Grenada Indus., Inc. v. Comm'r of Internal Revenue, Dockets Nos. 24571

• Citation: 17 T.C. 231
• Decision Date: 22 August 1951
• Docket Number: Dockets Nos. 24571,24640.
• Parties: GRENADA INDUSTRIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.NATIONAL HOSIERY MILLS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

17 T.C. 231

GRENADA INDUSTRIES, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.NATIONAL HOSIERY MILLS, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dockets Nos. 24571

24640.

Tax Court of the United States.

Promulgated August 22, 1951.

Two corporations, Industries and National, and two partnerships, Hosiery and Abar, were owned or controlled directly directly or indirectly by the same interests. On respondent's allocation of the income of the two partnerships to the two corporations, held, (1) allocation of Abar's income to the two corporations disapproved; (2) allocation of Hosiery's income to Industries approved; (3) allocation of Hosiery's income to National disapproved.

[17 T.C. 231]

Robert A. Littleton, Esq., for the petitioner.

Lester M. Ponder, Esq., for the respondent.

The Commissioner determined the following deficiencies:

+-----------------------------------------------------------------------------+
                ¦Docket¦Year¦Income tax¦Declared value ¦Excess ¦Penalty on excess ¦
                ¦No. ¦ ¦ ¦excess-profits tax ¦profits tax ¦profits tax ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦24571 ¦1941¦$25,019.41¦$10,265.16 ¦$22,352.95 ¦ ¦
                ¦1 ¦ ¦ ¦ ¦ ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦1942¦13,772.09 ¦ ¦17,183.98 ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦1943¦5,931.66 ¦ ¦43,946.64 ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦1944¦9,060.03 ¦ ¦62,835.39 ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦24640 ¦1940¦7,708.93 ¦1,794.24 ¦ ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦1941¦7,510.32 ¦ ¦14,467.34 ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦1942¦10,535.14 ¦1,870.81 ¦2,650.24 ¦ ¦
                +------+----+----------+---------------------+------------+-------------------¦
                ¦ ¦1943¦ ¦1,570.68 ¦34,485.08 ¦$1,724.25 ¦
                +-----------------------------------------------------------------------------+
                

These proceedings were consolidated for hearing. They present the issue whether respondent erred in allocating to petitioners income claimed to have been earned by two other enterprises. In both proceedings, the determined deficiencies rested in part on other adjustments, but the validity of these other adjustments is conceded by both petitioners. In Docket No. 24640, a 5 per cent penalty, amounting to $1,724.25, was added because of late filing of an excess profits tax return for the taxable period ending December 31, 1943, and the validity of this penalty is also conceded.

[17 T.C. 232]

FINDINGS OF FACTS.

Petitioner in No. 24571, Grenada Industries, Inc. (hereinafter sometimes referred to as ‘industries‘), is a corporation organized under the laws of the State of Mississippi, with its principal office at Grenada, Mississippi. For its fiscal years ending March 31, 1941, 1942, and 1943, it filed its tax returns in question with the collector of internal revenue for the district of Mississippi. For its fiscal year ending March 31, 1944, it filed its returns with the collector of internal revenue for the district of Indiana. Petitioner in No. 24640, National Hosiery Mills, Inc. (hereinafter sometimes referred to as ‘National‘), is a corporation organized under the laws of the State of Indiana, with its principal office at Indianapolis, Indiana. For its tax years under review, it filed its returns with the collector of internal revenue for the district of Indiana.

The ladies' hosiery industry consists of a number of recognized and distinct phases, which include: (1) Manufacturing unfinished and undyed hosiery, or hosiery ‘in the grey,‘¹ for which there is a market; (2) dyeing and finishing hosiery ‘in the grey‘; (3) developing and furnishing, to manufacturing and finishing mills, expert styling and merchandising specifications and ideas; (4) selling finished hosiery to the trade; (5) salvaging yarn and defective hosiery, by reclaiming yarn from waste and defective hosiery, and by mending defective hosiery and selling it to the trade. Many persons and businesses engage only in one or more of these phases of the industry.

Jacob A. Goodman (hereinafter also referred to as ‘J. A. Goodman‘) and Lazure L. Goodman (hereinafter also referred to as ‘l. L. Goodman‘) were brothers who had been engaged in the ladies' hosiery industry since 1915. At that time they operated their own business as hosiery distributors in Indianapolis and North Carolina. In or about 1920 they organized Real Silk Hosiery Mills, Incorporated (hereinafter referred to as ‘Real Silk‘), which came to engage in all the above-described phases of the industry. The Goodmans dominated and controlled Real Silk as long as they continued their affiliation with it, until 1937, and they acquired eminent reputations in the industry. They were responsible for Real Silk's successful merchandising and sales operations, and had extensive experience in merchandising and selling ladies' hosiery.

