Simonsen Indus., Inc. v. Comm'r of Internal Revenue
| Decision Date | 12 June 1956 |
| Docket Number | 55984.,Docket Nos. 55983 |
| Citation | 26 T.C. 515 |
| Parties | SIMONSEN INDUSTRIES, INC., ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Philip D. Caloger, Esq., for petitioners.
Andrew Kopperud, Jr., Esq., for respondent.
PROPERTY HELD PRIMARILY FOR SALE TO CUSTOMERS— PROPERTY PROPERLY TO BE INCLUDED IN INVENTORY.— Petitioners and others joined in a joint venture, called a syndicate, to purchase wire from the War Assets Corporation; the wire was purchased in 1946; some of the wire was sold in each of the years 1946 through 1951, and some wire was on hand at the end of each year. Sales were frequent and continuous in each year and expenses were incurred. In each year, the syndicate determined its profits from sales by use of inventories, and for each year prior to 1950 gross profit was reported on the basis of inventories. Held: (1) The wire was stock in trade of the syndicate and stock on hand at the close of each taxable year, 1950 and 1951, was properly included in the syndicate's inventory. (2) The wire was held primarily for sale to customers in the ordinary course of its business. Accordingly, ordinary income rather than capital gain was realized.
The Commissioner determined deficiencies in income tax for the years 1949, 1950, and 1951, as shown below, and in Docket No. 55984, he determined an addition to the tax for 1950 under section 294(d)(2), 1939 Code:
+---------------------------------------------+
¦Docket No.¦Year ¦Deficiency¦Sec. 294 (d) (2)¦
+----------+------+----------+----------------¦
¦ ¦ ¦ ¦ ¦
+----------+------+----------+----------------¦
¦ ¦( 1950¦$3,319.65 ¦ ¦
+----------+------+----------+----------------¦
¦55983 ¦( 1951¦4,683.43 ¦ ¦
+----------+------+----------+----------------¦
¦ ¦( 1949¦776.42 ¦ ¦
+----------+------+----------+----------------¦
¦55984 ¦( 1950¦12,970.25 ¦$2,060.91 ¦
+----------+------+----------+----------------¦
¦ ¦( 1951¦14,115.71 ¦ ¦
+----------+------+----------+----------------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------------+
Petitioners were members of a syndicate which purchased and sold music or piano wire and they reported income from sales of wire by the syndicate. The issue is whether the wire was not a capital asset under section 117(a)(1)(A), 1939 Code, i.e., whether it was property held primarily for sale to customers in the ordinary course of business, and was the kind of property which would properly be included in inventory, so that gains on sales are taxable as ordinary income; or whether the wire was held as an investment so that the gains are taxable as long-term capital gains.
In Docket No. 55984, certain adjustments are not contested. The addition to the tax for 1950 under section 294(d)(2), 1939 Code, is not contested; it is in issue to the extent only, that the determination of the main issue affects the computation under section 294(d)(2).
Simonsen Industries, Inc., filed its corporation income tax returns for 1950 and 1951 with the collector of internal revenue for the first district of Illinois. Edward H. and Ethel G. Simonsen filed joint returns for 1949, 1950, and 1951, with the collector for the first district of Illinois.
Simonsen Industries, Inc., is an Illinois corporation having its place of business in Chicago. Edward H. and Ethel G. Simonsen, husband and wife, were residents of Chicago during the taxable years.
Simonsen Industries, Inc., is engaged in merchandising metal products such as fishing tackle and tool boxes. Simonsen Metal Products Company is an Illinois corporation engaged in manufacturing metal products such as fishing tackle, tool boxes, and other items.
Edward H. Simonsen is president of Simonsen Industries, Inc., and he and his family own substantially all of the stock of that corporation. Edward H. Simonsen is president of Simonsen Metal Products Company, and he and his wife own all of its stock.
On May 11, 1946, Simonsen Industries, Inc., Simonsen Metal Products Company, Edward H. Simonsen, Ethel G. Simonsen, and others entered into a written syndicate agreement which provided as follows:
a. The Simonsen Wire Syndicate (hereinafter sometimes referred to as syndicate) was organized for the purpose of acquiring, financing, and marketing certain surplus war stock of music wire and piano wire from the War Assets Corporation.
b. Each member of the syndicate was to share in profits and losses of the venture in proportion to his contribution of capital after deducting $150,000 which was to be contributed by Simonsen Metal Products Company.
c. Edward H. Simonsen, Reinhardt J. Wagner, and John Hanisch were to be the syndicate managers, and Edward H. Simonsen was to be chairman of the managing committee.
