Harbour-Longmire Co. v. Commissioner

HARBOUR-LONGMIRE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Harbour-Longmire Co. v. Commissioner Docket No. 22594. United States Board of Tax Appeals 18 B.T.A. 33; 1929 BTA LEXIS 2119; November 9, 1929, Promulgated *2119 1. The petitioner and the Harbour-Longmire Co. of Enid were affiliated during the taxable years. 2. Where affiliated corporations filed separate income-tax returns for 1922, the tax liability became fixed and can not be altered by subsequently filing an amended consolidated return for that year. 3. If return of income is made on a separate basis for 1922, returns for 1923 shall be upon the same basis where no permission to change the basis has been granted by the Commissioner. Charles H. Garnett, Esq., for the petitioner. P. M. Clark, Esq., for the respondent. LANSDON *33 The respondent has asserted deficiencies in income taxes for the years 1922 and 1923, in the respective amounts of $90.61 and $2,772.86. The parties are agreed that if the amended consolidated return for 1922 be accepted there will be an overpayment for that year of $1,591.07. There are three questions presented for determination in this proceeding, which was instituted for a redetermination of the deficiencies asserted - (1) whether the petitioner and the Harbour-Longmire Co. of Enid were affiliated during the taxable years; *34 (2) whether they are entitled*2120 under the provisions of section 240 (a) of the Revenue Act of 1921 to file an amended consolidated income-tax return for 1922 after having filed separate returns for that year; and (3) whether an original consolidated return for 1923 may be filed where no permission to change the basis has been granted by the Commissioner. FINDINGS OF FACT. The petitioner is an Oklahoma corporation, with its principal office in Oklahoma City. Since its organization in 1911 it has engaged in selling furniture and house furnishings in Oklahoma City. The Harbour-Longmire Co. of Enid is an Oklahoma corporation, organized in 1920. During the taxable years it was engaged in selling furniture and house furnishings in Enid, Okla. On January 1, 1922, the capital stock of the two corporations was held as follows: Harbour-Longmire Co. Harbour-Longmire Co. of Enid Shares Per cent Shares Per cent W. M. Longmire [130] 25.24 [75] 16.67 Myrtie Longmire [45] 8.74 W. M. Longmire, guardian [10] 1.94 W. C. Chisum, Jr [75] 14.56 E. C. Longmire [50] 11.11 Total Longmire interests [260] 50.48 [125] 27.78 J. F. Harbour [100] 19.42 [45] 10.00 Rose Harbour Hocker [35] 6.80 [55] 12.23 Jerry Harbour [10] 1.94 Lee V. Sneed [50] 9,71 John S. Sneed [50] 9.71 J. P. Hocker [25] 5.55 Total Harbour interests [245] 47.58 [125] 27.78 Harbour-Longmire Co., of Oklahoma City [100] 22.22 Total Longmire and Harbour interests [505] 98.06 [350] 77.78 A. G. Hollis [10] 1.94 Austin Miller [25] 5.55 Prentiss Price [25] 5.55 Oklahoma Furniture Mfg. Co [50] 11.12 Total minority interests [10] 1.94 [100] 22.22 Total of all interests [515] 100.00 [450] 100.00 *2121 On December 23, 1922, petitioner's capital stock was increased from $51,500 to $300,000, and a stock dividend was declared and the stock issued for such increase. There were no other changes of stockholdings in petitioner during 1922. *35 Changes of stockholdings in the Harbour-Longmire Co. of Enid during 1922 were made by the transfer on April 25 of 50 shares of stock from E. C. Longmire to W. M. Longmire, and by the transfer on September 19 of 50 shares of stock from W. M. Longmire to H. W. Gouldy. On January 1, 1923, the capital stock of the two corporations was held as follows: Harbour-Longmire Co. Harbour-Longmire Co. of Enid Shares Per cent Shares Per cent W. M. Longmire [756] 25.20 [75] 16.67 Mrs. W. M. Longmire [260] 8.66 Aileen Longmire [60] 2.00 W. C. Chisum, Jr [437] 14.57 Total Longmire interests 1,513 50.43 [75] 16.67 J. F. Harbour [600] 20.00 [45] 10.00 Jerry Harbour [27] .90 Mrs. J. P. Hocker [200] 6.67 [55] 12.22 J. P. Hocker [25] 5.56 Lee V. Sneed [300] 10.00 John S. Sneed [300] 10.00 Total Harbour interests 1,427 47.57 [125] 27.78 Harbour-Longmire Co. of