LR Teeple Company v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 07 July 1942 |
| Docket Number | 107676,Docket No. 105051,107895. |
| Citation | 47 BTA 270 |
| Parties | L. R. TEEPLE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
S. J. Bischoff, Esq., and Robert T. Jacob, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
The Commissioner determined deficiencies in the petitioner's income tax as follows:
----------------------------------------------------------------------------
Docket No. | Year | Deficiency
------------------------------------------------------|-------|-------------
105051 ______________________________________________ | 1938 | $15,558.02
107676 ______________________________________________ | 1937 | 7,696.47
107895 ______________________________________________ | 1939 | 9,166.60
----------------------------------------------------------------------------
The only question presented is whether the petitioner was subject to the surtax imposed by section 102 of the Revenue Acts of 1936 and 1938 on corporations improperly accumulating surplus.
FINDINGS OF FACT.
The petitioner is an Oregon corporation which filed its income tax returns for 1937, 1938, and 1939 with the collector of internal revenue for the district of Oregon. It was incorporated on September 28, 1921, under the name of "Tepco Manufacturing Company" and with an authorized capital stock of $5,000, divided into 50 shares of common stock of a par value of $100 each. In October 1926 the name was changed to "L. R. Teeple Company." In the latter part of 1934 and pursuant to the declaration of a stock dividend of $145,000, the capital stock was increased to $150,000 consisting of 1,500 shares of a par value of $100 each. Upon organization of the petitioner L. R. Teeple acquired 51 percent of its stock in payment for certain patents. A few years later he acquired from the other stockholders the remainder of the stock. Since that time he and the members of his family have been the owners of all of petitioner's capital stock. The stock was held as follows at the end of 1939:
L. R. Teeple _______________________________________ 970 shares
A. L. Teeple (wife) ________________________________ 370 shares
L. R. Teeple, Jr. (son) ____________________________ 80 shares
Mary Ann Teeple (daughter) _________________________ 80 shares
With the possible exception of gifts totaling 30 shares made by L. R. Teeple to his son and daughter during the years 1937 through 1939 the holdings at the end of 1937 and 1938 were the same as at the end of 1939.
The petitioner was organized to engage in the business of manufacturing and selling devices for controlling, regulating, and indicating temperature and since its formation has been engaged in that business. The devices manufactured are generally denominated as thermostats, regulators, and pressure gauges. The petitioner manufactures all of the parts of its product except some small items which can be purchased from others cheaper than it can manufacture them. The manufacturing plant and office are in Portland, Oregon. Its operations were originally conducted in rented quarters, but for many years it has owned its own plants, at least three additions having been made to the first unit constructed.
L. R. Teeple has been president and manager of the petitioner since its formation. Prior to coming to Portland about 1920 or 1921 he was in the employ of the General Electric Co. at a plant in Fort Wayne, Indiana, and was engaged in developing patents and doing experimental work in the engineering department. As president and manager of petitioner he devotes practically all of his working time to supervising production, making final decisions respecting inventions created in the plant, and otherwise managing the business.
Following its organization the petitioner sold the products of another corporation on a commission basis. It also manufactured a few small control devices and made certain radio equipment. About 1923 or 1924 a corporation known as the Portland Wire & Iron Co. was formed for manufacturing and selling a combustion coal stoker. The corporation's name was later changed to Iron Fireman Manufacturing Co. The corporation had its office and plant at Portland. The petitioner, through L. R. Teeple, started working in cooperation with that corporation, sometimes hereinafter referred to as Iron Fireman, to develop a full thermostatic control for the coal stoker. Its efforts were successful, and since the fall of 1924 the petitioner has furnished Iron Fireman with the control equipment used on the stokers which it has manufactured and sold. In recent years Iron Fireman has gone into the manufacture of oil burners and petitioner has furnished the control equipment for them. Since 1924, 98 or 99 percent of the products manufactured by the petitioner have been sold to Iron Fireman. Substantially all of the remainder of the products manufactured by the petitioner have been sold to another concern in Portland that manufactures hot water tanks.
