Daily Journal Co. v. Com'r of Internal Revenue

• Decision Date: 29 April 1943
• Docket Number: No. 10240.,10240.
• Citation: 135 F.2d 687
• Parties: DAILY JOURNAL CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

135 F.2d 687 (1943)

DAILY JOURNAL CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 10240.

Circuit Court of Appeals, Ninth Circuit.

April 29, 1943.

Latham & Watkins, Dana Latham, and Ronald C. Roeschlaub, all of Los Angeles, Cal., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, A. F. Prescott, S. Dee Hanson, and Alvin J. Rockwell, Sp. Assts. to Atty. Gen., for respondent.

Before DENMAN, MATHEWS, and STEPHENS, Circuit Judges.

DENMAN, Circuit Judge.

Petitioning corporation seeks our review of an order of the Board of Tax Appeals, now called Tax Court of the United States, sustaining deficiencies in its income taxes for the years 1936, 1937 and 1938, asserted by the Commissioner of Internal Revenue because of a disallowance of a deduction from its gross income of a portion of the salary of its president. The ground of the decision is that a portion of the president's services was rendered to another corporation and not as petitioner's agent, and therefore not deductible. Hence (a) the true annual taxable incomes are larger than returned with corresponding increases in the taxes due for the years 1936-37-38, and (b) since petitioner is a personal holding company, the years' net gains so far as consisting of the amounts of the disallowed deductions, should have been included in the amounts of profits distributed in the years 1937 and 1938, and the failure to do so created the penalty liabilities prescribed by 26 U.S.C.A. Int.Rev. Code § 500.

Petitioner for many years prior to 1929 was engaged in the publishing business inter alia publishing a legal newspaper, the Los Angeles Daily Journal. It had three newspaper competitors in vigorous competition for several years prior to that date. In that year the four competing corporations entered into an agreement to consolidate their publishing businesses and formed a corporation, the "Consolidated Printing and Publishing Corporation," hereinafter called Consolidated, to publish the four papers. Each corporation was to continue in business and to hold shares in Consolidated. The propriety of the Consolidated's organization and purposes was approved by the California Corporation Commissioner, who issued its permit for the sale of its stock. Petitioner received 69 percent of Consolidated's Class A preferred, 65 percent of its Class B preferred, and 67 percent of its common stock.

Since, as later described, we view the deduction as properly taken, it is unnecessary to consider the character of petitioner with reference to the issue of the personal holding company surtax deficiencies.

The agreement for the formation of Consolidated provided that each of the contracting parties "will use their best efforts and endeavors to further and promote the business of said new corporation." The evidence is uncontradicted that it was specifically understood and agreed by all the parties that the new enterprise was to be managed by petitioner acting, as a corporation must, through its agents, here through its president, Douglas W. Wilson, and that had this not been agreed to the consolidation would not have been effected.

Consistent with the intent of the parties as heretofore set forth, the Consolidated agreement specifically provided that the new enterprise would pay no salary to any officer without the consent of all the directors.

Pursuant to this agreement, petitioner, through its agent, its president, Mr. Wilson, managed the business of Consolidated during the tax years in question — Mr. Wilson acting as the president of the latter. All four papers were published under their former names. No salary was paid petitioner's president by Consolidated. The only salary for such management was paid by petitioner. Mr. Wilson received $12,000 a year from petitioner and it is agreed that the services so rendered by him were worth that amount. Petitioner deducted the $12,000 in each of the...