41 S.E.2d 431 | Ga. Ct. App. | 1947
1. It is unnecessary to decide, under the record of this case, whether the proposed deficiency and assessment by the Commissioner against the taxpayer was presumed to be prima facie correct on the trial of an appeal to the superior court. It is likewise unnecessary to decide whether the dividends and interest involved be classified as non-taxable or taxable income.
2. (a) Where, as here, the taxpayer owns certificates of stock in other corporations, and receives therefrom non-taxable dividends on the stock in such other corporations, the intangible tax paid to the State on the certificates of stock is chargeable to the non-taxable dividends received and not chargeable and allowable as a deduction from the gross income of the taxpayer. *759
(b) The court was authorized, under the evidence, to find as a fact and to conclude as a principle of law that the taxpayer be allowed to deduct from his gross taxable income the amount the Commissioner disallowed for expenses incurred in connection with the earning and distributing of non-taxable income.
"1. King Plow Company is a corporation organized and existing under the laws of the State of Georgia doing business in Fulton County, Georgia, at No. 887 West Marietta Street, Atlanta, Georgia.
"2. All of the property of said corporation is located in the State of Georgia and the entire business income of the corporation is derived from property owned and business done in the State of Georgia within the meaning of Section 92-3113 of the Georgia Code of 1933, as amended.
"3. The principal business of the corporation is that of manufacturing and selling disc plows, harrows, plow points and sundry farm implements. The said corporation has charter authority to, and actually does, own stock in other corporations and obligations of political subdivisions of the State of Georgia. It receives dividends on said stock and interest on said obligations. Said monies are commingled with the general funds of the corporation and are available for distribution and are distributed by the corporation in the same manner and to the same extent that other funds of the *760 corporation are available for distribution and are distributed by the corporation.
"4. During the fiscal year June 1, 1941 to May 31, 1942, the corporation earned from the manufacture and sale of disc plows, harrows, plow points and sundry farm implements, a gross income of $230,674.41. In addition thereto the corporation owned stock in other corporations and received dividends on said stock as follows:
No. of Name of Amount of shares corporation dividend Acquired
5,700 The Coca-Cola Company $28,500 1934, 5, 6
200 Twin Coach Company 150 1937 ------- $28,650 "The corporation also received interest of $7,500 of obligations of Rutledge, Georgia, in amount of $300. Said obligations were acquired in 1938.
"5. In operating its business during said fiscal year appellant incurred, among other expenses, the following expenses for the following purposes and in the following amounts:
Officers salaries .................................. $19,073.66
Interest ........................................... 780.88
Capital stock tax and business license ............. 1,776.50
Pay roll tax on officers and office salaries ....... 687.47
Office salaries .................................... 8,186.73
Stationery and printing ............................ 1,342.24
Telephone and telegraph ............................ 1,046.59
Office supplies and expense ........................ 1,720.05
Auditing ........................................... 1,725.00
Heat, lights and water (Est.) ...................... 1,200.00
Depreciation — office ........................ 281.52
Air conditioning system ............................ 246.45
Office furniture and fixtures ...................... 494.21
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$38,561.30
"6. Except that the appellant did vote the stock of the Coca-Cola Company by proxy, neither appellant nor any of its officers or employees took any part in the management or operation of the Coca-Cola Company. Said stocks were held in a safety deposit box at the Trust Company of Georgia.
"The bonds of Rutledge, Georgia, during the fiscal year 1 June 1941 to 31 May 1942 were on deposit with, and in the possession of, the Department of Industrial Relations of Georgia. Neither *761 appellant nor any of its officers or employees took any part in the management of the affairs of Rutledge, Georgia.
"7. In determining its net taxable income for said fiscal year, appellant deducted from its gross income the expenses set out in paragraph 5 above, along with other expenses, and reported on its income tax return a net taxable income of $112,257.37. It paid a tax thereon of $6,174.15.
