Broadway Strand Theatre Co. v. Commissioner

BROADWAY STRAND THEATRE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Broadway Strand Theatre Co. v. Commissioner Docket No. 11506. United States Board of Tax Appeals 12 B.T.A. 1052; 1928 BTA LEXIS 3410; June 30, 1928, Promulgated *3410 1. Corporation - Income - Individual. - Where a corporation held a lease upon and operated a theatre and all expenses were paid from box office receipts, and where subsequently one of the stockholders became the owner of all except two qualifying shares of capital stock, but the corporate entity was still maintained to avoid personal liability and the business was conducted substantially as before by the corporation holding the lease and paying all expenses of operation, held that the income of the business was that of the corporation and not that of the individual stockholder. 2. Accounts. - Upon the facts of record, the accounts of two businesses should not be consolidated. Lee I. Park, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. MILLIKEN *1052 In this proceeding the petitioner seeks a redetermination of a deficiency in income and profits taxes for the year 1921 in the sum of $8,956.85. It is averred that the respondent erred (a) in including in the income of the petitioner, the sum of $28,471.41, which was income of Phil Gleichman, an individual, and did not constitute income of the petitioner; (b) *3411 in refusing to allow petitioner as deduction from gross income for the taxable year a reasonable allowance for the exhaustion of a leasehold of the Broadway Strand Theatre, Detroit, Mich.; (c) in refusing to allow as deduction from gross income for the taxable year a reasonable allowance for exhaustion of a contract with Famous Players-Lasky Corporation of exclusive right to exhibit pictures of the latter company; (d) in refusing to consolidate the petitioner's accounts with those of the business conducted by Phil Gleichman under the name of Ferry Field Theatre Co. At the hearing all of the alleged errors were abandoned except the first and last, viz, whether the income in question was that of the petitioner or Phil Gleichman, an individual; and whether or not petitioner has the right to consolidate its accounts with that of the Ferry Field Theatre operated by Phil Gleichman. FINDINGS OF FACT. The petitioner is a Michigan corporation with its principal office and place of business in Detroit, Mich. It was organized for the purpose of and was engaged in the theatrical business, operating theatres, and particularly picture shows. Its capital stock was $15,000, and prior to 1917*3412 the entire capital stock, with the exception of one share, was owned by Harry Garson and his wife, Martha L. Garson. In 1917 Phil Gleichman purchased half of the stock of the *1053 petitioner and in 1919 he purchased the remaining shares in the petitioner. In 1915 the petitioner acquired a lease for five years on a theatre in Detroit, Mich., known as the Broadway Strand Theatre. In 1917 an option to renew the lease was obtained by petitioner, and in 1920 the lease was renewed. Prior to his connection with the petitioner, Gleichman had been in the theatrical and picture business for about 17 years, and when he purchased his first half interest in petitioner he became the manager of the business. From 1917 to 1919, while the Garsons were still interested in petitioner, it conducted picture shows in the Broadway Strand Theatre, using no particular line of pictures, but any they could procure at suitable prices. In the summer of 1919, representatives of the Famous Players-Lasky Corporation entered into negotiations with Gleichman, for the purpose of entering into a contract with him for the exclusive right to exhibit its first-run pictures in the Broadway Strand Theatre, *3413 Detroit, Mich. Gleichman conferred with his fellow stockholders, Garson and wife, who were opposed to the proposition, and this ultimately resulted in Gleichman purchasing the stock owned by Garson and wife. In September, 1919, Gleichman, in his individual capacity, entered into a contract with the Famous Players-Lasky Corporation for a period of one year, by which he was granted the exclusive privilege to exhibit certain first-run pictures in Detroit, Mich. The contract was subsequently renewed and continued through the taxable year. The essential features of the contract were that it expressly provided for the exhibition of the pictures at the Broadway Strand Theatre, Detroit, Mich., and it was provided that the weekly admission receipts to said theatre should be applied substantially as follows: (1) To the payment of the actual expense of operating the theatre, not to exceed $2,375 per week; (2) to the payment of advertising expense, averaging $1,500 per week; (3) to the payment of the Famous Players-Lasky Corporation of $1,250; (4) and of the balance, if any, Gleichman agreed to pay the Famous Players-Lasky Corporation 50 per cent. The contract further provided the details*3414 for performing the contract, and for some additional payments to be made the Famous Players-Lasky Corporation, but the entire contract was based upon two ideas: (1) That the pictures were to be exhibited in the Broadway Strand Theatre, Detroit, Mich., and (2) all payments, rentals, and profits, if any, were to be derived from admissions and box-office receipts at that theatre. These contracts described Gleichman as being the owner and operator of the lease on the Broadway Strand Theatre. The petitioner was not a party to the Famous Players-Lasky Corporation contracts. When the contract was about to be drawn, the *1054 possibilities of Gleichman opening a new theatre in Detroit, Mich., were under discussion between Gleichman and the contracting officer of the Famous Players-Lasky Corporation, whereupon the latter suggested that if Gleichman was going to open a new theatre the contract had better be made to him individually, so that it would be operative at the new theatre, and for the additional reason that they wanted Gleichman to have it and not some one they did not know and have confidence in. Gleichman assented to this arrangement, giving as an additional reason*3415 that if the contracts had been made with