text:
    Reservoir Hill Gasoline Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44814.
    Promulgated June 1, 1932.

      Charles H. Garnett, Esq., for the petitioner.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Lansdon:

We think the holdings of the respondent must be sustained. Whatever may be said in favor of the unit-of-production method urged by the petitioner, it is obvious that some reasonable estimate of the mineral reserve must be shown in order to determine that portion of the cost of the plant borne by each unit of production. A further showing that the established reserve is reasonably certain to be exhausted within the estimated time must also be made. In neither of these essentials has the petitioner sustained the burden of proof incumbent upon him. Respecting the productive life of petitioner’s reserve, we have only the statement of Ramsey who says , that at the time he decided to build the plant the known gas supply was very small, with insufficient flow to supply fuel for the boilers. He further stated no one could know how long the Avells would last and that he was largely influenced in building the plant through politics and pressure brought to bear upon by the city.

The record, on the whole, indicates that it was the whole Long Beach gas field that Ramsey looked to for future supply of raw material for his plant and that the recovery from his own leases was but one of the several factors that entered into his scheme of operation when he decided to build. In this connection he testified: “We scoured the country thoroughly and got all of the gas we could get at that particular time and figured if we could run the plant a year and a half or two years we might get out of it.” With a picture of the field as the record shows it to be at the time Ramsey built his plant, in its primitive stage of development, it is clear that the project was largely speculative and that no reliable basis existed for determining its productive life. In view of these uncertainties and of the fact that the petitioner’s plant was still operating in 1928, with increased production, we are of opinion that the determination of the respondent should be approved.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Willard M. Whitney, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mae A. Kelley Murphy, Petitioner, v. Commissioner of Internal Revenue, Respondent. John P. Kelley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37927, 38222, 38233.
    Promulgated June 2, 1932.

      'Willard M. Whitney pro se, and Mae A. Kelley Murphy pro se.

      James B. Johnston, Esq., for the respondent.
   OPINION.

Smith :

The respondent being unable to collect the taxes due from the Whitney Coal Mining Company for 1918 and 1919 in the amounts of $4,114.15 and $1,314.01, respectively, seeks in these proceedings to establish the petitioners’ liability for them as transferees of the assets of the corporation. The respondent has the burden of proving the liability of the petitioners. Sec. 912, Revenue Act of 1928; G. G. Small, 16 B. T. A. 658; Annie Temoyan et al., 16 B. T. A. 923; Phil Gleichman, 17 B. T. A. 141; Angier Corporation, 17 B. T. A. 1376; G. C. Barkley et al., 19 B. T. A. 855; Kinnett-Odom Co., 19 B. T. A. 1124; Lillian Burke, 21 B. T. A. 45.

The first point made by the respondent is that the petitioners, directors of the corporation, are liable for the taxes of the corporation under sections 5186 and 6054 of the Statutes of the Commonwealth of Pennsylvania in force in 1920, which provide as follows:

Sec. 5786. Declaration of dividends. — AJI corporations heretofore or hereafter incorporated under any special or general law of this commonwealth may, at any time or times, declare dividends of so much of their net profits as shall appear advisable to the directors; such dividends to be paid to the stockholders or their legal representatives at such time after their declaration as the directors may fix; but such dividends shall in no case exceed the amount of the net profits actually acquired by the company, so that the capital stock shall never be impaired thereby. (1913, May 23; P. L. 336, § 1.)
Sec. 605'4. Individual liahility of directors. — If the directors of any company declare any dividend when the company is insolvent, or the payment of which would render it insolvent, they shall be jointly and severally liable for all the debts of the company then existing, and for all thereafter contracted, so long as they respectively continue in office; Provided, That the amount for which they shall be liable shall not exceed the amount of such dividend; and if any of the directors are absent at the time of making the dividend, or object thereto at said time, and file their objections in writing with the clerk of the company, they shall all be exempted from such liability. (1863, July 18; P. L. [1864] 1102, § 24.)

The respondent points out that the surplus of the corporation at December 31, 1920, was $57,065.88 and that on January 31, 1921, this surplus was credited on the books of the company in equal shares to the drawing accounts of the petitioners, to be paid to them when the corporation ivas in funds to make the payments. The contention is that this credit on the books of the corporation was tantamount to the declaration of a dividend by the corporation and that inasmuch as the balance sheet at December 31, 1920, does not show the corporation’s liability for taxes for 1918 and 1919 in the aggregate of $5,428.22, the credit upon the books of the corporation rendered the corporation insolvent and therefore make the petitioners, as directors, liable for the taxes.

In our opinion the respondent is in error in his contention that the credits upon the books of the corporation under the circumstances here stated were tantamount to the declaration of a dividend. The corporation filed a personal service corporation return for 1919 under section 218 (e) of the Revenue Act of 1918. The credits were made upon the assumption by the officers of the corporation that it was a personal service corporation and that they as the stockholders were liable to income tax on their individual returns for their pro rata shares of the profits. The credit was made subsequent to that supposition and not for the purpose of creating a liability of the corporation to the petitioners. In any event, the corporation was not in funds with which to pay the petitioners the credits made and was never able to make such payments. The amounts were not distributed to the petitioners.

Section 280 (a) (1) of the Revenue Act of 1926 provides for the collection of the tax of the transferor from “ a transferee of property of a taxpayer ” in certain circumstances. The section is not, however, authority for proceeding against persons, either individual or corporate, who may be liable for the tax where in point of fact they are not transferees of property. Thus, a corporation or an individual may at law be liable for the tax due from a taxpayer by reason of having guaranteed the payment of a tax. In Leetonia Furnace Co., 23 B. T. A. 979, 987, the Board defined a transferee as “ one who takes the property of another without full, fair and adequate consideration therefor, to the prejudice of the rights of creditors.” Before the respondent may proceed under section 280 a person must be a transferee of property from the taxpayer in circumstances which make him liable at law or in equity for the tax. It follows that if a person claimed to be a transferee has not received property from the transferor no liability for the tax attaches to him. Grand Rapids National Bank, 15 B. T. A. 1166; Phillips v. Commissioner, 283 U. S. 589; J. A. Steinle, Administrator, et al., 19 B. T. A. 325. In the last mentioned case an attempt was made to hold certain stockholders liable for the tax of the transferor under section 280. The stockholders, in subscribing for the stock of the taxpayer corporation, had given their notes, which were thereupon used by the corporation as collateral in borrowing money to be used in operating the company. The loans were paid by the corporation in due course, but the notes were never paid. The Commissioner contended that these notes represented assets of the corporation, which were, irr effect, distributed to the stockholders by cancellation without collection. We held, however, that the notes were liabilities of the stockholders to the corporation, enforceable against the stockholders by the corporation or by its creditors, but that such liabilities were not such as to make the petitioners transferees of the assets of the taxpayer.

In the proceedings at bar there is no evidence that assets of the corporation were distributed to the petitioners by virtue of the credits made to their accounts upon the transferor’s books of account ,on January 31, 1921. We are therefore of the opinion that no liability attached to the petitioners by virtue of such credits.

We have further to consider the question of the liability of the petitioners for the taxes due from the corporation for 1918 and 1919, upon the ground that after 1920 the petitioners were dis-tributees of the assets of the corporation under conditions which made them liable for the taxes as transferees under section 280 of the Revenue Act of 1926.

For some years subsequent to 1920, the corporation did a large volume of business. It proved unable, however, to collect many of its accounts receivable. Legal proceedings were resorted to in some cases, but without success. The corporation continued to pay cash salaries.to its president at the rate of $3,600 per year, and to its secretary and treasurer at the rate of $1,920 per year, but had no funds with which to pay the full salaries credited to the drawing accounts upon its books or the earnings which had been credited to such accounts for the years 1918, 1919, and 1920. The payment of the ordinary salaries was in no wise such a distribution of the assets of the corporation as would render the petitioners liable for the taxes of the corporation. The amounts were paid for services actually rendered. The petitioners claim that any amounts which were distributed to them subsequent to 1920 were on account of salaries. The burden of proof to show the contrary is placed by the statute upon the respondent. Section 602 of the Revenue Act of 1928. In Annie Temoyan, 16 B. T. A. 923, we said:

It is evident that the statute places a real burden on the Commissioner. He must establish tlie liability of the transferee against whom he proposes to proceed. He must establish alJ facts necessary to show that there is a liability at law or in equity on the part of that transferee for the payment of the whole or a part of the liability. This burden is not met by such an indifferent showing of the facts as we have here.

See Guy W. Renyx, 21 B. T. A. 1248, 1252.