"8. Appellee, upon examination of the tax return of appellant for said fiscal year, disallowed as expenses $4,299.58 of the items set out in paragraph 5 above as being expenses allocated to the earning of the dividends and interest set out in paragraph 4 above. Appellee's method of allocating such expenses is as follows:
Gross income ....................$230,674.41 88.85 percent.
Dividends and interest .......... 28,950.00 11.15 percent.
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$259,624.41 100.00 percent.
Expenses (Paragraph 5) $38,561.30 Amount allocated to earning dividends and interest set out in paragraph 4 (11.15 percent of $38,561.30) $4,299.58 "9. Appellee also disallowed as a deduction from the gross income of appellant intangibles tax paid by appellant to the State of Georgia in the amount of $454.54. The said intangibles tax was assessed against appellant by virtue of its ownership of the stocks set out in paragraph 4.
"10. By virtue of such action appellee proposed a deficiency against appellant in the principal amount of $261.48 with interest thereon to the date of assessment of $40.52, the total deficiency assessed, both principal and interest, being $302. To said proposed assessment appellant duly filed a protest. Said protest, after hearing, was denied and appellee thereafter on the 5th day of March, 1945, assessed the deficiency as set out above, from which ruling appellant appealed on the 9th day of March, 1945.
"11. It is further stipulated between the parties that the record in this proceeding was duly certified to the superior court of Fulton County by the State Revenue Commissioner within the time allowed by law.
"12. It is further stipulated between the parties that M. E. Thompson, State Revenue Commissioner, may be substituted as the party defendant herein for J. Eugene Cook, State Revenue Commissioner, *762 the said M. E. Thompson having succeeded to the office of State Revenue Commissioner during the pendency of this action."
The taxpayer introduced one witness, who testified:
"I am employed by the King Plow Company as assistant Secretary and Treasurer and office manager. About September will be twenty years I have been employed by that company. I am familiar with the bookkeeping processes of that corporation and items of expense and income of that corporation. I give orders regarding the books of that company, and on different items to what account they are supposed to be posted. I have supervision and direction of the books of the company, and it is under my supervision and direction that entries are made on the books of the corporation. I am familiar with the fact that King Plow Company owns stock in the Coca-Cola Company, stock of Twin Coach Company and bonds of Rutledge, Georgia. I know how the dividends of the Coca-Cola Company are received, and I know how the dividends of the Twin Coach Company and the interest on the bonds of Rutledge, Georgia, are received, and those items are received by mail. They come into our company by checks. Then the amount of the check is checked, if they were supposed to pay seventy-five cents a quarter dividend, why that check is turned over to the bookkeeper and she makes an entry on the books as dividends received, and the funds are then deposited on that date in the bank as a deposit. It is handled along with the other funds of the corporation in the regular routine business of the corporation. It is deposited in the bank along with the other funds of the corporation that come in on that date, the whole thing is deposited at one time. That is true with the checks from both corporations, Coca-Cola Company and the other company, all checks. We received the interest from Rutledge, Georgia, in the same way, by check, and the checks are handled the same way.
"Examination by the court: When those checks come in I would say at the most it takes the bookkeeper two minutes to put them on the books. She gets paid by the month. As to how much that would be a day, to be frank about it, I don't know the amount that she actually makes, but I think about $165 a month, which would be about $5.50 a day, and eight hours a day, about seventy cents an hour, and seventy cents an hour would be about a cent and a half a minute. It would take from about three to five cents to put *763 those checks on the books. She writes her initials up over here, the name, initials Coca-Cola Company, $1,500 in the bank, $1,500 dividends. She indorses the checks with a rubber stamp, the bookkeeper does. She has to make out a deposit slip and the janitor takes it to the bank. He would have to go anyhow, he has to go for the mail, and does it all at one time.
"Direct examination continued: There is no separate deposit slip made out, it goes along with the regular slip of the day. We just have one deposit a day, and that is in the morning, and that is everything from the mail of the night before. That is all that is necessary and all that is done in handling these items.
