Roessler & Hasslacher Chemical Co. v. Commissioner

THE ROESSLER & HASSLACHER CHEMICAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Roessler & Hasslacher Chemical Co. v. Commissioner Docket No. 34263. United States Board of Tax Appeals 25 B.T.A. 915; 1932 BTA LEXIS 1457; March 17, 1932, Promulgated *1457 Where any distribution or apportionment of deductions is proper under section 240(d) of the Revenue Act of 1921, it is incumbent upon the petitioner to prove an apportionment which is as accurate as reasonably may be under the circumstances. Lawrence A. Baker, Esq., Henry H. Elliott, Esq., and Henry Ravenel, Esq., for the petitioner. J. R. Johnston, Esq., for the respondent. MURDOCK *915 The Commissioner determined a deficiency of $31,588.36 in the income-tax liability of the Niagara Electro Chemical Company for the year 1922. An issue of affiliation has been abandoned, and the petitioner now contends that the respondent erred in failing to consolidate the accounts of the Niagara Electro Chemical Company with those of the Roessler & Hasslacher Chemical Company in the manner provided by section 240(d) of the Revenue Act of 1921. It also *916 contends that the amount of a net loss for 1921 to be carried over to 1922 should be redetermined after consolidating the accounts for that year. The name of Niagara Electro Chemical Company originally appeared in the caption of this proceeding, but, on motion of the respondent, that of The*1458 Roessler & Hasslacher Chemical Company was substituted because the two corporations consolidated under the latter name prior to the institution of these proceedings. FINDINGS OF FACT. The Niagara Electro Chemical Company (hereafter referred to as Niagara) and the Roessler & Hasslacher Chemical Company (hereafter referred to as the R. & H. Company) were New York corporations. They consolidated under the laws of New York at some time after 1922. The Perth Amboy Chemical Works (hereafter referred to as Perth Amboy) was at one time a New Jersey corporation. Each of these three companies had its principal office at 709 Sixth Avenue, New York City. The rent for the space occupied by all of these companies at this address was paid by the R. & H. Company. An accounting force of about 150 employees was maintained at this office at the expense of the R. & H. Company. This office force kept separate books of account for each company. The offices contained reception rooms, a directors' room, and other conveniences which were used by all of the companies. The R. & H. Company had plants at Perth Amboy, New Jersey, and St. Albans, West Virginia. It manufactured principally hydrogen*1459 peroxide, chloroform, ceramic colors and oxide of tin. Niagara's plants were at Perth Amboy and Niagara Falls. It manufactured principally metallic sodium, peroxide sodium, and cyanide sodium. Perth Amboy had a plant at Perth Amboy where it manufactured formaldehydes and their derivatives. The plants at Perth Amboy were separate, but were all situated upon ground belonging to the R. & H. Company. Niagara and Perth Amboy paid rent to the R. & H. Company amounting to about 6 per cent of the cost of the leased property. All of the plants at Perth Amboy were operated from one building. The R. & H. Company maintained a laboratory at Perth Amboy, which was at the service of the other companies. All of Niagara's products were either purchased by the R. & H. Company for the manufacture of its own products or sold by the R. & H. Company on commission. The R. & H. Company sold on commission about one-half of the output of Perth Amboy. The R. & H. Company purchased products from other companies for resale and also sold the products of other companies on commission. It *917 charged these other companies about the same commission which it charged Niagara and Perth Amboy. Neither*1460 Niagara nor Perth Amboy maintained a marketing organization. The R. & H. Company transacted most of the business of these two companies, including the making of purchases. Some of the expenses of thus transacting the business were charged directly to the two companies. Each company employed its own officers and bore the expense of the salaries of its own officers, as shown below: (Table omitted) Carveth was superintendent in charge of all plants. Frankel was in charge of the finances of all three companies. The offices of all officers were at 709 Sixth Avenue, New York City, except that Carveth had his office at Niagara Falls. During 1921 and 1922 the stock of these three companies was held as follows: Stockholder Niagara Perth Amboy R. & H. Shares Shares Shares R. & H. Company [590] 2,040 British interests [300] Alien Property Custodian (formerly Deutsche Gold und Silber Scheide Anstalt Industries) [110] Alien Property Custodian (formerly Holzoerkohling Industries A.G.) 1,960 Alien Property Custodian (in part formerly Deutsche Gold und Silber Scheide Anstalt Industries) 5,954 Total shares outstanding 1,000 4,000 13,000 *1461 On April 1, 1919, a voting trust was organized to vote some of the shares of the R. & H. Company. The trustees of this trust were Roessler, Hamann and Carveth. On October 3, 1921, another voting trust was formed to vote practically all