Oklahoma Contracting Corp. v. Commissioner

OKLAHOMA CONTRACTING CORPORATION AND T. R. JONES, INC., ASSIGNEE OF AND SUCCESSOR TO OKLAHOMA CONTRACTING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Oklahoma Contracting Corp. v. Commissioner Docket No. 77871. United States Board of Tax Appeals 35 B.T.A. 232; 1937 BTA LEXIS 905; January 8, 1937, Promulgated *905 1. Parties petitioner here include a taxpayer against which no deficiency was determined. Held, the petition is dismissed as to that taxpayer. Revenue Act of 1928, sec. 272(a); Rule 6, Rules of Practice of the Board of Tax Appeals; Fred Shingle,34 B.T.A. 875. 2. Oklahoma Co. was affiliated with Oklahoma Corporation, as its parent, throughout 1931. A final consolidated return for that year was filed four days late by T. R. Jones, Inc., as such parent. That return did not indicate who the actual parent was for any part of that period. Respondent determined the pending deficiency against petitioner on a separate basis for the period January 1 to July 23, 1931. Held, the only basis for computation of petitioner's income and tax thereon, for that year, to which petitioner has a legal right or which is so permitted, is a separate basis. Regulations 75, art. 18(b). Cf. Corner-Broadway-Maiden Lane v. Commissioner, 76 Fed.(2d) 106; American Gas & Electric Securities Corporation,33 B.T.A. 245. 3. But, since petitioner's taxable year or period was the entire calendar year 1931, the determination of the pending deficiency*906 for less than that period was unauthorized and that determination, together with the imposed delinguence penalty thereon, is reversed. Mrs. Grant Smith,26 B.T.A. 1178. I. J. Underwood, Esq., for the petitioners. DeWitt M. Evans, Esq., and L. C. Mitchell, Esq., for the respondent. LEECH *232 This is a proceeding for the redetermination of a deficiency for the period from January 1 to July 31, 1931, in the amount of $39,214.34, and a delinquency penalty in the amount of $9,803.58. The issues raised by the pleadings involve (a) the affiliation and the right of the petitioners to file a consolidated return for the entire year 1931 with the parent, the Oklahoma Contracting Co., or the T. R. Jones, Inc., as assignee of and successor to the Oklahoma Contracting Co.; (b) the disallowance of a deduction for salary paid to the petitioners' president during 1931 to the extent of $20,416.67; and (c) the disallowance of a loss deduction in the amount of $36,651.39. FINDINGS OF FACT. The Oklahoma Contracting Co., an Oklahoma corporation, hereinafter referred to as the Company, was, prior to 1931, engaged in the general pipe*907 line construction business, operating in a number of *233 different states, with its principal place of business in Dallas, Texas. Its outstanding capital stock, consisting of 401 shares of the par value of $100 each, was owned by T. R. Jones, of Dallas, Texas. As of the close of business on December 31, 1930, it transferred and conveyed to the Oklahoma Contracting Corporation, a Delaware corporation, hereinafter referred to as the petitioner, all of its pipe line construction equipment and business in exchange for all of the outstanding capital stock of the petitioner, consisting of 4,000 shares of stock of no par value. After the transfer of its construction business to the petitioner, the Company's activities were confined to the receiving of interest and dividends from its bonds and stocks and the buying and selling of stocks on its own account. The stocks were held in the name of T. R. Jones. The petitioner, during 1931, continued the general pipe line construction business carried on prior to 1931 by the Company. It had its principal office in Dallas, Texas. It carried on its pipe line construction business in the States of Kansas, Missouri, Iowa, Illinois, Kentucky, *908 and Texas. T. R. Jones was, during 1931, the president of both the petitioner and the Company. T. R. Jones, Inc., was incorporated by the State of Delaware on July 24, 1931. Its original incorporators held an organization meeting in Wilmington, Delaware, upon written waiver, on July 24, 1931. At such meeting bylaws were adopted, three directors were elected, and they were authorized, in their discretion, to issue the capital stock of the corporation in such amounts and for such consideration as determined from time to time. The first organization meeting of the directors, including T. R. Jones and George B. Cornelius, an employee, and I. J. Underwood, was held in Dallas, Texas, on September 2, 1931. At such meeting T. R. Jones was elected president and George B. Cornelius, secretary-treasurer; the form of the stock certificates and the corporate seal, as submitted, were adopted; the Corporation Trust Co. was appointed the Delaware agent of the corporation; and the treasurer was authorized to open up checking accounts and other accounts for the deposit of funds belonging to the company in such banks or trust companies as directed by the president. At a special meeting of*909 the board of directors of the Company held on January 4, 1932, in Dallas, Texas, a resolution was adopted authorizing the officers of the Company to transfer on its behalf all of its properties, whether real, personal, or mixed, to T. R. Jones, Inc., in consideration of the issuance by T. R. Jones, Inc., to T. R. Jones, personally, or to his nominee, of all of the authorized capital stock of T. R. Jones, Inc., consisting of 1,000 shares of no par value stock, and the assumption by T. R. Jones, Inc., of all its liabilities *234 and indebtedness. This stock was issued to T. R. Jones on January 4, 1932. On the same day at a special meeting of the board of directors of the petitioner, a resolution was adopted authorizing the officers of the petitioner to transfer, effective as of January 1, 1932, all its assets, properties and property rights, free and clear of all debts and