Oklahoma City [100] 22.22 Total Longmire and Harbour interests 2,940 98.00 [300] 66.67 A. G. Hollis [60] 2.00 Austin Miller [25] 5.55 Prentiss Price [25] 5.55 H. W. Gouldy [50] 11.11 Oklahoma Furniture Manufacturing Co [50] 11.12 Total minority interests [60] 2.00 [150] 33.33 Total of all interests 3,000 100.00 [450] 100.00 *2122 Changes of stockholdings in petitioner during 1923 were made by the transfer on January 2 of 60 shares of stock from A. G. Hollis to J. R. McBrayer and by the transfer on December 8 of 437 shares from W. C. Chisum, Jr., to the following: W. M. Longmire, 227 shares; Mrs. W. M. Longmire, 200 shares; and Aileen Longmire Flynn, 10 shares. Changes in the stockholdings of the Harbour-Longmire Co. of Enid during the year 1923 were made by transfers to petitioner on March 15 of 50 shares from the Oklahoma Furniture Manufacturing Co., and 25 shares from Austin Miller, and on April 5 by the transfer of 25 shares from Prentiss Price. *36 On December 31, 1923, the capital stock of the two corporations was held as follows: Harbour-Longmire Co. Harbour-Longmire Co. of Enid Shares Per cent Shares Per cent W. M. Longmire [983] 32.77 [75] 16.67 Mrs. W. M. Longmire [460] 15.33 Aileen Longmire [70] 2,33 Total Longmire Interests 1,513 50.43 [75] 16.67 J. F. Harbour [600] 20.00 [45] 10.00 Jerry Harbour [27] .90 Mrs. J. P. Hocker [200] 6.67 [55] 12.22 J. P. Hocker [25] 5.56 Lee V. Sneed [300] 10.00 John S. Sneed [300] 10.00 Total Harbour interests 1,427 47.57 [125] 27.78 Harbour-Longmire Co. of Oklahoma City [200] 44.44 Total Longmire and Harbour interests 2,940 98.00 [400] 88.89 J. R. McBrayer [60] 2.00 H. W. Gouldy [50] 11.11 Total minority interests [60] 2.00 [50] 11.11 Total of all interests 3,000 100.00 [450] 100.00 *2123 Most of the stockholders of the two corporations belonged either to the Harbour or the Longmire families. Mrs. W. M. Longmire, sometimes referred to as Myrtie Longmire, was the wife of W. M. Longmire; Aileen Longmire, referred to after her marriage as Aileen Longmire Flynn, was his daughter; E. C. Longmire was his brother; and W. C. Chism, Jr., was a brother of Mrs. W. M. Longmire. Rose Harbour Hocker, wife of J. P. Hocker, was a sister of J. F. Harbour; Jerry Harbour was his son; and Lee v. Sneed and John S. Sneed were his stepsons; A. G. Hollis and H. W. Gouldy were employees of the corporations, the former holding the office of secretary of petitioner. The operations of the two corporations were controlled and managed by W. M. Longmire, who was president of the Enid company and vice rpesident of petitioner, and J. F. Harbour who was president of petitioner and vice president of the Enid company. Austin Miller was a director of the latter corporation and was also manager of the Oklahoma Furniture Manufacturing Co. Practically all of the buying for the Enid company was done through the Oklahoma City office. The goods so bought were shipped partly to Enid and partly to Oklahoma*2124 City. Part of the Enid company's merchandise was furnished directly from the Oklahoma City company, the latter billing such goods at cost, regardless of the market. This practice resulted in an arbitrary shifting of profits for the reason that if the market was rising the Enid company was getting *37 its goods at less than market, while if the market was falling it was paying more for the goods. The shares of stock which were held by the members of W. M. Longmire's family were voted by him. The shares of stock held by members of J. F. Harbour's family were voted by him. All of the money which went into the Harbour-Longmire Co. of Enid, except $5,000 invested by Austin Miller and Prentiss Price, was furnished by W. M. Longmire and J. F. Harbour. The stock standing in the name of E. F. Longmire was paid for by W. M. Longmire and the certificate therefor was assigned to him in May, 1922. J. F. Harbour paid for the stock standing in the name of J. P. Hocker and actually held the certificate therefor. The harbour-Longmire Co. of Enid has never been a profitable enterprise, having lost money every year since its organization. In 1923 the petitioner paid its