Furniture Exhibition Bldg. Co. v. Commissioner

FURNITURE EXHIBITION BUILDING COMPANY AND KLINGMAN SAMPLE FURNITURE COMPANY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Furniture Exhibition Bldg. Co. v. Commissioner Docket No. 18596. United States Board of Tax Appeals 24 B.T.A. 1279; 1931 BTA LEXIS 1518; December 24, 1931, Promulgated *1518 1. The proper method of computing consolidated invested capital determined. 2. Respondent's action in reducing 1919 consolidated invested capital on account of 1918 taxes prorated sustained. 3. Respondent's action in determining deficiency in consolidated tax liability for 1919 and 1920 against one member of a consolidated group sustained. 4. Held that as to the Klingman Sample Furniture Company, the Board has jurisdiction for the years 1917 and 1918, years in which deficiencies were determined against said company, but does not have jurisdiction for 1919 and 1920, years in which no deficiencies were determined against said company. J. S. Seidman, Esq., and F. E. Seidman, C.P.A., for the petitioners. Brooks Fullerton, Esq., for the respondent. LOVE *1279 This proceeding is for the redetermination of deficiencies in income and profits taxes and penalties as follows: Taxpayer Year Tax Penalty [1917] $1,001.68 [1918] 998.46 Furniture Exhibition Building Company [1919] 6,253.48 $3,126.74 [1920] 7,455.41 3,727.71 [1917] 502.91 Klingman Sample Furniture Company [1918] 529.70 The matters*1519 put in controversy by the petition as amended and not waived by petitioners, or admitted by the respondent, are (1) whether the consolidated invested capital as determined by the respondent for each of the years in question is understated by the amount of $200,000; (2) whether invested capital for 1919 is to be reduced on account of 1918 income and profits taxes; (3) whether the respondent erred in failing to apportion taxes for 1919 and 1920 to petitioners on the basis of the net income properly assignable to each and (4) whether the Board has jurisdiction with respect to any deficiency against the Klingman Sample Furniture Company for 1917 through 1920. FINDINGS OF FACT. Petitioners are Michigan corporations and have their principal office at Grand Rapids. They are affiliated corporations and were so declared by the respondent for the years 1917 through 1920. *1280 The Klingman Sample Furniture Company, hereinafter referred to as the Klingman Company, was incorporated in 1896 for the purpose of selling furniture at both wholesale and retail. At the time of incorporation there was paid into the company $6,250 in cash for 625 shares of its common stock having a par*1520 value of $10 per share. The capital stock of the company was increased from time to time until on July 1, 1905, the outstanding stock of the company totaled $150,000 consisting of 5,800 shares of preferred stock of a par value of $10 per share, or $58,000, and 9,200 shares of common stock of a par value of $10 each, or $92,000. No additional stock was issued after July 1, 1905. The amount of stock outstanding from that date and continuing through 1920 remained at $150,000. All of the stock of the company was paid in in full and at no time was any part of its paid-in capital ever distributed or liquidated in any way. The Furniture Exhibition Building Company, hereinafter referred to as the Building Company, was incorporated in 1908 to operate real estate. It owns the building occupied by the Klingman Company. At the time of its incorporation there was paid into the company $300,000 for $300,000 par value of its common stock. The outstanding stock of the company has continued unchanged since incorporation. At no time has any part of the paid-in capital been distributed or liquidated in any way. P. J. Klingman was the active head of the petitioners from the time of their*1521 organization until his death in 1913. On or about July 20, 1914, the Building Company purchased from the estate of P. J. Klingman the entire outstanding capital stock of the Klingman Company and on or about the same date the Klingman Company purchased from the estate 50 per cent of the outstanding capital stock of the Building Company. Since July 20, 1914, the Building Company has owned all the outstanding capital stock of the Klingman Company and the Klingman Company has owned 50 per cent of the outstanding capital stock of the Building Company. The aggregate amount of capital actually paid in to both corporations and never distributed or liquidated prior to or during the years 1917 through 1920, was $450,000. Petitioners, in filing their consolidated income and profits-tax return for the year 1919, computed their consolidated invested capital for that year as follows: (Note: The purpose of the following computations is to show that both petitioners and respondent eliminated $300,000 from the combined capital actually paid in originally. Petitioners now contend that only $100,000 should have been eliminated, whereas the respondent insists that his determination is correct. *1522 The year 1919 was taken merely for convenience. The same elimination of $300,000 would appear in the respective computation of consolidated invested capital for each of the other years here in question.) Original capital actually paid in: Building