Paul Plunkett & Co. v. Commissioner

PAUL PLUNKETT & CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Paul Plunkett & Co. v. Commissioner Docket No. 91741. United States Board of Tax Appeals 42 B.T.A. 464; 1940 BTA LEXIS 996; August 6, 1940, Promulgated *996 1. Petitioner, having earned certain commissions, transferred its right to receive them to a corporation for all its stock, which was issued to petitioner's nominee. Held, the petitioner retained the absolute control and the unfettered command of the commissions when paid to its controlled transferee in the taxable year and such commissions should be included in petitioner's gross income. 2. Petitioner evolved a plan whereunder it received substantially all the commissions in the taxable year and retained the absolute control of the balance and did not report such commissions in its income tax return. Held, the return was false and fraudulent with the intent to evade tax and the assessment and collection of the tax is not barred by the statute of limitations. Mark Eisner, Esq., for the petitioner. Allen T. Akin, Esq., for the respondent. TYSON *465 The respondent determined a deficiency in income tax against petitioner for the fiscal year ended February 19, 1928, in the amount of $40,898.01 and a 50 percent penalty in the amount of $20,449.01, determined under section 293(b) of the Revenue Act of 1928, for the filing of a false*997 and fraudulent return. The petitioner alleges the respondent erred (a) in including $456,626.50 in its gross income for the taxable year, and (b) in determining that the petitioner filed a false and fraudulent return for the taxable year. The respondent affirmatively alleges in his answer that the petitioner filed a false and fraudulent income tax return for the taxable year, with intent to evade tax. The case is submitted on the pleadings, oral testimony supplemented by documentary evidence, and facts stipulated by the parties at the hearing. The period of limitation prescribed in section 275(a) of the Revenue Act of 1928 has expired and is a bar to the assessment and collection of the determined deficiency and penalty unless the petitioner filed a false and fraudulent return with intent to evade tax for the fiscal year involved. FINDINGS OF FACT. The petitioner is a New York corporation, with offices at 40 Wall Street, New York City, and was engaged in the fiscal year ended February 29, 1928, in the business of dealing in securities. It also acted as advisor in financial matters and, if the occasion demanded, advised on income tax matters. It filed its income tax*998 return for the taxable year with the collector of the third district of New York within the time required by law. Its books were kept and its income tax returns were filed on the accrual basis. All of petitioner's stock (except possibly qualifying shares) was registered in the name of Paul Plunkett and held by him as trustee for the benefit of the members of his immediate family. Paul Plunkett was the president and a director of petitioner and was primarily responsible for directing its activities. He received a salary of $30,000 a year from petitioner during 1927. Early in 1927 petitioner engaged in certain activities relative to securing a purchaser of certain shares of stock in the Southern California*466 Gas Co. and the Midway Gas Co. then owned by A. C. Balch and Ben R. Meyer. In February 1927 Paul Plunkett, acting on behalf of petitioner, made a trip to California to confer with Balch, remaining there several weeks. On his return to New York he, continuing to act on behalf of petitioner, entered into negotiations with a group of parties interested in purchasing the stock and held numerous conferences with them in an effort to work out the details of financing*999 the contemplated purchase. Balch and Meyer came to New York, at the suggestion of Plunkett, and employed counsel in New York to assist in working out the details. After having brought the prospective vendors and vendees together, Plunkett did not take a very active part in the negotiations but left most of the details to be worked out by the parties and their counsel. The petitioner had an understanding with Balch and Meyer that if the sale of the stocks was consummated petitioner was to receive a commission for its services. The contract for the sale of the stocks was consummated and immediately thereafter petitioner received a letter from seven Canadian corporations, which, in the meantime, had become the holders of the stocks formerly held by Balch, Meyer, and associates. The terms of the agreement, here involved, between petitioner and the holders of the stocks are embodied in this letter, as accepted and confirmed by petitioner, the letter reading as follows: Montreal, Canada, October 17, 1927. Paul Plunkett & Co., Inc., 17 East 42nd Street, New York City, N.Y. Dear Sirs: The undersigned corporations, owners of common stock of Southern California Gas Company*1000 and/or capital stock of Midway Gas Company, have this day entered into a contract with Chase Securities Corporation, Hunter Dulin & Co., Pynchon & Co. and Stone & Webster, Inc. by which said stockholders have agreed to sell all of said stock owned by them to a new corporation to be organized and financed by said bankers, at the price of $550. for each share of the par value of $100. and a proportionate price for each share of less par value, a portion of said purchase price to be paid in cash and the balance to be paid in 5% Collateral Trust Notes of such new corporation. You have been instrumental as brokers in bringing about the making of the above mentioned agreement and in consideration of your services in that connection we hereby severally agree that in the event that the sale of said stocks shall take place pursuant to the