of the stock of the R. & H. *918 Company. The trustees of the latter trust were Roessler, Hamann and three representatives of the Alien Property Custodian. Prior to October 3, 1921, the Alien Property Custodian was represented in the R. & H. Company by P. S. Rigney, assistant treasurer. The R. & H. Company filed consolidated returns for the years 1921 and 1922 on behalf of itself, Niagara, Perth Amboy, Mexican R. & H. Chemical Company, Pacific R. & H. Chemical Company, and the Nypania Transportation Company. The Commissioner denied that any affiliation existed between the R. & H. Company, Perth Amboy, and Niagara, and computed the tax liability of each of the latter two companies separately. No separate returns were filed by or on behalf of either of these companies for either of the years 1921 or 1922. The respondent accepted the figures shown on the consolidated returns, except for a minor adjustment the benefit of which the petitioner*1462 does not deny. The R. & H. Company expended the following amounts in conducting its own business, the business of Perth Amboy, the business of Niagara, and perhaps the business of the other three companies: Item [1922] Rent on business property $47,177.81 $47,009.70 Salaries and wages 261,070.18 284,196.42 Traveling 16,287.90 21,646.98 Mercantile agencies 767.75 1,053.75 Communications 16,472.85 16,850.61 Stationery and printing 11,702.07 9,161.89 Suppers 231.00 454.75 Moving expenses 600.00 Collection expenses 1,490.20 5,690.12 Research 138,904.29 54,855.55 Experimental 54,831.37 Patents and trade-marks 28,272.98 17,644.84 Library 2,857.21 3,637.73 Laboratory 1,421.92 Employees' liability 1,025.14 1,006.53 General expenses and supplies 17,863.82 11,870.86 Total 544,723.20 531,343.02 The companies had no agreement for distributing the above expenses. No part of the above amounts was allowed as deductions by the Commissioner in determining Niagara's net loss for 1921 or the deficiency in its tax for 1922. The three corporations had capital and surplus shown below: Company Dec. 31, 1921 Dec. 31, 1922 R. & H $3,097,058.97 $4,691,231.87 Niagara 2,153,271.32 2,606,787.49 Perth Amboy 1,580,353.86 1,700,387.87 *1463 *919 The consolidated returns for 1921 and 1922 disclose the following: [1921] Item Roessler & Hasslacher Chemical Co. Perth Amboy Chemical Works Niagara Electro Chemical Co. Gross sales $10,242,907.79 $1,600,307.89 $3,898,622.09 Gross income 951,062.91 298,799.61 157,870.97 Deductions 1,335,547.36 237,270.24 343,532.03 Net income -410,898.45 45,529.37 -185,741.06 Nontaxable income 26,414.00 16,000.00 80.00 [1922] Gross sales $13,029,392.66 $2,369,988.30 $5,571,427.12 Gross income 1,596,757.55 568,366.98 1,077,805.44 Deductions 1,485,040.68 316,750.25 397,679.29 Net income 111,716.87 251,616.73 680,126.15 1921 loss 384,484.45 None. 185,661.06 Taxable income None. 251,616.73 494,465.09 The Commissioner determined that the following figures were correct for the year 1922: Item Niagara Electro Chemical Co. Perth Amboy Chemical Works Income $680,126.15 $251,616.73 1921 loss 259,816.39 None. Subject to tax 420,309.76 251,616.73 Tax liability 52,538.72 31,452.09 Original tax allocated 20,950.36 12,543.42 OPINION. MURDOCK: The R. & H. Company filed consolidated returns*1464 for 1921 and 1922 on behalf of itself, Niagara, and four other companies. The Commissioner has removed Niagara from the alleged affiliation and has computed its tax liability separately. There is no controversy about the figures which he has used in making this determination. The petitioner contends that certain expenditures of the R. & H. Company for each year should be distributed or apportioned so that a part thereof may be used to offset Niagara's income, another part used to offset the income of Perth Amboy, and the remainder left to the R. & H. Company. It contends that authority for making this distribution or apportionment is found in section 240(d) of the Revenue Act of 1921. A similar contention has been considered by the Board in only one reported case, that of Broadway Strand Theatre Co.,12 B.T.A. 1052. Although later acts have contained a somewhat similar provision, in only one other reported case has the Board considered any of these later provisions. That was a case involving section 240(d) of the Revenue Act of 1924 and section *920 240(f) of the Revenue Act of 1926. *1465 Nowland Realty Co.,18 B.T.A. 405; affid., Nowland Realty Co. v. Commissioner, 47 Fed.