company should then distribute to its stockholders the said stock of the Securities Company.
    (3) That the stockholders of the old company who wore the first parties to the agreement should sell to the third party, representing the buyers, the stock of the old company at the price of $899,850 for the entire 4,285 shares outstanding, or at the rate of $210 per share, said price to be paid as follows: (a) as to each stockholder who shall sign the agreement and deposit his stock in escrow, as provided therein, prior to July 1, 1918, the sum of $116 on the deposit of the stock in escrow, less such sum as the stockholder might have received out of the initial payment of $100,000 to the escrow holder, or $94 per share, on or prior to July 1, 1918, and (b) as to each stockholder who signed the agreement and deposited his stock in escrow subsequent to July 1, 1918, but within the time limited in the agreement, the full amount of $210 per share upon such deposit of the stock.
    (4) That the stockholders of the old company, who are parties to the agreement, should deposit their certificates of stock in that company, endorsed in blank, with the Bank of California National Association as escrow holder, and the buyers should pay to said bank the purchase price, which should then be paid over by the bank to the stockholder entitled thereto; but that no stock was to be deposited prior to the formation of the Securities Company and the distribution of its stock to the stockholders of the old company.
    (5) That the buyers should make an initial payment to the escrow holder of $100,000 on account of the purchase price of the stock, immediately upon execution of the agreement by stockholders of the old company holding of record at least 2,857 shares of its stock, said $100,000 to be paid by the escrow holder to the stockholders depositing said stock in proportion to their respective interests.
    (6) That none of the stock of the old company was to be delivered to the buyers before July 1, 1918.
    (7) That all earnings from the said tugboats between May 1, 1918, and July 1, 1918, should be used solely for the payment of expenses of their operation on and after May 1, 1918, and were not to be distributed as dividends prior to July 1, 1918, but all dividends declared and paid after July 1, 1918, out of earnings derived from said tugboats on and after May 1, 1918, should belong to the buyers.
    (8) That any stockholder of the old company might execute the agreement within three months from its due date and become a party thereto.
    Pursuant to said agreement the Securities Company was organized and the assets of the old company, other than the tugboats and furniture and fixtures, were transferred to the Securities Company in exchange for its stock, which was then distributed pro rata to the stockholders of the old company.
    From time to time thereafter stock of the old company was deposited with the escrow holder, but there was delay in getting the agreement executed by some of the stockholders and the stock was not all deposited with the escrow holder until at least the latter part of the year 1918, but prior to January 10,1919.
    From the beginning of the negotiations for the purchase of the tugboats of the old company it was contemplated that a new corporation would be formed to take over and operate said tugboats, and at the time the agreement of May 15, 1918, was entered into it was agreed among the members of the syndicate who composed the buyers that, as soon as the stock of the old company was acquired, the boats and property of said company would immediately be turned over to a. new company to be thereafter organized by said syndicate and to be known as The Shipowners & Merchants Tugboat Co.
    On or about July 1,1918, the directors of the old company resigned and a new board was elected, consisting of certain members of the' syndicate of buyers to each of whom had been transferred from the stockholders of the old company 10 shares of its stock as qualifying shares; Thomas Crowley, one of the buyers, was chosen as its general manager and took charge of the operation of the tugboats. No other transfers of stock of the old company were made to the buyers or their representative until January 10, 1919, as hereinafter stated.

      On July 20, 1918, the buyers organized The Shipowners & Merchants Tugboat Co'., the taxpayer in this appeal, under the laws of the State of California, with an authorized capital stock of the par value of $1,500,000, consisting of 15,000 shares of a par value of $100 each.
    On January 10, 1919, after all of the outstanding'stock of the old company had been deposited with the escrow holder, the certificates endorsed in blank representing 4,195 shares of that stock (the remaining 90 shares having been transferred to the new board of directors as qualifying shares) were turned over to Kobert J. McGahie as the representative of the buyers. On the same day McGahie surrendered said certificates to the old company and there was issued to him as the representative of the buyers one new certificate, No. 516, for 4,195 shares of stock of said company. There was attached to said certificate a bill of sale, signed by McGahie, purporting to assign, trans-' fer and set over to the buyers the said shares of stock. The same day said certificate No. 516, to which said bill of sale was attached, was canceled. New certificates of stock of the old company were written out in the names of the buyers according to their respective interests and executed but were never detached from the stubs in the stock certificate book. These certificates were then endorsed by rubber stamp as follows:
    On the 10th clay of January, 1919, substantially all of the capital assets of this company were distributed to its stockholders, pursuant to authority and permission granted by the Commissioner of Corporations, and the value of the shares represented by this certificate was reduced accordingly.
    On the same day, January 10, 1919, the old company transferred, as of September 30, 1918, all of its assets, including its tugboats and its profits earned after May 15, 1918, to the taxpayer, The Shipowners & Merchants Tugboat Co. On the same day, January 10, 1919, the taxpayer, in exchange for said assets, issued to the old company 10,000 shares of the stock of the taxpayer, of a par value of $1,000,000, less the qualifying shares that had previously been issued to its directors. Said stock was then distributed to the buyers.
    Only a small percentage, and less than 50 per centum, of the stock of the taxpayer was issued' to persons who were stockholders of the old company during the negotiations for the purchase of the tugboats and at the time the agreement of May 15, 1918, was entered into.
    The delay in completing the transaction after the incorporation of the taxpayer on July 20, 1918, was due to the time that was required to get all of the stock of the old company into the hands of the escrow ' holder, and to obtain a permit to issue the stock of. the taxpayer from the Capital Stock Issues Committee in Washington and thereafter obtain a permit from the Commissioner of Corporations o.f the State of California.
    In addition to the amount of $899,850 paid by the buyers for all of the stock of the old company, there were certain additional obligations and expenses of the old company assumed by them, in the amount of $100,150, making a total of $1,000,000 so invested by them.
    The property received by the taxpayer in exchange for its stock on January 10, 1919, was worth $1,000,000.
    The taxpayer claimed an invested capital of $1,041,689.86 for the year 1920. The Commissioner reduced its invested capital for that year to $530,866.47 by limiting the amount that it could include on account of the tugboats and other items transferred to it for its capital stock of the par value of $1,000,000, to the’ amount allowable as invested capital to the old company on account of said property.
    Under date of November 19, 1918, the old company, Shipowners & Merchants Tugboat Co., entered into a written agreement with James Bolph, of San Francisco, for the sale by the former to the latter of the tugboat Hercules for the sum of $300,000. This agreement superseded a preliminary memorandum of agreement dated June 7, 1918, between the old company and Bolph Navigation & Coal Co., James Bolph’s corporation, for the sale of the Hercules for the sum of $310,000.
    Said agreement of November 19, 1918, provided for the immediate delivery of the possession of the tugboat to the purchaser, and for the payment by him to the old company, on account of the purchase price of the tugboat, of $50,000 on execution of the agreement, $60,000 on January 15, 1919, $50,000 on July 1, 1919, and $140,000 on Jan-uarjr 15, 3920, together with interest on all deferred payments at the rate of 6 per cent per annum until paid. Title to the tugboat was to remain in the vendor until all payments were made, when a bill of sale thereof was to be given to the vendee by the vendor.
    The tugboat Hercules was carried on the books of the old company at $197,946.74. When the taxpayer opened its books of account as of September 30, 1918, it included the Hercules at the same figure, namely, $197,946.74, at which it had been carried on the books of the old company. In making out its Federal income and profits-tax return for the year 1920, the taxpayer reported a taxable gain for that year from the sale of the Hercules of $48,127.79, arising from the receipt of the final payment of $140,000 under the said sales agreement of November 19, 1918. The amount thus reported as taxable gain was arrived at by treating the transaction as an installment sale on the basis of a cost of the tugboat to the taxpayer of $197,946.74, less depreciation of $1,077.73, or a net amount of $195,869.01.
    Throughout the year 1918 and in the early part of 1919 the tugboat Hercules had a value of not less than $300,000. In the offer for the sale of its tugboats by the old company during the early part of the year 1918, which was tentatively agreed upon, as above stated, the Hercules was included at the price of $300,000, and the purchase price of the stock of the old company, after its assets other than the tugboats and furniture and fixtures were eliminated, reflected a like value for the Hercules.