above mentioned agreement each of us will pay you as a commission for bringing about such sale and also the sale to such new corporation of the stock of Producers Gas and Fuel Company, the sum of $5.50 for each share of said stock of Southern California Gas Company and Midway Gas Company of the par value of $100. and a proportionate amount for each share*1001 of less par value so sold by each of us to said new corporation under said agreement, said commission to be paid to you upon payment by said new corporation for said stock. *467 If the terms of this letter meet with your approval will you please indicate your acceptance on the attached duplicate. Very truly yours, MERIDIAN LIMITED, By A. K. AUGESSEN, President. RAYBEN LIMITED, By A. K. AUGESSEN, President. KERCKHOFF LIMITED, By A. K. AUGESSEN, President. OHIO INVESTMENTS LIMITED By A. K. AUGESSEN, President. SAN MARINOLIMITED, By A. K. AUGESSEN, President. LEK SECURITIES CO., LIMITED, By A. K. AUGESSEN, President. SAN ANTONIO LIMITED, By A. K. AUGESSEN, President. ACCEPTED AND CONFIRMED: PAUL PLUNKETT & CO., INC. By ROGER MCGRATH, Treas. This letter was delivered in Canada to a representative of petitioner, pursuant to instructions. On or about October 26, 1927, the petitioner executed a document purporting to be an assignment of its interest in the commissions specified in the letter of October 17, 1927, to Jerome Booth, an employee of petitioner, for a consideration stated to be $15,000, *1002 which was paid by Booth's check on his personal bank account from funds in like amount deposited in Booth's account by petitioner for that purpose. The check of Booth, in the amount of $15,000, was credited on its books to the income account of petitioner and included in income in its income tax return. Booth received no property interest in the contract. He was merely the nominee of petitioner to receive the contract and transfer it to the Westchester Corporation, Ltd. (hereinafter referred to as Westchester). Booth never considered himself the owner of the contract which was assigned to him. He considered the transaction as a bit of office routine. The assignment to Booth was made by petitioner on advice of counsel. Roger McGrath was in charge of petitioner's books. As a part of its bookkeeping system, petitioner kept, in addition to its general ledger, a private ledger wherein was reflected the income of corporations with which petitioner did not want the bookkeepers in the office *468 to be too familiar. The receipt of the $15,000 purported to have been paid by Booth was shown in the private ledger. In 1927 and at about the time the purported assignment of*1003 the October 17, 1927, contract was made to Booth, the Westchester Corporation, Ltd., was organized under the laws of Canada and had its principal offices in Montreal, Canada. Roger F. McGrath, who was treasurer of petitioner, was made an officer of Westchester because of the interest of petitioner in Westchester. His duties with Westchester included the duty of signing checks. On or about October 26, 1927, petitioner, through its agent or conduit, Booth, transferred its right to receive commissions, as provided in the letter of October 17, 1927, to Westchester in exchange for all the capital stock of Westchester, which stock, a short time after October 26, 1927, was transferred through petitioner's agent and conduit, Booth, to petitioner's nominee, the Anchorage Corporation. The entire stock of the Anchorage Corporation was held by Paul Plunkett, as trustee for his wife and children, as was also petitioner's stock. Booth never regarded himself as the owner of the Westchester stock which passed through him. On November 17, 1927, when the sale of the stock of the Southern California Gas Co. and the Midway Gas Co. was completed, the commissions provided for in the letter of*1004 October 17, 1927, amounting to $456,626.50, were paid to Westchester in Canada by a check, dated November 17, 1927, drawn on the Royal Bank of Canada by Ben R. Meyer, and the check was deposited to the account of Westchester with the Bank of Montreal on November 18, 1927. Under date of November 18, 1927, the same day the check for $456,626.50 was deposited in the Bank of Montreal to the account of Westchester, petitioner received Westchester's check for $450,000 and petitioner's books showed a credit of that amount to Westchester. This was treated as a loan from Westchester to petitioner and the latter gave its note, or debenture, to Westchester for $450,000, bearing interest at 7 percent annually. This debenture, which was due on November 15, 1937, was executed November 15, 1927, two days before Meyer's check for $456,626.50 was given to Westchester, and three days before it was deposited to the credit of Westchester. On November 23, 1928, 450 shares of class B stock of petitioner were issued to Westchester in return for the cancellation, without interest, of the debenture bond of November 15, 1927. This stock represented an increase in petitioner's capital stock, authorized*1005 by certificate filed with the Secretary of State of New York on November 21, 1928. At the time of its issuance this class B stock had no market value. It had some intrinsic value, the amount of which is not established by the record. *469 The Bryan Corporation was formed on or about September 2, 1930, and Westchester transferred to it the 450 shares of petitioner's class B stock in exchange for the issuance of all the stock of Bryan to Westchester's sole stockholder. The Anchorage Corporation was the sole stockholder of Westchester, as petitioner's nominee, and thus petitioner received absolute control of its class B stock. During the negotiations for the sale of the stock of the Southern California Gas Co. and the Midway Gas Co., petitioner addressed a