Coca-Cola Bottling Co. of Sacramento v. Comm'r of Internal Revenue

• Decision Date: 31 July 1951
• Docket Number: 25082,Docket Nos. 19828,25083.
• Citation: 17 T.C. 101
• Parties: COCA-COLA BOTTLING COMPANY OF SACRAMENTO, LTD., PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 101

COCA-COLA BOTTLING COMPANY OF SACRAMENTO, LTD., PETITIONER, ET AL.,1

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 19828

25082

25083.

Tax Court of the United States.

Promulgated July 31, 1951.

1. INCOME— SEPARATE ENTITIES— CORPORATION AND PARTNERSHIP— SECTION 22(a).— Sacramento Corporation (Coca-Cola Bottling Company of Sacramento, Ltd.), which had a sole and exclusive license to bottle and vend Coca-Cola in the Sacramento, California area, granted to a partnership formed by its two principal stockholders, N. M. Sellers and Gladys Sellers, a sublicense to bottle and vend Coca-Cola in all of its territory for a period of 5 years. The corporation also sold to the partnership at book value all of its operating equipment and all of its inventories of materials and supplied used in the Coca-Cola bottling business in exchange for two promissory notes executed by the partnership. Held, that a new partnership was a separate entity from the corporation and that the net income and capital gain of the new partnership for the years 1944, 1945, and 1946 are not includible in the income of the taxpayer corporation.

2. PERSONAL HOLDING COMPANY— INCOME FROM ROYALTIES— EXCESS PROFITS TAX.—By the terms of the sublicense agreement with its parent bottler, Sacramento Corporation agreed to purchase from the parent bottler all the Coca-Cola syrup which it used at a basic rate of $1.30 per gallon. By the terms of a sub-bottling agreement with a partnership, the partnership agreed to purchase from the corporation the Coca-Cola syrup it used at a basic rate of $1.50 per gallon. The syrup was shipped directly to the partnership which transmitted $1.50 per gallon to Sacramento Corporation. The corporation retained 20 cents per gallon and transmitted the remainder to the parent bottler. Held, that the 20 cents per gallon retained by Sacramento Corporation constituted royalties which it received for the exclusive license which it had granted to the partnership, and held, further, that the petitioner, Sacramento Corporation, was a personal holding company and, therefore, was not entitled to any unused excess profits carry-back.

3. FAMILY PARTNERSHIP— CHILDREN OF PETITIONERS NOT RECOGNIZED AS MEMBERS OF PARTNERSHIP.— Upon consideration of all of the facts and circumstances present in these proceedings, held, the petitioners, N. M. Sellers and Gladys Sellers, did not in good faith and acting with a business purpose intend to joint together with their two children in the present conduct of the partnership during 1944 and 1945. W. T. Fitzgerald, Esq., and C. E. Musto, Esq., for the petitioners.

W. J. McFarland, Esq., for the respondent.

The Commissioner has determined deficiencies in taxes as follows:

+----+
                ¦¦¦¦¦¦
                +----+
                

                                                          Declared
                                                                Income    value      Excess
                Petitioner                             Year     tax       excess-    profits
                                                       ended
                                                                          profits
                Coca-Cola Bottling Co. of Sacramento,  ( 2/29/  $327.87   0          $13,194.41
                Ltd., Docket                           44
                No. 19828                              ( 2/28/  18,755.20 $7,467.88  36,187.77
                                                       45
                                                       ( 2/28/  19,662.50 5,521.68   12,204.94
                                                       46
                N. M. Sellers, Docket No. 25082        ( 12/31/ 17,497.67 ---------- ----------
                                                       44
                                                       ( 12/31/ 12,047.89 ---------- ----------
                                                       45
                Gladys Sellers, Docket No. 25083       ( 12/31/ 17,497.67 ---------- ----------
                                                       44
                                                       ( 12/31/ 12,047.89 ---------- ----------
                                                       45
                

In Docket No. 19828, Coca-Cola Bottling Company of Sacramento, Ltd., petitioner, referred to hereinafter as the Sacramento Corporation, the respondent determined that an alleged partnership, created in 1944 to bottle and vend Coca-Cola, was ‘lacking in substance or business purpose‘ and that the entire income of the partnership for 1944, 1945, and 1946 and all of its capital gains for 1945 and 1946 were taxable to the Sacramento Corporation. The primary question in Docket No. 19828 is whether the petitioner corporation is taxable in 1944, 1945, and 1946 on the net income and capital gains of a partnership and that question turns on whether any partnership carried on a business separate and apart from the Sacramento Corporation. The primary question in Docket No. 19828 is whether the petitioner corporation is taxable in 1944, 1945, and 1946 on the net income and capital gains of a partnership and that question turns on whether an partnership carried on a business separate and apart from the Sacramento Corporation.