    The tugboats acquired by the taxpayer were partly ocean-going-tugs and partly harbor tugs. The ocean-going tugs were engaged in towing oil barges between Port San Luis and San Francisco, which were bringing in oil principally for the use of the Shipping Board vessels and Navy vessels. The harbor tugs were engaged principally in shifting destroyers and submarines at the Bethlehem Shipbuilding plant, in handling new ships under construction for the Shipping Board at the different shipyards in San Francisco, and in shifting Navy barges and Navy vessels and docking Army transports. Said tugboats suffered a substantial decline in market value between the time of their acquisition by the taxpayer and December 31, 1920, and a still further decline as of March 3, 1924.
    The taxpayer now claims an allowance for amortizaton of its tugboats as a deduction for the year 1920. No claim for amortization was filed by it prior to June 15, 1924.
   OPINION.

Sternhagen:

The petitioner claims that its tugs were paid in for stock or shares and that they had at such time an actual cash value of $1,000,000, and hence, under section 32G of the Revenue Act of 1918, this amount is included in its statutory invested capital. The Commissioner asserts that, however this may be, the situation is within section 331, whereby the petitioner’s invested capital is limited as to the tugs by the amount allowable to the old corporation. The petitioner insists that section 331 is not applicable because this case is not within its letter or intendment.

The plan of the war and excess-profits tax is to impose such tax upon the income above an established return on the statutory invested capital. In the ordinary case invested capital consists of the factors enumerated in section 326. But section 331 was obviously included in the plan in order to jirevent a taxpayer from inflating its statutory invested capital and thus, by including appreciated values not otherwise recognizable, La Belle Iron Works v. United States, 256 U. S. 377, reducing the ratio by which its tax was measured. With no apparent departure from the accepted doctrine that corporate entities were separate from their stockholders, it was recognized that corporate action may be so guided by stockholders that legal ownership may be changed and the measure of tax liability contemplated by the statute defeated. In such a situation the statute provides by section 331 that the corporation as reorganized or otherwise changed shall have as its invested capital not the normal items set forth in section 326 but instead the items which would have existed if the change had not been brought about. By classifying such corporation for taxation upon the measure of its predecessor, the possibility of avoiding the intended tax was effectually frustrated. This was a method whereby differences brought about as we have described should be ignored so that the tax should apply equally to those within the general plan of taxation.

To accomplish this, general language had to be employed so as to embrace all cases. The fact that it might embrace an isolated case so peculiar in its facts as not to be within the class normally intended to be covered is an effect common to taxing statutes, and if it requires a remedy it is not by way of strained construction but of legislation. This Board is charged to apply the statute as it finds it, and to assume that Congress intended it to embrace all cases within the ordinary meaning of the language used.

It is not doubted that the old corporation’s invested capital would have included only such amount for tugboats as the Commissioner has allowed. That this remained unaffected by the price which any individual stockholder may have paid for his stock is indubitable. Appreciation of corporate assets usually is reflected in the price of stock while it may not appear in invested capital. La Belle Iron Works v. United States, supra.

Passing to the present corporation, it is not disputed that the tugs and other assets were on January 10, 1919, worth $1,000,000 and paid in for stock or shares. Looking to section 326 alone this would be included in its invested capital from that time forth, for it could hardly be said that, while the old corporation still owned the tugs and included them in its invested capital, the new corporation was also entitled to be regarded as their owner. True, negotiations and arrangements were in progress toward their acquisition by the new company and to that end stock of the old corporation was going into escrow. But we have seen that this does not affect invested capital. From early in 1918 there was a steadily changing ownership of stock, that is, the property of the individual shareholder, but no change in the ownership of the trade or business or the property of the old corporation and no change in its tax status under this statute. Section 331 was of no concern at that time.

It was only when the new corporation came into existence and its problem of invested capital arose that it was concerned with the ownership and value of the tugboats. It then for the first time became important to consider whether there was a “reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property.” Whether this is a reorganization within the meaning of the Act is not readily answered, for the word is not defined in the Act nor are its inclusions set forth as they subsequently were in the Revenue Act of 1921, section 202 (c) (2). It may be doubted whether it is to be confined to a narrow significance of corporate reorganization. There is little indication that a consolidation took place, except the sketchy testimony of Crowley that the plan was to include the boats of his old company.

It seems clear, however, that on January 10, 1919, there was a change of ownership of the trade or business of operating the.tugs for profit. Up to this point the old corporation was the owner, operating, it is true, through the management of Crowley but by virtue of its own appointment and at its own responsibility. And there was also on that date a change of property in the tugboats. But we can find no change of ownership before that date, and any attempt of the Government to determine a gain or loss or otherwise impose a tax predicated upon a change of ownership would certainly have been unjustified. Mind, it is not a change of interest or control which is the first consideration, but a change of ownership, and this occurs at a time and not vaguely over a period.

Having determined the time as January 10, 1919, we are then to say whether after this change of ownership “ an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them.” From the findings — all of which are substantially as requested by petitioner’s counsel' — -it appears that from time to time after May 15, 1918, the stockholders of the old corporation deposited their stock in escrow under the agreement. Apparently the holders of 2,857 shares deposited their stock early and received their pro rata share of the $100,000 deposited by the buyers. On January 10,1919, the stock of the old corporation was issued to McGahie, while the old corporation was still owner of the boats. Thus we have a clear fact, immutable before the law, that before the change of ownership of the trade or business or property McGahie had substantially more than a 50 per cent interest or control, not for himself but as the representative of the buyers. Shortly thereafter the ownership was formally transferred to the new corporation, whose stock therefor was issued to the old corporation, and thereupon the old corporation distributed this stock to the same persons who already had a greater than 50 per cent interest. Thus the situation is brought squarely within section 331.

Against these definite facts, each of which was established by these participants deliberately and for their own purpose, we are not at liberty to place an equitable construction to effectuate the alleged broader taxing purpose of Congress. It appears to be quite true that these stockholders have an aggregate investment in their corporation’s business of $1,000,000 and that their corporation’s tax is being determined as though they had invested substantially less, and it may be that the result is a hardship which Congress would not knowingly have imposed. But the statute is in our opinion clearly applicable and leaves no room for construction.

The petitioner returned as income a proportionate part of the amount received from the purchaser of the Hercules in 1920. From the facts disclosed this appears to be error. When the petitioner acquired the vessel or an interest in it, it paid its value and was charged with the knowledge of its sale and the incidental rights affected. The cost fo petitioner was on the basis of a value for the whole vessel of $300,000. It made no profit when in 1920 it received no more than this. How this view may affect the treatment of the old corporation in respect of the sale we need not consider.

The petitioner seeks amortization of its tugboats. No claim therefor was made before June 15, 1924, and its right therefore, if any it had, has lapsed and has not been revived by section 1209, Revenue Act of 1926.

Upon the issues raised we sustain the Commissioner as to the computation of invested capital and amortization, and the petitioner as to the amount received for the Hercules.

Judgment will be entered aceordingly after 10 days'1 notice, under Rule 50.


author: Sternhagen

text:
    Appeal of FIDELITY TRUST CO.
    Docket No. 4920.
    Decided July 27, 1926.
    1. The Board, Raving jurisdiction of the subject, must consider all matters necessary to the exercise of jurisdiction.
    2. Officers and directors of a corporation are not the agents of the individual stockholders and have no control over their individual stock holdings.
    3. The fact that a majority of the directors of a corporation resign and the board by election substitutes directors of another corporation is not sufficient to give the second corporation statutory control.
    4. The statute recognizes no qualification of the word control, such as legal control or actual control.
    5. The full management or control of the corporate and business affairs of one corporation by another is not sufficient to constitute statutory control.
    6. The fact that one corporation claiming to control the stock of another has voluntarily imposed upon itself restrictions upon the exercise of such control does not prove that control did not exist. The control depends upon the power of another to obstruct its exercise.
    7. On March 22, 1920, the president of the taxpayer made an offer to the president of another corporation to purchase the capital stock of the latter by the issuance of its stock in exchange therefor, on the condition that the holders of 80 per cent thereof signify their assent to the sale by depositing, within 30 days, their stock with the taxpayer as trustee, and the further condition that the offer be approved, and authority to issue additional stock be given, by stockholders of the taxpayer. On April 10, 1920, the prescribed 80 per cent of the stock had been deposited.
    On June 2, 1920, the stockholders of the taxpayer ratified the purchase agreement and approved the necessary increase in capital stock. Held, that the two corporations wore affiliated on and after April 10, 1920.
    8. Qucere: Whether all corporations involved in a question of affiliation are proper parties in a proceeding before the Board?

