Consol. Apparel Co. v. Comm'r of Internal Revenue

Decision Date21 March 1952
Docket Number24980.,Docket Nos. 20107
Citation17 T.C. 1570
PartiesCONSOLIDATED APPAREL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

1. Rentals paid to a family trust which was created for the purpose of acquiring the overriding leasehold estate from petitioner's lessor, disallowed, to the extent that they exceeded the rental which petitioner was obligated to pay in the taxable years under the old lease.

2. Reasonable compensation for services performed by petitioner's president and vice president determined on the evidence.

3. Where amortization deductions on leasehold improvements during the base period years were excessive, due to the fact that the cost of such improvements was spread over the remaining short term of petitioner's lease, held, that such excess should be disallowed under section 711(b)(1)(J), Internal Revenue Code, for the purpose of computing petitioner's average base period net income and its excess profits credits for 1945 and 1946.

4. An amount subscribed and paid during 1946 to a development and advertising association of merchants in petitioner's business district held deductible in full as a business expense of that year.

5. Verification of petitioner's income and excess profits tax returns for 1945 by its president, who was also treasurer, held substantial compliance with the statutory requirement that the returns be signed and sworn to by the president and the treasurer or other principal accounting officer. Joseph E. Rapkin, Esq., for the petitioner.

Harold H. Hart, Esq., for the respondent.

These proceedings involve deficiencies and penalties, as determined in the deficiency notices, as follows:

+-----------------------------------------------------------------------------+
                ¦        ¦          ¦         ¦Declared     ¦       ¦              ¦          ¦
                +--------+----------+---------+-------------+-------+--------------+----------¦
                ¦Year 1  ¦Income tax¦Penalty  ¦value excess-¦Penalty¦Excess profits¦Penalty   ¦
                +--------+----------+---------+-------------+-------+--------------+----------¦
                ¦        ¦          ¦         ¦profits tax  ¦       ¦tax           ¦          ¦
                +--------+----------+---------+-------------+-------+--------------+----------¦
                ¦1944    ¦          ¦         ¦$300.05      ¦       ¦$28,478.47    ¦          ¦
                +--------+----------+---------+-------------+-------+--------------+----------¦
                ¦1945    ¦          ¦$4,072.58¦3,238.10     ¦$809.53¦45,952.43     ¦$21,997.74¦
                +--------+----------+---------+-------------+-------+--------------+----------¦
                ¦1946    ¦$12,239.72¦         ¦             ¦       ¦22,231.67     ¦          ¦
                +-----------------------------------------------------------------------------+
                

FN1 Fiscal year ending July 31.

By an amendment to the answer filed in Docket No. 24980, respondent asks for increases in the deficiencies and penalties for 1945 and 1946 as follows:

* * * (1) in income tax for the taxable year ended July 31, 1946 in the amount of $2,717.00; (2) in declared value excess-profits tax for the taxable year ended July 31, 1945, in the amount of $701.01 and $177.50 in penalty; (3) in excess profits tax liability for the taxable years ended July 31, 1945 and 1946 in the total amount of $8,127.38 and (4) in the amount of $1,103.02 in penalty for 1945.

The issues presented are (1) the rental deductions to which petitioner is entitled in 1945 and 1946, (2) the reasonableness of salaries paid to petitioner's officers in 1945 and 1946, (3) whether in computing excess profits credits for 1945 and 1946 certain deductions taken for amortization of leasehold improvements should be disallowed under the provisions of section 711(b)(1)(J) and (K), Internal Revenue Code, (4) the deductibility in 1946 of the full amount of subscription and payment which petitioner made in that year to a merchants' promotional and advertising association of which it was a member, and (5) whether petitioner is liable for the statutory 25 per cent penalty for failure to file properly executed income and declared value excess-profits tax and excess profits tax returns for 1945.

Some of the facts have been stipulated.

FINDINGS OF FACT.
1. Rental Deductions.

The stipulated facts are incorporated herein by this reference.

Petitioner is a Wisconsin corporation engaged in the retailing of ladies' and children's ready-to-wear clothing, with its principal store and office located in Milwaukee, Wisconsin. Its returns for the years here involved were filed with the collector for the district of Wisconsin. The returns were made on an accrual basis for a fiscal year ending July 31.