It is true that subsequent to 1920 there were certain small distributions made to the petitioners by the Whitney Coal Mining Company. But there is no evidence as to whether the salaries accrued to the petitioners upon the company’s books of account were unreasonable in amount or that the amounts distributed, were not, as claimed by the petitioners, payments for salary, or for that matter in payment of other liabilities of the company to the petitioners. There is no evidence that any amounts were distributed by the company to the petitioners in liquidation of the corporation. We therefore hold, as in Guy W. Renyx, supra, that the Commissioner has not discharged the burden of proof placed upon him by section 602 of the Revenue Act. of 1928.

Reviewed by the Board.

Judgments of no liability will be entered for the petitioners.


author: Lansdon :

text:
    Burt L. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clara May Davis, Kenneth M. Davis and Anita M. MacDonald, Executors of the Estate of Winfield S. Davis, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30893, 30894, 39731.
    Promulgated June 2, 1932.

      J. Paul Miller, Esq., and A. W. Helvern, Esq., for the petitioners.

      E. A. Gox, Esq., for the respondent.
   OPINION.

Lansdon :

At the hearing in these proceedings the' petitioners abandoned their allegations of error as to the years 1922 and 1924, conceding that the deficiencies determined for those years were correct. Pursuant thereto the respondent’s determination as to such years will be approved.

Subsequent to the filing of the petition at Docket 30894, Winfield S. Davis died. His regularly appointed executors, Clara May Davis, Kenneth M. Davis and Anita MacDonald, have been substituted as parties petitioners.

In their income-tax returns for the taxable years and several others, the petitioners each deducted a pro rata part of the payment to Hougard, apparently as amortization of such amount. These deductions were disallowed by the Commissioner. Petitioners now seek to deduct the entire amount in the years in which the several installments were paid as losses sustained in such years, or, in the, alternative, as ordinary and necessary business expenses. The respondent contends that the entire payment to Hougard was consideration for his interest in the business and was a capital expenditure.

The petitioners’ contention must be that nothing of value was acquired in consideration of the $90,000 payment to Hougard. They do not contend that a payment for which tangible or intangible assets were acquired would be deductible as a loss in the taxable year. We think it is clear from the evidence that both tangible and intangible assets were acquired in consideration of the payment to Hougard, namely, all right, title, and interest in and to the partnership name of J. B. F. Davis & Son and to the use of such name; all right, title, and interest in and to all furniture, fixtures, contracts, books of account, and all other property and assets of every kind and description belonging to the partnership; and the agreement by Hougard that -he would not advertise himself as the successor, former partner, or as having been formerly connected with the J. B. F. Davis & Son partnership. Perhaps the assets were not worth the amount paid for them, but we think the Board is not concerned with that question. Even if the Davis brothers paid more than Hougard’s interest was worth, no loss was sustained at the time of payment.

In Arthur P. Williams et al., 24 B. T. A. 1070, we had a similar question presented. There the petitioners contended, as they do here, that the amounts were paid to avoid threatened legal action and its injurious effects to the business, as well as to assure retirement of the partner who threatened such legal action. We held that such payments were made to acquire the retiring partner’s interest in the partnership good will and that such payments were capital expenditures. At the hearing in that case the petitioners testified, as they did in the instant proceeding, that in making the payments they did not consider that they were made to acquire any interest in the good will of the business which the retiring partner might have had, but that the payments were made to prevent legal action.

We think the partnership of J. B. F. Davis & Son had good will of substantial value. It had operated as a general insurance brokerage agency in San Francisco for more than 50 years and doubtless had many clients who purchased insurance through the firm because of its long standing good reputation and good service. The good will of a partnership is ordinarily considered part of the partnership assets and is to be accounted for upon termination of the partnership. Hougard had an interest in any good will of J. B. F. Davis & Son „and was entitled to an accounting therefor upon termination of the * partnership. We think such interest in the good will was acquired along with other partnership assets in consideration of the payment of $90,000:

The facts of A. King Aitkin, 12 B. T. A. 692, are distinguished from the facts of the instant case. We there held that a payment of ^$5,000 to secure the withdrawal of a partner from the partnership was deductible in computing net income, since it resulted in the acquisition of no capital asset. The benefit of the $5,000 payment did not extend beyond the taxable year, since by the terms of the partnership agreement it could have been terminated at the close of 1920. The payment was made to secure the partner’s withdrawal from the firm four months before that time.

The petitioners argue in their brief that the Board erroneously excluded certain testimony offered by them to show that the written agreement from which we have quoted in our findings of fact was entered into under duress and that the $90,000 payment was a “ holdup,” paid only to prevent Hougard from carrying out his threat of legal proceedings to force a receivership which would wreck the business. Even if we concede their contention that the payment was a “ hold-up ” and that they were forced to- sign the agreement to save their business, we are still of the opinion that the amdlint is not deductible. Regardless of their motive in making the payment, the fact remains that in exchange therefor they did acquire capital assets of considerable value. At the time they concluded to purchase Hougard’s interest in the partnership for $90,000 the petitioners could only estimate the additional profits which each might expect from the additional one-sixth interest in subsequent partnership profits. We do not know the basis for their estimate or the value which they placed upon the tangible and intangible assets of the partnership. We do know, however, that they paid $90,000 for a one-third interest therein and in our opinion such payment was not an expense incurred to protect the business or a loss at the time it was made.

Reviewed by the Board.

Decisions will be entered, for the respondent.


author: SteRnhagen : Smith :

text:
    E. H. Nielsen Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. G. M. and S. Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Goetjen & Metson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8899, 16383, 17875.
    Promulgated June 2, 1932.

      Erwin E. Richter, Esq., and W. H. Metson, Esq., for the petitioners.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

SteRnhagen :

The petitioners prior to April, 1920, were the shareholders of the Golden State Asparagus Company. On April 17, 1920, they, in performance of a contract of January 13, 1920, sold their shares to the agent of the Western Canning Company for the stated price of $200,000. They so treated the transaction on their 1920 income-tax returns and deducted the resulting loss. The respondent has now determined that the price received by petitioners was not only the stated purchase price, but also included mortgage notes aggregating $400,000, which petitioners have treated as a dividend received by them from the Asparagus Company. Respondent defends his determination on the theory that by virtue of a single plan reflected in the contract of January 13, 1920, it was intended only that petitioners should transfer their shares to the Canning Company and receive instead cash and mortgage notes.

The determination, in our opinion, can not be sustained. It requires too wide a departure from accepted legal doctrines and Avould override plain provisions of the tax law, so as to assess a tax beyond that imposed by Congress.

The plan is found in the contract of January 13, 1920, and the evidence leaves no doubt that it was performed in strict accordance with its terms. The recital is drawn with less artistic accuracy perhaps than the operative provisions,- but it is fairly clear that more was contemplated than the sale and purchase of shares; and in so far as this may be doubtfully expressed, the doubt is immediately removed by the detailed transactions set forth in the integration. A doubt in the recital would not serve to take from any of the enumerated transactions their legal character. “ Whatever may be said of the recitals in the contract under consideration, the operative part is clear, and must therefore prevail under the rule adopted.” Williams v. Barkley, 165 N. Y. 48; 58 N. E. 765, 767. “What was done rather than the design and purpose of the participants should be the test.” United States v. Phellis, 257 U. S. 156.

By the operative provisions of the contract, the Asparagus Company agreed to sell and the Canning Company to buy the business and most of the assets for $230,000 in cash and $400,000 in periodic promissory notes secured by a mortgage on the property; the Asparagus Company agreed to declare and distribute a dividend of its entire surplus, which would include the mortgage notes; and the shareholders agreed to sell and the Canning Company to buy all the shares at par, which, as a result of the dividend, coincided with actual and book value. ' There were provisions for subsequent steps whereby the Canning Company was to reconvey to the Asparagus Company so that the business would be continuously carried on by the Asparagus Company, but this did not affect the shareholders. The transactions thus clearly provided for were precisely carried out, and the legal integrity of each step is clearly sustained by the evidence. The assets were in fact conveyed by the Asparagus Company and the cash and notes in the amount of $630,000 received, the dividend was properly declared and actually distributed, consisting of all the Asparagus Company’s assets above $200,000, and the shares were delivered by the shareholders to the Canning Company, and the $200,000 cash received by them. Thus in form, in fact, and in legal substance what these petitioners received were two separate and necessarily distinct things from two different sources by virtue of two different transactions with two different people — one, a dividend from the Asparagus Company payable to them only while and because they were shareholders, and the other, the purchase price from the Canning Company for these very shares. Whatever the effect of these events may be upon the petitioners’ taxes (or, for that matter, upon the taxes of any other party to these transactions), this is what happened and what in law must be recognized.