the petitioner, the rights thereunder would have belonged to the Broadway Strand Theatre Co., and in such event, if he lost control of the petitioner or the theatre he would have lost the contract rights or license. Geginning September 28, 1919, the Famous Players-Lasky Corporation films were exhibited in petitioner's theatre under the arrangement above indicated. During the period between 1917 and 1919, while Gleichman was the owner of 50 per cent of the capital stock of petitioner, Garson was president, Mrs. Garson vice president, and Gleichman was treasurer and manager. During the year 1921 the corporate existence of the petitioner was retained by compliance with the laws of Michigan, and a bank account was maintained in the name of the petitioner, from which all rent and expenses of operation of the business were paid. The petitioner owned the lease, a valuable organ, all the fixtures, operating equipment, and everything else that goes to make a theatre, and insurance was carried in the name of the petitioner. When Gleichman acquired the entire capital stock in 1919, the Garsons resigned as officers and directors and were succeeded*3416 by Judge Van Zile and Henry Maurer as directors, who each held one share of stock. Gleichman became president, treasurer and manager and so continued throughout the taxable year. The corporate existence was maintained until Gleichman sold his stock in 1924, but after September, 1919, Gleichman conducted the business in about the same manner that an individual would and without consultation or meetings with his directors. The reasons given by Gleichman for maintaining the corporate existence were that the petitioner owned the lease and it was not assignable, there was a certain risk in the operation of theatres, risk of accident and other liabilities, which an individual naturally didn't care to assume and on account of these his attorney suggested the corporation be kept intact. There was no practical change in the operation of the business after the purchase of the stock from the Garsons. The same bank account was kept in the name of the Broadway Strand Theatre Co. and admissions to the Broadway Strand Theatre were deposited therein, the rent for the theatre was paid from this account, as were *1055 the expenses of operation, advertising, film service, taxes, and all*3417 other expenses. Gleichman individually paid none of them. Neither the lease nor any property of petitioner other than its capital stock was ever transferred or assigned to Gleichman, nor were any of the Famous Players-Lasky Corporation contracts assigned or transferred to petitioner. From October, 1920, to shortly after the beginning of 1921, Gleichman operated, as an individual, the Majestic Theatre, which was controlled by the Famous Players-Lasky Corporation, but the petitioner was not a party to this transaction nor interested therein. During the taxable year, Gleichman, as an individual, was the lessee and operator of the Ferry Field Theatre in Detroit, Mich. Petitioner had no interest therein. This was a second-run theatre, cheaper and purely Gleichman's personal affair. It had its own separate books of account, bank account, and operating organization. Gleichman drew a salary from each theatre, managed both, the same bookkeeper kept the accounts of both, supplies were sometimes bought for both at the same time for economy, but that portion used by each theatre was charged to it, and sometimes ushers or operators of one were used in the other. Gleichman also kept*3418 a personal bank account and upon occasion loaned therefrom money to both the Broadway Strand and the Ferry Field, which was properly credited to him on the books of the respective theatres. No dividends were declared on the capital stock of the petitioner after Gleichman's purchase of additional stock in 1919. When he sold his interest therein in 1924, he sold his capital stock and nothing else. After the taxable year there was an alleged breach of contract by the Famous Players-Lasky Corporation and suit was entered thereon by Gleichman individually. During the period of Gleichman's control, one or more suits were filed against the petitioner, but not against Gleichman individually. The petitioner, for the taxable year, filed its tax return as a personal service corporation. OPINION. MILLIKEN: The main question presented for determination is whether the income for the year 1921 upon which the deficiency is based was the income of petitioner or of Phil Gleichman, an individual. In view of the extended and detailed findings of fact, we will not repeat them here. There is no dispute that prior to September, 1919, the petitioner was conducted and did business as a corporation. *3419 After that date and during the taxable year it was conducted exactly as it had been before except that there was a change of policy as to the character of pictures displayed. The mere fact that Gleichman owned or controlled the entire capital stock did not *1056 dissolve the corporation, nor did the failure to hold corporate meetings or declare dividends impair its existence. It was impossible to conduct the business without the corporation for it held the lease on the theatre and owned all the property therein. Gleichman and his attorney both testify that the corporation was continued in order to hold the lease and to relieve Gleichman from personal liability. Under these circumstances, we hold that the income in question was that of the corporation petitioner. Where a corporate cloak is resorted to for its business benefits, the burdens, if any, must also be assumed. The declarations in the contracts with producers of pictures that Gleichman was the owner of the lease are of no consequence as they are merely self-serving and not in accord with the facts. The Board had before it a similar question in *3420 , where a partnership of the same name claimed to have succeeded to the business of a corporation. It was there said: It may be conceded without discussion that, as suggested by the petitioner, no particular form of contract is necessary to the creation of a valid partnership, and that the contract may be oral or written. We may even concede for the purpose of this opinion