INTERVEST ENTERPRISES, INC. v. Commissioner
| Decision Date | 27 September 1971 |
| Docket Number | Docket No. 3936-68. |
| Parties | Intervest Enterprises, Inc., Rand American Fund, Inc., Intervest and Associates, Inc., and Little Theatre, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
John Anthony Smith and Ralph E. Lerner, 666 Fifth Ave., New York, N. Y., for the petitioners. Marlene Gross, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in and additions to petitioners' consolidated income tax:
Addition Addition
to tax to tax
Taxable year (Sec. (Sec
ended Deficiency 6651(a))1 6653(a))
Jan. 31, 1963.. $ 934.55 $233.64
Jan. 31, 1964.. 120,104.00 ..... $6,005.20
Subsequently, by amended answer, respondent has asserted an increased deficiency in income tax for the taxable year ended January 31, 1963 in the amount of $49,897.46 and an increased addition to the tax under section 6651(a) in the amount of $12,474.36.
The issues before us are: (1) the amount and character of the gain realized by petitioner Intervest and Associates, Inc., as a result of its transactions and dealings with the Government of Northern Nigeria (hereinafter sometimes referred to as the "Nigerian project" or "Gusau project"); (2) whether any portion of said gain is properly taxable to Intervest and Associates, Inc., in its taxable year ended January 31, 1963 rather than in the taxable year ended January 31, 1964, as reported by petitioners; (3) the amount of allowable consolidated deductions of petitioners for the taxable year ended January 31, 1963; (4) whether Intervest and Associates, Inc., owned 80 percent or more of all classes of the stock of Little Theatre, Inc., at any time during the taxable year ended January 31, 1964; and (5) whether any part of the underpayment of tax for the taxable year ended January 31, 1964 was due to negligence or intentional disregard of respondent's rules and regulations.2
Some of the facts have been stipulated. The stipulation of facts, together with the exhibits atached thereto, is incorporated herein by this reference.
Petitioners are all New York corporations having their principal places of business in New York, New York, at the time they filed the petition herein.
The consolidated corporation income tax return of petitioners Intervest Enterprises, Inc. (hereinafter sometimes referred to as "Enterprises"), Rand American Fund, Inc., and Intervest and Associates, Inc. (hereinafter sometimes referred to as "Associates"), for the taxable year ended January 31, 1963 was filed with the district director of internal revenue, New York, New York.
The consolidated corporation income tax return of the aforementioned corporations plus Little Theatre, Inc., for the taxable year ended January 31, 1964 was filed with the district director of internal revenue, New York, New York.
Petitioner Intervest Enterprises, Inc., was incorporated under the name Intervest, Inc. on or about February 6, 1961. On or about December 7, 1961, said petitioner's name was changed to Intervest Enterprises, Inc. No stock other than three original subscription shares was issued by Enterprises. Roger Euster, Leonard Tow, and Leonard Moore each received one of the three subscription shares. Euster was named president of the corporation and Tow and Moore were named vice presidents. After its incorporation, Enterprises engaged in public relations work in Africa and did preliminary work on the establishment of a mutual fund in South African gold shares.
In 1961, Leonard Tow presented to representatives of the Government of Northern Nigeria a proposal for the construction and operation of a textile mill in Northern Nigeria. In so doing, he represented the Thomas Meikles Trust of Southern Rhodesia, Strongweave Textiles of South Africa and Southern Rhodesia, and Intervest, Inc. The three companies were known to the Nigerians as the Intervest group.
The proposal consisted of a letter of intent, dated October 28, 1961, over the signature of Tow as vice president of Intervest, Inc., and was supported by projections, descriptions of capital equipment to be installed, factory designs, lists of managers, time schedules, etc. The letter of intent proposed "a joint venture" between the Intervest group and the Government of Northern Nigeria for the construction, equipping, and managing of a cotton spinning and weaving mill in the Northern Region, with both parties participating in such venture as "equal partners" and participating equally in the financing of the project. It suggested that a meeting be held before November 15, 1961, "at which time articles of agreement will be worked out and initialed."
On November 7, 1961, the Intervest group and the Government of Northern Nigeria entered into the following written understanding:
/s/ Permanent Secretary, Ministry of Trade & Industry Government of Northern Nigeria 7th November, 1961 /s/ Leonard Tow Vice President Intervest Inc 7th November, 1961. /s/ Thomas Meikles Trust 7th November, 1961. /s/ Strongweave Textile Mills 7th November, 1961.
The agreement was drafted by the Permanent Secretary of the Ministry of Trade and Industry of the Government of Northern Nigeria. Immediately thereafter, the Government of Northern Nigeria was advised and understood that the Intervest group would conduct its affairs in the form of Intervest and Associates, Inc., and thereafter the Government of Northern Nigeria dealt only with Intervest and Associates, Inc.
On November 28, 1961, in Lagos, Nigeria, Euster, Tow, and Moore signed a Certificate of Incorporation for petitioner Intervest and Associates, Inc., subscribing to one share of stock each, and then forwarded the certificate to their New York counsel, who filed it with the New York Secretary of State on December 7, 1961.
Sometime in December of 1961, the Southern Rhodesian and South African members of the Intervest group withdrew therefrom after a disagreement as to where the required mill equipment should be purchased, they being in favor of purchases in England, Scotland, or Ireland and Associates being of the view that American machinery would be better suited for the intended purpose.
Shortly after the November 7, 1961 document was signed, Tow proceeded to draft the Heads of Agreement. This latter document provided for the establishment of Gusau Industrial Corporation (Nigeria) Ltd., with an authorized capital of 1,000 shares having a par value of £1, 500 shares of which were to be subscribed for and issued to the Northern Regional Marketing Board and 500 shares to Associates. Additional first-stage financing was to be in the form of £1,000,000 seven-year, 7-percent bonds to be subscribed for and issued equally in the same fashion. Total financing of £5,000,000 was to be supplied equally by the Government of Northern Nigeria and Associates. The provisions of the November 7, 1961 document, relating to the letter of credit, were incorporated into the agreement as well as detailed arrangements relating to composition of the board of directors, share transfers, disposition of earnings, the land, buildings, and services to be provided, legislation, customs, and supply of raw materials.
As a supplement to the Heads of Agreement, a further agreement was prepared for execution by Gusau Industrial Corporation (Nigeria) Ltd. and Associates, whereby the latter was to be the Managing Agent of the company for a period of twelve years. In that capacity, Associates was to deal with all matters in connection with the final planning of the factory, the purchase of machinery and equipment, and the provision of technicians to supervise the building of the factory and the installation of the machinery and equipment and to manage the maintenance and operation of the factory, including the hiring and firing of employees, purchases, sales, contracts, keeping of accounts, etc. The agreement provided that, as compensation, Associates was to receive £5,000 for its services in getting the factory running and £10,000 annually thereafter for managing the operations. The Heads of Agreement and further agreement were never signed due to political upheavals in Northern Nigeria and the death of almost all of the representatives of the Government of Northern Nigeria with whom Associates had dealt.
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