In Docket No. 19828, an alternative question arises if the respondent's determination that a partnership cannot be recognized for tax purposes is rejected. The second question is raised by an allegation in the petition that for the taxable year ended February 29, 1944, the respondent erred in determining that the Sacramento Corporation was not entitled to an unused excess profits credit carry-back from the taxable year ended February 28, 1946, in the amount of $53,023.09, and in refusing the Sacramento Corporation's claim for refund of $17,359.52 excess profits taxes for the year ended February 29, 1944, based upon the unused excess profits credit. The respondent makes an alternative contention that the Sacramento Corporation was a personal holding company, not subject to the excess profits tax, and, therefore, not entitled to any excess profits credit.

In Docket Nos. 25082 and 25083, N. M. Sellers and Gladys Sellers, petitioners, the primary question is whether their son and daughter were members of the partnership which is involved in the main issue in Docket No. 19828 during the years 1944 and 1945. If it is decided that the partnership conducted a business of its own separate and apart from any business of the Sacramento Corporation, the respondent, in the alternative, takes the position that only N. M. and Gladys Sellers were members of the partnership, and that their son and daughter were not members of the partnership in 1944 and 1945. There is another question presented which is reached only if it is held in Docket No. 19828 that a partnership cannot be recognized for tax purposes to any extent whatsoever, regardless of any question relating to the composition of or membership in an alleged partnership, namely whether the two chief stockholders of the Sacramento Corporation, N. M. and Gladys Sellers, received dividends of the corporation constructively during 1944 and 1945.

The petitioners filed their returns for the taxable years in question with the collector for the first district of California.

The record in these proceedings comprises oral testimony, a stipulation of facts, and various exhibits.

FINDINGS OF FACT.

The facts which have been stipulated are found as stipulated.

Issue 1. N. M. Sellers and Gladys Sellers were married in 1919. They have two children, Jack born in 1920, and Virginia born in 1924. Shortly, after their marriage, together they had about $5,000, part of which belonged to Gladys Sellers. They used $3,500 of their $5,000 for a down payment on the purchase of a one-sixth interest in a Coca-Cola bottling company in South Bend, Indiana. The total price to be paid for the one-sixth interest was $5,000; and a note, which was subsequently paid, was given for the remaining $1,500. N. M. Sellers was hired as the general manager of the bottling plant. In 1927 the Sellers sold their interest in the bottling plant for approximately $18,000.

After they sold their interest in the South Bend plant, the Sellers went to California, where they purchased all the assets of a Coca-Cola bottling and vending business in Sacramento for $19,500. In order to have working capital to operate the bottling works, the Sellers borrowed $11,000 from Gladys' brother-in-law. They operated this business as equal partners until 1930, when the Coca-Cola Bottling Company of Sacramento, Ltd., hereinafter referred to as the Sacramento Corporation, was incorporated under the laws of California to take over the business. The original capital structure of the corporation consisted of 278 1/2 shares of common stock, each having a par value of $100. Ten of these shares were issued to the Pacific Coast Coca-Cola Bottling Company, hereinafter referred to as Pacific Coast, in payment of a $1,000 debt; 110 shares were issued to Mrs. Sellers' brother-in-law in payment of the $11,000 which had been borrowed from him in 1927, and the remaining 158 1/2 shares were issued in the name of N. M. Sellers.

On December 1, 1936, N. M. and Gladys Sellers jointly executed an agreement by which they converted the 158 1/2 shares of Sacramento Corporation's stock then standing in the name of N. M. Sellers into community property. On December 30, 1942, N. M. and Gladys Sellers entered into an agreement whereby each was given an undivided one-half interest in all the property as the sole and separate property of each. In accordance with this agreement, the 158 1/2 shares which had been issued in the name of N. M. Sellers were reissued in equal parts to N. M. and Gladys Sellers.

The business of bottling and vending Coca-Cola is controlled throughout the United States by two companies, the Coca-Cola Company of Atlanta, Georgia, and Coca-Cola Bottling Company (Thomas), Inc., of Chattanooga, Tennessee, hereinafter referred to as Thomas. The right to bottle and vend Coca-Cola in the United States has been granted to six companies, including Thomas, which are known as ‘parent bottlers.‘ Pacific Coast is the parent bottler for most of the west coast...