APPEAL OF SIMMONS & HAMMOND MANUFACTURING CO., Docket No. 407.

• Decision Date: 17 March 1925
• Docket Number: Docket No. 407.
• Citation: 1 BTA 803
• Parties: Appeal of SIMMONS & HAMMOND MANUFACTURING CO.
• Court: U.S. Board of Tax Appeals

1 B.T.A. 803 (1925)

Appeal of SIMMONS & HAMMOND MANUFACTURING CO.

Docket No. 407.

Board of Tax Appeals.

Submitted January 19, 1925.

Decided March 17, 1925.

Eben Winthrop Freeman, Esq., for the taxpayer.

Laurence Graves, Esq., for the Commissioner.

Before IVINS, KORNER, and MARQUETTE.

This appeal is from a determination by the Commissioner of a deficiency in income and profits taxes for the calendar years 1918, 1919, and 1920, in the amount of $19,266.12. Evidence, both oral and documentary, was offered by the parties at the hearing and from such evidence the Board makes the following

FINDINGS OF FACT.

1. The taxpayer is a Maine corporation with its principal office at Portland, Me., and is engaged in the production and sale ice cream. During the period under consideration the plant of the taxpayer was in property leased by it. The term of its leasehold does not appear from the record. In the year 1918 the requirements of the taxpayer's business necessitated an enlargement and improvement of its plant. An adjoining landowner was an ice company whose plant was contiguous to the plant of this taxpayer. The taxpayer secured from this ice company certain space in the latter's premises which the taxpayer could utilize by cutting through the dividing walls separating the two plants. The taxpayer could secure only a tenancy at will in this additional space just referred to. The additional space so acquired constituted about one-fourth of the entire plant space of the taxpayer after such acquisition. That is, after such acquisition the plant space which the taxpayer held under its term lease was three-fourths of the whole, while that held as tenant at will was one-fourth of the whole.

2. In the same year, 1918, the taxpayer began the overhauling, enlargement, and improvement of its plant, and expended for that purpose $5,072.83. The nature of the work done is illustrated by the following items: Cork insulation in walls, $1,871.27; tiling floors, $840; pipes and fittings, $648.94; electrical wiring, supplies, and equipment, $632.65; lumber and sheathing, $118.87; other insulation work, $280.23; constructing drains, $175.45; architects' fees, $26; waterproofing rooms, $40; freight, $69.96; labor, $249.90, unidentified, $129.56. These expenditures were evenly distributed over the entire plant of taxpayer, after its acquisition of the premises held by it as tenant at will, and it is found that of these expenditures $3,804.63 was made on the premises held by taxpayer under a term lease, and $1,268.20 was made on the premises held by it as tenant at will. In making these alterations, enlargements, and improvements certain of the old equipment was torn out and discarded as well as certain portions of the building which taxpayer was remodeling. No claim or deduction was made by taxpayer for obsolescence of such discarded property, nor was any evidence introduced at the hearing of this appeal as to the value thereof. A major portion of the expenditures referred to was incurred in changing the hardening and shipping rooms from one location to the other with the resulting necessity of building over these parts of the plant.

3. During the year 1918 the taxpayer purchased from four of its stockholders the shares of its capital stock held by those stockholders. Ninety-four shares were thus purchased, the taxpayer paying therefor, in cash and property of the corporation, the sum of $20,947.01. The shares were of the par value of $100 per share. Payment was made as follows: J. M. Berry received $6,000 for 30 shares, C. O. Barrow received $200 for 1 share, J. A. Gordon received $600 for 3 shares, E. M. Bartlett received $14,147.01 for 60 shares. Payment was made to Bartlett as follows: In October, 1918, $8,697.40 cash and $5,059.61 in property of the company. (This property consisted of the Brighton creamery, a branch of the taxpayer corporation, of the value of $3,157.01; a note due the taxpayer from Bartlett in the amount of $1,800; accrued interest on said note in the amount of $102.60.) In December, 1918, Bartlett received further payment of $390 in property connected with the Brighton creamery. The total sum of cash and property paid by the taxpayer for 94 shares of its capital stock was $20,947.01. The stock thus purchased by the taxpayer was original issue stock at par of $100 per share, full paid and nonassessable. The total issue of outstanding stock was 323 shares.

4. On December 30, 1918, at a meeting of the stockholders of the taxpayer corporation it was voted to sell these 94 shares, purchased by the corporation as set out in paragraph 3 of these findings, to Charles A. Simmons and Jonas M. Hammond at the price of $110 per share, which was the price offered by Simmons and Hammond therefor. Accordingly the officers of the corporation were authorized to sell and deliver 47 shares (of the 94 shares purchased) to Simmons in consideration of $5,170, payable without interest in installments equal to the amount of the dividends which might thereafter be declared upon said 47 shares, until the total amount of $5,170 shall have been paid by Simmons to the corporation, said installments being payable as and when such dividends shall have been declared upon the said 47 shares; "but in case of the declaration by the corporation of a stock dividend the shares of stock declared as a dividend upon said 47 shares shall be retained by the holder of said 47 shares and none of the installments above referred to shall be due because of such stock dividend." Identical action was taken with reference to the other 47 shares (of the 94 shares purchased) which were sold to Hammond. Before the purchase by the corporation of the 94 shares, as set out in paragraph 3 above, Simmons and Hammond held 188 shares of the total outstanding issue of 323 shares; Barrows, Berry, and Bartlett held 94 shares, and 41 shares were held by other parties. At the stockholders' meeting of December 30, 1918, on the motion to sell 47 shares to Simmons, 145 shares were voted in the affirmative; none was voted in the negative. Simmons did not vote. Similarly, on the motion to sell 47 shares to Hammond, 125 shares were voted affirmatively; none in the negative. Hammond did not vote.

5. On December 30, 1918, upon the consummation of the transactions set out in paragraph 4 above, the profit-and-loss account of the taxpayer corporation was charged with $10,607.01, that figure representing the difference between the price paid by the corporation for the 94 shares ($20,947.01) and the price at which the same shares were resold by the corporation to Simmons and Hammond ($10,340). No dividends were declared or paid by the taxpayer corporation between November, 1918, and August, 1920. In June, 1920, Simmons and Hammond each paid to the corporation $5,170 (a total of $10,340) as full payment for the 94 shares purchased by them on December 30, 1918.

6. In the year 1919 the taxpayer made alterations, improvements, and betterments to its plant similar in character to those referred to in paragraph 2 of these findings. These expenditures aggregated $2,941.67. The Commissioner allowed the taxpayer $2,313.89 of these expenditures as deductible expenses in the year 1919, but disallowed, on the ground that they constitute capital expenditures, the following: Piping on leased property, $95; cork...