It has too often been held that a corporation is.legally distinct from its shareholders, and that in the absence of fraud or unfairness their separate acts are not to be confused with each other, to admit of the disregard here of the intervening transactions. Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267, 273; Eisner v. Macom ber, 252 U. S. 189, 208; Planters Cotton Oil Co. v. Hopkins, 286 U. S. 332; Nixon v. Commissioner, 42 Fed. (2d) 833. To sustain the respondent would logically require ignoring the true gain or loss to the Asparagus Company from its sale of its assets. Furthermore, it would confuse the separate costs to the Canning Company of the assets and of the shares, for if the shareholders are to be treated as receiving for their shares not only the $200,000 price which they did receive, but also the $400,000 of the $630,000 paid to the Asparagus Company, then the Canning Company must by cognate reasoning be treated as paying $600,000 to petitioners for the shares and $230,000 to the Asparagus Company for the assets. Furthermore, since the dividend of the Asparagus Company was of all its surplus and this, as shown by the findings, included not only the mortgage notes, but also the cash on hand, bonds of $26,000, and receivables, to say nothing of the withholding of the $200,000 capital, the respondent’s idea would require more than Procrustean treatment.

It may be added too that in California as elsewhere, the shareholders could not convey title to the corporate assets, Gashwiler v. Willis, 33 Cal. 1; Phelan v. All Persons, 259 Pac. 725, and to ignore the sale by the Asparagus Company would be to take from the transaction the very element which gives it force. United States v. Board, 14 Fed. (2d) 459; Beisner Mfg. Co., 13 B. T. A. 841.

For the respondent, it is suggested that, even if .the petitioners are to be regarded as receiving the mortgage notes from the Asparagus Company, such distribution was in liquidation and hence not tax free as a dividend, sec. 234(a) (6), but taxable as a gain under section 201(c), citing Hellmich v. Hellman, 276 U. S. 233. This suggestion, which counsel does not expound, can be readily dismissed, since the evidence lends no support to a finding of liquidation, but clearly establishes that the Asparagus Company was expected to and did continue as a going concern.

It must not be forgotten that Congress has not left this situation to be dealt with by judicial construction of doubtful language. It is squarely and outspokenly dealt with in the Revenue Act of 1918. Dividends of incorporated shareholders are by section 284(a)(6) called deductions and thus serve to reduce taxable net income, the purpose obviously being to avoid taxing the same income more than once in the course of consecutive corporate ownership. Gain or loss from sale is covered by section 202. It is not the province of judicial determination to override this clear statutory scheme, and, by disregarding the legal substance expressly contemplated by the statute, find a greater tax than Congress has imposed.. From this record we are not in position to say how the tax revenue from the transactions in their entirety works out, but the fact that these petitioners may be free from tax at the time and point of their contact with the plan is because the method which the parties chose has been by Congress given this effect. The Commissioner has no rightful power to deprive them of it directly or to distort the legal significance of their proper conduct to bring about such deprivation.

Since we thus decide that the theory applied by the Commissioner is basically incorrect, it is unnecessary to consider whether the notes when received as a dividend had a fair market value and, if so, how much, and it is also unnecessary to consider the fair market value on March 1, 1913, of the Asparagus Company’s properties, since the value of the shares acquired prior to that date seems to have been regarded by both parties as higher than prior cost. In respect of the shares acquired by petitioners after that date, the cost is of course the basis of gain or loss.

Reviewed by the Board.

Judgment will be entered 'under Rule 50.

Smith :

dissenting: The prevailing opinion places undue emphasis upon the steps and forms adopted to effectuate the intent of the parties at interest in the transaction before us, those parties being the Nielsen, Goetjen & Metson, an’d Canning companies — individuals mentioned were merely the nominees or representatives of these companies. The intent of the parties is clearly expressed in the original contract, to wit, that the stockholders of the Asparagus Company “ desire to sell ” and the Canning Company “desires to buy ” from them all of their interest in the Asparagus Company “ at the total purchase price of $680,000.00, payable $280,000.00 in cash and the balance of $400,000.00 in promissory notes secured by mortgage upon the property ” of the Asparagus Company. In order to provide the security mentioned, the Nielsen and Goetjen & Metson companies (owning 100 per cent of the stock of the Asparagus Company) caused the Asparagus Company to convey its assets to a nominee of the Canning Company, who then executed the mortgage to provide the security for the notes of the Canning Company. The legal forms used to accomplish the desired result did not change the substance of the transaction, which is controlling here, unless each step, although comprehended by the original plan, is nevertheless, for tax purposes, distinguishable and separable from the whole transaction (cf. J. D. Bigger, 19 B. T. A. 797) ; but, as we said in George G. Moore, 19 B. T. A. 364, 370, 371:

* * * Where a general .purpose is carried out by a series of separate contracts such as those here involved, all interdependent and all intended to effect a definite result understood and agreed upon before any one of the several obligations is assumed, the realization of taxable income by one of the individual parties is determined by the result to him of the several transactions. Cf. Minneapolis Syndicate, 13 B. T. A. 1303; R. H. Perry & Co., 12 B. T. A. 328; Mellon v. United States, 279 Fed. 910.
* * * H* H: * *
* * * these -several related transactions were in effect one transaction and the methods used or forms adopted to effect the result agreed upon were hot material, the taxability of this petitioner being determined not by the form, but by the result. Cf. Western Maryland Ry. Co. v. Commissioner, 33 Fed. (2d) 695; Weiss v. Stearn, 265 U. S. 242; United States v. Phellis, 257 U. S. 156; Gulf Oil Corporation v. Llewellyn, 248 U. S. 71. * * *

In the taxable year before us, the Nielsen and Goetjen & Metson companies received, net, $200,000 cash upon the sale of their interests (which was nothing more than their stock) in the Asparagus Company, and a lien upon the property of the Asparagus Company for the balance of the net purchase price of $600,000. Upon default of the purchaser in 1921, the parties were placed in status quo, which the prevailing opinion indicates was accomplished by the Nielsen and Goetjen & Metson companies paying $17,500 and the cancellation and release of the unpaid mortgage notes.” From a consideration of the expressed intent of the parties, the various interrelated contracts, the result accomplished in 1920, and the default and reconveyance in 1921, I am satisfied that the transaction was in truth and substance a sale of the stock for a net consideration of $600,000 upon which the Nielsen and Goetjen & Metson companies realized a gain, and not for a net consideration of $200,000 upon which the prevailing opinion allows them a loss. See United States v. Board, 14 Fed. (2d) 459; O'Meara v. Commissioner, 34 Fed. (2d) 390; Commissioner v. Moore, 48 Fed. (2d) 526; Curran v. Commissioner, 49 Fed. (2d) 129; Commissioner v. Garber, 50 Fed. (2d) 588; W. S. Dudley, 15 B. T. A. 570. Cf. James Duggan, 18 B. T. A. 608; George M. Brady, 22 B. T. A. 596; Fred A. Hellebush et al., Trustees, 24 B. T. A. 660.


author: Sea well :

text:
    Cunard Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 26874, 26875, 28792.
    Promulgated June 2, 1932.

      Geo. E. El. Goodner, Esq., for the petitioner.

      John E. Marshall, Esq., and G. B. Marshall, Esq-, for the respondent.
   OPINION.

Sea well :

Various issues were raised in the pleadings, but all were disposed of at the hearing through certain stipulations except three, which we will consider in the order set out in our findings.

1. The facts and contentions of the parties as to the first issue are as follows: In 1912 petitioner acquired two coal leases which the parties have stipulated covered an available tonnage of 4,300,000 tons. One lease applied to a six-tenths interest in certain coal property and the other to a four-tenths interest in the same property (except as to 300 acres which were released from the former lease to a related company under certain conditions which do not appear to be in dispute) , and the petitioner was obligated under the leases to pay a royalty of 8 cents for each ton of coal mined, six-tenths of such amount going to one lessor and four-tenths to the other. After the execution of the leases and prior to the time when any coal had been mined, one lessor waived royalties to the extent of $25,000 and the other to the extent of $8,000 out of the first coal mined, as shown in our findings. On account of the foregoing waiver of royalties, the Commissioner allowed a paid-in surplus to the petitioner of $33,000. The parties have stipulated that the depletable capital of the petitioner in 1912 and on March 1, 1913, exclusive of the effect to be given to the paid-in surplus on account of free royalties, was $189,-720.67. On the basis of the foregoing depletable capital and the stipulated tonnage of 4,300,000 tons, the Commissioner determined a depletion unit of 4.4121 cents per ton and has allowed depletion deductions in each of the years consistent with such determination.

