A-1 Cleaners & Dyers Co. v. Commissioner

A-1 CLEANERS & DYERS CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. A-1 Cleaners & Dyers Co. v. Commissioner Docket No. 15625. United States Board of Tax Appeals 14 B.T.A. 1314; 1929 BTA LEXIS 2963; January 15, 1929, Promulgated *2963 1. The petitioner, under the facts stated, held not to be exempt under section 231(7) of the Revenue Acts of 1918 and 1921. 2. Held, further, that amounts retained by the corporation and included in reserve funds, were a part of its taxable earnings. S. D. Pack, Esq., for the petitioner. Eugene Meacham, Esq., for the respondent. TRAMMELL *1314 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921, and income taxes for the calendar years 1922 and 1923. The errors assigned are: (1) The failure of the respondent to find that the petitioner was exempt from taxation for the years involved under section 231(7) of the Revenue Acts of 1918 and 1921, respectively. (2) The failure of the respondent in determining the petitioner's tax liability as a taxable entity to exclude from taxable income certain "refunds" due members on the basis of work contributed. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of Illinois with its principal office and place of business at Chicago. Its charter provides that the object for which the corporation*2964 was formed was "to clean, renovate, dye, repair, finish and bleach cotton, wool, silk, linens and other textile fabrics, including carpets, rugs, curtains and household furniture, and to make, buy, sell and deal in all materials necessary, appurtenant or incident to the cleaning and dyeing business, and to manufacture, purchase, sell and generally deal in at wholesale and retail merchandise of every kind and character." The cleaning and dyeing establishment was operated and maintained to do work for members at cost. Each member or stockholder was acquired to purchase one share of stock and was limited to only one share during the taxable years involved. Any member desiring to sell his stock was required first to cause the shares to be appraised by the directors and thereupon was required first to offer his stock to the directors for the use of the corporation at such appraised value and on payment of the said amount the said stockholder would transfer and assign his stock to the corporation for the benefit of the remaining stockholders. At the time the work was done for a member such member was billed at a price fixed by the directors who under the by-laws had *1315 *2965 authority to exercise all powers and do all things which might be done or exercised by the corporation, except in matters involving selling, transferring, leasing, assigning or encumbering any of the real or personal property of the corporation. When the actual cost of performing the work had been ultimately determined, refunds are made to the stockholders in the amount of the difference between the cost charged and the actual cost of the work after all expenses had been paid. These refunds were in the nature of distributions to the stockholders of profits derived from the business. Article VIII of the by-laws provides as follows: Before payment of any dividend or making any distribution of profits there shall be set aside out of the net profits of the corporation such sum or sums as the directors, from time to time, in their absolute discretion, consider proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation. During 1920 from 5 to 6 per cent of the work done was for outsiders; that is, persons*2966 who are not stockholders. In 1921 practically 15 per cent, in 1922 approximately 20 per cent, and in 1923 approximately 30 per cent of the work done was for persons who did not own any stock in the corporation. During the taxable years involved the petitioner corporation made certain cash refunds to its stockholders and in addition thereto retained, during 1920, $6,436.02; in 1921, $6,740.66; in 1922, $10,620.82; and in 1923, $6,114.69. These amounts were not actually paid to the members but were credited to a special fund in the way of reserve funds for buglary insurance, bond retirement fund, and a building fund. On December 20, 1920, the following resolution was passed: Whereas, at a special meeting of the Board of Directors of the A-1 Cleaners & Dyers held on December 13th, 1920, it was decided to reduce the prices charged to stockholders by fifty per cent and to ask the stockholders to voluntarily contribute this fifty per cent to the Voluntary Burglary Insurance Fund, the purpose of this meeting was for the discussion and vote upon this subject. After a lengthy discussion, the above was put into a motion seconded, and carried. Similar resolutions were passed during*2967 the different years involved. On April 20, 1921, the following resolution was passed: That in view of the fact that this is a reciprocal organization, and that if the amount collected for cleaning warrants such action, it shall be the duty of this corporation to refund semi-annually after the time of the discontinuance of the reserve fund hereinbefore set up a sum equal to ten per cent of each member's cleaning bill during each six months period * * *. The petitioner took deductions in its income and profits-tax returns for the years involved on account of the so-called refunds to *1316 stockholders or members above set out, which amounts the respondent disallowed as deductions upon the ground that such amounts were not actually distributed to the stockholders but remained assets of the corporation as a part of its earnings and profits. OPINION. TRAMMELL: The petitioner takes the position in this case that it is a corporation which comes within the scope of section 231(7) of the Revenue Acts of 1918 and 1921, which is as follows: Business leagues, chambers of commerce or boards of trade not organized for profit and no part of the net earnings of which inures to*2968 the benefit of any private stockholder or individual. In our opinion, however, the petitioner does not come within the meaning of the above-quoted section of the statute. In this case the corporation was not one of the kind ordinarily organized for the purpose of carrying on business for profit, but was actually carrying on a business for profit. We see no similarity between a business league, chamber of commerce, or board of trade and this corporation. See . It is our opinion, therefore, that the petitioner is not exempt from taxation. This brings us to the question as to whether the so-called refunds made to the stockholders during the taxable years which were disallowed as deductions by the respondent, constitute earnings and profits of the corporation. Article VIII of the by-laws of the corporation quoted above, provides that before the payment of any dividend or making any distribution of profits there shall be set aside out of the net profits of the corporation such sum or sums as the directors may in their discretion consider proper as a reserve fund or for such purposes as the directors shall think conducive*2969 to the best interests of the corporation. In our opinion these so-called refunds, which were not actually distributed to the stockholders but were retained, were a part of the profits of the corporation which were set aside as provided in that article of the by-laws. The taxpayer contends that these amounts were first distributed to the stockholders and then voluntarily refunded to the corporation. In our opinion the evidence does not warrant this conclusion. There is nothing in the record to indicate that these amounts were actually credited to the stockholders or that they had the unqualified use thereof at any time. The corporation simply retained the amounts. There were certain resolutions passed which might lend support to the petitioner's contention as for instance, the resolution passed December 20, 1920, above quoted, which provided that it was decided to reduce the prices charged to stockholders and to ask the *1317 stockholders to voluntarily contribute the difference to the voluntary burglary insurance fund. These resolutions, however, are not sufficient to show that the amounts were ever actually paid to the stockholders or credited to them. If, however, *2970 the amounts were actually paid to the stockholders and were refunded to the corporation, we are not convinced, even under that state of facts, that the amounts were not distributions of profits and the profits are taxable to the corporation in the years in which earned or received, regardless of the fact that the corporation afterwards distributed them. This question, however, we are not deciding. We will merely decide the question presented to us and that is, that the particular amounts here involved were earnings and profits of the corporation. The respondent did not include as a part of the earnings and profits of the petitioner amounts actually distributed to the stockholders but only the amounts which the corporation did not actually distribute but retained, and this is the only question we are called upon to decide. Judgment will be entered under Rule 50.