Cord v. Commissioner

E. L. CORD, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cord v. Commissioner Docket Nos. 84860, 84861, 84862, 84863, 84864, 84890, 84891, 84892, 84893, 84919, 85016, 85018, 85019, 85032, 85033, 85034, 85035. United States Board of Tax Appeals 38 B.T.A. 1372; 1938 BTA LEXIS 744; December 15, 1938, Promulgated *744 A syndicate for the sale of a block of stock at a certain price, held, not an association taxable as a corporation. John Enrietto, Esq., for the petitioners. Brooks Fullerton, Esq., and Joseph C. Bruce, Esq., for the respondent. MURDOCK *1372 These are transferee proceedings under section 311 of the Revenue Act of 1932. Some of these petitioners were parties to a syndicate formed under an agreement dated June 2, 1932. The Commissioner has sent notices to the parties to that agreement stating that he has determined a deficiency of $259,662.52 against the syndicate for the year 1932, on the ground that it was an association taxable as a corporation, and notifying each recipient that he proposes to assess all or a part of the deficiency with interest against the recipient as a transferee of the assets of the association, as follows: Docket No. Transferee Proposed assessment 84893 E. L. Cord $259,662.52 84919 Estate of Margaret B. Chamberlain 2 2,395.42 84860 Edna I. Cord 9,706.19 84861 Julia Frische 9,706.19 84862 Ida L. Cord 9,706.19 84863 Lillian B. Montgomery 4,832.34 84864 Norma Frische 9,706.19 84890 Florence H. Pruitt 7,764.95 84891 A. J. Pruitt 8,756.32 84892 Virginia Kirk Cord 19,453.87 85016 Katherine W. Manning 114,452.34 85018 R. S. Pruitt 7,764.95 85019 Cord Corporation 259,662.52 85035 Manning & Co. 3 259,662.52 *745 *1373 Manning & Co., an Illinois corporation, was a party to the syndicate and received a distribution from the syndicate manager. Thereafter, on December 31, 1932, it transferred all of its assets to a Delaware corporation of the same name in exchange for all of the stock of the latter, which it promptly distributed to its stockholders and dissolved. The Delaware corporation distributed all of its assets to its stockholders in 1933 and dissolved. The Commissioner has notified those stockholders of his determination of the deficiency against the syndicate and of his intention to assess a part of it against them as transferees of the assets of the Illinois corporation, as follows: Docket No. Petitioner Proposed assessment 85032 R. S. Pruitt $24,356.77 85033 E. L. Cord 259,662.52 85034 L. B. Manning 121,783.85 A number of issues are presented, but the decision of the first issue in favor of the petitioners will completely dispose of all of the proceedings. That*746 issue is whether the Commissioner erred in holding that the syndicate was an association taxable as a corporation. FINDINGS OF FACT. The Cord Corporation, the Auburn Automobile Co., and Manning & Co. were all corporations organized prior to 1932. They will be referred to hereinafter as Cord, Auburn, and Manning. Cord was engaged in holding stock and managing corporations. Auburn was engaged in the manufacture of automobiles. Manning was a private investment house. These three corporations in May 1932 owned all, or substantially all, of the capital stock of a number of other corporations manufacturing automobiles or parts for automobiles. E. L. Cord, L. B. Manning, and R. S. Pruitt at that time owned all of the capital stock of Manning in proportions of 70, 25, and 5 percent. They and Manning also held a great many shares of the stock of Cord. They were officers and directors of Cord, Manning, and Auburn, and constituted the executive committee of Cord. Cord owned 43.41 percent, or 91,942 shares, of the stock of Auburn on May 31, 1932. Those shares had cost Cord on an average of about $55 each, but about one-half of the shares had been acquired in 1929 at an average*747 cost of about $67.50. The book value of a share of Auburn stock at that time was about $85, including quick assets to the extent of about $60 per share. The average earnings of the corporation per share for the preceding five years were $12.79. Dividends *1374 of $1 per share had been paid, and in four of the years a stock dividend of 2 percent had been paid. The stock was quoted on the New York Stock Exchange at 31 and 32 on May 31, 1932. The price of the stock had followed the general trend of other stocks, but its fluctuation had been more violent than that of the average stock from September 1931 to June 1, 1932. The executive committee of Cord had determined prior to June 1, 1932, to liquidate a substantial part of its investment in the automobile industry and to increase its investments in the field of aviation. They decided to sell at least 75,000 shares of Auburn for $67.50 per share, the book cost, or for as little less than that cost as could be obtained. Manning made several unsuccessful efforts to interest New York brokers. Cord had no desire to support the market itself in an effort to bring it up to $67.50 per share. An agreement was finally reached*748 whereby Manning would undertake to sell the stock and it and Cord would each assume one-half of the risk. E. L. Cord, L. B. Manning, and