American Package Corp. v. Commissioner

AMERICAN PACKAGE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. American Package Corp. v. Commissioner Docket No. 101266. United States Board of Tax Appeals 44 B.T.A. 179; 1941 BTA LEXIS 1367; April 16, 1941, Promulgated *1367 The petitioner, a Delawere corporation, issued all of its capital stock in exchange for all of the shares of capital stock of four corporations. Its entire income for 1937 consisted of dividends paid to it by the four corporations. The petitioner directed the operations of the subsidiary corporations. More than 50 percent in value of the petitioner's outstanding stock is owned by or for not more than five individuals within the meaning of section 351(b)(1) of the Revenue Act of 1936, as amended by the Revenue Act of 1937, and all its income for 1937 consisted of dividends received from its subsidiary corporations. Held, that the petitioner is a personal holding company within the meaning of section 351(b)(1) of the Revenue Act of 1936, as amended. J. G. Korner, Jr., Esq., for the petitioner. Lloyd W. Creason, Esq., for the respondent. SMITH *180 This is a proceeding for the redetermination of a deficiency of $420.94 in undistributed profits tax for 1937, and for personal holding company surtax liability of $5,549.74 for the same year. The petition alleges as follows: The determination of the tax as set forth in said notice of deficiency*1368 is based upon the following errors: (a) The Commissioner erred in computing an undistributed net income in the amount of $6,197.27, and in computing an undistributed profits surtax at 7% thereon, in the amount of $426.81, and in determining that there is a deficiency of $420.94 in petitioner's income tax by reason thereof. (b) The Commissioner erred in computing and determining a tax against petitioner under section 351 of the Revenue Act of 1937, and in computing and determining that there is undistributed adjusted net income of $7,666.32, subject to a tax of $5,549.74 under said section. FINDINGS OF FACT. Petitioner is a Delaware corporation, having its principal office at Portsmouth, Virginia. It filed its corporation income and excess profits tax return for 1937 with the collector of internal revenue at Richmond. In its return it showed its total gross income as dividends received in the total amount of $153,185.40. It deducted therefrom taxes of $508.25 and other deductions authorized by law of $161.63, and reported net income for excess profits tax computation in the amount of $152,515.52. It computed its total normal tax to be $2,540.03, which was duly paid*1369 to the collector. In the audit of the return the respondent determined its total normal tax and surtax to be in the amount of $2,960.97 and a deficiency in income tax in the amount of $420.94. *181 The respondent's computation is as follows: Undistributed Profits Surtax Computation. Net income for income tax computation $152,146.29 Normal tax 2,534.16 Adjusted net income $149,612.13 Dividends paid credit 143,514.86 Undistributed net income $6,097.27 Tax on $6,097.27 at 7% $426.81 Total surtax 426.81 Total normal tax and surtax 2,960.97 Income tax previously assessed, original, account #400355 2,540.03 Additional tax to be assessed 420.94 The respondent also determined that the petitioner was a personal holding company within the meaning of section 351(b)(1) of the Revenue Act of 1936, as amended by the Revenue Act of 1937, and held that it had a liability to tax imposed by section 351 of the Revenue Act of 1936 of $5,549.74. His computation is as follows: Computation of Tax under Section 351 of the Revenue Act of 1937. Correct Net Income $152,146.29 Less: Income Tax 2,960.97 Net $149,185.32 Less: Dividends paid credit 141,519.00 Undistributed adjusted net income $7,666.32 Tax on $2,000.00 at 65% $1,300.00 Tax on $4,555.32 4,249.74 Tax under Section 351 $5,549.74 Tax previously assessed, original, acct. #880204 Additional tax under Section 351 to be assessed $5,549.74 *1370 In 1935 a number of operating companies engaged in the same line of business desired to be consolidated for the purpose of eliminating wasteful competition and for the purpose of mutually profitable operation. On December 31, 1935, there were in existence four corporations, namely, Jersey Package Co., a New Jersey corporation of Bridgeton, New Jersey, Planters Manufacturing Co., a Virginia corporation of Portsmouth, Virginia, Riverside Manufacturing Co., a North Carolina corporation of Murfreesboro, North Carolina, and Riverside Land & Timber Co., a Delaware corporation with principal office at Murfreesboro, North Carolina. On the same date an agreement was entered *182 into among all the stockholders of the above companies, stating that the said corporations and their stockholders: * * * are desirous of consolidating and unifying the