HEYMANN MERCANTILE COMPANY, INC. v. Commissioner
| Decision Date | 18 November 1948 |
| Docket Number | Docket No. 14883. |
| Parties | Heymann Mercantile Company, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Randolph E. Paul, Esq., 1614 Eye St., N.W., Washington, D. C., and Carolyn E. Agger, Esq., for the petitioner. J. Richard Riggles, Jr., Esq., for the respondent.
Memorandum Findings of Fact and Opinion
By this proceeding petitioner challenges respondent's determination of deficiencies in income tax of $1,199.02, in declared value excess-profits tax of $10,735.06, and in excess-profits tax of $58,421.08 for the year 1944.
The primary litigated issue is whether petitioner is entitled to a deduction as a business expense of $89,767.73 said to represent a "del credere" cost, arising out of a contract whereby petitioner agreed to pay over to a "related" partnership all gross trading profit after an agreed return to petitioner, the partnership guaranteeing petitioner against loss.
By amended pleadings petitioner alternatively claims deductions for items of additional state franchise tax and salary.
The parties filed a stipulation of facts and evidence was adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are otherwise found from the record.
The stipulated facts are hereby found accordingly.
Petitioner, Heymann Mercantile Company, Inc., is a New York corporation organized in 1928, with its principal office at 108 Worth Street, New York, New York. Petitioner filed its corporation income and declared value excess-profits tax return and its corporation excess-profits tax return for 1944 on an accrual basis with the collector of internal revenue for the second district of New York.
Petitioner commenced business with 250 shares of common stock of the par value of $25,000. By 1935, it had 500 shares of common stock with a par value of $50,000, and that was its capitalization at the beginning of 1944, the taxable year here in question. Petitioner's profit and loss account for 1943 shows an earned surplus of $30,941.34 at the end of 1943 and of $25,301.54 at the end of 1944. At the latter date its balance sheet showed preferred stock of $50,000 and common stock of $50,000.
In 1943 and 1944 Heymann's 500 shares of common stock was held as follows:
Gillespie & Co. of New York, Inc
(hereinafter referred to as
"Gillespie") .......................... 416 shares — 83.2
Fred Nova, vice-president of petitioner ... 84 shares — 16.8
Amsinck, Sonne Corporation, a Delaware corporation, now known and hereafter referred to as "South Ridge," in 1943 and 1944, owned 2,000 shares, or 80 percent, of the outstanding shares of Gillespie, and Carl Jensen, president and director of petitioner, and president and director of Gillespie owned 500 shares, or 20 per cent of Gillespie.
Jensen held no stock in petitioner and received no salary from it. He received a salary of $17,200 in 1942 as president of Gillespie.
Randall M. Field was treasurer of petitioner and treasurer of Gillespie, and Philip H. Kunzig was secretary of both corporations.
Hans Christian Sonne, as president of Amsinck, Sonne & Co. of New York (a joint stock company, hereinafter referred to as "Amsinck"), and president of South Ridge, during 1944 received salaries from these companies in the respective amounts of $36,000 and $19,000. In 1943 and 1944 William T. Genth was a director of Gillespie and vice-president of Amsinck, and as such during 1944 received salaries of $12,000 and $13,000, respectively. He owned 550 shares, or approximately 3 percent, of South Ridge. Sonne owned a substantial interest in South Ridge, the remainder of the stock being owned by persons here not material. South Ridge owned stock in a number of companies engaged in import and export business. In addition to the 80 per cent interest above stated which it had in Gillespie, it owned 14,970 shares, or 99.8 percent interest in Amsinck.
Petitioner is engaged in the textile business. It buys, sells, converts, and deals in textiles, including the purchase of grey (greige) goods which it caused to be bleached, dyed, and printed and sold as finished material. In the years in question petitioner's sales were equally divided between the export and domestic markets. Amsinck was in the business of commission merchants and was the banking corporation of a group of companies controlled by South Ridge which is a holding company.