letter to two of the Canadian companies interested in the sale of the stock, in which it was stated, among other things: "We will also be glad to assist you, or either of you, with any suggestions as to the filing of your income tax returns for the year 1927." In reporting its income for the fiscal year here in question, the petitioner included in gross income the $15,000 purportedly paid to it by its agent and nominee, *1006 Jerome Booth, for the assignment to him of petitioner's right and interest in the commissions here in question, which $15,000 petitioner had furnished to Booth to make such payment. This amount was included in a total amount, not itemized, of $140,433.46, reported under item 4(a) of petitioner's return as "commissions and profits from joint ventures." The return contained no explanation of the sources from which such commissions and profits, or any part thereof, from such joint ventures were received and did not segregate from that total amount the $15,000. Petitioner did not report on its income tax return for the fiscal year in question any part of the $456,626.50 commissions paid by Meyer and associates for its services in connection with the sale of the Southern California Gas Co. and the Midway Gas Co. stock and there was no information in the return concerning this transaction. By including the $15,000 in its "commissions and profits from joint ventures" petitioner treated the transfer to Booth as a bona fide sale of all of its right, title, and interest in the commissions for $15,000. On its books during the taxable year it treated the $450,000 commissions paid over to*1007 it by Westchester as a loan. The income tax return of petitioner corporation for the fiscal year ended February 29, 1928, was false and fraudulent and was filed with intent to evade tax. Part of the deficiency is due to fraud with intent to evade tax. OPINION. TYSON: Two issues are presented for our decision: (1) Were commissions in the amount of $456,626.50, earned by petitioner in connection with the sale of Southern California Gas Co. and Midway Gas Co. stock and paid by check to Westchester, income to petitioner in the taxable year? and (2) Did the petitioner file a false and fraudulent *470 return with intent to evade tax for the taxable year ending February 29, 1928? On the first issue petitioner contends that it did not receive any part of the commissions in question, but had assigned and transferred its right to such commissions prior to the time they were due and payable. There is no question but that $456,626.50 was paid to Westchester on November 17, 1927, by the vendors of the Southern California Gas Co. and Midway Gas Co. stock, as commissions for services rendered by petitioner in bringing about the sale of that stock. Obviously, petitioner sought, *1008 by various assignments and transfers to nominees and its controlled corporations, to so camouflage the transaction as to conceal its own identity as the recipient of the commissions. In its income tax return it even went so far as to treat as a bona fide sale the transfer of its right to receive the $456,626.50 commissions to its employee and nominee, Booth, by including in that return, as income, the $15,000 which it furnished Booth to pay for the transfer. It also disguised as a "loan" $450,000 of the commissions turned over to it by Westchester, its wholly controlled Canadian corporation, immediately upon its receipt by Westchester. In fact, it appears from the record that on November 15, 1927, two days before the check for $456,626.50 for commissions was given by Meyer to Westchester, and three days before it was deposited to Westchester's account, petitioner executed its debenture bond to Westchester for the "loan" and on November 18, 1927, the same day the check was deposited in the Bank of Montreal to the account of Westchester, petitioner received Westchester's check for $450,000 and petitioner's books showed a credit of that amount to Westchester. Subsequently, petitioner*1009 took up its debenture, without the payment of interest, by issuing 450 shares ot its class B stock therefor, which stock was thereafter transferred to the Bryan Corporation, obviously organized for that purpose, and all the stock of Bryan was transferred to Anchorage, which owned all the Westchester stock, as petitioner's nominee, and, in turn, was owned by the same interests which owned all the stock of petitioner. The commissions here in question were, at all times, subject to the unfettered control of petitioner. Petitioner concedes, and we have so found, that Booth was but an agent or conduit of petitioner to transfer the contract to Westchester. Petitioner, through its nominee, Anchorage, owned Westchester. The so-called loan of $450,000 was but a subterfuge and a sham by which petitioner took over that amount of the commissions from Westchester. No real consideration was given for the loan. The debenture executed in favor of Westchester was, at all times, under the control of petitioner and the class B stock for which it was exchanged eventually found its way *471 back to the Bryan Corporation, whose stock was all issued to petitioner's nominee, Anchorage. *1010 Under the facts, petitioner must be regarded as the recipient of the entire amount of $456,626.50, which was at all times subject to its absolute command and disposition. Westchester was nothing more than petitioner's agent, whose sole function was to receive the commissions and pass them on to petitioner. , and authorities cited therein. It is true that petitioner had, through its agent, Booth, assigned the contract to Westchester, but all of Westchester's stock was held by Anchorage, petitioner's nominee, and Westchester had no ownership in the commissions which it could exercise independently of