1939 BTA LEXIS 789 | B.T.A. | 1939
Lead Opinion
The parties have stipulated that more than 50 percent in value of the petitioner’s outstanding stock was owned, directly or indirectly, by or for not more than five individuals during the taxable year. The respondent concedes that the gross income of the pe-tioner was $1,789,954.15, an amount somewhat larger than that reported on the original return. The stipulated amount of income derived from royalties, dividends, interest, annuities, and gains from the sale of stock and securities was about 84 percent of the gross income conceded by the respondent. The respondent contends, upon these facts, that the petitioner was liable for tax as a personal holding company under section 351. The first contention made by the petitioner is that its correct gross income for 1935 was $2,033,198.51, or $243,244.36 greater than the amount conceded by the respondent, and since its personal holding company income was less than 74 percent of that amount, it was not subject to tax under section 351. If the amount of $243,244.36 was properly a part of the gross income of the petitioner, then the other contentions of the petitioner to the effect that section 351 was never intended to apply to an operating company like the petitioner, and, if applied, would be unconstitutional, need not be considered.
The petitioner, at the end of each year, computed the portions of its overhead and general expenses which were applicable to the conduct of the business of Woodbury and Sales. It then allocated those portions of its expenses to Woodbury and Sales and charged them to those two corporations on its books in accounts receivable. The respondent does not attack the method of allocation and he does not contend that an incorrect amount has been allocated to either Wood-bury or Sales. He first suggests that the record is not clear that the two subsidiaries actually paid to the petitioner the amounts charged to them. However, since the petitioner was using an accrual method of accounting, actual payment was not necessary and there is no reason to believe that the accounts receivable were not genuine and adequate. He also suggests that the contracts were not entered into for profit. It is clear, however, that the contracts were entered into
It is immaterial for the purpose of computing the income tax due under section 13 whether the petitioner reported the amounts charged to Woodbury and Sales as income and deducted the full amount of its expenses, or whether it applied the amounts charged to Woodbury and Sales directly to reduce the amount of its deductible expenses. It chose the latter method until it realized that under that method it might be liable for a tax under section 351. It then attempted to change retroactively its accounting method for 1935. The original method of accounting for these items may have some evidentiary value, but it is not determinative of the case. If the items in controversy were a part of the gross income of the petitioner, as that term is defined in section 22 of the Revenue Act of 1934, then section 351 does not apply.
Gross income is defined in section 22 of the Revenue Act of 1934 as including gains, profits, and income derived from businesses, commerce, or dealings in property growing out of the ownership or use of or interest in such property, from rent or the transaction of any business carried on for gain or profit, and gains, profits, and income derived from any source whatever. The petitioner under its contract with Woodbury agreed to use its property and supply its services in manufacturing the Woodbury products. It was to receive compensation from Woodbury for those things. The compensation which it was to receive was measured by and was to be equal to that portion of its total overhead expenses allocable to Woodbury. The amount of the compensation was computed and was actually charged to Wood-bury as an account receivable. The petitioner used an accrual method of accounting, and the amount charged to Woodbury was income to the petitioner under the broad definition of section 22. The same is true of similar items charged to Sales. The petitioner, as owner of the property, was entitled to deduct the full amount of the taxes which it actually paid on its property, and the full amount of depreciation which it sustained on that property, as well as the full amount expended for labor and materials in repairing its property. The respondent does not contend to the contrary. Neither does he suggest any reason why the petitioner was not entitled to deduct on its re
It might be pointed out in conclusion that if the petitioner and its subsidiaries were engaged in a joint venture, or if the case of Southern Pacific Co. v. Lowe, 247 U. S. 330, applied, the petitioner would not be liable for tax under section 351. The Southern Pacific case is cited for the proposition that the mere receipt of money or other property does not necessarily imply the receipt of gross income. The proposition is, of course, sound. For example, the cost of goods sold is never regarded as a proper part of gross income and has been eliminated in the present case. But the Supreme Court in the Southern Paoific case completely disregarded the corporate entity of a subsidiary and held that dividends paid by the subsidiary were not income to the parent under the “very peculiar facts.” Woodbury had no bank account, no manufacturing plant or equipment, and no em
Decision will be entered wider Rvile SO.