There is no dispute between the parties as to the correctness of the allowance by the Commissioner on account of the original de-pletable capital of $189,720.67. The difference arises with respect to the adjustment to be made on account of the paid-in surplus item of $33,000. The Commissioner considered that since the paid-in surplus which he allowed was applicable only to the first coal mined until the royalties waived equaled $33,000, the deduction allowable in each year should be based on the so-called depletion or exhaustion of that amount as the coal to which it applied was mined. On the other hand, the petitioner contends that the paid-in surplus should be considered as applicable to the entire tonnage in the mine and therefore the depletion unit should be adjusted on the basis of a total depletable capital of $189,720.67 plus $33,000, and such unit applied to all coal mined. We are of the opinion that the action of the Commissioner should be sustained. Since the allowance of the paid-in surplus is not in dispute, we have little information as to the circumstances surrounding its allowance other than subsequent to the execution of the lease voluntary concessions were made by the lessors to the extent of $33,000. It was not therefore depletable capital existing at the acquisition of the lease, nor is it shown to have existed at March 1, 1913, but rather it appears to be capital recognized by the parties on account of benefits which inured to the petitioner for only a limited period, namely, the period during which coal was mined from the property involved without the payment of royalties. A deduction on account of such capital would therefore properly be confined to such period and the adjustment to invested capital would follow on the same basis.

Another' question which is related to the foregoing issue is the deduction allowable on account of cash royalties paid. On its returns the petitioner claimed deductions for royalties as follows:

For calendar year 1917-$11, 381. 36
Six months ended June 30, 1918_ 5, 876. 80
Fiscal year ended June 30, 1919- 11, 695.27

The Commissioner allowed deductions in the following amounts:

Calendar year 1917-$2,276. 24
Six months ending June 30, 1918_ 1,175.36
Fiscal year ending June 30, 1919- 6, 393. 20

The record shows that royalties were paid or accrued in the amounts of $5,692.55, $4,701.45 and $9,201.44 for 1917, the six-month period ended June 30, 1918, and the fiscal year ended June 30, 1919, respectively, and accordingly the petitioner is entitled to an additional deduction in each of the foregoing years of the difference between the amounts allowed by the Commissioner and the foregoing amounts now shown to have been paid in the respective years.

2. As to the salary deductions claimed by the petitioner, we are convinced that the evidence more than satisfies the requirement of the statute as to reasonableness. Little question could be raised as to the salary of C. B. Maxwell, who was described as one of the best mining engineers in central Pennsylvania and who, on account of more lucrative offers elsewhere, was retained by the .petitioner in part because of his stock interest therein. With respect to B. W. Wigton and F. H. Wigton, the evidence shows that they not only exercised general supervision over the petitioner in their capacity as officers and assumed full responsibility for collections, but also were responsible for the entire sales of petitioner’s coal. No commission or compensation was paid for the sales of coal other than was represented by their salaries. As measured by commissions alone, when compared with the commissions paid by other concerns for similar services, the salaries are reasonable. The fact that they held similar offices with two other concerns is not decisive.as to the salary allowances which may be deducted on account of services to the petitioner; the test is whether the compensation which is sought to be deducted by the petitioner is reasonable when measured by the services rendered to the petitioner, and as to this, we are satisfied. On the whole, we are of the opinion that the salaries as well as the directors’ fees claimed by the petitioner as deductions on account of compensation to the three officers named are reasonable and should be allowed.

3. We are of the opinion that the expenditures for mining equipment set forth in our findings of fact come within the rule laid down in various prior court and Board cases wherein similar items have been allowed as deductions, and accordingly the action of the Commissioner as to this issue is reversed. United States v. Roden Coal Co., 39 Fed. (2d) 425; Marsh Fork Coal Co. v. Lucas, 42 Fed. (2d) 83; Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777; West Virginia-Rittsburgh Coal Co., 24 B. T. A. 234; and Tennessee Consolidated Coal Co., 24 B. T. A. 369.

Judgment will be entered under Rule 50.


author: Black:

text:
    Teck Hobbs, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry Hobbs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 27351, 27352.
    Promulgated June 3, 1932.

      Harry G. Weeks, Esq., for the petitioners.

      F. R. Shearer, Esq., for the respondent.
   OPINION.

Black:

No deficiencies were determined against Henry Hobbs for the years 1919 and 1921, nor against Mrs. Hobbs for 1921, but overassessments were determined for those respective years and it follows that the proceedings for 1919 and 1921 as to Henry Hobbs, and for 1921 as to Mrs. Hobbs, should be and are hereby dismissed for lack of jurisdiction. Cornelius Cotton Mills, 4 B. T. A. 255.

On the hearing and upon final submission counsel for petitioners moved to dismiss the proceeding as to Mrs. Hobbs for the year 1919, upon tbe ground that the Board has no jurisdiction because the deficiency notice did not determine a deficiency against her for said year. The facts with reference to this phase of the proceeding have been stated in the findings of fact. .

Petitioners’ contention is based on section 273, Act of 1926, which defines “ deficiency ” as the amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax.” Petitioner contends that the use of Mrs. Hobbs’ deficiency to reduce Henry Hobbs’ overassessment is a collection without assessment and that when this is added to the tax shown on her return there is no deficiency. We think petitioner overlooks the word “previously” as used in the section. The act provides that when the deficiency is determined there shall be added to the amount shown on the return amounts previously assessed or previously collected without assessment. In making his determination here, the respondent followed the act as we interpret it. At the time of determining the deficiency there had been no previous collection of the amount involved therein with or without assessment and there was nothing to add to the tax shown on the return on this account. Moreover, the evidence shows that, notwithstanding the language used in the deficiency notice, there has never been any rise of the over-assessment determined in favor of Henry Hobbs in settlement of the deficiency determined against Mrs. Hobbs. In these circumstances we hold that respondent determined a deficiency and Mrs. Hobbs appealed from that determination to this Board, which is sufficient to give the Board jurisdiction. Cf. Austin Go., 8 B. T. A. 628; Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893.

Petitioners’ next contention is that the transfer by Hobbs and associates of their oil properties to the Hobbs Oil Company, a joint stock association, was a taxable transaction completed in 1919, and that the value of that stock so received in 1919, rather than the cost of the properties so exchanged for said stock, is the proper basis for determining the profit on the sale of the Hobbs Oil Company stock in 1920 to C. N. Haskell and associates.

In determining the gain of petitioners in the Haskell transaction, the respondent took as his basis the cost of the property which petitioners conveyed to the Hobbs Oil Company, while it is contended by petitioners that the proper basis was the fair market value of the Hobbs Oil Company stock on the date of its issue, December 15,1919; that said stock was worth more on that day than they received for it; and that a loss was sustained rather than a gain.

We do not agree to this contention. The organization of the Hobbs Oil Company and the transfer to it of the lands and leases was merely a part of one main transaction, which was to sell certain oil lands and interests in oil lands which were specified in the contract, plus 75 per cent of the stock in the Texas Chief Oil & Gas Company, for a consideration of $2,100,000 cash and $600,000 capital stock of the Delaware Company. The fact that to perform the contract the organization of a common law trust or association was resorted to as a means to carry through the deal, does not alter the character of the transaction. There was no intention on the part of Hobbs or his associates to effect an exchange of their oil lands for stock in the Hobbs Oil Company, but their intention was to make a sale of their lands to Haskell and the Delaware Company by which they were to receive a large part of the agreed purchase price in cash and the balance in stock of the Delaware Company. All the shares of stock of the Hobbs Oil Company were issued to Hobbs and by him immediately sent to New York for delivery to the Delaware Company to be held by it as a part of its own property. No owner of the oil lands and leases conveyed to the Hobbs Oil Company had any beneficial interest in or power of disposition over the stock, as it belonged to the Delaware Company as soon as issued. The interest of the owners of the oil lands and leases conveyed to Hobbs Oil Company was in the consideration which they were to receive under the main contract and supplements thereto. We hold that the respondent was correct in fixing, as the basis for the calculation of gain, the cost of the oil properties to petitioners. Commissioner v. Moore, 48 Fed. (2d) 526; certiorari denied, 284 U. S. 620; Commissioner v. Garber, 50 Fed. (2d) 588.

Petitioners’ next contention is that $800,000 of the notes received in 1920 in connection with the Haskell transaction and secured by a lien on the Hobbs Oil Company properties should be valued at not more than $300,000 for the purpose of fixing the profits on the Hobbs-Haskell transaction. Notwithstanding the testimony of some witnesses at the hearing that the fair market value of these notes was considerably less than their face value, we do not think petitioners have overcome the prima facie correctness of respondent’s determination that the notes were worth their face value. We think on this point it is sufficient to say that the notes were the unconditional promises to pay. They were negotiable and $650,000 of these notes were paid during 1920 and $150,000 early in January, 1921, and the nonnegotiable note for $100,000, which is not in controversy, was settled some years later. We have had the respondent’s valuation of these notes before us once before in W. Oscar Williams, 16 B. T. A. 109, and we there sustained the respondent, and that case was affirmed in Williams v. Commissioner, 45 Fed. (2d) 61. There is no substantial difference, we think, in the evidence in the instant case from that which we had before us in W. Oscar Williams, supra, and respondent’s action is approved.

