Mobile Bar Pilots Ass'n v. Commissioner

MOBILE BAR PILOTS ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Mobile Bar Pilots Ass'n v. Commissioner Docket Nos. 77016, 81295. United States Board of Tax Appeals 35 B.T.A. 12; 1936 BTA LEXIS 576; November 3, 1936, Promulgated *576 1. An organization of pilots held to be an association and taxable as a corporation. 2. Pensions paid two retired members of an association held to constitute ordinary and necessary business expenses of the association. 3. The useful life of boats owned and operated by an association determined. 4. Held, that the evidence herein fails to establish that an amount paid by an association to the widow of a deceased member thereof was either (a) a reasonable one for additional compensation for services rendered by the deceased husband or (b) an ordinary and necessary business expense of the association. George E. H. Goodner, Esq., for the petitioner. Lloyd W. Creason, Esq., for the respondent. TYSON *12 In these consolidated cases the petitioner seeks redetermination of deficiencies in income tax of $540.50 for the fiscal year ended March 31, 1932, and of $991.53 for the fiscal year ended March 31, 1933. *13 It is alleged by the petitioner that the respondent erred (1) in taxing it for both years as a corporation; (2) in disallowing for both years certain depreciation claimed by it on its pilot boats; (3) in disallowing*577 for both years deductions for pensions or additional compensation paid to two retired pilots; (4) in disallowing a deduction of $2,144.65 for the fiscal year ended March 31, 1933, paid to the widow of a deceased pilot as additional compensation for services rendered by such pilot; and (5) in disallowing a deduction for the fiscal year ended March 31, 1933, of $600 contributed to a community chest. The last assignment of error was abandoned at the hearing. FINDINGS OF FACT. Petitioner was, during the taxable years, a voluntary association of about twenty licensed pilots, operating in Mobile Bay, the harbor of Mobile, and their adjacent waters, and had been in continuous existence for fifty years or longer. Each pilot belonging to the association was licensed both by the United States and the State of Alabama. The business of the association was to furnish qualified licensed pilots for the purpose of piloting boats across Mobile Bar and into and out of the harbor of Mobile, Alabama. In order to become a member of the association each pilot was required to purchase and own an equal share or interest with each other pilot in the "plant" of the petitioner, which plant, during*578 the taxable years, consisted, among other properties, of three boats acquired in March 1931 from the State of Alabama at a total cost of $15,000, without which the business of the association could not have been operated. The three boats so acquired were named, respectively, the Alabamian, the Anna Ruth, and the Godbold, all of which were of wooden construction and received hard usage. We find that the useful life of each of these boats was as follows: That of the Alabamian, eight years from the date of its acquisition; that of the Anna Ruth, seven years after extensive improvements were made thereon immediately after its acquisition; and that of the Godbold, five years from the date of its acquisition. The association maintained an office in Mobile and its operations were managed by a president, a vice president, and a secretary, who, with two others, constituted its board of directors. It had been in force for about ten years prior to and including the taxable years in question written rules and bylaws regulating the conduct of its business. Piloting fees were collected by the association, placed in its bank account, and, after deduction therefrom of*579 expenses and an amount for a reserve or sinking fund which was to be used for any purpose deemed necessary by the board of directors, the balance remaining *14 was distributed equally among the members. By the agreement under which the association was operating in the taxable years the liability of the individual pilot members was limited to the extent that neither would be responsible for the act, default, or neglect of any other pilot. Continuity in the maintenance and operation of the association was not interrupted by the death of a member. Under the rules of the association, John Dorgan and Sid Dorgan received retirement pay or pensions during the taxable years by reason of their retirement prior thereto because of disability, the retirement pay or pensions of each being based upon the services he had rendered in the past and such as he might render in the future. These retired members held themselves subject to call by the association for the performance of certain duties other than that of actually piloting boats, and at times after their retirement rendered valuable services to the petitioner. During the taxable year ended March 31, 1932, the petitioner paid John*580 Dorgan a pension or retirement pay in the total amount of $576.65 and paid Sid Dorgan a pension or retirement pay in the total amount of $1,730, and in the taxable year ended March 31, 1933, the petitioner paid John Dorgan a pension or retirement pay in the total amount of $600 and paid Sid Dorgan a pension or retirement pay in the total amount of $1,715, the amounts so paid John Dorgan being at the rate of around $50 per month and those paid Sid Dorgan being at the rate of around $150 per month; all in compliance with the rules and bylaws of the association, which provided that amounts paid monthly to a retired pilot should not exceed 50 percent of his "monthly working share." John Dorgan had been a member since 1893 and was retired in 1925. Sid Dorgan had also been a member since 1893 and was retired sometime in 1931. We find that the amounts paid the Dorgans