      Samuel B. Fade, Esq., for the petitioner.

      M. N.. Fisher, Esq., for the Commissioner.
    BefoRe Steenhageit, Lansdon, and AeuNdell.
    The Commissioner determined that the petitioner ivas affiliated with the Logan Trust Company on and after June 2, 1920. The petitioner claims affiliation on March 22, 1920. There is in controversy only so much of the total deficiency of $64,560.70 for the fiscal year ended January 31,1921, and the subsequent period to December 31, 1921, as depends upon the correct determination of the period of affiliation.
    FINDINGS OF FACT.
    The Logan Trust Company is a Pennsylvania corporation organized in 1906. The Fidelity Trust Company is a Pennsylvania corporation organized in 1866.
    In December, 1919, the Pennsylvania banking department found that the capital of the Logan Trust Company was impaired. The directors made this good. Deposits decreased, and from January 1, 1920, to March 22, deposits dropped about 25 per cent. The company had reached the end of its borrowing power. This situation was known to the directors of the Logan Trust Company. The stockholders did not know it.
    A few days before March 22, 1920, the president of the Logan Trust Company and the president of the Fidelity Trust Company were in negotiation about the acquisition by the Fidelity Company of the stock of the Logan Company. The Fidelity Company was not a creditor of the Logan Company. The directors of the Fidelity Company had appointed a committee to consider the matter and an examination of the Logan Company’s affairs was made on March 20 and 21. The securities were examined but not checked in detail. Their value was difficult to determine. At the time of the negotiations the president of the Fidelity Company was told that the value of the Logan Company stock was $90 or $100 a share, which he did not verify. It ultimately turned out to he very much less.
    The reason why the Fidelity Company was interested in negotiating with the Logan Company was that it needed an office at this location and the Logan Company’s building and land suited its need; and also that the clientele and good will were believed to be desirable. These advantages were believed sufficient to justify a risk.
    At a meeting of the board of directors of the Fidelity Company on March 19, 1920, the president “ stated he was in negotiations with Mr. Walter H. Lippincott, president of the Logan Trust Company, relative to having this company take over the Logan Trust Company, and if the matter met with the approval of this board he would like permission to appoint a committee consisting of members of this Board with power to act.” And it was “ resolved that the president be empowered to appoint a committee consisting of members of this board with full power to continue negotiations for th,e stock of said Logan Trust Company.”
    The Logan Company directors at a meeting March 20,' 1920, authorized the president “ to negotiate with William P. Gest, president of the Fidelity Trust Company, for the purchase of the capital stock of our company at $100 per share or better on a basis of the exchange of stock for the Fidelity Trust Company at $500 per share.”
    On March 22, 1920, the president of the Fidélity Company wrote the following letter to the president of the Logan Company:
    On behalf of the Fidelity Trust Company, I hereby offer, through you, to the stockholders of the Logan Trust Company of Philadelphia, to purchase their stock at par, the purchase price to be payable in stock of the Fidelity Trust Company at the rate of $500 per share, this offer being made upon the express conditions—
    First: That it shall be accepted by the holders of 80% of the par value of the stock of the Logan Trust Company of Philadelphia within thirty days from the date hereof, such acceptance to be evidenced by the deposit with the Fidelity Trust Company, as Trustee, under a Deposit Agreement to be approved by it, of their Certificates of Stock, duly endorsed for transfer, and
    Second: That the offer shall be approved, and a sufficient increase of the stock of the Fidelity Trust Company authorized by the stockholders of said Company at a meeting duly called for that purpose.
    This offer if accepted by you shall be made a continuing offer to the Stockholders of the Logan Trust Company of Philadelphia for the time above set forth.
    This letter was on March 22, 1920, presented, by the president at a meeting of the board of directors of the Logan Tr'ust Company held ¡at 8.30 a. .m., at which “ the offer as contained in the above letter * * * was unanimously accepted.” At this meeting it was resolved “that the board of directors of this company does hereby recommend to each and every of the stockholders of this company the acceptance of the offer of the Fidelity Trust Company to purchase their stock at par, purchase price to be payable in stock of the Fidelity Trust Company at the rate of $500 per share, and that they dejmsit their stock forthwith with the Fidelity Trust Company as Trustee under the terms of a deposit agreement to be in such form as may be approved by the officers of this company as now constituted.” And it was also resolved that certain directors “ be appointed as a committee to present the offer to the stockholders and use their best efforts to solicit and obtain the deposit and sale of their stock in accordance with the terms of the offer.” And it ivas also resolved “ that in all cases in which this company is trustee for any estate, or in any other capacity shall bold any of the stock of the Logan Trust Company of Philadelphia as part of the trust estate, that this company, as such trustee, does accept the offer made by the Fidelity Trust Company for the purchase of said stock, and that the officers of said company as such trustees be authorized and directed to deposit same under deposit agreement which may be provided for that purpose under terms of said offer, and to accept shares of Fidelity Trust Company in exchange therefor.” At this meeting two of the Logan Company directors resigned from the board and the president and vice president of the Fidelity Company were immediately elected by the board as directors. The president and vice president of the Logan Company resigned and these two new directors were immediately elected president and vice president. On the same day, March 22, 1920, another meeting of the board of directors of the Logan Company was held at three o’clock, and at this meeting seven of the directors resigned and their places were immediately filled by the election by those present at the meeting of persons who were at that time directors or officers of the Fidelity Company. The board of the Logan Company was composed of sixteen members and after the foregoing meetings on March 22nd there were nine persons acting as such directors who were directors or officers of the Fidelity Company.
    It was understood by the president of the Fidelity Company in the negotiations with the president of the Logan Company that the Fidelity Company should have a free hand in the organization of the Logan Company; that there was no obligation to retain any members of the board or any of the officers; that having assumed the responsibility in a failing institution the Fidelity Company should have what they regarded as commensurate authority; that they should have complete control. A portion of the old board was retained as a matter of policy in order to retain the good will and clientele of the Logan Company. Retaining the directors and officers of the Logan Company was entirely in the discretion of the Fidelity Company. The executive officers of the Fidelity Company were elected as directors of the Logan Company in order to put the actual management in the hands of the Fidelity Company. The president then regarded the Fidelity Company as in absolute control of the Logan Company. From March 22, 1920, until June 2, 1920, the new officers and directors of the Logan Company who were connected with the Fidelity Company received their salaries from the Fidelity Company and there was no charge for their services against Logan funds. The principal officers spent nearly all their time in connection with the affairs of the Logan Company.
    The by-laws of the Logan Companjr provided that the annual meeting of the stockholders be held on the second Thursday of December, and special meetings might be called whenever the board of directors should direct or at the request of the owners of one-third of the capital stock. All stockholders’ meetings required ten days’ notice by the secretary, published in at least two daily newspapers, and at least five days’ notice given personally or by mail.
    At a special meeting of the board of directors of the Fidelity Company March 22, 1920, 12 o’clock noon, the president stated “ that with the approval of the committee appointed by the board at its last meeting to consider the advisability of acquiring the stock of the Logan Trust Company, he made a proposal to the president of that company, offering on behalf of the Fidelity Trust Company to purchase from stockholders of the Logan Trust Company their stock at par, the purchase price to be payable in new stock of the Fidelity Trust Company at the rate of $500 per share, the offer being conditioned upon its acceptance within thirty days by holders of at least eighty per cent at par value of the stock of the Logan Trust Company; and further, that the stockholders of this company shall approve the offer and authorize the increase of stock necessary to complete the transaction.” The president read his letter of March. 22nd above set forth. Thereupon, the board adopted the following resolution:
    That the offer of the president of this company made on its behalf to Mr. Walter H. Lippincott, president of the Logan Trust Company, to purchase the outstanding capital stock of that company from the holders thereof, as set forth in his letter of this date read at this meeting, be and the same is hereby ratified and approved, and the officers of this company are hereby authorized and directed to take such steps as may be necessary to complete the transaction in accordance with the terms and conditions of said offer.
    On March 22, 1920, the following announcement was published in the Philadelphia Public Ledger:
    Announcement is made by the Logan Trust Company of Philadelphia thai the Fidelity Trust Company has made an offer to purchase and acquire all of the Stock of the Logan Trust Company of Philadelphia, which will transfer unto the Fidelity Trust Company the management of the Logan Trust Company of Philadelphia.
    In accordance with the terms of the arrangement which has been made, Mr. Wm. P. Gest, President of the Fidelity Trust Company, and Mr. J. C. Neff, Vice President of the Fidelity Trust Company, will be elected President and Vice President, and Members of the Board of Directors of Logan Trust Company of Philadelphia, at a meeting to be held this morning, thus turning oyer to the Fidelity Trust Company at once, the management and control of the Logan Trust Company.
    According to the terms of the offer, stockholders of Logan Trust Company will receive one share of Fidelity Trust Company for every five shares of Logan Trust Company or of their holdings.
    Under date of March 22, 1920, the following agreement was made:
    AGREEMENT DATED MARCH 22, 1920, BETWEEN
    WALTER PI. LIPPINCOTT et al.
    and the
    FIDELITY TRUST COMPANY
    for the deposit of the
    Capital Stock of the Logan Trust Company of Philadelphia.
    AGREEMENT made this 22d day of March, 1920, between WALTER H. LIPPINCOTT, HUGH McILVAIN, ROWLAND COMLY, GEORGE M. BUNTING, and CHARLES MAJOR, as Managing Committee for Stockholders of Logan Trust Company of Philadelphia, parties of the first part, FIDELITY TRUST COMPANY, of- the City of Philadelphia, a corporation duly incorporated under the laws of the State of Pennsylvania, as Trustee, (hereinafter called the “Trustee”) of the second part, and such holders of the capital stock of Logan Trust Company of Philadelphia, a corporation of the State of Pennsylvania, as may become parties hereto by depositing their st'ock as hereinafter provided (hereinafter called the Depositors) of the third part, Witnesseth:
    Fidelity Trust Company has made an offer to purchase from the respective holders thereof all the capital stock of Logan Trust Company of Philadelphia, at the price of $100 per share, payable in stock of said Fidelity Trust Company at the rate of $500 per share, subject to the condition (a) that this offer be accepted by the holders of 80% of the capital stock of said Logan Trust Company of Philadelphia and such assent be evidenced by the deposit of their stock under the terms of this agreement; and (b) that said offer be approved by the stockholders of the Fidelity Trust Company and the necessary authority for the increase of the capital stock of that company be given by them. In consideration of the premises and for the purpose of carrying into effect the provisions of said offer, it is hereby agreed as follows:
    1. All holders of the capital stock of Logan Trust Company of Philadelphia, up to the amount of One Million Dollars ($1,000,000) par value thereof, may become parties to this agreement by depositing their certificates of stock as hereinafter provided with the Trustee on or before 3 o'clock P. M. on the 21st day of April, 1920. This time may be extended by the Trustee with the consent in writing of the Committee, but not later than the first day of June. 1920.
    2. All certificates of stock so deposited must be duly endorsed for. transfer in blank or accompanied by proper transfers in blank thereto attached with the signature of the transferrer guaranteed in the usual manner and accompanied by the proper Internal Revenue stamps, which may be uncancelled and unattached. If and when this agreement becomes operative, said stamps shall be duly cancelled and the several depositors hereby authorize the Trustee in their behalf to cancel the same. If this agreement should not become operative, all such stamps shall be returned with the certificates to the holders of the receipts for said certificates as hereinafter provided.
    3. Upon the deposit of any certificate or certificates for stock, the Trustee will deliver unto the depositor, in exchange therefor, its receipt, which shall be negotiable, and may be transferred by endorsement and delivered merely, and by the acceptance thereof and by transfer of the same the depositor and any transferee becomes bound by all the terms, conditions and provisions of this agreement. Said receipt shall be substantially in the following form:
    No- -Shares.
    FIDELITY TRUST COMPANY,
    325 Chestnut Street, Philadelphia,_,.1920.
    FIDELITY TRUST COMPANY, TRUSTEE, acknowledges to have received from-shares of the capital stock of Logan Trust' Company of Philadelphia this day deposited and received under and in accordance with the terms of an agreement for the deposit thereof made between Walter H. Lippincott and others and Fidelity Trust Company, Trustee, dated the_day of March, 1920, and on file in the office of this company and of Logan Trust Company of Philadelphia. By the deposit of said stock and the acceptance of this receipt, the depositor, and upon the transfer hereof, the transferee, becomes a party to said agreement and is entitled to all the benefits thereof and is subject to the terms and conditions therein set forth, to which agreement reference is hereby made for the terms and conditions upon which said deposit is made and the rights of the holders of this receipt thereunder. This receipt shall be negotiable by endorsement and delivery thereof, but no new receipt will be issued to the transferee.
    In case the agreement of purchase contained in said agreement becomes operative in accordance with its terms, the holder hereof will be entitled to receive, upon presentation and surrender of this receipt at the office of this company, stock of Fidelity Trust Company of the par value of one hundred dollars, at the rate of one share of said stock of Fidelity Trust Company for five shares of stock of said Logan Trust Company of Philadelphia, provided, however, that if this receipt be for less than five shares of said stock of Logan Trust Company or an amount not exactly divisible by five, then the holder hereof shall only be entitled to receive nondividend bearing scrip certificates for said odd shares of stock which shall be exchangeable for shares of stock of Fidelity Trust Company when thereafter presented together with other scrip certificates entitling the holder in the aggregate to one or more full shares of stock of said Fidelity Trust Company.