R. S. Pruitt agreed to take over, for themselves and members of their families, one-half of the interest of Manning, to be divided among the three family groups in proportion to the stock of Manning held by each group. A call for 75,000 shares of Auburn stock at $67.50 per share, good until September 30, 1932, was granted by Cord on June 1, 1932, to Manning for the benefit of the parties to the agreement hereinafter mentioned. The following agreement was entered into on June 2, 1932: AUBURN AUTOMOBILE COMPANY SYNDICATE AGREEMENT MANNING & Co., a corporation, is forming a syndicate to buy, sell, and generally deal in shares of stock of the Auburn Automobile Company, the position of the Syndicate to be limited to an aggregate total of one hundred thousand (100,000) shares of Auburn stock. The said syndicate has received from the Cord Corporation a call upon seventy-five thousand (75,000) shares of the capital stock of the Auburn Automobile Company at $67.50 per share good to September 30, 1932, and the other terms and conditions governing*749 the formation, activities, management and dissolution of said syndicate are as follows: 1. The Manager of the syndicate shall be Manning & Co., an Illinois corporation, hereinafter called the "Syndicate Manager", and as such Syndicate Manager it shall have full power to act upon its sole discretion in buying, selling or otherwise dealing in said securities for the account of the syndicate, and to purchase, repurchase, sell, resell and generally deal in any or all of said securities at such prices as it may deem advisable, and to employ brokers in connection therewith; to borrow money either from Manning & Co. or others, and as security for any and all loans so made to assign and pledge any of the securities held for the syndicate account, upon such terms and conditions as the Syndicate Manager shall deem for the best interest of the syndicate, to lend any shares of stock held for the syndicate upon such terms as it may *1375 deem advisable, and to grant calls upon Auburn stock to any other person or corporation when such action is deemed by the Syndicate Manager to be advantageous to the syndicate. 2. The Cord Corporation hereby subscribes to a 50% participation, Manning*750 & Co. to a 25% participation, and the individual subscribers to participations in the percentages set opposite their respective names, and each of said participants agrees, when called upon by the Syndicate Manager so to do, to deposit with the Syndicate Manager, its, his or her respective portions of any capital or Auburn stock required by the syndicate. 3. Nothing herein contained shall constitute the participants partners with the Syndicate Manager or with one another, nor render them liable to contribute more than their ratable amount, nor render the Syndicate Manager liable for subscriptions of any participants, provided however, that any loss suffered by the syndicate through failure of any participant to carry out its, his or her obligations hereunder, shall be charged as a loss to the entire syndicate. All expenses incurred in acquiring, holding and marketing any securities for the syndicate account and all interest charges and other expenses incurred in connection with the organization, operation and dissolution of the syndicate shall be charged against the syndicate and each subscriber hereto shall participate in the profits and/or losses and reasonable expenses of the*751 syndicate in the proportion that the amount subscribed by it, him or her bears to the total capital of the syndicate. 4. In case any participant shall fail to make payments or deliver Auburn stock as and when called hereunder, the Syndicate Manager may exclude it, him or her from all interest hereunder, and may, without further demand or notice, sell at public or private sale such participation or any interest or right therein, and may, if at public sale, become purchaser thereof without accountability except for the purchase price. Notwithstanding any such exclusion and/or sale such defaulting participant shall remain liable for all damages not exceeding the amount of his, her or its original participation. Such settlement shall include a charge of 10% of the net profits after deducting interest, commissions and expenses. 5. The Syndicate Manager shall have sole and exclusive control of the money and assets of the syndicate and may deposit the same with Manning & Co. or with any firm or firms members of the New York Stock Exchange or the Chicago Stock Exchange, or in any bank or trust company selected by it, and use the same in the operation of the syndicate, or loan the*752 same on call through Manning & Co. or any banks or brokers selected by it. Neither Manning & Co. nor any of the officers or directors shall be liable under any of the provisions hereof, nor for any error in judgment, nor for any mistake of law or fact, nor for any acts done pursuant hereto, save only for individual default or lack of good faith or failure to exercise reasonable diligence. 