Petitioner was organized in 1932. Its capital stock was held during the taxable years involved as follows:

+-----------------------------------------------------------------+
                ¦                                             ¦Shares of¦Shares of¦
                +---------------------------------------------+---------+---------¦
                ¦Stockholder                                  ¦common   ¦preferred¦
                +---------------------------------------------+---------+---------¦
                ¦H. LeVine & Bro., Inc                        ¦197      ¦827      ¦
                +---------------------------------------------+---------+---------¦
                ¦Ida Rosenberg Leubusher                      ¦99       ¦376 3/4  ¦
                +---------------------------------------------+---------+---------¦
                ¦Leonard LeVine                               ¦1        ¦60       ¦
                +---------------------------------------------+---------+---------¦
                ¦Aaron Scheinfeld                             ¦1        ¦1 1/4    ¦
                +---------------------------------------------+---------+---------¦
                ¦Harry LeVine                                 ¦1        ¦         ¦
                +---------------------------------------------+---------+---------¦
                ¦B. F. Saltzstein                             ¦1        ¦         ¦
                +---------------------------------------------+---------+---------¦
                ¦A. P. Rosenberg or A. P. Rosenberg Estate 1  ¦         ¦78       ¦
                +---------------------------------------------+---------+---------¦
                ¦Ada LeVine                                   ¦         ¦2   57   ¦
                +---------------------------------------------+---------+---------¦
                ¦Edward LeVine                                ¦         ¦50       ¦
                +---------------------------------------------+---------+---------¦
                ¦Willard LeVine                               ¦         ¦50       ¦
                +---------------------------------------------+---------+---------¦
                ¦Totals                                       ¦300      ¦1,500    ¦
                +-----------------------------------------------------------------+
                

FN1 A. P. Rosenberg died in 1945.FN2 Purchased by Ada LeVine in 1944.

H. LeVine & Bro., Inc., is a holding company whose stock was all owned, during the taxable years, by Harry LeVine, his wife, Ada LeVine, and their three sons, Leonard, Willard, and Edward, ages 33, 30, and 26, respectively. Aaron Scheinfeld is the son-in-law of Ida Rosenberg Leubusher, the former wife of A. P. Rosenberg, deceased. A. P. Rosenberg was the brother of Benjamin Rosenberg, who is married to a sister of Harry LeVine. He was the founder of petitioner's predecessor and a former partner of Harry LeVine.

Petitioner's officers were Harry LeVine, president and treasurer, Leonard LeVine, vice president, Aaron Scheinfeld, secretary. The directors were Harry LeVine, B. F. Saltzstein, Aaron Scheinfeld, and Leonard LeVine. The common shares only had voting power.

At the beginning of the tax year 1944 petitioner occupied premises consisting of the basement, ground floor, and a portion of the second floor located on the northwest corner of North Third Street and West North Avenue, Milwaukee, under leases from three different lessors. The major portion of the premises consisted of a portion of the building known as Berlin Arcade Building which was under a lease to Consolidated Mercantile Company, lessee, dated February 1, 1941, for a period ending April 30, 1952, at a yearly rental of $22,000. Consolidated Mercantile Company was a corporation organized at about the time of petitioner's organization whose stock was owned two-thirds by Harry LeVine or his wife and sons and one-third by Mrs. A. P. Rosenberg. It served no purpose but to hold the lease in question for petitioner's benefit and had no other assets. Petitioner paid Consolidated Mercantile Company a rental of $22,500 per year.

The lessor of the Berlin Arcade Building, Third-North Realty Company, held a 99-year lease on the entire building, which in 1944 had 67 years to run.

On May 27, 1944, Harry LeVine, as settlor, created a family trust, or trusts, hereinafter referred to as the Trust, which a few days later, on May 31, 1944, purchased the said 99-year leasehold from Third-North Realty Company, and on October 24, 1944, leased to petitioner the premises which it then occupied for a period of 25 years from August 1, 1944, at an annual rental of 3 per cent of gross sales with a minimum rental of $30,000 per year.

The trust indenture was entitled Harry LeVine Trusts.‘ The trustee was B. F. Saltzstein, an attorney, who had served petitioner as counsel and a director. The corpus consisted of $20,000 cash which Harry LeVine paid to the trustee. The beneficiaries were the wife and three sons of Harry LeVine. There were provisions of the trust indenture, not here material, for the distribution of income and corpus to the beneficiaries, equally. It was specifically provided that the primary purpose of the Trust was the acquisition of the Berlin Arcade Building leasehold. The trustee was authorized to borrow sufficient additional funds for that purpose.

Pursuant to that plan the trustee purchased the leasehold from Third-North Realty Company on May 31, 1944, for a total consideration of $190,000. This amount was made up of the $20,000 of original corpus, plus a loan of $55,000 from Harry LeVine, plus a mortgage and bond issue of $115,000.

The old lease between Third-North Realty Company and Consolidated Mercantile...

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