Bradford Co. v. Commissioner

THE BRADFORD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bradford Co. v. Commissioner Docket No. 8384. United States Board of Tax Appeals 14 B.T.A. 339; 1928 BTA LEXIS 2984; November 19, 1928, Promulgated *2984 1. Collection of the additional taxes involved herein is not barred by the statute of limitations. 2. The petitioner is entitled to have its excess-profits taxes for the year 1917 computed under section 209 of the Revenue Act of 1917. George H. Engelhard, Esq., for the petitioner. L. L. Hight, Esq., for the respondent. MARQUETTE *339 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1917 in the amount of $191,589.55. The petitioner alleges (1) that assessment and collection of the additional tax are barred by the statute of limitations, and (2) that it is entitled to have its profits tax computed under section 209 of the Revenue Act of 1917. *340 FINDINGS OF FACT. The petitioner is a corporation organized under the laws of Connecticut in the year 1911, with an authorized capital stock of $3,000, of which $1,000 was issued and outstanding during the year 1917. During the years 1911 to 1915, inclusive, the petitioner was engaged in selling aluminum in various forms, imported by the New England Enamel Co. It ceased that business in the year 1916. *2985 The petitioner's capital stock was all owned by Aaron Hecht and Melvyn Hecht, father and son, and they transacted all of its business. On January 1, 1917, the total net assets of the petitioner were $750. During the year 1917 the petitioner engaged in five transactions, from which it realized a profit of $490,341.19. The first transaction involved the sale of 2,500 tons of ship plates, structural shapes and angles to the Societe Commerciale di Navigazone, hereinafter called the Italian Company, and was carried out in the following manner: The petitioner's officers were informed that Captain Ruspini, representing the Italian Company, was in the market for 2,500 tons of ship plates, structural shapes and angles, and upon inquiry of Ruspini found that they had been correctly informed. They thereupon located the material that Ruspini desired at the Cambria Steel Co. and, having taken an option thereon, quoted a price on the same to Ruspini. Ruspini, on behalf of the Italian Company, accepted the petitioner's offer and on March 1, 1917, entered into a written contract with the petitioner for 2,500 tons of ship plates, structural shapes and angles at 6.86 cents per pound base for*2986 hull plates and 4.86 cents per pound base for structural shapes and angles, and Ruspini at the same time gave the petitioner a letter of credit for the amount of the contract price drawn on the National City Bank of New York. The petitioner on March 21, 1917, exercised its option from the Cambria Steel Co. and entered into a contract with that company to purchase 2,500 tons of ship plates and structural shapes and angles at 6.169 cents per pound base for hull plates, and 4.169 cents per pound base for structural shapes and angles. At the same time the petitioner gave to the Cambria Steel Co. a letter of credit to cover the purchase price, which letter of credit was issued by the Guarantee Trust Co., and which the petitioner had obtained by assigning to the Guarantee Trust Co. the letter of credit it had received from Ruspini. These letters of credit were issued against railroad bills of lading, invoices of the Cambrie Steel Co. and the petitioner, and inspection certificates of Lloyds as to the quality of the material. When the Cambria Steel Co. shipped the plates, structural shapes and angles covered by said contracts, it drew drafts on the Guarantee Trust Co. with bills of lading, *2987 invoices, and inspection certificates attached. The Guarantee Trust Co. notified the petitioner *341 of the arrival of the drafts and attached documents and the petitioner thereupon substituted its own invoices with the Guarantee Trust Co., which then took the documents to the National City Bank and received the payment called for in the contract between the petitioner and Ruspini. The difference between the amount the Guarantee Trust Co. received from the National City Bank and the amount it paid to the Cambria Steel Co. was credited to the petitioner on the books of the Guarantee Trust Co. and represented the petitioner's profits on the deal. The two contracts covering this transaction were identical except as to the price of the merchandise and the fact that in one contract the petitioner was the buyer and the other the seller. Transaction Nos. 2 and 3 involved the sale of 5,000 tons of hull plates and 1,000 tons of open hearth bars to Suzuki & Co. These transactions were handled in identically the same manner as was transaction No. 1. Transaction No. 4 covered the sale of three ships to one Frank J. Egan and was executed in the following manner: In the year 1917*2988 Aaron Hecht, one of the petitioner's two stockholders, learned that Egan desired to purchase ships, and that the Sinclair Navigation Co., hereinafter called the Sinclair Company, had for sale ships of the size and kind Egan desired. Hecht thereupon negotiated with both parties, with the Sinclair Company to sell to him, and with Egan to purchase from him, certain ships. The two sales having been agreed upon orally, Egan, Hecht, a representative of the Sinclair Company and a representative of the Guarantee Trust Co., met in the office of Hecht's attorney in August, 1917, at which time the Sinclair Company and Hecht entered into a written contract whereby the Sinclair Company agreed to sell, and Hecht agreed to buy, three ships for a stated consideration. At the same time Hecht and Egan entered into a written contract whereby Hecht agreed to sell and Egan agreed to buy from him the same ships that Hecht had contracted to purchase from the Sinclair Company. The title to the ships was conveyed at this meeting and Egan delivered his certified check for the purchase price of the ships to the representative of the Guarantee Trust Co., who in turn gave to the Sinclair Company a certified*2989 check for the amount it was to receive from Hecht. The difference between the amount paid by Egan and the amount paid to the Sinclair Company was paid to Hecht by the Guarantee Trust Co. and represented the petitioner's profit on the transaction. Although Hecht carried through this transaction in his own name, he was acting for the petitioner. Transaction No. 5 also involved the sale of a ship to Egan. This sale was originally intended to be included in transaction No. 4 but was not completed until November, 1917. It was handled in identically the same manner as transaction No. 4. *342 On June 14, 1918, the petitioner filed an income and profits-tax return for the year 1917 and reported a net income of $490,341.19 and tax due thereon in the amount of $52,343.43. It computed its excess-profits tax under section 209 of the Revenue Act of 1917. On January 4, 1923, December 