National Outdoor Advertising Bureau, Inc. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 65252

• Citation: 32 BTA 1025
• Decision Date: 25 July 1935
• Docket Number: 70999.,Docket No. 65252
• Parties: NATIONAL OUTDOOR ADVERTISING BUREAU, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

32 B.T.A. 1025 (1935)

NATIONAL OUTDOOR ADVERTISING BUREAU, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 65252, 70999.

Board of Tax Appeals.

Promulgated July 25, 1935.

Wilton H. Wallace, Esq., and E. F. Colladay, Esq., for the petitioner.

Nathan Gammon, Esq., and P. A. Sebastian, Esq., for the respondent.

These are proceedings, duly consolidated, for the redetermination of asserted deficiencies in income tax for the years 1929 and 1930 in the amounts of $2,793.94 and $5,064.80, respectively.

In both dockets it is alleged that the respondent erred in refusing to hold that petitioner is exempt from Federal income taxation under section 103 of the Revenue Act of 1928.

In Docket No. 65252 it is alleged, in the alternative, that the respondent erred in disallowing the deduction of (1) $21,500.34 representing a statutory net loss sustained in 1928, (2) $43,787.36 representing litigation expenses, and (3) $308.63 representing amortization of bonds.

In Docket No. 70999 it is alleged that the respondent erred in disallowing the deduction of (1) $21,500.34 and $19,986.08 representing statutory net losses sustained for 1928 and 1929, respectively, (2) $1,678.67 representing amortization of bonds, and (3) $1,201.02 representing a loss sustained from trade-in of automobiles used in business.

In both dockets the assignment of error relating to the disallowance of amounts representing amortization of bonds was waived.

FINDINGS OF FACT.

The petitioner is a New York corporation, organized under the laws of that state in December 1915 for the purpose of conducting an outdoor advertising business, with an authorized capital of $25,000 consisting of 250 shares of common stock of the par value of $100 each. In January 1919, by amendment to its certificate of incorporation, its authorized capital was increased to $200,000 consisting of 2,000 shares of $100 each. It has no preferred stock or bonds outstanding. In 1929 the petitioner had offices in New York, Cleveland, Detroit, Chicago, and San Francisco.

One of the most important activities of petitioner is the maintenance of rate and data service relative to plant owners, or persons who own or lease billboards or other outdoor advertising space, and types of space available for outdoor advertising in about 18,000 cities and towns in the United States and 1,000 or 2,000 cities and towns in Canada. The maintenance of this service requires personal inspection, which is rendered by petitioner's field service department, in which is a group of men who travel through the country continuously. This inspection service extends to every state in the Union, wherever there are billboard displays. This information is furnished only to petitioner's stockholders or members in a so-called rate and data manual published by the petitioner periodically or in estimates or detailed specifications. The petitioner also maintains an art studio for the production of copy and designs for posters, and for painted signs, or for the production of lay-outs and all incidental drawings required for copy to be sent to plant owners and for the furnishing of additional art work to its members. Ordinarily the art work produced or furnished by the petitioner is part of its regular or general service rendered to its members, although in a few instances where it was necessary to purchase art work some specific charge was made therefor.

The petitioner transacted no business with advertising agencies other than its own stockholders or members, except that in some instances it placed an order for an advertising agency which had applied for membership.

