Friedlander Corp. v. Comm'r of Internal Revenue
| Decision Date | 31 March 1953 |
| Docket Number | Docket No. 23046. |
| Citation | 19 T.C. 1197 |
| Parties | THE FRIEDLANDER CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
J. O. Gibson, Esq., and Waldo DeLoache, Esq., for the petitioner.
Ralph V. Bradbury, Jr., Esq., and Newman A Townsend, Jr., Esq., for the respondent.
1. BUSINESS DEDUCTION.— Rotary Club dues of petitioner's president and majority stockholder held not deductible.
2. SALARIES OF EMPLOYEES DISALLOWED IN PART.— Payment of salaries and bonuses paid to stockholder sons of administrative head of petitioner during period of employees' absence in military service, no replacements being required in the business, held properly disallowed in part by respondent.
3. PARTNERSHIP.— Respondent determined a deficiency against petitioner on the theory that partnership made up of a portion of petitioner's stockholders was a sham. Petitioner seeks redetermination on the theory that the partnership was entered into in good faith for a business purpose and that business was actually carried on and income here involved earned by partnership. Stated business purpose was primarily to afford opportunity for development of ideas and capabilities of sons of majority stockholder, and to avoid disruption in corporate affairs arising through conflict of ideas and business practices between sons and other majority stockholder. Secondary business purpose to obtain tax benefits. Alleged partnership business carried on in same manner and under same management as before creation thereof. Held, partnership was not entered into in good faith for a business purpose and was a sham created to siphon off profits of petitioner for sole purpose of avoiding income tax. Respondent's determination of deficiency upheld.
This proceeding involves the following deficiencies:
+-----------------------------------------+
¦ ¦Declared value ¦Excess ¦
+------+--------------------+-------------¦
¦Year ¦excess-profits tax ¦profits tax ¦
+------+--------------------+-------------¦
¦1942 ¦$2,126.13 ¦$9,414.68 ¦
+------+--------------------+-------------¦
¦1943 ¦4,038.36 ¦46,401.01 ¦
+------+--------------------+-------------¦
¦1944 ¦11,996.86 ¦101,016.74 ¦
+------+--------------------+-------------¦
¦1945 ¦20,663.37 ¦128,020.99 ¦
+-----------------------------------------+
The issues are whether the respondent erred in disallowing as deductions (1) the amount of $278 in the year 1943 as an expense for Rotary Club dues and (2) $825, $1,000, $1,480, and $1,932.50 in the years 1942, 1943, 1944, and 1945, respectively, of the total compensation paid to Irwin Friedlander and Max Friedlander, and (3) whether petitioner's income for the years 1943, 1944, and 1945 should include the income of Louis Friedlander & Sons, an alleged partnership or, in the alternative, whether certain deductions claimed by the petitioner for the years 1943, 1944, and 1945 are allocable to the alleged partnership. Other issues raised by the petition were conceded by the petitioner at the hearing.
The facts set forth in a stipulation are found as agreed to therein.
The petitioner, a Georgia corporation organized on August 19, 1929, has its principal place of business at Moultrie, Georgia. Its income and excess profits tax returns for the taxable years 1942 to 1945, inclusive, were filed with the collector for the district of Georgia.
Louis Friedlander, hereinafter for convenience sometimes referred to as ‘Louis,‘ president of petitioner at all times since its organization, was the sole proprietor of a dry goods store at the place of business of petitioner in Moultrie, Georgia, from about 1909 to 1911, when he and his brother Nathan formed a partnership to conduct the business. In 1926 the business was incorporated and upon the organization of petitioner in 1929 assets received by Louis as a stockholder in dissolution proceedings of the corporation were acquired by petitioner.
In 1935 Louis transferred to each of six sons, Irwin, Malvin, Max, Richard, Herman, and Jack, without consideration, 125 shares of common stock of petitioner. A stock dividend paid December 1941 increased the holdings of each of the transferees to 175 shares.
