Chelsea Prods., Inc. v. Comm'r of Internal Revenue
| Decision Date | 19 April 1951 |
| Docket Number | Docket Nos. 19849,22920. |
| Citation | 16 T.C. 840 |
| Parties | CHELSEA PRODUCTS, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ferdinand Tannenbaum, Esq., and Walter F. Sloan, Esq., for the petitioner.
Maurice S. Bush, Esq., for the respondent.
Petitioner is manufacturing company which manufactures fans and blowers and for several years sold its products through its own officers and ‘manufacturers' agents.‘ In 1944, three sales companies were organized to sell petitioner's products and were assigned separate territories. The stockholders of these sales companies were essentially the same as the stockholders of petitioner. Thereafter these sales companies acted as sales agents for petitioner and their income was derived from sales of petitioner's products. Each of these sales companies filed its own income and declared value excess-profits tax returns and excess profits tax returns. For the taxable years the Commissioner has added to the net income reported on petitioner's return the net income of each of these sales companies. Held, the sales companies were organized and operated for business purposes and must be recognized as separate corporate entities, and their income is not that of petitioner. National Carbide Corp. v. Commissioner, 336 U.S. 422, Held, further, section 45, I.R.C., as the Commissioner seeks to apply it is not applicable. Held further, section 129, I.R.C., is not applicable because the sales companies were organized and operated for business purposes and not primarily for tax avoidance or evasion.
Docket No. 19849 involves deficiencies determined by the Commissioner for the year 1944 of $110.58 in income tax and $37,091.85 in excess profits tax. These deficiencies are due to the following adjustment:
+---------------------------------------------------------+
¦(a) Chelsea Fan & Blower Co., Inc. ¦$13,936.08¦
+----------------------------------------------+----------¦
¦(b) Chelsea Fan & Blower Co. of Georgia ¦13,531.80 ¦
+----------------------------------------------+----------¦
¦(c) Chelsea Fan and Blower Company of Missouri¦14,221.80 ¦
+----------------------------------------------+----------¦
¦(d) Factory expenses ¦3,500.00 ¦
+----------------------------------------------+----------¦
¦Nontaxable income and additional deductions: ¦ ¦
+----------------------------------------------+----------¦
¦(e) Depreciation ¦864.25 ¦
+---------------------------------------------------------+
Explanations in the deficiency notice which are pertinent here are as follows:
(a), (b) and (c) It has been determined that the amounts of $13,936.08, $13,531.80 and $14,221.80, alleged to represent net income of Chelsea Fan & Blower Co., Inc., Chelsea Fan and Blower Company of Georgia and Chelsea Fan and Blower Company of Missouri, respectively, represent net income taxable to you for the taxable year 1944.
The petitioner assigns errors as to adjustments (a), (b), and (c) but does not assign error as to adjustments (d) and (e). Therefore, adjustment (d) and (e) are not in issue.
Docket No. 22920 involves deficiencies determined by the Commissioner for the year 1945 of $165.62 in income tax and $25,519.13 in excess profits tax. These deficiencies are due to the following adjustments made by the Commissioner:
+--------------------------------------------------------+
¦(a) Capital expenditures ¦$424.00 ¦
+----------------------------------------------+---------¦
¦(b) Capital stock tax ¦1,250.00 ¦
+----------------------------------------------+---------¦
¦(c) Travel and Entertainment expense ¦2,500.00 ¦
+----------------------------------------------+---------¦
¦(d) Chelsea Fan and Blower Co., Inc. ¦12,587.34¦
+----------------------------------------------+---------¦
¦(e) Chelsea Fan and Blower Company of Georgia ¦6,776.97 ¦
+----------------------------------------------+---------¦
¦(f) Chelsea Fan and Blower Company of Missouri¦6,900.97 ¦
+----------------------------------------------+---------¦
¦Nontaxable income and additional deductions: ¦ ¦
+----------------------------------------------+---------¦
¦(g) Depreciation ¦21.20 ¦
+--------------------------------------------------------+
Each of the above adjustments is explained in the deficiency notice. Adjustments (d), (e)d, and (f) are explained in the same manner as in the deficiency notice for 1944. The petitioner assigns error as to adjustments (d), (e), and (f) in the same manner as error was assigned as to similar adjustments for 1944. Error is also assigned as to respondent's disallowance of $2,500 traveling and business entertainment expenses for the year 1945, adjustment (c). Petitioner in its brief abandons any contest as to adjustment (c). Therefore, that adjustment is no longer in issue. The petitioner did not assign error as to adjustments (a), (b), and (g).
Many of the facts have been stipulated.
The stipulated facts are hereby found.
Petitioner filed its income and excess profits tax returns for 1944 and 1945 wit the collector of internal revenue for the fifth district of New Jersey. The returns were prepared on an accrual basis.
Petitioner was incorporated in New Jersey as Chelsea Fan & Blower Co., Inc., on January 3, 1941, as successor to a New York corporation of the same name in existence since 1935. The sole stockholders, officers, and directors of the New York company and of petitioner during the years in question were William J. Lohman, Sr., who owned 50 of the 100 shares of common stock outstanding, and his two sons, William J. Lohman, Jr., and Eugene W. Lohman, each of whom owned 25 shares. Petitioners officers during the years in question were: William J. Lohman, Sr., president; Eugene W. Lohman, vice-president; and William J. Lohman, Jr., secretary and treasurer.