      In ease the offer of purchase as contained and set forth in said agreement shall not become operative on or before the 15th day of June, 1920, the holder of this receipt shall be entitled to the return and redelivery of the shares deposited and specified herein, upon presentation and surrender of this receipt for that purpose at the office of this company.
    FIDELITY TRUST COMPANY, Trustee, By-
    4. No transfer of any of the deposited stock shall be made upon the books of the Logan Trust Company unless and until the conditions of the offer for purchase of said stock have been fulfilled and the agreement of purchase has become absolute, nor, in any case, prior to June 2, 1920, and the depositors shall be entitled to have, receive and take for their own use, respectively, any dividend on the stock deposited hereunder which may be declared prior to said 2d day of June, 1920, whether the agreement of purchase becomes operative or not, and no depositor shall he entitled to withdraw his stock or to the return thereof unless and until this agreement becomes inoperative according to its terms.
    5. If within the time herein limited, or any extended time, the amount of stock deposited hereunder shall equal 80% of the total outstanding capital stock of Logan Trust Company of Philadelphia, and which total outstanding stock shall not exceed ten thousand (10,000) shares, and if on or before the tenth day of June, 1920, the stockholders of Fidelity Trust Company shall approve of the purchase and acquisition of the stock of Logan Trust Company upon the terms hereinabove set forth, and the necessary increase in the capital stock of Fidelity Trust Company be duly authorized, this agreement and the offer for the purchase of said stock shall immediately become operative and the Trustee shall at any time, on or after the fifteenth day of June, 1920, deliver to the holders of the negotiable receipts issued hereunder shares of the capital stock of Fidelity Trust Company upon the surrender and delivery of said receipts at its office, 325 Chestnut Street, in the City of Philadelphia, in the proportion of one share of stock of the Fidelity Trust Company of the par value of one hundred dollars ($100), in exchange for each five shares of the stock deposited hereunder; provided, however, that no certificate for a fractional share of said stock shall be issued by said Fidelity Trust Company and that the holders of said receipts who may be entitled under the terms of said offer of purchase to fractional parts of a share of stock of Fidelity Trust Company shall receive a certificate in such form as may be satisfactory to said Fidelity Trust Company, which shall not entitle the holder thereof to any voting power thereof or to participate in any dividends declared by said Fidelity Trust Company, which shall be exchangeable, when presented with other certificates for fractional parts of a share entitling the holder in the aggregate to one or more full shares, for such full shares of said Fidelity Trust Company.
    The Trustee agrees with each of the depositors and holders of said receipts, in case the agreement of purchase becomes operative, to duly execute and deliver the shares of stock and certificates herein provided for.
    6. In case the amount of stock deposited hereunder at the date herein limited, or any extended date, be not equal to 80% of the total outstanding stock of Logan Trust Company, or if, notwithstanding such amount be deposited, the offer of the Fidelity Trust Company to purchase said stock be not approved by its stockholders, or the necessary increase of stock authorized by them,, on or before the tenth day of June, 1920, then this agreement and the offer of purchase upon which the same is based shall, unless declared operative under the provisions of paragraph 8, forthwith become null and void, and the stock deposited hereunder shall be returned and redelivered to the holders of the receipts therefor upon presentation and surrender of the same at the offic'e of the Trustee.
    7. The Trustee shall not be liable for any act, matter or thing done by it in good faith in the performance of this agreement, save only for the receipt, care, custody and delivery in accordance with the terms of this agreement, of the certificates of stock deposited with it for the certificates of its own stock in case the same become deliverable hereunder. It shall not be obliged to inquire into the genuineness or validity of any certificate of stock offered to it for deposit hereunder, nor into the validity of the transfer thereof or of the title of the transferrer, or the power to transfer the same, or the genuineness of the signature thereto, hut (he presentation and deposit with it of any certificate believed by it to be genuine and properly transferred shall be full warrant and authority for the issue of its receipt therefor. It shall not be liable for any delivery made by it of any of said stock to the holder of any of its receipts issued therefor, if and when the stock shall become returnable to the holders of said receipts under the provisions of this agreement, and shall not be bound to inquire as to the title of any such receipt of the person presenting the same, nor as to the genuineness or validity of any endorsement thereon or transfer thereof, but the return of any certificate or certificates of stock to the amount called for in any such receipt to the holder thereof upon presentation as and when under the terms of this agreement the said stock is returnable to such holder, shall be a full discharge of the Trustee from all liability with respect thereto. The Trustee shall not be bound or obliged to give any notice to any depositors or holders of the receipts issued by it with respect to any matter or thing which is the subject matter of this agreement, but may, in its discretion, give such notice to the depositors or holders of the receipts issued by it, but in case the Trustee elects so to do, it shall, nevertheless, not be liable for and failure to give such notice to any depositor or holder of said receipts.
    8. Notwithstanding less than 80% of the outstanding stock of Logan Trust Company shall be deposited under this agreement, the Trustee may at its sole option declare this agreement to be operative by notice in writing to the Committee, and thereupon the same shall be and become operative with like effect as though the requisite number of shares hereinbefore provided had been actually deposited hereunder.
    9. No notice shall be required to be given to any of the depositors with respect to any of the terms or provisions of this agreement or the things to be done thereunder, but in case either the Trustee or the Committee shall elect to give any such notice, the same shall be sufficiently given by publication twice in one week in two newspapers of general circulation, published in the City of Philadelphia. Either the Trustee or the Committee may, however, give such other notice by mail or otherwise as it or they may think proper, but shall not be liable in any wise for any failure to give notice to any depositor or holder of said receipts.
    10. Duplicate originals of this agreement shall be signed by the parties of the first and second part and one copy thereof lodged with the Trustee and the Committee, but it shall not be necessary that any copy thereof be signed by any of the depositors.
    In Witness Whereof, the said parties of the first and second part have caused these presents to be duly executed by them, and the parties of the third part have become parties hereto by the deposit of their stock as hereinbefore provided.
    (Signed) Walter H. Lippincott, [seal.]
    (Signed) Hush McIlvain, [seal.]
    (Signed) Rowland Comly, [seal.]
    (Signed) Geo. M. Bunting, [seal.]
    (Signed) Chas. Major, [seal.]