"Cross examination: Q. Who has charge of the general policies of the King Plow Company, formulating the general policies with respect to their business activities? A. Mr. King is president. Mr. King determines whether those stocks will be held or sold during the year. If anybody decided to hold them, Mr. King would be the man to decide to hold them. It is true that Mr. King decides the policy with reference to holding or selling of stock. During that year I think Mr. King received a salary of $800 per month.
"After this money received for the dividends and interest goes into the bank account, the distribution made of it is that it is paid out on our purchases and pay rolls. It all goes in a lump sum and it is distributed that way, just as part of the general operating expenses. I have no way of tracing the distribution of that money to show just where any particular fund goes.
"You ask who handles the distribution of that money and decides how that money shall be distributed — the money comes in and we O.K. all the invoices, bills; the superintendent for the plant O.K.'s the pay roll. When that money is paid out, if we don't have enough, we go to the bank to borrow it, to put more in there. After the money is deposited I am never able to trace the disposition exactly of that particular fund. If we deposit $100,000 today, and next week we have paid it all out, we can run that $100,000 down for you to show where every penny of it went to. I could compute that only by the sum that is in the bank at the time. If we got $1,500 say from dividends on Coca-Cola Company stock, we can not leave that $1,500 aside and show what distribution was made of that $1,500. That is mixed, all in connection with the accounts receivable that come in. *764
"The secretary and treasurer is Mr. Powell. He does not have much duties now. His duty during that year was checking the invoices mostly, checking the outgoing invoices. He would not then check invoices on which expenditures were made from my general fund; check the invoices that were going out and shipments that were going out. Those were not his only duties, he checked freight bills when they came in, and also had power to sign checks, to cosign checks, he cosigned checks on the general fund. I would say 99 percent of our outgoing checks were cosigned. Not by the secretary and treasurer, by Mr. King sometimes and the cashier, and by myself and the cashier, by Mr. Powell and myself; there are four of us have permission to sign and cosign. My salary also was a part that was included in the $19,073 that was returned in the company's income tax return during that year as officers' salaries. I did not state on direct examination that I made bookkeeping entries with respect to this interest and dividends; I didn't make the bookkeeping entries, but I advised the bookkeeper what to do with it. Those books are audited, and the auditor in auditing those books would also audit the funds that came in from the interest and dividends, the book entries with respect to those. I did not have any correspondence with respect to the interest and dividends; only connection we have had with the different companies, they would send us a proxy regarding the various meetings they would have; we would sign them and return them back in self-addressed envelopes, mail them back to them. I also had correspondence with reference to the general funds in which those dividends and interest were deposited; mailed out checks in paying operating expenses.
"You call my attention to certain figures that are listed on State's Exhibit B and Schedule 1-a, the second entry there and ask me to tell you what that is — that could be interest that is payable to the bank on a loan. That interest was paid on a loan of money for the purpose of carrying on the general business of the organization of the King Plow Company.
"The next entry below there is capital stock tax and business licenses. That was capital stock tax and business licenses that was paid for the purpose of carrying on the general business and operations of the King Plow Company.