Amsinck is engaged in merchant banking, patterned after European banking houses and not usually found in this country. A merchant banking house is more closely related to the merchant's business than American commercial banks. It was its practice to finance merchandise transactions of subsidiaries and other merchants. The subsidiaries who were the actual merchants operated independently by their own management but were assisted by the merchant banker in matters of finance and in evaluating risks. One of the functions of merchant banking was to make funds available in those areas where they were temporarily needed as capital, and then when the need no longer existed, to withdraw the funds and put them in some other line which needed financing.
In effectuating this type of financing Amsinck resorted to the formation of a "credit pool" to assume the risk of that portion of business which was too large for the subsidiaries' capital. The funds in the credit pool were supplied by Amsinck and by members of the management of the merchant house being benefited. The latter was at Sonne's insistence in order to have the management personally interested to insure conservative management of the enterprise.
This type of financing had heretofore been used in 1931 or 1932 when a subsidiary in this group wanted to buy larger amounts of coffee than was proper in relation to its capital. It was also used in a comparable operation in the early 1930's in connection with a large risk in pound sterling resulting from sales in England, and in 1940, in connection with the purchase of a quantity of dates resulting in a commitment too large for the subsidiary's capital.
Amsinck was established in 1850 and apparently was the only American house known in London as engaging in the European type of merchant banking business. It was purchased by Sonne and Genth in 1923, who continued to model it on the methods of the London merchant banking houses, except that instead of having various departments such as a banking department, a wool department, etc., Sonne and Genth decided it would be sounder financially to have each department a separate corporation with its own responsibilities and bank accounts. Petitioner was one of the subsidiaries acquired in accordance with this policy. Petitioner had specialized for decades in the dry goods trade and it was thought that its experience would be helpful in combination with the general exporting business of Gillespie. The controlling interest in petitioner was purchased by Gillespie in 1928.
The textile business is a specialized business requiring expert knowledge. The trade is subject to wide fluctuations.
Petitioner's capital and surplus, sales, gross profit, net profit, and dividends from the time of its acquisition by Gillespie in 1928, through 1943, were as follows:
Capital and
Year Surplus 12/31 Sales Gross Profit Net Profit Dividends
1928 (5 mos.) ................ $27,228.88 $ 185,169.13 $ 14,354.67 $ 2,228.88
1929 ......................... 33,423.51 682,324.58 41,878.44 6,194.63 $ 7,500.00
1930 ......................... 36,932.61 513,659.03 45,234.65 11,009.10
1931 ......................... 36,975.60 388,855.28 29,993.95 42.99
1932 ......................... 37,413.29 376,031.18 30,396.75 437.69
1933 ......................... 49,397.14 305,516.00 40,117.14 11,983.85
1934 ......................... 57,546.35 458,937.52 39,261.68 8,149.21 25,000.00
1935 ......................... 53,599.61 483,822.36 28,629.84 1,053.26 5,000.00
1936 ......................... 51,497.12 578,101.33 49,060.64 12,897.51 15,000.00
1937 ......................... 53,768.25 652,912.68 35,219.10 2,288.55 ........
1938 ......................... 54,000.44 802,904.17 63,995.81 22,732.19 22,500.00
1939 ......................... 60,066.55 708,465.18 69,456.52 24,066.11 18,000.00
1940 ......................... 69,713.21 507,832.69 69,924.95 23,885.17 18,000.00
1941 ......................... 75,560.08 1,244,980.31 144,080.21 35,846.87 30,000.00
1942 ......................... 73,258.84 1,113,239.64 169,747.58 33,698.75 36,000.00
1943 ......................... 73,955.47* 1,182,484.79 150,103.18 31,682.50 24,000.00
* On the assumption of a $50,000 capital, this
figure cannot be reconciled with either the
$30,941.34 surplus (above) or the $30,341.34 surplus
shown in Exhibit 3C, but since it is a
stipulated amount and the variance does not
appear material, we find it as a fact.
During 1943, and particularly during the last half thereof, an acute sellers' market developed in the textile business in the supply of grey goods, the raw material with which the textile converter works. The independent converter, in contrast to the integrated manufacturer and finisher of textiles, had particular difficulty in securing grey goods in this market. The mills which manufactured the grey goods were unwilling to sell in quantity to any buyer who presented any great risk. A buyer whose capital was small and who in the event...
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