(2d) 1018. In neither of these cases did the facts disclose any justification or basis for disturbing the Commissioner's determination. Section 240 of the Revenue Act of 1921 is entitled "Consolidated Returns of Corporations." In Paragraph (a) it makes provision for returns for any taxable year beginning on or after January 1, 1922. In paragraph (b) it provides for the computation and assessment of a tax based on a consolidated return and for a credit. Paragraph (c) states the circumstances under which two or more domestic corporations shall be deemed to be affiliated. Paragraph (d) is as follows: For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, *1466 for the purpose of making an accurate distribution or apportionment of gains, profits, income deductions, or capital between or among such related trades or businesses. Paragraph (e) provides that consolidated returns for any taxable year beginning prior to January 1, 1922, shall be made in the same manner and subject to the same conditions as provided by the Revenue Act of 1918. Paragraph (d) appeared for the first time in the Revenue Act of 1921. The following questions, among others, arise: Does the provision for the consolidation of accounts in paragraph (d) apply only to corporations entitled to the benefits of section 262 and perhaps to foreign corporations? Does it apply to a taxable year beginning prior to January 1, 1922? Were the businesses of Niagara and the R. & H. Company related, and were they owned or controlled directly or indirectly by the same interests within the meaning of the act? If the Commissioner has failed to consolidate accounts, may the Board require the consolidation of accounts, and if so, to what extent and under what circumstances? Cf. *1467 Broadway Strand Theatre Co., supra; Nowland Realty Co., supra; Nowland Realty Co. v. Commissioner, supra.None of these questions has been decided by this Board or by the courts. The petitioner contends, that the consolidation of accounts may be made in any case, particularly in the present case; the two businesses were related and were owned or controlled directly or indirectly by the same interests; the Board has jurisdiction; and it is immaterial that there is no question of abuse of discretion by the Commissioner. Although we are not inclined to wholly disagree with the petitioner, we nevertheless find *921 it unnecessary and therefore unwise to decide any of the questions suggested above, since in any event our judgment must be for the respondent. The petitioner has given us a list of various amounts expended and deducted entirely by the R. & H. Company. The claim is that these amounts were expended partly for the benefit of Niagara and Perth Amboy and therefore should be distributed or apportioned among the three companies. The act says the Commissioner may consolidate the accounts for the purpose of making an accurate distribution*1468 or apportionment of gains, profits, income, deductions, or capital among related businesses. Accurate must mean at least as accurate as reasonably may be under the circumstances. The Commissioner has not attempted to consolidate the accounts of these companies. He was not requested to do so prior to the hearing. We do not know what would be his method in a proper case. However, if this is an appropriate case for any distribution or apportionment, it was incumbent upon the petitioner to prove facts from which the Board could make a proper distribution or apportionment. The petitioner argues that it has met this burden of proof by showing three satisfactory methods for making the apportionment - an apportionment which a witness gave as his opinion of a proper one, and apportionments on the basis of gross sales, or capital. The witness confessed his inability to apportion the expenditures for research, experimentals, patents and trade-marks, and library, but he stated that in his opinion 15 per cent of each of the other items in the list should be apportioned to Niagara and 15 per cent to Perth Amboy. His estimate is based only upon his general knowledge of the volume of work, *1469 orders, billings, invoices, bills, checks, and money transactions of these companies. He had supervision of some books of the other companies, but not of the general books of Niagara. We do not think that the record shows his estimate to be even reasonably accurate. Furthermore, we see no reason to believe that the total rent could not have been distributed fairly accurately, perhaps by determining what part of the space was used by each company and showing the rent for such space. The salaries and wages might have been apportioned on the basis of the time spent by each employee on the work of the separate companies. Patents, trade-marks, communications, printing and stationery, like the other items, have no necessary relation to capital, gross sales, or volume of business, but could be accurately apportioned by determining to which company each item making up each total related. There was no effort made to segregate accurately any of the expenses to determine the amount applicable to each company. It does not *922 appear that such an attempt would have been futile or that it was necessary to rely upon an approximation. The methods suggested by the petitioner are short*1470 cuts. They are less onerous as to proof. But there were obviously better and more accurate methods which anyone wanting to make a reasonably accurate distribution would adopt in preference. Where some allocation is proper under section 240(d), it is incumbent upon a petitioner before this Board to prove a more accurate method of distribution or allocation than those suggested by this petitioner, or at least to show sufficient justification for failure to do so. Even if every other question in this case were decided in the petitioner's favor, nevertheless, we could not make any allocation. We need decide nothing more. Judgment will be entered for the respondent.