6. Any notice which the Syndicate Manager or any lender may have occasion to give to any participant shall be sufficient for all purposes if given in writing mailed postpaid to the address of such participant set opposite its, his or her signature hereto. 7. In case of the resignation or incapacity to act of the Syndicate Manager, a successor or successors shall be appointed in writing by a majority in amount of the subscribers, and the successor or successors so appointed shall thereupon possess and enjoy all of the powers of the Syndicate Manager hereunder. 8. Upon completion of its duties the Syndicate Manager shall prepare an account of its transactions and keep the same on file at the office of Manning & *1376 Co. for thirty days for inspection of participants. Such accounts*753 shall conclusively be deemed correct and shall be binding upon all participants who shall not file written specifications of objections thereto within the said period of thirty days. 9. This syndicate will terminate October 31, 1932, or may be dissolved at any prior time or extended at the discretion of the Syndicate Manager for two periods of three months each. Any stock belonging to the syndicate at the time of dissolution shall thereupon be delivered to the participants pro rata, and moneys or stock due to or from the syndicate participants shall be paid to or by them pro rata as the case may be. 10. This agreement shall be binding upon and enure to the benefit of the heirs, executors, administrators, successors and assigns of the parties hereto, and it may be executed in several counterparts, each of which when so executed shall be deemed to be the original and such counterparts shall together constitute but one and the same instrument. The interests of the subscribers to the agreement were as follows: Subscriber Interest Percent Cord Corporation 50.00 Manning & Co 25.00 F. O. Cord 14.50 Katherine W. Manning 5.875 Virginia Kirk Cord 1.00 Edna I. Cord .50 Ida L. Cord .50 Julia Frische .50 Norma Frische .50 A. J. Pruitt .45 Florence H. Pruitt .40 R. S. Pruitt .40 Lillian B. Montgomery .25 Exchange Natl. Bank, administrator, estate of Margaret B. Chamberlain .125 100.00 *754 Manning had only 57 shares of Auburn on May 31. It began to make purchases and sales of the Auburn stock and the market price of the stock began to rise. There were times during the period from June through December that the market price was in excess of $67.50 a share. Manning had purchased about 30,000 shares more than it had sold up to August 13, 1932. E. L. Cord then offered to take a subcall for 12,500 shares of Auburn stock at $67.50 per share from Manning, good until September 25, 1932, and that offer was accepted by Manning. E. L. Cord, on August 20, 1932, entered into another syndicate agreement with 10 individuals, which was substantially like the June agreement shown above. The subscribers were executives of the Cord group. E. L. Cord, as syndicate manager, sold 10,800 shares in excess of purchases up to September 7, and on September 8 made a call on Manning for 10,800 shares, pursuant to the agreement with Manning. Manning made a call on Cord for 60,800 shares on September 10, 1932. It did not sell any shares thereafter but it did purchase a few shares to test out the market and decided that it could not sell any additional shares. Auburn stock was quoted*755 at 54 on October 1, 1932, and declined to 38 during that month. *1377 The agreement of June 2 was terminated on its expiration date, October 31, 1932. Manning held property at that time as a result of the agreement of June 2. The property had an aggregate value of $1,948,251.27 and consisted of cash or credits in the amount of $1,817,160.17 and 3,169 shares of Auburn stock having a fair market value of $131,091.10. This property was distributed on October 31, 1932, among the subscribers to the agreement of June 2 as follows: Shares Fair market value Cash Total Cord Corporation 1,589 $65,912.30 $908,400.09 $974,312.39 Katherine W. Manning [186] 7,687.03 106,765.31 114,452.34 Lillian B. Montgomery [7] 252.54 4,579,80 4,832.34 Margaret Chamberlain [3] 85.52 2,309.90 2,395.42 Mrs. Julia Frische [15] 586.59 9,119.60 9,706.19 Norma Frische [15] 586.59 9,119.60 9,706.19 Ida L. Cord [15] 586.69 9,119.60 9,706.19 Edna I. Cord [15] 586.59 9,119.60 9,706.19 Virginia Kirk Cord [31] 1,254.68 18,199.19 19,453.87 E. L. Cord [461] 19,130.05 263,428.42 282,558.47 Florence H. Pruitt [12] 469.27 7,295.68 7,764.95 R. S. Pruitt [12] 469.27 7,295.68 7,764.95 A. J. Pruitt [14] 568.68 8,187.64 8,756.32 Manning & Co [794] 32,915.40 454,220.06 487,135,46 Total 3,169 131,091.10 1,817,160.17 1,948,251.27 *756 The cash was distributed by checks on Manning's bank account. The shares of stock were distributed in the form of street certificates. The parties to the agreement of June 2 never made and were never asked to make any payments in money or property under the agreement. The syndicate maintained no separate bank account. All money used in the purchase of the Auburn stock was advanced by Manning in reliance upon the agreement and financial responsibility of the subscribers. All money advanced by Manning was eventually returned to it. Manning made the purchases and sales of Auburn stock