Between June 30, 1943, and March 31, 1946, the petitioner's outstanding capital stock consisted of 1,734 1/5 shares of common stock which was held as follows:
+-----------------------------------------------------------------+
¦ ¦June 30, ¦July 1, ¦Dec. 31, ¦March 31,¦
+-------------------------+---------+---------+---------+---------¦
¦Name and title ¦1943 ¦1943 ¦1944 ¦1946 ¦
+-------------------------+---------+---------+---------+---------¦
¦Louis Friedlander, Pres ¦420 ¦420 ¦420 ¦420 ¦
+-------------------------+---------+---------+---------+---------¦
¦I.B. Perlman, Vice Pres ¦245 ¦245 ¦350 ¦350 ¦
+-------------------------+---------+---------+---------+---------¦
¦B.M. Cohen ¦2 4/5 ¦2 4/5 ¦2 4/5 ¦2 4/5 ¦
+-------------------------+---------+---------+---------+---------¦
¦A.I. Halpert ¦7 ¦7 ¦7 ¦7 ¦
+-------------------------+---------+---------+---------+---------¦
¦R.L. Powell, Sec. & Treas¦1 2/5 ¦1 2/5 ¦1 2/5 ¦1 2/5 ¦
+-------------------------+---------+-----------------------------¦
¦Irwin Friedlander ¦175 ¦ ¦
+-------------------------+---------+-----------------------------¦
¦Malvin Friedlander ¦175 ¦ ¦
+-------------------------+---------+-----------------------------¦
¦Max Friedlander ¦175 ¦ ¦
+-------------------------+---------+-----------------------------¦
¦Richard F. Friedlander ¦175 ¦175 ¦175 ¦175 ¦
+-------------------------+---------+---------+---------+---------¦
¦Herman Friedlander ¦175 ¦175 ¦175 ¦175 ¦
+-------------------------+---------+---------+---------+---------¦
¦Jack Ira Friedlander ¦175 ¦175 ¦175 ¦175 ¦
+-------------------------+---------+---------+---------+---------¦
¦United Investment Co ¦ ¦ ¦437 ¦437 ¦
+-------------------------+---------+---------+-------------------¦
¦Treasury Stock ¦17 ¦1 542 ¦ ¦
+-------------------------+---------+---------+-------------------¦
¦Total Stock ¦1,743 1/5¦1,743 1/5¦1,743 1/5¦1,743 1/5¦
+-----------------------------------------------------------------+
FN1 Sold Dec. 31, 1944, at par, 105 shares to I.B. Perlman, and 437 shares to the United Investment Co.
Louis and Esther Friedlander are husband and wife. I. B. Perlman is a brother of Esther and the husband of Fannye Perlman. R. L. Powell has been employed for many years by the petitioner as secretary and treasurer and has been in active charge of keeping its books of account and other records. B. M. Cohen is a brother-in-law of I. B. Perlman and Esther. A. I. Halpert was not related to Louis or I. B. Perlman.
From June 30, 1943, to March 31, 1946, the stock of the United Investment Co. was owned as follows:
+-------------------------------------------------------------------+
¦Stockholder ¦Shares ¦Stockholder ¦Shares ¦
+------------------+--------+------------------------------+--------¦
¦Esther Friedlander¦28 ¦Louis Friedlander, trustee for¦ ¦
+------------------+--------+------------------------------+--------¦
¦Irwin Friedlander ¦18 ¦Herman ¦12 ¦
+------------------+--------+------------------------------+--------¦
¦Malvin Friedlander¦15 ¦Louis Friedlander, trustee for¦ ¦
+------------------+--------+------------------------------+--------¦
¦Max Friedlander ¦14 ¦Richard ¦11 ¦
+------------------+--------+------------------------------+--------¦
¦Louis Friedlander ¦1 ¦Waldo DeLoache ¦1 ¦
+-------------------------------------------------------------------+
The United Investment Co. is mainly in the real estate business although it does some financing and lending of money on a small scale. It owns considerable real estate, most of which is in Moultrie, including the main store building of petitioner and The Fair Store building. Louis is secretary and treasurer of the company.
For a number of years prior to June 30, 1943, the petitioner operated a general merchandise business in a number of towns located in the southern part of Georgia and Alabama. The stores which the petitioner operated on June 30, 1943, were named and located as follows:
+-------------------------------------------+
¦Friedlander Corporation¦Moultrie, Ga. ¦
+-----------------------+-------------------¦
¦The Fair Store ¦Moultrie, Ga. ¦
+-----------------------+-------------------¦
¦Nettler's Hardware ¦Moultrie, Ga. ¦
+-----------------------+-------------------¦
¦Smart Shop ¦Moultrie, Ga. ¦
+-----------------------+-------------------¦
¦Friedlander's ¦Fitzgerald, Ga. ¦
+-----------------------+-------------------¦
¦Perlman's ¦Dothan, Ala. ¦
+-----------------------+-------------------¦
¦Farmers Hardware ¦Tifton, Ga. ¦
+-----------------------+-------------------¦
¦Famous ¦Andalusia, Ala. 1 ¦
+-----------------------+-------------------¦
¦Fashion Shoppe ¦Douglas, Ga. ¦
+-----------------------+-------------------¦
¦Fashion Shoppe ¦Thomasville, Ga. ¦
+-----------------------+-------------------¦
¦ ¦ ¦
+-------------------------------------------+
FN1 The stipulation includes this unit but it is not referred to in other evidence.
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