Prior to November 1, 1929, the petitioner assigned all contracts or orders for advertising which it received from its members to the General Outdoor Advertising Co., hereinafter referred to as the General Co., for execution and service. The General Co. billed the members of petitioner at current prices less a commission of 10 percent. Duplicates of all bills on contracts assigned by petitioner to the General Co. were sent to petitioner by that company. At the end of each month the General Co. paid to the petitioner 2 percent of the entire monthly amount billed. The General Co. carried the accounts receivable against petitioner's members on its books. At the end of each month the petitioner totaled the amounts on the duplicates of the bills and set up an entry on its books charging accounts receivable and crediting commissions with 2 percent of the total. After November 1, 1929, and during 1930 all orders received by petitioner from its members were distributed by it to the proper plant owners in the cities or towns designated, and thereafter petitioner carried on its books the gross accounts receivable against its members. The plant owners, upon execution of the orders, billed the petitioner at the current rates for advertising space less the prevailing discount of 16 2/3 percent. The petitioner, in turn, billed its members at the current rates less a discount which was determined by its board of directors at the beginning of the year. In 1929 and 1930 the discount was 10 percent. However, at the end of 1930 petitioner paid each of its members an additional 1 percent upon the volume of business placed with it by each member. In 1929 the petitioner retained 6 2/3 percent and in 1930, 5 2/3 percent on all billings to its members for its service and expenses in connection with such placing of the advertising orders for its members.

The stockholders or members of the petitioner are advertising agencies which handle advertising of every kind or description for their customers. They do not confine themselves exclusively to outdoor advertising. The petitioner does.

The requirements for membership in petitioner are general in character. The petitioner's aim is to leave the field as wide open as possible to all advertising agencies which have financial rating and conduct their business on a business-like basis, subject to the approval of a committee. Membership is obtained by filing an application for membership containing information relative to the business of the applicant, a so-called option to purchase stock of petitioner adopted as to form by petitioner in 1925 or 1926, and a so-called subscription form. The subscription form provides in substance that for the privilege of becoming a member the applicant agrees, in addition to taking an option upon one share of stock of petitioner, to pay an initiation fee based on its volume of advertising business during the year preceding the date of subscription. The so-called option to purchase stock provides, in part, that three trustees, for the petitioner and those holding similar options, grant the applicant an option to purchase at and after 10 years from date stock of petitioner in the amount agreed upon at $100 per share, to be paid within 15 days from the date of option; that the stock to be purchased on option is subject to assessment by petitioner during the life of the option to an amount not exceeding $100 per share; that upon receipt of payment therefor the petitioner will deliver to the trustees a certificate covering the agreed amount of stock; and that neither the option nor any rights or privileges thereunder or of membership shall be transferable except by consent of the petitioner, to be given by its board of directors or the officers and operating committee thereof. Prior to 1929 the option provided that during the life of the option the petitioner should be the sole agent of the applicant for the placing of outdoor advertising. At or about the time of the entry of the consent decree hereinafter referred to the existing options to purchase stock containing the exclusive agency agreement were succeeded by new option agreements which did not contain such provision. All the issued and outstanding stock of the petitioner except one share is held by the trustees.

As of December 31, 1929, the petitioner had issued and outstanding 1,097 shares of stock, 241 members having subscribed therefor in varying amounts ranging from 1 share to 41 shares.

As of December 31, 1930, the petitioner had issued and outstanding 1,057 shares of stock, 233 members having subscribed therefor in varying amounts ranging from 1 share to 80 shares.

The petitioner filed income tax returns (Form 1120) for 1928, 1929, and 1930. The following amounts were reported as income therein:

                ------------------------------------------------------------------------------------------------------
                                                                            |    1928     |    1929     |    1930
                ------------------------------------------------------------|-------------|-------------|-------------
                Commissions _______________________________________________ | $307,605.17 | $244,595.82 |  $549,148.20
                Advertising _______________________________________________ |    5,518.00 |  146,251.83 | ____________
                Initiation fees ___________________________________________ |    3,000.00 |    1,900.00 |       800.00
                Interest on bank deposit, notes, mortgages, and corporation |             |             |
                  bonds ___________________________________________________ |      477.67 |    1,608.09 |    10,969.04
                Discount on space _________________________________________ | ___________ | ___________ |       450.73
                ------------------------------------------------------------------------------------------------------
                

The amount of $244,595.82 for 1929 represents commissions of 2 percent which petitioner received from the General Co. The amount of $146,251.83 designated advertising represents commissions other than those received from the General Co. for the months of November and December 1929.

In "Schedule K, Balance Sheets", contained in the income tax returns for 1929 and 1930, the following items are shown:

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