Philipp Bros. Chemicals, Inc. v. Comm'r of Internal Revenue, Docket Nos. 1314-67— 1317-67

• Citation: 52 T.C. 240
• Decision Date: 14 May 1969
• Docket Number: 1359-67— 1361-67.,Docket Nos. 1314-67— 1317-67,1337-67— 1340-67
• Parties: PHILIPP BROTHERS CHEMICALS, INC. (MD.), ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

52 T.C. 240

PHILIPP BROTHERS CHEMICALS, INC. (MD.), ET AL.,1 PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 1314-67— 1317-67

1337-67— 1340-67

1359-67— 1361-67.

Tax Court of the United States.

Filed May 14, 1969.

[52 T.C. 240]

Nathan Wald and Bernard Wald, for the petitioners.

Edward H. Hance, for the respondent.

1. Held, Commissioner's allocations under sec. 482, I.R.C. 1954, approved in part and disapproved in part,

2. Held, Commissioner has failed to carry burden of proof to establish omission of more than 25 percent of gross income under sec. 6501(e), I.R.C. 1954, in respect of fiscal 1961.

The Commissioner determined the following deficiencies in petitioners' income taxes for the years indicated:

+-----------------------------------------------------------------------------+
                ¦Petitioner ¦Docket No.¦TYE ¦Deficiency¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals, Inc. (Md.) ¦1314-67 ¦2/29/60 ¦$5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦2/28/62 ¦5,485.70 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals, Inc. (R.I.) ¦1315-67 ¦11/30/60¦5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦11/30/62¦5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals, Inc ¦1316-67 ¦11/30/60¦5,008.56 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦11/30/62¦5,109.11 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals International Co., Inc¦1317-67 ¦3/31/60 ¦4,148.52 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦3/31/62 ¦5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals Trans—America Corp ¦1337—67 ¦3/31/60 ¦2,180.99 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦3/31/62 ¦1,444.86 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals Pan—American Corp ¦1338—67 ¦3/31/60 ¦3,909.04 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦3/31/62 ¦5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Phibro International Corp ¦1339—67 ¦3/31/60 ¦2,170.61 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦3/31/62 ¦782.79 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals Export Corp ¦1340—67 ¦11/30/60¦1,000.66 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦11/30/62¦855.72 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals, Inc. (N.Y.) ¦1359—67 ¦6/30/60 ¦101,072.44¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦6/30/61 ¦93,035.89 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦6/30/62 ¦102,781.12¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals, Inc. (Mass) ¦1360—67 ¦6/30/60 ¦5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦6/30/62 ¦5,066.91 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦Philipp Bros. Chemicals, Inc. (Pa.) ¦1361—67 ¦2/29/60 ¦5,500.00 ¦
                +----------------------------------------------+----------+--------+----------¦
                ¦ ¦ ¦2/28/62 ¦5,500.00 ¦
                +-----------------------------------------------------------------------------+
                

[52 T.C. 241]

The parties have made certain concessions relating to the above deficiencies. The issues remaining are (1) whether the Commissioner properly allocated to the petitioner in docket No. 1359-67 the net income (with appropriate adjustments) of the other petitioners by virtue of section 482, I.R.C. 1954; (2) if the reallocation was properly made, whether the petitioner in docket No. 1359-67 omitted an amount exceeding 25 percent of its gross income reported in the year ended June 30, 1961, so that the period of limitations on the assessment and collection of the tax for said year has not expired under the provisions of section 6501(e), I.R.C. 1954; and (3) if the reallocation was improperly made, whether the petitioner in docket No. 1340-67 was properly denied a surtax exemption under section 269, I.R.C. 1954.

FINDINGS OF FACT

Certain facts have been stipulated by the parties and are incorporated herein by this reference. All of the petitioners filed all their Federal income tax returns for the years at issue with the district director of internal revenue in Manhattan, New York.