In 1925 Real Silk opened a salvaging department, prior thereto having sold its waste and defective hosiery. Abraham J. Barskin (hereinafter referred to as ‘Barskin‘), who at one time had independently been in the business of dealing in waste and defective merchandise,

[17 T.C. 233]

was put in charge of that department. Barskin was related to the Goodmans through marriage to their sister, who died in 1940.

Henry V. Kobin (hereinafter referred to as ‘Kobin‘) had been associated with the Goodmans at Real Silk. He entered Real Silk's employ in 1921. Theretofore the Goodmans had taken his brother, William Kobin, into the business. When William died in 1928, Kobin left Real Silk and, with the participation of the Goodmans, organized National. The Goodman family made investments in National. National engaged in the production, dyeing, finishing, and merchandising phases of the industry. In 1937 National organized a sales force; up to that time National sold its product through the sales organization of the Trojan Division of Real Silk. Kobin was familiar with all phases of National's operations and he, like the Goodmans, attained wide experience in the industry. In 1928 Barskin also left Real Silk and joined Kobin at National, where he held executive office and assisted in the manufacturing phase of the business.

Israel E. Solar (hereinafter referred to as ‘Solar‘) likewise was associated with the Goodmans at Real Silk. He was hired by Real Silk in 1923, at the age of sixteen, and advanced rapidly in the organization. He remained with Real Silk, except for a brief period, until 1937. Almost his entire business career was spent in the hosiery industry, and during this period he had close business relations with the Goodmans and was associated with companies with which the Goodmans were connected. While at Real Silk, he also knew Kobin and Barskin.

Charles E. Stevens (hereinafter referred to as ‘Stevens‘) was an accountant, who was employed by Real Silk in 1928. Prior to that time he had miscellaneous accounting experience. He remained as an employee of Real Silk until about 1932, when he left to go into the private practice of accounting, with his office at Indianapolis. Shortly thereafter he was retained by National, and supervised its accounting affairs. In his practice of accounting he specialized in tax and estate matters. He knew the Goodmans since about 1926 or 1927, and he advised the Goodmans and Kobin respecting the arrangement of their business affairs. Stevens had no technical training or experience in the hosiery industry.

At Stevens' advice, the Goodmans and Kobin created certain trusts for their children. L. L. Goodman had two children, Elliot R. and Sue Ellen, about 27 and 19 years of age, respectively, at the time of the hearing. J. A. Goodman had three children, Robert A., Ruth Elaine, and Jacqueline, about 25, 22, and 23 years of age, respectively, at the time of the hearing. Kobin's children were William and Anne, about 22 and 19 years old, respectively, at the time of the hearing. Esther M. Goodman was the wife of L. L. Goodman; Sarah W. Goodman

[17 T.C. 234]

was the wife of J. A. Goodman; Florence Kobin was the wife of Henry V. Kobin. The Goodmans and Kobin set up the following trusts:

+----------------------------------------------------------------------------+
                ¦ ¦Date of ¦ ¦Original ¦Successor ¦Successor ¦
                ¦Trust ¦trust ¦Grantor ¦trustee ¦trustee ¦trustee ¦
                ¦ ¦indenture ¦ ¦ ¦ ¦ ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦Elliot R. ¦ ¦ ¦ ¦ ¦ ¦
                ¦Goodman: ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦Trust No. 1 ¦May 31, ¦L. L. ¦L. L. Goodman ¦Security Trust¦C. E. ¦
                ¦ ¦1929 ¦Goodman ¦ ¦ ¦Stevens ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦ ¦ ¦and E. ¦ ¦Co. to 12/21/ ¦ ¦
                ¦ ¦ ¦M. ¦to 9/30/41. ¦42. ¦todate. ¦
                ¦ ¦ ¦Goodman ¦ ¦ ¦ ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦ ¦July 1, ¦L. L. ¦J. A. Goodman ¦Security Trust¦C. E. ¦
                ¦Trust No. 2 ¦1940 ¦Goodman ¦to 9/30/41. ¦Co. to 12/21/ ¦Stevens to¦
                ¦ ¦ ¦ ¦ ¦42. ¦date. ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦ ¦Jan. 2, ¦L. L. ¦Security Trust¦C. E. Stevens ¦ ¦
                ¦Trust No. 3 ¦1942 ¦Goodman ¦Co. to 12/21/ ¦to date. ¦ ¦
                ¦ ¦ ¦ ¦42. ¦ ¦ ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦ ¦Jan. 2, ¦L. L. ¦Security Trust¦C. E. Stevens ¦ ¦
                ¦Trust No. 4 ¦1942 ¦Goodman ¦Co. to 12/21/ ¦to date. ¦ ¦
                ¦ ¦ ¦ ¦42. ¦ ¦ ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦Sue Ellen ¦ ¦ ¦ ¦ ¦ ¦
                ¦Goodman: ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+-----------+--------+--------------+--------------+----------¦
                ¦ ¦July 25, ¦L.

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