petitioner. "Taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid." . It is the command of income and its benefits which mark the real ownership of property. ; and . In matters of taxation substance rather than form will be regarded, *1011 , and where, as here, wholly controlled corporations of the taxpayer are used by it as mere agencies for the purpose of concealing the real nature of its transactions, such "fictional corporate comouflage cannot be made the device to escape taxation", . This Board and the courts have, in looking only to the substance of the transaction involved, disregarded corporate entities. In , this Board quoted the language of the Supreme Court in , as follows: Where stock ownership has been resorted to, not for the purpose of participating in the affairs of a corporation in the normal and usual manner, but for the purpose * * * of controlling a subsidiary company so that it may be used as a mere agency or instrumentality of the owning company or companies. * * * In such a case the courts will not permit themselves to be blinded or deceived by mere forms of law but, regardless of fictions, will deal*1012 with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require. and observed that "The rule above quoted is of peculiar importance in tax cases. ." See also, ; ; , and authorities cited therein. Cf. , where the Supreme Court said: "A taxpayer is free to adopt such organization for his affairs as he may choose * * *", but "the Government may not be required to acquiesce in *472 the taxpayer's election of that for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction * * *". Of the commissions here in question, $450,000 was turned over to petitioner upon its receipt by Westchester, *1013 camouflaged as a loan. The balance of $6,626.50, remaining in the hands of Westchester, its corporate agent, was subject to petitioner's unfettered command. It follows that the entire commissions paid, in the amount of $456,626.50, should be included in petitioner's gross income for the fiscal year ended February 29, 1928, and this decides the first issue against petitioner. Under the second issue, petitioner contends that its return for the fiscal year ended February 29, 1928, was not false and fraudulent with the intent to evade tax, but that the various transfers in evidence, and particularly the assignment to Booth, were made upon the advice of counsel. The evidence indicates that the various transactions involved were made in pursuance of a plan to conceal the real transaction, which was the receipt by petitioner of the commissions paid by Meyer. Petitioner's failure to include these commissions in its income tax return was but a part of the plan. It appears that petitioner did have the advice of counsel in making the transfer to Booth, but for what purpose such advice was given is not disclosed. However, petitioner was itself informed as to income tax law and, in*1014 fact, on occasions it advised on income tax questions. It may not now hide behind the advice of counsel and be heard to say that its failure to return the commissions as a part of its gross income was due to advice of counsel. Cf. ; affd., , and , especially where, as here, the advice is not shown to have been given with reference to the taxability of the commissions involved. . This is particularly true where, as here, the facts, taken as a whole, indicate that the taxpayer did not intend to turn square corners in dealing with the Government. It is well settled that there is nothing illegal in an honest effort to reduce taxes to the minimum required by law. Cf. ; ; ; *1015 Helvering v. Mitchell, supra, 1129; and in such event the purpose to avoid taxation by the transaction is in itself "legally neutral." ; certiorari denied, . But where a taxpayer, under cover of corporate fiction and transfers *473 to nominees, retains the unfettered control and disposition of its property, it can neither escape the tax on the income therefrom or the obligation to report such income in its tax return. ; cf. ;;; and . Obviously, petitioner, having earned commissions in the amount of $456,626.50, did not intend to sell its right and interest therein to Booth for $15,000. Nor did it intend to part with the power to take them at any time. What it obviously did intend was to avoid the necessity of including them in its gross income and thus evade the payment of income tax thereon. To this end*1016 it assigned its contract to Westchester for all of Westchester's stock; to this end it camouflaged as a loan the $450,000 turned over to it by Westchester; to this end it treated as bona fide the assignment to Booth and included in gross income the $15,000 it furnished Booth with which to "buy" all its right, title, and interest in the contract; and to this end it failed to include the commissions in its gross income for the taxable year, knowing that it had actually received $450,000 of the commissions and that the balance of $6,626.50 was always subject to its unfettered command and disposition. On the second issue we hold that respondent has sustained his burden of proof and that the petitioner filed a false and fraudulent return with intent to evade tax for the taxable year ending February 29, 1928. In this situation the assessment and collection of the tax is not barred by the statute of limitations. Inasmuch as part of the deficiency is due to fraud with intent to evade tax, the imposition of the 50 percent penalty is sustained. The determination of the respondent is approved. However, in computing the deficiency under Rule 50, credit should be allowed for any tax paid*1017 on the $15,000 purported to have been received from Booth and included in petitioner's gross income in its return. Reviewed by the Board. Decision will be entered under Rule 50.