ATLANTIC COMMERCE & SHIPPING CO., INC. v. Commissioner
| Decision Date | 07 May 1973 |
| Docket Number | Docket No. 5272-70. |
| Citation | 1973 TC Memo 106,32 TCM (CCH) 473 |
| Parties | Atlantic Commerce & Shipping Co., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Arthur L. Harrow, 19 Rector St., New York, N.Y., for the petitioner. Michael K. Phalin, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined deficiencies in petitioner's income tax for the taxable years 1965 and 1966 in the respective amounts of $21,057.98 and $18,360.63. The only issue before us is whether petitioner is liable for the accumulated earnings tax imposed by section 531.1
Some of the facts have been stipulated and are so found.
At the time the petition herein was filed petitioner's principal place of business was located in New York, New York. Petitioner filed its Federal income tax returns for the taxable years 1965 and 1966 with the district director of internal revenue for the Manhattan district in New York, New York.
Petitioner, Atlantic Commerce & Shipping Co., Inc., was incorporated under the laws of Nevada in 1941. It has been controlled since its formation by George S. Pathy (George). On December 31, 1965, George owned 98.75 percent of petitioner's stock and was its president. At that time George's brother, Ladislas Pathy (Ladislas), owned the remaining 1.25 percent of its stock.
The Pathy family has been involved in the international shipping business for nearly 50 years. Their substantial investments in the Hungarian Merchant Marine were confiscated at the outset of World War II. Later, they suffered significant losses when the Merchant Marine of the United Arab Republic was nationalized in 1957. Since 1957 they have invested heavily in the Canadian and American shipping industries.
In addition to petitioner the Pathy family controls several other corporations which are also engaged in shipping and related activities. During the years in issue George held an interest in 18 or 19 foreign and domestic Pathy family corporations. Petitioner also held an interest in most of the same family corporations. Large investments were often split up among the various family corporations, all of which were controlled by a group comprised of members of the Pathy family and other family corporations.
Among the corporations which the Pathy family controlled prior to and during the years in issue were Pathy Shipping, Inc. (Pathy Shipping), Federal Commerce and Navigation Co., Ltd. (Fed. Nav.), Federal Marine Terminals, Inc. (Federal Marine), and Federal Bulk Carriers, Inc. (Federal Bulk).
Pathy Shipping was incorporated under the laws of New York in 1953, and has always been under the control of Ladislas. At the close of 1966 Ladislas, together with his wife and children, owned 4,608 shares of stock in Pathy Shipping. George owned the remaining 36 shares. During the period in issue Pathy Shipping carried on business activities comparable to petitioner's, and both corporations shared the same offices.
Fed. Nav. is a large Canadian corporation engaged in international shipping on vessels which it either owns or time-charters. In 1964 the Pathy family gained complete control of Fed. Nav. when Pathy Shipping bought out the interest of an unrelated corporation which was dissatisfied with Fed. Nav.'s recent earnings performance. Pursuant to an agreement which Ladislas and George reached at the time of this purchase, petitioner in 1965 acquired from Pathy Shipping 9,347 shares in Fed. Nav. On December 31, 1965, the stock of Fed. Nav. was held as follows:
Number of
Party Shares
Petitioner .............. 9,347
Pathy Shipping .......... 28,153
George .................. 17,500
Ladislas ................ 17,500
Others .................. 47,500
_______
Total ................ 120,000
In 1966 petitioner purchased an additional 3,005 shares in Fed. Nav. from Pathy Shipping. By the close of 1966 Fed. Nav.'s business had improved and it had accumulated a very substantial amount of earnings. At the time of trial George was president of Fed. Nav. and had been for a number of years.
In 1965 the shipping activities of Fed. Nav. had expanded to the point where it needed its own shipping terminal in Chicago, Illinois. Fed. Nav.'s ships were being faced with costly delays in loading and unloading cargoes because existing commercial terminals were often too busy to service its ships promptly. Fed. Nav. was facing a similar problem in Detroit, Michigan.
