Consolidated Companies, Inc. v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 28 February 1929 |
| Docket Number | Docket No. 14079,14080. |
| Citation | 15 BTA 645 |
| Parties | CONSOLIDATED COMPANIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. IBERVILLE WHOLESALE GROCERY CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
G. S. Ruhl, C. P. A., for the petitioners.
F. R. Shearer, Esq., for the respondent.
These are proceedings for the redetermination of deficiencies in income and profits taxes as follows:
In the case of the Iberville Wholesale Grocery Co., Ltd., Docket No. 14080, deficiency for the six-month period ended June 30, 1918, in the amount of $15,429.06.
In the case of the Consolidated Companies, Inc., Docket No. 14079, deficiency for the six-month period ended December 31, 1918, in the amount of $5,143.19.
The proceedings were consolidated for hearing and decision.
The issues raised by the pleadings in the case of the Iberville Wholesale Grocery Co., Ltd., under Docket No. 14080, will not be referred to or considered herein, for the reason that the facts necessary to show jurisdiction in the Board have neither been alleged nor proved. The jurisdictional facts not having been established, said proceeding will be dismissed.
The issues raised by the pleadings in the case of the Consolidated Companies, Inc., under Docket No. 14079, are:
(1) Whether the respondent erred in holding that the petitioner did not come within the purview of section 327 (d) of the Revenue Act of 1918, and was, therefore, not entitled to have its profits tax computed under the provisions of section 328 of said Act, for the six-month period ended December 31, 1918; and (2) whether the respondent erred in disallowing the amount of $11,396.09 claimed by the petitioner as a deduction from income on account of the expense of operating a moving picture theater in 1918.
FINDINGS OF FACT.
The Iberville Wholesale Grocery Co., Ltd., was a corporation organized under the laws of the State of Louisiana in February, 1905, for the purpose of conducting a general wholesale grocery business, with principal office at Plaquemine.
In July, 1916, the charter of said corporation was amended to increase its authorized capital stock from $25,000 to $200,000, and to enlarge the scope of its corporate purposes and powers. The corporation operated under its amended charter from July 1, 1916, to June 30, 1918, when it ceased doing business and transferred its assets to the Consolidated Companies, Inc., a successor corporation.
In 1916, when the charter of the Iberville Wholesale Grocery Co. was amended, the transaction was treated by the corporate officers as if a new corporation had been organized. For convenience of designation, the business prior to that date was referred to as the Old Iberville Wholesale Grocery Co., and subsequent to that date as the New Iberville Wholesale Grocery Co.
On or about July 1, 1916, a meeting of the board of directors was held, and the board appointed V. J. Kurzweg as liquidator to settle and liquidate the affairs of the so-called Old Iberville Wholesale Grocery Co., and to distribute certain assets to the stockholders, including particularly the proceeds from the collection of accounts.
The meeting of the board of directors of the so-called old company was followed immediately by a meeting of the stockholders of the so-called new company, the company, however, being in each instance the same corporation. At this stockholders' meeting, a committee was appointed to fix the valuations of the stock of merchandise, equipment and buildings to be transferred from the books of the old to the books of the new company.
The so-called new company did not take over any of the accounts receivable and did not assume any of the accounts payable of the old company.
Kurzweg, acting in the capacity of a liquidator, collected the accounts receivable of the old company, paid its obligations, and distributed the balance to the stockholders. The liquidation of the retained assets of the old company has not yet been fully completed.
The original petition under Docket No. 14080 was filed in the name of the said Iberville Wholesale Grocery Co., as petitioner, on April 23, 1926, and was verified by an affidavit reading in part as follows:
Before me, the undersigned authority, personally came and appeared V. J. Kurzweg, who being duly sworn, deposes and says that he is Secretary and Treasurer of the Consolidated Companies, Inc., and was Secretary and Treasurer of the Iberville Wholesale Grocery Company which was merged into the said Consolidated Companies; * * *.
An amended petition was filed on March 1, 1927, in the name of "Iberville Wholesale Grocery Company, Ltd., Petitioner," paragraph 1 of which reads as follows: And said amended petition was verified by affidavit reading in material part as follows:
V. J. Kurzweg, being duly sworn says that he is the liquidator and was formerly Secretary and Treasurer of the Iberville Wholesale Grocery Company, Ltd., the petitioner herein; * * *.