"The next entry on there is pay roll tax on officers and office *765 salaries. That was the tax that was paid on the salaries of the officers and on the clerical help in the business office which handled the funds of the corporation. The next item listed there is office salaries; those were the salaries of the office help who handled the general business of the King Plow Company. They are not also the personnel who had dealings with the disposition of the general fund into which those dividends and interest were deposited; they didn't have anything to do with that, that is stenographers. You ask if they did not prepare the letters in which the checks were mailed out — there were not any letters; we wrote a check, put it in an envelope, that being an open-faced envelope and mailed in that manner. We don't have to address the envelopes to mail checks. The bookkeeper writes the name in and we stick the check in the envelope and it is already addressed. I did check in bills that come in. The duties of the clerical help in the office was to make invoices, and some of them figure invoices, and some answer the telephone probably, we have one telephone operator. We have four clerks out there in the business office. You asked what the item for stationery and printing included, and if that included the books upon which these bookkeeping entries were made with respect to the interest and dividends on that stock. No, this, I think, is mostly letterheads, envelopes, and price lists. I don't know how the bookkeeper posts it. It might be bookkeeping sheets, she keeps the books. Those were bought from office supply houses; might be that would be under office supplies. The printing of our checks is on there, and those are checks with which we make payments out of that general fund. With respect to the item for telephone and telegraph, I never had any conversations over the telephone with respect to those dividends and that interest. I did not discuss the question of voting that stock by proxy over the telephone; they just sent us in a proxy and we would send it back to them signed. I do not know whether anyone in that office ever discussed that question over the telephone; I haven't heard about it if they have. What is included in office supplies and expenses, well, that would be for, I would say, light stands, pens and ink, clips and so forth. I reckon those supplies would be the same ones that would be used in making the bookkeeping entries with respect to the dividends and interest. The other expenses with reference to heat and lights and water, depreciation on the *766 office, air conditioning system, office furniture and fixtures are the expenses of the actual physical establishment in which those activities are carried on. You ask if the intangible tax was for the ownership of the stock on which those dividends were paid — that is what we pay an intangible tax on in our office. I could not tell you how much expense was incurred by the King Plow Company in earning and distributing funds received as interest and dividends from the bonds and stock; I have never given it a thought; it could not be much, could not be hardly anything. Suppose those dividend checks did not come in, I expect the expenses would be just the same whether they came in or not. I don't see how it could possibly be anything, to amount to anything. As to our office expenses that we have been discussing being just the same if our income from the business of manufacturing plows increased by several thousand dollars — if our business, sales, increased, naturally we would have to have more men on the pay roll; would more than likely have a larger pay roll. We would have to make more stuff, ship more stuff, have to have more money to make it.
"You ask me to suppose the dividends that I received from the corporation stock were $200,000, whether under my theory there would be any additional expense in handling those dividends, no sir.
"Redirect examination: I do not know how much time Mr. King devoted to thinking about this stock or what he would do with it; do not know whether he devoted any time to this stock, manipulating it and thinking about selling it or disposing of it in any way."
We will not, in the evidence here, give any further details concerning the figures of the return of the taxpayer. 1. (a) There is no dispute as to the facts. There is no dispute as to the statutes involved. There is a sharp conflict between the parties as to the application of the facts to the principles of law applicable thereto, as well as a construction of the law as applied to the facts.
(b) There are issues learnedly and exhaustively discussed by the *767 parties which we do not deem necessary to determine, under the record of this case. (1) There is considerable argument as to whether or not the deficiency assessment by the Commissioner was clothed with the presumption of correctness in the trial of the appeal case in the superior court. Under the Code, § 92-8446 such an appeal, as here, is a de novo proceeding. We note from the record that the Commissioner assumed the burden of proof. We presume from this that he took advantage of the opening and concluding argument. Be this as it may, the court was not called upon to decide this question. Neither are we, even if we had authority to do so, under such a situation. We might also call attention to the fact that the appeal was made to the superior court after the proposed deficiency assessment of the Commissioner and before an execution was issued. Moreover, if the proposed deficiency assessment of the Commissioner made a prima facie case as to the deficiency assessment, it was a rebuttable presumption and could be removed by evidence. (2) Another question which receives considerable argument and citations of authority is whether the dividends received from the Coca-Cola Company and the Twin Coach Company and interest on obligations of the Town of Rutledge were "non-taxable income or taxable income." Since the motion for a new trial was on the general grounds only, it would appear that the trial judge proceeded with the trial on the theory that the dividends and interest in question were non-taxable income. We will conclude it also on this theory and principle.
2. This leaves us to determine two main issues: (1) Whether the Commissioner lawfully disallowed the taxpayer to deduct $454.54 for intangible tax paid to the State of Georgia for the fiscal year ending May 31, 1942, which the taxpayer incurred by reason of its ownership of the stock in the Coca-Cola Company and the Twin Coach Company; and (2) whether the taxpayer incurred any expenses in connection with earning and distributing the dividend income of $28,650 from the stock in the two corporations and $300 interest on the obligations of the Town of Rutledge. We will discuss these two questions in the order named.
