Clay Sewer Pipe Ass'n, Inc. v. Comm'r of Internal Revenue
| Decision Date | 02 February 1943 |
| Docket Number | Docket No. 108523. |
| Citation | 1 T.C. 529 |
| Court | U.S. Tax Court |
| Parties | CLAY SEWER PIPE ASSOCIATION, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
OPINION TEXT STARTS HERE
Petitioner was organized by producers of clay sewer pipe to promote the use and sale of such pipe. In carrying out this purpose it furnished its services to the subscribers therefor, who were also its stockholders, for 24 cents per ton of clay sewer pipe sold by them respectively. Such receipts of petitioner during the taxable year exceeded its expenditures for the same period. Though petitioner made no contracts during the taxable year to pay any future specific items of expense, its president promised to spend this excess in the following years in furnishing the services for which it was organized and existed and for which it was paid in the taxable year. Upon its dissolution, petitioner's then stockholders, as such, were entitled to share in the net assets of petitioner in proportions based upon the amounts which they had paid to petitioner as subscribers for its services. Held, petitioner's sole contention, which is that the excess of receipts over expenditures for the taxable year is not includible in its ‘taxable income,‘ is denied. Robert Guinther, Esq., for the petitioner.
Lawrence R. Bloomenthal, Esq., for the respondent.
This proceeding is for a redetermination of an income tax deficiency of $5,913.41 for the calendar year 1939. The sole issue is whether petitioner is taxable upon the excess of receipts over expenditures.
Petitioner, a corporation organized under the laws of Ohio, filed its income tax return for the calendar year 1939 with the collector of internal revenue at Pittsburgh, Pennsylvania. Petitioner's books were kept and its returns prepared on the accrual method of accounting.
In 1938 H. C. Maurer, who had had considerable experience as a sales manager of a clay sewer pipe company, was asked by several men in the clay sewer pipe industry to come to a meeting which they had called in the city of Pittsburgh. Many sewer pipe manufacturers are located along the Ohio River, where there is a good source of clay.
In years prior to 1938 the clay sewer pipe industry was losing much of its market to other competitive materials, such as transite pipe, cast iron pipe, and brick, but chiefly to concrete pipe. In the latter part of 1938 volume and sales had fallen considerably, so that the manufacturers of clay sewer pipe had called this meeting at Pittsburgh to discuss ways and means of combating the situation. At this meeting Maurer was asked to prepare some sort of a program of promotion to submit to the group. At a subsequent meeting he discussed such a promotional program, as well as the method of paying for it. He suggested that the industry hire the services of a competent chief engineer and subordinate who might go out in the various states and by personal contact attempt to expand the use of clay sewer pipe. He also suggested that by advertising and the distribution of technical literature the sale of clay pipe would be promoted. He pointed out to the manufacturers that to begin such a program would entail a period of time. He stated that two or three years would be necessary to get an organization functioning adequately.
At the latter meeting Maurer submitted a tentative budget and a plan for paying for this promotional program. He had estimated that the program could be paid for by computing the amount of money each member was to pay on the tonnage sold at .4 of 1 percent, which amounts to 24 cents per ton of clay pipe. He also stated that receipts in the first year would exceed expenditures since the organization would not be functioning because of the time needed to organize. He told one of the manufacturers that the corporation could put the excess money in a special fund and hold it until they could ‘judiciously expend‘ it.
After the meeting Maurer contacted the individual manufacturers and was able to get 19 signed agreements similar to the one set forth in part below:
AGREEMENT
H. C. MAURER, of Cuyahoga Falls, Ohio, and CLAY CITY PIPE CO. of Uhrichsville, O., agree with each other as follows:
(1) Maurer will cause a company to be incorporated, to be known as Clay Sewer Pipe Association, Inc., * * *
(2) Maurer will assign all the benefits of this contract to such corporation, and will require it to agree to perform its services in behalf of and for the benefit of Clay City Pipe Co., and others. Such services shall include diligent efforts to advance Public Knowledge of the advantages of Vitrified Clay Sewer Pipe over pipe made of other materials; to collect and distribute information concerning prospective uses of sewage pipe generally; to collect and distribute information concerning the quantities of Vitrified and other Sewer Pipe used, from time to time, in construction work; to perform laboratory and research work for the purpose of demonstrating the usability and advantages of Vitrified Sewer Pipe in differing soils and locations; to prepare and publish advertising material dealing with the merits of Vitrified Sewer Pipe; and, generally, to promote the use of Vitrified Clay Sewer Pipe and Products in Public Works constructed by Cities, Counties, Villages and the like, and by all other users of Sewer Pipe.