Some time prior to October 4, 1927, and subsequent to the organization of the Consolidated Companies, Inc., the charter of the Iberville Wholesale Grocery Co., Ltd., was canceled.
The petitioner, Consolidated Companies, Inc., is a Louisiana corporation, with principal office at Plaquemine. It was organized as of July 1, 1918, and took over the business and assets of the Iberville Wholesale Grocery Co. and of the St. Mary Wholesale Grocery Co.
In 1918 a corporation was organized for the purpose of operating a moving picture theatre, known as the Liberty Theatre, at Plaquemine, La. It was operated from April until October, 1918. The members of the Wilbert family were the principal stockholders of the W. J. Hebert Co., a competitor of the Consolidated Companies, Inc., in the wholesale grocery business. Prior to the organization of the Liberty Theatre, the Wilberts owned the only theatre in Plaquemine. The stockholders of the Consolidated Companies, Inc., instigated and brought about the organization of the Liberty Theatre for the purpose of fighting its competitor, forcing it out of the wholesale grocery business, and thus eliminating undesirable competition.
In October, 1918, the Liberty Theatre and the Wilbert Theatre were closed at the request of the Board of Health on account of an epidemic. Immediately thereafter, negotiations were commenced with a view to arbitrating the differences between the principal competitors. In December, 1918, an agreement was reached whereby the operation of the Liberty Theatre was discontinued in consideration of the discontinuance of the wholesale grocery business by the petitioner's competitor.
The Liberty Theatre corporation had an authorized capital stock of $40,000 or $50,000, of which approximately $30,000 was paid in. The outstanding stock was owned by about 40 stockholders, including the petitioner corporation and some of its stockholders. The petitioner owned $5,000 or $10,000 of the Liberty Theatre stock.
Some time subsequent to the date on which the agreement was reached to discontinue the Liberty Theatre, the assets of the theatre corporation were sold and the proceeds used to liquidate at par the stock owned by the minority stockholders, or stockholders other than the Consolidated Companies, Inc., and its stockholders. From $5,000 to $8,000 was so paid to the minority stockholders. All creditors of the Liberty Theatre were paid in full, except the petitioner corporation and the Schwing Lumber & Shingle Co. After the minority stockholders were paid, the balance of the proceeds from the sale of the theatre assets was applied on the company's open accounts.
The tax return of the Consolidated Companies, Inc., for the six-month period ended December 31, 1918, showed in Schedule A-17, the following items:
Accounts Charged Off
10/30 Liberty Theatre loss __________________________ $3,654.96
12/23 Liberty Theatre loss __________________________ 3,542.55
_________
Total _________________________________________ $7,197.51
Said total amount was claimed on the return as a deduction from income for 1918.
In 1919 the petitioner charged off $4,198.58 to the same account, which amount was claimed as a deduction from income for 1919.
The Liberty Theatre was never operated by the Consolidated Companies, Inc. It was run by a separate corporation organized for that purpose. The petitioner advanced money, merchandise, material and equipment to the theatre corporation, which items were charged on open account. The "losses" charged off by the petitioner, and for which deductions were taken in its returns for 1918 and 1919, in the total amount of $11,396.09, consisted of the balance of said open account, amounts refunded to minority stockholders, and the loss sustained by the petitioner on the stock of the theatre corporation. Said deductions were disallowed by the respondent.
When the Consolidated Companies, Inc., was organized, a considerable amount of its stock was distributed among and sold to merchants in its territory, who would be prospective customers. To a large extent, these new stockholders thereafter gave the petitioner the preference on their business by purchasing merchandise from it when the prices were not greater than could be obtained elsewhere. These stockholders also rendered varying services to the petitioner, without compensation, principally in the way of conferring informally with its officers and directors concerning matters of credit, and soliciting business.
The Iberville Wholesale Grocery Co., one of the predecessor corporations, about 1913 began using a trade-mark called the "Red Ball" to identify its highest quality goods. This trade-mark was consistently used from and after 1913. At the time of the organization of the petitioner...
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