APPEAL OF GEORGIA CAR & LOCOMOTIVE CO., Docket No. 3131.

• Decision Date: 26 October 1925
• Docket Number: Docket No. 3131.
• Citation: 2 BTA 986
• Parties: APPEAL OF GEORGIA CAR & LOCOMOTIVE CO.
• Court: U.S. Board of Tax Appeals

2 B.T.A. 986 (1925)

APPEAL OF GEORGIA CAR & LOCOMOTIVE CO.

Docket No. 3131.

Board of Tax Appeals.

Submitted July 2, 1925.

Decided October 26, 1925.

Edward McCarthy, Jr., Esq., for the taxpayer.

P. S. Crewe, Esq., for the Commissioner.

Before JAMES, LITTLETON, SMITH, and TRUSSELL.

This is an appeal from the determination of a deficiency in the amount of $45,611.36 for the calendar year 1918, arising from the refusal of the Commissioner to permit the taxpayer and the Greene County Railroad Co. to file a consolidated return; from the disallowance of $4,301.51, the cost of a new roof placed upon the erecting shed of the taxpayer, as an ordinary and necessary expense; and from the reduction of invested capital in the amount of $18,730.96, on account of dividends alleged to have been paid in excess of available earnings.

FINDINGS OF FACT.

The taxpayer is a Georgia corporation, engaged in the business of building, rebuilding, and repairing railroad freight and passenger cars, with principal offices in Atlanta. At all times since incorporation the majority of its capital stock has been owned by Forest Greene.

The Greene County Railroad Co. was incorporated under the laws of Georgia in 1911, and at all times since incorporation at least 97.5 per cent of its capital stock has been owned by Forest Greene. This company has 20 miles of main line, with terminals, station buildings, and water tanks, but no shops or roundhouses. It was dependent upon the taxpayer for repairs, which were made at prices considerably less than the prices charged to other customers.

The railroad was originally built by Forest Greene for the purpose of placing cars of the Georgia Car & Locomotive Co. into regular per diem service under the name of the Greene County Railroad Co., but, due to a change in the Master Car Builders' rules before the road was completed, this plan was never carried out. Forest Greene, as principal officer of both corporations, interchanged employees of the two companies from time to time in such manner as seemed to him to be best. When a salaried employee of one company was assigned to work for the other company, no charge was made for such service. The offices of the Greene County Railroad were in the building of the taxpayer, no rent being charged by the latter, and the clerical force of the taxpayer performed the office work of the railroad company.

During the taxable year the stockholdings in the two corporations were as follows:

                ----------------------------------------------------------------------------------------------------
                                                                                           |  Georgia   |
                                                                                           |   Car &    |   Greene
                                               Stockholder.                                | Locomotive |   County
                                                                                           |    Co.     |  R. R. Co
                ---------------------------------------------------------------------------|------------|-----------
                Forest Greene, president both corporations _______________________________ |       75.3 |       97.5
                Forest Greene, executor of Hubert Greene, his brother ____________________ |        7.5 |         .5
                John C. Knapp ____________________________________________________________ |        4.3 |        1.0
                Walter Turner, employee of Georgia Car & Locomotive Co ___________________ |        4.3 | __________
                C. G. Harris, employee of Georgia Car & Locomotive Co ____________________ |        8.6 | __________
                W. H. Patterson __________________________________________________________ | __________ |        1.0
                                                                                           |____________|___________
                                                                                           |      100.0 |      100.0
                ----------------------------------------------------------------------------------------------------
                

The 7.5 per cent of Georgia Car & Locomotive Co. stock standing in the name of Hubert Greene was held by Forest Greene as executor under the will of Hubert Greene, his brother, who died in 1915. At or about the time this stock was acquired by Hubert Greene, Forest Greene was endeavoring to acquire control of the stock of the two corporations, but did not have sufficient money immediately available to pay for the stock. Hubert Greene was in a position to assist his brother in carrying out his desire and purchased the stock with the understanding that Forest Greene would later take over the stock at cost, should his brother so desire. In the meantime Hubert Greene died and, as the stock was paying dividends, Forest Greene continued to hold it as executor in order that the dividends might be applied in payment of the decedent's indebtedness. The beneficiaries of the estate were his wife and children. The widow informed Forest Greene that it was her desire that he should handle the estate as he thought best, and none of the beneficiaries gave Forest Greene any instructions as to what disposition should be made of any property belonging to it. This stock was voted by Forest Greene during the taxable year 1918.

John C. Knapp, who during the taxable year owned 4.3 per cent of the stock of the taxpayer, had been connected with the company since 1907, until the middle of 1917. In 1914, Forest Greene sent Knapp to Monroe, Ga., to manage the Greene County Railroad, Knapp at the same time retaining his official connection with the taxpayer. In 1917, the taxpayer's business began to improve. The outlook, however, was uncertain and, after consulting Greene, Knapp was granted an indefinite leave of absence from his position with the taxpayer and the Greene County Railroad in order that he might accept employment at a larger salary in the City of Birmingham, Ala., with the understanding that when conditions improved Greene would call...