Company $300,000.00 Klingman Company 150,000.00 Aggregate amount actually paid in 450,000.00 LESS INTERCOMPANY HOLDINGS 300,000.00 Balance of original capital 150,000.00 Additions: Surplus Building Company 242,936.88 Surplus Klingman Company 50,109.16 Reserve for bad debts Klingman Company 1,375.44 Sub-total 444,421.48 Deductions: Adjustment for prior year's taxes $658.25 Adjustment for inadmissibles 31,374.06 32,032.31 Consolidated invested capital as reported by petitioners $412,389.17 *1281 The respondent determined that the cost of the stock of the Klingman Company to the Building Company was $50,000 and that the cost of 50 per cent of the stock of the Building Company to the Klingman Company was $50,000. In determining the consolidated invested capital, he began with the invested capital as reported by petitioners (thereby eliminating the $300,000, as petitioners*1523 had done) and made the following adjustments as shown in his deficiency notice: Invested capital as originally reported $412,389.17 Plus: Restoration of improvement tax 318.25 Overstatement of deduction for inadmissibles: Deducted on return $31,374.06 Correct deduction 18,100.11 13,273.95 Overassessments of prior years 178.51 Adjustment of Surplus at date of acquisition 30,222.71 $456,382.71 Less: Additional 1917 tax 1,504.59 1918 tax $3,085.76 prorated $1,304.04 Deducted on return 658.25 645.79 Klingman accounts eliminated 95,253.05 Surplus credit eliminated 104,746.95 Depreciation understated 10,541.28 Real Estate appreciation 30,828.71 Withdrawals eliminated 79,946.17 Understatement of interest 3,941.61 327,408.15 Invested capital as corrected $128,974.56 *1282 For the year 1918, the respondent determined the total income and profits taxes of petitioners to be $3,085.76. Of this amount he allocated $2,236.87 to the Building Company and $848.89 to the Klingman Company. In computing invested capital for 1919, the respondent prorated the amount of $3,085.76*1524 in accordance with the dates upon which the four installments of that tax became payable. This resulted in a deduction of $1,304.04 from the consolidated invested capital for 1919. For 1917 and 1918 petitioner filed separate income and profits-tax returns. For 1919 and 1920 they filed consolidated income and profits-tax returns on May 14, 1920, and May 17, 1921, respectively. In these returns there were shown separately for each of petitioners, the items of income and deductions. The returns also showed separately the assets and liabilities of each company. The total tax shown on the consolidated returns for 1919 and 1920 was assessed against and paid by the Building Company. Officers of the petitioners for the years 1919 and 1920 were as follows: Officer Building Company Klingman Company Dudley E. Waters President Treasurer. Martin T. Vanden Bosch Secretary President. Henry H. Masten Assistant treasurer Assistant treasurer. For the year 1919 the respondent determined the consolidated net income to be $38,225.66. Of this amount he determined $4,535.90 to be the income of the Building Company and $33,694.74 to be the income of the Klingman*1525 Company. He determined the consolidated invested capital to be $128,974.56, and the total tax assessable on the consolidated income and invested capital to be $10,297.43. All of that amount was determined by the respondent to be assessable against the Building Company. For 1920 the respondent determined the consolidated net income to be $42,268.50, of which $15,810.54 was determined to be the income of the Building Company and $26,457.96 to be the income of the Klingman Company. He determined the consolidated invested capital to be $138,120.14 and the total tax assessable on the consolidated income and invested capital to be $11,704.63. He determined all of that amount to be assessable against the Building Company. On May 25, 1926, the respondent mailed a deficiency notice, which reads in part as follows: FURNITURE EXHIBITION BUILDING COMPANY, Grand Rapids, Michigan. SIRS: A further examination of your income tax returns and books of account and those of your subsidiary, Klingman's Sample Furniture Company, *1283 results in the determination of a deficiency in tax and penalty for the years 1909 to 1920 as shown in detail in the attached statement. Pertinent*1526 parts of the attached statement referred to are as follows: STATEMENT In re: Furniture Exhibition Building Co., (Parent), Klingman Sample Furniture Co., (Subsidiary), Grand Rapids, Michigan. * * * Summary Furniture Exhibition Building Company Year Additional Tax (Waiver) Penalty [1917] $1,001.68 (Waiver) None [1918] 998.46 (Waiver) [1919] 6,253.48 (Waiver) $3,126.74 [1920] 7,455.41 (Waiver) 3,727.71 Summary Klingman Sample Furniture Company Year Additional Tax (Waiver) [1917] $502.91 (Waiver) [1918] 529.70 (Waiver) The above mentioned letter of May 25, 1926, addressed to the Building Company, was the only notice of the determination by the respondent of the deficiencies here involved, no notice having been sent to the Klingman Company of the respondent's determination of the deficiencies against it. On July 17, 1926, the petitioners filed with the Board a petition which reads in part as follows: Furniture Exhibition Building Co., and Klingman Sample Furniture Co., Petitioners, v. Commissioner of Internal Revenue, Respondent. Docket*1527 No. PETITION The above-named petitioners hereby jointly petition for a redetermination of the deficiency set forth by the Commissioner of Internal Revenue in his notice of deficiency (IT:E:Aj HMS-4895-60D) dated May 25, 1926, and as a basis of their proceedings allege as follows: 1. The petitioners are affiliated corporations, both organized under the laws of Michigan, and with their principal office at Ionia and Fountain Streets, Grand Rapids, Michigan. *1284 2. The notice of deficiency (a copy of which is attached and marked Exhibit A) is dated May 25, 1926. 