CHICAGO STOCK YARDS COMPANY v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 20 March 1940 |
| Docket Number | Docket No. 83797. |
| Citation | 41 BTA 590 |
| Parties | CHICAGO STOCK YARDS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Joseph N. Welch, Esq., Edward J. Keelan, Jr., Esq., Lawrence E. Green, Esq., Joseph K. Moyer, Esq., and Francis B. Keeney, Esq., for the petitioner.
Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent.
The respondent has determined deficiencies of $1,817,686.10, $1,301,638.97, and $1,147,111.92 in petitioner's income taxes for the years 1930, 1932, and 1933, respectively. All issues have been settled by stipulation except one arising from respondent's determination that petitioner is subject to tax under section 104 of the Revenue Acts of 1928 and 1932.
FINDINGS OF FACT.
1. The petitioner is a corporation, organized under Maine law on September 26, 1911, in pursuance of a plan dated June 30, 1911, in the form of an agreement between a committee acting on behalf of the petitioner, if and when formed, and the holders of the common stock of the Chicago Junction Railways & Union Stock Yards Co. (hereinafter called the Jersey Co.). The powers of the petitioner, as stated in its charter, include the carrying on of many kinds of active business, including the purchase and lease of real estate, the holding of stocks and bonds of other corporations, the guaranteeing of obligations of others, and the carrying on of any other business which might seem to the company convenient to enhance the value of its properties.
2. The Union Stock Yards & Transit Co. of Chicago (hereinafter called the Transit Co.) is a corporation, organized under special act of the Illinois Legislature on February 13, 1865. From 1911 through 1933 it had issued and outstanding 132,000 shares of common stock of a par value of $100 per share. Under its charter it has power to operate stockyards and a belt line railroad and to borrow money to an amount not in excess of $500,000. It has continued to operate the stockyards to the present date. On January 1, 1930, it had outstanding debenture notes in the amount of $500,000, which were paid off in that year, and it did not have any outstanding bond or note obligations thereafter. During the years 1911-1913 more than 98 percent of the capital stock of the Transit Co. was owned by the Jersey Co., and since December 31, 1913, the Transit Co. has been wholly owned by the Jersey Co.
3. The Jersey Co. is a corporation, organized under New Jersey law on July 10, 1890, for a period of 50 years. It was formed at a time when the meat packers having plants in Chicago west of the stockyards, known as Packingtown, had instituted suits to compel the railroads to switch their freight without charge and to have the stockyards declared a nuisance, and had threatened to move to Indiana, where they had purchased and developed a tract of land at a cost of about $1,000,000. At all times the authorized and issued capital stock of the Jersey Co. has consisted of 65,000 shares of preferred stock of $100 par value and 65,000 shares of common stock of $100 par value, a share of each class being entitled to one vote. On July 10, 1890, the Jersey Co. issued $10,000,000 5 percent collateral trust gold bonds due July 1, 1915, and on July 15, 1892, it entered into an agreement with certain packers whereby the Jersey Co. agreed to and did pay $3,000,000 in 5 percent bonds due July 1, 1907, and the packers agreed to and did continue to keep their businesses in Packingtown for 15 years from July 1, 1891. Similar arrangements with other packers were also made in the years 1892-1901, for periods of from 5 to 20 years, the Jersey Co. paying in all $4,665,000 in cash and bonds and other property to the packers. In 1900 the issuance of $14,000,000 new 40-year 4 percent bonds was authorized, $4,000,000 of which were issued. In 1915 the remaining $10,000,000 were issued to retire the $10,000,000 5 percent bonds which matured in that year. Owing to the high rates of interest at which money was loaning at the time, the new issue carried an interest rate of 5 percent.
4. The Chicago Junction Railway Co. (hereinafter called the Railway Co.) is a corporation, organized under Illinois law on April 26, 1898, as a consolidation of two corporations which were wholly owned by the Jersey Co. One of these was the Chicago Hammond & Western Railroad Co., which owned a belt line railroad (known as the "Outer Belt") in Chicago and its vicinity. The other was the Chicago & Indiana State Line Railway Co., which operated another belt line railroad (known as the "Inner Belt") in the same vicinity, directly serving the Chicago stockyards under lease from the Transit Co. dated December 15, 1897. The Railway Co. had an authorized and issued capital stock of $2,200,000, divided into 22,000 shares of $100 par value, until 1913, when 33,000 additional shares were issued as a stock dividend to the Jersey Co. The Railway Co. has been at all times wholly owned by the Jersey Co. During the years 1930-1933 the Railway Co. had no outstanding indebtedness. The "Outer Belt" line was sold in 1907.