entirely through brokers, who did not know whether Manning was dealing on its own account or on behalf of others. All stock purchased was delivered to Manning and was paid for at the time of delivery by checks drawn upon the bank account of Manning. Stock certificates which were in street names were placed in the safety deposit box of Manning in an envelope marked "Auburn Trading No. 9." Deliveries pursuant to sales were made from those certificates. Certificates were never issued in the name of any party to the agreement, and the stock was never left with the broker, or assigned or used as*757 collateral on loans. The interests of the parties were evidence only by the agreement. Nothing in the form of certificates of interest or shares was ever issued. There were no stock records. No provision was made for taking in additional parties, for contributions of additional capital, *1378 or for the registration and transfer of interests. No transfer of an interest was ever made. No separate books of accont were kept. The only account was that on the books of Manning designated "Auburn Trading No. 9." That account contained no assets or income producing items other than the Auburn stock. It was reflected in a "control" account in Manning's ledger, which included transactions made by Manning on behalf of others. Manning never gave any notice to the parties of the transactions in the account and never rendered any statement until the account was closed, at which time it made up a statement of the distributions to be made and notified the parties of the closing of the transaction. It made no other distributions to the parties and never loaned any money from the account. It made no charges for office service, overhead, and management. Charges were made for interest*758 on debit balances in the account and for the expenses incident to the purchase and sale of the stock. There was no body similar to a corporate board of directors or executive committee except the syndicate manager. The syndicate had no officers or employees. There were no bylaws. No meetings of any kind were ever held or provided for, nor was there any provision for meetings, votes, decisions, or expressions of policy. No powers of attorney or proxies were ever executed. No papers or documents were executed in the names of the parties as a group other than the agreement. There were no letterheads and no seal. The parties never made any public representations as to the existence or operation of the syndicate, and never maintained an office or designated a place of business. E. L. Cord and L. B. Manning, who were officers of Manning, sometimes conferred and directed purchases and sales, but they never consulted any of the parties to the agreement in this connection. Manning filed a partnership return on behalf of the syndicate on March 15, 1933, with the collector of internal revenue for the first district of Illinois, showing gains in the amount of $1,948,251.27 and the*759 portion thereof distributed to each of the participants. Each of the parties to the agreement of June 2 included in his income the gain derived under the agreement. Manning, the Illinois corporation, transferred all of its assets as of December 31, 1932, to a new corporation of the same name organized under the laws of Delaware, and received in exchange all of the capital stock of the Delaware corporation. It distributed this stock to its stockholders and dissolved on January 9, 1933. The Delaware corporation distributed all of its assets in liquidation to its stockholders in December 1933 and dissolved on December 19, 1933. Its last board of directors consisted of its stockholders, E. L. Cord, L. B. Manning, and R. S. Pruitt. The fair market value of the assets *1379 distributed in liquidation by the Delaware corporation was as follows: E. L. Cord $1,221,054.98 L. B. Manning 436,091.07 R. S. Pruitt 87,218.21 All facts contained in the stipulation not set out above are incorporated herein by this reference. OPINION. MURDOCK: There are a number of issues raised by the pleadings in these proceedings. If all of those issues were to be discussed*760 and decided, additional facts should be stated. However, the first issue must be decided in favor of the petitioners and, that being so, all other issues and facts supporting those issues become immaterial. The first issue is whether the Commissioner has correctly determined that this syndicate was an association taxable as a corporation. If it was not taxable as a corporation, then it matters not what it was for tax purposes because the Commissioner here seeks to tax it solely as a corporation. Section 1111(a)(2) of the Revenue Act of 1932 defines the term "corporation" as including associations. It does not define the term "association." It defines the term "partnership" as including "a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation." The above quoted definition of "partnerships" appeared for the first time in the Revenue Act of 1932, but the classification of associations as corporations appeared in earlier acts. *761 The Supreme Court, in discussing this question, said that the "inclusion of associations with corporations implies resemblance; but it is resemblance and not identity." Morrissey v. Commissioner,296 U.S. 344. That case is one of the leading cases on the subject, but it did not lay down an absolute test. Each case must be decided upon its own facts by comparing the characteristics of the alleged association as shown in those facts with the characteristics typical of a corporation. If there is sufficient resemblance, the organization is taxable as a corporation, while if there is little similarity, it may not be so taxed. N. B. Whitcomb Coca-Cola Syndicate,35 B.T.A. 1031; affd., 95 Fed.