that the several stockholders of the petitioner did at the informal meeting of September 25, 1920, and shortly thereafter, enter into a valid partnership agreement, but the formation of the partnership was not of itself sufficient to vest it with title to the petitioner's assets, and whether it acquired the petitioner's business on January 1, 1920, or at a later date, is a question of fact to be determined from the evidence. While it may have been the intention of the persons who formed the partnership, and who were also directors of the corporation, to acquire and take over the assets of the corporation on January 1, 1920, we are of the opinion that the evidence is not sufficient to warrant us in holding that they did in fact acquire them at that time. The greater*3421 weight of the evidence is against that view. The evidence shows that during the period in question the business was conducted under the corporate name, all purchases were made in the name of the corporation and were paid for with its checks duly signed by its treasurer. The evidence further shows that as late as February 28, 1920, the board of directors contemplated an increase of the corporation's capital stock and actually called a stockholders meeting for that purpose. These facts are all inconsistent with the petitioner's claim that the business was taken over and belonged to the partnership on and after January 1, 1920. The petitioner continued after that date and until May 17, 1920, to hold the title thereto and to hold itself out to the world as the actual owner, and all of the circumstances surrounding the conduct of the business support the conclusion that it was in fact the owner, and the respondent properly taxes to it the income involved herein, and we so hold. The cases cited in behalf of petitioner do not apply to the facts of this case. In *3422 , the corporate entity was used merely as an adjunct to a real estate partnership and as a convenience in taking the conveying title to real estate, it had no capital paid in and no assets. The activity of the corporation was practically nil. The Thorkildsen case, , was a question of the allowance of a loss sustained on shares of stock in a corporation. The *1057 taxpayer bought up a large acreage of mineral leases and, in order to secure certain leases held by a corporation, bought its entire capital stock. In subsequent mining operations he disregarded the corporate entity and ultimately abandoned the lease, which was forfeited. This left the corporation with no assets or property of any kind and the stock was worthless. The loss thereon was allowed as a deduction. The distinguishing feature between that case and this case is that Thorkildsen never operated the corporation, while in this case the Broadway Strand Theatre was always operated as such. In *3423 , the corporation failed and liquidated its business by turning over all its property and accounts to its creditors. Subsequently, a partnership was formed doing business under the same name, by some of the old stockholders, and it was held that its income was not income of the corporation. Clearly such a case is not decisive of the case at bar. As an alternative proposition, petitioner urges that its accounts and those of the Ferry Field Theatre be consolidated pursuant to the provisions of section 240(d) of the Revenue Act of 1921, the pertinent part of which is as follows: - * * * That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses. The above provision appears for the first time in the Revenue*3424 Act of 1921 and the reason therefor is set forth in Report No. 275 of the Committee on Finance: A new subdivision is added to this section giving the commissioner power to consolidate the accounts of related trades or businesses owned or controlled by the same interests, for the purpose only of making a correct distribution of gains, profits, income, deductions, or capital, among the related trades or businesses. This is necessary to prevent the arbitrary shifting of profits among related businesses, particularly in the case of subsidiary corporations organized as foreign trade corporations. There is thus given to the respondent the authority in a proper case to consolidate accounts. Counsel for respondent contends that inasmuch as the respondent, in his discretion, has not found it necessary to consolidate the accounts, the relief requested should be denied. We are not convinced that the mere failure of the respondent to exercise the power given him by statute forecloses the relief to which a given petitioner may be entitled. We may in a given case based upon proper facts be of the opinion that a consolidation of the accounts would be in order. In the case at bar we have*3425 not been convinced that the statute in question should be applied. It has not *1058 been shown that there was such an intermingling of the accounts of the two businesses in question as weould necessitate the consolidation of their accounts in order to make "an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses," or that the accounts should be consolidated to obviate the situation as pointed out in Report No. 275 of the Committee on Finance "to prevent the arbitrary shifting of profits among related businesses." Even if the accounts were consolidated, it would be necessary to again distribute the profits and gains to each of the businesses involved and we have no proof that a consolidation of accounts would produce a different result from that obtained by the respondent. Separate books of accounts were maintained in which were recorded the usual revenues and expenses. The mere fact that lump purchases may have been made for both businesses, especially when, as here, the purchases were allocated to each business, or the fact of an occasional exchange of an employee, without more, does*3426 not prove that this section should be invoked. An accountant for the petitioner testified that the Ferry Field Theatre Co. sustained a loss in the year 1921 of $5,696.56. If the loss could be so accurately determined and if the gross income and expenses could be so ascertained, we see no necessity for consolidating the accounts as requested. Judgment will be entered for the respondent.