Philipp Bros., Inc., was a corporation engaged in extensive business activities involving metals and chemicals. In 1945 or 1946 Charles H. Bendheim (Bendheim) acquired the chemicals department or business of that corporation. His father (S. Bendheim) and another person each owned 50 percent of the stock of Philipp Bros., Inc., and Bendheim's acquisition of the chemicals business was a consequence of his father's decision to retire and withdraw from the corporation. In May 1946 Bendheim formed Philipp Bros. Chemicals, Inc. (N.Y.), a New York corporation; it is the petitioner in docket No. 1359-67 and is hereinafter sometimes referred to as ‘New York.’ It is the principal corporation of the 11 petitioners involved in this proceeding that were

[52 T.C. 242]

utilized by Bendheim to carry on the chemicals business. Shortly after New York had been incorporated the petitioner in docket No. 1360-67, Philipp Bros. Chemicals, Inc. (Mass.) (hereinafter sometimes referred to as ‘Massachusetts'), was organized on May 27, 1946, under the laws of Massachusetts as a wholly owned subsidiary of New York to conduct the chemicals business in the New England area. In July 1946, New York acquired all the stock of Philipp Bros. Chemicals, Inc. (Pa.) (hereinafter sometimes referred as ‘Pennsylvania’), petitioner in docket No. 1361-67, and all the stock of Philipp Bros. Chemicals, Inc. (Md.) (hereinafter sometimes referred to as ‘Maryland’), petitioner in docket No. 1314-67. ‘Pennsylvania’ and ‘Maryland’ had each been incorporated on March 22, 1944, under the laws of Pennsylvania and Maryland, respectively, as affiliates of Philipp Bros., Inc.

In 1950, three more of the petitioner corporations were formed. The petitioner in docket No. 1316-67, the Philipp Bros. Chemicals, Inc. (hereinafter sometimes referred to as ‘Connecticut’), was formed on November 26, 1950, under the laws of Connecticut. The petitioner in docket No. 1340-67, Philipp Bros. Chemicals Export Corp. (hereinafter sometimes referred to as ‘Export’) was formed on December 20, 1950, under the laws of New York. The petitioner in docket No. 1315-67, Philipp Bros. Chemicals, Inc. (R.I.) (hereinafter sometimes referred to as ‘Rhode Island’), was formed on December 22, 1960, under the laws of Rhode Island. Connecticut and Rhode Island were formed to take over the chemicals business in their respective States which had previously been conducted by Massachusetts and which had substantially expanded by 1950.

In 1951, the remaining four petitioner corporations were formed. On April 3, 1951, the petitioner in docket No. 1338-67, Philipp Bros. Chemicals Pan-American Corp. (hereinafter sometimes referred to as ‘Pan-American’) was formed under the laws of New York as a Western Hemisphere trade corporation. On April 10, 1951, the petitioner in docket No. 1317-67, Philipp Bros. Chemicals International Co., Inc. (hereinafter sometimes referred to as ‘International’), was formed under the laws of New York. On April 11, 1951, the petitioner in docket No. 1337-67, Philipp Bros. Chemicals Trans-America Corp. (hereinafter sometimes referred to as ‘Trans-America’) was formed under the laws of New York as a Western Hemisphere trade corporation. On April 13, 1951, the petitioner in docket No. 1339-67, Phibro International Corp. (hereinafter sometimes referred to as ‘Phibro’) was formed under the laws of New York.

The shareholders of the petitioner corporations and the percentages of stock they owned were at all relevant times as follows:

+---------------------------------------------+
                ¦ ¦Bendheim ¦B. ¦New ¦
                +-------------+---------+-----------+---------¦
                ¦ ¦and ¦Landers 1 ¦York ¦
                +-------------+---------+-----------+---------¦
                ¦ ¦family ¦ ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦ ¦Percent ¦Percent ¦Percent ¦
                +-------------+---------+-----------+---------¦
                ¦New York ¦89.9 ¦11.1 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦Massachusetts¦ ¦ ¦100 ¦
                +-------------+---------+-----------+---------¦
                ¦Pennsylvania ¦ ¦ ¦100 ¦
                +-------------+---------+-----------+---------¦
                ¦Maryland ¦ ¦ ¦100 ¦
                +-------------+---------+-----------+---------¦
                ¦Connecticut ¦87.5 ¦12.5 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦Rhode Island ¦87.5 ¦12.5 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦Export ¦87.5 ¦12.5 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦Pan—American ¦87.5 ¦12.5 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦International¦87.5 ¦12.5 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦Trans—America¦87.5 ¦12.5 ¦ ¦
                +-------------+---------+-----------+---------¦
                ¦Phibro ¦87.5 ¦12.5 ¦ ¦
                +---------------------------------------------+
                

[52 T.C. 243]

The bookkeeping and the shipping arrangements for all the petitioners were handled in the office of New York in New York City. Orders for chemicals to all the petitioners would be sent to the New York City office, where employees of New York would make arrangements for filling and delivering the orders and would credit the sale to the proper petitioner. During the years here involved and...