operations of the said corporations under one control and management in order to effectuate desirable business ends favorable to all parties concerned * * * * * * in order to effectuate the said desired aim, the parties hereto propose to enter into and consummate, as a reorganization, a change from business enterprises conducted respectively*1371 by single corporations, * * * to the same business enterprise conducted by a parent and subsidiary corporations * * * It was realized that if one corporation acquired the assets of the four companies at their fair value the corporations or their stockholders might be subject to taxes upon the profits realized from the sale. In order to effect a reorganization under the provisions of the Revenue Act of 1934, which would avoid or postpone the payment of such taxes, it was agreed that a corporation should be organized which should issue its shares of stock for the shares of stock of the four companies named and conduct its operations as the parent of the four subsidiary corporations. Accordingly the petitioner was incorporated January 9, 1936, under the laws of the State of Delaware, and it issued all of its shares of stock in exchange for all of the shares of stock of the four named corporations. The affairs of the petitioner corporation are conducted through a board of directors of nine, who are also officers of the subsidiary corporations. The board of directors organized a number of committees whose duty it was to make recommendations to the petitioner's board of directors*1372 for the purpose of management of the subsidiary corporations. The board of directors met at least once a month at different places for the purpose of passing upon matters which would properly come before them. The activities of the subsidiary corporations were subject to the control and direction of the board of directors of the petitioner. No important action was taken by the boards of directors of the subsidiary companies without the prior approval of the board of directors of the petitioner. The petitioner's board of directors even instructed the boards of directors of the subsidiary companies as to the amount of dividends which each subsidiary was to pay and, pursuant to such instruction, the boards of directors of the subsidiaries declared dividends and the same were paid into the treasury of the petitioner. Although the bylaws of the petitioner corporation provided for salaries to be paid to the officers of petitioner, the board of directors agreed that the salaries for at least 1937 should be paid by the subsidiary companies. The result was that the petitioner paid no salaries and only nominal amounts for expenses during 1937. The return filed by the petitioner for*1373 that year, as above indicated, showed only $669.88 of expenses paid. Of the $153,185.40 of dividends received from the *183 subsidiary company, $152,515.52 was reported on the tax return as net income for excess profits tax computation. More than 50 percent in value of the petitioner's outstanding stock during 1937 was owned by or for not more than five individuals within the meaning of section 351(b)(1) of the Revenue Act of 1936, as amended by the Revenue Act of 1937. The petitioner's net income for 1937 consisted entirely of dividends received from the four subsidiary corporations. The petitioner's income tax return for 1937 was made upon the accrual basis. OPINION. SMITH: In its income tax return for 1937 the petitioner reported normal tax in the amount of $2,540.03. The respondent has determined the normal tax to be in the amount of $2,534.16. The petitioner did not report any undistributed net income. The respondent determined that it had an undistributed net income of $6,097.27. The petitioner contends that it had no undistributed net income for the reason that it was paid out to certain of the subsidiary companies which had advanced it money to enable*1374 it to pay necessary expenses. In its petition the petitioner alleges in part: (j) At and after the time of its creation and organization American Package Corporation (the petitioner) contracted debts for various expenses, including charter fees, legal and accounting services, technical services, travel expenses, office supplies, and other similar items, the amount of which was not determined or determinable until after December 31, 1936. Soon after January 1, 1937, these amounts were definitely ascertained and the petitioner discharged them with money borrowed for that purpose. The amount of these items was $7,169.40. All this occurred long prior to August 26, 1937. This allegation of the petitioner had been denied by the respondent in his answer. It is not clear from the record whether the expenses which are claimed to have accrued in 1937 accrued in that year or not. Nor is it clear that the amounts would be legal deductions