Carnie-Goudie Manufacturing Co. v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 21 January 1930
• Docket Number: Docket No. 20074,27095.
• Citation: 18 BTA 893
• Parties: CARNIE-GOUDIE MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

18 B.T.A. 893 (1930)

CARNIE-GOUDIE MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.¹

Docket Nos. 20074, 27095.

Board of Tax Appeals.

Promulgated January 21, 1930.

Phil D. Morelock, Esq., for the petitioner.

L. A. Luce, Esq., for the respondent.

In these proceedings, which have been consolidated for hearing and decision, the petitioner seeks a redetermination of the additional taxes and penalties which the respondent has asserted for the years shown, as follows:

                     1921, additional tax ______________________________ $15,743.78
                     1922, additional tax ______________________________   6,259.40
                     1922, penalty _____________________________________   1,564.85
                     1923, additional tax ______________________________   1,369.03
                

For its causes of action the petitioner alleges that the respondent erred (1) in reducing its invested capital for the year 1921 by excluding therefrom the sum of $16,372.67, representing paid-in surplus; (2) in restoring to its gross income, for each of the years, amounts representing alleged business losses incurred by it in the operation of a branch store at 804 Walnut Street in Kansas City, Mo.; (3) in denying petitioner's claims of affiliation during 1922 with the Lux Fibre Co.; and (4) in imposing against it a delinquency penalty of $1,564.85 for delayed filing of its return for 1922.

FINDINGS OF FACT.

The petitioner is a Missouri corporation, with its principal office at Kansas City. It was incorporated in July, 1907, for purposes declared in its articles of association, as follows:

Seventh. The purposes for which this corporation is formed are to manufacture tents, awnings, screens, bags, flags, decorations, tent furniture, implements, canvas and leather goods, and other like or appurtenant commodities, and to deal in the same for themselves or on commission and in the materials thereof; and to that end and in connection therewith to acquire, hold, lease, and dispose of real estate, buildings and factories; to acquire, hold, use, and dispose of, patents and territorial rights therein; to borrow money upon security, and in general to do each and every thing which is requisite or necessary for carrying out the purposes and powers of this corporation.

Sometime in 1913 the petitioner entered into an agreement with the R. L. Kenyon Co., through which it obtained ready-made frames suitable for the mounting of tents manufactured and sold by it. Later, in 1915, it acquired ownership or control of some of this company's stock, in amounts not shown, and caused its treasurer, L. R. Goudie, to be elected a director and vice president of the Kenyon Co. In 1918 this company, whose name had been changed to "The Lux Fibre Company," encountered financial difficulties which threatened to force it into liquidation. In this extremity the petitioner advanced it $50,000, and at the same time acquired an option to purchase the remainder of its stock. This option was exercised later. During the years in question the ownership of its common and preferred stock was divided between the petitioner and minority stockholders, as follows:

                ---------------------------------------------------------------------------------
                                                  |                    | Carnie-Goudie |
                                                  |       Total        |    Mfg. Co.   |  Minority
                                                  | shares outstanding |    control    |  holdings
                ----------------------------------|--------------------|---------------|----------
                Preferred stock _________________ |             503.25 |        390.00 |    113.25
                Common stock ____________________ |             977.06 |        730.32 |    246.74
                                                  | __________________ | _____________ | _________
                   Total ________________________ |     11,480.31 |      1,120.32 |    359.99
                   Ratio to total ___ per cent __ |             100.00 |         75.68 |     24.32
                ----------------------------------------------------------------------------------
                

In the latter part of 1920 the petitioner found itself possessed of a large surplus stock of secondhand army goods not readily salable at its regular place of business on Grand Avenue in Kansas City. To relieve this situation it opened branch sales rooms in its warehouse at Fifth and Highland Avenues, and removed some of its surplus stock there. It also leased premises at 804 Walnut Street, on which was located a three-story brick building suitable for merchandising purposes, which it remodeled and stocked with goods, taken in part from its main store and in part purchased in the market. This lease was for a term of five years beginning January 1, 1921, and provided for an annual rental of $9,600 to be paid by petitioner in monthly installments, with renewal privileges. This lease was executed by the petitioner in due corporate form, on November 24, 1920, and although the rentals provided for did not begin to run until January 1, following, it included a proviso which allowed the petitioner to take immediate possession of the premises. Immediately following the execution of the lease, the petitioner announced its plans with respect to the character of the mercantile business to be carried on by it there, in a full-page advertisement which it caused to be inserted in the Kansas City Star on November 26, 1920. This advertisement carried a photographic cut of the building, showing location, etc., and of numerous articles of army goods, blankets, shoes and children's toys. At the top of this page was superimposed the following announcement:

GREATEST MONEY SAVING SALE IN HISTORY OF KANSAS CITY!

America's Greatest Merchants Are Forced To Turn Immense Stocks Of Brand New Shoes, Toys, Etc., Into Quick Cash!

They investigated scores of concerns throughout the country to determine the best possible connection. These progressive merchants decided only one could handle such an enormous sale. Other merchants would not handle because the low prices would demoralize their regular stocks, bought at high prices. The Carnie-Goudie Co. was selected because of reputation, financial responsibility, square business methods, location and ability to dispose of merchandise in any quantity in their wholesale and retail business. Never before in the history of Kansas City has there been such a remarkable offer on dependable merchandise at such money-saving prices. See the goods! Note our prices! Nobody will even attempt to dispute our claims. Money Back Guarantee on each and every item offered for sale.

(Signed) CARNIE-GOUDIE CO.

The store was opened for business about December 1, 1920, and was placed in the charge of one Howell, whose prior connections are not shown. L. R. Goudie, treasurer of the petitioner, however, edited the advertisement hereinabove noted and from time to time assisted at the new store and partly directed its affairs. C. R. Goudie also at odd times gave some personal attention to the store on Walnut Street, and at times, during rush hours, help from petitioner's store at 22nd and Grand Avenues was called in to assist in taking care of the trade. Soon after opening the store on Walnut Street the officials of the petitioner decided that the new and diversified class of merchandise it was obliged to carry and the trade methods it was forced to adopt to make this store a success involved such a drastic departure from its established policy that a continuance thereof, under the firm name, might be injurious to its established trade. They, therefore, decided to abandon the use of the corporation's name and to operate the branch store as a partnership composed of L. R. Goudie, C. R. Goudie, and G. W. Goudie. Accordingly, on December 3, 1921, the petitioner inserted in the Kansas City Star a full-page advertisement similar in form and import to the one hereinbefore noted, except that the firm name "Goudie Brothers" appeared as owners thereof in lieu of that of the petitioner. Books of account were separately kept at this store of the business transacted there, under the name of "Goudie Brothers," as well as bank accounts in various banks in Kansas City. The operations at this store for the month of December, 1920, resulted in a net profit of $2,174.35, which was divided equally among the three Goudie brothers and entered to their credit on the general ledger of the putative partnership.

In March, 1921, a partnership income-tax return was filed with the collector of internal revenue at Kansas City, Mo., for Goudie Brothers, in which the net income for 1920 and distribution as above noted were reported. This return was signed and sworn to by L. R. Goudie, petitioner's treasurer, as one of the copartners in such firm.

An insurance policy was taken out by the petitioner, covering the stock of goods in the store at 804 Walnut Street, and insuring the same against loss from burglary. Upon the renewal of this policy, on November 26, 1921, the name of the "insured" was changed by petitioner's broker from Carnie-Goudie Manufacturing Co. to "Goudie Brothers (Geo. A., and Chas. R., and LeRoy Goudie)," in which name it was thereafter continued to and including the year 1923. In December, 1922, this store was broken into and a quantity of goods stolen therefrom. In a suit, brought by "Goudie Brothers" against the insurance company for the recovery for this loss, in the Circuit Court of Jackson County, Mo., the plaintiffs in their petition described their firm as: "George A. Goudie, Charles R. Goudie and LeRoy Goudie, doing business as Goudie Brothers, a copartnership," and, as such, recovered a judgment in the sum of $5,292.89, which was thereafter affirmed.

For the year 1921 the operations of Goudie Bros. resulted...