(2d) 596; Mark L. Gerstle,33 B.T.A. 830; affd., 95 Fed.(2d) 587; Stantex Petroleum Co., Trustee,38 B.T.A. 269; C. H. Clovis,32 B.T.A. 646. The petitioners rely upon the above cited cases, as well as upon Darol Trading Account,34 B.T.A. 837; *762 W. S. Farish,36 B.T.A. 1114: and American Cities Power & Light Corporation,38 B.T.A. 74, *1380 and argue that the present case presents features which are even more favorable to the holding that the syndicate was not an association taxable as a corporation. The Commissioner admits that the Whitcomb and Darol cases support the petitioners, but contends that the present case is more like the case of Vernon J. Bert,34 B.T.A. 805; affd., 92 Fed.(2d) 491. He further contends that the Whitcomb case can not be reconciled with the Bert case and the latter should be followed rather than the former. We distinguished the Bert case in the Whitcomb case. We hold, on authority of the group of cases cited above, that this syndicate was not an association taxable as a corporation. The group got together for a short period only and for a single purpose, namely, to effect the sale of a block of Auburn stock owned by Cord so that Cord, in which all of the members were interested, could make a partial shift from the automobile to the aviation business. When as much of that stock as could be sold was*763 sold, the syndicate was terminated. Title to the stock was never taken in the name of the syndicate. As the court said in the Whitcomb case, "An association which can be taxed as a corporation is organized with more permanency. It owns its property. Its managers are its agents. Its profits and losses are conceived of as its own, the associates as having ownership only in what may finally be distributed to them. A joint adventure is not such." That language is appropriate here also. There is this difference between the present agreement and that in the Whitcomb case which might be deemed unfavorable to the contention of the present petitioners. Here the manager was to buy and sell "for the account of the syndicate" and the stock was referred to as "held for the syndicate account", whereas in the Whitcomb case the corresponding language was "for the account of each subscriber." However, the word "syndicate" is a word of business and not of legal art, Gates v. Megargel,266 Fed. 811, and the conclusion can not be drawn from the words used in this agreement that the syndicate was an entity separate from the participants, or that the manager was*764 agent for the syndicate rather than for the participants. Cf. William K. Dick et al., Executors,20 B.T.A. 637; Gates v. Megargel, supra.The evidence in the present case clearly indicates that the subscribers did not intend that the manager should be manager for a separate entity rather than for the individual subscribers. The manager had sole discretion in making purchases and sales, as well as in deciding upon other matters. The subscribers had practically no control over the manager. No capital was paid in and all transactions were financed with money advanced by the manager upon the credit of the members. The syndicate had no bank account. There were no certificates of interest. There was no provision for taking in additional capital or members or for the transfer of *1381 interests, although it is probably true that adjustments might have been made if there had been any necessity for them. There were no directors, officers, employees, bylaws, meetings, minutes, place of business or use of the syndicate name as an entity. The Commissioner concedes that the subscribers did not attain the advantage of limitation of liability, *765 as in the case of a corporate stockholder, and it is apparent that there was not such limitation of liability as in the case of a corporation since the remaining subscribers were to be liable pro rata for the obligations of any defaulting subscriber. Cf. American Cities Power & Light Corporation, supra.Also, the members were liable for expenses. Cf. Stantex Petroleum Co., Trustee, supra.The Darol case is quite like the present case in many important respects. Reviewed by the Board. Decisions will be entered for the petitioners. SMITH and TURNER dissent. Footnotes 1. The titles and docket numbers of the proceedings of the 17 petitioners consolidated herein are set forth in the preliminary statement. ↩ 2. Margaret B. Chamberlain, a party to the agreement, died on Nov. 20, 1934, and notice of liability was sent to the administrator of her estate. ↩ 3. An Illinois corporation. ↩