constituted payments in reasonable amounts for past services rendered by them prior to their retirement and for services rendered by them after retirement and that they are deductible as ordinary and necessary business expenses. In the taxable year ended March 31, 1933, George W. Raley, a member of the association, was*581 taken ill while on duty and died within a few days thereafter. Until his death he had been an active member of the association for 15 years, rendering excellent service. Petitioner paid to his widow $2,144.65 in consideration of his good and faithful services rendered in the past. There was no provision in the agreement under which the association operated or in its rules and bylaws at the time of Raley's death for the payment to the estate or the widow of a deceased member of any amount, except such amount as was due him at his death for "every day worked by *15 him during the month in which he died", and "his pro rata share of the sinking fund on hand at the time of his death, and his share of the plant." OPINION. TYSON: The first question for determination is whether or not the petitioner is taxable as if it were a corporation. This must be answered in the affirmative, since, as shown in our findings of fact, it operated the business of piloting boats, collecting fees therefor, and distributing the fees among its members after certain deductions therefrom, and possessed many attributes of a corporation such as having a centralized management through a president, *582 vice president, secretary, and board of directors, rules and bylaws, continuity of existence which was not interrupted by the death of a member, equal ownership by the members of shares or interest in the property of the association, such interest or share being acquired on payment to the association by each member of the amount of the value of his share, and limited personal liability of its members. From all of these facts it clearly appears that petitioner was, during the taxable years, engaged in business for profit and was an association taxable as a corporation under the rulings of the United States Supreme Court in ; ; ; and . Cf. ; affd., . Petitioner contends, on brief, without the citation of any authority other than the statute itself to sustain such contention, that it is exempt from taxation under either or both of subsections (1) *583 and (12) of section 103 of the Revenue Act of 1932, and concedes that if petitioner is exempt from taxation as an association such exemption must be derived from these subsections. Subsection (1) relates to "Labor, agricultural, or horticultural organizations" and subsection (12) relates to "Farmers', fruit growers', or like associations organized and operated on a cooperative basis." We do not think this contention is sound as petitioner, clearly, was not embraced within any of the classes set out in these subsections. Relative to the question of the amount allowable as a deduction for depreciation on the three boats, the Alabamian, the Anna Ruth, and the Godbold, owned and operated by the association, we find that there is no proof of error in the respondent's determination of the cost basis of each separate boat upon which depreciation must be computed. Therefore, the respondent's determination as to the separate cost basis of each boat is approved. However, the evidence does establish that the respondent erred in his determination of the *16 useful life of each of the three boats and, consequently, also erred in the rate applied in computing the amount*584 allowed by him as a deduction for depreciation thereon in each of the years in controversy. In our findings of fact we have determined the useful life of each separate boat, and the allowable deduction for depreciation in the taxable years must be computed at rates based on such useful lives. Relative to the disallowance by the respondent of a deduction for pensions paid as additional compensation to the two retired Dorgans, it is shown in our findings of fact that both had been in the active service of the association for more than twenty-five years prior to the date of their retirement and that, under the rules and bylaws of the association, John Dorgan received in the taxable year ended March 31, 1932, the amount of $576.65, and in the taxable year ended March 31, 1933, the amount of $600, and Sid Dorgan received in the taxable year ended March 31, 1932, the amount of $1,730 and in the taxable year ended March 31, 1933, the amount of $1,715, all of such amounts having been paid as reasonable additional compensation for past services rendered prior to retirement and services rendered after retirement. We hold that both the Dorgans were members of the association at the time*585 of their retirement and were retired members during the taxable years and that the payments made to them as additional compensation for past personal services rendered by them prior to their retirement and services rendered thereafter were reasonable amounts therefor and are deductible as ordinary and necessary expenses paid by petitioner in carrying on its business during the taxable years. ; ; ; ; , affirming . The action of respondent in disallowing the deduction of $2,144.65 paid the estate of George W. Raley, a deceased member of the association, is approved. There is no evidence in the record showing that such amount was reasonable additional compensation for the services rendered by him prior to his death. Petitioner's failure to establish this vital fact is fatal to his contention on this issue. *586 ; . Moreover, there is also no evidence in the record establishing the fact that this payment was an "ordinary and necessary" expense of the business of petitioner within the meaning of section 23(a) of the Revenue Act of 1932. Cf. . Cf. , and . Decision will be entered under Rule 50.