      Managing Committee.

    Fidelity Trust Company,
    By (Signed) Wm. P. Gest, President.

    Attest:
    (Signed) Jos. McMorris, Secretary.

    On March 22nd the members of the old board of directors of the Logan Trust Co. immediately assigned among themselves the names of the stockholders whom they would undertake to persuade to deposit their stock in accordance with the agreement. The stock was held by many people, all of whom were members of the Society of Friends. It had been originally issued to the personal friends and families of the directors and it was still principally in the hands of the original holders. The directors believed on March 22nd that they would have no difficulty in securing the deposit of all of the stock. All the stockholders, as soon as the situation was described to them, agreed to deposit their stock and no question or difficulty was raised. The directors of the Logan Company immediately indicated their intention to sell their holdings under the agreement and their stock was the first to be deposited.
    The president and vice president of the Fidelity Company had no doubt that the arrangement would go through. The president would not have made the agreement unless he had confidence that it would go through, and he believed that the offer of the Fidelity Company was so liberal to the stockholders of the Logan Company and their need ivas so pressing that there was no practical doubt of the consummation of the plan.
    The total capital stock of the Logan Company outstanding on March 22nd was 10,000 shares of $100 par value. The capital stock of the Fidelity Company at this time was 50,000 shares of $100 par value.
    On March 22, 1920, the stockholders of the Logan Trust Co. began to deposit their stock with the Fidelity Trust Co. under the agreement, and the aggregate number of shares on deposit at the close of each day is as follows:
    Shares. Shares.
    March 22, 1020_ 567 March 27, 1920_3,759
    March 23, 1920_1,165 March 29, 1920_1_4, 401
    March 24, 1920_1, 719 March 30, 1920_5, 312
    March 25, 1920_2, 952 March 31, 1920_5, 475
    March 26, 1920_ 3, 093 April 1, 1920_5, 655

      Sil «iros. Sharps.
    April 3, 1920_5, 928 April 21, 1920_9, 576
    April 5, 1920_6,108 April 22, 1920_9, 628
    April 6, 1920_0,513 April 23, 1920_9, 673
    April 7, 1920_7, 323 April 24, 1920_9, 708
    April 8, 1920_7, 620 April 26, 1920_9, 712
    April 9, 1920_7,717 April 27, 1920_9, 718
    April 10, 1920_8, 011 April 28, 1920_9,723
    April 12, 1920_8,390 April 29, 1920_9, 751-
    April 13, 1920_8, 520 April 30, 1920_9, 786
    April 14, 1920_8, 627 May 3, 1920_9, 804
    April 15, 1920_8, 827 May 4, 1920_9,807
    April 16, 1020_8, 858 May 14, 1920_9, 817
    April 17, 1920_9,076 May 19, 1920_9.821
    April 19, 1920_9,360 May 26, 1920_9, 897
    April 20, 1920_9, 526 June 2, 1920_9,999
    On March 29, 1926, the Fidelity Company sent to all its stockholders the following blank form of proxy:
    PROXY
    Know all Men by these Presents; that-do make, constitute and appoint William P. Gest, J. O. Neff and Joseph McMorris, or any of them_ true and lawful proxy or proxies, for-and in_name to attend a special meeting of the stockholders of the Fidelity Trust Company, to be held at the office of the Company, 325 Chestnut Street, in the City .of Philadelphia, State of Pennsylvania, on the 2nd day of June, 1920, at 12 o’clock M., and then and there or at any adjournment or adjournments of said meeting vote the shares of stock of the Company standing in-name on its books for or against the following resolutions, viz—
    Resolved, that the capital stock of this Company be increased from $5,000,000 to $5,200,000, by the issue of 2000 additional share of the par value of $100 per share.
    Resolved, that the agreement heretofore made by this Company, providing for the purchase of stock of the Logan Trust Company at a price equal to the par value thereof, payable in capital stock of this Company at a valuation or rate of $500 per share, be and the same is hereby ratified and approved, and the officers and Board, of Directors of this Company are hereby authorized to carry said agreement into effect by issuing and delivering new stock of this Company, authorized at this meeting, to holders of stock of the Logan Trust Company in exchange for said stock, on the terms and conditions of the said agreement.
    And also to vote upon any other business that may come before said meeting or any adjournment or adjournments thereof, with the same force and effect as_could do if personally present, with power of substitution, hereby ratifying and confirming whatever_said proxy or proxies, or their or his substitute or substitutes may lawfully do by virtue hereof.
    Witness_hand and seal this_day of_ 1920.
    Witness: _ [l. s.]
    The by-laws of the Fidelity Company provided that the capital stock could be increased by the action of the owners of a majority of the outstanding capital stock. In the history of the company the stockholders had never failed to ratify the action of the directors.

