Commonwealth v. Southeastern Iron Corp.*

• Decision Date: 11 June 1925
• Citation: 128 S.E. 528
• Parties: COMMONWEALTH et al. v. SOUTHEASTERN IRON CORPORATION.*
• Court: Virginia Supreme Court

128 S.E. 528

COMMONWEALTH et al.

v.SOUTHEASTERN IRON CORPORATION.^*

Supreme Court of Appeals of Virginia.

June 11, 1925.

[Ed. Note.—For other definitions, see Words and Phrases, First and Second Series, Partnership.]

[Ed. Note.—For other definitions, see Words and Phrases, First and Second Series, Trustee.]

Error to Circuit Court, Rockbridge County.

Petition by the Southeastern Iron Corporation, to be relieved from certain assessments for taxation upon its capital, opposed by the Commonwealth of Virginia and the County of Rockbridge. From an order granting relief, opponents bring error. Affirmed.

E. Warren Wall, of Richmond, A. Willis Robertson, of Lexington, and Herbert M. Gould, of West Palm Beach, Fla., for plaintiffs in error.

Munford, Hunton, Williams & Anderson, and Wirt P. Marks, Jr., all of Richmond, for defendant in error.

PRENTIS, P. The commonwealth and the county of Rockbridge are here seeking the reversal of an order entered upon the petition of the Southeastern Iron Corporation, relieving it from certain assessments for taxation upon its capital, which it is alleged was illegally omitted for the years 1919 and 1920.

The essential facts may be thus stated: Southeastern Iron Corporation, hereinafter called Southeastern, was incorporated under the laws of Virginia May 21, 1917, with its principal office in the city of Richmond. It maintained an office in the city of Chica-go, Ill., and was authorized to do business there. The Iroquois Iron Company, an Illinois corporation, hereinafter called Iroquois, for many years prior to 1918 had been operating five furnaces at South Chicago, Ill. The Miami Metals Company, an Illinois corporation, hereinafter called Miami, commenced the business of developing the production of domestic ferro-manganese ore in 1915 or 1916. During the World War this company largely acquired control of the domestic ore, and made contracts with Brazilian producers for high grade ferro-manganese ore mined there. Miami owned no furnaces, however, and in 1916 it entered into contract with Iroquois under which that corporation agreed to manufacture ferro-manganese and spiegeleisen from the ore owned and furnished by Miami. As compensation to Iroquois for manufacturing the ore, a fixed proportion of the profits which Miami derived from the operations was agreed upon, and this arrangement continued during 1916 and 1917.

Southeastern was capitalized at $500,000, of which capital stock Miami owned about 60 per cent., but none of the other 40 per cent. of the capital stock of Southeastern was owned by any of the officers or directors of Miami. The board of directors of Miami consisted of three members, while the board of Southeastern consisted of seven. None of the directors of either corporation was a director of the other. Each had a different president and secretary. At one period three directors of Miami were vice presidents of the Southeastern. Miami did not own any of the capital stock of, and was not financially interested in, Iroquois.

After its organization, Southeastern acquired from furnace property located at Goshen, Rockbridge county, Va., which included a large acreage with a blast furnace and its usual accessories. The early operations of the Southeastern proved unprofitable, but to January 1, 1918, these were conducted solely for its own account. Thereafter it operated under the contracts hereinafter referred to.

It appears that the demand for ferro-manganese was greatly increased during the World War, and the chief sources of production were the mines of Brazil, India, and Russia; little being mined in this country prior to that time. It was impossible, on account of war conditions, to procure high grade ore from India and Russia, and therefore the owners of the Brazilian mines controlled the manganese ore market in this country. As a result of this control and the large demand incident to the war, this Brazilian ore advanced about 600 per cent. over the normal prewar price, and, when it became necessary to negotiate contracts for this ore in 1918, the Brazilian producers required contracts for the entire amount need ed during the whole year at the then prevailing high price. Southeastern was therefore, in the latter part of 1917, under the necessity, either of contracting in advance with Brazilian producers for manganese ore for all of its 1918 requirements at war prices, or of changing its methods. It was anticipated that at the end of the war there would be a sudden decline in the price of this ore, so that, in view of the war conditions, and the uncertainty as to its continuation, Southeastern was unwilling to hazard its capital in a contract with the Brazilian owners for all of its 1918 requirements.