24, 1924, and October 30, 1925, the petitioner and the respondent entered into the following written agreements: JANUARY 4, 1923. INCOME AND PROFITS TAX WAIVER. In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, The Bradford Company of Middletown, *2990 Conn., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said corporation for the year 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations. THE BRADFORD COMPANY, (Signed) MELVYN H. HECHT, Vice Pres., Taxpayer. (Signed) D. H. BLAIR, Commissioner. *343 If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. DEC. 24, 1924. INCOME AND PROFITS TAX WAIVER. In pursuance of the provisions of existing Internal Revenue Laws, The Bradford Company, a taxpayer of Middletown, Connecticut, *2991 and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1917 under the Revenue Act of 1924, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau. THE BRADFORD COMPANY, Taxpayer. (Signed) J. BAUER, Pres't. D. H. BLAIR, Commissioner. If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as*2992 are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which the seal, if any, of the corporation must be affixed. OCTOBER 30, 1925. INCOME AND PROFITS TAX WAIVER (For taxable years ended prior to Jan. 1, 1922). In pursuance of the provisions of existing Internal Revenue Laws, The Bradford Company of Middletown, Connecticut, address c/o George H. Engelhard, 30 Pine Street, New York City, and the Commissioner of Internal Revenue, hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1917 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board*2993 then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. (Signed) THE BRADFORD COMPANY, Melvyn Hecht, Taxpayer. (Signed) D. H. BLAIR, Commissioner. If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. The respondent, upon audit of the petitioner's return for 1917, determined that it was not entitled to have its excess-profits tax computed under section 209 of the Revenue Act of 1917, and that there is a deficiency in tax for the year 1917 in the amount of $191,589.66. The deficiency letter was mailed to the petitioner on August 28, 1925. The petition herein was filed October 24, 1925. The additional tax was assessed on or about January 10, 1927. OPINION. MARQUETTE: This proceeding raises two questions for our determination, namely: (1) Is collection of the additional tax asserted by the respondent for the*2994 year 1917 barred by the statute of limitations, and (2) is the petitioner entitled to have its excess-profits tax computed under section 209 of the Revenue Act of 1917? The questions will be discussed in the order in which they are stated. *344 The record discloses that the petitioner's income and profits-tax return for 1917 was filed on June 14, 1918. The statutory period of five years from the date the return was filed provided by the Revenue Acts of 1918 and 1921 for assessment and collection of any tax due on the return, therefore, expired on June 14, 1923, and assessment and collection of such tax became barred on that date unless extended by the waivers or consents executed by the petitioner and the respondent. It is not necessary to discuss at length the validity of the first and second waivers further than to state that the first expired April 1, 1924 (Proclamation of Commissioner, Mim. 3085, C.B. II-1, p. 174), and that the second expired not later than April 1, 1925. There was, however, a third waiver filed on October 30, 1925, after the statutory period of assessment and collection as extended by the first and second waivers had expired, but prior to the enactment*2995 of the Revenue Act of 1926. The situation thus presented comes squarely within the scope of our decision in , and , wherein we held that the expiration of the statutory time within which taxes may be determined, assessed and collected bars the remedy, but in the absence of statutory provisions to the contrary does not bar the liability, and that where prior to the enactment of the Revenue Act of 1926 a taxpayer and the Commissioner entered into a consent in writing extending the time within which taxes for a prior year might be determined, assessed and collected, such consent is valid, notwithstanding the fact that at the time it was executed the statutory period for assessment and collection had expired. We are therefore of opinion, and so hold, that the written consent executed by the petitioner and the respondent on October 30, 1925, is valid and that collection of the additional tax herein is not barred. It is the contention of the petitioner that even if the time within which assessment and collection of any tax that might be found due on its return for 1917 has not expired, *2996 it is entitled to have its excess-profits tax for that year computed under section 209 of the Revenue Act of 1917, and that if it is so computed there is no deficiency. Section 209 of the Revenue Act of 1917 provides: SEC. 209. 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. The evidence herein shows that the petitioner's statutory invested capital for the year 1917 was only $1,000, which, it is clear, was only nominal in amount. The profits accumulated with the taxable year *345 formed no part of its invested capital, but on the contrary they were expressly excluded therefrom by section 207(a) of the Revenue Act of 1917. Furthermore, *2997 they were not employed or used in the petitioner's business but were accumulated and laid aside for future distribution. The petitioner's business, stripped of its form and reduced to substance, was essentially brokerage. Its officers knew of commodities and the prices at which they could be bought and sold, and they brought together seller and purchaser and the petitioner profited therefrom, but the business did not require or use capital. The result of the five transactions in which the petitioner engaged in the year 1917 may be summarized as follows: (a) No money or other property belonging to the petitioner was employed in the transactions, and all the petitioner furnished was the services of its officers; (b) the steel and ships involved in the transactions never came into the possession of the petitioner, but passed directly from the owner to the real purchaser; (c) no part of the money involved in the transactions, except the profit resulting to the petitioner, ever came into the possession of the petitioner, but passed directly from the customer's bank to the real seller. This case is not materially different from *2998 , wherein we held that the taxpayer was entitled to the benefits of section 209 of the Revenue Act of 1917. See, also, ; ; affd. ; ; and . We are of opinion that during the year 1917 the petitioner was a corporation having not more than a nominal capital within the meaning of section 209 of the Revenue Act of 1917, and that it is entitled to have its excess-profits tax for 1917 computed under that section. Judgment will be entered under Rule 50.