(1) Code (Ann. Supp.), § 92-3109 (a) reads: "All the ordinaryand necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; *768 traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition of the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he had no equity. Expense incurred in earning nontaxable income is not an allowable deduction from taxable income before computing the tax." (Italics ours.)
Subsection (c) reads: "Taxes paid or accrued within the taxable year, except State and Federal income taxes, estate and inheritance taxes, gift taxes, cigar and cigarette taxes, gasoline taxes, and taxes assessed for local benefits of a kind tending to increase the value of the property assessed: Provided, however, that the taxpayer may only deduct from gross income the amount of Federal net income taxes shown to be due and actually paid during the immediate preceding taxable year on the return filed by said taxpayer in such preceding taxable year, and, provided further, that where the entire net income of the taxpayer is not taxable by the State of Georgia, then the taxpayer may only deduct such Federal net income taxes in the same proportion that the net income taxable by the State of Georgia bears to the entire net income taxable by the Federal Government."
During the tax year the taxpayer paid $454.54 on its certificate of stock, which stock produced the non-taxable dividend which it received on its stock in the Coca-Cola Company and the Twin Coach Company, set out above. In making the income-tax returns for the year in question, the taxpayer deducted the amount of this intangible tax which it had paid to the State from its gross income. The Commissioner disallowed this deduction. The Commissioner contends that the amount of this intangible tax was expense incurred or an outlay in earning the non-taxable income under subsection (a) of Code, § 92-3109, supra, and particularly under the last sentence in said subsection, which reads: "Expense incurred in earning non-taxable income is not an allowable deduction from taxable income before computing the tax." The Commissioner contends that the word "expenses" under this subsection of the Code, while not expressly mentioning intangible tax on certificates of stock which produce non-taxable income, that there are no words of limitation, — the word "expenses" is sufficiently broad to include *769 any outlay of expense including intangible tax on the stock certificates, to be classed as an expense or outlay which produced the non-taxable income. It will be noted that the Code, § 92-3109, subsection (a), defines the expenses of any trade or business as "ordinary and necessary expenses . . including . . salaries, compensation for personal services . . traveling expenses . . rentals . ." The expenses deductible under this subsection of the Code must be expenses similar to those specifically enumerated and expenses" when would fall under the words "all the ordinary and necessary expenses" when we give to such words their common and ordinary meaning. We think that such expenses as this section enumerates are embraced within the meaning of the word "expenses" wherever used in this section and that it was not the legislative intent when using the word "expenses" as applied to "expenses" incurred in earning non-taxable income, to include intangible tax paid or accrued during the tax year on the stock certificates which produced the non-taxable income. We are further confirmed in the correctness of this interpretation when we read subsection (c) of the Code, § 92-3109. It will be noted that subsection (c) deals exclusively with taxes which the taxpayer may deduct and which he may not deduct before computing the tax on the taxable income. That section says taxes paid or accrued within the tax year except certain taxes enumerated therein which may not be deducted as will appear from the provisions of this subsection hereinabove quoted. Intangible taxes are not included within the exceptions. Not being included in the exceptions which are not deductible, it necessarily follows that they are deductible before computing the tax. It therefore follows that the Commissioner erred in disallowing this item of intangible tax paid during the tax year and finding a deficiency against the taxpayer in this amount.
(2) We come next to consider the question set forth in this subhead of our opinion. The portion of Code § 92-3109 (a) applicable to this question is contained in the last sentence thereof, as follows: "Expenses incurred in connection with earning and distributing nontaxable income is not an allowable deduction from taxable incomes before computing the tax." The taxpayer was engaged in the manufacturing of items set forth in paragraph 3 of the stipulation. It appears from the tax return in question that *770 the taxpayer did a gross business of $734,220.83, with a gross income of $230,674.41. He claimed an operating expense of $38,561.30. The nontaxable dividends from the stock in the Coca-Cola Company and the Twin Coach Company and interest on obligations of the Town of Rutledge amounted to $28,950.
