B. T. Couch Glue Co. v. Commissioner

B. T. COUCH GLUE CO., BY THE CLARKSON GLUE CORPORATION, SUCCESSOR AND TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. B. T. Couch Glue Co. v. Commissioner Docket No. 16746. United States Board of Tax Appeals 12 B.T.A. 1321; 1928 BTA LEXIS 3368; July 12, 1928, Promulgated *3368 1. Four persons holding all the stock of the two affiliated corporations exchanged it, share for share, for stock of a new corporation, effective October 1, 1920. Held, that the new corporation could not join the other two in an affiliated return for the entire year 1920 on the theory that ownership and control of the entire business remained in the same persons throughout the year. 2. A corporation and its stockholders may not be regarded as merged in one entity for purposes of effecting an affiliation under section 240 of the Revenue Act of 1918. 3. In a proceeding involving only the year 1920, the Board is without jurisdiction to determine an overpayment of taxes for the year 1919 or to direct a credit of taxes alleged to have been overpaid in 1919 against a deficiency for the year 1920. Dickerman & Englis, Inc.,5 B.T.A. 633. George W. Wilbur, Esq., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. LOVE *1322 The Commissioner determined a deficiency in income and profits tax for 1920, in the amount of $8,794.58. The petitioner alleges errors as follow: (1) Denial of affiliation for the*3369 entire year 1920 between the B. T. Couch Glue Co. and the Clarkson Glue Co. of Missouri, and the Clarkson Glue Co., an Illinois corporation. (2) Refusal to credit against the deficiency asserted for 1920, an alleged overpayment of income and profits tax for the year 1919. Petitioner contends that such a credit is required by section 284(c) of the Revenue Act of 1926. No objection has been raised to the respondent's allocation of the tax to this petitioner. The facts are stipulated. FINDINGS OF FACT. The B. T. Couch Glue Co. of New York, and Clarkson Glue Co. of Missouri were corporations actively engaged in business during the entire year 1920, having their principal office and place of business in Chicago, Ill. September 14, 1920, the Clarkson Glue Co. of Illinois was duly organized under the laws of that State, and on September 15, 1920, through its board of directors, it offered to exchange, share for share, $150,000 par value of its capital stock for the total outstanding stock of the Clarkson Glue Co. of Missouri, amounting to $100,000 par value, and the outstanding stock of the B. F. Couch Glue Co. of New York, amounting to $50,000, the stcok of all of the above*3370 named corporations being owned in equal proportions by J. H. Clarkson and his three sons, namely, J. E. Clarkson, W. T. Clarkson, and J. H. Clarkson, Jr., this exchange being effected under date of October 1, 1920. No other change was made during the year 1920 in the manner of conducting the business of these corporations, separate books and records being maintained for the B. F. Couch Glue Co. and the Clarkson Glue Co. of Missouri from January 1 to December 31, 1920, the Illinois corporation being merely a holding company from October 1 to December 31, 1920. March 15, 1921, a corporation income-tax return was filed by the Clarkson Glue Co. of Illinois, as successor to the Clarkson Glue Co. of Missouri, and the B. T. Couch Glue Co. of New York, showing therein a net taxable income of $89,302.02, invested capital amounting to $358,843.41 and a tax liability of $22,033.49, which amount was paid in quarterly installments on or about March 15, June 15, September 15, and December 15, 1921. This return combined the income and invested capital for all three corporations, and was for the calendar year 1920, this being the only return filed by any of the corporations for the year in*3371 question. *1323 August 8, 1925, the Commissioner caused an examination of the books and records of said corporations to be made throught his duly qualified representative, in order to verify the accuracy of said return, and, under date of August 8, 1925, a report of the findings of this agent was transmitted to the Commissioner. In this report the taxable income was shown to be $95,262.07, the invested capital as $360,046.97, and tax liability was computed at $24,707.43, or $2,670.94, in excess of the amount paid during the year 1921. This report combined the income and invested capital of all three corporations for the year 1920, the income received by each corporation being consolidated with the income of the other corporations, and all treated as a unit for the year 1920. Included in the increased income are items amounting to $3,662.05 for which a like amount was deducted from the invested capital, these items consisting of merchandise purchases, amounting to $1,047.92; payments for freight on goods shipped amounting to $589.13; and payments for labor amounting to $2,025 were stated to be items which properly belonged in the year 1919. The petitioner made no protest*3372 against the revenue agent's findings. February 10, 1925, petitioner was notified by the Commissioner that its additional tax liability was increased to $8,794.58, the income of $95,262.07 for the year 1920 having been divided into two periods, namely, January 1 to June 30, 