3. The taxes in controversy are income and profits taxes for the calendar years 1917 to 1920, and for $16,741.64, and penalties thereon for the years 1919 and 1920 in the amount of $6,854.45. The petition was sworn to by Martin T. Vanden Bosch, as vice president of the Building Company and as secretary of the Klingman Company. Vanden Bosch had general supervision over the activities of both companies, including the keeping of their books of account. He had particular supervision over their tax matters. The two companies maintained the same office. OPINION. LOVE: By agreement of counsel at the*1528 hearing only four issues are submitted for our determination. All other issues raised by the pleadings are disposed of either by the admissions of the respondent or are waived by the petitioners. The issues before us for determination are (1) whether the consolidated invested capital as determined by the respondent for each of the years in question is understated by the amount of $200,000; (2) whether invested capital for 1919 should be reduced on account of the prorated 1918 income and profits taxes; (3) whether taxes for 1919 and 1920 are to be apportioned between petitioners on the basis of the net income properly assignable to each, and (4) whether the Board has jurisdiction with respect to any deficiency against the Klingman Company for the years 1917 through 1920. With respect to issue No. 1, petitioners contend that the respondent has erroneously understated the paid-in consolidated invested capital by $200,000 as a result of his treatment of intercompany stockholdings. The respondent, however, contends that his action is correct. The computations of both parties are set forth in our findings. In July, 1914, the Building Company purchased all of the capital stock of*1529 the Klingman Company of a par value of $150,000. About the same time the Klingman Company purchased 50 per cent of the capital stock of the Building Company, the total par value of whose stock was $300,000. The respondent has determined that the cost to the Building Company of the stock of the Klingman Company so acquired, was $50,000, and that the cost to the Klingman Company of the stock acquired by it in the Building Company, was also $50,000. There is no controversy between the parties with respect to the respondent's determination as to these costs. All of the $150,000 par value of the capital stock of the Klingman Company and the $300,000 par value of the capital stock of the Building Company was paid in in full and at no time was any part of these amounts of paid-in capital ever distributed or liquidated. *1285 Consolidated invested capital is to be determined by computing separately the statutory invested capital of each corporation as defined by section 326, and then eliminating from the combined statutory invested capital of the affiliated group, so determined, the amount of cash or its equivalent, paid out by the group in the acquisition of subsidiary stock. *1530 In addition to the amount so paid out, if any, the statutory invested capital, as defined by section 326, must also be reduced by the amount of any liquidating dividend, or amount otherwise withdrawn from the original investment and returned to the stockholders. ; ; ; affd., . Applying the foregoing principles to the instant case, we conclude that in determining the consolidated invested capital of petitioners, the invested capital of each should be computed separately in accordance with the provisions of section 326, and there should then be eliminated from the combined statutory invested capital the amount of $100,000 representing the total cost to the group of the intercompany stockholdings which was paid out of the group and returned to the estate of P. J. Klingman. In other words, we hold that the item subtracted in petitioners' computation of consolidated invested capital originally reported and*1531 adopted by the respondent in his computation should have been $100,000, instead of $300,000; from which it follows that the consolidated invested capital, as determined by the respondent, is understated by the difference, or $200,000. Petitioners' contentions on this issue are sustained. With respect to the respondent's reduction of consolidated invested capital for 1919 on account of 1918 income and profits taxes prorated in accordance with the dates upon which the four installments of such taxes became payable, petitioners contend that such action was erroneous and rely upon the decision in . This decision, which has been affirmed by the United States Supreme Court in , since the briefs were filed, is adverse