Petitioners’ next contention is that they should be taxed with only so much of the commissions in the Haskell transaction as Hobbs received in 1920. Respondent included $23,820.13 as the amount which petitioners received in 1920 on account of these commissions. There has been no adequate evidence to rebut the correctness of the determination of the Commissioner on this point and accordingly we approve this determination.

Petitioners further contend that the 500 shares of Texas Chief Oil & Gas Company stock transferred by Henry Hobbs to his wife in 1919 constituted a gift and made that stock her separate property; that the basis for determining taxable profit on the subsequent sale of these shares of stock was their value at the date of gift; and that no part of the proceeds of sale can be considered as taxable income to Henry Hobbs. The facts with reference to this transaction have been fully stated in our findings of fact and need not be repeated here. We think they evidence a gift from Hobbs to his wife of his interest in these 500 shares of stock. And the gift took place before there was ever any talk of a sale of such shares to C. N. Haskell and associates. The shares of stock were community property of which Mrs. Hobbs was already the owner of 250 shares. As to these 250 shares, the gain will be the difference between their cost, of $2,500 and their sale price of $20,000, amounting to $17,500. The basis for the other 250 shares is their market value at the date of the gift, which we found to be $25,000. None of the profit resulting from the sale of these particular 500 shares of stock in Texas Chief Oil & Gas Company was income to Henry Hobbs, because he had parted with his title to them before the sale took place.

Petitioner presents an assignment of error to the effect that the 5,000 shares of stock in the Delaware Corporation obtained from Haskell in 1920, as the result of a telegram sent Haskell by attorney Britain and Henry Hobbs, constituted a gift and is not taxable; that the stock was never received by Hobbs, but went to his wife as her separate property and, if taxable at all, it is taxable to her and it should not be valued at more than $5 per share. We think the evidence shows that the payment of these shares of stock was in the nature of compensation for services performed or to be performed and was not intended as a gift. Arthur L. Lougee, 26 B. T. A. 23. Cf. Roy A. Meagent v. Bowers, decided by the Circuit Court of Appeals, Second Circuit, April 11, 1932. These shares of stock were first income to the community estate, even though Hobbs, after Haskell had notified him that the 5,000 shares would be transferred to him, gave his interest in them to his wife and the shares were actually issued to her. Lucas v. Earl, 281 U. S. 111.

Petitioners’ next contention is that the sale of the Emmerich property in 1919 constituted a closed transaction taxable in that year; that the deferred payment of $300,000 to be made in oil was readily marketable and should be valued at its market value on that date, and that this value, with .appropriate adjustments for collection thereon, constitutes the proper basis to determine profit or loss on the subsequent resale in 1920. The facts relating to this transaction are stated in our findings of fact.

ISTo negotiable paper was executed and the $300,000 of deferred payment was payable only on the contingency that the oil was produced. We think the facts in the instant case with reference to the Emmerich Oil Company transaction are very similar to those in Commissioner v. Garber, supra.

In that case Garber and his associates had received $2,500,000 in oil certificates from Sinclair Oil Company, payable $500,000 each year. The certificates were nonnegotiable. Garber made his income-tax returns on the cash receipts and disbursements basis just as petitioners have done in the instant case. He returned his part of the $500,000 due each year, if and when it was received, but after the statute of limitation had tolled, he sought to treat the whole transaction as complete in 1918 and contended that all of it was taxable in that year. This the court refused to allow, saying:

Counsel for the respondent [petitioner below] cite a number of cases holding that where property is exchanged for negotiable paper or other property that can be readily liquidated, the profit is realized and taxable. No claim, however, is made that the Sinclair agreement was a negotiable instrument.
Indeed, the Sinclair transaction was hedged about with conditions, not only as to time of performance, but as to certainty of performance.
• * * * * * *
The facts and the law in the instant case are identical with those in Commissioner of Internal Revenue v. M. C. Garber and related eases, decided by the Tenth United States Circuit Court of Appeals on March 14, 1931, 48 F. (2d) 526. The respondents in that ease were the associates of the respondent in the present suit. In that case, the court, holding, as we do, that the trilateral transaction whereby the taxpayers sold their Garfield oil stock for $500,000 cash and $2,500,000 in deferred payments, gave rise to no income in 1918 save as to the cash payment, said: [The court here quotes from the opinion of the Tenth Circuit.]
With this holding we are in entire accord. Such a view is based upon sound public policy as well as upon written law. It malees income taxable when it is received by the citizen. It precludes the possibility of a sudden change of theory after the statute of limitations has run. It does mathematical justice between government and taxpayer. [Italics supplied.]

There is no evidence which shows that either of the petitioners returned any profits from the Emmerich Oil Company transaction on their 1919 income-tax returns, which was the year in which they now claim the transaction was completed and taxable.

Respondent, in computing income from this transaction in 1920, allowed full return of capital to petitioners before taxing any of the cash received in that year as income. In view of the evidence, we think the action of the respondent relative to this transaction was correct, and it is approved. Cf. Burnet v. Logan, 283 U. S. 404.

Petitioners lay much stress on the fact that there was evidence that the contract with the Emmerich Oil Company, calling for future payments of $300,000 out of oil, had a fair market value at the date of the transaction of $200,000. But that is not conclusive.

As said by the court in Bedell v. Commissioner, 30 Fed. (2d) 622 (affirming the Board in Alfred M. Bedell, 9 B. T. A. 270) :

Of course, it is true that an obligation, even a conditional obligation, is in some sense property, and, like anything else that can be transferred, may be said to have a value, but nevertheless payment is made in exchange for title, and wil-1 never be made if it is not conveyed. To speah of the profit as result-mg because its amount cam, be presently ascertained, though performance remains uncertain, seems to us a perversion of language. [Italics supplied.]

The remaining issue is as to the tolling of the statute of limitations. No question is raised as to the validity of any of the waivers, except the one signed by A. E. Myles as attorney in fact for Mrs. Hobbs. This was dated December 1, 1926, and referred to the years 1919, 1920 and 1921, and by its terms extended the limitation period to December 31, 1927.

The deficiency letter was mailed to Mrs. Hobbs on February 24, 1927, and was in time, if the waiver is valid. A. E. Myles was a tax accountant and had charge of income-tax matters for the petitioners for the years in question, under a written power of attorney which was filed with the Bureau of Internal Revenue and is copied in our findings of fact. Petitioners contend that the waiver is invalid because under the power of attorney Myles was not authorized to sign the waiver because (1) the power was joint to represent both petitioners and he was not authorized to represent one, (2) his authority was to represent petitioners only in the “ determination and adjustment ” of tax liability, and this does not authorize signing a waiver, and (3) there is no specific authority given to sign waivers.

We hold that Myles had authority to sign the waiver. The general rule is that every general power implies every particular power necessary to its exercise or performance. Undoubtedly the object of the employment of Myles and the power of attorney given him Avas to put the determination and adjustment of petitioners’ taxes for 1919 and subsequent years in Myles’ charge and he was clothed with any and all power necessary to accomplish that purpose successfully. He was expressly authorized “to enter into any and all such agreements, compromises and settlements” and “to sign our names to any or all such agreements, compromises and settlements.” The Avaiver was an agreement, or consent in writing, in furtherance of negotiations with reference to petitioners’ tax liability for the years covered by the power of attorney. One of its objects was to prevent an arbitrary jeopardy assessment and obtain time for a calm deliberative consideration of the questions involved.

We think it was incidental to the general power to adjust and settle the taxes that Myles had the right to sign the waiver and that it was valid. E. M. Pringle Naval Stores Co., 23 B. T. A. 1327; Joff v. Commissioner, 45 Fed. (2d) 679. It follows that limitation has not barred the deficiencies asserted herein, nor the collection of the unpaid balances on taxes for 1920 against either or both petitioners.

Decision will be entered under Rule 50.


author: MaRqtjette :

text:
    Van Camp Packing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46131.
    Promulgated June 6, 1932.

      Paul E. Sliorb, Esq., and FI. G. Anderson, Esq., for the petitioner.

      J. N. Leinenlmgel, Esq., for the respondent.
   OPINION.

MaRqtjette :

The first assignment of error is conceded by the stipulation. Petitioner’s taxable net income for 1926 must, therefore, be reduced by $29,701.17.

The question left for our determination is whether the purchase and later sale of the capital stock of one affiliated corporation, made by another affiliate with persons not affiliated, resulted in gain or loss to the company making the same, and hence to the consolidated group. The transactions did not disturb the group affiliation.

