SAN FRANCISCO HOTEL COMPANY v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 16 March 1931
• Docket Number: Docket No. 8913.
• Citation: 22 BTA 740
• Parties: SAN FRANCISCO HOTEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

22 B.T.A. 740 (1931)

SAN FRANCISCO HOTEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 8913.

Board of Tax Appeals.

Promulgated March 16, 1931.

Herman Phleger, Esq., and A. Porter Robinson, Esq., for the petitioner.

Eugene Meacham, Esq., for the respondent.

OPINION.

BLACK:

This is a proceeding under Rule 62 (b) of the Board's rules of practice. A hearing was had before the Board on July 1, 2, and 3, 1929, the hearing being limited, pursuant to the stipulation of the parties and the order of the Board, to the issues which do not involve sections 327 and 328 of the Revenue Act of 1918.

On March 24, 1930, the Board rendered its decision (19 B. T. A. 383), holding that the petitioner was entitled to deduct the business expenses disallowed by the Commissioner, but sustaining the action of the Commissioner in disallowing affiliation, in computing the tax upon a fiscal year basis, and in disallowing a deduction for obsolescence of good will. In its decision the Board ordered that further proceedings be had under Rule 62, or in the absence of such proceedings, that judgment be entered under Rule 50.

On May 19, 1930, the petitioner filed a motion for a hearing upon the issue as to whether the petitioner is entitled to have its tax determined as provided in section 328 of the Revenue Act of 1918.

On July 10, 1930, the parties filed a stipulation that the issue as to whether or not the petitioner is entitled to have its tax determined as provided in section 328 of the Revenue Act of 1918, may be submitted for determination by the Board upon the testimony taken and evidence introduced at the trial held on July 1, 2, and 3, 1929.

On August 14, 1930, the Board entered an order granting said motion and approving said stipulation. The principal facts are set out in our earlier decision and need not be repeated here.

The petitioner's claim for special assessment is based upon section 327 of the Revenue Act of 1918, the pertinent provisions of which are as follows:

That in the following cases the tax shall be determined as provided in section 328:

* * * * * * *

(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. * * *

Under the provisions of Rule 62 and the practice of the Board, the sole issue now before the Board is whether or not there were abnormal conditions affecting the capital or income of the petitioner for the period here involved which would entitle the petitioner to a special assessment upon the basis of the comparatives referred to in section 328 of the Revenue Act of 1918. The petitioner claims the right to a special assessment by reason of the following abnormal conditions affecting its income:

(1) The income of the petitioner was artificially increased by the diversion of earnings from Crocker Hotel Company to the petitioner.

(2) The taxable income of the petitioner was artificially increased by the computation of the petitioner's tax on a fiscal year basis.

We will first take up petitioner's claim (1) as to why special assessment should be granted. The petitioner and the Crocker Hotel Company were both incorporated in 1901. Petitioner was organized for the purpose of leasing and operating the St. Francis Hotel, located in San Francisco, Calif. The Crocker Hotel Company was organized at the same time for the purpose of constructing and holding title to the hotel property. From the time they commenced business and continuously thereafter the two corporations occupied the relationship of lessor and lessee, the Crocker Hotel Company owning the hotel and the petitioner operating it under lease. The only income of the Crocker Hotel Company was from this lease. During the taxable years the entire capital stock of the Crocker Hotel Company was owned by Templeton Crocker and Jennie Crocker, and they also owned from 52.62 per cent to 55.36 per cent of the stock of the petitioner. The remaining stock of the petitioner was owned by employees, attorneys, and personal representatives of the Crockers, and by business associates of the Crockers or the petitioner.

During the taxable years the president, vice president, and secretary of petitioner held similar positions with the Crocker Hotel Company, and all of the directors of the latter were directors of petitioner. The affairs of both companies were dominated by Henry T. Scott, a prominent banker and business man, who had been the guardian of the Crockers until they became of age in 1905 and afterwards acted for them under power of attorney. He was president of petitioner and vice president of the Crocker Hotel Company, directed their policies and acted on all matters of consequence, usually without consulting his directors.

Shortly after the incorporation of the companies the main building was erected and leased to petitioner on a basis of gross rental amounting to 5.5 per cent of the cost, and the annexes subsequently erected were leased at gross rental of 6 per cent of the cost. The lease on the main building expired January 1, 1919, and a new lease was not...