of 1937 even if accrued in that year. At least a part of the expenses related to the costs of organizing the petitioner corporation and they may have represented, not ordinary and necessary expenses of carrying on a trade or business, but capital*1375 expenditures. It is significant that the petitioner in its tax return for 1937 did not claim the amounts as deductible expenses of 1937. There is no difference between the petitioner and the respondent as to the dividends paid credit for 1937. Both parties are in agreement that the dividends paid in 1937 amounted to $141,519 and that the petitioner is entitled to a dividend carry-over from 1936 of $1,995.86, making the dividends paid credit for 1937 $143,514.86. The respondent *184 determined that the petitioner had an undistributed net income for 1937 of $6,097.27 and there is no evidence to show that his computation is in error. The second question for consideration is whether the petitioner is a personal holding company within the meaning of section 352 of the Revenue Act of 1936, added by the Revenue Act of 1937. That section carries its own definition of a personal holding company for purposes of the tax imposed by section 351. It is as follows: SEC. 352. DEFINITION OF PERSONAL HOLDING COMPANY. (a) GENERAL RULE. - For the purposes of this title and of Title 1 the term "personal holding company" means any corporation if - (1) GROSS INCOME REQUIREMENT. *1376 - At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 353; * * * (2) STOCK OWNERSHIP REQUIREMENT. - At any time during the last of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. The term "personal holding company income" used in section 352(a)(1), above, is defined in section 353(a) of the Revenue Act of 1936, added by the Revenue Act of 1937, as follows: For the purpose of this title the term "personal holding company income" means the portion of the gross income which consists of: (a) Dividends, interest, royalties (other than mineral, oil, or gas royalties), annuities. In the instant proceeding 100 percent of the petitioner's gross income for the taxable year 1937 was for dividends. Thus, the gross income requirement is met. It has been stipulated that: * * * more than 50 percent in value of petitioner's outstanding stock is owned by or for not more than five individuals within the meaning of section 351(b)(1) of the Revenue Act of 1936 as amended by the Revenue Act of 1937. Section 354(a)(2) *1377 of the Revenue Act of 1936, added by the Revenue Act of 1937, provides in material part as follows: SEC. 354. STOCK OWNERSHIP. (a) CONSTRUCTIVE OWNERSHIP. - For the purpose of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 352(a)(2), section 353(e), or section 353(f) - * * * (2) FAMILY AND PARTNERSHIP OWNERSHIP. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the purposes of this paragraph the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. In view of the stipulation of the parties, it must be held that the second contention contained in the definition is likewise met in this case. *185 The petitioner does not deny that technically it comes within the definition of a personal holding company as defined above. It contends, however, that it does not come within the intendment of the statute. It argues that the law was aimed at purely holding companies and not operating companies, which it*1378 claims to be. It submits that it has been subjected to capital stock tax upon the ground that it was an operating company. We are asked to disregard the corporate entities of the subsidiaries and consider them as merely branches or departments of petitioner's organization, although the subsidiary companies have made returns not as mere branches of the petitioner but as separate operating corporations. The facts are that the petitioner was organized in the manner in which it was organized for the purpose of constituting a reorganization within the meaning of the Revenue Act of 1934. In order to come within the provisions of the Revenue Act of 1934 the petitioner issued its shares of stock for the shares of stock of the four subsidiaries. While postponing tax liability in the reorganization in 1936, the petitioner finds itself within the ambit of the holding company provisions of the Revenue Act of 1936, as amended. The petitioner's contention, that Congress in the enactment of the Revenue Act of 1936 and 1937 did not intend to include as personal holding companies a company such as the petitioner, is sufficiently answered by the opinions of the Board in *1379 , and . Cf. Noteman v. Welch (C.C.A., 1st Cir.), affirming ; . In our opinion the petitioner is a personal holding company within the meaning of the Revenue Act of 1936, as amended, and we discover no error in the determination of tax liabilities by the respondent. Decision will be entered for the respondent.