to the contention here advanced. On this issue we sustain the action of the Commissioner. The petitioners contend that since they did not enter into nor file with the respondent any agreement with respect to the apportionment of the taxes for 1919 and 1920, the respondent erred in failing to apportion such taxes between them on*1532 the basis of the net income properly assignable to each. The respondent contends that since the petitioners filed consolidated returns for 1919 and 1920, and as *1286 the entire amounts of the tax shown thereon were assessed against and paid by the Building Company during 1920 and 1921, respectively, and as no question as to apportionment of taxes was raised by either of the petitioners until about the time of the hearing, when the petition was amended to raise this issue, the petitioners should not now be heard to complain because the deficiencies for these years were not apportioned between them. The petitioners in support of their contention rely, among other cases, on , wherein the court reversed our decision reported at . In that case the two affiliated corporations had the same officers, used the same office and had a common control and management. The two corporations filed a consolidated return. No express agreement was entered into between them as to how the taxes due for the taxable year in controversy should be assessed against them nor did they notify the Commissioner*1533 as to how he should assess such taxes. The amount of the tax shown on the consolidated return was assessed against the Essex Coal Company. The second and third installments of the tax were paid by checks of the Essex Coal Company, while the first and fourth installments were paid by checks of the other corporation. In reaching the conclusion that the acts of the parties and the other circumstantial evidence established that there was an understanding or agreement between the two corporations that the tax should be assessed against the Essex Coal Company, we said: The agreement referred to in this statute is one between the corporations included in the consolidated return. It is not required to be in writing or to be in any particular form or language. Such a contract may be implied as well as express. Such an agreement does not relate to the payment of the tax but only to its assessment. Whether such an agreement was made may be shown by circumstantial evidence and the conduct of the parties as well as the testimony of witnesses. Here the officers of the two corporations were the same individuals. The individual who represented and acted for one company as president, acted*1534 in the same capacity for the other. An agreement between the said officers in one capacity and the same individuals in another capacity might have been a mere mental process evidenced only by the outward acts and conduct of the parties. It would have been a useless process for the president of one company to agree with himself as president of another company, and for the other officers in their respective capacities to agree with themselves by any express language. An agreement which is inferred from the acts and conduct of parties is just as effective as any other kind of an agreement. We think that this case is governed by the principles set forth in the case of , wherein the court stated: It is finally contended on behalf of the trustee in bankruptcy that, even though the tax here in question was properly computed on the basis of the consolidated return, the government in making the assessment should have apportioned the tax between the two companies, as provided *1287 in section 240 of the Revenue Act of 1918. The evidence shows that the tax was computed as a unit, and was not apportioned, but*1535 was all assessed against the Temtor Company. Under the statute it was proper for the two corporations concerned to agree as between themselves as to the proportion of the entire tax to be assessed against each. As the entire tax appears to have been assessed against the Temtor Company, and as that company, without objection or request for an apportionment, paid three quarterly installments of the tax, it must be inferred that both companies agreed to the assessment as made. As already stated, the companies had practically the same officers and directors, and the course followed by them was the legal equivalent of an agreement and request that the entire tax be assessed against the Temtor Company. In the present posture of the case, I do not think it is open to either company to object to the course taken by the government in assessing the tax. Considering all the evidence in the case, it is our opinion that an agreement was entered into between the two corporations to the effect that the total tax might be assessed against the petitioner. In *1536 , we considered the decision of the Circuit Court of Appeals and there said: We have considered the decision of the , reversing our determination in the Essex case, supra. We are of opinion, however, that the principle laid down in the determination mentioned is sound and that the court's decision is only that the facts presented did not warrant our conclusion that an agreement for allocation of the tax existed among the corporations therein involved. In the