The same question, upon factual conditions the same as appear here, was before us in Farmers Deposit National Bank, 5 B. T. A. 520. We there held that, under section 240 (a) of the Revenue Act of 1918, the affiliated group was to be considered as existing with the attributes of a single taxpayer; that shares of the capital stock of one affiliate, outstanding in the hands of the public, were shares of capital stock of the group; that sales of such stock owned by an affiliate of the issuing company, the affiliation continuing, was a sale by the group of its own capital stock, and. that such a sale must be treated as a capital transaction resulting in neither a taxable gain nor a deductible loss. In so deciding we said:

That a corporate taxpayer realizes no taxable gain from the sale, of its own capital stock is a well established principle of the taxing statutes. It is a principle which the Commissioner has consistently adhered to in all of the regulations promulgated under the several Revenue Acts. In the Appeal of Simmons & Hammond, Mfg. Co. 1 B. T. A. 803, this Board held that the sale by a corporate taxpayer of its own capital stock constituted a capital transaction and that no deductible loss resulted therefrom. It follows, per contra, that a corporate taxpayer realizes no taxable gain from the sale of its own capital stock. * * * if it is the purpose o'f the statute to disregard the separate entities of these two companies and to treat them, other than for the actual assessment and payment of taxes, as one business enterprise and one taxpayer, then any capital stock emanating from either one, irrespective of the name its shares may bear, emanates fro'rn and is the capital stock of the consolidated group; and a sale by one member of shares of capital stock owned by it in another member of the group is' a sale by the consolidated group of its own capital stock, and, a fortiori, a sale by a corporate taxpayer of its own capital stock, which can not result in either a taxable gain or a deductible loss.

And after analyzing section 240 (a) of the Revenue Act of 1918 we concluded that “ for the purpose of determining the tax liability of the members of an affiliated group, the group is to be regarded and treated as a single corporate taxpayer.” To the same effect are Interurban Construction Co., 5 B. T. A. 529; H. S. Crocker Co., 5 B. T. A. 337; John Scowcroft & Sons Co., 18 B. T. A. 532.

Respondent contends that the'“single taxpayer” theory above set forth is denied in Bowman Hotel Corporation, 24 B. T. A. 1193; Commissioner v. Ben Ginsburg Co., 54 Fed. (2d) 238; Woolford Realty Co. v. Rose, 53 Fed. (2d) 821; and First National Bank of Chicago v. United States, 283 U. S. 142. An examination of those cases discloses that they were decided upon facts materially different from those in the Deposit Bank case, swpra, and from those in the present proceeding. In the first three of the cases cited by respondent it appears that losses sought to be deducted by the groups in their consolidated returns had been incurred by a member prior to the date of affiliation. In the Bank of Chicago case a commercial bank was affiliated with a joint-stock bank which sustained a loss. The income of such land banks was tax exempt. The court refused to allow deduction of such loss in the consolidated return, on the theory that it could not be presumed that Congress intended to permit an ordinary commercial bank, with an income subject to taxation, to secure partial relief therefrom through affiliation with a joint-stock land bank which could not have any taxable income. Manifestly, such a situation presents a very different problem than the one now before us, and the decision in that case is not controlling here.

Section 240 (a) of the Revenue Act of 1926, which controls this proceeding, does not differ essentially from section 240 (a) of the Revenue Act of 1918, under which Farmers Deposit National Bank, supra, was decided. We adhere to that decision and hold that no taxable gain was realized by the Yan Camp Tank Car Company from the sale of its shares of petitioner’s capital stock. The respondent erred in his determination of deficiency in so far as it resulted from including $125,000 as taxable profit from such sale.

Decision will be entered under Rule 50.


author: ARUNdell:

text:
    Estate of S. S. Hunter, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60198.
    Promulgated June 6, 1932.

      W. W. Spalding, Esg., for the petitioner.

      J. Arthur Adams, Esg., and F. A. Swine, Esg., for the respondent.
   OPINION.

ARUNdell:

The respondent has moved to dismiss the petition filed herein for the reason that it appears that the corporate existence of the petitioner had terminated prior to the filing of the petition and hence there is no proper petition before the Board and we are without jurisdiction.

Oil January 10, 1930, the stockholders of S. S. Hunter, Inc., a Louisiana corporation, met and adopted resolutions as follows:

Bn It Resolved, that the Estate of S. S. Hunter, Inc., be dissolved and liquidated, and that said dissolution and liquidation proceedings be had out of court.
Be It Further Resolved, That S. D. Hunter, whose post office address is 703 Commercial National Bank Building, Shreveport, Louisiana, be elected as liquidator without bond to conduct the winding up of the dissolution of this corporation, and for such purpose that he be given full and complete authority to do any and all things necessary for the complete and final dissolution and liquidation of this corporation, including all of the powers and authorities vested in corporate liquidators under the terms of Act Number 250 of 1928, particularly in Sections 57 and 02 thereof.

Thereafter, on January 21, 23 and 25, 1930, notice of adoption of the above resolutions was published in a newspaper as required by law. On January 27, 1930, S. D. Hunter executed the following affidavit:

CERTIFICATE OF DISSOLUTION OF THE ESTATE OF S. S. HUNTER, INC.
State of Louisiana :
Parish of Caddo . . .
I, S. D. Hunter, duly appointed as liquidator to conduct the winding up of the affairs of the Estate of S. S. Hunter, Inc., by resolution of the stockholders of said corporation, duly adopted on the 10th day of January, 1930, said resolution having been duly published in the Shreveport Journal three times on separate dates, as prescribed by law, do hereby certify that all of the property and assets of said corporation have been distributed among the stockholders and that said corporation has been completely wound up and is dissolved.
Done an'd signed this 27th day of January, 1930.
S. D. Hunter, Liquidator.
Personally came and appeared S. D. Hunter, who being duly sworn, deposes and says: That he is the liquidator of the Estate of S. S. Hunter, Inc., and that all of the facts stated in the above and foregoing certificate are true and correct.
S. D. Hunter
Sworn to and subscribed before me on this the 25th day of January, 1930.
(seal) Zula Porter,
Notary Public.

Copies of papers pertaining to the dissolution proceedings, including the resolutions and affidavit above set out, were filed with the Secretary of State of Louisiana on January 30, 1930. Copies of the same, except the affidavit of January 27, 1930, were also filed with the recorder of Caddo Parish, Louisiana.

On September 29, 1931, respondent mailed a deficiency notice to “ Estate of S. S. Hunter, Inc.,” setting forth the determination of a deficiency in income tax for the year 1928 in the amount of $401,-749.19. On October 14, 1931, a petition for redetermination of the deficiency was filed, in the caption of which the petitioner is styled: “ Estate of S. S. Hunter, Inc., A Corporation.” In the jurisdictional allegations of the petition the petitioner is stated to be “ a Louisiana Corporation.” The petition is verified as follows:

S. D. Hunter, being duly sworn, states that he is the liquidator otf the Estate of S. S. Hunter, Inc., and as such is duly authorized to verify the foregoing petition; that he has read the said petition and is familiar .with, the statements contained therein, and that the facts stated are true, except as to those facts stated to be upon information and belief, and those facts he believes to be true.
(Signed) S. D. Hunter
Subscribed and sworn to before me by S. D. Hunter this 6th day of October, 1931.
(seal)
(Signed) Bernice J. Beale,
Notary Piiblio.

On or about December 1, 1931, the respondent entered a jeopardy assessment against Estate of S. S. Hunter, Inc., and on or about December 4, 1931, the collector issued a notice and demand which was delivered to S. D. Hunter, who, on December 23, 1931, paid to the collector $90,936.02 tax and $14,792.29 interest.

On these facts respondent contends that the corporate existence of Estate of S. S. Hunter, Inc., had completely terminated prior to the filing of the petition, that therefore no petition has been legally filed by or on behalf of that corporation, and consequently we do not have jurisdiction to redetermine its tax liability. Petitioner’s position, as we understand it, is that even though the corporation was dissolved, the liquidator continues to be its statutory representative and is the proper person to sue or be sued in the name of the corporation.