d. Edward H. Simonsen, as chairman of the syndicate managers, was to receive 10 per cent of net sales, and ‘net sales' was defined as the gross amount received less the cost of merchandise sold, less freight and other direct charges.
e. The syndicate managers were to manage the affairs of the syndicate and were to be repaid for reasonable expenses of the syndicate operations.
f. The managing committee conducted the operations of the syndicate, and the other members of the syndicate assumed no active part in the management of the syndicate.
g. The syndicate managers were to use the facilities of Simonsen Metal Products Company and were to pay that company a reasonable amount for such services in handling the merchandise, including but not limited to accounting and auditing services, rent, light, power, insurance, use of personnel, telephone, and office expenses.
h. After all of the merchandise purchased by virtue of the syndicate agreement had been resold, the syndicate was to be dissolved.
From May through November 1946, the syndicate purchased music and piano wire in approximately 57 different lots from the War Assets Corporation for a total net price of $191,592.51. Freight on the wire amounted to $24,687.34, so that the total cost of the wire was $216,279.85. There were no additional purchases of wire by the syndicate, nor did the syndicate purchase or sell any other product. The term ‘music wire’ includes piano wire, and the parties have used both terms interchangeably and as meaning the same thing.
The syndicate purchased, in 1946, 37 different sizes of wire, and all of the wire purchased weighed approximately 1,500,000 pounds.
The wire was purchased by the syndicate for the same price which the United States set in selling it to other countries.
The syndicate thought that the piano wire or music wire, was something they could buy, sell, and merchandise at a profit. It was purchased with the sole and exclusive objective of reselling the wire as soon as possible after acquisition, and members of the syndicate did the best they could to move it. The members of the syndicate believed, in 1946, that they could dispose of the wire in 2 years or thereabouts.
All of the wire purchased by the syndicate was manufactured by corporations in the United States which are still in business. The wire was of different thicknesses or diameters, some being finer than a strand of hair.
Simonsen Wire Syndicate filed partnership returns of income (Form 1065) in each of the 6 years 1946 through 1951; the returns show the following:
a. For the taxable year 1946, the syndicate reported an ordinary loss of $7,962.76. The return shows gross receipts from business, $34,758.11; merchandise bought for sale, $216,949.43; inventory at end of year, $181,463.27; gross loss from business, $728.05; salaries and wages, $4,317.63; rent, $1,350; insurance, $628.54; supplies, $692.90; and sundry expenses, $245.64. Schedule G shows no gains or losses from sales or exchanges of capital assets. Question 3, on page 3, asks the nature of the organization filing the return; it is answered that it is a partnership. The partnership reported income on an accrual basis and stated that inventories were valued at cost or market, whichever was lower. Schedule I shows as partners each of the petitioners, and Simonsen Metal Products Co., and Springs Incorporated.
b. The syndicate's 1947 return is similar to the return for 1946 and shows an ordinary loss of $3,757.40.
c. The syndicate's 1948 return states that it is a wire jobber, that merchandise bought for sale amounted to $10,489.24, and that there was an ordinary loss of $9,948.29.
d. The syndicate's 1949 return is similar to the return for 1948 and shows sales expense of $1,368.82, and an ordinary loss of $2,194.14.
The individual income tax return of Edward H. Simonsen and Ethel G. Simonsen for the year 1949 shows in Schedule E.— ‘Income from Partnership, * * *,‘ an ordinary loss of $3,730.61 from Simonsen Wire Syndicate.
Simonsen Wire Syndicate reported a profit for the first time on its 1950 partnership return. On the syndicate's returns for 1946 to 1949, inclusive, ordinary losses were reported, and on its 1950 and 1951 returns net long-term capital gains were reported in the amounts of $86,885.86 and $69,463. 34, respectively. The 1948 and 1949 returns show that the syndicate was in the business of wire jobbers, and the 1950 and 1951 returns state the syndicate business as ‘Investment in Wire.’ Syndicate returns for 1946 to 1949, inclusive, name five partners, namely, Simonsen Metal Products Co., Simonsen Industries, Inc., Springs Incorporated, Edward H. Simonsen, and Ethel G. Simonsen; and the 1950 and 1951 returns show 16 partners.
The 1950 and 1951 returns of Simonsen Industries, Inc., and the 1950 and 1951 returns of Edward H. Simonsen and Ethel G. Simonsen, report long-term capital gains from Simonsen Wire Syndicate.
The Syndicate determined its gross profits from sales in each of the years 1946 to 1951, inclusive, by use of...
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