The Commissioner disallowed $4,299.58 of operating expensesof the taxpayer as being attributable to the earning anddistributing of the nontaxable income. The Commissioner arrived at this disallowance in the manner as follows:
"Gross income $230,674.41 88.85 per cent.
Dividends and interest 28,950.00 11.15 per cent.
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Total income $259,624.41 100.00 per cent. Expenses to be allocated 38,561.30 Amount allocated to earning dividends and interest and thus disallowed.
11.15 per cent of $38,561.30 $4,299.58" The taxpayer contends that under the evidence the expenses (if any) incurred in connection with its nontaxable income which it received as a dividend on the stock it owned in the Coca-Cola Company and the Twin Coach Company and the interest on the obligations of the Town of Rutledge were so small as to be trivial and thus not substantially within the provisions of the act sufficiently to reverse the findings of the trial judge under the law.
The Commissioner contends, on the other hand, that the evidence shows a substantial apportionment should be chargeable to the earnings and distributing of such nontaxable income, and that moreover regardless of how small, it was the duty of the court to ascertain the amount of expense, if any. And further, that the evidence shows that there was established under the evidence, a substantial expense in connection with earning and distributing the nontaxable income. We agree with the Commissioner and the taxpayer that it was the duty of the trial judge acting without a jury to determine whether there was any expense incurred in connection with the earning and distributing the nontaxable income. After a careful consideration of the record we have reached the conclusion that the trial judge was authorized in finding as a fact and a conclusion of law that there were no expenses incurred in connection with the earning and distributing of the nontaxable income, in the instant case. The gross business of the taxpayer was over $700,000. *771 The evidence shows that the certificates of stock in the corporations and the obligations which it owned against the Town of Rutledge all of which produced the nontaxable income, were acquired by the taxpayer several years prior to the fiscal tax year in question. None of the officers of the taxpayer devoted any time, so far as the evidence shows, to operating the corporations which produced the nontaxable income. This income was evidenced by three checks which came into the office to be handled in the regular course of its nearly three-quarters of a million dollars of business. The witness introduced by the taxpayer and whose business it was to direct the employees handling these items, stated that there was no additional expense incurred in earning and distributing this income. Under the particular facts of this case we think the trial judge was authorized in concluding that if any additional expense was incurred, it was necessarily trivial. The attorney for the Commissioner inquired of the witness if the amount had been $200,000 would any additional expense have been incurred. The witness answered "no." Under the testimony of this witness he went somewhat into detail as to the conduct of the business of the taxpayer. We will not refer to those details here, since we have set the evidence of this witness out in full. We might observe here, however, that if a nontaxable dividend check of $200,000 had been received in one check and paid out in one check, with the same office force, that this would not have been any substantial expense incurred in connection with the earning and distributing of a nontaxable income. Of course we can as easily concede that in some cases there no doubt does and will arise instances where expenses would be incurred in connection with earning and distributing nontaxable income. This, however, necessarily depends upon the facts of each particular case. It wisely rests upon a fact-finding body and not this court.
The attorneys for the Commissioner call attention to the decision of the Supreme Court in Carreker v. Walton,
In conclusion of this division of our opinion it is held: (1) That the trial judge did not err as a matter of law in allowing as a deduction from the gross income of the taxpayer the sum of $454.54 as intangibles tax on stock in the Coca-Cola Company and the Twin Coach Company, and (2) the court did not err in finding as a fact and a conclusion of law that the $4299.58 nor any other sum was chargeable to the taxpayer as an expense attributable to the earning and distributing of nontaxable income. The judgment of the lower court is affirmed in allowing the taxpayer a deduction from its gross income of $454.54; and affirmed in allowing as a deduction from his gross income the sum of $4299.58.
This case being originally assigned to the First Division and there being a dissent, the case was referred to the entire court. After consideration by the whole court, the court concurred in the affirmance of the case, with no dissent.
Judgment affirmed. All the Judges concur.
