Niles Fire Brick Co. v. Commissioner

1927 BTA LEXIS 3621 | B.T.A. | 1927

Lead Opinion

OPINION.

Teussell:

In the case of McFarlane v. McFarlane (1894), 31 N. Y. S. 272, the court said:

Tile mere fact of the bequest to them, by will, of the net estate in question, and of the business, did not constitute them partners, but merely made them joint owners; but their election to continue the business, each contributing thereto his share of the property so bequeathed to him-, rendered the relation between them that of copartners, and the property copartnership property.

This rule of law has been long established and is supported by many decided cases. It must therefore be taken as established that when the heirs of John R. Thomas acquired, under his will, the properties and the going business known as The Niles Fire Brick Co. and continued -to operate the same they thereby became a partnership and continued in the relation of partners until such time as they, by definite and specific acts, changed their relation of partners to some other legal relationship. Has such a change been made, and, if so, when ? It has been shown that in December, 1900, nearly three years after the partnership relation became established, these same heirs of John R. Thomas joined in the execution of articles of incorporation and filed the same with the proper officers of the State of Ohio. The statutes of the State of Ohio, as then existing, required that persons forming a corporation must do certain acts and things, among which are subscriptions for capital stock; the payment of not less than 10 per cent of such subscriptions; the holding of corporate meetings; and the election of directors and officers. None of these things were done by the parties connected with the business here under consideration. In State ex rel. Attorney General v. Fidelity & Casualty Ins. Co. of New York, (1892), 49 Ohio St. 440; 31 N. E. 658, the court held that the making and filing of articles of incorporation in the office of the Secretary of State did not make an incorporated company, and that no company existed within the meaning of the statute until the requisite stock had been subscribed and paid in and the directors chosen.

In the case of American Ball Bearing Co. v. Adams (1915), 222 Fed. 961, the court said:

* * * The Ohio law differs from the law of many states, in that the mere filing of articles of incorporation in due form does not create or bring into existence a corporation, notwithstanding the provision of G. C. § 8029, that a certified copy of articles of incorporation shall be prima facie evidence of the existence of the corporation therein named. * * *

And in the same case the court, referring to these specific requirements of the Ohio statutes, continued:

That these are not merely directory provisions of law, but are mandatory, and must be complied with before a corporation can come into existence under Ohio law, is sufficiently established by Telephone Company v. Cincinnati, 73 Ohio State 64, 76 N. E. 392 [1905] * * *.

It thus seems that The Niles Fire Brick Co., by virtue of the action of its owners in December, 1900, did not thereby become a corporation.

The only other act of the owners of The Niles Fire Brick Co. in respect to the formation of a corporation was taken some time in the year 1918 when such owners apparently held a meeting and went through the form of adopting corporate by-laws. This action in connection with the previous action in December, 1900, was equally ineffective of establishing a corporation within the view of the Ohio statutes. After carefully considering all the facts shown in the record of this case and the provisions of the statutes of the State of Ohio governing the organization of corporations and the interpretation placed upon such statutes by the courts, we are forced to the conclusion that the owners of The Niles Fire Brick Co. never perfected an organization as a corporation.

Furthermore, if it could be held that the form of articles of incorporation executed by the five heirs of John R. Thomas and filed with the Secretary of State of Ohio in December, 1900, together with the other things done in respect thereto, did actually create and bring into being a corporation, can it be found that such corporation was, during the years 1918, 1919, and 1920, a living entity engaged in carrying on any business and producing income and profits subject to tax under the then existing income-tax legislation? The record of this proceeding shows clearly that the answer to that question is in the negative. No going business and no property of any nature whatsoever was ever transferred or conveyed to such a corporation. No shares of such a corporation were ever issued, and no person ever became a tona fide stockholder of such a corporation. No one was ever elected a director and no one was ever elected an officer of such a corporation. If then in fact such a corporation was created and existing, it was a mere empty shell, with no capital, with no stockholders, with no directors, and with no officers. It did no business of any nature or kind whatever and produced no income subject to any income-tax law.

The record is equally silent respecting any act or thing done by the owners of The Niles Fire Brick Co. which could be construed to bring them within the category of an association within the meaning of paragraph 2 of section 1 of the Eevenue Act of 1918.

We are thus brought irresistibly to the conclusion that the partnership, made up of the heirs of John E. Thomas, when they acquired the business known as The Niles Fire Brick Co. in 1898, has never changed its character; has never become a corporation; has never been merged into a corporation or an association; that the partnership relation between the owners of this business has never changed; that the duties, responsibilities, and liabilities of partners still rest upon each member of that partnership; and that both the partnership organization and the partners individually wore, during the years here under consideration, required to comply with those provisions of the Eevenue Act of 1918 imposing duties and responsibilities upon partnerships or the members of partnerships, and that they are equally entitled to the benefits, if any such exist, under such Act in respect to partnerships and members thereof, and that during said years the gains and profits and income produced by the business of The Niles Fire Brick Co. must be taxed as the income of the members of such partnership.

Our attention has been called to the case of the McDonald Coal Co. v. Heiner, 9 Fed. (2d) 992, in which case the decision of the District Court has been affirmed by the United States Circuit Court of Appeals for the Third Circuit. 16 Fed. (2d) 274. The McDonald Coal Co. was in court suing to recover income and profits taxes paid by it under the corporate tax provisions of the Eevenue Acts of 1917 and 1918, claiming that during the years in question the McDonald Coal Co. was a partnership and not a corporation. The trial court found that in 1906 three persons formed a partnership and procured leases on certain coal lands; that they operated these leases as a partnership until 1909, when the same three persons became the incorporators of a corporation known as the McDonald Coal Co., and that from 1909 until the time when the case was on trial the corporation had operated the same coal land leases procured by the former partnership; that said leases had never been assigned to the corporation for the reason that the lessor refused to consent to the assignment, although the lessees had persistently tried to procure such consent. The court further found that at the organization of the McDonald Coal Co. the incorporators paid in to the company an operating plant said to have cost $50,000, and received in exchange therefor capital stock of the corporation of a par value of $6,000. During the years in question the McDonald Coal Co. reported the income from the operations of the coal land leases as its income; paid corporate taxes thereon; made various representations concerning the corporate records, and at one time secured an abatement of taxes based upon a showing of certain corporate actions in respect to officers’ salaries. The corporation had continually held itself out to the world as a corporation carrying on the business of operating these coal leases, and it had permitted itself to be sued as a corporation in a damage suit in the state courts of Pennsylvania and raised no question as to its corporate existence or liability.

The record of the instant case is very different from that disclosed by the reported decision in the case of the McDonald Coal Co. In the case of The Niles Fire Brick Co. it is established that no corporate stock was ever issued; nothing was ever paid in for any such stock; it never held itself out to the world as a corporation; and, so far as the record discloses, the only thing which it ever did in the guise of a corporation was the making of its income and profits-tax returns upon corporate forms.

We are, therefore, of the opinion that for the year 1919 there is no deficiency in income taxes against The Niles Fire Brick Co. as an organization, and that the deficiencies and overassessments recited in the deficiency letters as against the other four petitioners herein must be recomputed in accordance with the foregoing opinion.

An order of redetermination in each case will be made upon 15 days’ notice, pursuant to Bule 50, and judgment will be entered in due eou/rse.