Kendrick Coal & Dock Co. v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 6 BTA 1092 |
| Decision Date | 29 April 1927 |
| Docket Number | Docket No. 6806. |
| Parties | KENDRICK COAL & DOCK CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
W. Yale Smiley, Esq., for the petitioner.
Thomas P. Dudley, Jr., Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1920 in the amount of $18,804.01. The petitioner alleges error on the part of the Commissioner in adding to its net income for 1920, $50,000 profit on the sale of certain assets.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation engaged in the wholesale coal business. It was organized June 24, 1916, with a capital stock of $50,000, divided into 500 shares of a par value of $100 each. Its entire capital stock was issued, with the exception of qualifying shares of directors, to Edward S. Kendrick, Jr. Kendrick had been engaged in the coal business for a number of years prior to the organization of the petitioner, first in Philadelphia, then in Cincinnati, and then in Minneapolis. He came to Minneapolis in 1911 and became associated with the Berwind Fuel Co. as its sales manager for the northwestern territory adjacent to Minneapolis. For about five years subsequent and until May, 1916, Kendrick remained in this position. During this period he became acquainted with industries in the Northwest which were large purchasers of coal, and also with various coal companies which sold coal in that territory. In May, 1916, he severed his connection with the Berwind Fuel Co. and went into the coal-jobbing business individually under the name of the Kendrick Coal & Dock Co.
Kendrick continued his individual business for a period of about two months when the petitioner was incorporated. During this period he secured numerous orders for the sale of coal, including both orders for single shipments and orders for shipments extending over a period of several months. None of the orders which were on hand and unfilled in June, 1916, provided for shipments extending beyond one year. On the organization of the petitioner, Kendrick turned over his individual coal business, including all of the unfilled orders on hand, for the entire capital stock of the petitioner.
The books of account as of December 31, 1917, show assets and liabilities as follows:
ASSETS. | LIABILITIES
|
Cash __________________ $22,504.45 | Accounts payable __________ $48,163.82
Accounts receivable ___ 77,582.75 | Accrued expenses __________ 5,083.78
Liberty bonds _________ 12,000.00 | Surplus ___________________ 60,865.35
Corporate stocks ______ 2,025.75 | ___________
____________ | 114,112.95
Total ___________ 114,112.95 |
In 1918 Kendrick was mustered into the military service of the United States and was not mustered out until April, 1919. He returned to Minneapolis and continued the conduct of his coal business.
Owing to keen competition, Kendrick saw that if his business was to become a large business, it would be necessary for the corporation to acquire a dock at Duluth and for it to make arrangements whereby it could get coal by water transportation from the eastern coal fields. Prior to June, 1920, Kendrick had been negotiating with certain eastern coal interests for the enlargement of his business. These negotiations were carried on with A. W. Thompson of the Wilson Transit Co. and F. E. Taplin of the Cleveland & Western Coal Co. In May, 1920, at a special meeting of the stockholders of the petitioner, its officers were authorized to enter into an agreement with the above-named individuals under the terms of which the petitioner was to agree in consideration of $50,000 of the stock of the Inland Coal & Dock Co. (corporation to be formed) to convey to Thompson and Taplin acting for and on behalf of such corporation "all the office furniture and fixtures, office supplies and equipment, also the good will and all of the benefits to be derived in the way of profits from the contracts which this corporation has for the purchase or sale of coal, and the contracts themselves, profits in which are estimated at $40,000 by the officers of the company, and it being understood that the purchaser is to assume all liabilities or losses which may arise in connection with said coal contracts." Pursuant to such authorization Kendrick proceeded to Cleveland, Ohio, for the purpose of entering into the agreement referred to. Objection was raised by the attorney for the Inland Coal & Dock Co. to the issuance of any of its capital stock in payment for the assets of the petitioner above referred to. It was then agreed that the transfer should be made for $50,000 in cash, and that the petitioner should thereupon subscribe for 500 shares without nominal or par value of the common stock of the Inland Coal & Dock Co., to be paid for in cash. This change in the plan of the transaction was agreed to by Kendrick and the petitioner and a resolution in accordance therewith was duly passed by the directors of the petitioner.
The following is the agreement entered into between Taplin and Thompson and the petitioner by E. S. Kendrick as president under date of June 1, 1920:
MEMORANDUM OF AGREEMENT made and entered into this first day of June, 1920, by and between A. W. THOMPSON and F. E. TAPLIN, acting for and on behalf of a corporation to be formed to take over and operate the ISLAND CREEK COAL COMPANY's dock at Duluth, Minnesota, Parties of the First Part, and KENDRICK COAL & DOCK COMPANY, a corporation of Minneapolis, Minnesota, PARTY of the Second Part.
WITNESSETH:
WHEREAS, a corporation is to be formed under the laws of the State of Ohio to take over and operate the ISLAND CREEK COAL COMPANY's dock at Duluth, Minnesota; and
WHEREAS, it is desirable that said dock company so to be formed shall have the benefits to be derived from the going organization of Second Party and the good will connected therewith, and also from certain contracts now held by the Second Party, and shall further secure the benefit of the services of E. S. KENDRICK, now President of the Second Party.
NOW, THEREFORE, it is agreed as follows:
(1) Parties of the First Part agree to purchase, and Party of the Second Part agrees to sell, all of Second Party's office furniture and fixtures, supplies and equipment, also the Good Will of said Company, and all of the benefits to be derived in the way of profits from the contracts which Second Party has for the purchase or sale of coal, it being understood that said corporation so to be formed shall assume all liabilities or losses to arise in connection with said coal contracts.
(2) In full payment for said property, Party of the Second Part agrees to accept, and Parties of the First Part agree to pay, the sum of Fifty Thousand Dollars ($50,000.00) in cash.
(3) It is understood between the parties that while said coal contracts are not to be assigned or transferred to the new Dock Company, nevertheless, from and after the date hereof, all operations of Second Party in connection with said contracts are for the sole use and benefits or loss, as the case may be of said new Dock company.
(4) Party of the Second Part agrees upon request to execute any and all papers necessary or proper to effect the transfer of the property hereby purchased by Parties of the First Part, it being understood that said transfer shall be made to the corporation before mentioned when duly organized. All physical assets covered by this agreement of purchase and sale shall be transferred free of liens or encumbrances of any sort.
(5) It is understood that it is part of this agreement, supported by the consideration herein named, that the corporation to be formed shall employ the said E. S. KENDRICK as Vice-President in charge of sales and management of the Duluth Coal Dock and of the Northwestern business of the corporation, at a salary of Fifteen Thousand Dollars ($15,000.00) a year and expenses, said employment to continue so long as said E. S. KENDRICK shall retain his stock ownership in said corporation.
A bill of sale or assignment was then executed by the petitioner, in which it...
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