liabilities, except current indebtedness, to T. R. Jones, Inc., in consideration of the assumption by T. R. Jones, Inc., of all the outstanding debts of the petitioner and the surrender for cancellation of all of the outstanding capital stock of the petitioner, except the qualifying shares to be held by*910 its directors. On the same day at a special meeting of the directors of T. R. Jones, Inc., held at Dallas, Texas, resolutions were adopted accepting the offers of the Company and the petitioner to transfer their properties to T. R. Jones, Inc. The members of the board of directors of the petitioner, the Company, and T. R. Jones, Inc., were the same. Under date of January 2, 1932, the Company, by warranty deed, filed for record September 21, 1932, with the County Clerk of Dallas County, Texas, transferred and conveyed certain real estate therein described to T. R. Jones, Inc. Under the same date the Company by bill of sale acknowledged before a notary public September 21, 1932, transferred all its personal property located upon the real estate therein described to T. R. Jones, Inc. A certificate for 1,000 shares of stock of T. R. Jones, Inc., was issued to T. R. Jones on January 4, 1932. The Company and the petitioner were dissolved in the spring of 1932. Under date of March 10, 1932, T. R. Jones, Inc., addressed a letter to the collector of internal revenue at Dallas, Texas, requesting an extension of 30 days from March 15, 1932, in which to file the income tax return*911 for 1931 for "T. R. Jones, Inc., formerly Oklahoma Contracting Company, parent corporation, and Oklahoma Contracting Corporation, subsidiary." This extension was granted by the Commissioner by letter under date of March 10, 1932. T. R. Jones, Inc., caused to be filed with the collector of internal revenue at Dallas, Texas, on March 14, 1932, a tentative income tax return for the calendar year 1931 under the following designation: T. R. JONES, INC., Formerly OKLAHOMA CONTRACTING COMPANY and SUBSIDIARY Two further requests for the extension of time within which to file the 1931 return of the taxpayer as designated in its letter of March 10, 1932, were made by letter by T. R. Jones, Inc., which requests were granted, the time being extended thereby to June 1, 1932. *235 On June 4, 1932, T. R. Jones, Inc., caused to be filed with the collector of internal revenue at Dallas, Texas, a final income tax return for the calendar year 1931, in the name of: T. R. JONES, INC., AND SUBSIDIARY, OKLAHOMA CONTRACTING CORPORATION This return contains 11 schedules, all of which are captioned "T. R. Jones, Inc., and Subsidiary, Oklahoma Contracting Corporation" except schedule 11, *912 which is captioned "T. R. Jones, Inc. Successor to Oklahoma Contracting Company." In answer to questions contained therein, the return discloses that no return had been filed under the same name for the preceding taxable year, that T. R. Jones, Inc., was an "outgrowth, result, continuation, or reorganization of a business or businesses in existence during this or any prior year since December 31, 1917", and that the name of its predecessor was the "Oklahoma Contracting Company." On form 1122 the petitioner under date of June 13, 1932, named T. R. Jones, Inc., as the parent corporation. The petitioner and the Company had separate books of account for 1931. All the figures and data contained in such final return were taken from the books of account of the petitioner and the Company, respectively. During January 1932, T. R. Jones, Inc., took over all the assets of the petitioner and the Company and assumed their liabilities. Books of account were opened for T. R. Jones, Inc., as of January 1, 1932. Prior to 1932 T. R. Jones, Inc., had no books of account or financial records, except that, on September 14, 1931, a bank account with the Republic National Bank & Trust Co. of Dallas*913 in the name of T. R. Jones, having a credit balance of $102.85, was closed into a new account in the name of T. R. Jones, Inc. After September 14, 1931, interest and dividends received from the bonds and stocks of the Company were deposited in such bank account together with certain items of income personal to T. R. Jones. A brokerage account of the Company was also carried in the name of T. R. Jones and the proceeds from such account were also deposited in such account after September 14, 1931. All the items deposited in such bank account constituting income of the Company, including such interest, dividends, and proceeds from the brokerage account, were entered and recorded as income of the Company in the books of account of the Company. Mostly all checks drawn on such account were drawn for the payment of personal expenses of T. R. Jones. T. R. Jones was one of the organizers of the Company and since 1929 was the sole owner thereof. Prior to 1929 he had a partner who managed the inside or office work of the Company. Such partner died in 1929 and T. R. Jones purchased his interest and thereafter the office work was entrusted to employees. T. R. Jones *236 procured*914 all the construction contracts prior to 1931 for the Company and during 1931 for the petitioner and supervised their execution. He personally financed such contracts. When money was needed therefor he always signed notes personally for loans from the bank. During the construction period he traveled from job to job and was absent from Dallas most of the time during that period. During the construction period he was in Dallas on an average of less than a day a week. During 1929 and 1930 he received a salary of $50,000 a year from the Company. During 1931 he received from the petitioner a salary of $4,166.66, per month from January to and including October, or a total of $41,666.66, which was reported as community income of himself and wife on their Federal income tax returns for 1931. The books of account of the petitioner