The Business Corporation Act of Louisiana (Act No. 250 of 1928) as far as material to this proceeding provides that voluntary proceedings for dissolution of corporations may be conducted either in court or out of court; that when proceedings are had out of court the stockholders must, at the time of adopting a resolution to dissolve, also appoint “ a liquidator or liquidators to conduct the winding up.” (Sec. 54-11.) Section 54 further provides for the publication of the stockholders’ resolutions, and the filing of copies with the secretary of state and the recorder of mortgages. Other pertinent provisions of the act are as follows:

Section 57. Winding Up in Proceedings Out op Court, and the Authority op Liquidator or Liquidators.
I. Except as may be otherwise provided in the resolution or consent of appointment, the liquidator or liquidators, where the winding up is to be out of court, shall be vested with full authority.
(a) to demand, collect, sue for and recover, in the name of the corporation, the debts and property of the corporation, and may be sued in the same name;
(b) to compromise, compound and settle, and to grant acquittance for claims of, or against the corporation, upon such terms and conditions as such liquidator or liquidators shall deem best;
(c) to sell and convey, either in whole or in part, at public or private sale, the property of the corporation, movable and/or immovable, on such terms and conditions as such liquidator or liquidators shall deem best;
(d) to collect the whole, or so much as may be necessary and just, or any amounts remaining unpaid on subscriptions to shares;
(,e) to carry on temporarily the business of the corporation as a going concern, when it is necessary for the purpose of properly and economically winding up and liquidating the affairs of the corporation;
(f) to pay all debts and liabilities of the corporation according to their respective priorities;
(g) and, in general, to do any and all things which may be necessary, proper or convenient for the purpose of winding up and liquidating: the affairs of the corporation.
XI. Any surplus remaining, after paying off all debts and liabilities of the corporation, shall be paid by the liquidator or liquidators to the shareholders according to their respective rights and preferences.
* * * # % # 4
Section 61. Time and Effect of Commencement' of Proceedings for Dissolution.
‡ # s)< ‡ *
II. When a proceeding for dissolution has commenced,
(a) all the rights, powers and duties of the officers and board of directors shall be vested in the liquidator or liquidators appointed by the shareholders or the court, as the case may be, and the authority and duties of the officers and directors of the corporation shall cease, except insofar as may be necessary in the opinion of the liquidator or liquidators, to preserve the corporate assets, or insofar as they may be continued by the liquidator or liquidators, or as may be necessary for the calling of meetings of shareholders ;
* # * * * * *
Section 62. Order on Certificate of Dissolution : Filins Same.
I. When a corporation has been completely wound up, the court, if the proceeding is subject to the supervision of the court, shall make an order declaring the corporation to be dissolved; and if the proceeding is out of court, the liquidator or liquidators shall sign and acknowledge a certificate stating that the corporation has been completely wound up and is dissolved.
II. Said order or certificate of dissolution shall be delivered to the Secretary of State, who shall file the same in his office, and thereupon the corporate existence shall terminate and the Secretary of State shall issue a certificate of dissolution, which shall forthwith be filed for record in the office of the Recorder of Mortgages in the parish in which the corporation has its last registered office.
III. Any assets inadvertently or otherwise omitted from the winding up shall vest in the liquidator or liquidators, for the benefit.of the persons who would have been entitled thereto if they had been in their hands before the dissolution of the corporation, and on realization shall be distributed accordingly.

The statutes of Louisiana governing dissolution of corporations prior to the Act of 1928 provide that:

All corporations, whether they expire by limitation or are otherwise dissolved, shall be continued as bodies corporate for the purpose of prosecuting and defending suits by or against them * * *.
(a) Upon the dissolution * * * the stockholders shall elect from among their number one or more liquidators * * *
(b) The liquidator shall have authority to sue. for and recover debts in the name of the corporation, and may be sued by the same name * * *. [Act of 1914.]

In two cases we have had occasion to consider the state statute just quoted and in them we pointed out that under that statute a dissolved corporation was continued as a body corporate for certain purposes and that the liquidators were the proper persons to act for the corporations. Iberville Wholesale Grocery Co., Ltd., 15 B. T. A. 645 and 17 B. T. A. 235; Southwestern, Investment Co., 19 B. T. A. 30. The fact that in the statute of 1928 the dissolution of corporations is dealt with in considerable detail and contains no provision for continuing the corporate existence like that of the earlier one, with which it must be presumed the legislature was familiar, indicates that such provision was deliberately omitted in the enactment of the later act. It is difficult to conceive of clearer language than that contained in section 62-11 as follows:

Said order or certificate of dissolution shall be delivered to the Secretary of State, who shall file the same in his office, and thereupon the corporate existence shall terminate * * *

In S. Hirsch Distilling Co., 14 B. T. A. 1073, there was involved a question of our jurisdiction where a Missouri corporation purported to file a petition after dissolution. The Missouri statute was similar to that of Louisiana in constituting the president and directors trustees for the purpose of winding up corporate affairs, with power to sue and be sued, and in failing to provide for continuance of corporate existence after dissolution. In that case, after quoting the Missouri statute, we said:

An examination of the above sections of the Missouri statutes indicates clearly that, unlike the situation in many other States, there is no provision made for keeping the corporation alive in order to settle its affairs once it has been dissolved.

We concluded that a petition filed on behalf of the wholly dissolved corporation did not give us jurisdiction. That case was distinguished from the George Wiedemann Brewing Co., 4 B. T. A. 664, on the ground that in the Wiedemann proceeding the corporation, though formally dissolved, continued in existence under provisions of state laws for a reasonable time for the purpose of winding up its affairs.

It is fundamental law that a corporation possesses only those properties which the law confers upon it. Dartmouth College v. Woodward, 4 Wheat 518. And, as said in Oklahoma Natural Gas Co. v. Oklahoma, 273 U. S. 257:

* * * corporations exist for specific purposes, and only by legislative act, so that if the life of the corporation is to continue even only for litigiating purposes it is necessary that there should be some statutory authority for the prolongation.

Examining the Louisiana statutes in the light of this quotation, we fail to find anything therein continuing the life of the corporation after its dissolution so as to enable it to execute a valid petition in a proceeding before the Board.

Counsel for petitioner points to several provisions of the Louisiana statute which may be briefly noticed. Section 57 vests the liquidator with authority to “demand, collect, sue for and recover, in the name of the corporation, the debts and property of the corporation, and may be sued in the same name.”

This section precedes that which prescribes that corporate existence shall terminate on filing certificate of dissolution (section 62) and evidently is designed to define the powers of the liquidator only during the period prior to dissolution. It is argued that section 62-III, heretofore quoted, provides for the preservation of the property and property rights of the corporation after dissolution. In one sense this is true, but by the terms of the statute the preservation is only “ for the benefit of the persons who would have been entitled thereto if they [the assets] had been in their hands before the dissolution of the corporation.” We take it that this section means that the liquidator shall continue to represent stockholders and creditors until complete distribution of assets is made if it so happens that dissolution occurs before distribution is completed. Certainly there is nothing in the section specifically continuing corporate existence after dissolution.

Petitioner’s counsel says that it was not liable for the tax and interest paid by S. D. Hunter on December 23,1931; that the amount paid constitutes an overpayment for which petitioner has a valid claim against respondent; and that such overpayment is an asset of petitioner omitted from the winding up of its business, which, under section 62-III, supra, and section 322 of the Revenue Act of 1928, may be recovered in this proceeding. As set out above, Hunter had previously certified under oath that “ all of the property and assets of said corporation have been distributed.” If that statement was true then the payment made by Hunter in December, 1931, could not have been out of assets of the corporation but must have come from some other source. Whatever might be the status of an overpayment of taxes made during the process of winding up preparatory to dissolution, the fact here is that the payment was not made until long after the dissolution was completed, and more than sixty days after these proceedings were instituted.

A number of cases decided by Louisiana courts, having to do with powers of receivers and liquidators, are cited by petitioner, but these all appear to have arisen under earlier statutes. We are referred to no Louisiana case construing a statute such as we have here which on its face cuts short the corporate existence upon dissolution.

In proceedings before the Board the presumption is always against jurisdiction, and it is the duty of the party averring jurisdiction to affirmatively establish it. Coca-Cola Bottling Co., 22 B. T. A. 686, 700. In this case the petitioner has failed to establish to our satisfaction that the statutes of Louisiana kept alive the corporate entity after its formal dissolution, with power to file the petition here involved. The respondent’s motion is granted and an order will be entered dismissing the proceeding for want of jurisdiction.


author: Matthews :

text:
    Universal Rim Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 18963, 22693.
    Promulgated June 6, 1932.

      Nelson T. Hartson, Esq., and Edward H. Hart, Esq., for the petitioner.

      L. A. Luce, Esq., and F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Matthews :

Section 209 of the Revenue Act of 1917 provides:

That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions:. In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.

Section 200 of the Revenue Act of 1918 defines a personal service corporation as follows:

Seo. 200. That when used in this title—
* * * * * * *
The term “ personal service corporation ” means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material incoime-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

The underlying purpose and intent of the provisions in the two acts are the same and it is incumbent upon the petitioner to show that for each of the taxable years the capital employed was incidental rather than substantial.

We have found that no cash was paid in at the time of the incorporation of the petitioner and that the entire capital stock in the amount of $100,000 par value was issued in equal amounts to Baker and Hawley in exchange for certain patents and patent applications and other property more particularly described in our findings of fact. We cannot say that the property turned over to petitioner by Baker and Hawley in exchange for the capital stock of the company was reasonably worth $100,000, but it is not necessary to determine its true value. We are of the opinion that the patents and the trade name “ Universal ” had some value at the time they were exchanged for the petitioner’s capital stock. Although the patents originally assigned to the petitioner proved to be impractical, other patents were developed and improvements were being continually made, all of which related to demountable rim constructions. At the beginning of the taxable period petitioner owned more than thirty patents. The respondent has never determined the value of the patents for invested capital purposes, but this does not mean that petitioner had no invested capital.