Since its incorporation petitioner has engaged in the manufacture of fans and blowers. Prior to June 21, 1944, the products were sold by petitioner through its officers and ‘manufacturers' agents‘ situated throughout the country, and the profits were entered on petitioner's books of account. The ‘manufacturers' agents‘ were paid commissions of about 10 per cent. Petitioner's gross sales through its manufacturers' agents and officers for 1943 and the period from January 1 to June 30, 1944, were as follows:
+---------------------------------------------------------------+
¦ ¦Manufacturers'¦Petitioner's¦Total gross¦
+-----------------------+--------------+------------+-----------¦
¦Period ¦agents ¦officers ¦sales ¦
+-----------------------+--------------+------------+-----------¦
¦1943 ¦$224,635.74 ¦$324,484.54 ¦$549,120.28¦
+-----------------------+--------------+------------+-----------¦
¦Jan. 1 to June 30, 1944¦156,082.98 ¦181,848.82 ¦337,931.80 ¦
+---------------------------------------------------------------+
In the Spring of 1944, the three Lohmans consulted their attorney about the advisability of making a change in petitioner's manufacturing and selling activities. One reason given for desiring a change was to reduce petitioner's liability to persons injured by its fans. The Lohmans had in mind two recent accidents involving fans, one resulting in a man's electrocution by a fan sold by petitioner. Other reasons given were that sales could be increased, especially in the southern states, if promoted by a firm operating locally, and the further advantages of saving freight charges by establishing assembly plants in the states of ultimate sale. The attorney advised the Lohmans that the problems of petitioner would be simplified if, instead of qualifying petitioner to do business in several states, separate and distinct corporations would be organized to sell petitioner's products. He also advised the Lohmans that petitioner should be a manufacturing company and that if these steps were taken, liability arising from personal injuries due to defective fans would be minimized inasmuch as the sales company's assets would be small as compared with the assets of petitioner and that state social security tax liability would be reduced. The attorney also recommended that the name of petitioner should be changed from Chelsea Fan & Blower Co., Inc., to Chelsea Products, Incorporated.
Pursuant to the attorney's advice petitioner's name was changed on June 12, 1944, to Chelsea Products, Incorporated; and on June 21, June 26, and July 3, 1944, three new corporations were organized under the laws of Missouri, New Jersey, and Georgia, respectively. They were named Chelsea Fan and Blower Company of Missouri, Chelsea Fan & Blower Co., Inc., and Chelsea Fan & Blower Company of Georgia, and are hereinafter called the sales companies.
Each of the sales companies issued 1,200 shares of capital stock at $1 per share. The three Lohmans each purchased 400 shares in the New Jersey and Georgia sales companies, and were the sole stockholders. The stock in the Missouri sales company was held as follows:
+-------------------------------+
¦Stockholder ¦Shares ¦
+----------------------+--------¦
¦ ¦ ¦
+----------------------+--------¦
¦William J. Lohman, Sr ¦400 ¦
+----------------------+--------¦
¦William J. Lohman, Jr ¦400 ¦
+----------------------+--------¦
¦Eugene W. Lohman ¦399 ¦
+----------------------+--------¦
¦David T. Zucker ¦1 ¦
+-------------------------------+
The three Lohmans constituted the board of directors of each sales company during the period in question.
By three separate written agreements dated July 11, 1944, petitioner appointed the sales companies as its exclusive agents to sell its merchandise. The agreements were signed by William J. Lohman...
To continue reading
Request your trial
-
Ross Glove Co. v. Comm'r of Internal Revenue , Docket Nos. 7486-70
...was owned and operated by Carla Trading. See National Carbide Corp. v. Commissioner, 336 U.S. 442 (1949); Chelsea Products, Inc., 16 T.C. 840 (1951), affd. 197 F.2d 620 (C.A. 3, 1952). This Court has recognized the existence of a wholly owned subsidiary which sold its entire output to its p......
-
Latham Park Manor, Inc. v. Comm'r of Internal Revenue
...by my suggested application of section 482. Compare Commissioner v. Chelsea Products, 197 F.2d 620, 624 (3d Cir. 1952), affg. 16 T.C. 840 (1951).RAUM, DRENNEN, FAY, AND TANNENWALD, JJ., agree with this concurring opinion. 1. All section references are to the Internal Revenue Code of 1954, a......
-
Riss v. Comm'r of Internal Revenue
...resultant disadvantage to the taxpayer is usually substantial. Commissioner v. Chelsea Products, 197 F.2d 620 (C.A. 3, 1952), affirming 16 T.C. 840 (1951). Hence, where respondent has failed to plead section 482, and where the invocation of that section at a later point in the proceedings h......
-
Marc's Big Boy-Prospect, Inc. v. Comm'r of Internal Revenue, Docket Nos. 299-67— 308-67.
...Id. at 37. Further, significant operative authority was reposed in and exercised by the various corporations. The facts in Chelsea Products, Inc., 16 T.C. 840 (1951), affd. 197 F.2d 620 (C.A. 3, 1952), were similar to those at hand. A majority of this Court, however, held that the predecess......