show a loss on the "Shell-Kilgore-Houston-10" contract as of July 1, 1931, of approximately $36,000. The Commissioner determined that the petitioner was affiliated with the Company for a period from January 1 to July 23, 1931, and with T. R. Jones, Inc., during the balance of the year, and that the Company had filed no return for 1931. He computed the*915 tax liability of petitioner for the period from January 1 to July 31, 1931, upon the basis of a separate return which resulted in the deficiency in tax here involved. He computed the tax liability of the petitioner and T. R. Jones, Inc., for the period from August 1 to December 31, 1931, on the basis of a consolidated return, which resulted in no tax liability for that period. He computed the tax liability of the Company upon the basis of a separate return for the entire year 1931. In his computation of the tax liability of the petitioner for the period from January 1 to July 31, 1931, he disallowed the claimed loss on the "Shell-Kilgore-Houston-10" contract in the amount of $36,651.39, but held it allowable for the period from August 1 to December 31, 1931. He also disallowed a portion of the salary to the extent of $20,416.67 paid in 1931 by the petitioner to T. R. Jones. OPINION. LEECH: The income tax deficiency predicating this proceeding was determined against Oklahoma Contracting Corporation, alone. Therefore, that corporation, and no other, can be the petitioner here. Accordingly, the petition is dismissed as to T. R. Jones, Inc. Revenue Act of 1928, sec. 272(a); *916 Rule 6 of the Rules of Practice of the Board of Tax Appeals; . See ; . The dissolution of petitioner occurred within the *237 three years preceding the filing of this petition, so it is the proper petitioner. Vernon's Revised Statutes of Texas, art. 1389. The deficiency resulted from the computation of petitioner's income on a separate basis and was determined for the period January 1 to July 23, 1931. The validity of all or any part of that determination is the controlling question presented. The right of petitioner to have its income and taxes thereon computed upon a consolidated basis depends upon two premises: (1) The fact of its affiliation within the applicable statute and regulations (Revenue Act of 1928, sec. 141(d); Regulations 75, art. 2(b)); and, (2), its election of that basis under the applicable statute and regulations (Revenue Act of 1928, sec. 141(a); Regulations 75, arts. 1 and 10). We believe this record sustains beyond reasonable doubt that the Company, and not T. R. Jones, Inc., was affiliated*917 with petitioner during the entire calendar year 1931. That status of affiliation between the Company and the petitioner was not changed during that year. The right to have corporate income computed on a consolidated basis and the tax determined on such basis is a privilege extended by Congress, conditional upon the strict compliance with the regulations of the Commissioner, authorized by the statute, and antecedent to the grant of that privilege. Revenue Act of 1928, sec. 141(a) and (b); Regulations 75, art. 1. ; certiorari denied, ; ; ; affd., ; certiorari denied, ; ; . The regulations decisive here are reasonable. ; *918 . The election to exercise that privilege must be exercised when the return of the parent corporation is filed, and at no other time. Regulations 75, art. 10. ;; . The several tentative returns filed here, though captioned differently than the final return, were upon a consolidated basis. The only final return here is that of T. R. Jones, Inc., parent, and petitioner, subsidiary. Whether or not the election to file consolidated returns was properly exercised is controlled by that final return. It purports to include the income of petitioner, as subsidiary, and T. R. Jones, Inc., as parent. The schedules attached to this return purported to *238 detail and segregate that income. Such return was obviously in error and was so noted by respondent as to the period in 1931 preceding July 23, since it was clear that T. R. Jones, Inc., could not be a parent prior to its birth on the latter date. But, *919 obvious as was that fact on the return, the actual parent for that period, or any other period during 1931, was not indicated in any way. That return, erroneous as it was, has not been amended nor has any attempt to amend it been made. The question of whether, under the present circumstances, it could have been amended, is not before us. Accordingly, not only is the petitioner not entitled under the applicable statute and regulations to have its income and tax thereon computed upon a consolidated basis with any company for the calendar year 1931 (Revenue Act of 1928, sec. 141(a) and (b); Regulations 75, art. 12(a) and art. 18(b)), but, on this record, respondent could legally compute petitioner's income tax for the calendar year 1931 only on a separate basis. Regulations 75, art. 18(b). Cf. ; However, the pending deficiency determined by respondent covers only the period in 1931 from January 1 to July 23. The respondent has no authority to determine a deficiency for any other than a taxable period or year of the taxpayer. Revenue Act*920 of 1928, sec. 41; ; affd., . The status of affiliation existing between the Company and petitioner throughout the entire calendar year 1931 was not changed in any way at any time during that year. Therefore, petitioner corporation had no other taxable period or year than the entire calendar year 1931. It follows that respondent had no legal right to determine a deficiency against petitioner for any other period than the entire calendar year 1931. Accordingly, there is no deficiency against the petitioner for the period in controversy, to wit: January 1 to July 23, 1931. ; ; ; And, since there is no deficiency, the delinquency penalty was improperly imposed. ; *921 ; . Decision will be entered for the petitioner.