F. Wallis Armstrong Co. v. McCaughn

• Decision Date: 12 August 1927
• Docket Number: No. 10950.,10950.
• Citation: 21 F.2d 636
• Parties: F. WALLIS ARMSTRONG CO. v. McCAUGHN, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Pennsylvania

21 F.2d 636 (1927)

F. WALLIS ARMSTRONG CO. v. McCAUGHN, Collector of Internal Revenue.

No. 10950.

District Court, E. D. Pennsylvania.

August 12, 1927.

Porter, Foulkrod & McCullagh, of Philadelphia, Pa., for plaintiff.

George W. Coles, U. S. Atty., of Philadelphia, Pa., for defendant.

Findings of Fact.

KIRKPATRICK, District Judge.

1. The plaintiff, until May 31, 1917, the date on which it was dissolved, was a New Jersey corporation doing business in Pennsylvania.

2. The plaintiff filed with the Collector of Internal Revenue its income and excess profits return for the portion of the year 1917 during which it was in business, disclosing net income for the period of $50,272.82, and computed its excess profits tax in accordance with the provisions of section 209 of the Revenue Act of 1917 (Comp. St. § 6336 3/8j) as having "no invested capital or not more than a nominal capital." The excess profits tax computed under that section on the plaintiff's income was $3,781.82, and the income tax was $2,789.46, or a total of $6,571.28 which was duly paid.

3. On review of the case, the Commissioner of Internal Revenue made a slight reduction in income not here pertinent, but held that the plaintiff was not entitled to compute its excess profits tax under section 209, and made an assessment under section 210 of the act (Comp. St. § 6336 3/8k) which provides for cases where "the Secretary of the Treasury is unable * * * satisfactorily to determine the invested capital." Under the assessment so made, the plaintiff's excess profits tax was $10,321.01, the income was $2,397.11, or a total tax of $12,718.12, amounting to $6,146.84 more than originally paid.

4. The plaintiff, on October 23, 1927, paid the additional tax so computed and assessed under protest based upon erroneous classification, and filed claim for refund, which the Commissioner denied by letter on March 15, 1924, on the ground that assessment had been correctly made, whereupon the plaintiff brought this suit for the recovery of the additional tax.

5. The plaintiff was incorporated in 1907 (under the name of Powers & Armstrong) as the successor of a partnership engaged in operating an advertising agency, and it engaged in that business and no other during its existence, including the portion of the year 1917 under consideration. At the time of its incorporation, the plaintiff acquired the assets and assumed the liabilities of the partnership. The assets so acquired consisted of cash, $5,842.78; office furniture and fixtures, $3,206.94; bills and accounts receivable, $78,178.69; and good will, $90,000; liabilities assumed or accounts payable amount to $77,055.15. Capital stock to the amount of $100,000 was issued, of which $90,000 was issued for good will and $10,000 for cash.

6. At the beginning of the taxable year 1917, the plaintiff's assets consisted of cash $37,653.96; good will, $90,000; furniture and fixtures, $2,344.88; and accounts receivable of $354,896.04; bills receivable in the amount of $21,057.27. The increase in net worth resulted in the main from profits earned and not paid out in dividends, but included interest on bank balances in the sum of $1,393.40. The liabilities consisted of accounts payable, $357,524.11, capital, $100,000, and surplus, $47,428.04.

7. Plaintiff's business was conducted by its representatives first getting in touch with a client or firm desiring to carry out a program of advertising. The plaintiff's representatives would study the problems of the advertiser and investigate their markets. They would then make general plans for advertising and submit them to the client for approval. These plans might include the use of magazines, circulars, booklets, or bill-boards. If approved, the plaintiff would contract for space in the advertising media selected and would then prepare the copy — that is, the advertisement itself — including plates, drawings, and legend, and in case of a periodical send it to the periodical for insertion at a particular date.

8. The plaintiff ordinarily entered into a written contract with its clients by which it agreed to handle clients' advertising for a certain period, with the right on the part of the plaintiff to terminate the contract if the bills submitted by it were not paid by the clients when due. By its contract, the plaintiff agreed to analyze the client's advertising situation, to advise the clients in linking the publicity campaign with their sales organization, to plan and guide the campaign, prepare copy, select media, order the spaces and insertions, oversee the appearance of the advertising, check the advertisements, audit the bills, and arrange for the printing of all the advertising matter. The plaintiff agreed to pay for the account of the client all bills from publishers, artists, plate makers, and printers. Clients agreed to pay the plaintiff the bills so paid, together with 15 per cent. for their services.

9. The plaintiff employed writers, draftsmen, artists, printers, etc., some of whom were in its employ regularly, and some of whom worked under contracts. The plaintiff added to the bills to its clients the cost to it of such work, but did not add anything additional and did not derive any profit from this practice. The amount received by the plaintiff from its clients in 1917 to cover these and similar items was about $7,000.

10. It was the plaintiff's regular practice to bill its clients so that the bills would be payable in advance of the time when the plaintiff would have to pay the publications, etc., and as a result of this they frequently had a considerable amount of cash in bank from which they would subsequently pay the publishers and other parties. Occasionally, and contrary to custom, plaintiff accepted notes in payment of accounts which necessitated the payment of bills by the plaintiff from its own funds. The amount of loss suffered by the plaintiff by reason of clients not paying their bills during the ten years of its existence was negligible.

11. The plaintiff contracted for space in the magazines and other media for the account of the particular client for whom it was acting. It did not buy the space in its own name and then sell it. However, under its contracts the plaintiff made itself responsible for the payment for the space.

12. The plaintiff received from the magazines and other advertising media a cash discount for prompt payment of bills. In all cases where the plaintiff's clients had paid them at the time when the...