Jacob Sincoff, Inc. v. Comm'r of Internal Revenue
| Decision Date | 30 April 1953 |
| Docket Number | Docket No. 37956. |
| Citation | 20 T.C. 288 |
| Parties | JACOB SINCOFF, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. EXCESS PROFITS— ACCUMULATIONS BEYOND BUSINESS NEEDS— SECTION 102.— A paper jobbing corporation which accumulated earnings beyond the reasonable needs of its business and invested large amounts in securities unrelated to its business is subject to tax under section 102.
2. EXCESS PROFITS— CREDIT BASED ON INVESTED CAPITAL— BORROWED MONEY—SECTION 719(a)(1).— A balance owed in a brokerage account through which securities were being purchased does not qualify as indebtedness under section 719(a)(1), Internal Revenue Code. J. Henry Landman, Esq., for the petitioner.
S. Jarvin Levison, Esq., for the respondent.
The Commissioner determined deficiencies for 1945 of $46.81 in income tax, $9,531.81 in tax under section 102, and $3,690.32 in excess profits tax. The issues for decision are whether the petitioner is subject to tax under section 102 and whether funds borrowed by the petitioner qualify as borrowed invested capital under section 719.
The petitioner, a New York corporation, filed its returns for 1945 with the collector of internal revenue for the third district of New York.
Jacob Sincoff has been engaged in the business of buying and selling paper, paperboard, and twine since 1912. He owns two-thirds and his wife owns the remaining one-third of the stock of the petitioner which was incorporated under the laws of New York in January 1924 to take over the business which he had previously operated as an individual. He and his wife are also the directors of the petitioner. Sincoff made all purchases and his brother made most of the sales for the petitioner. Sincoff's wife was treasurer of the petitioner. Its only other employee was a bookkeeper. Sincoff and his wife gave only part time to the business of the petitioner. The salaries of the three Sincoffs represented most of the expenses of the petitioner.
The following table shows the gross sales, gross profits from sales, interest, dividends, capital gains, total income, total expenses, and net profit or loss for the years 1936 through 1951:
The mills from which the petitioner obtained merchandise usually shipped the petitioner's orders directly to its customers and billed the petitioner, allowing it 30 days within which to pay. The petitioner allowed its customers 20 days within which to pay it amounts due on goods. The merchandise inventory of the petitioner at the end of the years 1935, 1936, and 1937 averaged about $12,050, dropped to half of that at the end of 1938 and thereafter ranged from a low of about $1,500 at the end of 1949 to a high of about $3,600 at the end of 1948. The petitioner, prior to 1945, showed investments on its balance sheets which began with about $25,000 in 1935, increased to almost $53,000 in 1937, dropped off to $5,000 in 1940 and 1941, and increased to a little over $70,000 in 1943. They were shown on the balance sheet as ‘Other Investments‘ and ‘Other Assets‘ but were not further explained in the record.
The opening and closing balance statements of the petitioner for 1945 were as follows:
+-------------------------------------------------------------------------+
¦Assets: ¦Dec. 31, 1944 ¦Dec. 31, 1945 ¦
+-----------------------------------------+---------------+---------------¦
¦Cash ¦$45,398.54 ¦$35,464.06 ¦
+-----------------------------------------+---------------+---------------¦
¦Accounts Receivable ¦26,455.37 ¦23,784.81 ¦
+-----------------------------------------+---------------+---------------¦
¦Merchandise Inventory ¦3,036.35 ¦1,835.46 ¦
+-----------------------------------------+---------------+---------------¦
¦Other Investments ¦40,275.00 ¦54,200.00 ¦
+-----------------------------------------+---------------+---------------¦
¦Other Assets ¦59,118.48 ¦64,915.08 ¦
+-----------------------------------------+---------------+---------------¦
¦Deferred Assets ¦847.68 ¦678.45 ¦
+-----------------------------------------+---------------+---------------¦
¦Investments in Government Obligations ¦ ¦302,484.38 ¦
+-----------------------------------------+---------------+---------------¦
¦Total Assets ¦$175,131.42 ¦$483,362.24 ¦
+-----------------------------------------+---------------+---------------¦
¦Liabilities and Capital: ¦ ¦ ¦
+-----------------------------------------+---------------+---------------¦
¦Accounts Payable ¦$29,966.20 ¦$32,173.90 ¦
+-----------------------------------------+---------------+---------------¦
¦Due to brokers for purchase of Government¦ ¦ ¦
+-----------------------------------------+---------------+---------------¦
¦securities ¦ ¦281,225.27 ¦
+-----------------------------------------+---------------+---------------¦
¦Accrued Expenses ¦2,137.69 ¦4,197.18 ¦
+-----------------------------------------+---------------+---------------¦
¦Reserve for Federal income taxes ¦18,240.54 ¦15,516.67 ¦
+-----------------------------------------+---------------+---------------¦
¦Due to stock brokers ¦5,046.22 ¦ ¦
+-----------------------------------------+---------------+---------------¦
¦Capital Stock (Common) ¦70,000.00 ¦100,000.00 ¦
+-----------------------------------------+---------------+---------------¦
¦Earned Surplus and Undivided Profits ¦49,740.77 ¦50,249.22 ¦
+-----------------------------------------+---------------+---------------¦
¦Total Liabilities and Capital ¦$175,131.42 ¦$483,362.24 ¦
+-------------------------------------------------------------------------+
The record does not show how much, if any, money or other property was paid in for capital stock but shows that at least $20,000 of the capital stock at the beginning of 1945 and $50,000 of the capital stock at the end of 1945 was a capitalization of earnings with the result that the accumulated earnings of the petitioner at the end of 1945 amounted to at least $100,249.22 of which at least $30,508.45 was accumulated during 1945.
The petitioner never declared or paid a dividend, except stock dividends, during its existence through 1945.
The petitioner had an account in 1945 with the brokerage firm of Eisele & King, Libaire, Stout & Co. That company customarily used an instrument in connection with transactions wherein a client remained indebted to it in which the client stated, inter alia:
I will always maintain such margin for my account or accounts as...
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