Advance Machinery Exch. v. Commissioner of Int. Rev.

• Decision Date: 12 May 1952
• Docket Number: No. 83,Docket 21447.,83
• Citation: 196 F.2d 1006
• Parties: ADVANCE MACHINERY EXCHANGE, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

196 F.2d 1006 (1952)

ADVANCE MACHINERY EXCHANGE, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 83, Docket 21447.

United States Court of Appeals Second Circuit.

Argued April 8, 1952.

Decided May 12, 1952.

J. H. Landman, New York City, Frank T. Kleiger and James A. Ronayne, New York City, of counsel, for petitioner.

Ellis N. Slack, Acting Asst. Atty. Gen., Helen Goodner and Richard D. Harrison, Sp. Asst. to Atty. Gen., for respondent.

Before CHASE, BIGGS and CLARK, Circuit Judges.

CHASE, Circuit Judge.

The Tax Court affirmed a deficiency assessment in the declared value excess profits taxes and excess profits taxes of the petitioner for the year 1942 on the ground that amounts of income reported by other taxpayers were properly allocable to the petitioner under §§ 45 and 22(a), I.R.C., 26 U.S.C.A. §§ 45 and 22(a). The Tax Court also affirmed the exclusion of certain amounts from the computation of the petitioner's equity invested capital which was a credit in determining the excess profits tax due and from both of these determinations the petitioner has appealed.¹

Whether the Tax Court was correct in allocating income to the petitioner under § 45, I.R.C. is essentially one of fact and the decision below must be affirmed if supported by substantial evidence. Section 1141 (a), I.R.C. as amended, 26 U.S.C.A. § 1141 (a). Section 45 provides:

"In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income * * * between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses."

The Tax Court found that the petitioner was organized in 1928 by one Joseph Blachman to deal in used machinery. Subsequently, the Blachman Machinery Company, Inc. and the Awon Holding Corporation were formed, and, in 1939, Joseph Blachman proceeded to engage in this business individually. Joseph Blachman and his son, Seymour Blachman, were officers and directors of all of these corporations, did most of the buying and selling for each of the business enterprises, and they or their immediate families owned all of the stock in them. Each of the enterprises was conducted from the same office with the same employees, using the same equipment, and to a large extent supplying the same customers. The petitioner, however, carried on by far the largest part of this business. There was evidence that large numbers of purchase invoices had been altered to attribute them to one or another of these taxpayers and that these changes were made without any set policy to indicate that there was any motive in doing so other than to divert income from the petitioner. Typical of this shifting of income under the arrangement used was the fact that, in the last half of 1942, when Blachman Machinery Company, Inc. was inactive, and listed no employees in its Social Security returns for that period, the sales invoices indicated that it made 47 separate sales. Such evidence gave the Tax Court an adequate basis on which to find that: "All four businesses were controlled by J. Blachman and Seymour Blachman, father and son. The two operated the business and kept the books and records of all four businesses in such a way that the net profit of each could be manipulated as they saw fit, and, in general, so conducted the business that it is impossible to determine where the activities of one or the other begin and end." And, in view of the extent to which this was done, to hold that "petitioner had not shown that respondent erred in attributing to it all the net income of the three other businesses, * * *".

The petitioner argues that if the formal tax entities are not to be charged with the income they each received, then, any attribution of income to another taxpayer under § 45 must be to Joseph and Seymour Blachman as individuals, and not to the petitioner, since these individuals controlled all four enterprises. However, as the Tax Court found, "The evidence is clear that petitioner served as the connecting link for the (business) conducted by these four entities and the outside customers." This conclusion is supported by substantial evidence. The petitioner's contention, therefore, indicates a misconception of the purpose served by § 45. It was not these two individuals who, in fact, earned all of the income reported by the four enterprises any more than that would be true of the income of any closely held corporation. An individual "is free to adopt such organization for his affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages." Higgins v. Smith, 308 U.S. 473, 477, 60 S.Ct. 355, 358, 84 L.Ed. 406. While § 45 permits the Commissioner to reallocate income, it does not permit him to disregard valid tax entities altogether. Here, it was determined that there were four such entities but that only one, in fact, earned the income which was divided among all four and that one was the petitioner. Consequently, it is the taxpayer to whom the income in question was properly allocated.

We need not decide whether what the Commissioner did is sustainable under § 22 (a), I.R.C. alone, cf. Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75; Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731; Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, since we think § 45 is applicable to this situation despite the petitioner's contention that what the Commissioner has done amounts to a consolidation of the income of the various entities as under § 141(d), I.R.C. in violation of Regulation 111, § 29.45-1(b).²

At first blush, this regulation would seem to support the petitioner's position but analysis shows the contrary. The effect of such an interpretation would be to exclude from the applicability of § 45 fact situations like the present one if the separate entities involved were all corporations and the Commissioner had sought to allocate all of the income from each to one of them, since this "would produce a result equivalent to a computation of consolidated net income under § 141." It may, perhaps, be...