Alexander & Garrett v. United States
| Decision Date | 26 July 1927 |
| Citation | 21 F.2d 547 |
| Parties | ALEXANDER & GARRETT v. UNITED STATES. |
| Court | U.S. District Court — Southern District of Georgia |
Hull, Barrett & Willingham, of Augusta, for plaintiff.
Chas. L. Redding, U. S. Atty., of Savannah, Ga.
By appropriate stipulation between counsel for the parties, this case is for determination as to the facts as well as the law by the court alone.
There are only two questions for answer in the case: (1) Was the plaintiff taxable for the year 1917 under section 209 of the Revenue Act of 1917 or under section 201 (Comp. St. §§ 6336 3/8j, 6336 3/8b)? and (2) Was the plaintiff in the years 1918, 1919, 1920, and 1921 taxable as a personal service corporation?
The plaintiff was a corporation during all the years in question, with a capital stock of $75,000, styled during 1917 and 1918 as Alexander, Goodwin & Garrett. Such corporation was the result of the consolidation of the business previously conducted by Alexander & Goodwin and the business previously conducted by Henry B. Garrett. The good will of Alexander & Goodwin was valued at $63,000 and that of Henry B. Garrett at $12,000. Garrett bought from Alexander & Goodwin sufficient stock to make the holdings of the three equal. No payment of money or property was made to the corporation for the issuance of its stock other than the said good wills. Upon the death of Goodwin in 1919, his stock holdings were acquired by Alexander and Garrett and the corporate name was changed to Alexander & Garrett. During all the years under consideration, the stockholders devoted their entire time exclusively to the operation of its business, and. according to the uncontradicted testimony of the stockholders, more than 90 per cent. of the earnings of the corporation were directly attributable to the work of such stockholders. The business of the corporation was soliciting and writing fire insurance, renting real estate as agent of its owners, selling real estate, negotiating loans between borrowers and lenders, and a small amount of such work as inspection. The employees of the corporation, other than the stockholders, were a treasurer, bookkeeper, clerk, a man in charge of repairs and rentals, a man in charge of fire insurance, looking after the details of the office, an appraiser of real estate, and three stenographers.
At the beginning of 1917 the corporation had a surplus of $4,185.26, of which $1,027.24 was invested in furniture and fixtures and $400 in automobiles, leaving a net amount otherwise available of $2,758.02. The following statement shows the earnings, dividends, and remaining surplus for each of the years in question:
January 1, 1917 ......................... $ 4,185.26
Earnings for 1917 ....................... 7,247.57
__________
December 31, 1917 ....................... $11,432.83
Dividends paid out ...................... 7,500.00
__________
Surplus ............................ $ 3,932.83
Earnings 1918 ................. $9,262.38
Less profit and loss account .. 28.36
_________
$9,234.02 9,234.02
__________
December 31, 1918 ....................... $13,166.85
Dividends paid out ...................... 7,500.00
__________
Surplus ............................ $ 5,666.85
Earnings 1919 ........................... 15,863.74
__________
December 31, 1919 ....................... $21,530.59
Dividends paid out....................... 15,000.00
__________
Surplus ............................. $ 6,530.59
Earnings 1920 ............................ 15,264.55
__________
December 31, 1920 ........................ $21,795.14
Dividends paid out ....................... 15,000.00
__________
Surplus ............................. $ 6,795.14
Earnings 1921 ............................ 2,977.01
__________
Surplus ............................. $ 9,772.15
The gross earnings during the several years were: 1917, $43,059.21; 1918, $48,155.03; 1919, $65,032.99; 1920, $87,641.50; 1921, $63,308.98.
The earnings on commissions on insurance and rents ranged from fifty-two and a fraction to sixty-seven and a fraction per cent. of the gross earnings per annum. In addition to such commissions it also received commissions on negotiating loans, on the sale of real estate, inspection fees, interest, and discount and miscellaneous earnings. Just what constituted the sources of the miscellaneous earnings is not made apparent. Miscellaneous earnings for the years in question were: 1917, $1,020.71; 1918, $1,283.46; 1919, $746.87; 1920, $1,224.50; 1921, $5,225.79.
At all times there were substantial sums of money held by the corporation representing rents collected and not remitted to owners. Settlement with insurance companies was required to be made within 60 or 90 days, and insurance premiums paid were on hand until the necessary date for remission to the companies. From time to time, especially in December of each year, advances were made to customers for the payment of taxes and for other purposes. Money for this purpose was mostly supplied by that collected and not remitted as stated above. At times it was necessary to borrow from the bank. During all of the period substantial sums were advanced to the stockholders, and each year such advances to the stockholders were very largely in excess of the surplus for each year, except for the year 1921, when the advances to the stockholders aggregated $11,896.73 and the surplus was $9,772.15. On the books there is included in bills payable an item of $14,000, which, as explained, was not technically properly there, as it represented a loan of money belonging to Mrs. Annie G. Taylor; the title being taken in the name of the corporation for convenience, she being absent from the country. Disregarding this item, the amounts owing each year by the stockholders for advances were in excess of bills payable, except for the year 1921. The excess in 1921 of bills payable over the amounts owing by stockholders is explained by the purchase of stocks in other corporations in that year. In 1919 a stable was bought in Augusta which netted from its rental about $500 per annum. In 1920 the corporation leased an office building in Athens, known as the Holman building, which resulted in a substantial loss. A large part of the earnings were distributed to the stockholders each year by the declaration of dividends as shown above.
"* * * In the case of a trade or business having no invested capital or not more than a nominal capital." Act approved Oct. 3, 1917, 40 Stats. 306; Comp. Stat. § 6336 3/8j.
The sole question therefore is, Did this corporation have any "invested capital" or "more than a nominal capital"?
The act of 1917 carries, in section 207 (Comp. St. § 6336 3/8h),...
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Miller v. Comm'r of Internal Revenue
...Edward P. Allison Co. v. Commissioner, 63 F.2d 553, 558 (C.A. 8, 1933), affirming 22 B.T.A. 1371 (1931); Alexander & Garret v. United States, 21 F.2d 547, 549 (S.D. Ga. 1927); Fred J. Sperapani, supra, and cases cited at 334. We think petitioner's income from the real estate brokerage busin......