Oklahoma Contracting Corporation v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 08 January 1937 |
| Docket Number | Docket No. 77871. |
| Citation | 35 BTA 232 |
| Parties | OKLAHOMA CONTRACTING CORPORATION AND T. R. JONES, INC., ASSIGNEE OF AND SUCCESSOR TO OKLAHOMA CONTRACTING CORPORATION, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
I. J. Underwood, Esq., for the petitioners.
DeWitt M. Evans, Esq., and L. C. Mitchell, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency for the period from January 1 to July 31, 1931, in the amount of $39,214.34, and a delinquency penalty in the amount of $9,803.58.
The issues raised by the pleadings involve (a) the affiliation and the right of the petitioners to file a consolidated return for the entire year 1931 with the parent, the Oklahoma Contracting Co., or the T. R. Jones, Inc., as assignee of and successor to the Oklahoma Contracting Co.; (b) the disallowance of a deduction for salary paid to the petitioners' president during 1931 to the extent of $20,416.67; and (c) the disallowance of a loss deduction in the amount of $36,651.39.
FINDINGS OF FACT.
The Oklahoma Contracting Co., an Oklahoma corporation, hereinafter referred to as the Company, was, prior to 1931, engaged in the general pipe line construction business, operating in a number of different states, with its principal place of business in Dallas, Texas. Its outstanding capital stock, consisting of 401 shares of the par value of $100 each, was owned by T. R. Jones, of Dallas, Texas. As of the close of business on December 31, 1930, it transferred and conveyed to the Oklahoma Contracting Corporation, a Delaware corporation, hereinafter referred to as the petitioner, all of its pipe line construction equipment and business in exchange for all of the outstanding capital stock of the petitioner, consisting of 4,000 shares of stock of no par value. After the transfer of its construction business to the petitioner, the Company's activities were confined to the receiving of interest and dividends from its bonds and stocks and the buying and selling of stocks on its own account. The stocks were held in the name of T. R. Jones.
The petitioner, during 1931, continued the general pipe line construction business carried on prior to 1931 by the Company. It had its principal office in Dallas, Texas. It carried on its pipe line construction business in the States of Kansas, Missouri, Iowa, Illinois, Kentucky, and Texas. T. R. Jones was, during 1931, the president of both the petitioner and the Company.
T. R. Jones, Inc., was incorporated by the State of Delaware on July 24, 1931. Its original incorporators held an organization meeting in Wilmington, Delaware, upon written waiver, on July 24, 1931. At such meeting bylaws were adopted, three directors were elected, and they were authorized, in their discretion, to issue the capital stock of the corporation in such amounts and for such consideration as determined from time to time. The first organization meeting of the directors, including T. R. Jones and George B. Cornelius, an employee, and I. J. Underwood, was held in Dallas, Texas, on September 2, 1931. At such meeting T. R. Jones was elected president and George B. Cornelius, secretary-treasurer; the form of the stock certificates and the corporate seal, as submitted, were adopted; the Corporation Trust Co. was appointed the Delaware agent of the corporation; and the treasurer was authorized to open up checking accounts and other accounts for the deposit of funds belonging to the company in such banks or trust companies as directed by the president.
At a special meeting of the board of directors of the Company held on January 4, 1932, in Dallas, Texas, a resolution was adopted authorizing the officers of the Company to transfer on its behalf all of its properties, whether real, personal, or mixed, to T. R. Jones, Inc., in consideration of the issuance by T. R. Jones, Inc., to T. R. Jones, personally, or to his nominee, of all of the authorized capital stock of T. R. Jones, Inc., consisting of 1,000 shares of no par value stock, and the assumption by T. R. Jones, Inc., of all its liabilities and indebtedness. This stock was issued to T. R. Jones on January 4, 1932.
On the same day at a special meeting of the board of directors of the petitioner, a resolution was adopted authorizing the officers of the petitioner to transfer, effective as of January 1, 1932, all its assets, properties and property rights, free and clear of all debts and liabilities, except current indebtedness, to T. R. Jones, Inc., in consideration of the assumption by T. R. Jones, Inc., of all the outstanding debts of the petitioner and the surrender for cancellation of all of the outstanding capital stock of the petitioner, except the qualifying shares to be held by its directors.
On the same day at a special meeting of the directors of T. R. Jones, Inc., held at Dallas, Texas, resolutions were adopted accepting the offers of the Company and the petitioner to transfer their properties to T. R. Jones, Inc.