      The first proxies to come in were dated April 1, 1926. On April 2nd proxies for 28,559 shares, or over 50 per cent of the stock had been executed; on April 3rd over 60 per cent, on April 7th over 80 per cent; and on April 22nd over 90 per cent.
    On June 2,1920, a meeting of the stockholders of the Fidelity Company was held and the resolutions set forth in the form of proxy were adopted, and the capital stock was increased by $200,000 par 'value.
    On June 4, 1920, the directors of the Fidelity Company resolved to perform the acts required by the agreement of March 22, 1926, to issue new stock certificates in conformity with the now capitalization, and to purchase all the property of the Logan Company and assume its liabilities. On June 9, 1920, the Fidelity Company offered to purchase the Logan Company’s property subject to outstanding obligations as of June 12, 1920, for $1,000,000 cash, and a deed therefor v*as executed and delivered June 12, 1920. The Fidelity Company was on that date the owner of all the stock and all the property of the Logan Company. No dividends were declared or paid by the Logan Company after March 22, 1920.
    On January 17,1922, the following letter was sent by the Treasury Department to the Fidelity Company:
    Treasury Department Washington
    IT: SA: OR: Af Jan 17 1922
    LJP-8
    Fidelity Trust Company,
    825 Chestnut Street,
    Philadelphia, Pennsylvania.
    Sirs:
    Reference is made to the executed Affiliated Corporations Questionnaire filed by you for the taxable year 1921 and to the statement and correspondence relative thereto.
    From the facts presented, you are advised that during the taxable year ended January 31, 1921 your company, the Fidelity Building Corporation, and the Logan Trust Company, (from the date of acquisition, March 22, 1920) were affiliated within the purview of Section 240 of the Revenue Act of 1918. You should, therefore, file a consolidated income and profits tax return for the above-mentioned fiscal year including therein the Fidelity Building Corporation for the entire year and the Logan Trust Company from the date of acquisition, provided that such action has not been taken.
    Pursuant to this ruling, a copy of this letter should be attached to the return when filed.
    If not in agreement with this ruling, you are requested to submit an answer within thirty days from the date of this letter.
    In your reply, refer to IT: SA: CR: Af-LJP-8.
    Respectfully,
    E. H. Batson,
    Deputy Commissioner.
    By (Signed) Wm. P. Bird Chief of Subdivision.

      On Apri] 24, 1925, the Commissioner advised the petitioner of “ a revised affiliation ruling deeming the Logan Trust Company affiliated with the Fidelity Trust Company from June 2, 1920,” and determined the deficiency of $64,560.70.
   OPINION.

Sternhagen

: The petitioner contests the validity of the Commissioner’s final determination that it was not until June 2, 1920, that there was an affiliation between the petitioner and the Logan Trust Co., within section 240 of the Revenue Act of 1918, and takes its stand upon an earlier determination of the Commissioner that such an affiliation must be recognized from March 22, 1920. The Logan Trust Co. is not being called upon for any additional tax, and nominally it has not appeared or become a party to the proceedings, so that, from a strict regard for the rights and obligations of parties, it might be questionable how far its interests could be affected by any decision now rendered. But the parties here have proceeded as though the Logan Company were at one with the petitioner, and, since this is apparently completely so, we assume the acquiescence of the Logan Company in the redetermination prayed for. That we do so, however, in the amicable circumstances existing in this proceeding, can not in another case control our disposition of any question properly presented as to the necessity of having before us all interested parties.

The issue is not simply whether these two corporations were affiliated on June 2, 1920, as claimed by the Commissioner, or on March 22, 1920, as claimed by the petitioner, for it is readily conceivable that the answer to both those questions would still leave open the question of the proper deficiency. By the statute, this Board is required to redetermine the deficiency, Hotel de France Co., 1 B. T. A. 28, and in order properly to do this it is necessary to determine all the facts and establish all the intermediate conclusions upon which such a redetermination can correctly be based. Like a court of equity, the Board, having jurisdiction of the ultimate subject matter, must consider all matters necessary to the proper exercise of that jurisdiction. Shaffer v. Carter, 252 U. S. 37, 48. The question, therefore, principally to be decided here is not only whether the taxpayer is right or wrong, but upon what date did the conditions of statutory affiliation first exist. American La Dentelle, Inc., 1 B. T. A. 575. Both parties agree that affiliation existed on June 2, 1920. Neither party contends that affiliation existed prior to March 22nd. It is some time between these two dates that the scale is tipped.

The case turns upon the application of section 240(b) of the Revenue Act of 1918, which is as follows:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

On March 22, 1920, the president of the Fidelity Company offered, in behalf of his corporation, to purchase the stock of the Logan Company upon certain expressed conditions. This offer was made not directly to each of the stockholders but to the president of the Logan Company and by him communicated to the directors, who voted to accept the offer and recommended its acceptance to each stockholder. They also undertook to persuade the individual stockholders to accept the offer and its conditions. On' the same day the Logan Company directors, by resignations and substitutions, placed, so far as it was in their power to do so, the board of directors, and hence the affairs of the Logan Company, in the hands of the directors of the Fidelity Company. The president of the Fidelity Company was immediately elected to be president of the Logan Company. On the same day an agreement was made between Lip-pincott and others, “ as managing committee for stockholders of Logan Trust Company,” and the Fidelity Company, “ as trustee,” providing for the method of fulfillment of the purchase contemplated by the offer of the Fidelity Company. And on that date there were deposited with the Fidelity Company, as trustee under the agreement1, 567 shares of Logan Company stock.

These circumstances, it is contended, fulfill the requirements of affiliation, the argument proceeding not so much from the legal significance of the events of the day as from their practical significance. The Logan Company was in dire straits and its stockholders were pressed by necessity. Fulfillment of the plan was the only reasonable course, and in the opinion of all who knew it was bound to be carried out. Quick action was needed, the Logan Company directors took it, and the Fidelity Company and all concerned were confident that their action would not be questioned. To support this view, it is proven that there was complete adoption of the plan by everyone concerned as early as the evidence of such adoption could be given, and by the doctrine of ratification the legal effect of the subsequent acts is sought to be related back to March 22nd.

Looking at the facts as they were on that date, we are of opinion that the Fidelity Company did not own or control substantially. all of the Logan Company stock. That it did not own the stock is clear. The process of acquiring it had just begun, and many of the owners of stock were on that date not aware of the plan of reorganization. Tlie announcement published in the press has not by the evidence been brought home to the stockholders and could not serve to deprive them of either ownership or control.

Nor is there evidence of control at that time. The Fidelity Company by its agreement recognized its lack of control and protected itself against failure of control by reserving the condition that SO per cent of the stock should be deposited before the agreement became effective, unless the Fidelity Company elected otherwise. The effect of the agreement is plain; it was entirely executory and not binding upon any stockholder who had not accepted it in the prescribed manner. Petitioner’s counsel argues at length that Lippincott or his associates were agents of the stockholders for the sale of the stock, and that by making the agreement to sell they bound the stockholders and thus placed the Fidelity Company in control of the stock and the business. But the officers or directors of a corporation are not the agents of the individual stockholders and have no control over the stock; and they did not attempt to exercise such authority, but confined themselves to a mere recommendation to the stockholders that they accept the offer by depositing their stock. The stockholder until he deposited his stock was still the owner and in complete control of all the incidents of ownership. The Fidelity Company was until that time merely in a state of expectancy, the outcome of which rested with someone other than itself. When the stockholder deposited his stock he became a party to the agreement from that time forth. There was nothing in this act by way of ratification and nothing to be related back to March 22, 1920. No one had sold or agreed to sell as of that date and there was nothing which needed ratification. There was an offer of the Fidelity Company to purchase and this offer and its conditions were fro tanto accepted by the deposit of stock. When the stockholder made this deposit he acted for himself and became for the first time a party to the agreement. He was not ratifying an act that had already been done for him and was not recognizing that an agency had existed.