liabilities, *2125 bought the stock of Austin Miller, Prentiss Price, and the Oklahoma Furniture Manufacturing Co., and took over and liquidated its assets. Prior to January 1, 1924, the income-tax returns of the petitioner and the Enid company were prepared in the office of petitioner at Oklahoma City, by its regular bookkeeper and under the direction of its officers. The general books of the Enid company were kept at Oklahoma City. Income-tax-return blanks were mailed by the collector of internal revenue to each corporation, upon receipt of which they were filled in and returned on March 15 of each year. None of the bookkeepers or officers had any knowledge that for the year 1922 these corporations had the choice of filing separate or consolidated returns. About January 1, 1924, the officers of the petitioner employed a firm of accountants to make an annual audit of its business and prepare the income-tax returns for both corporations. At that time the question of affiliation and the right to file consolidated returns was raised by the accountants employed and, upon their advice, an amended consolidated return was filed for the year 1922, and for the year 1923 an original consolidated return*2126 was prepared and filed. Upon audit by the Commissioner the consolidated returns were rejected on the ground that petitioner and its affiliated company had filed separate returns for 1922 and that under the provisions of section 240(a) of the Revenue Act of 1921 the basis could thereafter be changed only with permission of the Commissioner. OPINION. LANSDON: The petitioner contends that during the years 1922 and 1923 it was affiliated with the Harbour-Longmire Co. of Enid. The same contention was presented with respect to the year 1921 in *38 , where we held that the two corporations were affiliated. The facts presented in the instant proceeding are substantially the same as those in the prior proceeding. If there is any difference, the facts here are generally more favorable to the petitioner's contention. We think the requirements of section 240(c) of the Revenue Act of 1921 have been met and that the corporations were affiliated during the taxable years. This brings us to the question whether the petitioner and the Enid company may file an amended consolidated return for 1922 and an original consolidated return*2127 for 1923. Section 240(a) of the Revenue Act of 1921 provides: That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner. We have repeatedly held that affiliated corporations filing separate returns for 1922 may not subsequently file a consolidated return for that year. ; ; ; see, also, ; ; affd., *2128 ; and . The petitioner contends, however, that under the provisions of section 240(a), above, affiliated corporations are entitled to an election between the consolidated basis and the separate basis for returning income and that lack of knowledge of the provisions of section 240(a) precludes an election, even though separate returns are filed, for a person can not elect if he has no knowledge of his rights. We are not impressed with petitioner's contention or the citations in support thereof. An "election" as defined in petitioner's brief is not provided for in section 240(a). That section provides: "That corporations which are affiliated * * * may * * * make separate returns or * * * make a consolidated return * * *. If return is made on either of such bases, all returns thereafter made shall be upon the same basis * * *." The petitioner and the Enid company filed separate returns for 1922. They may not later file an amended consolidated return. The remaining question - whether petitioner and its affiliated company may file a consolidated return for 1923 - is*2129 answered by the *39 last sentence of section 240(a), viz, "If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted to the Commissioner." It is not alleged that permission to change the basis has ever been sought by these corporation. It follows that income for 1923 should be computed on the basis of separate returns. Reviewed by the Board. Decision will be entered for the respondent.