Federal Marine is a domestic corporation which was incorporated in April 1965 for the purpose of acquiring marine terminals in Chicago and Detroit and operating them for the exclusive use of Fed. Nav. During 1965 and 1966 the stock of Federal Marine was held as follows:
Name Shares Capital
Petitioner ........... 5,000 $ 25,000
Pathy Shipping ....... 5,000 25,000
Ladislas, Jr. ........ 1,500 7,500
Federal Bulk ......... 4,000 20,000
Other Interests ...... 5,000 25,000
______ ________
Totals ............ 20,500 $102,500
Federal Marine acquired a terminal in Chicago in 1965, and a terminal in Detroit a year or two later.
Federal Bulk was incorporated under the laws of New York in 1955. Petitioner invested $51,275 in Federal Bulk upon its formation and received in exchange 500 of its 10,000 shares of preferred stock at $100 per share, and 1,275 of its 30,000 shares of common stock at one dollar per share. The Pathy family has maintained complete control of Federal Bulk through the combined holdings of family members and family corporations.
Federal Bulk was formed for the purpose of buying and operating an ocean-going vessel, and in 1956 it purchased an American flagship named the S.S. Federal Jurist. It operated the vessel for a period and resold it at a large gain. It then acquired a 60 percent interest in a Canadian corporation which had been formed to build a giant oil tanker which was subsequently completed in 1959. This venture proved unprofitable and was liquidated by Federal Bulk in 1965. In April 1965 Federal Bulk acquired a 19.75 percent interest in Federal Marine.
Petitioner sold its interest in Federal Bulk to Ladislas in May 1967.
Throughout 1965 and 1966, petitioner also held substantial interests in two foreign enterprises which were controlled by Alexander Pathy, another brother of George. These consisted of a $40,821.25 investment in Societe Industrille Commerciale Lyonnaise, and a $4,990.46 investment in Febrica Accessori Imbottigliamento Bezande, S.A. The business activity of these two companies was unrelated to petitioner's business. One of petitioner's witnesses, a certified public accountant who has been in charge of auditing its books since the early 1950's, had prepared a comparative balance sheet for the years 1964 and 1965 which classified petitioner's holdings in these two companies as current assets and included them in a computation of working capital.
Since its incorporation petitioner's activities have centered around various aspects of the shipping business. In the early years of its existence petitioner was principally active in the ownership of ocean-going shipping vessels. Later it had changed its mode of operation and chartered vessels rather than owning them.
The years 1960, 1961, and 1962 were very poor for the shipping industry. Excess tonnage and low shipping rates caused petitioner to suffer substantial operating losses during each of these three years.
By the end of 1962 petitioner had concluded that its chartering business was too vulnerable to recurring losses brought about by downswings in the cyclical economy of the shipping industry. It therefore made a final decision in 1962 to terminate its direct participation in the chartering of shipping vessels. It decided instead to furnish brokerage and management services to other shippers. Petitioner's transformation from a chartering business to a brokerage operation was largely effected by the close of 1962, and was virtually completed by the close of 1963.
At the time petitioner decided to change the nature of its business from chartering to brokerage it also entered into an arrangement to provide brokerage services for Fed. Nav. During the years 1965 and 1966 substantially all of petitioner's operating income was derived from the brokerage commissions which it received from Fed. Nav. for soliciting and placing dry cargoes on that corporation's ocean-going vessels. During 1965 petitioner earned commissions totaling $264,288; of this amount $254,395 was received for placing cargoes on ships either owned or chartered by Fed. Nav. In 1966 petitioner received from Fed. Nav. $290,924.67 out of its total commission income of $291,621.59.
Pathy Shipping also performed brokerage services for Fed. Nav. during the years in issue, and it also derived substantially all of its operating income from commissions which it received for placing cargoes on ships owned or chartered by Fed. Nav.
In April 1957 George contributed $24,166.52 to petitioner as paid-in capital surplus. This brought the total of petitioner's capital stock plus capital surplus to $224,166.52, a level which it maintained until January 1966. On October 6, 1965, petitioner's board of directors voted to declare a nontaxable stock dividend of $200,000 payable in January 1966. Incident to this stock dividend petitioner transferred $200,000 from earned surplus to capital stock in January 1966.
Prior to 1963 petitioner had needed a capital base in excess of $200,000 in order to properly conduct its charter business. However, its capital needs were much smaller after it shifted to a purely brokerage business. Its brokerage operations generated very low operating costs in comparison to its chartering activities, and virtually...
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