(4) Clay City Pipe Co. shall at all times have access to the books and records of the corporation for the purpose of determining its receipts and expenditures, and the nature of the services performed; and the corporation may, at reasonable times, have access to the books and records of Clay City Pipe Co. for the purpose of determining its total sales, as aforesaid.
(5) This contract shall be effective as of Jan. 3-39, and shall continue for a period of One (1) Year, and for annual periods thereafter unless, at least Fifteen (15) days before the expiration of such annual period, either party shall notify the other, in writing, of intention not to continue.
Thereafter, articles of incorporation for the petitioner were filed under the laws of Ohio. The articles provided inter alia:
The undersigned, a majority of whom are citizens of the United States, desiring to form a corporation, for profit, under the General Corporation Act of Ohio, do hereby certify:
THIRD, The purpose or purposes for which it is formed are:
To advance Public Knowledge of the advantages of Vitrified Clay Sewer Pipe over pipe made of other materials; To collect and distribute information concerning prospect (sic) uses of sewer pipe generally; To collect and distribute information concerning the quantities of Vitrified and other Sewer Pipe used, from time to time, in construction work; To perform laboratory and research work for the purpose of demonstrating the usability and advantages of Vitrified Sewer Pipe in differing soils and locations; To prepare and publish advertising material dealing with the merits of Vitrified Sewer pipe; and, generally, to promote the use of Vitrified Clay Sewer Pipe and Products in Public Works constructed by Cities, Counties, Villages and the like, and by all other users of Sewer Pipe.
Shares of stock shall be as follows:
Such shares shall be designated as ‘Subscribers Shares.‘ No share shall be issued except to persons or firms who subscribe for and agree to pay for the services performed by the corporation and whose subscription or agreement has been accepted by the Board of Directors of the corporation. One share only shall be issued to each subscriber.
The holder of each share shall be entitled to one vote at any meeting of the shareholders, whether annual or special.
When any shareholder shall cease to be a subscriber to the services of the corporation, his rights and interests as a shareholder shall likewise cease and the certificate of stock issued to him shall thereupon be surrendered for cancellation.
Upon any liquidation or dissolution or at the time of any other distribution or surplus or of assets, each person or firm then a shareholder shall be entitled to participate in the distribution in proportion to the amount theretofore paid by said shareholder to the corporation for its services.
The material portions of the ‘Code of Regulations‘ (bylaws) adopted by the stockholder-subscribers are as follows:
Section 1.— Certificates. Certificates evidencing the ownership of the stock of the corporation shall be issued to any person or firm who subscribes for and agrees to pay for the services performed by this corporation and whose subscription or agreement has been accepted by the Board of Directors of the corporation. One share only shall be issued to each such subscriber. Each certificate * * * shall contain a recital thereon that the same is not transferable and the right and interest of the holder shall cease and be completely at an end when the holder shall cease to be a subscriber to the services performed by the corporation. It shall likewise recite thereon that when any said holder ceases to be a subscriber to the services of the corporation, he will surrender the certificate of stock for cancellation. It shall recite further thereon that the rights to participate in any distribution of surplus or assets shall be in proportion to the amount theretofore paid by the holder to the corporation for its services.
Subject to the provisions of law and the provisions of the charter of this corporation, the Board of Directors may declare dividends or make distributions from the surplus of property or money at any time possessed by the corporation and not required by it in the conduct of its business.
At any time when a distribution of surplus or of assets is made, each person then a shareholder, as shown upon the books of the corporation, shall be entitled to participate in the distribution in proportion to the amount theretofore paid by said shareholder to the corporation for its services; that...
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