The members of the board of directors of the petitioner, the Company, and T. R. Jones, Inc., were the same.
Under date of January 2, 1932, the Company, by warranty deed, filed for record September 21, 1932, with the County Clerk of Dallas County, Texas, transferred and conveyed certain real estate therein described to T. R. Jones, Inc. Under the same date the Company by bill of sale acknowledged before a notary public September 21, 1932, transferred all its personal property located upon the real estate therein described to T. R. Jones, Inc. A certificate for 1,000 shares of stock of T. R. Jones, Inc., was issued to T. R. Jones on January 4, 1932.
The Company and the petitioner were dissolved in the spring of 1932.
Under date of March 10, 1932, T. R. Jones, Inc., addressed a letter to the collector of internal revenue at Dallas, Texas, requesting an extension of 30 days from March 15, 1932, in which to file the income tax return for 1931 for "T. R. Jones, Inc., formerly Oklahoma Contracting Company, parent corporation, and Oklahoma Contracting Corporation, subsidiary." This extension was granted by the Commissioner by letter under date of March 10, 1932. T. R. Jones, Inc., caused to be filed with the collector of internal revenue at Dallas, Texas, on March 14, 1932, a tentative income tax return for the calendar year 1931 under the following designation:
T. R. JONES, INC., Formerly OKLAHOMA CONTRACTING COMPANY and SUBSIDIARY
Two further requests for the extension of time within which to file the 1931 return of the taxpayer as designated in its letter of March 10, 1932, were made by letter by T. R. Jones, Inc., which requests were granted, the time being extended thereby to June 1, 1932.
On June 4, 1932, T. R. Jones, Inc., caused to be filed with the collector of internal revenue at Dallas, Texas, a final income tax return for the calendar year 1931, in the name of:
T. R. JONES, INC., AND SUBSIDIARY OKLAHOMA CONTRACTING CORPORATION
This return contains 11 schedules, all of which are captioned "T. R. Jones, Inc., and Subsidiary, Oklahoma Contracting Corporation" except schedule 11, which is captioned "T. R. Jones, Inc. Successor to Oklahoma Contracting Company." In answer to questions contained therein, the return discloses that no return had been filed under the same name for the preceding taxable year, that T. R. Jones, Inc., was an "outgrowth, result, continuation, or reorganization of a business or businesses in existence during this or any prior year since December 31, 1917", and that the name of its predecessor was the "Oklahoma Contracting Company." On form 1122 the petitioner under date of June 13, 1932, named T. R. Jones, Inc., as the parent corporation.
The petitioner and the Company had separate books of account for 1931. All the figures and data contained in such final return were taken from the books of account of the petitioner and the Company, respectively. During January 1932, T. R. Jones, Inc., took over all the assets of the petitioner and the Company and assumed their liabilities. Books of account were opened for T. R. Jones, Inc., as of January 1, 1932. Prior to 1932 T. R. Jones, Inc., had no books of account or financial records, except that, on September 14, 1931, a bank account with the Republic National Bank & Trust Co. of Dallas in the name of T. R. Jones, having a credit balance of $102.85, was closed into a new account in the name of T. R. Jones, Inc. After September 14, 1931, interest and dividends received from the bonds and stocks of the Company were deposited in such bank account together with certain items of income personal to T. R. Jones. A brokerage account of the Company was also carried in the name of T. R. Jones and the proceeds from such account were also deposited in such account after September 14, 1931. All the items deposited in such bank account constituting income of the Company, including such interest, dividends, and proceeds from the brokerage account, were entered and recorded as income of the Company in the books of account of the Company. Mostly all checks drawn on such account were drawn for the payment of personal expenses of T. R. Jones.
T. R. Jones was one of the organizers of the Company and since 1929 was the sole owner thereof. Prior to 1929 he had a partner who managed the inside or office work of the Company. Such partner died in 1929 and T. R. Jones purchased his interest and thereafter the office work was entrusted to employees. T. R. Jones procured all the construction contracts prior to 1931 for the Company and during 1931 for the petitioner and supervised their execution. He personally financed such contracts. When money was needed therefor he always signed notes personally for loans from the bank. During the construction period he traveled from job to job and was absent from Dallas most of the time during that period. During the construction period he was in Dallas on an average of less...
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