The petitioner rests its assertion of control on the further premise that on March 22, 1920, it had a majority of the board of directors of the Logan Company. The evidence discloses that nine of the sixteen duly elected directors resigned on that date and that their places were immediately filled in the directors’ meeting. The power of the board to accomplish these substitutions is not here in dispute, but it may be seriously questioned whether such a procedure was sufficient to give the new directors any authority over the affairs of the Logan Company. See Wright v. Commomwealth, 109 Pa. St. 560; 1 Atl. 794; Moses v. Tompkins, 84 Ala. 613; 4 So. 763; Mecleary v. John S. Mecleary, Inc., (Del.) 119 Atl. 557. And it can hardly be contended that by a substitution of the board so accomplished the Fidelity Company gained control of siibstantially all of the stock of the Logan Company, — the very stock which it was seeking regularly to control through ownership by the means prescribed in the agreement. This agreement was made in recognition of the lack of ownership or control of the Fidelity Company and of the entire freedom of each individual stockholder to determine voluntarily whether to become party to it or to take his chance otherwise.

The reliance of petitioner upon a distinction between what is called actual control and legal control makes it essential to keep in mind that the statute makes no such distinction. _ The word control as found in the statute is unadorned, and we may not inject a qualification not manifestly intended by Congress. The question must in each case turn upon the application to the facts of the word control. The most that can be determined as of March 22, 1920, is that the Fidelity Company had started on a course which it hoped and believed would give it ownership and control of the Logan Company and its stock, and this incipient stage we think is not sufficient to satisfy the statute.

When, in the rapid progress of events, was control first established? It is not disputed that the Fidelity Company controlled the corporate and business affairs of the Logan Company at once. The Logan directors yielded to the demand of the Fidelity Company and turned over to it the full management. This they felt compelled to do and no one questions their faith or wisdom in doing so. But the statute contemplates more. Norwich & Worcester R. R. Co., 2 B. T. A. 215.

The condition of the agreement that the Fidelity stockholders should approve the purchase of the Logan stock did not obstruct the control of the stock in so far as such control may have otherwise existed prior to the approval. This was a condition which the Fidelity Company imposed for its own protection, and since there was no legal reason in Pennsylvania why the stock could not have been purchased outright it rested with the Fidelity Company to free itself from this condition at its choice. It was not deprived of control because it voluntarily chose not to exercise it to the full extent until the stockholders’ meeting. The Fidelity’s increase of capital stock was dependent upon the stockholders’ approval but this was not a necessary legal condition of the sale, which could have been effected by the transfer of existing stock if it were available. Since the stockholders’ meeting was not a condition precedent to control, it is apparent that the execution of proxies by Fidelity stockholders does not affect the question. The control does not depend so much upon the Fidelity Company’s acts as upon the acts of the Logan Company stockholders with whom rested the power to obstruct it.

The plan by its terms did not become operative until 80% of the Logan Company stock was deposited, and this in fact was on April 10,1920. While it is true that prior to that date the depositing stockholders had agreed not to vote the stock, it is also true that the Fidelity Company had no right or power in respect of such stock. Such restraint as was imposed upon the stockholder after deposit was voluntary and not because of the control of the Fidelity Company. The principal incident of ownership of the stock, namely, the right to such dividends as might be declared, expressly remained with the depositing stockholder; and this is inconsistent with the petitioner’s contention that it was the beneficial owner of the stock. When, however, on April 10, 1920, the prescribed 80% of the stock was deposited, the Fidelity Company’s right to control it was substantially complete. Both parties to the sale were then bound and the right of the depositor of the stock was to receive the purchase price in lieu of his prior ownership of Logan Company stock. The remaining minority, while still the owners in possession of their stock during the short period until its deposit, controlled nothing. They were powerless to vote, for there was no way of calling a meeting at which to vote, except as the Fidelity Company chose to do so, and there was nothing else that their stock.represented to them that the Fidelity Company did not dominate. There was no chance of a dividend and no way to compel one, for the board of directors was either impotent, since the majority had resigned, or else the new majority, if authoritative, was the instrument of the Fidelity Company. And this situation only arose when the deposit of 80% of the stock made the agreement effective and converted the Fidelity Company’s offer into a right. Until that time, when less than 80% was deposited, the Fidelity Company could do nothing as to the stock unless it first exercised its right to declare the agreement operative.

We therefore hold that the petitioner and the Logan Trust Co. were affiliated on and after April 10, 1920.

Judgment will he entered under Rule 50 in accordance with this opinion.

Phillips concurs in the result only.


author: Love:

text:
    Appeal of J. S. FOWLER, Sr.
    Docket No. 3260.
    Decided July 27, 1926.
    As the taxpayer operated his business as a sole proprietorship, money withdrawn from the cash drawer by him but included in gross profits should not be charged to him a second time as income from salary.

      J. Alexander Neely, Jr., Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.

      Before SteRnhagen, Geeen, and Love.
    This is an appeal from the determination of a deficiency in income tax for the years 1919 and 1920, in the aggregate amount of $7,134.17. The controversy arises over: (a) The refusal of the Commissioner to allow a deduction for rent claimed to have been paid in 1919 by the taxpayer in the amount of $2,302.55. The Commissioner allowed only $1,202.55.
    (b) The inclusion by the Commissioner in gross income for 1919 of a quantity of cotton produced in 1919,' but carried over into 1920 and sold in 1920.
    (c) The action of the Commissioner in increasing the profits realized on the sale of a tract of land to Frank Pilgrim from $6,180 to $8,080.
    (d) The action of the Commissioner in alleging a profit of $31,400 in the sale of 700.2 acres of land to R. E. McKinney for $80,000, the taxpayer claiming no profits were realized.
    (e) The action of the Commissioner in increasing from $456.15 to $1,105.65 the profits realized on the sale of 11.34 acres of land out of the same tract from which were taken the 700.2 acres sold to R. E. McKinney.
    (f) The action of the Commissioner in alleging a profit realized on the sale in 1920 of the taxpayer’s life estate in a city block, with improvements, in the City of Anderson, S. Car., for the amount of $40,000. The taxpayer claimed that no profit was realized.
    (g) The action of the Commissioner in disallowing a deduction of $1,191.57 as expenses of operating automobiles used by his collectors in his business.
    (h) The action of the Commissioner in charging $3,174.62 as salary paid by the taxpayer to himself.
    From the depositions and testimony taken at the hearing, the Board makes the following
    BINDINGS OE PACT.
    The taxpayer is an individual residing in Anderson, S. Car. His principal business is the operation of several farms in and near Anderson.
    In 1919, the taxpayer is entitled to deduct the following items as customary and reasonable expenses of his business:
    To Mrs. Cunningham for use of 500-acre tract_L $700
    To Mrs. Cooley for use of 800-acre tract_'_1, 000
    To Mrs. J. C. Simpson for use of property_ 350
    To colored church for use of lot at stable_ 00
    To J. W. LaBoon for use of farm_ 120

      Total_2, 230

      The taxpayer kept his accounts on a cash receipts and disbursements basis. Cotton of a market value of $7,500 was produced in 1919, but sold in 1920.
    In 1919 the taxpayer owned property which had cost him $6,300. This he gave, together with $14,000 in cash, to Mrs. Cunningham in exchange for a' tract of land. The latter tract of land he sold in 1919 to Frank Pilgrim for $26,080.
    Prior to 1902, the taxpayer bought a number of adjoining tracts of land aggregating 733.75 acres, for which he paid $19,364.75. From time to time prior to March 1, 1913, he made the following improvements at the following costs :
    Improvement Cost
    Ditching-$10, 000
    Building- 15, 000
    Ginnery_r_ 4, 000
    Clearing and terracing_ 3, 500
    Dwellings and outbuildings_ 0, 000
    Total_ 38, 500
    On March 1, 1913, the value of the 733.75 acres, together with the improvements, was $73,375, or $100 per acre. In 1919, the taxpayer sold 700.2 acres of this land to E. E. McKinnej'" for $80^000, and in the same year he sold 11.34 acres of this land to C. E. Pilgrim for $956.15.
    Prior to 1913, the wife of the taxpayer conveyed to him a life estate in a certain city block in Anderson. Subsequent to such conveyance, the taxpayer expended $40,000 and upwards in improvement of this property. On March 1,1913, the entire property was worth $140,000. He sold his life estate in this property to the remaindermen for $40,000.
    The taxpayer had some expenses incident to the operation of two automobiles for the use of his collectors in 1920.
    In the return for 1920, the Commissioner added to gross income $3,174.62 as salary received by the taxpayer from his own business, of which he was sole proprietor. This money was already included in gross income of the taxpayer, and was so accounted for in his return.
   OPINION.

