Iberville Wholesale Grocery Co. v. Commissioner

IBERVILLE WHOLESALE GROCERY CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Iberville Wholesale Grocery Co. v. Commissioner Docket No. 14080. United States Board of Tax Appeals 17 B.T.A. 235; 1929 BTA LEXIS 2327; September 13, 1929, Promulgated *2327 1. Order of dismissal for lack of jurisdiction vacated and set aside on production of evidence at rehearing to establish essential jurisdictional facts. 2. Action of respondent in including in income for 1918 the amount of $8,161.26 collected by the petitioner in that year from debtors whose accounts were charged off as worthless in 1916, approved. 3. Special assessment denied. G. A. Ruhl, C.P.A., for the petitioner. F. R. Shearer, Esq., for the respondent. TRAMMELL *235 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the 6-month period ended June 30, 1918, in the amount of $15,429.06. In its original and amended pleadings the petitioner also sought the redetermination of a deficiency for the year 1917 in the amount of $1,609.04, but at the hearing the appeal was abandoned in so far as it related to the deficiency for the year last mentioned. With respect to the deficiency for 1918, the following issues are raised by the pleadings: (1) Whether or not respondent erred in including in the petitioner's income for 1918 the amount of $8,161.26 charged off as bad debts in 1916 and collected*2328 in the taxable year; and (2) Whether or not respondent erred in refusing to compute the petitioner's profits tax in accordance with the provisions of sections 327 and 328 of the Revenue Act of 1918. FINDINGS OF FACT. The Iberville Wholesale Grocery Co., Ltd., petitioner herein, was a Louisiana corporation, organized in 1906, with its principal office at Plaquemine, and was engaged in the wholesale grocery business. Pursuant to the statutes of Louisiana, the said corporation was dissolved by a consent to dissolution executed by its stockholders under date of December 31, 1924, and filed with the Secretary of State of the State of Louisiana on January 5, 1925. In accordance with the provisions of section 30 of Act 267 of the General Assembly of the State of Louisiana for the year 1914, the stockholders of said corporation, in the aforesaid consent to dissolution, appointed H. N. Sherburne and V. J. Kurzweg as liquidators, without bond, with full powers to settle the affairs of the said corporation and, among other things, to sue and to be sued by and in the name of the corporation. *236 In July, 1916, the charter of said corporation was amended to increase its authorized*2329 capital stock from $25,000 to $200,000, and to enlarge the scope of its corporate purposes and powers. Prior to said amendment of its charter, the stock of the corporation was owned by 15 stockholders, and subsequently its increased capital stock was distributed among 55 stockholders. The corporation operated under its amended charter from July 1, 1916, to June 30, 1918, when it ceased to do business and transferred certain of its assets to a successor corporation, the Consolidated Companies, Inc. In 1916, when the charter of the petitioner was amended, the transaction was treated by the corporate officers as if a new corporation had been organized. For convenience of designation, the company prior to that date was referred to as the "Old Iberville Wholesale Grocery Company," and subsequent to that date as the "New Iberville Wholesale Grocery Company." On or about July 1, 1916, a meeting of the board of directors was held, and the board appointed V. J. Kurzweg as liquidator to settle and liquidate the affairs of the so-called old Iberville Wholesale Grocery Co. and to distribute certain assets to the 15 stockholders, including particularly the proceeds from the collection of*2330 accounts. The meeting of the board of directors of the so-called old company was followed immediately by a meeting of the stockholders of the so-called new company, the company, however, being in each instance the same corporation. At this stockholders' meeting, a committee was appointed to fix the valuations of the stock of merchandise, equipment and buildings to be transferred from the books of the so-called old to the books of the so-called new company. Kurzweg, acting in the capacity of a liquidator, collected the accounts receivable of the so-called old company, paid its obligations and distributed the balance to the 15 stockholders in proportion to their stock ownership. The liquidation of the retained assets of the so-called old company has not yet been fully completed. In 1916, prior to amendment of its charter, the petitioner charged off as bad debts certain accounts receivable in the approximate amount of $11,000, of which there was subsequently collected in 1918 the amount of $8,161.26, including interest. Said accounts were collected through the collection department of the petitioner corporation, and were distributed by Kurzweg to the 15 holders of the petitioner's*2331 stock in 1916. Said amount so collected in 1918 was not included by the petitioner in reporting its taxable income, but was added to the petitioner's income by respondent in computing the deficiency involved herein. For the 6-month period ended June 30, 1918, the petitioner's gross sales amounted to $749,655.87, its invested capital was $176,007.13, *237 and it paid interest in the amount of $7,761.33. Salaries of employees amounted to $8,136.97, and compensation was paid to its three officers in the total amount of $3,000, as follows: Officers Duties Time Salary for 6 months H. N. Sherburne, president Credit man Entire $750 P. H. Kurzweg, vice president Branch manager Entire 1,200 V. J. Kurzweg, secretary and treasurer General manager Entire 1,050 3,000 Petitioner's net income for the taxable period, as shown by its return, was $28,219.66. OPINION. TRAMMELL: This proceeding was duly consolidated for hearing and decision with that of the Consolidated Companies, Inc. (Docket No. 14079), and a hearing had on September 19, 1928. On February 28, 1929, the Board's decision was promulgated, and