By 1927 the business of Iron Fireman was such that the acquisition of an additional manufacturing plant was decided upon and about that time a plant was acquired in Cleveland, Ohio. Since then a number of additions have been made to the Cleveland plant, one as late as 1938.
Iron Fireman has a Canadian subsidiary in Toronto, Ontario, which does not use petitioner's products but supplies its needs from manufacturers there. During the past three or four years, Iron Fireman has had large branch offices in New York, Cleveland, Chicago, and St. Louis. Most of its manufacturing is done at the Cleveland plant and the greater portion of its output is sold in the eastern part of the United States. It still maintains its home office and a plant in Portland, where its principal stockholders and managerial officers live.
The business of Iron Fireman is placed with petitioner by an annual oral agreement which covers desired model changes, price per unit, and the time of delivery. At the time the annual agreement is made, Iron Fireman ordinarily gives petitioner an order to cover its requirements for a period of about three months and before that order has been delivered it gives petitioner another order for a similar period. Iron Fireman advises petitioner of its prospective sales program for the coming year. On this information and its past experience, petitioner arranges its manufacturing schedule so as to supply the requirements of Iron Fireman for the year. It does most of its manufacturing during the months of June, July, August, and September, the peak being reached during August. During the last two or three months of the year it does not do much manufacturing and it is during that period that model changes are worked out and research work is done. Normally petitioner has disposed of most of its products by December, and its inventory at the end of the year consists mainly of materials and supplies.
While the stoker controls manufactured by petitioner are made specifically for the stokers manufactured by Iron Fireman, they are adaptable in many respects to the stokers made by many other manufacturers and portions of such controls will work on gas furnaces. Petitioner has never attempted, however, to obtain business from any of the manufacturers of other heating devices, the reason being that it has had a tacit understanding with Iron Fireman that so long as it purchases petitioner's controls petitioner will not solicit the business of other manufacturers of heating devices in the United States and Canada.
Under the arrangement between the petitioner and Iron Fireman the petitioner is not permitted to put its name on the outside of the products sold by it to Iron Fireman. It is permitted, because of the inspection requirements of underwriters, to place its name on the inside of the device but not in such a way as to constitute a trade mark. Iron Fireman in advertising its products does not advertise the fact that the controls or similar appliances attached thereto are manufactured by petitioner or that it uses petitioner's products.
The petitioner owns 1,650 shares of Iron Fireman stock, being slightly less than one-half of 1 percent of the Iron Fireman stock outstanding. This stock was purchased on the open market at the request of officials of Iron Fireman and for the purpose of showing petitioner's interest in that company. Neither Iron Fireman nor any of its officers own any stock in the petitioner, nor are there any of the officers or directors of that company who are officers or directors of petitioner. There is no intercompany connection between Iron Fireman and petitioner which would cause that company to patronize petitioner in preference to other companies manufacturing devices of the same character. There are from one hundred to one hundred fifty firms in the United States engaged in the manufacturing of devices of the same general character as those manufactured by petitioner and of that number fifteen or twenty are manufacturing devices which could be used by Iron Fireman. In obtaining the business of Iron Fireman from year to year, petitioner has had to meet the competition from such firms, which to some extent accounts for the fact that for the years 1935 through 1939 the increase in cost of sales has been proportionately greater than any increase in the amount of sales.
As early as 1929 L. R. Teeple, petitioner's president, considered the advisability of establishing a service station or service office adjacent to Iron Fireman's plant in Cleveland, but no such move has ever actually been made. At various times Teeple and other officers of petitioner have considered other steps such as putting on a national advertising campaign and manufacturing for others besides Iron Fireman; selling petitioner's products in the open market to the general public; or going into production of new products...
To continue reading
Request your trial