Shortly after the company was organized an agreement was entered into between Baker and Hawley, who owned all the stock, and Walter S. Harris and T. Stewart Harris, whereby the Harris brothers agreed, in consideration of the issuance to them of 500 shares, or one-half of the capital stock of petitioner, to pay into the treasury of petitioner sums not to exceed $40,000, to be used in the development of petitioner’s patents and in building up the business, About $33,000 was in fact advanced by the Harris brothers for tlie purpose specified. This amount represents cash paid in to the corporation and it should be included in petitioner’s invested capital. We do not know the amount of petitioner’s invested capital, but the position that petitioner had no invested capital can not be sustained under the circumstances set out herein.

With respect to the question whether petitioner had more than a nominal capital, within the meaning of the statute, it may be remarked that it is not the amount of capital which is important, but rather whether it is capital in name only, that is, not substantial. The real issue is, did the earning power of the petitioner function independently of capital? This question is likewise pertinent in determining petitioner’s tax liability for the years 1918, 1919 and 1920. Petitioner earnestly contends that its income for these years was attributable primarily to the activities of its stockholders and that capital was not a material income-producing factor. Failure to prove either of these contentions will be fatal to petitioner’s right to be classified as a personal service corporation.

It is not disputed that the three stockholders of petitioner, Baker, Hawley and Anglada, were regularly engaged in the active conduct of the affairs of the corporation. We have stated that petitioner was the owner of a number of patents relating to demountable rim constructions and its essential business was developing and licensing these patents. Petitioner did not manufacture demountable rims and wheels, but entered into license agreements with manufacturing companies under which the licensees paid, the petitioner 5 cents for each rim manufactured by them which used any device covered by any of petitioner’s patents or patent applications. These license agreements specifically provided that the patents therein mentioned included any future patents which might be obtained or acquired by the petitioner. Mechanical improvements were made from time to time and new applications for patents were taken out by petitioner’s stockholders, all of which applications and patents were assigned to the petitioner for the nominal consideration of $1 each. Petitioner paid the cost of obtaining these patents and bore the expenses incurred in experimentation and development work. Although the inventions differed in details of construction, they all dealt with carrying a spare tire inflated and ready for use upon a rim which could be mounted upon an automobile wheel in accordance with the practice which is now almost universal. The license agreements provided that the petitioner would furnish to the licensees, free of charge, at all reasonable times, service in a consulting capacity, the licensees to pay the traveling and other expenses in connection with such services where the expenses were incurred upon the request and specific authority of the licensees. Baker kept in touch with all the licensees, calling on them personally at regular intervals, making suggestions and assisting them in their manufacturing operations. Reference is here made to our findings of fact for a more complete statement of the assistance rendered to the licensees in accordance with this provision.

The petitioner claims that the services of its stockholders were indispensable and that the patents were valueless without such service. It is suggested -by petitioner that the licensees might have canceled their agreements and refused to make any payments if these services had been withheld.

There is no question that it was advantageous to petitioner to make improvements and to assist the licensees in their manufacturing operations because petitioner’s income from the royalties was thereby increased. It was important also that the petitioner keep informed as to the manner in which the licensees were operating under the license agreements. These agreements expressly provided that the petitioner might audit the books and records of the licensees and inspect their demountable rim departments at -all reasonable business hours and the licensees agreed to abide by all lawful restrictions which the petitioner might impose upon the manufacture and sale of the patented demountable rim constructions. The petitioner had the right to insist that the manufactured products come up to a certain standard. Baker testified that he paid all expenses incurred in connection with his visits to the licensees' and that they never compensated him for the services furnished, so that these visits appear to have been made for purposes of inspection as well as to render any services which might be desired by the licensees. It is recognized, however, that, because of rapid changes in the wheel and rim industry, if the petitioner had not been ready and willing at all times to render this assistance, the license agreements would have become much less valuable as a source of income. The value to the petitioner of the license agreements was dependent upon the value of the patents and patent applications which covered the devices used by the licensees in the manufacture of the rims and wheels. It can not be doubted that the perfection of rim devices by the petitioner in the form of basic patents or patent applications and later improvements thereon were extremely valuable as producers of income. Unquestionably the services which the stockholders rendered to the licensees increased petitioner’s good will and resulted in the payment of additional royalties, but we do not agree with the petitioner’s contention -that the petitioner’s income was mainly ascribable to the activities of its stockholders. It follows that classification as a personal service corporation should be denied.

The development work and the engineering service which was furnished to the manufacturing companies necessitated the expenditure by petitioner of considerable amounts. In 1919 and in 1920 there were charged off on petitioner’s books to experimental expenses the respective sums of $15,059.45 and $14,525.79.

On cross-examination Baker testified as follows:

Q. Where did you get the money to perfect your new patents and your raw devices in 1917, 1918 and 1919; where did that money come from?
A. From our royalties,
Q. In other words, you put the royalties back into the business?
A. We put a great deal of it back into experimental work, and for service expense, and things of that kind. We never intended to put it back in the business, if we could possibly help it, because we wanted the dividends, if we could get them, and Mr. Hawley was more insistent on keeping them out than I was,- and he mortgaged all he had to put into this service stock.
Q. Well, now, it cost you money to keep your business up during these years, didn’t it? Say in 1918, 1919 and 1920, didn’t it cost you money to keep your business up, to keep these devices up to the development of the trade?
A. It would necessarily cost money to do that. We couldn’t make experiments, we couldn’t go around and find out what was necessary to be done and do all of those things without money.
Q. In other words, you couldn’t operate unless you had money coming in all of the time, could you?.
A. Money was necessary’in the business.

He further testified that receipts from royalties, less operating expenses (which apparently included experimental and engineering expenses), were promptly distributed in the form of dividends and that petitioner did not maintain bank balances in any considerable amount. His testimony indicates that the expenses of carrying on experiments and of perfecting the patents and adapting them to the needs of the licensees, were treated in the same manner as the running expenses of the petitioner’s business, such as office rent, so that many items of a capital nature appear to have been charged to expense.

From time to time the petitioner became involved in various interference proceedings and instituted suits for infringement of its patents. The profit and loss statement of petitioner for 1917 shows an item of $20,361.11 for legal expenses. The profit and loss statements for the years 1918, 1919, and 1920 show legal expenses in the respective sums of $5,021.38, $3,800.97, and $3,567.21. One of petitioner’s witnesses testified that petitioner at one time received $75,000 in settlement of an infringement suit, but was not certain as to the date such amount was paid.

The petitioner’s balance sheet for the year ended December 31. 1916, showed a surplus of $56,506.48.

Under these circumstances we hold that capital played an integral part in the actual production of petitioner’s income and that petitioner is not entitled to assessment under section 209 of the Revenue Act of 1917.

We have carefully considered the cases relied upon by petitioner, including the case of DeLaski & Thropp Circular Woven Tire Co. v. Iredell, 268 Fed. 377; aff'd., 290 Fed. 955, where the court held that the patents involved did not constitute capital. Without discussing the reasoning employed, we consider the facts to bo distinguishable from those of the instant case and that the decision is not controlling herein. The court pointed out in the DeLaski & Thropp Co. case that the taxpayer’s entire business was simply to collect and distribute the rental or royalty charged for the use of its patents. Its capital stock was reduced from $100,000 to $10,000 and in 1917 it had a surplus of only $2,000. In the instant case we have found that substantial amounts were expended by petitioner during the taxable years in developing patents and furnishing engineering service to the .manufacturing companies. Petitioner’s stockholders were constantly bending their energies to develop new ideas to succeed prior inventions as a competitive market rendered the old patents obsolete. We can not accept the proposition that the capital used was merely incidental to the earning power of the corporation. Cf. Lincoln Chemical Co. v. Edwards, 272 Fed; 142; aff'd., 289 Fed. 458; Harvey Friction Spring Co., 11 B. T. A. 309.

In reaching this conclusion we have not considered the operation of the service station,“which the petitioner claims was only incidental, having been established to furnish instruction in the operation of the devices covered by petitioner’s patents. It is clear that capital was essential in operating the service station, which did repair work and kept on hand a stock of wheels and rims, but the petitioner urges that inasmuch as the service station was closed out as of April 30, 1917, after which time petitioner had no stock in trade and kept no inventories, petitioner should not be deprived of the right to assessment under section 209 of the Revenue Act of 1917. Petitioner has .endeavored to separate on its books for 1917 the “ service station ” business from the “ personal service ” business. It is admitted that there was no actual separation on the books, but petitioner claims that the items are easily identifiable. Without passing upon the correctness of this method, we conclude that, irrespective of the operation of the service station, capital was a material factor in producing the income sought to be taxed herein. The determination of the respondent is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.

TRAmmell, Arundell, McMahon, and Goodrich dissent.