pursuant thereto the*2332 appeal of the petitioner herein was dismissed for lack of jurisdiction for the reason that the facts necessary to show the jurisdiction of the Board to redetermine the deficiency were neither pleaded nor proved. The record as presented at said original hearing disclosed that the petitioner corporation had theretofore been dissolved, and it was not shown that any liquidator or liquidators had been appointed in accordance with the statutes of the State of Louisiana, empowered to institute actions in the name of the corporation, nor was it shown that there was any person lawfully authorized to bring this proceeding in the name or in behalf of said corporation. On May 18, 1929, the respondent filed a motion herein to modify said order of dismissal, which motion was denied, and on the same date respondent filed an alternative motion to vacate the order of dismissal entered on February 28, 1929, grant a rehearing with respect to the question of jurisdiction, and again take the proceeding under submission for decision on the merits. The motion for rehearing was duly granted and a rehearing had on June 24, 1929, at which time evidence was adduced to establish the necessary jurisdictional*2333 facts, as set out in our findings of fact hereinabove. Accordingly, an order will be entered vacating and setting aside the order of dismissal above referred to, and the case considered and decided upon the issues raised in the pleadings. The petitioner alleges that in computing the deficiency here involved the respondent erred (1) by including in income the amount of $8,161.26 collected in the taxable year from debtors whose accounts *238 were charged off as worthless in 1916, and (2) in refusing to compute the petitioner's profits tax under the provisions of sections 327 and 328 of the Revenue Act of 1918. The evidence offered by the petitioner in support of issue (1) is vague and wholly unsatisfactory. Apparently, certain accounts receivable in the approximate amount of $11,000, were charged off as worthless by the petitioner in 1916 prior to or about the time its charter was amended and the so-called reorganization effected. The petitioner contends that these accounts originally were assets of the so-called "Old Iberville Wholesale Grocery Company," and that $8,161.29 thereof was collected by Kurzweg in 1918, as "liquidator" of the old company, which amount he distributed*2334 among the 15 stockholders of the old company. Hence, the petitioner argues, the amount in question does not constitute income to the petitioner corporation, the so-called "New Iberville Wholesale Grocery Company." We are unable to concur in this contention. In our opinion, the evidence clearly establishes that the so-called old and new companies were one and the same corporation. This corporation was organized in 1906, and in 1916 its charter was amended to increase its authorized capital stock and to enlarge the scope of its corporate powers. Prior to that time, its stock was held by 15 stockholders and subsequently the increased stock was distributed among additional stockholders, making a total of 55. It is well settled that a corporation is a separate entity from its stockholders, and that a change of stock ownership, either complete or partial, does not create a new corporation. Accordingly, if the debts in question were ascertained to be worthless and were properly charged off in 1916, the amount collected in 1918 would constitute income to the petitioner for the latter year. *2335 . On the other hand, if the accounts were not in fact worthless and were not ascertained to be worthless in 1916, they were improperly charged off in that year and the petitioner would not be required to include the amount collected in 1918 as income. . Counsel for the petitioner asserts in his brief that the fact that the debts were not worthless in 1916 and were improperly charged off, is indicated by the recovery of nearly 80 per cent of the total amount in 1918. However, no evidence was offered with respect to whether the facts as they existed in 1916 justified the action of the petitioner in charging off said debts as worthless; and the mere fact, standing alone, that a debt was charged off in one year and later collected, does not constitute proof that it was improperly charged off in the prior year. From the record before us, we can not say that the respondent erred in including said amount of $8,161.26 in the petitioner's income *239 for 1918, and the respondent's action on this point, therefore, is approved. In respect of the second issue, the petitioner*2336 alleges that it is entitled to special assessment of its profits tax under the provisions of sections 327 and 328 of the Revenue Act of 1918, because of abnormal conditions affecting both its income and capital, arising from (1) low salaries paid to its officers, and (2) the use of borrowed money in its business. No evidence was adduced by the petitioner to show what would have constituted reasonable compensation for the services rendered by its officers, or to what extent, if any, the compensation paid was inadequate. The return filed by the petitioner for the taxable period shows that its gross sales amounted to $749,655.87; that its net income was $28,219.66; and that it paid salaries to its employees in the aggregate amount of $8,136.97, and compensation to its officers in the amount of $3,000. These meager facts, in our opinion, are insufficient to establish the existence of an abnormality, within the meaning of section 327, supra. The other abnormal condition complained of by the petitioner concerns the use of borrowed money, yet no proof was offered as to the amount of borrowed capital used by the petitioner, or whether it was used in its business to produce any part*2337 of the taxable income. We know only that the petitioner had an invested capital of $176,007.13, and paid interest in the amount of $7,761.33. On the evidence before us, the action of the respondent in denying special assessment is approved. Reviewed by the Board. Judgment will be entered for the respondent.