On December 1, 1913, the Transit Co. leased its "Inner Belt" line to the Railway Co. at an annual rental of $600,000, and on May 19, 1922, the Transit Co. and the Railway Co. entered into a lease under which the "Inner Belt" line was leased by them to the Chicago River & Indiana Railroad Co., wholly owned by the New York Central Railroad Co., for 99 years at a rental, guaranteed by the New York Central, of $1,500,000 for the first year and $2,000,000 for each year thereafter, the lessee to pay all maintenance charges and taxes. On May 16, 1922, the Interstate Commerce Commission authorized the lease, subject to the conditions, among others, that nothing should be construed as a finding that the rental was just and reasonable and that any person having an interest in the subject matter might at any future time make application for such modification of the conditions as might be required in the public interest. Jurisdiction was retained to reopen the proceeding on the Commission's own motion for the same purpose. The application of the New York Central for authority to buy the Railway Co. properties under an option given with the lease was denied, without prejudice to future proceedings.
5. The Chicago Junction Railroad Co. (hereinafter called the Elevated Co.) is a corporation, organized under Illinois law on November 20, 1902, for the purpose of providing elevated passenger service through Packingtown. It was created after the city of Chicago had passed an ordinance requiring that all the railroad tracks in Chicago be elevated and after the Transit Co. had elevated its freight tracks. On September 30, 1903, the Elevated Co. leased its properties to the South Side Elevated Railroad Co., which connected with lines running all through Chicago, and on March 1, 1905, the Elevated Co. issued $2,327,000 first mortgage 4 percent 40-year gold bonds, due March 1, 1945, and guaranteed by the Jersey Co. The rental was the payment of taxes and interest on the Elevated Co. bonds. During the years 1930-1933 the Elevated Co. had outstanding capital stock of $50,000, which has been at all times wholly owned by the Jersey Co.
6. The Stock Yards Harness & Saddlery Co. (hereinafter called the Harness & Saddlery Co.) is a corporation, organized in Illinois in 1903. It is a small company and has continually been wholly owned by the Transit Co.
7. Central Manufacturing District (hereinafter called the District) is a real estate trust with transferable shares, created by the transfer to trustees on May 2, 1902, of real estate northwest of and adjacent to the stockyards, the Jersey Co. being the sole beneficiary. This real estate and another tract later acquired were vacant land which was acquired and used for development into a manufacturing district to provide additional tonnage for the "Inner Belt" line. The District has its own streets and police, water, lighting, and sewerage facilities. The District constructs buildings for lessees, the petitioner assisting in financing if the District does not have sufficient funds. The District had outstanding bonds of $2,915,000 in 1930, $2,700,000 in 1931, $2,475,000 in 1932, and $2,250,000 in 1933. These bonds were guaranteed by the Jersey Co.
8. The Produce Terminal Corporation (hereinafter called Produce Terminal) is a corporation which was organized under Illinois law on March 4, 1915, pursuant to an order of the Illinois Commerce Commission to carry on the business of supplying electric light and power to the Chicago stockyards, this having been formerly done by the Transit Co. During the years 1930-1933 Produce Terminal's capital stock was $2,000,000, consisting of 20,000 shares, of which 7,170 shares were issued in 1927 as a stock dividend to petitioner. Produce Terminal was wholly owned by the Transit Co. from the date of its formation until 1921, when all its shares were distributed by the Transit Co. to the Jersey Co. as a dividend. On December 31, 1926, the Jersey Co. distributed those shares to the petitioner as a dividend and Produce Terminal has since been wholly owned by the petitioner. Although this stock was entered on the petitioner's books at a value of $499,091.29, its value when distributed was actually $1,032,431.95.
9. When the Jersey Co.'s 1892 contracts with the packers came to an end in 1907 the packers asked for a further share in the profits of the stockyards, and after efforts of F. H. Prince, a stockholder of the Jersey Co., Armour,1 one of the packers, became a shareholder of the petitioner, the packers then continuing to do business at the stockyards.
10. Under the plan for the formation of the petitioner dated June 30, 1911, the common stockholders of the Jersey Co. were offered the guaranty of the petitioner, by way of stamp on their stock certificates, of $9 annual dividends or the privilege of exchanging their...
To continue reading
Request your trial