1920, and July 1, 1920, to December 31, 1920, $87,370.45 being allocated to the first period as income of Clarkson Glue Co. of Missouri and the B. T. Couch Glue Co. of New York, and $7,891.62 to the latter period as the income of the Clarkson Glue Co. of Illinois, the Clarkson Glue Co. of Missouri, and the B. T. Couch Glue Co. The invested capital was shown as $367,152.40 and reduced to $183,566.20 for six-twelfths of a year, and a tax liability of $30,353.79 was computed as being due thereon for the first six-month period from the Clarkson Glue Co. of Missouri and the B. T. Couch Glue Co. of New York, and a tax liability of $474.28 was computed as being due form the Clarkson Glue Co. of Illinois, the Clarkson Glue Co. of Missouri, and the B. T. Couch Glue Co. of New York for the last six-month period. In subsequent communications from the Commissioner, dated March 15, 1926, and April 9, 1926, petitioner was*3373 notified that the additional tax liability of $8,794.58 had been assessed against the B. T. Couch Glue Co. under the provisions of sections 279 and 280 of the Revenue Act of 1926, but no mention was made therein relative to an alleged credit or alleged refund that is alleged to be due for the year 1919 under section 284 of the Revenue Act of 1926, on account of the reduction of the invested capital by $3,662.05 through disallowance of the said items applicable to the year 1919. *1324 Counsel for the Commissioner concedes that the Commissioner was in error in dividing the income at July 1, but that it should have been divided at October 1, and the invested capital decreased for a period of nine-twelfths of a year instead of six-twelfths. No inventory was taken on or about October 1, 1920. The $150,000 capital stock of the Illinois company received by the Clarksons was the entire capital stock of that company. OPINION. LOVE: The petitioner contends that it and the Clarkson Glue Co. of Missouri (hereinafter referred to as the Missouri Company) should be permitted to file an affiliated return for the entire year 1920 with the Clarkson Glue Co. of Illinois (hereinafter*3374 referred to as the Illinois Company). From January 1, 1920, to October 1, 1920, the Couch Company and the Missouri Company were affiliated through 100 per cent stock ownership in each by the four Clarksons. Effective October 1, 1920, the Illinois Company, by an exchange of stock, share for share, acquired the entire capital stock of the Couch and the Missouri Companies from the Clarksons. Section 240(b) of the Revenue Act of 1918 provides that: * * * Two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests. The Couch and the Missouri Companies meet the requirements of subdivision (2) of the said section for the period January 1, 1920, to October 1, 1920. All three corporations herein involved meet the requirements of subdivision (1) for the period from October 1, 1920, to December 31, 1920. It is evident that the Illinois Company, which came into existence September 14, 1920, and which*3375 had, so far as the record shows, no relation to the other two companies prior to October 1, 1920, can not meet the requirements of either subdivision (1) or (2) above, for any period perior to the date last mentioned. The basis of the petitioner's contention, therefore, is that in essence no change in ownership resulted from the stock exchange of October 1, 1920, and that ownership and control of the Couch and the Missouri Companies continued in the four Clarksons through ownership and control of the Illinois Company. We have held that under section 240, supra, the generally recognized principle of corporate identities must under certain circumstances be disregarded for the purpose of the determination of income and profits taxes. . In effect, the statute directs that the income, invested capital *1325 and deductions of two or more corporations be merged for computation of the taxes. The petitioner would have us go further and hold that the identities of a corporation and its stockholders may be considered as merged and that the Illinois Company and the Clarksons may be regarded as one entity which controlled the*3376 Couch and the Missouri Companies during the entire year 1920. The statute does not warrant such an interpretation. See , where we held that ownership by a corporation is not ownership by its stockholders. In accordance with the rule announced in , the tax of the Couch and the Missouri Companies should be determined upon the basis of affiliation for the period January 1, 1920, to September 30, 1920, and the tax of all three corporations herein mentioned should be determined upon the basis of a consolidated return for the period October 1, 1920, to December 31, 1920. The second issue results from respondent's failure to credit against the deficiency asserted for 1920, which is the only year involved in this proceeding, an alleged overpayment of income and profits tax for the year 1919. The year 1919 is not involved in this proceeding. The Commissioner did not make any determination as to 1919 in the deficiency notice. The Board has no jurisdiction to determine whether the tax for 1919 has been overpaid or underpaid, or to direct a refund or credit of taxes for that year. See *3377 ; . Judgment will be entered under Rule 50.