Love:

The taxpayer has established by uncontradicted testimony the fact that in 1919 he paid out as customary and reasonable expenses of his business a total of $2,230 for the use of land, on which he conducted his operations for gain.. He therefore should be allowed to deduct this amount as an expense of his business.

Although the taxpayer’s method of accounting was very unsatisfactory, for the purpose of calculating his income, nevertheless, it appears from the testimony that it was on a cash receipts and disbursements basis, and that cotton which had a market value of $7,500, produced in 1919 but carried over to and sold in 1920, was included in the calculation of the 1920 income tax, and ought not to be included in the calculation of the 1919 income tax.

The taxpayer in 1919 realized a taxable profit of $5,780 when he sold a tract of land to Frank Pilgrim for $26,080. By a series of purchases and trades he acquired property which, the evidence shows, cost him $6,300. In 1919 he gave this property and $14,000 cash in exchange for a tract of land. In the same year he sold this latter tract for $26,080. The cost subtracted from the selling price leaves $5,780 as profit.

There was considerable testimony in regard to the sale of two tracts of land, one to B,. E. McKinney and the other to C. E. Pilgrim. After consideration of all the testimony concerning the March 1. 1913, value of this land, it is our opinion that the fair value on March 1, 1918, of the 733.75 acre tract was $73,375, or $100 per acre. Included in this March 1, 1913, value were improvements in the -wa.j of ditching, buildings, a ginnery, and clearing and terracing, which in all cost the taxpayer $38,500 prior to 1913. Between 1913 and 1919 certain of these improvements had undoubtedly depreciated. But in the absence of any testimony as to the character of the improvements or their rate of depreciation, we are unable to include this item in our calculation of the taxable profit realized from the sale of this land and must assume that the Commissioner is satisfied that it has been taken care of in other ways. Accordingly, we hold that the taxpayer realized a taxable profit or gain of $9,802.15 when in 1919 he sold 700.2 acres for $80,000 and 11.34 acres for $956.15.

The only thing in controversy between the taxpajmr and the Commissioner in regard to the sale by the taxpayer in 1920 of his life estate in the city block was the March 1, 1913, value of the entire property. We find this value to have been $140,000, and, by a calculation agreed upon, the taxpayer received no taxable gain in 1920 when he sold his life estate to the remaindermen for $40,000.

There is no satisfactory evidence on which to base a deduction for expenses which the taxpayer claims he paid for the operation of two automobiles for the use of his collectors in 1920. No books or expense accounts or positive testimony by anyone who had kept account of these alleged expeditures was given in evidence. Consequently, no deduction can be allowed, although money was actually spent by the taxpayer in operating these business cars.

The testimony shows that on the 1920 return someone has charged the taxpayer with $3,174.62 as salary, the contention being that it was money which he had received from his own cash drawers. It was testified that all of this money had been included in the gross income of the taxpayer on the 1920 return, and, as he could only receive the money once, it should be charged to him as income only once.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.


author: Littleton

text:
    Appeal of NEW YORK THEATRE PROGRAM CORPORATION.
    Docket No. 4357.
    Decided July 27, 1926.
    Certain amounts paid to officers and stockholders and deducted as compensation for services rendered, held to have represented a distribution of profits.

      Marie Eisner, Esq., for the petitioner.

      E. 0. Mitchell, Esq., for the Commissioner.
    Before Littleton, Smith, and TRUssell.
    This is an appeal from the determination of a deficiency in income and profits tax for the fiscal year ending May 31,1921, in the amount of $29,298.17, arising from a reduction by the Commissioner of the amount claimed as compensation of officers and for personal services rendered from $100,773.78 to $35,363.63.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation engaged in the business of printing theatre programs, together with advertising matter contained therein, which it secures through its stockholders and salesmen employed for that purpose.
    During the fiscal year ending May 31, 1921, the taxpayer printed theatre programs for approximately 55 theatres in New York City. These programs were furnished to the various theatres without cost, and substantially all of the taxpayer’s income was derived from profits upon charges for advertisements inserted therein. The entire capital stock of the taxpayer was owned as follows:
    Shares.
    Drank V. Storrs_1, 965
    Ralph Trier-1_ 750
    Richard M. Huber_ 285
    Trier was president of the corporation and received a regular salary of $15,000 a year. Huber was vice president and received a regular salary of $8,000 a year. One Chevalier was secretary and received a salary of $12,363.63 a year. Storrs held no executive position with the company but was chairman of the board of directors. He received no fixed compensation. Certain salesmen employed by the corporation for the purpose of securing advertising contracts were paid a commission of 20 per cent.
    Trier had charge of obtaining contracts from operators of theatres for the privilege of printing their programs and also solicited advertising contracts. Huber had charge of the printing of the programs. He also solicited advertising contracts. Storrs had been in the advertising business for approximately 25 years and devoted a portion of his time in 1921 and prior years to soliciting advertising contracts. Trier and Huber, up to the taxable year 1921, had been with the taxpayer in the above mentioned capacity for six years.
    The following advertising contracts were credited to the three stockholders:

    During the taxable year the taxpayer credited to the accounts of the three stockholders certain amounts, computed upon the basis of the stockholdings, as follows:

    The taxpayer carried upon its books a commission account to which was charged all commissions due to salesmen. The amounts paid to the stockholders were never entered in the commission account but, on May 31, 1921, an entry was made upon the books charging “ Officers’ Salaries ” with the amount of the payments made to them and crediting “ Stockholders’ Account ” previously charged. Between January and March, 1920, the stockholders discussed the matter of profits from advertising and concluded to pay to each stockholder during the fiscal year ending May 31, 1921, 20 per cent of the profits arising from contracts secured by him. In the years prior to 1921, it had not been the custom of the taxpayer to pay its officers or stockholders commissions upon advertising contracts secured, the profits earned by the corporation being distributed as dividends. The fiscal year ending May 31, 1921, was the most prosperous in the taxpayer’s history. No payments were made to stockholders during the taxable year 1921, or any year subsequent thereto, as dividends, or otherwise, on account of the profits during that year, with the exception of the amounts paid as commission.
   OPINION.

Littleton

: The taxpayer contends that the amount of $65,410.15 paid to its stockholders during the fiscal year ending May 31, 1921, should be allowed as a deduction as an ordinary and necessary expense, as additional compensation for services rendered during that year. The Commissioner allowed the taxpayer to deduct $15,000, $8,000 and $12,363.63, representing regular compensation of the president, vice president, and secretary, respectively, but disallowed the deduction of the first-mentioned amount upon the ground that the same represented a distribution by the taxpayer of profits to its stockholders.

The taxpayer further claims that, while the payments made were computed upon the number of shares of stock held by each stockholder, the stock holdings were used as a convenient basis for arriving at the amount which each stockholder should receive upon the basis of 20 per cent and that the amounts so paid, together with the regular compensation fixed by the directors, were no more than reasonable compensation for the services rendered.

The statute, section 234 of the Revenue Act of 1921, provides that a corporate taxpayer shall be allowed a deduction of reasonable compensation for personal services actually rendered. It is not the policy of the law to allow a corporate taxpayer to deduct amounts paid in the form of compensation when, in reality, such payments amount to a distribution of profits or are made in lieu of the payment of dividends. When, as in this case, profits are distributed to the owners of all of the stock in proportion to the number of shares held by each, and claimed as deductions in addition to the regular compensation fixed by the directors, the evidence offered that such payments were in fact reasonable compensation for personal services actually rendered must be convincing, especially where the sole stockholders constitute the board of directors.

Frank Y. Storrs, the majority stockholder, was interested in other corporations and held no executive position with the taxpayer. He devoted only a portion of his time to securing advertising contracts. So far as the evidence shows, he had never been paid a salary or fixed compensation. Only one witness testified. His testimony does not very clearly show just what was agreed Tip on by the three stockholders early in 1920, and his statements as to the extent to which other salesmen employed by the taxpayer rendered services in connection with contracts credited to the three stockholders are equivocal. Although the year ending May 31, 1921, was the most prosperous in the taxpayer’s history, no payments by way of dividends were made to the stockholders after they had received the amounts claimed to have been paid as compensation.

From all the evidence the Board is of the opinion that the amounts paid to the stockholders between July 19, 1920, and May 31, 1921, did not constitute reasonable compensation but were distributions of profits to the stockholders, and as such are not deductible from gross income.

Judgment for the Commissioner.