instant case the petitioners filed consolidated returns in which no mention was made as to any agreement between them as to how the tax should be assessed against them. Neither did either of them file with the respondent any agreement with respect to the apportionment of the taxes between them. The amount of the tax shown on the returns was assessed against the Building Company. The evidence shows that when the tentative return for 1919 was filed for the petitioners on March 16, 1920, the Building Company made a payment of $2,125, which was more than one-half of the consolidated*1537 tax liability reported on the completed return for that year. The amounts paid by the Building Company on September 14, 1920, and December 15, 1920, completed the payment of the tax shown on the consoldiated return for 1919. Payments of the tax shown on the consolidated return for 1920 were made by the Building Company during 1921, on May 31, June 15, September 13, and December 14. The same persons were officers in each of the petitioners and the petitioners occupied the same office. Vanden Bosch had general supervision over the activities of both corporations and had particular supervision over their tax matters. So far as the record shows, the parties made no objection to the respondent's action in assessing against the Building Company the tax reported on the *1288 consolidated returns or his determination of the deficiencies against that company until the hearing in June, 1930, when an amendment to the petition was filed raising the question. Thus it is seen that for about 10 years with respect to the 1919 taxes and for about 9 years with respect to 1920 taxes, the petitioners remained silent as to the respondent's action with respect to the original assessments, apparently*1538 acquiescing in what had been done. It was more than four years after the respondent made his determination of the deficiencies here involved before the petitioners raised any objection as to the action of the respondent with respect to this issue. In support of their contention the petitioners submitted the testimony of Vanden Bosch, who testified that no agreement was made between the two corporations for the apportionment between them of the taxes for 1919 and 1920. As against this testimony of Vanden Bosch, who was an officer in both corporations and who, according to his own testimony, was in direct charge of the tax matters of both corporations, we have his course of dealings for a period of some 9 or 10 years. If, as he testified, there was no agreement as to the apportionment of the taxes, why did he remain silent when the taxes were assessed against the Building Company or why did he permit that company to pay such assessments? Or why was this contention not raised before the respondent when other contentions respecting the tax liability for these years were presented to him? These and other questions remain unanswered by the record. Considering as a whole the evidence*1539 on this point, we are not prepared to reverse the action of the respondent. See ; In re , affd. sub nom. ; . While the petition as amended raises the question as to whether we have jurisdiction with respect to any deficiency against the Klingman Company for the years 1917 through 1920, the petitioners in their briefs direct their argument only to the years 1919 and 1920, making no reference to that portion of the issue relating to 1917 and 1918. The petitioners contend as to the years 1919 and 1920 that we have no jurisdiction with respect to the Klingman Company, since the deficiency notice was addressed to the Building Company and nowhere in it is there any mention made of there being a deficiency in wthe taxes of the Klingman Company for these years. The respondent contends that, since the petitioners filed consolidated returns for these years that authorized and invited a joint deficiency notice, and the notice having*1540 been directed to the Building Company, notice to one was notice to both. *1289 Since the petition as amended has raised the question of our jurisdiction of the tax liability of the Klingman Company for all the years 1917 through 1920, our discussion of the matter will not be limited to the years 1919 and 1920. In this case the Commissioner determined a deficiency against the Klingman Company for the years 1917 and 1918, and sent a notice of such deficiency to the Furniture Company, but did not send a notice to the Klingman Company, and both companies appealed to the Board. Under the authority of the case of , we hold that for the years 1917 and 1918 the Board has jurisdiction of the Klingman Company. For the years 1919 and 1920, the Commissioner did not determine a deficiency against the Klingman Company, but that company joined in the appeal with the Furniture Company. On authority of the following cases, we hold that the Board does not have jurisdiction of the Klingman Company for the years 1919 and 1920: *1541 ; ; : . Reviewed by the Board. Judgment will be entered under Rule 50. MURDOCK MURDOCK, dissenting: I dissent in so far as the opinion holds that we have jurisdiction as to the Klingman Sample Furniture Company for the years 1917 and 1918. MARQUETTE, SMITH, STERNHAGEN, TRAMMELL, and MCMAHON agree with this dissent.