Miami at that time controlled the domestic ore and had contracts with the Brazilian producers for ore to be delivered in 1918, and Miami desired to have all of its ore, that from the domestic mines, as well as that which it would receive under its Brazilian contracts, manufactured as promptly as possible, while Southeastern and Iroquois desired to keep their respective furnaces in operation without being obliged to purchase large quantities of high grade ore at war prices. This resulted in three identical contracts, each for 6 months, between Miami and Southeastern, covering the entire period of 18 months, from January 1, 1918, to July 1, 1919.

These contracts are most carefully drawn. The one exhibited here covers 14 pages of the record, and embraces many details which in our view of the issues involved need not be specified. In substance, it was agreed by Southeastern to operate its Goshen furnace in the manufacture of spiegeleisen ferro-manganese, ferro-silicon, or pig iron, for the account of Miami, from ore, coke, and limestone to be furnished by Miami in sufficient quantities to keep South-eastern's furnace in continuous operation. This ore, coke, and limestone was to be delivered to Southeastern by Miami, and all the manufactured product so produced by Southeastern for Miami was either to be loaded from the furnace into cars for shipment, or was to be placed in stock by Southeastern for Miami on the premises of Southeastern leased to Miami for that purpose, and ultimately loaded and shipped by Southeastern for account of Miami as and when it should be directed by Miami so to do. Other sections refer to the keeping of accounts, so as to ascertain accurately the amount to be paid to Southeastern as compensation for such manufacture.

The contract also states that Miami had entered into a similar agreement with Iroquois to manufacture similar ores for account of Miami.

After providing in the most minute way for the keeping of accounts by both, in order to determine accurately the net profit accruing to Miami per ton of metals so manufactured and sold, the contract pro-vides that the compensation that Southeastern is to receive from Miami shall be one-third of the net profits received by Miami from the Southeastern operation, to be determined as provided for in the contract, together with one-third of the net profits arising from the Iroquois operation. Statements were to be furnished by Miami of the operation of the Iroquois furnace, including a statement of its net profits, and settlements were required to be made on the first day of each month.

The capital required for this operation was thus provided: Southeastern and Iroquois each loaned Miami $400,000, to bear interest at 6 per cent. per annum, and Miami was itself to provide $400,000 of capital, making a total of $1,200, 000. If any additional funds were required, Miami was to supply them. These loans were to be paid 60 days after the termination of the agreements, and were to be repaid by Miami on the final settlement, and if, from the combined operations, a loss should result, one-third of that loss was to be charged against Southeastern.

There was also a provision that if, after a final settlement, any taxes should be assessed against Miami on account of the operation, Southeastern should pay to Miami one-third thereof; by which provision we understand that if, after it had paid to Southeastern one-third of the net profits from the two operations, it subsequently appeared that there were additional items for taxes which should have been also deducted in ascertaining these profits, then Southeastern, to the extent of one-third of such taxes, would have received more than it was entitled to. It was the amount of this excess that it was required to repay to Miami by this clause. The books and papers of each party, so far as they related to the subject-matter of the contract, were to be open to the inspection and examination of the other party at all reasonable times. Settlements of differences were to be made by arbitration. Improvements or additions to the Goshen furnace during the operation, whether paid for by Miami or Southeastern, were to be the sole property of Southeastern; Miami was prohibited from selling a greater tonnage than could be produced at the furnace; and the contract was to be binding upon and inure to the benefit of the respective parties and their successors.

The manufactured products were all shipped in the name of Miami Metals Company, except 12 shipments, which were shipped in the name of Miami Metals Company by the Southeastern Iron Corporation.

Under section 8 of the Tax Bill, as amended by Act March 6, 1918 (Acts 1918, p. 171), it is provided that the assets of persons, firms and corporations employed in a trade or business, not otherwise taxed, shall be classified and taxed as capital, and defines the term "capital" as used in the act. Among other things, "capital" is defined to include, "inventory of stock on hand, which shall include all raw materials for use of the business, whether at the place of business, in storage, or elsewhere in the state."

The principal office of Southeastern being in the city of Richmond, its tax returns were required to be filed there, but section 8 of...